You may already contribute to an organization here in Colorado that helps children. But did you know that your donation may qualify for a sizable tax credit? The Colorado Child Care Contribution Tax Credit is available for Colorado donors who make a contribution to a qualifying child care organization or fund. Such a donation can generate a Colorado tax credit of up to 50% of your total donation. However, please note that in-kind donations (non-cash gifts like school supplies, snacks, etc.) don’t qualify.

What donations qualify?

To qualify for this tax credit, your donation(s) must be made to an organization that promotes the establishment or operation of a licensed child care facility or program. For example:

• Child care centers
• Placement agencies
• Family child care homes
• Foster care homes
• Homeless youth shelters
• Residential child care facilities
• Residential treatment centers

*Registered child care programs that provide services similar to licensed programs may also qualify.

How your child care donation reduces your taxes

Here’s how your child care donation gives back to you, the taxpayer. Let’s say you are in the 25% Federal income tax bracket, itemize your deductions, and make a $5,000 donation to a not-for-profit licensed agency that provides child care to children under 12. When you file your federal taxes, you’ll receive a $5,000 charitable deduction, which will reduce your federal liability by $570 and your Colorado liability by $230. You will then receive a $2,500 credit against your remaining Colorado liability when you file your state taxes. The credit will either reduce your payment or increase your refund. So, although you may have written your donation check for $5,000, your contribution actually cost you only $1,700. (See the chart below.)

Things to remember

• The tax credit is limited to $100,000 per year
• The tax credit is limited to the tax liability of the taxpayer. Any excess credit can be applied against the tax liability in up to five successive years.
• Your donation must be made to licensed child care programs that benefit children age 12 or under. Organizations that serve children under 12 and over 12, unless grandfathered, will allocate your donation between both groups, unless specific donor restrictions are given at the time of the donation.
• The organization you donate to will provide you with a DR1317 Child Care Contribution Tax Credit Certification form for you to attach to your income tax returns for the year you claim the credit.

As you can see, when you give a financial gift to a child care organization, you not only help improve the lives of local families, but also help yourself save by utilizing an effective tax strategy. If you have any questions about the Colorado Child Care Contribution Tax Credit, please do not hesitate to contact us.

The notice sends shivers down your spine — the IRS has called or written to inform you that your organization has been selected for an audit. Now what? Understanding the nuts and bolts of IRS reviews can help reduce your risk of running into trouble.

Types of IRS reviews

The IRS conducts three types of reviews of not-for-profit's:

1. Field audit. If your initial contact letter schedules an agent to visit your premises, the IRS is conducting a field, or in-person, examination. Field audits are done at an organization’s location, the organization’s representative’s office or an area IRS office. It usually takes place where the not-for-profit’s books and records are located.

Field audits fall into two categories. A general program exam usually is conducted by a single IRS agent. A team examination program audit focuses on large, complex organizations and may involve a team of examiners.

2. Office /correspondence audit. If the initial letter asks you to deliver documents to an IRS office by mail, you are undergoing a correspondence audit. An agent generally conducts the audit using letters and phone calls to work with the organization’s officers or a representative.

But a correspondence audit can expand to become a field audit if the issues grow more complex or the not-for-profit doesn’t respond. Both correspondence and field audits can expand to include prior and subsequent tax years.

3. Nonaudit. The contact letter might indicate that the IRS is conducting a compliance check, which isn’t an audit but may include a checklist with specific questions. Or the compliance check may ask about information and forms that your not-for-profit is requred to file or maintain, such as Forms 990, W-2 or W-4.

Compliance checks are an accountability tool, like audits, but are simpler and less burdensome and don’t directly determine a tax liability for any particular period. They can, however, lead to an audit.

Selection of organizations

Not-For-Profit's are chosen for reviews based on several methods, including:

• IRS examination initiatives and projects,
• Complaints about potential noncompliance with the tax law,
• Risk modeling from the revised Form 990,
• Related examinations of other taxpayers, such as business partners, clients or vendors, whose returns were selected for audit,
• Document matching — when payor records, such as Forms W-2 or 1099, don’t match the information reported, and
• Certain claims for refund or requests for abatement that require further review.

Form 990 plays a strong role in the selection process. In its FY 2012 Annual Report & FY 2013 Workplan, the IRS delivered this “bottom-line message” to not-for-profit's: “The IRS uses the Form 990 responses to select returns for examination, so a complete and accurate return is in your best interest.”

General process

An audit begins with the initial contact and continues until audit findings are discussed in a closing conference (in person or by phone) and a closing letter is issued. Both the conference and the letter will explain your appeal rights.

A compliance check also starts with the initial contact letter, and the IRS may contact your organization again if it needs more information or you don’t respond. The agency typically issues a closing letter at the end of a compliance check.

During a field audit, the agent will tour your office and interview an officer or representative. For a correspondence audit or compliance check, IRS personnel will review requested items submitted via mail and follow up as needed. They may request additional information.

Don’t go it alone

This can be serious business – worst-case audit findings include adjustments to tax liability or tax-exempt status. If you get a call or letter from the IRS, contact your CPA immediately.

Here are some ways Stockman Kast Ryan + CO can help:

• Corresponding with the IRS on your behalf or assisting you in your correspondence,
• Holding field audits at our office, where we can assist with answering auditor questions, and
• Reviewing documents prior to submission to ensure completeness and accuracy.

Feel free to contact us with questions, clarifications, or assistance with any IRS dealings.

Your status with the IRS as a tax-exempt “public charity” gives you significant benefits — paying no federal, state or local income taxes is the most obvious advantage. And the good news doesn’t stop there.

The designation also enables you to receive donations, may qualify you for special grants and government funding, and can entitle you to special rates for services, such as mail delivery. In short, the status better enables your organization to apply its financial resources toward its mission and goals than if it were a for-profit entity.

But keeping your 501(c)(3) status isn’t automatic. Here are some important dos and don’ts to follow if you want to retain the privilege:

The "Dos"

Do comply with reporting obligations. Your nonprofit is required to file some type of IRS Form 990 — Form 990, Form 990-EZ or Form 990-N, depending on the amount of your total annual receipts and total assets — each year. If you fail to do so for three years in a row, your tax-exempt status will be revoked.

If you’re required to file the full Form 990 or Form 990-EZ, be sure to annually complete Schedule A, Part I (“Reason for Public Charity Status”) to identify why you aren’t a private foundation. Check the box that coincides with the reason that you’re a public charity for the current tax year.

You also must file all required payroll tax returns for your employees and 1099 forms for independent contractors, and answer related questions about these workers on your Form 990.

Do maintain the required level of public support. As detailed on Schedule A to the 990, if your nonprofit is primarily supported by a government unit or the general public or is a community trust (Box 5, 7 or 8 on Schedule A, Part I), you’ll also need to pass the public support test on Part II of Schedule A. If your organization is exempt because it receives more than one-third of its support from contributions and activities related to its exempt function, as outlined in IRC Section 509(a)(2), you’ll need to pass the public support test on Part III of Schedule A each year.

Do pay employment taxes and properly withhold from employees’ paychecks. Even though your organization doesn’t pay income taxes, you must still pay applicable employment taxes, such as the employer portion of each employee’s Social Security and Medicare taxes. And you must withhold from your employees’ paychecks the employee portion of employment taxes, as well as federal, state and local income taxes where applicable — and remit the withheld amounts to the appropriate governmental agency.

Do use a formal process to approve compensation. The salaries and benefits you pay your executive director and “key employees” are available to the public on your Form 990 and have been identified as a primary focus of exempt organizations’ audits by the IRS. Even more important than the compensation total is the process you use to determine that the compensation is reasonable and comparable to amounts paid by organizations of similar size and activity. The IRS sees this review and approval as a responsibility of your board of directors or one of its committees.

The "Don'ts"

Don’t operate for the benefit of private interests. No part of a 501(c)(3) organization’s earnings or equity can benefit individuals, such as the organization’s founders, executives or board members — or their family members. Your nonprofit was granted its tax-exempt status to benefit the public, not private parties or interests.

Don’t generate excessive unrelated business income (UBI). UBI is income from a trade or business activity that is regularly carried on and is unrelated to your exempt mission. Although the Internal Revenue Code is silent as to how much is too much, excessive UBI has been interpreted as spending a “significant” amount of time on the unrelated activity.

For example, if an organization has more expenditures for the unrelated activity than program expenses, the IRS likely will consider terminating its exempt status. But courts have considered an organization spending even as little as 10% of its total efforts on a UBI activity to be too much.

Don’t pay more than market rates for goods and services. Ensure you’re using your organization’s resources wisely by getting at least three quotes before purchasing a significant asset or establishing a service contract or a standing order for supplies. If you ever decide to do business with related parties (board members, founders, executives or their businesses), the other quotes will support the “going rate” in your market and show you aren’t providing an excess benefit to the related party.

Should the IRS determine that you’ve provided excess benefits, your organization and its leaders will be subject to penalties as well as the possibility of losing the nonprofit’s exempt status.

Don’t engage in substantial lobbying or any political campaign activities. Two methods can determine whether lobbying activities are “substantial.” One considers the time spent by compensated employees and volunteers on lobbying activities. The other is the expenditure tests.

Your nonprofit can elect to use the latter option — called a 501(h) election — by filing Form 5768. (Churches are ineligible.) The 501(h) election sets a defined limit on the amount of resources an organization can use to influence legislation before losing its exempt status, based on a percentage of its total expenses.

Political campaign activities include making contributions to a political campaign fund or making public statements for or against a candidate (either written or verbal). Participating in any of these activities can result in the IRS either revoking your exempt status or imposing certain excise taxes on your organization.

“Excess benefits” and “disqualified persons”

When is compensation “reasonable”?

When is there a conflict of interest?

Playing by the rules

Understand unrelated business income and how to avoid excess amounts

Like other nonprofits, your organization probably has searched for new sources of revenue during the recession and economic slump. Hopefully, though, you haven’t run into problems accumulating too much unrelated business income (UBI). That kind of green can subject your nonprofit to taxes — and even threaten your tax-exempt status.

The IRS defines UBI

Certain product sales count

Ad space revenue is UBI, too

Selling unrelated services also matters

Exceptions to the rules exist

Gaming is ticklish

Report UBI carefully

IRS substantiation rules apply to contributors

Your donors are gearing up for tax-filing season soon. It’s not too late to make sure that your organization is following the IRS donation “substantiation rules” so that your benefactors have the proof they need to deduct financial gifts. Proper documentation is also crucial so that your donors don’t have any future problems with the IRS.

Legal precedents exist

Case law generally supports the IRS. In the court ruling Durden v. Commissioner, a church had received $25,171 in contributions from a married couple. The taxpayers had canceled checks documenting these 2007 donations, and the church sent them a written acknowledgment of receipt. But the acknowledgment didn’t note whether the taxpayers had received any goods or services in exchange for their contributions. The IRS requires such a statement, so it disallowed the taxpayers’ deduction.

The taxpayers then obtained a second receipt from their church, stating that they hadn’t received any goods or services in exchange for their donations. The second receipt was dated June 21, 2009, and the IRS rejected it for failing to meet the “contemporaneous” requirement, which requires the notification to be obtained at the time of the gift.

The taxpayers appealed the IRS decision. Concluding that the couple had “failed strictly or substantially to comply with the clear substantiation requirements of Section 170(f)(8),” the Tax Court upheld the IRS’s disallowance of the deduction.

What’s required by the IRS?

For donors’ charitable contributions to be eligible for deductions on their income tax returns, they must follow the IRS “substantiation rules.” These requirements vary with the nature and amount of the donation, but clearly state that, if a taxpayer fails to meet the substantiation and recordkeeping requirements, no deduction will be allowed.

For cash gifts of under $250, a canceled check or credit card receipt is generally sufficient substantiation. If, however, any goods or services were provided in exchange for a cash gift of $75 or more, the charity must provide a contemporaneous written acknowledgment that includes a description and good-faith estimate of the value of the goods or services.

For cash gifts of $250 or more, as well as noncash gifts of $500 up to $5,000, the rules generally also require a contemporaneous written acknowledgment from the charity, which must include these four elements: 1) the donor’s name, 2) the amount of cash or a description of the property contributed (separately itemized if one receipt is used to acknowledge two or more contributions), 3) a statement explaining whether the charity provided any goods or services in consideration, in whole or in part, for the gift, and 4) if goods or services were provided, a description and good-faith estimate of their value.

If the only benefit the donor received was an “intangible religious benefit,” this must be stated. Goods or services of “insubstantial value,” such as address labels or other small incentives in a fundraising campaign, don’t need to be taken into account.

The requirements for noncash donations valued over $500 include attaching a completed Form 8283 to the donor’s tax return and, if valued over $5,000, include obtaining a qualified appraisal of the donated property. Before you accept such donations, it may be wise to confirm with the donors that they are aware of the requirements and have obtained an appraisal, if necessary.

Quid pro quo

A donation at the end of the year might be your supporters’ holiday gift to your nonprofit. Make sure that you reciprocate by giving them credit and verifying that their donations are properly documented.

In December of 2014, Congress approved the Achieving a Better Life Experience (ABLE) Act that allows for tax-advantaged savings for persons with disabilities. Known as ABLE accounts, these new accounts allow earnings to grow tax-free and distributions to be tax-free for qualified disability expenses. Under the provisions of the new law the accounts cannot reduce certain Medicaid or supplemental security income (SSI). The accounts are designed to encourage savings to maintain health, independence and quality of life and secure funding that will supplement other benefits individuals with disabilities receive through Medicaid, SSI, or employment without disqualifying them from those benefits.

The beneficiary of the account can withdraw contributions and earnings at any time for qualified disability expenses. These include:

• Education
• Housing
• Transportation
• Employment training and support
• Assistive technology and personal support services
• Health, prevention and wellness
• Financial management and administrative services
• Legal fees
• Expenses for oversight and monitoring
• Funeral and burial expense
• Other expenses consistent with the purpose of this provision