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Logo of Michigan Camp Meeting 2019: As a Witness, Matthew 24:14

Are you Putting Our 501(c)3 at Risk

Mark Tallis




  • June 19, 2019
    12:45 PM
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Good morning I'm Mark callus I am the managing partner of telephone associates Lansing accounting firm. I've been in the accounting field since 1981 and I started off working for c.p.a. firms. Shortly after getting out of school got married to my wife Deborah moved on to doing consulting work with health care professionals they are in the cards for not knowing how to run an office. Or managing their personnel so did that for a while got tired of that decided I'm going out on my own 1090 was a very stressful year for me started the business in January of 1990 my daughter came along in May of 1900. Any of you that have been self employed you know what that's like with Where's the paycheck coming from and all your wife doesn't work and all the mortgages there are foods there and now there's a child. Very intriguing. Give you an idea of my life. My wife doesn't know me for 4 months between January and April 15th. Personally I prepare proximately $700.00 tax returns during that timeframe a lot of them were still out there their extended clients are notorious for waiting till October 15th but by the end of the year we do 700 returns by myself. I got my bachelor's degree from Michigan State University in accounting business administration majoring in accounting I am a member of the Michigan tax and accounts profession in the state here and I am also. For the past year a member of the Michigan income tax advisory group and what they had is a group of right now about 5 preparers who sit down with the different department heads of Treasury and tell him what they're doing wrong and giving him advice. I've gotten to know Mr Bonds who is the head of the Income Tax Division and sometime in Lansing he has requested that we do quarterly luncheons together to talk about problems and where we can help them improve their services and so that works out really well I am not a c.p.a. I am what is classified as an enrolled agent does anybody know what enroll agent is all right I got one. Call. We are licensed through the Department of Treasury and not regulated by our own internal board but everything runs through i.r.s. and they are the ones who deal with what we're allowed to do and what not to do so that's basically a little broad overlap of what I do and what I'm all about but before we get started you'll love this one if. One of the things that I got to say is I'm not going to be giving you x. advice or anything along that line I'm going to give you information today if you take something home that you think will be worthwhile for your organization please talk to your local professionals on this. As the old saying goes you give a 1000 pounds a tax return to prepare you're going to get a 1000 different answers. Each one of us has our own way of doing things and our comfort level so I don't know the facts and circumstances of your individual organizations so I need you to talk to the people that you work with that do know those actual facts and circumstances so that you're not led astray. We got that out of the way co-op let's go into some of the traps in the tax code as you know there was a new tax code that occurred this past year called the tax cut and Jobs Act public gets the tax cuts the accounts get the jobs. It expanded our business quite a bit based on what they are doing. And so our jobs have expanded the need for more accounts has expanded just to keep up with what they're up to. Basically all of us Michel said you're under the churches 501 c 3 status nothing to do with a 90 count your blessings they are about a 20 page form and they go in circles I do ninety's for clients and they're a mess I'll just leave it at that however there is the potential for reform needing to be done it's called $980.00 unrelated business taxable income account a little backwards because we had an acronym of you back. In the team backwards but it's there. That return is only done when you have an income that is not related to your services and I got movement to put in my pocket there's a recorder there how be knockin around. So anyway 2 things I'm going to go over 1st. That how it affects the churches under that new tax law as all of you know the standard deductions went up 212024000 which takes away some of that advantage of charitable giving that out of the 700 returned that I did very few itemized. The $24000.00 and some other requirements that are in their basic they're doing away with that whole concept Personally I think within 4 years itemized deductions will totally be eliminated from the tax returns just that they'll increase the standard deduction What does that mean for churches whoa 10 Chile left giving. On a positive note my clientele I didn't see any changes in their giving. And personally when somebody is giving to a church for tax deduction it 1520 percent is it truly charitable giving. That's just me and my concept solve you know we look at that to Ok what's out there and how does that work now for school treasurers we had a positive for you guys under the new tax code there is a provision for 529 plans 529 is for college was for college tuition the new tax law change that it added private school k. through 12 schools so somebody can put in you can talk to your neighbor for your child or whomever you know parents grandparents neighbors. Person off the street can fund a 529 plan for their child put that money into that plan child start kindergarten we've got a fund used to wards that tuitions now family can put 5001st sink a single person 100048 married couple into a 529 that will sit there and grow until the child needs it and the one thing I will say is 529 do not affect their federal returns it will affect a diminishing return only into an adjustment on schedule one for the Michigan return only so that is a benefit there now if you have questions feel free to ask as I go throughout try to answer yes or yes that's an annual maximum doesn't matter how many you know if you have 3 kids and you want to do 520 ninth's Max is 5000 is. The Piri it said on Michigan only. Basically the Michigan return starts with the adjusted gross income from the Federal then there's addition subtraction speak for you get to the taxable side it is part of the subtractions on that. It is college and private is the way they've worded it so propre all I'm going to say yes now I may be wrong but that's my attitude on it. Any other question fire Ok. You can set it up with any investment company are any organization like that you can. Each state has their own 529 so you can do a national 529 you know if you google 529 plan you're going to get about 10 pages you look for the investments that you're comfortable with the other thing that they'll ask you because I did one for my daughter with her college is they ask what is the timeframe before you start drawing out because if you get 8 to 10 years before you want to use it they're going to go into a higher risk of an investment so as to get more rate of return for you if you need it next month it's going to be in a money market. And you're not going to get a lot of return on that so that's the other item that you need to look at with that. Yes. Up to the $5.00 and $10000.00 Yep. No you couldn't do that. Yep you put it into the 5 The one drawback to a $529.00 is if you don't use it for education and you basically you earmark it for Bobby Susie Jane if they decide a not to go to the Academy be not go to college now what do you do you turn it over exactly you can rename it for another student and use it that way but if you decide to cash it in it's all taxable and loses it now the positive side of it is when Abi goes to school the distribution shows and his main. It is totally exempt from income taxes including any earnings on the money solve a good selling point for the students in the schools to be able to do that and their parents grandparents usually grandparents are the ones that like to do it because parents if you do it and it's used in the college that's also considered part of the household resources so have grandparents do it it's not part of the resources as the person who invests it is technically the owner the student is the beneficiary so different possibilities here yes or. Yes Yep Yep you can buy from any States plan you can go to a national plan whatever you want to do whatever you see you can get the best return for what you're looking to do so all right one other thing I just learned this one and this is kind of intriguing there is and I'm going to kill the name of it cause I've made my own name up it's the charitable Rick acquired minimum distribution people who are age 70 and a half are required to make required minimum distributions from IRAs there's a little piece of information law that I learned when I was doing the research on this that if that individual rights has a check made out from their Ira directly to the church it is not taxable on their tax return. It is still a charitable donation on their tax return so it's sort of a double dip they don't have to report it is taxable income as part of the distribution but they still get the statement from the church as being part of their charitable donation The catch is. That has to be from the 3rd party administrator some 3rd party administrators will say Well here we're going to give you a checkbook to write checks from that's fine however if you are one if you have members who are the type who December 30 if they're writing their donation for the year they've got to do it through the 3rd party administrator because it has to clear the bank account if they're the individuals writing the check versus if the 3rd party administrator is writing the check it just has to be drafted so there's a real fine line there that they have to watch if me I'm working with actually is my sister. Her 3rd party administrator just gave her a checkbook from her Ira and it's allowed to write checks she can write checks to her church and as long as the check clears the bank at through her investment account by December 31st then it's fine you know. It it's not really it's going to be more towards the donor's responsibility talking to my sister's advisor he said look if you're going to make a check out in December have or call us I mean. It will probably have on their denial as Ira account are some or something along that lines. I'm a little bit surprised with you know them wanting the duplications of it but that sounds like an i.r.s. agent anyway. Just the way that you have to question the backs or. The double benefit will go away but the benefit of not being part of taxable income will still be there. It's my crystal ball which is a little foggy somedays AWB just the way they're moving I can see most of my clientele that were under 40500000 of income didn't itemize above that did and I don't think you're going to hear a lot of screaming from the general taxpaying community if they do away with itemized deductions that are affecting people with half a 1000000 and higher in income that's just not going to buy too much if it. Only with the required minimum Yeah. Yep. K. any other questions on that yes. The other opportunity is if they are able to itemize currently then it's still classified as a charitable donation and so they would get a donation factor there also Yeah. Not going to be political here but I think if our current president gets reelected that you'll probably see one of the 1st tax laws is going to be doing away with itemized deductions just personal opinion there but all right. Now I think we'll start going into what everybody wants to hear about which is the you've hit on. Underlies business income it's basically not going to get I apologize a little technical here it is income derived from an activity that is not directly related to your organization organizations exempt purpose. Basically the best way I think about it is you're doing something that is in direct competition for a trade or business that is a non exempt business so couple examples and I find these intriguing do a hospital pharmacy that provides medical supplies prescriptions to hospital patients that's exempt under the law because that's part of the hospital exempt. Program however if they sell those medical supplies medicines to the general public just walking in that is unrelated business income and they are subject to tax on that. With the tax law the corporate tax is now at 21 percent and that's what the tax rate for the unrelated business income is also is 21 percent but that's up that gross. One that may come into play and there's ways around this for you soliciting selling and publishing commercial advertising is a trader business now you probably were thinking What the heck am I talking about your. Directory of members your monthly bulletins you allow businesses to advertise in. That advertising is business advertising you are selling soliciting and publishing commercial ads that is subject to the unrelated business income so a couple of issues there that are going to be something that you hit and you need to worry about but to help understand this I gotta do couple of definitions 1st off is regularly conducted. A business activity of an exempt organization ordinarily are considered regularly conducted if they show a frequency and continuity and are pursued in a matter similar to comparable commercial activities of a non exempt organization but they do what does that mean besides a lot of jumbled words it is. Running a day to day month to month however you want to look at it and doing it consistently if you do something one time a year that's not regular It doesn't fall under these provisions if it's more frequently you've got a look at it and everything tax law comes down to facts and circumstances and most everything I'm telling you today and I think you'll agree with me we can circumvent based on facts and circumstances you know I have a warped sense of thinking and I was I woke up middle of night going Ok how do we we've got this new bit what do we do about it well you have deductions against that which I'll talk about a little better and there are certain things that we have to prorate How do you determine the proration there's many ways to do that and many ways to offset that potential gross income to get at 0 net so don't Michelle told me not to scare you all off today I'm trying not to I'm trying to give you information but these are all things that not done rightly he's right he does what you're going to be doing is screaming and running away in a hurry. But Ok the 2nd definition is substantially related a business activity is not substantially related to an organization's exempt purpose if it is not contribute importantly to accomplishing that purpose. Unfortunately the fact that it raises money for you to do your purpose is irrelevant. Beck Yes oh yes you can. Yeah basically what you run into is one of my favorite words documentation in a seminar that I tend regularly. Wark I sit in a seminar for 2 days straight 16 hours going through tax code. It's about $600.00 pages that we cover in 2 days. Yeah it's a fun seminar. Basically what they have what I have drawn from that is you do documentation you get an auditor and they look at it and they say disagree with your documentation it's up to them to prove you wrong if you have no documentation they look and say you did it wrong now your opportunity next is going to appeals which appeals is fun because appeals a better name for Iris appeals is let's make a deal they want to close cases the auditors want to generate money. The appeals Department wants to get the case closed off their desk so usually you go to appeals most everything unless it's blatantly wrong will be corrected appeals will look at it and say Ok prove the auditor wrong you have no documentation how you determine this so more documentation the more they've got to prove that you did are not following the law and that's basically where it comes down to and the mood of the auditor. So. Ok there. K. let's look at an issue that's going to probably hit all of you that's dual use of facilities how many of you have a building that you use for non church activities or non school activities. And the one out scare you with comes off with. No pick on the schools have been picking on churches too much here recently. Which is a nice school has a pool they use the pool for educational purposes throughout their school year summer comes along and they decide they're going to use the pool to keep it mate for the maintenance purposes they going to use the pool during the summer to do swim classes the staff of the school runs the program they collect the money they schedule the classes you think that's related to their educational purposes has nothing to do with the education of the students it is unrelated income and subject to tax. Unfortunately they would have to pay tax on it. I'm going to go back a minute here to the membership directory for a church if a membership directory lists scuse me each member. Isn't just a minute here. If we list each member in the same font and just provide their names addresses and even their business activity and we sell it to our members not unrelated that's that's fine to do Not a big deal now we change it a little bit like I said earlier and allow Tallackson associates to come in and advertise an acct. What I pay for that advertisement what any other business pays that is considered unrelated business income so it's made up the donation it's promotion. And you put a thank you well the thing that you have with yearbooks with monthly newsletters are you charging so much per line so much per quarter page so much half page if they have the ability to pick and choose the size then you're going to be looking at the unrelated business. If it's all if you have a funk you page it lists every business same file same everything I don't think that's going to be a problem is it going to be multiple variable sizes My gut reaction is going to be it's not going to be a donation it they're paying based on the size of the ad if we did everything identical and they they gave $5000.00 for a square or somebody gave $50.00 for the same square then it wouldn't be an issue I think it would be if you know I think you'd be a concern there if it was. Them deciding I'll get to you about. Can you wait about 10 minutes oh Ok. Yes or. I ask you to wait 15 minutes you're right there for him on that and everybody. As I said I go through the bad then I'll give you the good and everything yes me no. How do you know big deal if they give more and more or less I don't think you're going to have a problem. It's me. I'm reporting it. To you. Well there's 2 ways of thinking of this a headset the local level and I refer back to the tax code there I said it was the Jobs Act makes my job a lot more fun because there's going to be more work for accountants. That these things are done at the local level and there is a form right now that's out there it's called a 90 t. which is unrelated business income that only I think if I read correctly that I think it's only like 10 pages instead of 20. Yep because it's their entity no running out of the room right now please. And nobody can quit. Yes. They would do the $980.00 because they're the entity generating. The correct yep. Internal Revenue right there is a separate address for it it's yeah basically there is. And I'm not sure this is I think they can be electronically filed with the ninety's also. And done that way but it's it's another tax return that. I think they're getting little carried away with taxation but that's just an account suppose opinion and that one so. On unrelated 21 percent it's the same as the federal rate for corporations all right since you asked earlier about rent guess what's up. Ok the church or a school has a building that they buy decided they're going to plan for expansion but they turn around and right now don't have a. They're got building it's too big for what they need they turn around and rent that out to another nonprofit or a for profit business and they collect rent we have very strange situation a for profit entity paying rent to a nonprofit gets to the dock that rent under the law the way it is written the nonprofit if it's strictly for the rental of part of the building is not included as unrelated business income yet. Rental income for a nonprofit that's strictly for the real property of the building it's not part of unrelated business income so now if you're renting a suite that is fully furnished you have prorated because rent on personal assets desks fax machines computers that is taxable as unrelated business income. I don't make these laws up. That's part of the building. Depends on how you want to word it I'm going to carry a sound system. Are you providing use of dishes for reception for a wedding. That is going to potentially there you know you've got a lot of what ifs now the kitchen potentially that's part of the building well throw a curve ball what about all the dishes and everything are in there it's not a fun portion of the law personally commercial kitchen that's one big entity and I include all the dishes when I'm doing returns and it's all real property not personal but if you're Foley's are renting out a furnished office area that's what I see you're going to have problems but you still standing in here good. Sure. Whatever. Yeah basically i.r.s. in general is the only profit making entity of the federal government and they're one of the largest budget cuts that occurs every year. Their auditing staff I think if I remember correctly 4 tenths of one percent of returns get audited I have been in business for myself 30 years I have had one nonprofit audit that was due to a person that received services being upset and filed a complaint. Because due to some technical difficulties the business the nonprofit for one year was not licensed through internal revenue as a nonprofit some paperwork slipped through the cracks they corrected it just happened to be the same year that this woman went out and looked on the i.r.s. website and they're not shown as a nonprofit so she filed a complaint saying hey this company is advertising that there are nonprofit and they're not on your list auditor came out most audit take 4 hours minimum she came into my office went through our records she was gone in an hour saw it's if everything's in line nonprofit auditor going to be hey you need to fix this. Or you know just no changes at all so don't panic over it. I guess the worst case scenario is a say Ok you have unrelated business income you owe us x. number of dollars. You know that's the bottom line of it all. All right how many of you have no one has looked at anything with the Jobs Act or heard about the parking and. Fiasco I guess parking permit fiasco or mass transit fiasco of this is going to be fun for a. Congress and they use this term in loose terms in their ultimate wisdom decided that if non-profits allow their employees to take a payroll deduction for paid parking or transit passes that that is unrelated business income other corporations for profit corporations aren't allowed to deduct it anymore so they thought it was kind of bad to allow non-profits to be able to offset it and really doesn't matter to a nonprofit as I don't pay tax so they determine Nope we're going to change this and make it into a unrelated business income situation with where you have to pay this tax on it now now he think about it that sounds like it's more for large cities with where Ok you have and so used to going to Pittsburgh to see my daughter 8090 toll road that you can do the fast pass to go through the toll gates are you parking in parking structures next to the church whatever those types of things are what they were looking at Except it doesn't stop there it's for employer paid parking How many of you have parking lots next to your buildings how many of your staff uses that parking and you're paying for all the maintenance that's paid parking. Yeah congratulations as I said that's not what they intended that's what they did I expect it to be. Blair revoked but that's what we have today that's the bad side of it we'll get to the good side of it in a minute here but you know those are the types of things I don't you'll find Congress in their wisdom passes laws and there is a senator I won't mention her name but about 4 years ago with a health care act going through it was stated Well we have to pass the law so that we know what we passed. Yes I kid you not that is a quote from her and I lost all respect for that young lady up she's older than I am at that time in manner because I'm sorry if you don't know what you're passing Why are you passing it. All right now I've scared ya'll Let's talk about what the $990.00 entails 100 years me 1st off the 1st threshold to look at is you must have over a $1000.00 gross income of unrelated business income before you have to worry about the 90 and you notice I said gross that and that we're going to get to expenses in just a 2nd but we have to have that to look at it now there are 2 different types of expenditures that we can offset against that income 1st one is what I call directly related. And pick on that staff person who does that. Advertising bulletin every month and that's all they get paid for so that payroll and payroll taxes for that person are directly related. 100 percent offset against that income to get expenses just like any tax return income plus the expenses now you have other expenses that are unrelated that or are used both for profit side and the nonprofit side those we have to prorate and this is where it gets to be fun and I'm going to pick on the parking lot for a minute how much does a parking lot cost and you depreciated over about 7 years so let's just say I'm going to keep it simple for my brain it's early in the morning still and so on the Sunday night usually I'm not thinking about tax law on Sundays let's just say a 70000 dollars parking lot we're going to depreciated over 7 years so $10000.00 you get $365.00 days in a year you get $52.00 days used for church you have $280.00 days used for staff see where I'm going with this you get substantially more over here to depreciate allocate towards the unrelated business income than you do for the church and it isn't going to make any difference to the church sent its nonprofit saying with the school come back down to the documentation making sure we've got it documented making sure that we are justifying how we came up with it. When my bosses in the past i.r.s. mandates that you have to have a method how you come up with what you come up with. One of the best things is an example is when I have a business owner uses his personal car for business and you ask him how many miles they drove. And they go and they're counting the holes in your ceiling all about the same as last year. All k. No that's not a method Oh I drove 7000 mark does not like round numbers so I have adopted a policy of one of my old bosses Iris mandates that I have a method of how we determine mileage or business use you take what they told you and you look at the last digits of their social number. And you have a non round number normally just don't use it every year. I haven't had anybody yell at me yet but I haven't had it checked and I'd either solve but basically it's up to you and your organization how you determine that portion that business versus the nonprofit status documented I can't stress documentation anough you walk in with documentation to a potential audit head and you walk into the documentation and they're like oh crap and the organization I belong to we did an experiment with the state of the state our skin is federal auditors in the state of Michigan they give you a list of Usually 30 things that they want we went through the 1st 5 and just had more documentation and anybody wanted to look at the last 15 nothing. By the time you get to the 5th one and you start handing him these 3 inch binders of documentation you get to the 6th one you have documentation Yep Ok let's go in x. and they don't even look so the documentation is going to be the ultimate for you guys with this whole program making sure that you've got that. Other than that you know you're at the mercy of that auditor. And what their mood is like shit off from coffee. I would pro Well you would have to figure out in each community again this is all relative what is paid parking going for I know in Lansing it's I going to go downtown Lansing get a monthly parking pass I think it's $100.00 a month. Another thriving community hopefully none of you know where it's headed Hanover. Where my family has a summer cottage. You don't blink because you miss the city or the town the little community because there's no traffic light I think it's one stop sign. It's going to be substantially less so from this whole standpoint you look and say Ok here's what we have determined this parking is worth here's what our depreciation is Darnay down to 00 well. Yes. Well you're paying for the parking not the landscaping so if you're going to restrike the lot or if you're seal coating it that's going to be part of those expenses that we appropriated now. Maintaining it. Basically now that we've gone through this but the chances of getting audited on this slim and none but you get somebody coming in you know i.r.s. auditor's It's disgusting I have to put it this way they are reviewed by what they find the more problems that they find more revenue they bring in the better their rating and the better for their promotion if they do an audit and it's a no change audit they get criticized for why did you bother going out there you just wasted 10 hours of time prep work and everything they're going to find something that's just a matter of the way it is and that's why I said earlier you don't want to be afraid of Appeals because the audit is going to find something and I've gone through audits with where they found a $120000.00 of taxes owed because of the way she did things I went to appeals and by the way taxpayer did oh the money that we settled for I walked out of the peels at $12000.00 the client really p. OED The auditor I won't be let up clients go to audit so I do my one mistake I let one go she spent 4 hours in front of the auditor going I don't know why I'm here I did nothing wrong this is stupid in a waste of time. I kid you not the auditor was disallowing this lady was an attorney criminal defense attorney. She had been reprimanded by judges more than once in the year because of her mouth thank you the auditor got so tired of her in Lansing the one court building has no parking lot you have to pay a meter. The auditor was disallowing the $0.35 an hour for. For the parking because he had no receipt. Yes needless to say we got some of those things changed but that's the things that you have to look into how a cow All right one other thing I'm going to be quick on this one. There is at the state of Michigan level with the attorney general you have a solicitation license you guys are exempt from it however there is a form 3 of them to get the exact name here. It's called the C.T.'s over 3 from the attorney general's office and this is going don't laugh too loud this forum is very general were exempt from having to file for us for the solicitation license and that basically when you're raising funds other than charitable donations and you receive over 25000 you need to file for this basically it registers you with the state they know you exist but you don't have to do. Absolutely free it just see why for. Your organization. This medium was brought to you by audiophiles a website dedicated to spreading God's word through free sermon audio and much more if you would like to know more about audio or if you would like to listen to more sermon please visit w w w dot audio for top work.


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