Understanding Accounting: Basic Finance For

Non-Financial Managers- For the nonprofit entity -

Karen Hughes, CPAPO Box 26083, Honolulu, HI 96825

Telephone: 808-221-0138 Email: karenhughes28@gmail.com

You formed an entity….now what?Sole ProprietorshipLimited Liability Company (LLC)

* Single-member LLCs * Multiple-member LLCs

PartnershipCorporationS-CorporationNonprofit Organization

We’ll focus on thenonprofit organization today…

Nonprofit OrganizationsToday we’ll cover the basics:Tax exemption applicationFederal taxationState taxationDepartment of Attorney General requirementsHawaii General Excise Tax

Federal Tax Exempt ApplicationMost commonly the 501(c)3 applicationWho can file?Must be organized as a trust, corporation, or an associationOrganizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals

Federal Tax Exempt Application

You may not have to file if annual gross receipts normally under $5,000; churches also do not need to file

You may be tax exempt under above circumstances but you must file the application and receive exemption recognition from the IRS for the donations made to your organization to be tax deductible

Federal Tax Exempt Application

File within 27 months from date of entity formation for tax exempt status to apply retroactively to date of formation

If you don’t file within 27 months of formation, you may not be able to qualify for exempt status before IRS receives application, generally the postmark date is used

Federal Tax Exempt ApplicationApplication will be available for public

inspection, so carefully and correctly complete your application

A charitable organization must make available to the public their approved exempt application, all supporting documents, last 3 annual information returns upon request without charge (reasonable fee for reproduction and copying costs are ok). The IRS imposes penalties for failure to comply with these requirements

Federal Tax Exempt ApplicationHow do you file and how much does it cost?Generally on Form 1023 for 501(c)3

organizations, available at www.irs.govCost to file: $400 those with annual gross

receipts less than $10,000 during preceding 4 years; $850 for those with annual gross receipts more than $10,000

Be sure to review application carefully before you submit! Call IRS if you do not hear from them within 180 days

Federal Tax Exempt ApplicationIn 2014 the IRS created Form 1023-EZ and

you can apply online. There’s a 7-page eligibility worksheet to determine if you can use Form 1023-EZ instead. You must answer “No” to all the questions to qualify to file Form 1023-EZ. Look under Form 1023-EZ instructions

Fee is $400Much shorter and simplified application. If

approved, as quickly as 3 to 4 weeks. Call IRS if you do not hear from them within 90 days

http://www.stayexempt.irs.gov/

Federal Tax RequirementsWhat do you need to file annually with the IRS?Generally file one of the 990-series forms

Status Form to File

Gross receipts normally < $50,000

990-N (e-Postcard)

Gross receipts < $200,000, and Total Assets < $500,000

990-EZ or 990

Gross receipts > $200,000, orTotal assets > $500,000

990

Private foundations – regardless of financial status

990-PF

Federal Tax RequirementsFile Form 990-N E-Postcard at

http://epostcard.form990.org/Other 990 Forms can be found on www.irs.govDue dates for filings:Generally on the 15th day of the 5th month after year endsExample: nonprofit organization with year end 12/31/2014 – filing will be due 5/15/2015Nonprofit organization with fiscal year end 7/31/2015 – filing will be due 12/15/2015.May apply for two – 3 month extensions

Federal Tax RequirementsBe sure to file your annual tax or

informational returns. If you do not file for 3 consecutive years, you will automatically lose your tax exempt status.

There is a list on IRS website of organizations whose tax-exempt status was automatically revoked because of failure to file. There are about 3100 organizations in State of Hawaii whose tax exempt status was revoked due to noncompliance

If you do not have tax-exempt status, you must file a return based on your entity type

Federal Tax RequirementsIRS penalties for nonfiling of Form 990 are

high: $20/day, about $600/month, not to exceed lesser of

$10,000 or 5% of the organization’s gross receipts for that year, unless you can show late filing was due to reasonable cause

Organizations whose gross receipts exceed $1 million are subject to penalty of $100/day, about $3,000/month, with maximum penalty for any one return of $500,000

Penalties against responsible person(s) may also be imposed if the IRS notifies organization to file if the organization continues to remain noncompliant. The penalty is $10/day with maximum penalty on all persons for failure to file any one return not to exceed $5,000

Hawaii State Tax RequirementsIn general, if you have a federal tax exempt

status, you do not need to file a Hawaii state tax exempt/nonprofit organization tax return

Unless, you have Hawaii gross income from an unrelated trade or business activity of $1,000 or more. File Hawaii Form N-70NP. Forms and instructions are available online at www.tax.Hawaii.gov/forms

Dept of Attorney General Requirements

The State of Hawaii Department of Attorney General’s Tax & Charities Division administers and enforces Hawaii’s charitable solicitation law and provides oversight of Hawaii’s public charities, charitable trusts, and private foundations.

Visit their website at www.ag.Hawaii.gov/tax

Dept of Attorney General Requirements

If your organization solicits contributions, you must register unless you are exempt:

Churches and other religious organizations Parent-teacher association Organization normally receives less than $25,000

in contributions annually, if organization does not compensate any professional solicitor or professional fundraising counsel

Other less common organizations

Dept of Attorney General Requirements

Register your organization if necessary (no cost): http://efile.form990.org/frmNPRequestLogin.asp

File annual financial report “Hawaii Charity Annual Transmittal Form” and attach PDF copy of the filed IRS Form 990 or 990EZ or prepare on their website

If you file federal Form 990-N (E-Postcard), file “Annual Charity Transmittal Form” with AG

File annual reports here: http://efile.form990.org and click on “Hawaii” under Quick Menu

Dept of Attorney General Requirements

If you file Form 990 or 990EZ, the annual report due to AG is the due date of the Form 990/990EZ including extensions

If you file Form 990-N, the annual report due to AG is no later than the 15th day of the 5th month following close of organization’s fiscal year

Organizations who receive more than $500,000 in gross revenues or have an audited financial statement because it was required to obtain one by another governmental agency or 3rd party, must also submit a copy of the audited financial statement

Dept of Attorney General Requirements

Filing fees are based on organization’s gross revenues:Gross Revenues Annual Fee

Less than $25,000 $10

$25,000 but less than $50,000

$25

$50,000 but less than $100,000

$50

$100,000 but less than $250,000

$100

$250,000 but less than $500,000

$150

$500,000 but less than $1 million

$200

$1 million but less than $2 million

$250

$2 million but less than $5 million

$350

$5 million and over $600

Dept of Attorney General Requirements

Late Fees: $20/day up to maximum of $1,000 for late filing $20/day up to maximum of $1,000 for late payment

You cannot register with AG until you receive your tax exempt status.

Hawaii General Excise TaxEvery person doing business during the year in

the State of Hawaii must obtain a license and file returns

Tax is on gross income, before expenses, with some exceptions

Oahu: Also has county surcharge tax of 0.5% because of rail transit project

Common Tax Rates:Oahu 4.5%All other islands 4.0%

Hawaii General Excise Tax

Even if you are a nonprofit organization, you must file your general excise tax returns

Revenues related to your organization mission is tax exempt if you have a GE tax exemption (still file a “zero” return)

Fundraising revenues and other “unrelated business income” are subject to GE tax. Fundraising income is subject to the 4% tax rate.

Hawaii General Excise Tax

To obtain a GE tax license: Use Hawaii Business Express to obtain a GE tax

license: https://hbe.ehawaii.gov/BizEx/home.eb Or file Form BB-1 or BB-1X

Register to file and pay GE tax returns online: http://tax.hawaii.gov/eservices/

Or file on paper Forms G-45 (don’t forget annual Form G-49)

Forms are available at www.tax.Hawaii.gov/forms

Hawaii General Excise TaxHow often do I need to file?

Semi-Annually: if you will pay $2,000 or less in GE taxes per year (at 4.5% Oahu rate, about $44,500 or less of gross revenues for the year)

Quarterly: if you will pay $4,000 or less in GE taxes per year (at 4.5% Oahu rate, about $89,000 or less of gross revenues for the year)

Monthly: if you will pay more than $4,000 in GE taxes per year (at 4.5% Oahu rate, gross revenues over about $89,000 for the year)

Hawaii General Excise TaxWhen are the filing due dates?

Semi-annuallyJanuary – June period due July 20th

July – December period due January 20th

QuarterlyJanuary – March due April 20th

April – June due July 20th

July – September due October 20th

October – December due January 20th

MonthlyDue 20th of each month (Ex: January is due February 20th)

How do we file for GE tax exemption?

File paper Form G-6 or G-6S: Application For Exemption From General Excise Taxes ($20 fee)

Use Form G6-S (short form) if you are applying within 3 years from date of organization received or applied for a federal income tax exemption

All others use Form G-6 If you are a Hawaii organization and file within 3

months from date your were legally formed, then your approved application will be effective on date of legal entity formation. If didn’t file within 3 months, may request for retroactive approval

Hawaii General Excise TaxWhy do we charge 4.712%? Because we pay tax on entire amount we collect from our customers

If we only charged 4.5% to our customers……..

Example of sales to customer: Sales $10,000Oahu GE Tax 4.712% =

$471.20Total sales: $10,471.20Tax paid to Hawaii State Tax

Collector: $10,471.20 x 4.5% = $471.20

Sales $10,000 x 4.5% = $450Total sales: $10,450Tax paid to Hawaii State Tax

Collector:$10,450 x 4.5% = $470.25

$470.25 - $450.00 = $20.25 which we have to pay out of pocket

Questions?

Thank you!