Presented by William A. Albright CPA 972-270-5452 - - PowerPoint PPT Presentation

Texas Association of Quilters Guild

July 26/2016

Presented

by William A. Albright CPA 972-270-5452 balbright@ahscpas.com

Topics for Discussion

• Raffle Prizes – Reporting and Withholding.
• 501 (c)(3) vs. 501 (c)(7)
• Sales Tax
• Other Matters
• Door Prizes
• Purchases of Items with Guild Funds

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Tax-Exempt Organizations and Raffle Prizes - Reporting Requirements and Federal Income Tax Withholding Tax-Exempt and Government Entities Division

A tax-exempt organization that sponsors raffles may be required to secure information about the winner(s) and file reports on the prizes with the Internal Revenue Service. The organization may also be required to withhold and remit federal income taxes on

• prizes. Reporting Raffle Prizes “Raffle” Defined: In general, a raffle is considered a form of

lottery. Generally, an exempt organization must report raffle prizes if (a) the amount paid reduced, at the exempt organization’s option, by the wager (the amount a person paid for the chance to win a prize), is $600 or more; and (b) the payout is at least 300 times the amount of the

• wager. The organization uses Form W-2G for this report. Example 1: Wendy purchased a $1

ticket for a raffle conducted by X, an exempt organization. On October 31, 2004, the drawing was held and Wendy won $900. X must file Form W-2G with the IRS and give a copy of Form W-2G to Wendy. A person receiving gambling winnings must furnish the exempt

• rganization a statement on Form 5754 made under penalties of perjury stating his or her

identity and the identity of any others entitled to the winnings (and their shares of the winnings.) When the person receiving winnings is not the actual winner, or is a member of a group of two or more winners on a single ticket, the recipient must furnish the exempt

• rganization information listed on Form 5754, Statement by Person(s) Receiving Gambling

Winnings, and the

• rganization

must file Forms W-2G based

• n

that information. The

• rganization must keep Form 5754 for four years and make it available for IRS inspection. (See

the specific instructions for Form 5754 for more information.) The exempt organization must file Forms W-2G with the IRS by the last day of February of the year after the year of the raffle. Use Form 1096, Annual Summary and Transmittal of U.S. Information Returns, to transmit Forms W-2G to the IRS. The organization must also issue Forms W-2G to prize recipients by January 31 of the year after the year of the raffle.

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Withholding Tax on Raffle Prizes Regular Gambling Withholding: An organization that pays raffle prizes must withhold 25% from the winnings and report this amount to the IRS on Form W-2G. This regular gambling withholding applies to winnings of more than $5,000. If the organization fails to withhold correctly, it is liable for the

• tax. Example 2: Lou purchased a $1 ticket for a raffle conducted by X, an

exempt organization. On October 31, 2004, the drawing was held and Lou won $6,000. Because the proceeds from the wager are greater than $5,000 ($6,000 prize minus $1 ticket cost), X must withhold $1,499.75 ($5,999 x 25%) from Lou’s winnings. If X fails to withhold $1,499.75 before distributing the prize, X is liable for the withholding tax. An

• rganization is required to withhold 28 percent of the total proceeds if (1)

the prize is otherwise subject to reporting, and (2) the winner fails to furnish a correct taxpayer identification number. Noncash Prizes: For noncash prizes, the winner must pay the organization 25% of the fair market value of the prize minus the amount of the wager. Example 3: Jason purchased a $1 ticket for a raffle conducted by X, an exempt

• rganization. On October 31, 2004, the drawing was held and Jason won a

car worth $10,000 (fair market value). Because the prize exceeds $5,000 and the fair market value of the car is $10,000, the tax on the fair market value of the prize is $2,499.75 [($10,000 minus $1 ticket cost) x 25%)]. Jason must pay $2,499.75 to X to remit to the IRS on his (Jason’s) behalf. X would indicate the fair market value of the prize ($10,000) in box 1 and the amount of the withholding tax paid ($2,499.75) in box 2 on Form W- 2G.

Tax-Exempt Organizations and Raffle Prizes - Reporting Requirements and Federal Income Tax Withholding Tax- Exempt and Government Entities Division

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Organization Pays Withholding Tax: If the organization, as part of the prize, pays the taxes required to be withheld, it must pay tax not only on the fair market value of the prize less the wager, but also on the taxes it pays on behalf of the winner. This results in a grossed up prize requiring the use of an algebraic formula. Under this formula, the organization must pay withholding tax of 33.33% of the prize’s fair market value. The organization reports the grossed up amount of the prize (fair market value of prize plus amount of taxes paid on behalf of winner) in box 1 of Form W-2G, and the withholding tax in box 2 of Form W-2G. Example 4: If in Example 3, X pays the withholding tax on Jason’s behalf, the withholding tax is $3,332.67 [($10,000 fair market value of prize minus $1 ticket cost) x 33.33%]. X must report $13,333 as the gross winnings in box 1 of Form W-2G, and $3,334.67 withholding tax in box 2. Reporting and Paying Tax to the IRS The organization must use Form 945, Annual Return of Withheld Federal Income Tax, to report and send withheld amounts to the IRS. Form 945 is an annual return, and is due January 31 of the year after the year in which the taxes were withheld. Separate tax deposits are required for payroll and non-payroll withholding. Be sure to mark the Form 945 checkbox on Form 8109, the Federal tax deposit

• coupon. The organization must list the EIN (employer identification number) of

the organization conducting the raffle on Forms W-2G, 1096, and 945. For more information, see IRS Publication 3079, Gaming Publication for Tax- Exempt Organizations.

Tax-Exempt Organizations and Raffle Prizes

• Reporting Requirements and Federal

Income Tax Withholding Tax-Exempt and Government Entities Division

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501 ( c )(3) vs 501 (c ) (7)

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501(c)(3) qualified Charity 501 ( c )(7) Social Club Purpose Religious, Educational, Charitable, Scientific, Literary, Pleasure, recreation, social activities Examples churches, charities, private schools, homeschool co-ops with an educational purpose Fraternities, sororities, country clubs, hobby clubs, homeschool support groups Requirements No private inurement allowed. Upon dissolution all assets must be distributed to another 501(c)(3) organization. Personal contact, fellowship and co-mingling of members. No private inurement allowed. Activities Can hold programs, sell services and products as part of their exempt purpose. Can provide meals or services only to members in connection with club activities Tax deductible donations allowed Yes No Tax exempt (no taxes on profits) Exempt from Federal income tax unless the organization has unrelated business income Exempt from Federal income tax on income derived from members;

• ther income taxed

Source of Income Membership fees, fees for services, donations, fund raisers, program fees Primarily (65% or more) from membership fees. Membership Open to public Limited membership and consistent with the purpose of the club. IRS Application Required? Yes, if gross revenues over $5,000/year. File Form 1023

• No. The IRS does not require

501(c)(7) organizations to file an

• application. They can “self-

proclaim” tax exempt status. Annual IRS Reporting Form 990N, Form 99EZ or Form 990 Form 990N, Form 99EZ or Form 990 Legislative Lobbying permitted? Insubstantial lobbying allowed (less than 20% of total expenses). No endorsement of a candidate. No limit on legislative activity as long as it furthers the exempt purpose

Public Disclosure and Availability of Exempt Organizations Returns and Applications: Public Disclosure Requirements in General

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• 1. In general, what public disclosure requirements apply to tax-exempt
• rganizations?

In general, exempt organizations must make available for public inspection certain annual returns and applications for exemption, and must provide copies of such returns and applications to individuals who request them. Copies usually must be provided immediately in the case of in-person requests, and within 30 days in the case of written requests. The tax-exempt organization may charge a reasonable copying fee plus actual postage, if any. The IRS must also make this same information publicly available. Generally, it may take the IRS up to 60 days to process your request.

• 2. What organizations are tax-exempt organizations for purposes of the law requiring that

certain tax documents be disclosed and copies of those documents be provided to persons requesting them? The law affects organizations exempt from federal income tax under Internal Revenue Code section 501(a) and described in section 501(c) or 501(d). Examples of tax-exempt organization to which the law applies include charities, schools, labor organizations, business leagues, fraternities, social clubs, veterans

• rganizations and voluntary employees' beneficiary associations.

Public Disclosure and Availability of Exempt Organizations Returns and Applications: Public Disclosure Requirements in General

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• 3. What tax documents must an exempt organization make

available for public inspection and copying? a) An exempt organization must make available for public inspection its exemption application. An exemption application includes the Form 1023 (for organizations recognized as exempt under Internal Revenue Code section 501(c)(3)), Form 1024 (for organizations recognized as exempt under most other paragraphs of section 501(c)), or the letter submitted under the paragraphs for which no form is prescribed, together with supporting documents and any letter or document issued by the IRS concerning the application. b) In addition, an exempt organization must make available for public inspection and copying its annual return. Such returns include Form 990 , Return of Organization Exempt From Income Tax,Form 990- EZ , Short Form Return

• f

Organization Exempt From Income Tax, Form 990-PF, Return of Private Foundation. Returns must be available for a three-year period beginning with the due date of the return (including any extension of time for filing). For this purpose, the return includes any schedules, attachments,

• r

supporting documents that relate to the imposition of tax on the unrelated business income of the charity.

What are my filing responsibilities once I receive/apply for my tax-exempt status?

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Status Form to File Gross receipts normally ≤ $50,000 Note: Organizations eligible to file the e-Postcard may choose to file a full return 990-N Gross receipts < $200,000, and Total assets < $500,000 990-EZ

• r 990

Gross receipts ≥ $200,000, or Total assets ≥ $500,000 990 Private foundation - regardless of financial status 990-PF

Garage Sales and Texas Sales Tax

• Selling Personal Items – You May Need a Texas Sales and Use Tax Permit If you are

having a garage sale, or selling personal items through an auction website or an advertisement, you may have a sales tax responsibility. Texas sales tax is due on sales

• f tangible personal property. “Tangible personal property” means property that can be seen,

weighed, measured, felt or touched. Examples include clothing, shoes, CDs, DVDs, books, furniture, bicycles, toys and other personal items typically sold at a garage sale or other

• sales. If you sell tangible personal property, you may be required to have a sales tax permit

and collect tax, depending on how many sales you make during a 12-month period and the dollar amount of those sales. If you already have a sales tax permit, sales tax is due on your sales of taxable items, unless another exemption applies to the sale, even if the sales are not made in the normal course of your business. Sales by Individuals If you make only “occasional sales,” as defined in Texas Tax Code Section 151.304, you are not required to have a sales tax permit or collect tax on sales of qualifying items. But, if you have a sales tax permit, the sales you make are not occasional sales. “Occasional sales” can be made by a person who does not have, or is not required to have, a Texas sales and use tax permit or a similar permit or license issued by another state. Occasional sales include: • one or two sales of taxable items, regardless of price, during any 12- month period (Texas Tax Code Section 151.304(b)(1)); or • sales totaling up to $3,000 in a calendar year of items that were originally acquired for personal use by the person or a family member of the person selling them (Tax Code Section 151.304(b)(5)). For example, in the same calendar year, you have a garage sale of your family’s personal items and earn $1,000; sell your used bicycle for $200; and sell your childhood toy for $500 through an auction website. You have made more than two sales in a 12-month period, so the exemption in Section 151.304(b)(1) does not apply. On the other hand, because the items you sold during the calendar year were originally acquired for personal use, and the sales total less than $3,000, you qualify for the exemption in Section 151.304(b)(5). If you keep selling taxable items after making more than two sales or reaching the $3,000 limit on sales of personal items in a calendar year, you are considered to be engaged in business. You must

• btain a sales tax permit and start collecting tax on all future sales of taxable items,

beginning with the first sale after the limit is reached.

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Garage Sales and Texas Sales Tax

• Group Sales and Community-Wide Events The occasional sale exemption does not apply

to: • groups or organizations, including student and church groups, that collect items to sell at a garage sale; or • community-wide events produced by a third party, if the seller is required to pay a fee for booth or space rental or a commission to participate in the

• event. In these situations, sales tax must be collected, unless other exemptions apply. •

Window on State Government: www.window.state.tx.us • Local Number in Austin: 512- 463-4600 • Window on State Government: www.window.state.tx.us S A L E S A N D U S E T A X Garage Sales and Texas Sales Tax BULLETIN Artists, Craftsmen and Other Sellers If you are already in the business of selling taxable items, then you cannot qualify for the

• ccasional sale exemption under either Section 151.304(b)(1) or (b)(5). A person who

buys or otherwise obtains goods from others for the purpose of reselling them (including barters or trades) or a person who routinely sells taxable items, including an artist or craftsman who fabricates goods for sale, is considered to be engaged in business. In that case, you are required to have a Texas sales tax permit and collect tax on all sales of taxable items, even on your personal items. In other words, if you are engaged in the business of making taxable sales, you cannot claim an exemption from tax on the first two sales in a 12-month period or on the first $3,000 worth of personal taxable items sold in a calendar year.

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Garage Sales and Texas Sales Tax

• Artists, Craftsmen and Other Sellers If you are already in

the business of selling taxable items, then you cannot qualify for the

• ccasional

sale exemption under either Section 151.304(b)(1) or (b)(5). A person who buys or

• therwise obtains goods from others for the purpose of

reselling them (including barters or trades) or a person who routinely sells taxable items, including an artist or craftsman who fabricates goods for sale, is considered to be engaged in business. In that case, you are required to have a Texas sales tax permit and collect tax on all sales of taxable items, even on your personal items. In other words, if you are engaged in the business

• f

making taxable sales, you cannot claim an exemption from tax on the first two sales in a 12-month period or on the first $3,000 worth of personal taxable items sold in a calendar year. As with all exemptions, the seller is required to maintain records to document that the exemption applies.

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Garage Sales and Texas Sales Tax

If….IF……. AND…ANDAD THEN… You have a sales tax permit Sales tax is due (unless another exemption applies to a sale) You are an individual who does not have, and is not required to have, a sales tax permit 1) During the year, you sell taxable items originally bought for your personal use (or for use by a member of you family) and 2) The total amount of money received for the sales (no matter how many sales) is not more than $3,000during the calendar year You are not required to collect sales tax, and the purchaser does not owe use tax. You are an individual or a business who does not have, and is not required to have , a sales tax permit You make two (2) sales in a 12-month period (regardless

• f the dollar amount of the

sales) 1) The $3,000 limit does not apply and 2) You are not required to collect sales tax, whether you are an individual or a business.

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Other Matters

• Door Prizes.
• Purchases of items with guild funds.
• Failure to file.
• If an organization has had its tax-exempt status automatically revoked and wishes

to have that status reinstated, it must file an application for exemption and pay the appropriate user fee even if it was not required to apply for exempt status initially.

• If the IRS determines that the organization meets the requirements for tax-

exempt status, it will issue a new determination letter. The IRS also will include the reinstated

• rganization

in the next update

• f

Exempt Organizations Select Check (Pub. 78 database), and indicate in the IRS Business Master File (BMF) extract that the organization is eligible to receive tax-deductible contributions. Donors and others may rely upon the new IRS determination letter as of its stated effective date and on the updated Exempt Organizations Select Check and BMF extract listings.

• In most cases, the effective date of reinstated exemption will be the date that the
• rganization’s

exemption application was submitted to the IRS. However,

• rganizations may choose to request that reinstatement be retroactive to the

effective date of revocation. The IRS will grant retroactive reinstatement of exemption under certain limited circumstances. A new IRS fact sheet explains reinstatement options. Because the list is an official IRS record of organizations that lost their exempt status for failing to file for three consecutive years, an

• rganization whose exempt status is reinstated remains on the list.

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