Every year, changes to tax codes can have a dramatic effect on the cash flow of individuals, corporations, and certainly nonprofits and associations. The annual exercise, at least here in the U.S., is generally one of lowering the impact of a tax bill by being aware of all the various codes that can affect one’s bottom line.
A knowledgeable tax accountant can be helpful for end-of-year filing, but preparing throughout the year for tax season can also be beneficial. For nonprofits, an accounting software tool tailored to their organization’s needs can help lessen the yearly tax burden.
Let’s look at three areas that have a taxable effect on nonprofits.
The largest tax impact for most organizations will be federal taxes. To reduce the impact, be sure to do the following.
Review all the checklists affecting nonprofit board and staff members for items such as:
- Wage tax withholdings from employee paychecks and how the latest tax codes can affect both your organization and employees
- Health insurance premiums paid by employee or employer, being sure to generate any additional needed forms
- Highly compensated employees (over $1 million) and how newer tax laws may require additional review
- Family and medical leave and how it applies to your organization and affected employees
Be aware of constituent tax exemptions:
- Such as limitations of state and local income taxes (SALT) that can be itemized for deduction
- The allowable amounts of charitable contribution deductions
- Other less commonly used deductions and limitations on itemization
Be aware of the impact of the latest federal tax updates:
- How this could create a change in your donors’ behavior, based on changes in the tax laws
- Being sure to adjust your organization’s fundraising appeals to match any tax law changes
The next largest tax impact for organizations may be at the state level, depending upon in which state a nonprofit or association is incorporated.
Be aware of the nonprofit (incorporated entity) filing requirements for your state.
- Such as the need to update contact information on file with your state
- Keeping registration renewals, if any, up-to-date
- Completing any annual filing requirements in a timely manner
Not to be forgotten is the impact some organizations may feel, based on location, regarding local taxes. By being aware of the global “big picture” effect of tax situations, taking local action could be the difference between a lackluster donor season and a successful fundraising campaign.
- Understanding your local donors’ motivations when it comes to making charitable contributions
- Communicating with various levels of donors in your local community
- Being sure to communicate the proper use of tax benefits as a fundraising talking point
Regardless of what level from which your tax issues arise, consider the advantage of being prepared year-round to tackle the annual exercise of handling your organization’s tax implications.