Protecting the Reputation of your Non-profit Organization by Carolyn Flaherty

The reputation of a non-profit is perhaps their greatest asset and an equally important marketing tool. Therefore you should be proactive in protecting your organization’s good name particularly in today’s environment when a disgruntled employee, volunteer, donor or service recipient can instantly vent frustrations over the Web via any number of popular social media sites; Facebook, Twitter, YouTube, and blogs to name a few.

Below are a few ideas for how to mitigate reputational risk:

1. Set up and adhere to human resource policies. Ensure that employees and volunteers are fairly treated and issues are addressed in a timely manner.

2. Create a comprehensive conflict of interest policy that is distributed and understood.

3. The AICPA recommends setting up a whistleblower hotline or similar medium for stakeholders to direct concerns and frustrations. Having an outlet for your shareholders to turn to may keep them from turning to public platforms like social media.

4. Engage in social media. Having a social media presence keeps you in the conversation. Your participation in the conversation allows the stakeholders to gain a better understanding of you and your organization. If you can get to know the stakeholders and form a relationship, you will likely become aware early on of a brewing issue that could go public and therefore able to reach out to parties before the snow ball gets rolling. Furthermore, you will have a ready audience to engage and likely a veritable army of fans that will come to your defense should a problem arise.

Finally, there are also communication consultants and reputational monitoring and protection services available. Communication consultants can assist you with your social media personality and help you put a plan in place to deal with negative media. Reputational monitoring and protection services will aide in watching online and media activity concerned with your entity and can even help you rebuild your reputation.
Your non-profit organization’s good name is definitely an example of when the best defense is a good offense!

Does Your Child Need to File as a Result of a Distribution from a Qualified Tuition Program? By Carolyn Flaherty

Section 529 Plans, also known as Qualified Tuition Programs or QTP, have become extremely popular over the course of the previous decade. In many cases, the plans were set up so that a dependent child is listed as the owner and beneficiary of a plan. Therefore, when distributions are made, the child receives a Form 1099Q from the educational institution in their social security number. The Form 1099Q is also furnished to the IRS.

Distributions are generally fully excludable from taxable income if they do not exceed qualified higher education expenses. If distributions exceed qualified expenses, the excess (less original basis) is includable as taxable income to the recipient. Qualified higher education expenses include tuition, fees, books, supplies, equipment required for enrollment or attendance, expenses for special needs services and room and board costs for students who are at least ½ time students.

The question arises, if a taxpayer, who is not otherwise required to file a tax return (due to minimal amounts of reportable income), receives a Form 1099Q distribution that is fully excludable under the guidelines above: does the distribution cause the taxpayer to be required to file?

The correct answer is somewhat inconclusive at this time as the IRS has not perfected their matching program when it comes to 1099Q’s. Reportable/Includable Income and taxable income are two different things in the eyes of the tax law. Code Section 529(c)(3)(A) asserts that distributions for a QTP are INCLUDABLE in the recipient’s income under the Code Section 72 rules to the extent not excluded under any other Code provision. Therefore, though the issue is somewhat ambiguous, it seems that distributions are indeed income and hence reportable but not taxable assuming they meet the education requirements above.

Furthermore, because the IRS is provided a copy of Form 1099Q, they will match the form to the recipient’s social security number. If no return is filed, the IRS may generate a notice of deficiency. To avoid unnecessary complications and dealings with the IRS, our office has made it a policy to file a return for the student when these circumstances arise.

When is Form 8283 required to be filed for a charitable contribution? by Karla Hopkins

Form 8283, Non cash Charitable Contributions, must be filed with an individual’s income tax return to substantiate non cash charitable contributions. The instructions for the form say that you must attach the form to the return for the year in which you contribute the property and first claim the deduction.

But what if you make a non cash contribution and elect to utilize the standard deduction instead of itemizing? Is the form still required that year if the deduction was limited by adjusted income limits before making the standard deduction election?

In that case, the non cash charitable contribution would technically be eligible to be carried over to the following year.

How do you substantiate the non cash charitable contribution deduction?

The best practice in the case where the non cash charitable contribution deduction is limited and the taxpayer elects to utilize the standard deduction instead of itemizing is to attach the required Form 8283 in the year of making the non cash contribution even though the form is not required that year due to the standard deduction election.

Simple Ways to Protect your Corporate Shield by Carolyn Flaherty

Many small business owners are using the limited liability corporate structure in order to limit their personal liability. Once a business is incorporated, it exists as a separate legal entity. Therefore, generally the corporation and not the business owner will be responsible for the debts and liabilities of the entity. The commonly called, “corporate shield” separates your personal assets from the assets of the business.

However, in order for the shield to properly defend your personal assets, you must ensure your LLC remains in good standing. Below are several practices you should implement to keep your corporate shield in place.

1. Do not comingle your personal and business finances. Maintain separate bank accounts and credit cards for your business. Do not use corporate funds for personal expenditures as this may place your personal assets at risk.
2. File state required annual reports. Delinquent filings can result in penalties, late fees or even suspension or dissolution of your corporation.
3. Record any changes in the Articles of Incorporation. Such changes as company address, name change, authorization of additional shares, changes in the board members, etc. should be formalized in Articles of Amendment and submitted to the state.
4. Make sure your business is in compliance with the requirements in all states in which you operate. If you are doing business in a state other than your state of incorporation, you will need to qualify and register as a foreign entity and depending on your business type may require licenses or permits in order to legally operate.
5. Timely file your tax returns.

Many well intending business owners do not follow these steps to protect themselves. Business owners often spread themselves very thin taking on a great deal of responsibility in order to ensure their success. These administrative tasks must be part of the priority to avoid costly negative consequences.

USING A BUY/SELL AGREEMENT TO TRANSFER OWNERSHIP by Karla Hopkins

A buy/sell agreement is a contract that restricts business owners from freely transferring their ownership interests in a business. It is a tool for providing a planned and orderly transfer. Some of the important advantages of this type of agreement are:

• Provides for business continuity upon the death, disability, or retirement of a shareholder
• It establishes a market value for the corporation’s stock that might otherwise be difficult to sell
• It ensures that the ownership of the business remains with individuals selected by the owners or remains closely held
• It provides liquidity to the estate of a deceased shareholder to pay estate taxes
• It supports the deceased family members with proceeds upon the sale of the stock

A few disadvantages to a buy/sell agreement are:

• The cash paid for the life insurance premiums that fund the agreement is not available for business operations or shareholder personal expenses
• Circumstances may change after the agreement is adopted that cause purchasers to regret the obligation that they made to buy a withdrawing owner’s interest.

The contract can be between the shareholders of a corporation individually or between a corporation and a shareholder. The contract provides that a shareholder’s stock will be sold to the other shareholders or to the corporation upon an occurrence of a specified event. Events generally include death, disability, and retirement, but may also include divorce, bankruptcy or inability to practice due to licensure requirements. The agreement may also be designed as a right of first refusal in the event that one or more of the shareholders want to sell their stock.

In a redemption agreement, the shareholder and the corporation enter into a contract in which the shareholder agrees to sell their shares to the corporation for a certain price, term or circumstance that is specified in the agreement. If the stock redemption agreement is funded with life insurance, the corporation pays the premiums and the corporation owns the policy and is the policy’s beneficiary.

The costs of the insurance premiums are carried proportionately by all the shareholders because the corporation is responsible for all the premium payments. The administration of the arrangement is simplified because there is only one life insurance policy on each shareholder and the legal agreement can be drafted as a single document.

Redemption agreements can have complex tax implications and a potential for adverse income tax consequences. If a corporation pays more than the fair market value for the stock the selling shareholder could be deemed to receive a gift from the other shareholders or compensation from the corporation. If the corporation pays less than the stock’s fair market value, the remaining shareholders may have received either a gift or compensation. To qualify for tax advantaged sale treatment the transaction must meet some strict statutory requirements. If the corporation is the beneficiary of a life insurance policy that funds the stock redemption, the insurance proceeds could trigger Alternative Minimum Tax.

A cross purchase agreement is a contract between the shareholders of the corporation to offer their shares for sale to the other shareholders at the price and terms specified in the agreement. In the event of a shareholder’s death, the estate is normally required to offer the decedent’s ownership interest to the other shareholders at the specified price and terms. The other shareholders are generally obligated to buy the interest in the event of specified circumstances. These agreements are funded with insurance and therefore are best when a corporation has only 2 or 3 shareholders because each shareholder must carry life insurance on all the other shareholders which can be prohibitive.

Having no agreement is often the most costly of all because it can result in personal collateral damage. Shareholders become enemies and family members can become bankrupt. The decisions on exiting a business should always be made during the time of creation of the business and be readdressed regularly as circumstances come up that could affect the viability of a buy/sell agreement plan.