More On Tax Planningfrom The Advisor's Professional Library
As filing season winds down this month, tax practitioners (and advisors who work with practitioners on behalf of their clients) can breathe easier, but only for a moment. Once those 2006 returns are complete and tax pros catch up on some shut-eye, it is time to deal with new legislation that is already having a big impact on 2007 and thus the next filing season (which will be here sooner than you think). The Tax Talk Today series of live, interactive Webcasts has dedicated its early 2007 programs to big federal changes for this year--including sweeping changes for tax-exempt organizations and the people who contribute to them, and a new tip-reporting program for smaller food and beverage establishments.
Legislative Overhaul for Tax-Exempt Orgs
Tax-exempt organizations, including those entities exempt from tax under 501(C)(3), now face some of the most significant tax-law changes these groups have seen in 35 years. New provisions in the Pension Protection Act of 2006 increase taxes and penalties, expand filing requirements (especially for supporting organizations), and affect the charitable donation of funds and property.
Form 990, Return of Organization Exempt from Tax, received quite a few changes as a result of the Pension Protection Act of 2006. But a makeover wasn't the only Form 990 change: requirements for filing this form now include supporting organizations, i.e., those organizations which exist to raise funds for a particular charity, of any size, no matter how small. This means that, with the exception of churches, all tax-exempt organizations now have an annual federal filing requirement.
"The new bottom line is that every organization that is tax-exempt should be filing something with us every year," said Theresa Pattara, project manager, internal revenue, tax-exempt and government entities division, in the IRS's Office of Exempt Organizations. Pattara also noted that churches still need not file annual returns or notifications with the IRS.
One type of tax-exempt entity that received special attention in the new legislation is the credit counseling organization. In an unusual move, Congress created a new code section--Section 501(q)--that governs tax exemptions for credit counseling organizations. The IRS commented that it will be interesting to see if Congress continues this trend of legislation specific to a certain type of charitable organization.
Special provisions in the new legislation affect qualified persons for donor-advised funds and for their sponsoring organizations. Any donor or donor advisor to a donor-advised fund, as well as any family member of the donor or donor advisor, are now disqualified persons with respect to the fund and its sponsoring organizations. Any transaction between the donor-advised fund and a disqualified person is an automatic "excess benefit transaction," and that money has to be repaid in its entirety. A tax will also apply.
Another new rule impacts contributors to donor-advised funds. Donors must obtain a written acknowledgement from the charity stating that the charity has exclusive legal control over the funds that were donated.
"This was obviously intended to counteract a perception by many people--an incorrect one--that the money was still the donor's and that they still had control over it, when in fact it was transferred to the charity," said Susan Kassell, senior counsel, Income Tax & Accounting, IRS Office of Chief Counsel.
Tougher Rules on Donations
Tax practitioners will also have to help their individual clients adhere to new rules regarding contributions of funds or property to tax-exempt organizations. In order to claim a tax deduction for cash contributions (defined as contributions made via cash, check, electronic fund transfer, or credit card), the donor must obtain and keep either a written communication from the charity or a bank record (bank statement, cancelled check, or credit card statement) that includes the date and amount of the donation and the name of the charity.
"Before the new law, personal notations prepared by the donor were generally considered to be acceptable," said Kassell. "Under the new law, they are not acceptable."
For contributions of property, donated clothing or household goods must be in "good used condition" in order to be deductible. The exception: a donated item for which the claimed deduction is greater than $500, but only if the donor submits a qualified appraisal of the item. For any contribution of property with a claimed value over $5,000, a qualified appraisal must be obtained. The Tax Talk Today panel noted that some charities are communicating the new requirements to their donors in an effort to help their supporters stay informed.
"There is a lot of concern about what the charities need to be doing to assist their donors in complying with the rules," said March panelist Patricia Read, senior VP, public policy and government affairs, for the charity forum Independent Sector.
Several notices from the IRS, including Notices 2006-96 and 2006-110, will provide good information on these and other tax-exempt issues. Tax Talk Today panelist Rochelle Korman, a partner with the New York law firm of Patterson Belknap Webb & Tyler LLP, strongly recommended that practitioners get a copy of the Joint Committee on Taxation's report on the subject to learn as much as they can about how the new legislation will impact their clientele. Small establishments get their own pilot program for tip reporting
The IRS launched the Attributed Tip Income Program (ATIP) in January of this year in an effort to simplify and encourage tip reporting for small- and medium-sized food and beverage establishments. This formula-based tip reporting program, which is currently a three-year, voluntary pilot program, should ease some of the burdens of other tip reporting programs on smaller businesses.
"The end game here is, we want more tip income on W-2s for wait staff," said Mary Gorman, an assistant division counsel, Prefiling, with the IRS.
Participation in ATIP is simple: the employer simply checks the appropriate box on Form 8027, Employer Annual Information Return. (Businesses with 10 or fewer employees only need to complete Lines 1 through 5 on this form.) The participating employer must also:
Demonstrate 20% of gross receipts on credit card charge slips, with tips included;
Maintain participation of at least 75% of all tipped employees (directly and indirectly tipped employees qualify for ATIP); and
Report the tips on W-2s, and withhold income and employment tax as appropriate.
To compute the "formula tip rate" used in ATIP, participating employers divide the charged tips by the charged receipts showing charged tips, and subtract 2%. The 2% reduction is intended to compensate for typically lower tipping on cash transactions and "stiff" rates (customers who don't tip). The employer multiplies the resulting formula tip rate by the total gross receipts for the period to calculate the pool of tips for that period, and then distributes that pool of tips to employees according to the allocation determined by that particular business. The employer must select a period of time, not longer than one month, for computing the total tip amount and attributing tips to all tipped employees.
The formula tip rate is computed based on one particular day: the first day of the first pay period after January 1 of that year, which means that employee participation must already be at 75% or more. However, because this is ATIP's first year, the IRS has extended the date for sign up and formula tip rate computation to June 30, 2007. This extension applies only to 2007.
"You've got to negotiate with your workers and you've got to encourage that 75% participation," said Marianna Dyson, a panelist from the Washington-based law firm of Miller & Chevalier.
Tax pros with clients affected by ATIP need to take a good, long look at Revenue Procedure 2006-30 to get details on the benefits and requirements of the new program. Moreover, because ATIP is in its pilot-program phase, tax practitioners can provide feedback on the program directly to the IRS via e-mail to: tip.program@IRS.gov.
"The government is relying on the food and beverage employers and employees and the tax practitioners to make this program work," said Cindy Hockenberry, a tax information analyst with National Association of Tax Professionals.
Other '07 Changes to Watch
As in any other year, there are already changes in the works that will affect 2007 returns in a variety of ways. Experts and IRS officials on Tax Talk Today recommended that tax pros keep abreast of these 2007 changes:
Welfare-to-Work Credit--The new Form 8850 is the result of changes to move people from the Welfare-to-Work Credit into the Work Opportunity program.
Section 199--Tax practitioners with business clients should be on the lookout for changes to Section 199, the manufacturers' production deduction. Beginning in 2007, non-production wages will no longer reduce this deduction.
Research credit--This credit, claimed by businesses for research and development expenses, will allow an alternative option for calculation of these expenses incurred after 2006. "It's really going to be beneficial for start-up companies because it won't be determined based on gross receipts," said William E. Philbrick, CPA/ABV, MST, CVA, senior vice president of accounting firm Greenberg, Rosenblatt, Kull & Bitsoli, PC in Worcester, Massachusetts.