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Tax from an Auxiliary’s Perspective

Tax from an Auxiliary’s Perspective. Auxiliary Forum. Vickie Fry, University Tax Manager. June 3 rd , 4 th & 5th, 2013. Why This Topic. “In this world nothing can be said to be certain, except death and taxes." Benjamin Franklin, 1789

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Tax from an Auxiliary’s Perspective

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  1. Tax from an Auxiliary’s Perspective Auxiliary Forum Vickie Fry, University Tax Manager June 3rd, 4th & 5th, 2013

  2. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Why This Topic “In this world nothing can be said to be certain, except death and taxes." Benjamin Franklin, 1789 Indiana University may be tax exempt but we are still responsible for paying taxes

  3. Auxiliary Forum - Tax from an Auxiliary's Perspecitive IU Tax Status • Exempt Organization • Nonprofit organization – Sec. 501(c)(3) • Instrumentality of the State of Indiana • Governmental Entity – Sec. 115 • Established by the State Legislature • Primary purpose is teaching, research, and public service

  4. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Reality is IU is a Big Tax Payer • 2012: • Remitted $311,739,479 in payroll taxes • Remitted $1,028,384 in sales & innkeepers tax • Remitted $388,921 in taxes on payments to Nonresident Aliens • FYE 2012 (Tax Year 2011) Paid $127,823 in business income tax on $375,949 in unrelated business income

  5. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Forms Reported - 2012 • 133,539 1098-T • 50,311 W-2, 65% delivered electronically • 7,889 1098-E • 5,553 1099-Misc • 468 1099-R, 155 1099-K • 1,662 1042-S • Weekly, Monthly, Quarterly, and Annual payments and returns

  6. Auxiliary Forum - Tax from an Auxiliary's Perspecitive We would not need a tax department if IU did not: • Receive funds from students • Provide funds to students • Pay employees • Pay for services or rentals • Sell goods • Engage in proprietary activities

  7. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Tax Department is Responsible for • Compliance and Reporting • Sales/Lodging • Business Income • Wages, Scholarship/Fellowship, Royalties, Non-employee compensation, Others • Licenses and Permits • Tax-Exempt Leases

  8. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Take away • Understanding of tax effects of • Business income • Making payments • Practical resources • When to ask – Red flags • Who to ask

  9. Auxiliary Forum - Tax from an Auxiliary's Perspecitive What you need to know about Taxes • Are you receiving payments? • What activity is generating the income? • Who are your customers? • Are you making payments? • Who are you paying? • What is the purpose of the payment? All payments are taxable (reportable) unless there is an exclusion

  10. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Receiving Payments

  11. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Payments Received –Tax Issues • Sales Tax • Unrelated Business Income • Exemptions • Exclusions • Advertising/Sponsorship

  12. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Charging Sales Tax Sales of tangible personal property as part of a proprietary activityby a state college or university recognized as a governmental agency are subject to sales tax. (45 IAC 2.2-4-20 ) • Proprietary Activity • Associated with private business • Outside the scope of activities • IU, in performance of proprietary activity constitutes a retail merchant transaction

  13. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Proprietary Activity Examples • Sales by a bookstore of items such as T-shirts, sweatshirts, hats, athletic apparel, memorabilia, class rings, license plates, etc.; • Sales of books, stationery, haberdashery, supplies, or other property by an accredited college or university; • Sales of merchandise, cards, clothing, toiletries, and other goods typically purchased in retail stores; • Sales of catering and food services; • Sales of computers, software, and related items; • Sales of food and drink at athletic, theatrical, artistic, cultural, or informational events; • Receipts from the rental of accommodations for periods of less than 30 days to nonstudents. The tax does not apply to any student renting lodging in a university residence hall while participating in a course of study for college credit at the college or university

  14. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Charging Sales Tax • Sales tax collection • Is the sale subject to Indiana sales tax? • Is the person, or entity, exempt from sales tax on the sale?

  15. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Collection of Indiana Sales Tax http://www.fms.indiana.edu/tax/sales/PayingSalesTaxIntro.pdf

  16. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Charging Sales Tax • Not subject to IN sales tax collection if shipped outside of IN • Receipt of exemption certificate must remain in files for 4 years • Must report gross and taxable sales with sales tax collected through KFS documents each month. • The tax department performs the filing and tax remittance as a service for all of IU

  17. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Sales Tax on Food/Catering Activities • Considered proprietary activities • Food is personal in nature and not exempt due to our exempt purpose • So even if we sell to ourselves still subject to sales tax • Example – RPS Traditions Catering or Athletics Catering

  18. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Unrelated Business Income Recent Developments • IRS issued final report April 2013 – College and Universities Compliance Project • 400 compliance questionnaires sent out in 2008 • IU participated • 34 universities were audited – IRS disallowed 75% of loss deductions resulting $60M in tax • Adjustment in these areas – fitness and rec centers, sports camps, facility rentals, arenas, golf courses and advertising

  19. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Unrelated Business Income Determination • Revenue Producing Activity Questionnaire – • IU Policy VI-121 Establishing and Modifying Revenue Producing Activity • Committee evaluates the activity and will communicate with you tax implications • If the activity generates UBI, Tax will provide guidance on the type of records to maintain in order to properly account for the income and expenses • The tax department will distribute tax charges to the activity.

  20. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Unrelated Business Income • Unrelated business income = UBI • UBI is defined as the income generated from an activity that is unrelated to our primary purpose for which we are exempt • Unrelated business income tax = UBIT • UBIT is Tax on Net Income From Activities Unrelated to Tax Exempt Purpose • Corporate Income Tax Calculations and Rates • Reported on Form 990-T

  21. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Key Unrelated Business Income Concepts • Rational for tax on unrelated business income is to prevent unfair competition with for-profit business • Expenses allowed must be directly connected to the business income • How the Funds are Used DoesNot Matter • How the Funds areEarnedDoes Matter

  22. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Unrelated Business Income To be UBI, must meet all 3 criteria: • Activity operated like a trade or business • AND • Activity that is regularly carried on AND • Activity that is not substantially related to our exempt purpose

  23. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Unrelated Business Income • Activity operated like a trade or business • Sale of goods or performance of services • Activity is conducted like commercial enterprise • Fragmentation rules • ‘Profit Motive’ is based on facts and circumstances • History of income and loss • Manner in which the activity is carried out • Expertise in the activity • Success in carrying on other similar or dissimilar activates

  24. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Unrelated Business Income • Activity that is regularly carried on • Shows frequency and continuity • Conducted in the same manner as a for-profit organization (are we competing?) • On-going administrative activity for an annual event • Manner carried on vs. commercial activities • Sales to the general public are infrequent

  25. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Unrelated Business Income • Activity that is not substantially related to exempt purpose • Does not directly support furthering our exempt purpose of teaching, research, and public service • Substantially related only if the casual relationship is a substantial one and “contributes importantly” to the conduct of the organization’s exempt purpose • Open to interpretation and scrutiny by IRS

  26. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Payments Received - UBI • Payment of taxes should not deter the carrying on of a revenue producing activity • It’s OK to pay taxes if: • Real Net Income Is Generated • Tax Is Factored Into Cost Structure • Deductions and Exemptions Are Claimed • $0.70 out of $1.00 is better than $0.00

  27. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Payments Received – UBIExamples of activities that are: Unrelated • Advertising • Catalog Merchandise • Golf Course • Catering and Food Service • Hotel operations Related • Athletic and Cultural events (public service) • Educational services (teaching) • Activities conducted for the purpose of providing training to students

  28. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Payments Received - UBI • Not all Unrelated Business Income is Taxable • Exemptions • Exceptions • Qualified Sponsorship vs. Advertising

  29. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Payments Received – UBIExemptions • “Passive” Income Exemption • IU Not Active Participant In The Business • Interest and Dividends • Rents from Real Property • Royalties - Payment for Use of Valuable Rights • Commissions • Exempt if a % of Gross Revenue • Taxable if a % of Net Income

  30. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Payments Received – UBI Exemptions • Exemption Can Be Lost If: • Substantial Services Provided to 3rd Party • Joint Marketing Efforts • Providing Administrative Support • Providing Technical Resources & Support • IU Shares in Net Income • So What? Terms of the Deal Make a Difference

  31. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Payments Received – UBIExceptions • “Convenience Exception” • Activity is conducted for the convenience of its members • Includes faculty, staff, students, patients • NOT alumni or general public Example: Laundry facility operated in student dormitory, or student use of the Golf Course, is for the convenience of our members

  32. Auxiliary Forum - Tax from an Auxiliary's Perspecitive UBI Analysis – Tower Rental Space • RTVS has rented space on the Sare Road transmitter since 2003 with contracts negotiated through the IU Real Estate office and Purchasing. • RTVS wishes to authorize Purchasing to issue an RFP to find a vendor interested in filling a vacant tower space to provide additional revenue. • Estimated annual revenues are projected to average $110,000 • Trade or business? • Regularly carried on? • Not substantially related? • Exceptions? YES UBI - YES YES YES NO

  33. Auxiliary Forum - Tax from an Auxiliary's Perspecitive UBI Analysis – Food Sales • Adding a new coffee shop in the residence hall that is currently under construction on BL campus. Estimated completion date August 2013. • Revenues from 10% employees, 90% students • Estimated annual revenues are projected to average $150,000. • Trade or business? • Regularly carried on? • Not substantially related? • Exceptions? YES UBI - NO YES YES/NO YES – Convenience Exception

  34. Auxiliary Forum - Tax from an Auxiliary's Perspecitive UBI Analysis – Food Sales • Same fact but coffee shop is located in the business school at IUPUI. Activity is run by students as part of class • Revenues from 10% employees, 90% students • Estimated annual revenues are projected to average $150,000. • Trade or business? • Regularly carried on? • Not substantially related? • Exceptions? YES UBI - NO YES NO

  35. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Sponsorships • Qualified Sponsorship – Not UBI • Financial Support for University Events and Programs By Businesses/Corporations • Business/Corporation receives no substantial benefits other than use or acknowledgement of its products or services • IU Foundation can provide a contribution receipt

  36. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Sponsorships • Acknowledgement Defined • Sponsor’s Logo, Slogans • Name, Address, Phone, Fax, e-mail, Web • Sponsor Brand or Trade Name • Value-Neutral Description of Services • On-Site Display/Distribution of Product

  37. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Sponsorships • Non-Qualified Sponsorship • Portion of sponsorship more than 2% Return Benefit • Subject to UBI review • Examples of return benefit • Advertising • Merchandise (T-Shirts) • Facilities – both rental space • Tickets – event ticket, table at a fund raising event, • Meals

  38. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Sponsorships • Advertising Defined • Qualitative Language: “Highest Quality” • Comparative Language: “Best in Town” • Calls to Action: “Go to Joe’s for. . .” • Inducement: “You Owe it to Yourself . . .” • Endorsements • Use of logo or acknowledgement in a periodical

  39. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Sponsorships • Sponsorship Policy is in the development stage • Will include a form to determine the qualified and non-qualified portions

  40. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Sponsorship Example • A department is putting on a job fair and is soliciting 5 -$1,000 sponsorships to off set the cost. • The sponsors receive acknowledgement signage at the event and an ad in the printed materials. They also receive a free booth valued at $100. The ad is also valued at $100. What part of the sponsorship is qualified and is there a non-qualified portion? $1,000 x 2% = $20, The rental and the ad are non-qualified and are subject to UBI review

  41. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Current Activities on 990-T • Dental School – Sterilization, Lab Testing • Catering – Athletics • Telecom – IUPUI • Special Event Parking – IUPUI • TV Tower Rental • Card Services • Sunapsis software • Advertising • IUPUI Publications/JAGTAG • IU Press • IUPUI Athletics • BL Program Ads • Not on the return • Golf Course • IUPUI Hotel

  42. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Payments Made

  43. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Making Payments • Compensation for Services • Employee vs. Non-employee • Scholarship/Fellowship • Services vs. Scholarship/Fellowship • Travel or Reimbursements • Prizes or Awards • Moving • Purchase/Rental/Lease Classification of payment requires different withholding and reporting rules to be followed

  44. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Making Payments • Form does not matter • Considered a payment for tax withholding and reporting purposes: • Cash, Check, Credit Card • Tangible personal property • Benefits • Internal billings/transfers • Payments made by the Foundation for IU’s benefit

  45. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Making Payments – To Whom • U.S. Person • U.S. Citizen • U.S. Company • Lawful Permanent Resident (green card holder) • Resident alien (for tax purposes) • Completes IRS Form W-9 • Non-U.S. Person • Foreign Company • Nonresident alien (for tax purposes) • Completes IRS Form W-8 Payee tax status requires different withholding and reporting rules to be followed

  46. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Basic differences in university obligation to withhold on, or report, payments. There are many exceptions.

  47. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Reportable Transactions • All 1099-MISC reportable payments are based on the object selected by the initiator of a payment document • Independent Contactor payments, Rents, Royalties and Prize and Awards – always use a reportable object code http://www.indiana.edu/~cats/formsAndDocs/FrequentlyUsedObjectCodesTaxPeferences.pdf

  48. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Payments to Nonresident Aliens • Short-term Visitor – Pre-planning • Payment? Travel, and/or Honorarium • Documents to collect • Is there a tax treaty? • Is the department going to pay the taxes? • More information at FMS website • http://www.fms.indiana.edu/tax/NRA/FVTguide.asp

  49. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Payments for Services • Worker Classification – New IRS focus • In an IRS audit, employees that were also paid as non-employees will be strongly challenged. IU POLICY IV-220 • Tax Management reviews cash disbursement requests, university-wide, to employees outside of the payroll system.

  50. Auxiliary Forum - Tax from an Auxiliary's Perspecitive Payments for Services • IU POLICY IV-220 - Determination of Employee or Independent Contractor Status • Default set on ‘Employee’, Unless: Activity is Not a Core Function • Worker Operates a Bona Fide and Established Business • Activity is of Short Duration • Written Terms of Agreement On File • Independent Contractor Questionnaire • Determination based on fact and circumstance

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