A to Z of Becoming Tax-Exempt


You’ve formed a non-profit group and now you want to become tax-exempt in the eyes of the IRS.  Lucky for you, there’s an easy and free way to do this, in spite of what you may hear from third-party companies offering to “help” you become tax exempt.  They charge a “small fee” of course, and that’s absolutely not necessary.  IRS form 1023 is all you need, plus a little bit o’ internet guidance from me!

IRS Form 1023 Looks Intimidating But Don’t Let That Stop You!

But before we get Form 1023, which is the application for tax-exempt status, let’s start at the very beginning…

Step One: Get an EIN

Obtain an EIN (Employer Identification Number) for your organization.  That can be done in minutes over the phone, on the IRS website here, or by mail if you insist on being old-fashioned.

Step Two:  Make Sure Your Organization is Structured Properly

Your organization must be a corporation or a trust.  It can also be something called an unincorporated association, which means a group of people who volunteer to come together for the same purpose…like a trade union or an environmental group.
Partnerships are NOT eligible to become tax-exempt under Section 501(3)(c).

Your organization must also have a mission statement or other such organizing document that limits its activities to furthering only its stated exempt purpose.

Step Three:  Fill Our IRS Form 1023

Yes it’s a long form so just take your time and step by step you’ll make it through.  Here are the things you’ll be asked about on the form:

  • who are the members
  • what is the history of your group?
  • do the officers/directors/key players get compensated?  if so, how and how much?
  • does anyone get benefits?  who and what are the benefits?
  • what are the activities of your group?
  • supply detailed financial records of your group
  • is your group a public charity?
Step Four:  Use the IRS Website as a Resource

Go here for an online tutorial on becoming tax-exempt under Section 501(3)(c).  There are also FAQs and publications you can read here.  And just remember: you don’t have to pay somebody to help you apply to become tax-exempt.  You can do it!





Own Stuff Abroad? Do This or Face More than $10,000 in Fines!


If you own something outside the United States then you must file IRS Form 8938 and report it on your tax return.  The penalties for failure to file this form are particularly horrendous…$10,000 is just the beginning!

Statement of Specified Foreign Financial Assets

IRS Form 8938 is called Statement of Specified Foreign Financial Assets.  OK we got the statement part…you must report to the IRS on your tax return, stuff you own in foreign countries.  They need to know about it.  But what are specified foreign assets?  Here are a few examples:

  • a savings account in a foreign country
  • stocks issued by a foreign corporation, but not maintained by a brokerage company
  • your interest in a trust fund, which is held/maintained in a foreign country
  • your interest in a partnership or corporation that’s in a foreign country
  • bonds issued in a foreign country
  • a foreign pension plan

If your foreign financial assets total more than $100,000 then you must file IRS Form 8938.  If not, then you don’t have to file this form.  If you file your taxes married filing jointly, then the total of you and your spouse’s foreign financial assets must meet the $100,000 threshold in order to require filing of form 8938.

File 8938 or Pay HUGE Fines!

The penalty for failing to file Form 8938 is an astonishing $10,000!  And it doesn’t stop there.  You can be assessed that fine even if you do file 8938 but file it incomplete or incorrect.  No ‘A’ for Effort here!  If you don’t file, then the IRS send you a letter telling you to file, and you still don’t file…another $10,000every 30 days!  Let me say that again…

$10,000 a month for failing to file IRS Form 8938

Need I say more about the importance of telling the IRS about your foreign financial accounts?  Here’s a quick link to the IRS website where you can get a PDF copy of this all-important form for rich people who own stuff in foreign countries.  If your accountant didn’t tell you about this then fire him or her immediately.



How to Easily Pay Off Your Tax Debt


You may have at one time thought very little of running up a tab with the IRS.  Perhaps you were very young and considered yourself under the radar, and you didn’t worry about the IRS.  But now you’re older and you want to move forward with your life.  Perhaps you want to get a credit card or buy a home.  Owing back taxes to the IRS makes this sort of thing very difficult.  Here’s what can happen if you don’t pay your tax bill with the IRS.

If You Don’t Pay Your Back Taxes, You Could End Up With a Tax Lien

Unpaid back taxes will not just go away.   Sometimes you can file for bankruptcy and eliminate some of your tax debt, but only if the taxes you owe are income taxes, you weren’t committing fraud when you failed to pay them, and the tax debt is at least three years old.  You also have to have filed a tax return in order to declare bankruptcy and remove your tax debt.  On top of that, it’s case by case so you’re never sure whether you can remove your tax debt with bankruptcy.

Taxes that go unpaid will cause the IRS to send you letters about your bill.  They letters get more and more insistent that you pay, and if you ignore the letters you’ll eventually have a tax lien.  This is a very nasty situation because the IRS is freezing your life…they pretty much own your house, your car, and your assets until you pay up.  Once you get a tax lien from the IRS, you can’t remove it with bankruptcy.

Avoid a Tax Lien and Set Up an Installment Agreement With the IRS

Work something out with the IRS and don’t get into a tax lien situation where you can’t even sell your home or get a credit card.  The IRS has several options for paying back taxes and they want to resolve it in a practical way.  Why else would they have come up with IRS Form 9465… Installment Agreement Request?  This is a form for setting up a payment plan with them so you can pay your tax bill even if you don’t have the cash on hand at the moment.  Form 9465 is short and easy to fill out, and it saves you from the tax lien that can wreck your life for a while.

You simply enter how much you owe, and how much you can pay each month.  Send it to the IRS completely filled out and you’re on your way to solving your tax debt.



5 Things You Must Know About Tax-Favored Accounts

us tax form

Tax-favored accounts make sense because they offer a way to save for the future and save on taxes at the same time.  Put your money in a savings account and that’s a step up from doing nothing.  Put your money into a tax-favored account and that’s a step higher.  Why?  Because the money you put into a tax-favored account (called your contributions) is money you won’t have to pay taxes on, at least not just yet.

Here’s an example: you put money into an IRA …if it’s a Roth IRA, you won’t pay income tax on the money you take out after the age of 59 1/2.  It’s a way of helping yourself out in retirement…pay the taxes now so you won’t have to later.  You’ve already paid the taxes now because the money came from your current income, which is taxed.

1.  There are Rules About Using Money in a Tax-Favored Account

But if you withdraw that IRA money before you hit age 59 1/2, you pay a penalty.  You’ll have to pay an additional 10% tax on the distribution.  It’s called an early distribution when you withdraw money from a tax-favored account that’s supposed to remain intact until its designated purpose.

2.  If You Break Those Rules, You Have to Tell the IRS About It

Tax-favored accounts come in all sorts of shapes and sizes.  Some are for retirement, some are for medical expenses, and others are for education.  The general idea is, you are encouraged to save money for these important life events that require large amounts of cash.  The encouragement comes in the shape of a tax break…hence the label tax-favored account.  If you use the money for something other than the designated purpose, you are taking an early distribution.  You will have to fill out and submit IRS Form 5329 and ‘fess up to the IRA about breaking the rules of the tax-favored account you had.

3.  Not Only Do You Have to Tell the IRS You Broke the Rules, You’ll Also Have to Pay a Fine or a Tax

Also, you’ll be paying some sort of penalty or tax, as well.  There’s an Additional Tax on early withdrawals from your IRA, for example.  It’s 10%.

4.  Tax-Favored Accounts Can Actually be Worse Than Doing Nothing At All

If you break the rules, that is.  That’s because of above-mentioned additional taxes and penalties.  So think carefully if you are considering a tax-favored account.  If you can think of any reason at all where you’d be likely to need that money for something else, you’d be better off doing nothing at all with your cash than just leaving it in a savings account.

5.  It’s Possible to Break the Rules in Many Different Ways

You can even break the rules by contributing too much to your tax-favored account.  There are contribution limits to IRAs and such.  If you put in too much, again you’ll have to file IRS Form 5329 and pay an additional tax.

Here’s a link to IRS Form 5329 and the instructions that go with it.  Make sure you know the conditions of a tax-favored account before setting one up so you don’t have to pay additional tax or other penalties.


How to Get Ready for the Financial Apocalypse


The future is uncertain… but one thing we all seem to agree on is that our Social Security system is getting weaker and weaker, while health care costs get worse and worse.  People retiring twenty years from now face laughable Social Security checks, unheard of medical costs, and probably financial doom…in other words a Financial Apocalypse.

Yup, you can start an IRA now.  You can try and pay off your debts.  You can live frugally, keep a budget and live wisely and exercise all you want but if you don’t start thinking outside the box you’ll never be ready for any type of secure financial future.  Save all you can for the future and hope Social Security somehow comes through for you by the time your retire.  But on the medical cost angle…here’s what else you can do.  Prepare yourself, because it’s radical…

Stop going to the doctor’s so much.

Americans run to the doctor for every little sniffle, every little ache, and consequently run up medical costs like no other country in the world.  Guess what, it doesn’t make us any healthier, either.  It just makes us poorer.  If you can cut your doctor’s office visits, take better care of yourself, eat right and exercise, you can probably change the type of health insurance plan you have.  And that’s what this post is all about: the Health Savings Account.

HSA’s and IRS Form 8889

If you get a high-deductible health insurance plan, you are eligible to open a Health Savings Account (HSA).  That means huge tax savings when it comes to filing your federal income tax return with the IRS.  IRS Form 8889 is used to report to the IRS the contributions you make to an HSA.  Your contributions are tax free!  They reduce your taxable income, thereby reducing your tax bill.  Plus, you are saving for future medical expenses so no medical emergency will wipe you out, causing a Financial Apocalypse.



How to Run a Business With Your Spouse

Small business team

Very often, owning a business involves your significant other.  I don’t just mean the moral support he or she provides, the countless hours spent listening to your plan in the early days, your problems as you carry it out, and the ongoing day-to-day trials and tribulations that come with owning your own business.  All that will never go away, and you’ll always need a good sounding board to keep you sane.

What is a Partnership?

I’m actually talking about a partnership here, where both spouses participate and share in the running of the business, as well as the profit or loss that results. That’s actually called a partnership, and it means you share as equals everything about the business. No formal agreement is necessary, it’s just how you view your business, what’s expected of each partner, and how you have decided between you to run things.  Sometimes partners contribute in different ways: maybe one has all the money but the other one does all the work.  Seems like a match made in heaven but if you have any experience in this type of thing it’s actually a hellish arrangement further down the line.  Lots of resentment and such, but that’s another topic!

A partnership is a business relationship that’s not a corporation but not a sole proprietorship either.  Unlike a corporation, a partnership doesn’t pay income tax but rather passes through it’s profit or loss to the partners.  The partners will include income from the partnership on their 1040 tax returns.

What is a Qualified Joint Venture?

If your partnership is husband and wife, and you like to file your taxes with the status of Married Filing Jointly, then you can become a Qualified Joint Venture if you want.  If you do this, you won’t have to file IRS Form 1065.  Just one less IRS tax form to file is reason enough to elect to become a Qualified Joint Venture.

Filing Taxes for Partnerships: IRS Form 1065

As partners, one thing you’ll have to learn to do is file IRS Form 1065.  That’s the tax return of a partnership.  It’s structured like any other federal income tax return: income first, then deductions, a few Schedules and you’re done.  If you keep good records this won’t be a big hassle to fill out and submit.

Here’s a link to IRS Form 1065 on the IRS website…the only place you should be getting tax forms.


Want to Declare Business Expenses? Get Your W9s Up Front

Tax Form Filling

If you pay contractors to do lawn work for your home, you may or may not be interested in submitting 1099s for them at tax time.  Yes you are supposed to if you pay someone more than $600 throughout the year.  However, many people don’t even know this, many forget, and some simply just don’t know the rules or have them completely wrong.  C’est la vie.

If you own a business, on the other hand, it’s stupid not to 1099 your contractors.  After all, it’s a business expense, dummy!  The more expenses you have, the less profit, meaning the less taxes your business pays.  The key to everything is IRS Form W-9…if you don’t get your contractors to fill out the W9 then it’s kinda hard to report to the IRS a business expense with no Tax Identification Number.

The way to make sure you get to declare all the business expenses you deserve is to get your contractors to fill out the W-9 Form before they start work for you.  That way, it’s rather like saying…

you can’t work for me unless you fill out IRS Form W-9 first…

Then, when it comes time to issue 1099s, you’ve already go their tax ID number and you’re good to go.  Otherwise, you’ll be trying to fill out tax forms and you’ll have to stop everything and try and find those contractors, and say “hey I’m a lame business owner and i never got your tax id…can I have it now so you can pay more taxes and i can get one more business expense on my tax return?”

No way is that going to be easy or fast.  Good luck finding that random phone number of the guy you hired eight months ago to paint your office.  Then have a good time waiting a week for him to get back to you.  Then enjoy yourself more when you try and email the W9 form to him and he never responds.  And if he does respond, your tax deadline has long since come and gone!

So that’s why please please please have your contractors for your business fill out the IRS Form W-9 as a condition for working for you.  Here’s where you can find a copy of the form…on the IRS website, the only place you should ever get tax forms.


Write that Check, Pay that Guy…But Don’t Forget to tell the IRS!


If you paid someone over $600 this year for any service, then you have to issue an IRS Form 1099 or the IRS will be angry with you.  No, just kidding about the angry part.  But you are actually supposed to report to the IRS any contract work you paid for in excess of $600 over the course of the tax year.  And if you’re a business then you really should report it so you can claim it as a business expense.

IRS Form 1099 is used to report to the IRS any contract work you had done, to whom, and how much for the year.  So let’s say that you hired the same guy eight times from February to November to fix your toilets in your store.   Each time it was $100.  The total amount is $800, which is well over the threshold amount for having to report contract work ($600).  You would issue one IRS Form 1099 in the amount of $800 rather than eight separate 1099s for $100 each.  Seems kinda silly to have to spell that out with the IRS and taxes it’s nice to be absolutely sure you’re understanding everything, right?

Now, it’s not going to change anything for you except that you will get to claim $800 more in business expenses.  That’s a good thing because it means you’ll be paying less taxes.  So, it behooves you to issue 1099s.  It doesn’t benefit the other guy at all.  In fact, he’ll probably want to avoid getting that 1099 because he’ll have to pay income taxes on that money he received from you.  After all, it was straight profit for him…you didn’t take any money out of his pay to send to the IRS to cover Social Security and Medicare taxes, did you?  No, I think not!  So nobody gets to make pure income without the tax man getting involved.  IRS Form 1099 is how the IRS ensures that contractors pay their fair share.

Your tax prep software will be able to issue electronic 1099 forms for you, for submission to the IRS.  You can then print paper copies for the service provider or contractor, so he or she can prepare his or her own taxes.  The IRS will not accept paper copes of 1099 forms from your printer.  They must be ordered from the IRS or submitted electronically.

Here’s more info on the 1099-MISC, the most common type used for paying contractors and other service providers for whom you did not issue a W2.


Why I Love Paying FUTA


Don’t get me wrong- I hate paying taxes.   But when it comes to paying federal unemployment tax (FUTA), I’m just giddy.  There are actually three reasons for my tax joy:

  1. The form for filing FUTA (IRS Form 940) is wonderfully simple.
  2. FUTA tax rates are pretty low.
  3. When I’m figuring and filing IRS Form 940, it means I’m almost done with tax returns for the year.

You see, once I’m at the state where I’m ready to fill out IRS Form 940, I’ve done all the hard work already.  Line 3 asks for the

Total Payments to all employees…

Well if I know that, I’ve already done my huge income tax for for the two corporations I manage… that’s filling out two entire 1102S forms for the S Corporations I take care of.  Now that’s a hateful form!  But the 940?  Piece of cake!  Maybe now you get why I love paying FUTA.

IRS Form 940 is SIMPLE to Understand

It’s easy as pie, since we’re talking sweets here.  It’s easy, especially if your business doesn’t pay any fringe benefits or get involved in dependent care, health insurance, or group life insurance.  If all you do is pay people a straight wage, then IRS Form 940 will take you all of five minutes to complete.

The one thing that can make the 940 a little hard to understand is if you live in what the IRS cryptically calls a credit-reduction state.  This is basically a state that owes the Feds money.  The feds get their money back by taking it from taxpayers in that state.  More specifically, employers in credit reduction states will pay the IRS higher FUTA than normal.  It’s in the form of a smaller credit, rather than an added tax.    This is actually quite simple to enter on your IRS Form 940, not hard at all.  If you want to know more about credit reduction states, here’s the IRS page on their website that explains in detail how it works.

Take a look: IRS Form 940 is a simple joy to fill out and submit.  Download it from only one source: the IRS website.  Happy FUTA!



A Little-Known Secret About Family Treasures & Taxes : IRS publication 544

Senior man standing outside house

You’re good at cleaning out the house and making a buck doing it.  You are the Yard Sale Queen or King.  While you may see cash where others see beloved possessions, you know that sometimes there are some real treasures hidden away in Aunt Dottie’s attic. That can mean some true cash…ever seen “Antiques Roadshow”?  People bring in old things from their homes and find out they’re worth thousands of dollars.

Treasures are Taxable

When it comes to selling your treasures for a profit, it isn’t as simple as you always thought.  For example, did you know that you’re supposed to report capital gains and pay income tax to the IRS when you file your return?  Yup, the IRS wants its share of the spoils, even when you sell your Aunt Dottie’s prize collection of rooster-themed salt and pepper shakers..if you turned a profit, that is.

Your Old Junk Isn’t

But when you sell your old things at a garage sale to make a few bucks, that is not considered capital gains because you are selling it for less than what you paid.  Yes, you’re making some money but if you consider your garage sale items like investments, you’re losing hand over fist!

It’s only when something appreciates in value that you are making money and the IRS gets involved.  IRS publication 544 explains this in detail, so you know the difference between un-taxable garage sale money you make, and taxable collector’s item sale on which you made a mint.

Other Tidbits You’ll Find in Pub 544

Basically this publication covers any money you receive that’s not from a job or an investment.  When you sell real estate (your home) or securities, or trade for them, or exchange property for stock, or sell a business, renew a franchise or other sales of assets, Publication 544 spells it all out for you.  Cutting some timber on your land?  The IRS wants their share of the profit.  Selling your childhood stamp collection?  You can’t profit without sharing with the IRS, unfortunately.  All this and more, in 42 pages of Pub 544.