Tax Cuts and Jobs Act alert: Today, the IRS has issued Notice 2018-76 providing guidance on the business expense deduction for meals and entertainment. For more information, contact your Dean Dorton advisor or Melissa Hicks.
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Accounting & Tax
Kentucky charitable organizations have been hard hit by the Department of Revenue’s interpretation of Kentucky’s new sales tax law. To assist organizations in complying with the law, we have compiled a list of frequently asked questions. Before getting to the list, however, there are three general rules to keep in mind:
The “exemption” for nonprofits that everyone is most familiar with is the exemption from sales tax when a 501(c)(3) organization purchases something for use within the educational, charitable, or religious function of the organization. The organization provides the seller with the organization’s purchase exemption certificate. KRS § 139.495(1).
There are other specific exemptions for elementary and secondary schools and organizations related to those schools (KRS § 139.497), and colleges and universities and certain school sponsored clubs. KRS § 139.495(2)-(5). The exemption for elementary and secondary schools is broad, while the exemption for colleges and universities is narrow. Generally, these exemptions are not addressed here.
Tax is not imposed on the first $1,000 of sales made in any calendar year by individuals or nonprofit organizations not engaged in the business of selling. This exemption is limited
to:
a. Garage or yard sales; and
b. Fundraising events held by nonprofit civic, governmental, or other nonprofit organizations.
KRS § 139.496(1).
Download Nonprofit Sales Tax FAQ
DISCLAIMER: The answers to the questions are based on answers provided by the Department of Revenue. Nevertheless, it is our understanding that the Department is continuing to review questions and there is a possibility that answers may change.
To assist organizations in complying with the law, we have partnered with Kentucky Nonprofit Network and compiled a list of frequently asked questions submitted by their members.
| Questions | Answers |
|---|---|
| Are tickets for fundraising events taxable? | Yes. Kentucky is now taxing admissions to fundraising events. |
| Is the entire ticket price subject to sales tax, even if a portion is a charitable contribution? |
Yes. The sales tax is imposed on gross receipts, which includes the charitable contribution portion of the ticket price. |
| Can the sales tax be included in the price of the ticket? | Yes. However, if the tax is included in the total price, a statement must appear on the ticket saying sales tax is included in the price, unless the tax is separately stated on a sign posted in a conspicuous place at the place where the tickets are sold. |
| Are sponsorships for fundraising events taxable? | Sponsorships are taxable if the sponsor receives tickets or tangible property in exchange for the sponsorship. |
| Can a sponsor be billed separately for its tickets and sponsorship so that tax is paid only on the tickets? | Yes. Tickets and sponsorship income can be billed separately. Then, there would be no tax on the sponsorship income. Also, there is no tax on sponsorship income in connection with an event that is not ticketed. |
| Are auctions (live or silent) taxable? | Items purchased at auctions that are tangible property (artwork, jewelry, gift baskets, etc.) are taxable. Items such as experiences (trips, tours, etc.), services (i.e., landscaping), and gift cards are not subject to tax. |
| Do purchasers pay sales tax on the total price paid for an auction item or on the item’s fair market value? | Sales tax is charged on the amount paid for the item, regardless of whether the amount is higher or lower than fair market value. |
| How is a gift basket sold at an auction that contains taxable and nontaxable items treated? | The gift basket would be taxable. |
| Are donations to auctions or for raffles subject to tax? | No. |
| Are raffles taxable? | No. Games of chance are not subject to sales tax. |
| Is a gift card to Disney World taxable? | No. Gift cards are not subject to sales tax. |
| Are registration fees for a charitable run, walk, or golf tournament taxable? | Yes. |
| Are admissions to theaters or museums operated by nonprofits subject to tax? | Yes; these admissions are subject to tax. Tax must be charged on the full ticket price. |
| Is the rental of parking spaces subject to sales tax? | No. The rental of parking spaces is treated as the rental of real property and is not subject to tax. |
| Are membership fees taxable? | Provided that the membership fee does not provide admission to a taxable venue, such as a museum, sporting event, fair, gym, golf course, etc., the membership fee is not taxable. |
| Are membership fees taxable if a member receives benefits such as a quarterly newsletter or publication, and/or the opportunity to attend seminars, lectures, or instructional classes? | No. |
| Is the sale of t-shirts or other logo items purchased and used by volunteers of an organization subject to sales tax? | Yes. Furthermore, it does not matter whether the t-shirts or other items are available to the public at large or only to a few people; the items are taxable. |
| Are tickets to professional development or networking events taxable? | No. The sale of admissions to a professional conference, educational conference, or networking event is not subject to tax. |
| Are 501(c)(3) organizations still exempt from sales tax on purchases of equipment? | Yes. 501(c)(3) organizations are exempt from purchases of tangible personal property, digital property, and services used within the educational, charitable, or religious function of the organization. |
| May a nonprofit use its purchase exemption certificate to avoid paying sales tax on services that are now taxable, such as janitorial services, linen services, and lawn mowing? | Yes, if the invoice is billed directly to the nonprofit institution and the purchase is used within the scope of its exempt function. Purchases for fundraising activities are not considered to be within the scope of the exempt function. |
| Are clothes sold by a nonprofit thrift store taxable? | Yes. |
| In addition to the sale of a ticket in some instances certain fees are charged, for example, a convenience or handling fee or ticket provider fee. Are these fees taxable in addition to the ticket price? | Yes; all charges by a retailer for any services necessary to complete the sale are subject to tax. However, charges related to credit extended on a sale, such as credit card fees, interest and financing and carrying charges, are not subject to tax. |
| Are bingo cards taxable? | Yes. |
| Are pull-tabs taxable? | No. |
| What must be taxed when a 501(c)(3) is hosting a golf tournament? | Taxable: admission/green fees; sponsorship with admission/green fees included; cart fees; food purchased; anything purchased from the pro shop. Not taxable: hole sponsorship; mulligan. |
| Are historic sites exempt from event/auction sales? | No; only admission to the historic site is exempt. |
| Is the sale of used goods, such as at a rummage sale, taxable? |
Yes. |
| Is the sale of vegetables from a church garden to church members taxable? | No. |
| Is the sale of vegetables from a church garden at a farmers’ market taxable? | No. |
| Is rental of office space by a nonprofit taxable? | No. |
| Is room/board/etc. for volunteers taxable? | No. |
| Are fees dictated by local governments, such as city animal license fees and fees regarding boarding or surgeries, taxable? | If the required license fee is separately stated by the retailer, it would not be subject to tax. |
| Are coffee sales by a nonprofit café the proceeds of which are used to support the café taxable? | Yes. |
| Are Medicare-sponsored memberships, such as Silver Sneakers, to medical fitness facilities taxable? | Yes, if the membership is billed to an individual customer. |
| Is the sale of “heart pins,” the proceeds of which are donated to a nonprofit, taxable? | Yes. |
| Are employee benefits on a membership to a wellness facility taxable? |
The purchase of a membership to a wellness facility is taxable. |
| Do you file a tax return regardless of whether there were any sales? | Yes. A zero return must be filed. |
| Must sales tax returns be filed beginning July 1 even though there are no sales for several months? | Yes. Zero returns must be filed. |
| Is there tax on rental of housing? | No. There is no tax on the rental of real property. |
| Are annual memberships to museums and theaters taxable? | Yes, if the membership includes admittance to the museum and/or shows at the theatre. |
| Are memberships to a “friends of” organization taxable? | Yes, if the membership is bundled with admission to an event or taxable venue. |
| If tickets are purchased by a tax-exempt entity (e.g., the Rotary Club) for resale to members, are the tickets taxable? | Yes. |
| Is space or a booth for a trade show taxable? | No. |
| Are fees to set-up booths at a trade show taxable? | No. |
Kentucky’s new sales tax laws: FAQIf an organization holds a special fundraising event, is the entire ticket price subject to sales tax, even if a portion of the ticket price is considered a charitable contribution (Ex. $100 ticket price with a $20 FMV of goods/services received)?
- Yes, the sales tax would apply to the total amount of the ticket price, including the charitable contribution portion. The sales tax can be imbedded into the total price ($94.34 + $5.66 = $100) or added onto the total price ($100 + $6 = $106). If imbedded, it would need to be disclosed that the total price includes the sales tax. If FMV cost is $20, then the donor’s tax deductible portion would be $74.34 ($100-$5.66-$20). If sales tax was added on to the ticket price, then the tax deductible portion would be $80 ($106-$6-$20).
If we hold an auction at our fundraising event, would sales tax apply?
- Yes, sales tax would apply to the total amount paid, but only for tangible property items (artwork, jewelry, gift baskets, etc). Items that include experiences (trips, tours, etc.) and gift cards are not taxable.
If I hold a raffle at my fundraising event, is this taxable?
- No, games of chance are not subject to sales tax.
Is sponsorship income taxable?
- Sponsorship income can be taxable if the agreement is bundled with anything other than name recognition. For example, tickets to an event or lunch offered along with the name recognition at an event would cause the entire sponsorship amount to be subject to sales tax. However, you can bifurcate the ticket and sponsorship income on the invoice and the sponsorship income would then not be subject to sales tax. Also, there is no tax on sponsorship income in connection with an event that is not ticketed.
Would the sponsorship income received for the right to include a booth at a trade show or educational seminar be subject to sales tax?
- Sponsorship income received for the right to have a booth at a trade show or event would not be subject to sales tax as long as the sponsor did not also receive free tickets to the event.
Is the admission to a summer camp taxable?
- The general rule is that admissions to summer camps are not taxable as long as the camp is instructional/educational in nature. The room and board included in the admissions would also not be taxable.
Are entry fees to participate in an event taxable?
- Yes, entry fees for participation, such as a run/walk are taxable. However, fees paid to be on a little league or gymnastics team or for an exercise class, such as Zumba, are not taxable. Entrance fees into sporting events, music concerts, performances, and plays are also taxable.
Tax law changes specific to higher educationIs the fee for a transcript subject to sales tax?
- No, the service charges by an educational institution for the provision of official transcripts is not deemed the sale of tangible personal property and is not subject to sales tax.
Is the sale of food to students in the cafeteria taxable?
- The sale of food to student is exempt from sales tax. If the cafeteria is managed by a third-party, the sale of food to students is still exempt, however, the sale of food to anyone other than students, would be subject to sales tax.
Are sales by a university bookstore taxable?
- Sales by the bookstore for textbooks, workbooks, and course materials are exempt. However, apparel and other memorabilia is subject to sales tax.
If a university organization holds a networking event, is this subject to sales tax?
- If the purpose of the event is professional development, educational, or instructional, then the admission charge would not be taxable. The general rule is that an educational event must be predominantly devoted to the educational purpose (i.e. educational speaker). However, a professional organization at the university holding a networking event would be considered professional development even if no instructional speaker or workshop.
The answers provided above are based on the law as it has been interpreted and known at this time. The most current information may be found at taxanswers.ky.gov.
For more information, please contact your Dean Dorton advisor or:
Allison Carter, alcarter@deandorton.com
Erica Horn, ehorn@deandorton.com
As we reflect on the recent Kentucky sales tax changes, we do not see significant impacts targeted at the energy-related industries. However, the sales tax points raised below should help all companies, including those in the energy industry.
Prior to July 1, Kentucky taxed five services, including hotel stays and telephone service. Effective July 1, 12 new services are taxable:
Labor associated with the repair, installation, and maintenance of taxable tangible personal property
- Extended warranties
- Landscaping and lawn care
- Janitorial
- Small animal veterinarian
- Industrial laundry
- Dry cleaning and laundry
- Linen supply
- Pet grooming and boarding
- Diet and weight-reducing
- Tanning
- Limousine, if a driver is provided
The primary questions arising from the extension of sales tax to these services have centered on installation and repair labor and what is called the pyramiding of the tax.
Electricians, HVAC contractors, plumbers, and others were among the most concerned taxpayers when the changes were initially announced. The Kentucky Department of Revenue quickly clarified that the extension of sales tax to installation and repair labor applied only to “tangible personal property,” and not improvements to real estate or fixtures in a building, which is the work done by contractors. For example, a heating and air conditioning unit becomes a permanent part of the residence, commercial, or industrial building in which it is installed. The HVAC unit is a fixture and therefore, neither installation nor repair of the unit is subject to sales tax.
The second issue relates to tax being charged on something on which tax has already been paid. An example occurs in the area of landscaping services. As the law is currently written, if a landscaper contracts with a tree removal service to remove a customer’s tree, the landscaper must pay sales tax to the tree removal company for removing the tree, and then, the customer also must pay the landscaper for the tree removal. Good tax policy dictates that the transaction between the tree removal service and the landscaper not be subject to tax and the tree removal only be taxed once when billed to the customer by the landscaper.
There has been talk that the General Assembly may pass a “fix” for this problem.
In addition to new services subject to tax, the General Assembly extended the types of admissions subject to sales tax. Previously, tickets for entrance to a display, program, sporting event, music concert, performance, play, show, movie, exhibit, fair, or other entertainment or amusement were taxable. Now, the sales tax is extended to include admission to campgrounds, bowling centers, skating rinks, swimming pools, tennis courts, golf courses and country clubs, and other events and activities.
The Department has established a website with questions and answers: www.taxanswers.ky.gov. Individuals and businesses can also submit their own questions through the website.
For more information, please contact your Dean Dorton advisor or Erica Horn at ehorn@deandorton.com.
Kentucky small businesses that add one or more employees, equipment,or technology in the past 24 months may qualify for a tax credit of up to $25,000 on their 2018 tax return through the Kentucky Small Business Tax Credit program. The program is available to most for-profit businesses with 50 or fewer full-time employees.
If this is you, read on for more information about this credit.
The credit is calculated as the lesser of:
• $3,500 per eligible position added, the total dollar amount invested in qualifying equipment or technology, or
• $25,000 per calendar year.
To qualify for the credit, employers must meet the following qualifications:
• Add at least one eligible position within the past 24 months (see below for the definition of an eligible position)
• Spend at least $5,000 on qualifying equipment (excluding real property) within six months before or after filling the new position
A new employee meets the eligible position requirements if the employee:
• Is subject to Kentucky individual income tax (i.e. Kentucky resident)
• Works an average of 35 hours per week or more for 12 consecutive months
• Is paid an hourly wage of at least $10.88 per hour (includes wages, tips, bonuses and commissions, but not employee benefits)
• Increases your business’s base employment (i.e. did not replace someone who left)
• Is replaced within 45 days if terminated within the 12 consecutive month period
LEARN MORE AND APPLYFor more information, please contact your Dean Dorton advisor or:
Mike Harbold, mharbold@deandorton.com
Erica Horn, ehorn@deandorton.com
In the 1960’s, Artificial Intelligence and machine learning was something we read about in science fiction books. Today, it’s a reality.
As thought-leaders delved into the topic of AI and machine learning in finance at the recent 2018 State of Technology conference, it was easy to see how the future can take shape for financial management and accounting.
So, what might a future in financial management look like? Where are we likely to see AI and machine learning support finance, and how can accounting take advantage of technology’s advancements?
Auditing
Auditing is the first place finance leaders can look to technology for support. Instances already exist where technology via machine learning can simplify complex and tedious data examination by pouring through volumes of transactions, documents and contracts to identify anomalies in a fraction of the time it would take a person to do.
Reporting and Compliance
At present, big banks already use AI to navigate complicated regulatory guidelines. Accounting firms are quick to follow this lead, so we should only expect that the future will offer greater compliance support and data retrieval in our financial management solutions at the company level.
Sage Intacct, a best-in-class cloud accounting solution is the first of its kind of software designed to support the new ASC 606 and IFRS 15 guidelines for subscription-based companies and non-profit organizations alike and has promised there is more to come.
A Bright Future
Siri and Alexa occupy center stage, but financial management should keep on the lookout for Sage Intacct’s Pacioli, now in the works.
The cloud-based accounting software company is currently developing their own machine learning technology designed to record your activity to make information retrieval faster and easier for your accounting teams.
While no date is set on the release of Pacioli, it is expected that Sage Intacct aims to have it up and running sooner rather than later.
Sage Intacct’s offers strong financial management solutions, and expert streamlining for audits, consolidations, compliance, and collaboration. For this reason, we can anticipate a bright future with Sage Intacct when it comes to AI and machine learning.
If your business is rapidly growing, both in size and complexity, it might be time to consider adopting a system that can grow and scale with your business.
To find the right financial management platform to replace your current static, on-premises software system, we can help.
Give us a call for expert guidance into options that have the strength to grow and change with the future of accounting technology.
*Credits: google images