Clean Run Magazine - April 2007 - 13

Corporate Income Tax Rates for 2006 (IRS) Taxable Income: Over But Not Over 0 50,000 75,000 100,000 335,000 50,000 75,000 100,000 335,000 10,000,000 Pay + % on Excess 0 7,500 13,750 22,250 113,900 + + + + + 15.0% 25.0% 34.0% 39.0% 34.0% Of the Amount Over 0 50,000 75,000 100,000 335,000 To be approved as a tax-exempt entity, the club must be able to clearly deﬁne the club’s exempt purpose and how it intends to accomplish this task. Once approved, the club then must report annually what was achieved in carrying out the entity’s exempt purpose. Further, board of director personal information (name and address) is required to be reported regardless of earnings or position held. A tax-exempt entity must maintain complete and accurate records on the accrual method of accounting, which requires outstanding customer receivables and vendor payables to be recorded at the time of transaction, not at the time of deposit and disbursement. These records are also open for public inspection by any individual, company, or agency that makes a formal request. These records include the application for tax-exempt status (Form 1024), annual returns for up to three years (Form 990 or 990-EZ), and other ofﬁcial reports, ﬁlings, and correspondence. Finally, an often overlooked area is unrelated business income. While business income is rare for a canine club, its existence can create a Federal tax burden. It commonly occurs when a club owns a facility and either sublets a substantial portion of the facility to an outside party or rents out its space for a signiﬁcant number of non-canine related events. Always be cognizant of the club’s revenue streams to avoid unrelated business income treatment. Sounds daunting, especially for a small club that maintains (on an average basis) no more than $5,000 in the bank, which equals $750 cumulatively paid into the IRS if set up as a taxable entity. While I generally refrain from stating my position on the options presented, I believe the canine club community is best served under a taxable formation rather than tax-exempt, after careful examination of pros and cons of each entity type. Be sure to actively engage your club’s ﬁnancial advisor as questions or concerns arise. Remember, your dog jumps through hoops, shouldn’t your accountant? D Geoffrey Goudy is a certified public accountant, has been in practice for 17 years, and has participated in canine sporting events since the mid-90s. Go to www.CSpotCount.com/CanineSport.asp to learn more about or direct questions to Geoffrey and his practice. Should your club’s actual legal setup be a mystery, review organizational and bank account documents, initial and subsequent board minutes, and interview listed individual parties to ﬁll in any holes. Note: nonproﬁt does not equal tax exempt. So while it may be assumed that the club was set up as a nonproﬁt corporation with the Secretary of State, should the club not have letter from the Internal Revenue Service explicitly stating that the club has been approved for tax-exempt status under IRC 501(c)(7), social and recreation clubs, then the club is by default a taxable corporation for Federal taxation purposes. Not that that is a bad situation to be in. Especially when you consider that the ﬁrst level of Federal corporate income tax rate assessment is 15% for up to $50,000 of annual income. And should a loss occur in any tax year, it is wise to carry the loss forward because it is generally not worth the effort to carry the loss back to a prior proﬁtable year. Yet, our natural instinct is to earn money tax-free. But as a taxexempt entity, three key elements must be understood: 1. Exempt purpose 2. Public inspection 3. Unrelated business income Financial Reporting Public Notice Requirement N/A Annual Federal Filing Requirement Always—Form 1120 or 1120-A Member Transactions Reported N/A Annual State Filing Requirements Yes Yes If Receipts > $100,000 Form 990 or 990-EZ Yes Each state has its own initial, renewal, and operating activity reporting requirements. Carefully review respective Secretary of State, Department of Revenue, and Attorney General ﬁling and reporting requirements. April 07 | Clean Run 13

http://www.CSpotCount.com/CanineSport.asp

Clean Run Magazine - April 2007

Table of Contents for the Digital Edition of Clean Run Magazine - April 2007