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IRS Form 1023For nonprofit organizations, navigating the process of establishing tax-exempt status can be a challenging experience, but the benefits are more than worth the effort. Contributors being able to deduct donations from your taxes, being exempt from income and property taxes and having access to funding through grants, for example, are just a few of the many benefits of being granted tax-exempt status.

Filing for tax-exempt status involves the completion of IRS Form 1023, which covers section 501(c)(3) of the tax code. It may be helpful to have the assistance of an attorney or tax professional when completing this form, as it likely demands a greater understanding of the law than most people are likely to have. Some of the key aspects of the application include outlining the structure of your organization, along with descriptions of your organization’s history, activities and accurate and thorough financial records.

Receiving a successful approval for tax-exempt status may seem like an event worth celebrating, and it is. But there are also steps you need to take to protect your nonprofit status. One of these is establishing and maintaining a clear corporate structure. For nonprofits, there are two basic options: leaving decision-making to the board of directors, or allowing members to play a role in the process. Regardless of which option your nonprofit corporation chooses to adopt, roles must be clearly indicated and followed.

Another key element of maintaining tax-exempt status is keeping accurate records of your nonprofit organization’s activities. This helps protect the limited personal liability of the directors, and is simply a good business practice in general. Some of the records you will want to keep organized and well maintained include meeting minutes and records pertaining to major decisions the corporation makes. Accurate and thorough financial and tax records should also be maintained.

There are also a number of rules nonprofit organizations need to follow to preserve their tax-exempt status. Many of these relate to political activities, the distribution of profits and the distribution of assets in the event of the corporation’s dissolution. For instance, nonprofits are barred from making political campaign contributions, and their ability to lobby for legislation is severely limited.

As far as profits are concerned, no nonprofit can be set up to operate for its members’ personal financial benefit. And because the structure of tax-exempt organizations prevents them from owning their assets, those assets cannot simply be distributed to its members if the corporation dissolves. Nor can they be sold. Instead, they must be donated to another tax-exempt organization.

Not surprisingly, it can be easy for any nonprofit organization to find itself in legal trouble due to poor recordkeeping, engaging in inappropriate activity or failing to abide by the rules of its structure. To ensure you understand these issues and remain compliant with the law, consult an experienced attorney.

Tom Bolt serves as Managing Attorney of BoltNagi PC and advises many U.S. Virgin Islands nonprofits.  He serves on several local and national nonprofit boards.

Net LossesOne of the unfortunate realities of operating a business is that you might not always make the money you anticipated. Whether you’ve only recently started your business and have not earned back your initial investment, or you’re dealing with problems related to the larger economy, earning a profit isn’t always possible. In fact, for businesses in these situations, it’s fairly common to be operating at a loss.

Because this situation is so common, there is a provision in the tax code that allows business owners, especially sole proprietors, to receive a quick tax refund by claiming a net operating loss. In short, this is what you have when your losses are greater than your combined income from all sources, and while it sounds bad—and certainly isn’t pleasant to experience, given the fact that your business is losing money—claiming a net operating loss actually provides some relief by lessening your tax burden.

Claiming a net operating loss allows business owners to receive a partial or even full refund of taxes from previous years. Even better, this refund may often be made relatively quickly, which means business owners benefit from receiving much-needed funds when they can actually use them.

Calculating your net operating loss

Determining whether your business has a net operating loss, and in what amount, may be more complicated than you’d expect. For sole proprietorships, if your listed expenses are greater than your income, you have a net operating loss. For other types of businesses, such as partnerships, LLCs and S corporations, business losses are deducted from your income along with any other deductions. In other words, they are factored in when determining your adjusted gross income. If your adjusted gross income is a negative number after all of your deductions have been factored in, your business can claim a net operating loss.

You have two options when it comes to applying your net operating loss to your taxes. You may either apply it to previous tax years or to future tax years—carrying the loss back or forward, in IRS parlance. In general, carrying the loss back allows you to benefit from a quick refund, while carrying the loss forward allows you to reduce your tax liability in future years. The best option depends on a number of factors, including how much tax you’ve paid in the past.

Because the process of claiming and benefiting from a net operating loss can be complex, it’s best to seek the input of an experienced and knowledgeable business attorney as soon as possible if you’re interested in proceeding. By leveraging the provisions for claiming net operating losses, you can help your business find stronger footing sooner, and hopefully begin earning a profit in the months to come.

Adam N. Marinelli is an attorney in the Civil Litigation Practice Group at BoltNagi PC, a full service business law firm serving the U.S. Virgin Islands.

Does your company have confidential information? What about trade secrets? The concept of owning and protecting confidential information or trade secrets may not have occurred to most businesses. Yet, if you have a client list, pricing formula, particular device or pattern of installation, you have intellectual property worth protecting. This information is no less important to your business than your star employee or your brand name, and it deserves the same diligent protection.

In the U.S. Virgin Islands, a trade secret is considered to be information used in a business that is secret and gives a competitive advantage. It may be a formula, pattern or device, a compound, a manufacturing process, a pattern for a machine or a customer list.

Continue Reading Protecting Your “Trade Secrets” in the U.S. Virgin Islands

IRS PhotoFor an S corporation — a small corporation that is structured and taxed similarly to a partnership—one of the biggest advantages of this structure is its ability to avoid payment of Social Security and Medicare taxes. However, while this benefit has become very popular among S corporations, it has become decidedly less so for the U.S. Internal Revenue Service.

The key provision at issue is that earnings and profits taken in by an S corporation and distributed to its shareholders are not subject to Social Security and Medicare taxes. Because the owners of an S corporation act as both shareholders and employees, they control not just the distribution of profits, but also the amount of their salaries. By taking low salaries and claiming larger profits as corporate distributions, owners are able to avoid significant taxation. Some S corps, in fact, have taken the approach of paying shareholders nothing at all—or at least nothing they classify as employee salary.

The IRS frowns upon these practices, as they deprive the federal government of significant tax revenue. A 2000 study by the IRS determined that nearly half a million S corporations with single shareholders—in other words, owners beholden to no one when it comes to their salaries—paid no salaries to their owners. This revelation has resulted in the IRS taking a more aggressive approach to identifying and penalizing S corps that fail to pay their shareholders a reasonable salary.

But what constitutes a reasonable salary for an S corporation employee, at least as far as the IRS is concerned? Unfortunately, there is no set dollar amount that will free you from scrutiny. Instead, the agency looks at a variety of factors when determining whether a salary is reasonable or not. Among these factors are the following:

  • The specific duties and the level of responsibility shouldered by the employee;
  • The time, energy and effort the business demands of its employees;
  • Whether salaries were determined using a formula;
  • The cost of living in the area in which the business is located; and
  • Patterns of payment for employees over time.

After examining these and numerous other factors, the IRS develops a range of salaries it considers reasonable for the job, and whether the employee’s salary is considered reasonable determines if any of the corporate distributions are reclassified as salary and thus subject to taxation.

Naturally, this process can be extremely complicated, particularly as the IRS takes so many factors into consideration. If you’re wondering whether your S corporation is approaching employee salaries in a reasonable and responsible manner, it’s best to seek the guidance of an experienced business law attorney.

Adam N. Marinelli is an attorney in the Civil Litigation Practice Group at BoltNagi PC, a full service business law firm serving the U.S. Virgin Islands.

There are many types of industries in which hiring independent contractors is a big part of a company’s business model. There are some benefits to working with independent contractors, but as with any type of hiring practice, it’s important to make sure you abide by all the federal and territorial rules and plan out the hiring in a way that protects your company.

With this in mind, here are some tips for hiring independent contractors to your company.

Continue Reading Tips for Hiring Independent Contractors

A sole proprietorship is the simplest business structure you can operate under. It is technically not a legal entity—it is just a single person who owns the business and is personally responsible for its debts. The business can operate under the name of its owner or under a fictitious trade name.

Continue Reading What You Should Know About Operating a Sole Proprietorship

One of the many ways to efficiently grow your business is to acquire other companies, taking over their intellectual properties and customer bases. Of course, there is a lot of planning and hard work that goes into an acquisition, and the process of actually finding a company worth acquiring isn’t always easy.

Continue Reading How to Find a Sensible Acquisition Target

While the U.S. Virgin Islands’ bonds are still rated in junk status, there are some significant signs of improvement and glimmers of hope for economic recovery in the territory. The price of some of the Territory’s bonds has more than doubled since the end of 2017, thanks in large part to a boom in construction during the post-hurricane rebuild and the reopening of the St. Croix oil refinery. Now, economic experts in the Territory feel good about the growth in the local economy believe there is a positive future for the territory’s bond ratings.

Continue Reading Signs of Economic Improvement: USVI Bonds Pick Up

A short sale is when a lender agrees to a person or entity selling property at fair market value even if the outstanding mortgage against the property is more than that value. In such a case, the lender generally forgives the balance due on the loan after the sale occurs, and the borrower is not required to pay off the remaining balance (though this isn’t always true).

Continue Reading An Overview of the Short Sale Process