Grants: Positioning Your Organization For 2025
1. Reassess Your GoalsBefore diving into grant applications, revisit your nonprofit’s goals for 2025. Identify the programs or projects you want to fund and ensure they align with your mission. A clear vision will …
1. Reassess Your Goals
Before diving into grant applications, revisit your nonprofit’s goals for 2025. Identify the programs or projects you want to fund and ensure they align with your mission. A clear vision will guide your search and strengthen your grant applications.
2. Research Funding Opportunities
Start researching potential funders now. Explore both familiar sources and new opportunities, such as foundations or government agencies that align with your mission. Create a calendar of grant deadlines to stay organized and ahead of schedule.
3. Build Relationships with Funders
Grant success goes beyond applications—it’s about relationships. Reach out to funders early to introduce your nonprofit, share your goals, and learn about their priorities. A proactive approach can offer valuable insights and help establish connections.
4. Strengthen Your Organizational Profile
Update your website, refine your mission statement, and gather data and impact stories. A polished and compelling organizational profile makes your grant applications more competitive and appealing to funders.
5. Diversify Your Funding Sources
While grants are important, don’t rely on them exclusively. Develop a diverse funding strategy that includes individual donations, corporate partnerships, and earned income. This approach ensures stability and increases your appeal to funders.
6. Invest in Grant-Writing Capacity
Strong grant writing can significantly improve your success rate. Consider training current staff or hiring a professional grant writer to enhance your applications and streamline the process.
7. Plan for Sustainability
Funders want to know their investment will have a lasting impact. Develop a plan to sustain funded projects beyond the grant period to improve your chances of securing multi-year funding.
8. Stay Updated on Funding Trends
Keep an eye on emerging trends in your sector. Understanding funder priorities and shifts in grant-making practices can help you refine your approach and remain competitive.
9. Prepare Your Team
Grant-seeking is a team effort. Ensure your staff, board, and volunteers understand your funding priorities and can clearly articulate your nonprofit’s impact.
10. Reflect on Past Efforts
Review your 2024 grant efforts. Identify what worked well and what can be improved, then apply these insights to refine your strategy for 2025.
By starting early and focusing on clear goals, strong relationships, and organizational readiness, your nonprofit will be better positioned to secure the funding it needs to succeed in 2025. For more assistance in developing your grant strategy, contact De Boer, Baumann & Company today.
Boards: Three Areas NPO Leaders Need To Develop
Nonprofit leaders are known for their dedication and passion in driving meaningful change in their communities. They invest countless hours to create positive social impacts, often with limited financial rewards. Their commitment to their …
Nonprofit leaders are known for their dedication and passion in driving meaningful change in their communities. They invest countless hours to create positive social impacts, often with limited financial rewards. Their commitment to their organization’s mission and perseverance through challenges are truly inspiring. However, many leaders find themselves expending significant time and energy without achieving the desired outcomes.
To lead successfully, nonprofit leaders must focus on developing three critical areas:
- Fostering strong relationships with staff
- Engaging board members and cultivating a solid CEO/Board partnership
- Effectively communicating the organization’s positive impact
Building strong internal relationships is the foundation of any thriving organization. Leaders who inspire their teams by making them feel valued, heard, and integral to the mission are more likely to achieve success. As Maya Angelou famously said, “People will forget what you said, people will forget what you did, but people will never forget how you made them feel.” Listening to employees and showing genuine support for their efforts fosters trust and respect far more than authority alone.
A successful leader also prioritizes collaboration with their board. Beyond understanding the board’s fiduciary and advisory roles, it’s essential to engage them as strategic partners. This can be achieved through open dialogue on organizational challenges and leveraging the unique expertise of board members. Using the “50% rule,” where half of each board meeting is dedicated to strategic discussions, can help create a more dynamic and engaged board. Questions like, “What is the impact we’re having on those we serve?” or “What sets us apart from others?” can spark meaningful conversations.
Additionally, nonprofit leaders must prioritize measuring and communicating their organization’s success. A compelling question for reflection is, “If our nonprofit had a stock price, what would it be today?” Demonstrating measurable impact is crucial because donors are more inclined to support successful organizations. Clear and consistent communication about achievements ensures the organization isn’t a “best-kept secret,” which can hinder growth and sustainability.
In conclusion, nonprofit leaders who prioritize building strong internal relationships, fostering partnerships with their board, and effectively communicating their impact are better positioned to thrive. By consistently showcasing success, nonprofits can attract greater support and drive lasting change in their communities.
This thought leadership is provided by Dennis C. Miller. Dennis is the founder and chair of DCM Associates, a firm specializing in nonprofit board and leadership coaching, as well as executive searches.
For more information on how to strengthen your nonprofit’s leadership and communication strategies, reach out to De Boer, Baumann & Company today!
Ten Nonprofit Funding Models
Nonprofit leaders often grapple with critical financial questions: How much funding is needed? Where can it be found? Why is it scarce? These concerns become especially urgent in tough economic times, but the answers …
Nonprofit leaders often grapple with critical financial questions: How much funding is needed? Where can it be found? Why is it scarce? These concerns become especially urgent in tough economic times, but the answers are elusive. While nonprofit leaders excel at program development, they typically lack expertise in securing sustainable funding, and philanthropists often struggle to understand the full impact of their donations.
This disconnect between nonprofits and funding sources can have serious consequences, such as promising programs being reduced or abandoned. Additionally, limited funding can lead to disorganized fundraising efforts.
In contrast, the for-profit sector benefits from clear financial strategies, often explained through business models. These models provide a shared understanding of how companies operate and succeed, allowing for efficient communication and informed decision-making between business leaders and investors.
The nonprofit sector, however, lacks similarly defined funding models, which leads to confusion and missed opportunities. To address this, our research has identified 10 nonprofit models commonly used by large U.S. organizations. These models aim to help nonprofit leaders better articulate their funding strategies and understand the potential and limitations of different approaches.
Beneficiaries Are Not Customers
Nonprofits face a unique challenge in developing funding models because, unlike for-profit businesses, the process of generating revenue is not directly tied to creating value for beneficiaries. While a for-profit company earns revenue by satisfying customers, nonprofits must identify a separate economic engine to fund their mission, as donors—not beneficiaries—provide the funding.
Experts like J. Gregory Dees and Clara Miller highlight that nonprofits operate in two separate “businesses”: one focused on programs and the other on fundraising. This distinction is why we use the term “funding model” rather than “business model” to emphasize the need to focus on financial strategies, not just program activities.
For smaller nonprofits, raising funds may be more flexible, but as organizations grow and need to raise larger sums—often $25 million or more—well-defined funding models become crucial. Research of large nonprofits shows that those achieving significant growth have successfully matched their funding sources with their activities, creating a professional, targeted fundraising approach.
As nonprofits scale, it’s essential to rely on established funding markets with clear decision-makers, such as government funding or large groups of individual donors. While changes in public awareness or events may lead to funding increases, these shifts are unpredictable and should not be relied upon as consistent sources of revenue. Nonprofits that adopt intentional, strategic funding models are more likely to achieve predictable, long-term financial sustainability.
Ten Funding Models
Creating a framework for nonprofit funding comes with challenges, as the models need to be specific enough to be relevant, but not too detailed that they lose their broader application. For instance, a community health clinic supported by Medicaid and a nonprofit funded by the U.S. Agency for International Development (USAID) are both government-funded, but the type of funding and decision-makers involved are vastly different. Including both in the same model would be ineffective. However, separating them into distinct models would be overly narrow.
To create a meaningful framework, we identified three main parameters to define funding models: the source of funds, the types of decision-makers, and the motivations of these decision-makers. These factors allowed us to distinguish ten distinct funding models.
Interestingly, some models we initially considered didn’t emerge. For example, nonprofits relying entirely on earned income from ventures separate from their core activities or those that operate strictly on a fee-for-service basis didn’t appear in the large nonprofits we studied. We believe these models don’t sustain large-scale nonprofit advantages over for-profit entities.
Here are the ten models, ordered by the dominant funder type:
Heartfelt Connector
Some nonprofits, like the Make-a-Wish Foundation, use this model by focusing on causes that resonate with a broad range of people. They connect large groups of individuals to causes that appeal to emotions, typically across a range of incomes and demographics. Such nonprofits often engage volunteers through fundraising events, building an emotional bond with a wide network. The Susan G. Komen Foundation is an example of a Heartfelt Connector, which organizes events like the Race for the Cure to fund cancer research.Questions to consider:
- Is there a large group of people already passionate about this cause?
- Can we articulate the nonprofit’s mission clearly and concisely?
- Can we attract volunteers on a wide scale?
Beneficiary Builder
Nonprofits like Cleveland Clinic rely on donations from individuals who have directly benefited from their services. These organizations generally charge for services but rely on additional donations for major projects. Examples include universities and hospitals, where alumni donations contribute significantly to operations and long-term goals.Questions to consider:
- Does our service create individual benefits seen as a social good?
- Do we have a strong connection with beneficiaries who may donate?
- Can we scale our outreach to reach a large number of beneficiaries?
Member Motivator
This model involves nonprofits like Saddleback Church, where members donate to support causes central to their lives. These organizations serve communities (such as religious or environmental groups) who collectively benefit from the organization’s work. The National Wild Turkey Federation (NWTF), for example, raises funds via membership and events that engage individuals around shared interests.Questions to consider:
- Will our members feel the organization directly benefits them?
- Can we engage and manage members for fundraising activities?
- Can we remain true to our core members and their interests?
Big Bettor
Big Bettors, like the Stanley Medical Research Institute, rely on large donations from a few major donors or foundations. These organizations usually focus on medical or environmental issues where large sums can accelerate change, often from donors passionate about specific issues. Conservation International (CI) uses this model by attracting large donors to fund projects aimed at protecting biodiversity.Questions to consider:
- Can we create a tangible solution to a major problem within a foreseeable timeframe?
- Can we effectively communicate how large-scale funding will address our goals?
- Are we able to attract wealthy individuals or foundations to fund our cause?
Public Provider
Nonprofits like the Success for All Foundation depend on government funding to provide services in social sectors like housing, education, and human services. They often contract with the government to deliver services according to predefined rules. An example is TMC (Texas Migrant Council), which started with federal funding and expanded over time to secure additional government sources.Questions to consider:
- Is our nonprofit a good fit for government funding programs?
- Can we demonstrate that our service delivery is superior to competitors?
- Are we prepared to manage regular contract renewals and compliance?
Policy Innovator
Some nonprofits, such as Youth Villages or HELP USA, develop new methods to tackle social issues and secure government funding by proving their solutions are more effective and cost-efficient. They often push for policy changes or new funding mechanisms to support their innovative approaches.Questions to consider:
- Is our approach significantly more effective or cost-efficient than existing solutions?
- Can we provide evidence that our program works?
- Are we able to cultivate strong relationships with key government decision-makers?
Beneficiary Broker
Nonprofits like the Iowa Student Loan Liquidity Corporation fall into this model. These organizations act as intermediaries, providing government-funded services to beneficiaries but competing for these funds with other nonprofits. They typically work under government grants or contracts to deliver specific services.Questions to consider:
- Can we differentiate our services from competitors?
- Do we have the capacity to meet government criteria for service delivery?
- Are we prepared for competitive funding processes?
Resource Recycler
Some nonprofits, such as those supported by corporate funding, use this model to supplement their activities. These organizations may receive in-kind donations or direct financial support from corporations to fund initiatives. Often, this model leverages corporate social responsibility (CSR) programs.Market Maker
This model involves mixed funding sources, where nonprofits secure a blend of government, corporate, and individual donations. These organizations may focus on innovative programs that require diverse funding channels to grow.Local Nationalizer
The Local Nationalizer model combines local and national funding sources to sustain operations. These nonprofits typically operate at both a local and national level, drawing support from a broad range of funders.
These 10 models represent different strategies nonprofits use to secure funding. They highlight the complexity of nonprofit funding and how organizations must tailor their approach to their mission, the needs of their beneficiaries, and the sources of funding available.
Implications for Nonprofits
In today’s economic climate, nonprofit leaders may be tempted to seek funding from any available source, but this approach can lead to losing focus. It’s crucial to carefully examine and maintain discipline in fundraising strategies, especially during challenging times. This article aims to guide leaders in refining their funding models.
While funding approaches will vary, nonprofits can benefit from clarity in their strategies. Some may even develop models capable of generating substantial revenue—evidenced by nearly 150 nonprofits achieving over $50 million in annual revenue between 1970 and 2003.
Philanthropists, too, are becoming more strategic in their investments. Foundations like the Edna McConnell Clark Foundation and New Profit Inc. are focusing on strengthening both program and funding models to better support grantees.
As society increasingly relies on nonprofits and philanthropy to address critical issues, understanding and implementing effective funding models is essential for fulfilling these goals.
For more information on how to refine your nonprofit’s funding strategy, reach out to DBC for guidance and support.
Navigating the Tax Complexities of Hiring Household Employees
Household employees play a crucial role in many homes, providing essential services such as childcare, eldercare, housekeeping, and gardening. However, employing household help comes with a set of responsibilities, particularly in terms of payroll, …
Household employees play a crucial role in many homes, providing essential services such as childcare, eldercare, housekeeping, and gardening. However, employing household help comes with a set of responsibilities, particularly in terms of payroll, withholding, and tax reporting. This article delves into the intricacies of household employment, including the classification of workers, payroll requirements, tax implications, and the penalties for non-compliance.
Who is a Household Employee? – A household employee is someone who performs domestic services in a private home. This includes nannies, caregivers, housekeepers, gardeners, and other similar roles. The key factor that distinguishes a household employee from an independent contractor is the degree of control the employer has over the work performed. If the employer dictates what work is to be done and how it is to be done, the worker is typically considered an employee.
A worker who performs childcare services in their home generally is not an employee of the parents whose children are cared for. If an agency provides the worker and controls what work is done and how it is done, then the worker is not considered a household employee.
Examples of Household Employees:
- Nannies and babysitters
- Caregivers for elderly or disabled individuals
- Housekeepers and maids
- Gardeners and landscapers (if they work under the homeowner’s direction)
Independent Contractors: Independent contractors, on the other hand, operate their own businesses and provide services to the public. They typically supply their own tools, set their own hours, and determine how the work will be completed. They are not treated as household employees and there are no reporting requirements when they work for you in your private home. Examples include:
- Plumbers
- Gardeners and landscapers (if they don’t work under the homeowner’s direction)
- Electricians
- Pool maintenance workers
- Freelance landscapers
Payroll and Withholding Requirements – When you hire a household employee, you become an employer and must adhere to specific payroll and withholding requirements. Here are the key steps involved:
- Obtain Employer Identification Numbers (EINs): You need to obtain a federal EIN from the IRS and, in some cases, a state EIN.
- Form I-9: Both the employer and the employee must complete Form I-9 to verify the employee’s eligibility to work in the U.S.
- Schedule H: Household Employment Taxes – Employers report household employment taxes on Schedule H, which is filed with their federal income tax return (Form 1040). Schedule H covers Social Security and Medicare taxes, FUTA, and any withheld federal income tax.
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- Social Security and Medicare Taxes: You must withhold Social Security and Medicare taxes from your employee’s wages and pay the employer’s share of these taxes. For 2024, the Social Security tax rate is 6.2% for both the employer and the employee, and the Medicare tax rate is 1.45% each.
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- Federal Unemployment Tax (FUTA): You may also need to pay FUTA tax if you pay your household employee $1,000 or more in any calendar quarter. The FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee.
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- Income Tax Withholding: Federal income tax withholding is not required for household employees unless both the employer and the employee agree to it. However, it is advisable to withhold federal income tax to help the employee avoid a large tax bill at the end of the year.
- State Employment Taxes: State requirements vary, but you may need to pay state unemployment insurance and disability insurance taxes. Contact this office for state reporting requirements.
- W-2 and W-3 Forms: At the end of the year, you must provide your household employee with a Form W-2, Wage and Tax Statement, and file a copy with the Social Security Administration along with Form W-3, Transmittal of Wage and Tax Statements. These forms are generally due by January 31 following the year you paid the employee.
“Nanny” SEPs – A recent tax law change allows employers of domestic employees to establish a Simplified Employee Pension (SEP) plan to provide retirement benefits for their domestic employees, such as nannies. These plans have come to be termed “Nanny” SEPs, but can be made available to other types of domestic employees.
- Tax Treatment: Contributions made to a SEP are generally tax-deferred for the employee, meaning the employee does not pay taxes on the contributions until they withdraw the funds, typically during retirement.
- Distribution Rules: Distributions from SEPs are taxed similarly to IRA distributions. Early withdrawal penalties may apply if funds are withdrawn before the employee reaches age 59½.
- Required Minimum Distributions (RMDs): Employees must start taking required minimum distributions from the SEP once they reach the age of 73 (or 70½ if they reached that age before 2020, or if they attained age 72 during 2020 through 2022).
- No Loans: Loans are not permitted from SEP plans, as they are considered IRA-based plans.
This provision allows domestic employees to benefit from retirement savings plans like those available to employees in other sectors, promoting financial security for these workers. This is not a requirement but can be a valuable benefit to attract and retain quality household employees.
Deductibility of Household Employee Payments – Payments to household employees, and the employer’s associated payroll tax payments, are generally considered personal expenses and are not deductible. However, there are exceptions:
- Medical Expenses: Wages and other amounts paid for nursing services can be included as medical expenses if the services are necessary for medical care. This includes services such as administering medication, bathing, and grooming the patient.
- Child and Dependent Care Credit: Expenses for household services or care of a qualifying individual that allow the taxpayer to work may qualify for the child and dependent care credit. However, the same expense cannot be used both as a medical expense and for the child and dependent care credit.
Penalties for Non-Compliance – Failing to comply with household employment tax requirements can result in significant penalties:
- Failure to Withhold and Pay Taxes: If you do not withhold and pay Social Security, Medicare, and FUTA taxes, you may be liable for the unpaid taxes, plus interest and penalties.
- Failure to File Forms: Not filing required forms, such as Form W-2, can result in penalties. For example, the penalty for failing to file a correct Form W-2 by the due date can range from $60 to $330 per form, depending on how late the form is filed.
- Misclassification of Employees: Misclassifying an employee as an independent contractor to avoid payroll taxes can lead to back taxes, interest, and penalties. The IRS has strict guidelines for determining worker classification, and misclassification can result in significant financial consequences. Some states have different guidelines, often more restrictive than the federal rules.
Other Tax Issues:
- Overtime Pay: Under the Fair Labor Standards Act (FLSA), domestic employees are nonexempt workers and are entitled to overtime pay for any work beyond 40 hours in each week. However, live-in employees are an exception to this rule in most states.
- Hourly Pay vs. Salary: It is illegal to treat nonexempt employees as if they are salaried. Household employees must be paid on an hourly basis, and any overtime must be compensated accordingly.
- Separate Payrolls: Business owners must maintain separate payrolls for household employees. Personal funds, not business funds, must be used to pay household workers. Including household employees on a business payroll is not allowable as a business deduction.
Employing household help comes with a set of responsibilities that go beyond simply paying wages. Understanding the classification of workers, adhering to payroll and withholding requirements, and complying with tax reporting obligations are crucial to avoid penalties and ensure legal compliance. Additionally, offering benefits such as Nanny SEPs can help attract and retain quality household employees.
Please contact our office for questions and help meeting federal and state reporting requirements.
Don’t Leave Money on the Table: Essential Tax Credits You Might Be Missing
Tax preparers often encounter clients who are confused about the various tax credits available to them. Understanding these credits can significantly impact your tax liability and, in some cases, result in a refund. This …
Tax preparers often encounter clients who are confused about the various tax credits available to them. Understanding these credits can significantly impact your tax liability and, in some cases, result in a refund. This article aims to demystify individual tax credits, explain the difference between refundable and non-refundable credits, and discuss credit carryovers. By the end, you should have a clearer understanding of how to leverage these credits to your advantage.
What Are Tax Credits? Tax credits are amounts that reduce the tax you owe on a dollar-for-dollar basis. Unlike deductions, which lower your taxable income, tax credits directly reduce the amount of tax you owe. There are two main types of tax credits: refundable and non-refundable.
Refundable vs. Non-Refundable Tax Credits
- Refundable Tax Credits: These credits can reduce your tax liability to zero and result in a refund if the credit amount exceeds your tax liability. In other words, if your tax liability is $400 and you have a refundable credit of $1,000, you will receive a $600 refund. This is where many individuals who are not required to file a tax return miss out on substantial refundable tax credits intended for those with low incomes.
- Non-Refundable Tax Credits: These credits can reduce your tax liability to zero but cannot result in a refund. If your tax liability is $400 and you have a non-refundable credit of $1,000, your tax liability will be reduced to zero, but you will not receive a refund for the remaining $600.
Credit Carryovers – Some non-refundable credits come with carryover provisions, allowing you to apply any unused portion of the credit to future tax years. This can be particularly beneficial if you have a low tax liability in the current year but expect higher liabilities in future years.
Common Individual Tax Credits – Let’s delve into some of the most common individual tax credits, indicating whether they are refundable or non-refundable and if they include carryover provisions.
- Earned Income Tax Credit (EITC) – The Earned Income Tax Credit (EITC) is designed to benefit low to moderate-income working individuals and families. The credit amount varies based on your income and the number of qualifying children you have. For the 2024 tax year, the maximum credit is $7,830.
Type: Refundable
- Child Tax Credit (CTC) – The Child Tax Credit (CTC) provides up to $2,000 per qualifying child under the age of 17. Up to $1,400 of this credit is refundable, meaning you can receive a refund even if you do not owe any tax. The refundable portion is known as the Additional Child Tax Credit (ACTC).
Type: Partially Refundable
- American Opportunity Tax Credit (AOTC) – The American Opportunity Tax Credit (AOTC) is available for the first four years of post-secondary education. The maximum credit is $2,500 per eligible student, with 40% of the credit (up to $1,000) being refundable. The credit covers tuition, fees, and course materials.
Type: Partially Refundable
- Lifetime Learning Credit (LLC) – The Lifetime Learning Credit (LLC) provides up to $2,000 per tax return for qualified higher-education expenses. Unlike the AOTC, the LLC is non-refundable, meaning it can reduce your tax liability to zero but will not result in a refund. There is no limit on the number of years you can claim this credit.
Type: Non-Refundable
- Saver’s Credit – The Saver’s Credit is designed to encourage low to moderate-income individuals to save for retirement. The credit is worth up to $1,000 ($2,000 for married couples filing jointly) and is non-refundable. It can be claimed for contributions to retirement accounts such as IRAs and 401(k)s.
Type: Non-Refundable
- Child and Dependent Care Credit – The Child and Dependent Care Credit helps offset the cost of childcare or care for a dependent while you work or look for work. The credit is worth up to 35% of qualifying expenses, with a maximum of $3,000 for one qualifying individual or $6,000 for two or more. This credit is non-refundable.
Type: Non-Refundable
- Adoption Credit – The Adoption Credit provides financial assistance for qualified adoption expenses. For the 2024 tax year, the maximum credit is $16,810 per child. This credit is non-refundable but can be carried forward for up to five years if the credit exceeds your tax liability.
Type: Non-Refundable with Carryover
- Residential Clean Energy Credit – The Residential Clean Energy Credit is available for the installation of qualified energy-efficient improvements, such as solar panels and solar water heaters. The credit is worth 30% of the cost of the improvements and is non-refundable. Unused portions of the credit can be carried forward to future tax years.
Type: Non-Refundable with Carryover
- Premium Tax Credit (PTC) – The PTC helps eligible individuals and families cover the cost of premiums for health insurance purchased through a government Health Insurance Marketplace. The credit amount is based on your family income and the cost of the premiums. This credit is refundable, meaning you can receive a refund if the credit exceeds your tax liability.
Type: Refundable
- New Clean Vehicle Credit – Commonly referred to as the Electric Vehicle (EV) Credit, the New Clean Vehicle Credit is available for the purchase of qualifying all electric, plug-in hybrid, and fuel cell vehicles. Limits apply based your income and the manufacturer’s suggested retail price of the vehicle. The credit amount varies based on the vehicle’s battery capacity but can be up to $7,500. In lieu of claiming the credit on your tax return, you may be able to transfer the credit to the dealer at the time of purchase, which could reduce the vehicle’s cost or your downpayment.
Type: Non-Refundable with no carryover
- Previously Owned Clean Vehicle (EV) Credit – The Previously Owned Clean Vehicle Credit is designed to incentivize the purchase of used electric vehicles. The credit is up to $4,000 or 30% of the vehicle’s price, whichever is less. As with the New Clean Vehicle credit, there are caps on the income of the purchaser and the cost of the vehicle, but the amounts are different. This credit is non-refundable with no carryover.
Type: Non-Refundable with no carryover
- Credit for the Elderly or Disabled – The Credit for the Elderly or Disabled is available to low income individuals who are 65 or older or who are retired on permanent and total disability. The maximum credit is $7,500, but it is non-refundable, meaning it can only reduce your tax liability to zero.
Type: Non-Refundable
- Foreign Tax Credit – The Foreign Tax Credit is available to individuals who pay taxes to a foreign government on income that is also subject to U.S. tax. This credit is non-refundable but can be carried back one year and forward up to ten years if it exceeds your tax liability.
Type: Non-Refundable with Carryover
- General Business Credit – The General Business Credit is a collection of various credits available to businesses, including sole proprietorships, that are passed through to the individual. These credits are non-refundable but can be carried back one year and forward up to twenty years.
Type: Non-Refundable with Carryover
Our firm’s goal is to help you navigate the complexities of the tax code and maximize your tax benefits. If you have any questions or need assistance with your tax return, please do not hesitate to contact our office. Together, we can ensure you take full advantage of the tax credits available to you.
Maximize Your Tax Savings by Understanding the Hobby Loss Rules
When engaging in activities that generate income, it’s essential to understand how the IRS classifies these activities for tax purposes. The distinction between a hobby and a business can significantly impact your tax obligations. …
When engaging in activities that generate income, it’s essential to understand how the IRS classifies these activities for tax purposes. The distinction between a hobby and a business can significantly impact your tax obligations. This article will delve into the hobby loss rules, the impact of the Tax Cuts and Jobs Act (TCJA) on deductions, the nine factors the IRS uses to determine if an activity is engaged in for profit and provides examples of court cases involving profit motive.
Hobby Loss Rules Overview – The IRS uses hobby loss rules to determine whether an activity is a hobby or a business. If an activity is classified as a hobby, the income generated is taxable, but for years 2018 through 2025 the expenses incurred are not deductible. This means you cannot use hobby expenses to offset other income.
Impact of the Tax Cuts and Jobs Act (TCJA) on Deductions – The TCJA, enacted in 2017, brought significant changes to the tax code, including the suspension of miscellaneous itemized deductions subject to the 2% of adjusted gross income (AGI) floor for tax years 2018 through 2025. This suspension means that hobby expenses are not deductible during these years, making the entire income from a hobby taxable.
Nine Factors to Determine Profit Motive – The IRS considers nine factors to determine whether an activity is engaged in for profit. No single factor is decisive; instead, all factors must be considered together:
- Businesslike Manner: Is the activity carried out in a businesslike manner? This includes maintaining complete and accurate books and records.
- Expertise: Does the taxpayer have the necessary expertise or consult with experts to carry out the activity successfully?
- Time and Effort: How much time and effort does the taxpayer put into the activity? Significant time and effort may indicate a profit motive.
- Expectation of Asset Appreciation: Does the taxpayer expect the assets used in the activity to appreciate in value?
- Success in Similar Activities: Has the taxpayer succeeded in similar activities in the past?
- History of Income or Losses: What is the history of income or losses from the activity? Consistent losses may indicate a lack of profit motive.
- Amount of Occasional Profits: Are there occasional profits, and if so, how substantial are they?
- Financial Status: Does the taxpayer have substantial income from other sources? If so, the activity may be more likely to be considered a hobby.
- Elements of Personal Pleasure: Does the activity involve elements of personal pleasure or recreation?
Presumptions of Profit Motive – The IRS provides a presumption of profit motive if an activity generates a profit in at least three of the last five consecutive years, including the current year. For activities involving breeding, training, showing, or racing horses, the presumption applies if there is a profit in at least two of the last seven consecutive years.
Election to Delay Determination of Profit Intent – Taxpayers can elect to delay the determination of whether an activity is engaged in for profit by filing Form 5213, “Election to Postpone Determination as to Whether the Presumption Applies That an Activity Is Engaged in for Profit.” This election allows taxpayers to defer the determination until the end of the fourth tax year (or sixth tax year for horse-related activities) after the activity begins. This election (1) should not be made unless the taxpayer is being audited by the IRS and the IRS is disallowing their deductions under the hobby loss rules, and (2) cannot be made if the taxpayer has been engaged in the activity for more than five years (seven years for horse-related activities).
Sequence of Deductions to the Extent of Income for years before 2018 and after 2025 (providing Congress allows the TCJA rules to expire) – If an activity is classified as a hobby, deductions are allowed only to the extent of the income generated by the activity. The sequence in which deductions are allowed is as follows:
- Home Mortgage Interest, Taxes, and Casualty Losses: These deductions are allowed first.
- Deductions That Do Not Reduce Basis: These include expenses such as advertising, insurance, and wages.
- Deductions That Reduce Basis: These include depreciation and amortization.
Hobby Income and Self-Employment Tax – If income is determined to be hobby income rather than trade or business income after applying the nine factors to determine whether an activity is engaged in for profit, the income is subject to income tax but not self-employment tax. This distinction is crucial because self-employment tax can significantly increase the tax liability for individuals engaged in a trade or business activities.
Court Cases Involving Profit Motive – Several court cases have addressed the issue of profit motive, providing valuable insights into how the IRS and courts determine whether an activity is a hobby or a business.
- Groetzinger v. Commissioner (1987): The Supreme Court held that a full-time gambler who bet solely on his own account was engaged in a trade or business of gambling. This prevented his gambling losses from being tax preference items for the purpose of computing minimum tax.
- Gajewski v. Commissioner (1983): The court held that a taxpayer who did not hold himself out to others as offering goods or services was not in a trade or business. The taxpayer was a professional gambler who bet solely for his own account, and the denial of his business deductions turned the expenses into Schedule A deductions.
- Ditunno v. Commissioner (1983): The court ruled that the proper test of whether an individual was carrying on a trade or business required examination of all facts involved. In this case, a full-time gambler was determined to be in a trade or business of gambling, and his gambling losses were business expenses, even though they were not related to offering goods and services.
Examples of Hobby vs. Business – To illustrate the distinction between a hobby and a business, consider the following examples:
- Example 1: The Amateur Photographer – Jane enjoys photography and occasionally sells her photos online. She does not maintain detailed records, consult with experts, or spend significant time on her photography. Jane’s activity is likely to be classified as a hobby, and her expenses will not be deductible.
- Example 2: The Professional Photographer – John is a professional photographer who maintains detailed records, consults with experts, and spends significant time on his photography business. He has a history of generating profits and expects his photography equipment to appreciate in value. John’s activity is likely to be classified as a business, and his expenses will be deductible.
- Example 3: The Horse Breeder – Sarah breeds and trains horses. She has generated profits in two of the last seven years and maintains detailed records. Sarah’s activity is likely to be classified as a business, and her expenses will be deductible.
Understanding the hobby loss rules and the impact of the TCJA on deductions is crucial for taxpayers engaged in income-generating activities. By considering the nine factors used by the IRS to determine profit motive, taxpayers can better assess whether their activities are likely to be classified as hobbies or businesses. Additionally, being aware of the sequence in which deductions are allowed, or whether deductions are allowed at all, and the implications for self-employment tax can help taxpayers make informed decisions about their activities. Finally, reviewing court cases involving profit motive provides valuable insights into how the IRS and courts approach these determinations.
If you have any questions, please contact our office.
Maximizing Your Retirement Savings: Strategies for Late Starters
As a baby boomer, you may find yourself approaching retirement with less savings than you’d hoped. Whether due to economic fluctuations, personal circumstances, or simply the demands of life, many late starters face this …
As a baby boomer, you may find yourself approaching retirement with less savings than you’d hoped. Whether due to economic fluctuations, personal circumstances, or simply the demands of life, many late starters face this challenge. However, it’s never too late to take action. Here are effective strategies to maximize your retirement savings and catch up on your financial goals.
1. Assess Your Current Financial Situation
Start by taking a comprehensive look at your finances. Calculate your net worth by subtracting your liabilities from your assets. Understand where you stand regarding retirement savings, debts, and other financial obligations. This assessment will provide a clear picture of your financial health and help you set realistic goals.
2. Create a Realistic Budget
Budgeting is crucial for anyone looking to save more, especially late starters. Track your income and expenses to identify areas where you can cut back. Consider the 50/30/20 rule: allocate 50% of your income to necessities, 30% to discretionary spending, and 20% to savings. This will help you redirect funds towards your retirement savings without drastically altering your lifestyle.
3. Maximize Contributions to Retirement Accounts
Take full advantage of retirement accounts like 401(k)s and IRAs. If your employer offers a matching contribution, aim to contribute at least enough to receive the full match—it’s essentially free money. For 2024, you can contribute up to $23,000 to a 401(k) or $7,000 to an IRA. Maxing out these contributions can significantly boost your savings over time.
4. Explore Catch-Up Contributions
If you’re age 50 or older, you’re eligible for catch-up contributions, which allow you to contribute extra amounts to your retirement accounts. For 401(k)s, you can add an additional $7,500, while IRAs allow for an extra $1,000. This is a powerful way to increase your savings as you near retirement.
5. Diversify Your Investments
Investment diversification is essential for managing risk and optimizing growth. As you age, consider adjusting your asset allocation to include a mix of stocks, bonds, and other investments. While you may want to lean towards more conservative investments as retirement approaches, having a portion of your portfolio in growth-oriented assets can help offset inflation and increase your savings over time.
6. Consider Part-Time Work or Side Gigs
If your current income isn’t sufficient to boost your retirement savings, consider part-time work or side gigs. This can provide extra cash flow that you can funnel directly into your retirement accounts. Freelancing, consulting, or even seasonal work can be excellent ways to earn additional income while allowing you to maintain flexibility.
7. Reduce Debt
Reducing or eliminating debt should be a priority, especially high-interest debt like credit cards. The more you can reduce your liabilities, the more you can allocate towards savings. Consider strategies such as the snowball or avalanche method to pay down debt systematically, freeing up more cash for your retirement.
8. Leverage Home Equity
If you own a home, consider leveraging your home equity to boost your retirement savings. Options like a home equity line of credit (HELOC) or a reverse mortgage can provide funds that you can invest in your retirement. However, proceed with caution and consult a financial advisor to ensure you understand the implications.
9. Stay Informed About Social Security Benefits
Understanding Social Security benefits is crucial for retirement planning. If you’re behind on savings, your Social Security income may play a larger role in your retirement strategy. Consider factors such as the optimal age to begin receiving benefits and how working longer can affect your benefits. Delaying benefits can lead to higher monthly payouts, which can significantly impact your overall retirement income.
10. Consult a Financial Advisor
Navigating retirement planning can be complex, especially if you’re a late starter. A financial advisor can help you create a personalized retirement strategy, considering your unique circumstances, risk tolerance, and goals. They can provide valuable insights on investment options, tax strategies, and how to maximize your retirement income.
It’s Never Too Late to Start Saving
While starting late may feel daunting, there are numerous strategies available to help you catch up on your retirement savings. By assessing your financial situation, maximizing contributions, and making informed decisions, you can build a more secure financial future. Remember, the sooner you start taking action, the more time your savings have to grow.
Ready to Boost Your Retirement Savings?
Contact our office today to speak with an advisor who can help you create a personalized tax-optimized retirement strategy. Let us guide you toward maximizing your retirement savings and achieving your financial goals.
USDA Doubles its Funding for Climate Mitigation Projects
The U.S. Department of Agriculture (USDA) is ramping up its commitment to climate mitigation, announcing a remarkable $5.7 billion in funding for conservation efforts over the next year. This represents a significant doubling of …
The U.S. Department of Agriculture (USDA) is ramping up its commitment to climate mitigation, announcing a remarkable $5.7 billion in funding for conservation efforts over the next year. This represents a significant doubling of the amount allocated during the previous fiscal year, highlighting an unprecedented interest in USDA’s stewardship programs. “We’re confident that we can continue to get the support out to conservation-minded producers,” said Agriculture Secretary Tom Vilsack.
With the inclusion of $2 billion in routine funding for existing conservation programs, the total investment in conservation projects for fiscal 2025 could reach up to $7.5 billion. This would mark the largest single-year expenditure by the USDA for land and water conservation initiatives.
The newly earmarked climate funding comes from a broader $19.5 billion package designated for USDA stewardship programs under the 2022 climate, health care, and tax legislation. The breakdown of this funding includes:
- $2.8 billion for the Environmental Quality Improvement Program, which offers cost-sharing for conservation efforts.
- $1.4 billion for the Regional Conservation Partnership Program, aimed at enhancing land and water stewardship across various landscapes.
- $943 million for the Conservation Stewardship Program, the USDA’s pioneering working-lands initiative.
- $472 million for the Agricultural Conservation Easement Program, which protects vital lands from development.
The issue of climate mitigation is currently a contentious topic in discussions around the new farm bill. The Republican-backed farm bill approved by the House Agriculture Committee suggests allowing climate funds to be used for projects that do not specifically sequester carbon or lower greenhouse gas emissions. This has drawn criticism from Senate Agriculture Chairwoman Debbie Stabenow, who opposes the removal of “guardrails” on spending.
So far, the USDA has committed approximately $11.4 billion—or 58%—of the climate mitigation funding. This includes $2.8 billion allocated in fiscal 2023 and nearly $2.9 billion in fiscal 2024, according to a USDA fact sheet released in August.
In an effort to further enhance these initiatives, the USDA has also introduced 14 new practices eligible for climate funding. These practices include:
- Mulching with natural materials.
- Grazing management designed to enhance wildlife food and habitat.
- Brush management techniques tailored for arid regions.
In addition to these conservation efforts, the USDA announced $852 million in loans and loan guarantees aimed at improving electric infrastructure and smart-grid technology across 14 states. Furthermore, $443 million will be allocated for projects related to drinking water, sewage disposal, and stormwater management in 24 states.
This significant investment from the USDA reflects a growing commitment to support sustainable practices and address climate challenges, providing vital resources for producers and communities alike.
View the full article at: USDA doubles its funding for climate mitigation projects (agriculture.com)