What's wrong with running a quasi-nonprofit using your own personal accounts, without actually setting up a real nonprofit?
A lot of small nonprofits get started this way. An altruistic person has an idea, and raises a few thousand dollars for a small cause. They don't want to set up a real nonprofit for this fledgling idea; it may never really grow or may fizzle out eventually. Or they just want to keep it small.
Nor do they have the funds to pay an accountant to set up and maintain a real non profit.
This can cause real headaches when filing a personal return. Here is an example:
Mr. Amateur Altruist starts asking people for small donations for a worthy cause, and processes them using a credit card processor, using his own SSN, instead of a nonprofit EIN.
A 1099-K will be issued by the processor and the amounts are reported to the IRS as receipt of goods or services, as if the person had a small business.
They will have to report this income on Schedule C of their tax return. Deductions for expenses can be taken. The question is, how to report distributions to so-called-beneficiaries of the so-called charity?
It would be considered 1099-NEC independent contractor payments.
So he will have to issue 1099-NECs to the so-called-beneficiaries, and they would have to report the income as self employment on their tax return, subject to income tax & self employment tax. They won't be happy about this.
If he doesn't file 1099-NECs, he could be subject to penalties up to $630 per form.
Realize yet what a mess he got himself into?
Even worse, if the so-called nonprofit/business shows no profit for 3 straight years (which is expected in such a case), the IRS will classify it as a hobby, with deductions being disallowed.
No more 1099s for the so-called beneficiaries. Now he's on the hook to pay taxes on the full amount of the donations.
A real mess!
Make sure to set up a nonprofit and nonprofit bank account from the beginning, no matter how small of an idea. It's not worth the trouble and regret.
Comments