This page will continuously develop to share the details of sustainable community building tax-related processes and the details of One Community’s tax process specifics. In includes what we annually file for our for-profit and nonprofit entities as well as other sustainable community tax-related resources.
We discuss these areas with the following sections:
NOTE: THIS PAGE IS STILL UNDER CONSTRUCTION
One Community operates a for-profit and nonprofit to open source and build duplicable teacher/demonstration communities, villages, and cities. Here are our tax processes for both.
Here is One Community’s annual nonprofit tax responsibilities and process:
One Community’s annual for-profit tax responsibilities and process:
NOTE: These may be needed for non-profit also.
Open sourcing both our for-profit and nonprofit tax processes is purposed to teach people exactly what this process entails for us so they can make more educated decisions about what kind(s) of entity(s) they wish to set up themselves. It is also purposed to meet our goals of complete transparency.
Taxes should be considered when beginning any community building project. Early consideration is important because taxes are different in different countries, different states, and different counties. This page is focused on the US (for now), and purposed to help people find the information they need as part of their US development process and/or their state and county selection process.
The following areas are discussed:
The best way to understand taxes for a specific area is to talk to a tax specialist within that area. There are resources though that can help you to have a basic understanding of the tax differences for various areas. Here are a few examples showing these tax differences between different states and counties. How important these differences are will differ greatly based on the goals and financial structure of your own community.
DEPARTMENT OF TAXATION WEB PAGES
To review the most current details for each state and access the state-specific tax documents, here are links to each state’s government tax page.
So what are the tax concerns that you need to be aware of if you are starting a community? To answer this question, it is helpful to think of your community as a business because “businesses” are what the tax code was written for. With this in mind, many aspects of a business influence the amount of tax due, and even the slightest change of the daily operation can result in hundreds of dollars in tax saving or wasting. This number can balloon to thousands, tens of thousands, or even more if your business/community becomes large enough.
Here are some factors that you might want to be aware of during tax planning:
Another consideration when forming any collaborative community is whether to operate as a for-profit, nonprofit, neither, or both. There are significant differences between the taxation of for-profit and non-profit entities. Operating as “neither” would mean that the community is just group of people living together and not having any specific entity structure.
Here is a side-by-side comparison of the taxation rule differences between a nonprofit (NFP) organization and a for-profit (FP) business:
|Items||Not-for-profit organization with tax exemption status||For-profit business|
|Property tax||Full or partial exemption||No exemption, around 4%|
|Sales tax||Exemption||No exemption, 0-12%|
|Income tax||Exemption||No exemption, 0-20%|
|Employee tax||Social Security tax: 6.2% * first $118,500 of wages
Medicare tax: 1.45% * full wages
(for employee and employer respectively, 2015 tax year)
Property tax consideration includes location, purpose, and market value. A NFP organization might be exempt from the property tax if the whole property is used for qualified purposes. The insurance expense and coverage on the property varies. If the property is owned and managed by the company, the insurance can cover both the building and the office content. But if the property is leased from a third party, the insurance can only cover the office content.
NFP organization who received tax exempt status will not be subject to sales tax and income tax, which can be a huge saving for the company. However, the sales tax exempt is only valid on purchases of necessities used in qualified activities. For example, when hospitals make purchases of medicines, it will qualify as a necessary product and will be sales tax free, but if they buy shavers to sell in the pharmacy store, this purchase will be considered unnecessary thus will not receive the tax benefit. Similar rule applies to income tax exemption, only the portion of income that is directly related to the qualified activities will be tax free.
Employee taxes include Social Security tax and Medicare tax. The tax rate changes every year and it is calculated by multiplying a certain percentage to the employee wages. The employee tax rates are the same for NFP and FP companies. For organizations that hire unpaid volunteers, the employee taxes will be greatly reduced because the wages are considerably lower than for-profit businesses.
Initially, One Community thought that some aspects of One Community’s revenue generating ventures like eco-tourism, sale of products, etc. would only be able to be operated as for-profit. Thanks to the help of our tax and accounting consultants, we’ve now come to believe that all aspects of One Community can be part of our nonprofit. Any that aren’t will be covered with complete details on our for-profit page.
For organizations like ours that are seeking to operate as 100% nonprofit, here are the key areas we’ve researched and consider essential to understand:
Classifying any revenue generating venture as not-for profit has several important criteria that it must meet:
Here is how to apply for tax exemption status. You can also click here for copies of everything we filed when we applied for our nonprofit status.
1. Determine the right category
Private Foundation: has a single major source of funding, it is the default category for most organizations
Public Charity: receive funding from multiple sources, including the general public
2. Request an Employer Identification Number (EIN), even if the organization does not have any employees. Application form SS-4: http://www.irs.gov/pub/irs-pdf/fss4.pdf
3. Submit the application (Form 1023-series) for exempt status under section 501(c)(3).
1>Standard application in PDF (Form 1023): http://www.irs.gov/pub/irs-pdf/f1023.pdf
2>Interactive version with hints and links (Form 1023, interactive):
3>Streamlined e-filing for smaller NFP (Form 1023-EZ):
Organizations who meet all the requirement specified in Form 1023-EZ eligibility worksheet (http://www.irs.gov/pub/irs-pdf/i1023ez.pdf ) will be able to apply the exempt status through Form 1023-EZ: http://www.irs.gov/uac/About-Form-1023EZ
This e-filing method requires simpler supporting documents and will significantly reduce the process time.
4. User fees for exempt organizations
The amount of user fees varies, please use below link to find the one matches your organization:
5. Step by step review to ensure you have everything ready
6. Submit the complete application portfolio to Internal Revenue Service (IRS)
7. Public inspection after receiving the tax exemption
The organization needs to have its approved application with all supporting documents and last three annual reports ready for public inspection.
P.S. Must notify Internal Revenue Service within 27 months from the date of formation to be treated as a 501(c)(3) from the date formed.
If the intent is to operate non-traditional nonprofit ventures, transparency to prove these ventures as nonprofit is essential. Here are the foundations for accomplishing this.
Disclose quarter/semiannual/annual financial statements online and the proof of the contribution to One Community, if no distribution is made to the shareholders, the total revenue received from visitors minus the total expense (program service, utility, depreciation, marketing, taxes, etc) should equal the amount of contribution to One Community. This will ensure and prove to the public the State Tax Department and Internal Revenue Service that the resort is a 501(c)(3) organization which should receive tax exemptions.
To provide the living experience in a totally sustainable environment in the eco-tourism resort. Educational experience with volunteer tutors explaining the sustainable system and how the community functions.
A certified financial statement should include two years audited Balance sheet and three years audited Income statement. Below examples show only one year format. We are illustrating the income statement format for both the for-profit business and the not-for-profit organization.
NFP organizations account for their resource in funds, and each of the funds is a separate accounting entity, meaning the record of each funds is separate but there might be transfers between funds. According to Financial Accounting Standards Board (FASB), NFP must classify the net assets into three categories: unrestricted, temporarily restricted, and permanently restricted. The classification is based on donors’ will, which means the person or corporation who made the contribution will decide the nature of the asset.
Generally, permanently restricted net assets are the endowments with a principal that can never be used, but the income from the principal is available for expenditure. Temporarily restricted net assets are mainly the resources that are to be used for specific purposes in a set period of time. The net assets that do not fall into the two categories are unrestricted net assets.
Contribution of services are the costs would otherwise occur for the NFP if it is not performed by the unpaid volunteers. Two criteria need to be met for the NFP to recognize the contribution:
1>The services create or enhance nonfinancial assets.
2>The services require specialized skills and would likely need to be purchased if not donated.
According to FASB, the services are those provided by accountants, carpenters, doctors, electricians, lawyers, nurses, plumbers, teachers, and other professionals.
Journal entry on service contribution recognition: Debit Credit
Revenue from contributed services $xxx
Though GAAP allows organizations to recognize services revenue if above two criteria are met, in real world it is sometimes difficult to justify.
Individuals cannot deduct the value of your time or services, so organizations should not issue receipts of donations for the services.
Income Statement (For-profit)
Balance Sheet (For-profit)
Statement of Financial position (Not-for-profit)
Each FP business or NFP organization would have differences in financial reporting depending on the nature of the activities. Above information is for illustration only, it does not cover all aspects of a business or NFP operations.
General comparison between NFP compare to FP
to benefit the community
to increase shareholders’ equity
Origin of resource
public contribution, federal charity allocation, program revenue
business revenue, paid in capital
receive tax exemption in income tax, property tax, sales tax, etc
no tax benefit
statement of financial position, statement of activities, statement of cashflows
balance sheet, income statement, cash flow statement
Left off here for behind the scenes blog 117
When volunteers leave the property, they might want to let One Community manage the house during their leave and earn income from renting it out. When the volunteer (house owner) needs One Community to manage the house during their leave, the house owner will be charged for the expense cost and receive profit if the house is rented out. In the same time, One Community will also earn revenue from providing the management service. We think this will be a win-win situation for both house owner and One Community. Below we have the tutorial on how to record expenses and revenues in this case.
Calculate the daily expense to maintain one house, including cleaning cost, toiletries expenses, utilities expenses, etc. For example, the total expense is $20 per day.
When such expenses occur, debit the total amount to accounts receivable, credit cash / payable. One Community would not record expenses because the house is not owned or leased by One Community and the house owner is responsible for the maintaining cost of the house.
Accounts receivable (from house owner) $20.00 Cash/accounts payable $20.00
If the house is not rented out during the house owner’s leave, no revenue is recognized. If the house is rented out, we would debit cash (or accounts receivable if customer pay by credit) and credit accounts payable to house owner. For example, daily charge for one room is $120 per day.
Cash/accounts receivable $120.00
Service revenue (for providing management service) $30.00
Accounts payable (collected on behalf of house owner) 90.00
Make the net payment ($90-$20=$70) to the house owners when they return. If the house owner wants to make further contribution to One Community, then we will recognize contribution revenue and the donor may be able to deduct the amount.
Accounts payable $90.00
Accounts receivable $20.00
This is where I left off for blog 118
Possible accounts to the Statement of Activities:
ASK Jae how we put these on the site
The financial statement in excel is constructed with the accounts that will likely be used in the eco-tourism resort. For organizations with other products or services, the accounts needed can be very different. Here are some additional accounts and the accounts with definitions that could vary dramatically for different organizations:
special event incentives,
legacies and bequests,
allocated by federated fundraising organizations,
allocated by unassociated and non federated fundraising organizations,
grants from other organizations,
other program fees (e.g. student tuitions, patient care charges, church service charges),
sales of necessary products (e.g. educational materials, prescribed medicines),
perpetual trust revenue,
realized and unrealized gain on investment or properties,
gain on investment transactions, and etc.
program services (e.g. employee salaries and benefits, research, public health education, professional training, inventories cost, scholarships to students),
supporting services (depreciation on buildings and equipments, investment management fees, change from retirement obligations, gains from discontinued operations),
allocations to other charity organizations, and etc.
The above accounts and classifications may vary based on specific organizations. For example, investment income might be within program services (the main function of an NFP organization) for a charity foundation, but supporting services for a hospital or college. It is important that organizations consult with a professional accountant who knows about your organization before setting up these accounts for yourself.
Possible accounts to the Statement of Financial position
charity gift annuity
beneficial interest in perpetual trust
contribution receivable from charitable remainder trust
funds held for others
liabilities under interest-split agreement
government loan advances
Tourism revenue has been identified as the revenue stream most capable of accomplishing our global transformation goals by further supporting and sharing One Community as a teacher/demonstration community, village, and city. We will use a combination of the visitability of our location, educational classes, and non-stop creation of open source blueprints to market and share this option with the world. Sustainable infrastructure combined with an all volunteer labor force will keep operational expenses low while we share the fulfilled living and enriching environment as a marketable eco-tourism option. This will allow us to offer significantly more value, for a lower price, with an endless and free open source sharing marketing engine that benefits us and the world. In short, the more (and higher quality) our open source sharing, and the more fun our environment is, the more successful we will be; all of which will help to fuel our secondary revenue streams as well.
Q: Is anyone (directors, consultants, etc.) paid as part of One Community?
No, we are a 100% unpaid volunteer organization.
Q: How would individuals who want to make money as part of One Community do so?
Please see our entrepreneurial model page.
Q: Are you basing these concepts on an existing model? In other words, how confident are you they will work?
These concepts are based on the foundations of intelligent business in almost any industry: providing value, low cost to profit ratio, and a quality marketing engine. The successful (and growing) model to compare what we are creating with would be the affordable tourism industry. Affordable tourism continues to gain market share and sustainability as an industry and an interest continue to grow also. Visiting a property like One Community’s, an environment like One Community’s, and hands on experience with all of One Community’s open source blueprints and creations all add to our desirability and marketability. Further add to this that the entire “staff” of One Community are non-profit volunteer residents not doing a “job,” but rather operating the Highest Good society model that is the core of One Community, makes it a fun place to be and visit, and an exciting and world changing organization to maintain.
Combining all these things produces a place people want to visit, that will offer much more interesting and fun things to do, at a lower price, with a higher profit margin, staffed by people who are (instead of “workers”) equal and full shareholders in the experience. On top of this, we are changing the world for the better and the more fun and beautiful residents make One Community, the more they individually benefit, the more visitors benefit, and the more it benefits One Community’s global transformation goals.
For these reasons, we are very confident in the financial viability of One Community.
Q: What about duplicability, how will this be duplicable for others?
The marketing engine of One Community is growing to specifically support and coordinate with other teacher/demonstration communities, villages, and cities too. When other teacher/demonstration hubs contribute to the global open source archive, we will help them promote their work through our engine. We will operate this like a franchise where inclusion is based on open source contributions to positive and permanent global transformation. This means future models will have a significantly easier time implementing this same model. We will are also open source free-sharing the complete for-profit, non-profit, and entrepreneurial models and details of One Community so others will be able to duplicate them with our without association with One Community.
Q: Why do you have a for-profit component, why not be 100% non-profit?
There are two primary reasons for this:
First, in essence One Community is establishing itself to place maximum profits into our non-profit and global goals. However, there are elements of One Community that will not legally fall under the umbrella of a non-profit and these areas will need to be classified and taxed as for-profit ventures operated under a separate legal entity. We also see it as a positive thing for both One Community and Visitors so long as we offer enough value that people feel good about the investment in the for-profit elements of One Community. In this way we hope to demonstrate and spread Highest Good economics as part of our model too.
Second is our goal to demonstrate and open source share a model that is A) sustainable and B) can meet the needs of as many people as possible. In the case of the model being sustainable, we do not consider any model that operates 100% on donations as a sustainable and duplicable solution because donated resources are limited. Revenue is also necessary to purchase everything that cannot be produced effectively internally like machinery, appliances, technology, clothing, some food items, vehicles, etc. These items will differ for different people in different locations and an effective revenue stream addresses this.
In the case of meeting the needs of as many people as possible, One Community is also taking into account those who have debt, those seeking only to invest, and the reality that there will be many who will try a model like this and then change their mind and want to leave and/or do something else. The for-profit element of One Community is purposed to provide duplicable revenue streams that help all three of these group while also helping share and spread teacher/demonstration communities, villages, and cities by demonstrating them as a progressive and profitable opportunity.
Q: If you are a team of people without debt, how do you intend to teach people with debt how to become free of debt?
Our goal is to clearly define as many of the variables as possible for creating a financially viable teacher/demonstration hub with a diversity of options for implementation to suit different demographics and budgets. The more One Community grows and expands, the more open source blueprints, tools, tutorials, and resources we will provide for others to duplicate our efforts. This is why we are focused on people joining the Pioneer Team that are financially stable, so we can focus 100% of our energy on open source creation for those that aren’t in such a fortunate position. This is also one of the reasons why we won’t move onto the property with any debt as an organization.
Q: If you are a non-profit organization, how do you intend to operate for-profit businesses too?
Any activities of One Community deemed by tax code and federal law to not be operable under our 501(c)3 status will be operated under a separate for-profit corporate entity.
Q: Will One Community ever pay any of its members?
One Community’s #1 financial priority is expansion and our global goals. If we are accomplishing expansion and these goals successfully, and a 100% consensus of the membership agrees that distribution of funds is warranted and will not in any way compromise these goals, then distributions can be made.
Q: What about property liability and ownership by individuals versus a foundation, corporation, etc.?
Premise Liability: (click here for a resource about this)
The property owners or non-owner residents, are responsible for maintaining a relatively safe environment. When people enter the property and hurt themselves because the environment is not safe, they may sue the property owners or residents unless they are intoxicated or are trespasser. The residents are treated in the same manner as the property owner.
Insurance on premise liability:
Business owner policy includes property coverage and general liability coverage.
Property: Building, officer contents
General liability: Property damage or bodily injury suffered by a third party (not owned or employed by the business) accidentally caused by normal business operation.
If the owner also occupies the property, the owner can insure the office building and the office contents of the building on the same policy; most insurance companies can only insure the office contents in a leased space.
If the property manager is an employee of the property owner, the owner usually will continue to be liable for the injuries caused by negligence because employers are responsible for the action of their employees and agents.
How to identify whose responsibility:
The ownership form does not increase or decrease the total amount of liabilities taken by the owner or the manager, but it does influence the insurance coverage of the property. Only when the manager is also the owner of the property, can they insure the building and the office contents, otherwise the manager can only insure the office contents.