Q & A on Chinese School Financial Management Legal Considerations, Procedures
By Duwang Shao, General
Principal of Huaxia Chinese School at NJ,NY & PA.
Source of information: CPA Firm "Rosenberg Rich Baker Berman & Company" (No legal value)
The Q & A may not meet all the needs, but
it certainly give us the confidence to continue our
operation with less complexity. Based on the information we received, we
decided to continue to use 1099 instead of w-2. If anyone need further professional help, please visit Rosenberg Rich
Baker Berman & Company's website at http://www.rrbb.com/ or contact them
directly. The contact person's name is Larry Simon, (908) 231-1000 or
Assumption: The school is as a not-for-profit organization certified by IRS with 501 c (3) status. What is the minimum requirements we must meet to satisfy IRS's regulation?
Q 1. What are the necessary accounting and book keeping work we should do?
A 1. At a minimum, they should have receipts and disbursements journals. As long as they are only receiving client fees, there is no issue as to special requirements. Those come into play once the n-f-p accepts donations. For example, if the Chinese Catholic Church offers them $20,000 but stipulates that they want to see financial statements, then they need to comply.
Q 2. We paid some money to teachers and staffs as part of their reimbursement and part of appreciation for the time they spent. Currently, we issue a 1099 to them at each calendar year for their tax purpose. Should
we start to issue W-2 form instead of 1099?
A 2. This is a tax or labor question. The school that I audit has mostly full time teachers who obviously receive W-2's. They also have consultants who do receive 1099's and are not full time employees. In reading the situation of this school, I would think that 1099's are sufficient. It doesn't appear that any of the teachers are full time and it seems like the amounts are small. I would guess that most of these teachers really have other full time positions.
Q 3. When IRS comes to audit, what they are looking for? What are the contents of the audit? If failed, what is the fatal weakness might possible be?
A 3. As for his questions regarding an IRS audit, my guess would be that they look to see how much money the officers are taking from the n-f-p and why they are taking it. They may have a legitimate reason for receiving
funds, then again maybe not. If…big IF…a n-f-p "fails" an IRS audit, the first thing that probably happens is that the IRS takes away their exempt status and then they have to pay taxes.
Q 4. Because all our operation is performed in staff and teacher's spare time, can we use a simple scheme to account for the teachers/staffs' school related business expenses? Is it OK for the school to offer reimbursement (or call it credit) to their teachers and staff members to cover the cost in their work for the school, and not count this as income for these individuals?
A 4. It seems as though the way he pays reimbursed expenses (travel), it should be taxable to the recipient. If he wants to avoid this, then they need to document each reimbursement.
Q 5. Because of the school's mission, part of the charged tuition is used to sponsor culture activities. Can we count part of the fee as mandatory contributions the school members (all registered students and their parents/guardians) make to this non-profit organization, as some Catholic schools do? If this is allowed, are there any rules, which guide the computation of the part counting as contribution?
A 5. Fees are a great source of income. Keep in mind they are not a donation and the payer is not entitled to a write off. As for the n-f-p organization they're great because they bear no restrictions. The board can allocate any amount of fee income towards sponsoring cultural activities. They can even provide a letter to their members breaking out the amount that is applied to tuition and the amount that is considered a donation so that
the member can have somewhat of a deduction. However, if they want to encourage contributions beyond tuition, they need to advise the donor that their entire donation is tax deductible, unlike the portion applicable to
Q 6. The principal is usually the signer of the School account. Can the principal sign a reimbursement check to his/her-self if a detailed reimbursement form is filled and all receipts are attached?
A 6. This is more of an internal control question. Certainly, the suggestion made is appropriate so long as receipts and other documents are attached. Better yet, a threshold of, say, $300 is a good limit for one
person to have check-signing ability. After that $300, it is recommended that two signatures be required. If the account is not already set up that way, I suggest you have this policy implemented.
Q 7. Almost two years ago, a foundation was formed to collect donations to support one of school members fighting for her life. Doctors have to remove Yanping Wang's two arms and two legs in order to save her life. Due to the urgent situation, the Yanping Wang Foundation used school's tax ID and 501 C 3 status for its immediate operation. The foundation is certainly a good thing, but does not serve the purpose claimed in our by-law. Can we continue to keep it under the school umbrella? What is the liability School may carry if we do so and what are the necessary requirements the foundation committee should meet if they want to continue to use School's Tax ID and 501 C 3 status?
A 7. Separate foundation or fund certainly may be established under the umbrella of the school. I suggest that if the purpose of the organization does not include this endeavor that the articles of incorporation and/or by-laws be amended to include such OR a Board Resolution be issued. This way, you are certainly covered. If the fundraising starts to approach >$25,000, it then may be time to consider a separate non-profit status filing.
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