Before you jump headfirst into the year-end financial reporting process, review the role independent audit committees play in providing investors and markets with high-quality, reliable financial information.
Recent SEC statement
Under Securities and Exchange Commission (SEC) regulations, all public companies must have an independent audit committee or have the full board of directors act as the audit committee. Likewise, many not-for-profit entities and large private companies have assembled audit committees to oversee the financial reporting process and help reduce the risk of financial misstatement.
SEC leadership recently issued a joint statement. It highlights the following key areas of focus for audit committees:
Tone at the top. Audit committees set the tone for the company’s financial reporting and the relationship with the independent auditor. The SEC statement encourages audit committees to proactively communicate with auditors and understand how they resolve issues.
Auditor independence. This is a shared responsibility of the audit firm, the issuer and its audit committee. The SEC statement suggests that audit committees consider corporate changes or other events that could affect independence.
U.S. Generally Accepted Accounting Principles (GAAP). The audit committee is charged with helping management comply with existing GAAP. The SEC statement reminds audit committees to consider major new accounting standards that have been adopted in recent years, including the new revenue recognition, lease and credit loss rules.
Internal controls over financial reporting (ICFR). Audit committees are responsible for overseeing ICFR. The SEC statement stresses the importance of following up on the remediation of any material weaknesses.
Communications with independent auditors. Audit committees must openly communicate with external auditors throughout the audit reporting process. The SEC statement recommends discussing such issues as accounting policies and practices, estimates and significant unusual transactions.
Non-GAAP measures. These metrics, when used appropriately in combination with GAAP measures, can provide decision-useful information to investors. The SEC statement suggests that audit committees learn how management uses these metrics to evaluate performance — and whether they’re consistently prepared and presented from period to period.
Reference rate reform. Discontinuation of the London Interbank Offered Rate (LIBOR) may present a material risk for companies with contracts that reference LIBOR. The SEC statement encourages audit committees to understand management’s plan to address the risks associated with reference rate reform.
Critical audit matters (CAMs). These are material accounts or disclosures communicated to the audit committee that require the auditor to make a subjective decision or use complex judgment. Beginning in 2019, auditors are required to include CAMs for certain public companies in the auditor’s report. The SEC statement reminds audit committees to understand the nature of each CAM, including the auditor’s basis for determining it and how it will be described in the auditor’s report.
Let’s work together
Collaboration between the audit committee and external auditors is critical, regardless of whether a company is publicly traded or privately held. Contact us with any questions you have regarding the financial reporting process. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The IRS announced it is opening the 2019 individual income tax return filing season on January 27. Even if you typically don’t file until much closer to the April 15 deadline (or you file for an extension), consider filing as soon as you can this year. The reason: You can potentially protect yourself from tax identity theft — and you may obtain other benefits, too.
Tax identity theft explained
In a tax identity theft scam, a thief uses another individual’s personal information to file a fraudulent tax return early in the filing season and claim a bogus refund.
The legitimate taxpayer discovers the fraud when he or she files a return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the tax year. While the taxpayer should ultimately be able to prove that his or her return is the valid one, tax identity theft can cause major headaches to straighten out and significantly delay a refund.
Filing early may be your best defense: If you file first, it will be the tax return filed by a would-be thief that will be rejected, rather than yours.
Note: You can get your individual tax return prepared by us before January 27 if you have all the required documents. It’s just that processing of the return will begin after IRS systems open on that date.
Your W-2s and 1099s
To file your tax return, you must have received all of your W-2s and 1099s. January 31 is the deadline for employers to issue 2019 Form W-2 to employees and, generally, for businesses to issue Form 1099 to recipients of any 2019 interest, dividend or reportable miscellaneous income payments (including those made to independent contractors).
If you haven’t received a W-2 or 1099 by February 1, first contact the entity that should have issued it. If that doesn’t work, you can contact the IRS for help.
Other advantages of filing early
Besides protecting yourself from tax identity theft, another benefit of early filing is that, if you’re getting a refund, you’ll get it faster. The IRS expects most refunds to be issued within 21 days. The time is typically shorter if you file electronically and receive a refund by direct deposit into a bank account.
Direct deposit also avoids the possibility that a refund check could be lost or stolen or returned to the IRS as undeliverable. And by using direct deposit, you can split your refund into up to three financial accounts, including a bank account or IRA. Part of the refund can also be used to buy up to $5,000 in U.S. Series I Savings Bonds.
What if you owe tax? Filing early may still be beneficial. You won’t need to pay your tax bill until April 15, but you’ll know sooner how much you owe and can plan accordingly.
Be an early-bird filer
If you have questions about tax identity theft or would like help filing your 2019 return early, please contact us. We can help you ensure you file an accurate return that takes advantage of all of the breaks available to you. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Does your not-for-profit organization have a conflict-of-interest policy in place? Do your board members, trustees and key employees understand how the policy affects them? If you answer “no” to either (or both) of these questions, you have some work to do.
Nonprofit board officers, directors, trustees and key employees all must avoid conflicts of interest because it’s their duty to do so. Any direct or indirect financial interest in a transaction or arrangement that might benefit one of these individuals personally could result in bad publicity, the loss of donor and public support, and even the revocation of your organization’s tax-exempt status.
This is why nonprofits are required to have a written conflict-of-interest policy. To stress the importance of this requirement, the IRS asks tax-exempt organizations to acknowledge the existence of a policy on their annual Form 990s.
Define and provide procedures
In general, conflict-of-interest policies should define all potential conflicts and provide procedures for avoiding or dealing with them. For example, to prevent a board member from steering a contract to his or her own company, you might mandate that all projects are to be put out for bid, with identical specifications, to multiple vendors.
It’s critical to outline the steps you’ll take if a possible conflict of interest arises. For instance, board members with potential conflicts might be asked to present facts to the rest of the board, and then remove themselves from any further discussion of the issue. The board should keep minutes of the meetings where the conflict is discussed. You should note the members present, as well as how they vote, and indicate the final decision reached.
Making it effective
As with any policy, conflict-of-interest policies are only effective if they’re properly communicated and understood. Require board officers, directors, trustees and key employees to annually pledge to disclose interests, relationships and financial holdings that could result in a conflict of interest. Also make sure they know that they’re obliged to speak up if issues arise that could pose a possible conflict.
For help crafting a thorough policy, contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
As you’ve probably heard, a new law was recently passed with a wide range of retirement plan changes for employers and individuals. One of the provisions of the SECURE Act involves a new requirement for employers that sponsor tax-favored defined contribution retirement plans that are subject to ERISA.
Specifically, the law will require that the benefit statements sent to plan participants include a lifetime income disclosure at least once during any 12-month period. The disclosure will need to illustrate the monthly payments that an employee would receive if the total account balance were used to provide lifetime income streams, including a single life annuity and a qualified joint and survivor annuity for the participant and the participant’s surviving spouse.
Under ERISA, a defined contribution plan administrator is required to provide benefit statements to participants. Depending on the situation, these statements must be provided quarterly, annually or upon written request. In 2013, the U.S. Department of Labor (DOL) issued an advance notice of proposed rulemaking providing rules that would have required benefit statements provided to defined contribution plan participants to include an estimated lifetime income stream of payments based on the participant’s account balance.
Some employers began providing this information in these statements — even though it wasn’t required.
But in the near future, employers will have to begin providing information to their employees about lifetime income streams.
Fortunately, the effective date of the requirement has been delayed until after the DOL issues guidance. It won’t go into effect until 12 months after the DOL issues a final rule. The law also directs the DOL to develop a model disclosure.
Plan fiduciaries, plan sponsors, or others won’t have liability under ERISA solely because they provided the lifetime income stream equivalents, so long as the equivalents are derived in accordance with the assumptions and guidance and that they include the explanations contained in the model disclosure.
Critics of the new rules argue the required disclosures will lead to confusion among participants and they question how employers will arrive at the income projections. For now, employers have to wait for the DOL to act. We’ll update you when that happens. Contact us if you have questions about this requirement or other provisions in the SECURE Act. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
You already may have reviewed a preliminary draft of your company’s year-end financial statements. But without a frame of reference, they don’t mean much. That’s why it’s important to compare your company’s performance over time and against competitors.
Conduct a well-rounded evaluation
A comprehensive benchmarking study requires calculating ratios that gauge the following five elements:
1. Growth. Business size is usually stated in terms of annual revenue, total assets or market share. Is your company expanding or contracting? An example of a ratio that targets changes in your company’s size would be its year-over-year increase in market share. Companies generally want to grow, but there may be strategic reasons to downsize and refocus on core operations.
2. Liquidity. Working capital ratios help assess how easily assets can be converted into cash and whether current assets are sufficient to cover current liabilities. For example, the acid-test ratio compares the most liquid current assets (cash and receivables) to current obligations (such as payables, accrued expenses, short-term loans and current portions of long-term debt).
3. Profitability. This evaluates whether the business is making money from operations — before considering changes in working capital accounts, investments in capital expenditures and financing activities. Public companies tend to focus on earnings per share. But smaller ones tend to be more interested in ratios that evaluate earnings before interest, taxes, depreciation and amortization. EBITDA ratios allow for comparisons between companies with different capital structures, tax strategies and business types.
4. Turnover. Such ratios as total asset turnover (revenue divided by total assets) or inventory turnover (cost of sales divided by inventory) show how well the company manages its assets. These ratios also can be stated in terms of average days outstanding.
5. Leverage. Identify how the company finances its operations — through debt or equity. There are pros and cons of both. For example, within limits, debt financing is generally less expensive and interest on debt may be tax deductible. Equity financing, however, can help preserve cash flow for growing the business because equity investors often don’t require an annual return on investment.
Seek input from the pros
Most companies use an outside accounting firm to compile, review or audit their preliminary year-end financial results. This is a prime opportunity to conduct a comprehensive benchmarking study. We can help take your historical financial statements to the next level by identifying comparable companies, providing access to industry benchmarking data and recommending ways to improve performance in 2020 and beyond. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you save for retirement with an IRA or other plan, you’ll be interested to know that Congress recently passed a law that makes significant modifications to these accounts. The SECURE Act, which was signed into law on December 20, 2019, made these four changes.
Change #1: The maximum age for making traditional IRA contributions is repealed. Before 2020, traditional IRA contributions weren’t allowed once you reached age 70½. Starting in 2020, an individual of any age can make contributions to a traditional IRA, as long he or she has compensation, which generally means earned income from wages or self-employment.
Change #2: The required minimum distribution (RMD) age was raised from 70½ to 72. Before 2020, retirement plan participants and IRA owners were generally required to begin taking RMDs from their plans by April 1 of the year following the year they reached age 70½. The age 70½ requirement was first applied in the early 1960s and, until recently, hadn’t been adjusted to account for increased life expectancies.
For distributions required to be made after December 31, 2019, for individuals who attain age 70½ after that date, the age at which individuals must begin taking distributions from their retirement plans or IRAs is increased from 70½ to 72.
Change #3: “Stretch IRAs” were partially eliminated. If a plan participant or IRA owner died before 2020, their beneficiaries (spouses and non-spouses) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary’s life or life expectancy. This is sometimes called a “stretch IRA.”
However, for deaths of plan participants or IRA owners beginning in 2020 (later for some participants in collectively bargained plans and governmental plans), distributions to most non-spouse beneficiaries are generally required to be distributed within 10 years following a plan participant’s or IRA owner’s death. That means the “stretch” strategy is no longer allowed for those beneficiaries.
There are some exceptions to the 10-year rule. For example, it’s still allowed for: the surviving spouse of a plan participant or IRA owner; a child of a plan participant or IRA owner who hasn’t reached the age of majority; a chronically ill individual; and any other individual who isn’t more than 10 years younger than a plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally still take their distributions over their life expectancies.
Change #4: Penalty-free withdrawals are now allowed for birth or adoption expenses. A distribution from a retirement plan must generally be included in income. And, unless an exception applies, a distribution before the age of 59½ is subject to a 10% early withdrawal penalty on the amount includible in income.
Starting in 2020, plan distributions (up to $5,000) that are used to pay for expenses related to the birth or adoption of a child are penalty-free. The $5,000 amount applies on an individual basis. Therefore, each spouse in a married couple may receive a penalty-free distribution up to $5,000 for a qualified birth or adoption.
These are only some of the changes included in the new law. If you have questions about your situation, don’t hesitate to contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Nonprofit capital campaigns aim to raise a specific — usually, a significant — amount of money over a limited time period. Your not-for-profit may undertake a capital campaign to acquire land, buy a new facility, expand an existing facility, purchase major equipment or seed an endowment. Whatever your goal, a capital campaign can be grueling, so you need to ensure stakeholders are on board and ready to do what it takes to reach it.
Appoint a leader
Capital campaigns generally are long-term projects — often lasting three or more years. To carry out yours, you’ll need a champion with vision and stamina. Consider board members or look to leaders in the greater community with a fundraising track record, knowledge of your community, the ability to motivate others, and time to attend meetings and fundraising events.
Your leader will require a small army to achieve capital campaign goals. Volunteers, board members and staffers will be required to raise funds through direct mail, email solicitations, direct solicitations and special events. If you need more help, look to like-minded community groups and clients who have benefited from your services.
The biggest challenge of any capital campaign is securing donations. To this end, identify a large group — say 1,000 individuals — to solicit. Draw your list from past donors, area business owners, board members, volunteers and other likely prospects. Then narrow that list to the 100 largest potential donors and talk to them first.
Traditional fundraising wisdom holds that you shouldn’t go public with your campaign until you’ve secured significant “lead gifts” from major donors. The percentage varies, with an organization commonly waiting until 50% of its fundraising goal is reached before announcing a campaign. Even if you decide not to follow this model, know that it’s generally easier to solicit donations under $1,000 after you’ve already landed several large gifts.
To engage key constituents and ensure that they share your strategies for reaching the campaign’s goals, break down your ultimate target into smaller objectives. Celebrate as you reach each goal. Also regularly report gifts, track your progress toward reaching your ultimate goal and measure the effectiveness of your activities.
Pay attention to how you craft your message. Potential donors must see your organization as capable and strong, but also as the same group they’ve championed for years. Instead of focusing on what donations will do for your nonprofit, show potential donors the impact on their community. And, as always, publicly recognize donors in your newsletter and thank them at public events.
Remember hidden costs
If you’re still trying to decide on your financial goal, keep in mind that it will cost money to execute the campaign. Fundraising events, marketing materials, consultant fees and other expenses can eat into donations. For help determining these and other hidden costs, contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
A significant law was recently passed that adds tax breaks and makes changes to employer-provided retirement plans. If your small business has a current plan for employees or if you’re thinking about adding one, you should familiarize yourself with the new rules.
The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was signed into law on December 20, 2019 as part of a larger spending bill. Here are three provisions of interest to small businesses.
These are only some of the retirement plan provisions in the SECURE Act. There have also been changes to the auto enrollment safe harbor cap, nondiscrimination rules, new rules that allow certain part-timers to participate in 401(k) plans, increased penalties for failing to file retirement plan returns and more. Contact us to learn more about your situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Some benefit plans are required to include an opinion from an independent qualified public accountant (IQPA) when filing Form 5500 each year. The IQPA examines the plan’s financial statements and schedules to ensure they’re presented fairly and in conformity with Generally Accepted Accounting Principles (GAAP). The financial statements and IQPA opinion are often referred to collectively as the “audit report.”
100 participant rule
Generally, employee benefit plans with 100 or more participants — including eligible, but not participating, as well as separated employees with account balances — must include an audit report with Form 5500, “Annual Return/Report of Employee Benefit Plan.” An audit report filed for a plan that covered 100 or more participants at the beginning of the plan year should use the “large plan” requirements.
A return/report filed for a pension benefit plan or welfare benefit plan that covered fewer than 100 participants at the beginning of the plan year should follow the “small plan” requirements. If your total participant count as of the first day of the plan year is less than 100, you generally don’t need to include an audit report with your Form 5500.
For the plan to be exempt from this requirement, at least 95% of the plan assets must be “qualifying” plan assets. And any person who handles plan assets that don’t constitute qualifying plan assets must be bonded in accordance with ERISA. The amount of the bond may not be less than the value of the qualifying plan assets.
A slight variation in the general rule exists within what is commonly referred to as the “80-120 participant rule.” If the number of participants is between 80 and 120, and a Form 5500 was filed for the previous plan year, you may elect to complete the return/report in the same category (large or small plan) that you filed for the previous return/report.
Generally, if a plan chooses to report as a large plan, the IRS requires the plan sponsor to file an audit report. But there are some limited exceptions to this requirement.
For example, employee welfare benefit plans that are unfunded, fully insured, or a combination of unfunded and insured don’t have to file an audit report. And neither do employee pension benefit plans that provide benefits exclusively through allocated insurance contracts or policies fully guaranteeing the payment of benefits.
Certain welfare benefit plans aren’t required to include an IQPA opinion if:
In addition, if one plan year is seven or fewer months, the IRS will defer the audit requirement for the first of two consecutive plan years. But you must still provide the financial statement, and your audit report for the second year must include an IQPA opinion on both the previous short year and the second year.
Know the rules
Failing to include a required audit report could result in the plan facing a civil suit. But you don’t want to pay for an IQPA if you don’t need to. Contact us to determine the appropriate course of action. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Technology has made it easier to work from home so lots of people now commute each morning to an office down the hall. However, just because you have a home office space doesn’t mean you can deduct expenses associated with it.
Regularly and exclusively
In order to be deductible for 2019 and 2020, you must be self-employed and the space must be used regularly (not just occasionally) and exclusively for business purposes. If, for example, your home office is also a guest bedroom or your children do their homework there, you can’t deduct the expenses associated with the space.
If you qualify, the home office deduction can be a valuable tax break. There are two options for the deduction:
Changes through 2025
Under prior tax law, if you were an employee (as opposed to self-employed), you could deduct unreimbursed home office expenses as employee business expenses, subject to a floor of 2% of adjusted gross income (AGI) for all your miscellaneous expenses. To qualify under prior law, a home office had to be used for the “convenience” of your employer.
Unfortunately, the TCJA suspends the deduction for miscellaneous expenses through 2025. Without further action from Congress, employees won’t be able to benefit from this tax break for a while. However, deductions are still often available to self-employed taxpayers.
If, however, you’re self-employed, you can deduct eligible home office expenses against your self-employment income. Therefore, the deduction will still be available to you through 2025.
Be aware that we’ve covered only a few of the requirements here. We can help you determine if you’re eligible for a home office deduction and, if so, establish the appropriate method for getting the biggest possible deduction. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
A much-hated tax on not-for-profit organizations is on the way out. At the end of 2019, Congress repealed a provision of 2017’s Tax Cuts and Jobs Act (TCJA) that triggered the unrelated business income tax (UBIT) of 21% on nonprofit employers that provide employees with transportation fringe benefits. Unequipped to handle the additional administrative burdens and compliance costs, thousands of nonprofits had complained — and legislators apparently listened.
Same benefits, new costs
At issue is the TCJA provision saying that nonprofits must count disallowed deduction amounts paid for transportation fringe benefits such as transit passes and parking in their UBIT calculations. UBIT applies to business income that isn’t related to the organization’s tax-exempt function. Thus, simply by continuing to provide some of the same transportation benefits they’ve always provided employees, nonprofits were liable for additional tax.
For example, employers were forced to assign a value to parking spaces provided to employees. Such activities were time-consuming and burdensome, and the additional costs forced nonprofits to divert funds from pursuing their missions. Nonprofit coalition Independent Sector estimates that the transportation tax and related administrative costs set back nonprofits by an average $12,000.
Fortunately, the repeal of the UBIT provision will be retroactive. Although the details haven’t yet been hammered out, nonprofits that paid the tax on applicable transportation benefits in 2018 and 2019 are expected to get their money back.
Repealing the UBIT on certain transportation benefits isn’t the only recent legislation of interest to nonprofits. Last month, Congress also streamlined the foundation excise tax. The current two-tiered tax that many foundations protested will be replaced with a 1.39% revenue-neutral tax.
Congress is likely to address other nonprofit demands — for example, for the introduction of a universal charitable deduction — in future sessions. We can help you stay current with the latest tax developments affecting nonprofits. Contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
While you were celebrating the holidays, you may not have noticed that Congress passed a law with a grab bag of provisions that provide tax relief to businesses and employers. The “Further Consolidated Appropriations Act, 2020” was signed into law on December 20, 2019. It makes many changes to the tax code, including an extension (generally through 2020) of more than 30 provisions that were set to expire or already expired.
Two other laws were passed as part of the law (The Taxpayer Certainty and Disaster Tax Relief Act of 2019 and the Setting Every Community Up for Retirement Enhancement Act).
Here are five highlights.
Long-term part-timers can participate in 401(k)s.
Under current law, employers generally can exclude part-time employees (those who work less than 1,000 hours per year) when providing a 401(k) plan to their employees. A qualified retirement plan can generally delay participation in the plan based on an employee attaining a certain age or completing a certain number of years of service but not beyond the later of completion of one year of service (that is, a 12-month period with at least 1,000 hours of service) or reaching age 21.
Qualified retirement plans are subject to various other requirements involving who can participate.
For plan years beginning after December 31, 2020, the new law requires a 401(k) plan to allow an employee to make elective deferrals if the employee has worked with the employer for at least 500 hours per year for at least three consecutive years and has met the age-21 requirement by the end of the three-consecutive-year period. There are a number of other rules involved that will determine whether a part-time employee qualifies to participate in a 401(k) plan.
The employer tax credit for paid family and medical leave is extended.
Tax law provides an employer credit for paid family and medical leave. It permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. The credit is equal to 12.5% of eligible wages if the rate of payment is 50% of such wages and is increased by 0.25 percentage points (but not above 25%) for each percentage point that the rate of payment exceeds 50%. The maximum leave amount that can be taken into account for a qualifying employee is 12 weeks per year.
The credit was set to expire on December 31, 2019. The new law extends it through 2020.
The Work Opportunity Tax Credit (WOTC) is extended.
Under the WOTC, an elective general business credit is provided to employers hiring individuals who are members of one or more of 10 targeted groups. The new law extends this credit through 2020.
The medical device excise tax is repealed.
The Affordable Care Act (ACA) contained a provision that required that the sale of a taxable medical device by the manufacturer, producer or importer is subject to a tax equal to 2.3% of the price for which it is sold. This medical device excise tax originally applied to sales of taxable medical devices after December 31, 2012.
The new law repeals the excise tax for sales occurring after December 31, 2019.
The high-cost, employer-sponsored health coverage tax is repealed.
The ACA also added a nondeductible excise tax on insurers when the aggregate value of employer-sponsored health insurance coverage for an employee, former employee, surviving spouse or other primary insured individual exceeded a threshold amount. This tax is commonly referred to as the tax on “Cadillac” plans.
The new law repeals the Cadillac tax for tax years beginning after December 31, 2019.
These are only some of the provisions of the new law. We will be covering them in the coming weeks. If you have questions about your situation, don’t hesitate to contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
When the Financial Accounting Standards Board (FASB) updated its rules for recognizing revenue from contracts in 2014, it only added to the confusion that nonprofits already had about accounting for grants and similar contracts.
Fortunately, last year, the FASB provided some much-needed clarification with Accounting Standards Update (ASU) No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. Calendar-year nonprofits must follow this guidance when preparing their 2019 year-end financial statements.
Nonprofits traditionally have taken varying approaches when they:
The FASB’s updated revenue recognition guidance — ASU 2014-09, Revenue from Contracts with Customers — eliminated some of the previous guidance for nonprofits and imposed extensive disclosure requirements that didn’t seem relevant to contributions. ASU 2018-08 clarifies matters by laying out rules that will help nonprofits determine whether a grant or similar contract is indeed a contribution — and, if so, when they should recognize the revenue associated with it.
Exchange vs. contribution
To determine how to treat a grant or similar contract, you must assess whether the “provider” receives commensurate value for the assets it’s transferring. If it does, you should treat the grant or contract as an exchange transaction. ASU 2018-08 stresses that the provider (the grantor or other party) in a transaction isn’t synonymous with the general public. So, indirect benefit to the public doesn’t represent commensurate value received. Execution of the provider’s mission or positive sentiment received from donating also doesn’t constitute commensurate value received.
What if the provider doesn’t receive commensurate value? You then must determine if the asset transfer is a payment from a third-party payer for an existing transaction between you and an identified customer (for example, payments made under Medicare or a Pell Grant). If it is such a payment, the transaction won’t be considered a contribution under the ASU, and other accounting guidance would apply. If it isn’t such a payment, the transaction is accounted for as a contribution.
According to ASU 2018-08, a conditional contribution includes:
Unconditional contributions are recognized when received. However, conditional contributions aren’t recognized until you overcome the barriers to entitlement.
Is there a barrier to overcome before your organization can receive a contribution? Consider the inclusion of a measurable performance-related barrier, limits on your nonprofit’s discretion over how to conduct an activity or a stipulation that relates to the purpose of the agreement (not including administrative tasks and trivial stipulations such as production of an annual report). Some indicators might prove more important than others, depending on circumstances. And no single indicator is determinative.
As a result of the updated guidance, nonprofits will likely account for more grants and similar contracts as contributions than they did under the previous rules. Check with your CPA to determine what that means for your financial statements, loan covenants and other matters. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you think search engine optimization (SEO) is something only for-profit businesses need to worry about, think again. The Google rankings of your not-for-profit’s website can make a tremendous difference in the donations and other support you receive.
Cracking Google metrics
Google, of course, isn’t the only search engine on the Web. But it accounts for more than 75% of search engine traffic worldwide and an even greater percentage in the United States. Research has found that sites appearing on the first page of Google search results receive more than 90% of search traffic — and that about 60% of traffic goes to the first three results.
Although it’s not easy (or even possible) to crack Google’s search engine metrics and configure your site so that it lands a top spot, monitor trends and adjust your Web strategies accordingly. For example, periodically review the keywords you use in headlines, content, titles, heading tags and meta descriptions. Then check their popularity using Google Trends. If there’s a heavily trafficked news item that relates to your nonprofit’s mission or programs, you might be able to use fresh keywords to tie your site to the story and, thus, increase traffic.
Another thing that can boost your search engine standing are links from other sites. Quality matters when it comes to incoming links. A few links from sources with strong reputations in the relevant areas will be ranked higher than dozens from less credible sources. Know that reputable and popular sites are more likely to link to yours if you provide substantive content that isn’t available elsewhere.
Keeping up with trends
Mobile device traffic has exploded over the past decade — so your site’s content must be mobile-friendly to get the most mileage with search engines. Google has expanded its use of mobile-friendliness as a ranking factor and even offers a Mobile-Friendly Test Tool at http://bit.ly/2DlChHB. Use it to identify mobile usability problems so you can make your site easier for users to navigate and search engines to index.
Social media is the other game-changer of the past 10 years. Facebook, Twitter, LinkedIn and other platforms are instrumental in boosting the visibility of your nonprofit’s site and, indirectly, your SEO. Include links to your site in social media posts so the links are shared when readers repost your content. However, keep in mind that links from other sources are rated more highly than links from your own postings.
There’s a lot you can do — even with only a little technical knowledge — to improve your site’s search engine visibility. But if you’re starting from scratch with a newly designed website, consider getting advice from an SEO expert. Some contractors offer lower-fee arrangements for nonprofits. Ask us for recommendations. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
In its 2018 decision in South Dakota v. Wayfair, the U.S. Supreme Court upheld South Dakota’s “economic nexus” statute, expanding the power of states to collect sales tax from remote sellers. Today, nearly every state with a sales tax has enacted a similar law, so if your company does business across state lines, it’s a good idea to reexamine your sales tax obligations.
A state is constitutionally prohibited from taxing business activities unless those activities have a substantial “nexus,” or connection, with the state. Before Wayfair, simply selling to customers in a state wasn’t enough to establish nexus. The business also had to have a physical presence in the state, such as offices, retail stores, manufacturing or distribution facilities, or sales reps.
In Wayfair, the Supreme Court ruled that a business could establish nexus through economic or virtual contacts with a state, even if it didn’t have a physical presence. The Court didn’t create a bright-line test for determining whether contacts are “substantial,” but found that the thresholds established by South Dakota’s law are sufficient: Out-of-state businesses must collect and remit South Dakota sales taxes if, in the current or previous calendar year, they have 1) more than $100,000 in gross sales of products or services delivered into the state, or 2) 200 or more separate transactions for the delivery of goods or services into the state.
The vast majority of states now have economic nexus laws, although the specifics vary:Many states adopted the same sales and transaction thresholds accepted in Wayfair, but a number of states apply different thresholds. And some chose not to impose transaction thresholds, which many view as unfair to smaller sellers (an example of a threshold might be 200 sales of $5 each would create nexus).
If your business makes online, telephone or mail-order sales in states where it lacks a physical presence, it’s critical to find out whether those states have economic nexus laws and determine whether your activities are sufficient to trigger them. If you have nexus with a state, you’ll need to register with the state and collect state and applicable local taxes on your taxable sales there. Even if some or all of your sales are tax-exempt, you’ll need to secure exemption certifications for each jurisdiction where you do business. Alternatively, you might decide to reduce or eliminate your activities in a state if the benefits don’t justify the compliance costs.
Note: If you make sales through a “marketplace facilitator,” such as Amazon or Ebay, be aware that an increasing number of states have passed laws that require such providers to collect taxes on sales they facilitate for vendors using their platforms.
If you need assistance in setting up processes to collect sales tax or you have questions about your responsibilities, contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The Financial Accounting Standards Board (FASB) hasn’t issued any major new accounting rules in 2019. But there have been some important developments to be aware of when preparing annual financial statements under U.S. Generally Accepted Accounting Principles (GAAP).
Deferral of major accounting rules
Accounting Standards Update (ASU) No. 2019-09 delays the effective date of the updated guidance for long-term insurance contracts. For public business entities, except smaller reporting companies (SRCs), the effective date is delayed until fiscal years beginning after December 15, 2021. For all other entities, the effective date is postponed until fiscal years beginning after December 15, 2023.
In addition, ASU 2019-10 defers the effective dates for three other ASUs as follows:
1. ASU 2016-02, Leases. For public business entities (including SRCs) and certain nonprofit organizations and employee benefit plans, the effective date remains as fiscal years beginning after December 15, 2018. For all other entities, the effective date is deferred to fiscal years beginning after December 15, 2020.
2. ASU 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments. For public business entities that don’t meet the definition of an SRC, the effective date remains fiscal years beginning after December 15, 2019. For all other entities, the effective date is deferred to fiscal years beginning after December 15, 2022.
3. ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. For public business entities (including SRCs) the effective date remains as fiscal years beginning after December 15, 2018. For all other entities, the effective date is deferred to fiscal years beginning after December 15, 2020.
Effective dates going forward
ASU 2019-10 also updates the FASB’s philosophy for setting the effective dates for all major ASUs going forward. It will group entities into two overall buckets, as follows:
Bucket 1. Large public companies that are SEC filers and don’t meet the SEC definition of SRCs, and
Bucket 2. Entities other than large public companies, including SRCs, private companies, nonprofit entities and employee benefit plans.
In general, the FASB plans to set the effective dates of major ASUs for Bucket 2 entities at least two years after the initial effective dates for entities in Bucket 1.
Starting in 2019, private companies that follow GAAP must use an updated five-step method to recognize revenue from long-term contracts. Public companies that made the switch in 2018 report that the process was more difficult than expected.
Unfortunately, many private companies underestimate the amount of work it takes to apply the updated rules — and many accounting software solutions can’t effectively handle the changes, including the disclosure requirements. If you haven’t started implementing the updated revenue recognition guidance, contact us to get you back on track.
Throughout 2019, the FASB has issued some other narrow-scope accounting rules, including guidance that 1) updates the rules for reporting share-based payments to customers and nonemployees, 2) extends the scope of private company alternatives for reporting goodwill to nonprofit organizations, and 3) clarifies major accounting standards updates. Contact us to discuss how the changes to GAAP, including various proposed amendments, will affect your financial statements in 2019 and beyond.
Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
As part of a year-end budget bill, Congress just passed a package of tax provisions that will provide savings for some taxpayers. The White House has announced that President Trump will sign the Further Consolidated Appropriations Act of 2020 into law. It also includes a retirement-related law titled the Setting Every Community Up for Retirement Enhancement (SECURE) Act.
Here’s a rundown of some provisions in the two laws.
The age limit for making IRA contributions and taking withdrawals is going up. Currently, an individual can’t make regular contributions to a traditional IRA in the year he or she reaches age 70½ and older. (However, contributions to a Roth IRA and rollover contributions to a Roth or traditional IRA can be made regardless of age.)
Under the new rules, the age limit for IRA contributions is raised from age 70½ to 72.
The IRA contribution limit for 2020 is $6,000, or $7,000 if you’re age 50 or older (the same as 2019 limit).
In addition to the contribution age going up, the age to take required minimum distributions (RMDs) is going up from 70½ to 72.
It will be easier for some taxpayers to get a medical expense deduction. For 2019, under the Tax Cuts and Jobs Act (TCJA), you could deduct only the part of your medical and dental expenses that is more than 10% of your adjusted gross income (AGI). This floor makes it difficult to claim a write-off unless you have very high medical bills or a low income (or both). In tax years 2017 and 2018, this “floor” for claiming a deduction was 7.5%. Under the new law, the lower 7.5% floor returns through 2020.
If you’re paying college tuition, you may (once again) get a valuable tax break. Before the TCJA, the qualified tuition and related expenses deduction allowed taxpayers to claim a deduction for qualified education expenses without having to itemize their deductions. The TCJA eliminated the deduction for 2019 but now it returns through 2020. The deduction is capped at $4,000 for an individual whose AGI doesn’t exceed $65,000 or $2,000 for a taxpayer whose AGI doesn’t exceed $80,000. (There are other education tax breaks, which weren’t touched by the new law, that may be more valuable for you, depending on your situation.)
Some people will be able to save more for retirement. The retirement bill includes an expansion of the automatic contribution to savings plans to 15% of employee pay and allows some part-time employees to participate in 401(k) plans.
Also included in the retirement package are provisions aimed at Gold Star families, eliminating an unintended tax on children and spouses of deceased military family members.
These are only some of the provisions in the new laws. We’ll be writing more about them in the near future. In the meantime, contact us with any questions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If your top executive were to step down tomorrow, would your not-for-profit know how to make a smooth leadership transition or would your boat suddenly be rudderless? Research by the nonprofit BoardSource has found that only 27% of charitable organizations have written succession plans. Most nonprofits, therefore, face an uncertain future — one that could include lost funding, program disruption and even an early demise.
Fortunately, creating a succession plan isn’t as difficult as you might think. An experienced advisor can guide you through the process. But there are several points for you and your board to keep in mind as you establish policies for replacing leaders.
Don’t make assumptions
Ideally, any succession will be planned and allow for time to identify and recruit a successor and move that person into the job. If you don’t already, start developing employees who can move up the ladder when an executive director or other senior manager leaves.
However, promoting from within can be difficult for some organizations, particularly smaller ones with limited “bench strength.” What’s more, your nonprofit may require an executive director who’s already experienced in running a nonprofit or comes with specific skills. So you can’t rule out hiring an outsider.
Indeed, don’t assume that your next executive needs to be as similar as possible to the outgoing one. Your nonprofit and its constituencies may change over time. Succession planning provides a great opportunity to reevaluate your strategies and identify new qualities that will be important going forward.
Another thing to keep in mind: Not all successions are planned. A sudden departure due to illness or death can be particularly challenging for the staff and other stakeholders left behind. Outline policies for communicating with donors, clients and the press if a leadership emergency arises, as well as steps your board should take to put in place a temporary leader and find a permanent replacement.
Start with a strong organization
Your succession plan will only be as effective as the organization that makes it. Among other things, you need a functional board, dependable funding sources, well-run programs and a dedicated staff that can handle change. Solid systems and well-documented procedures can help you leverage organizational knowledge and keep your nonprofit running smoothly during leadership transitions. Contact us for help planning for succession and to strengthen your current operations. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Don’t let the holiday rush keep you from taking some important steps to reduce your 2019 tax liability. You still have time to execute a few strategies, including:
1. Buying assets.Thinking about purchasing new or used heavy vehicles, heavy equipment, machinery or office equipment in the new year? Buy it and place it in service by December 31, and you can deduct 100% of the cost as bonus depreciation.
Although “qualified improvement property” (QIP) — generally, interior improvements to nonresidential real property — doesn’t qualify for bonus depreciation, it’s eligible for Sec. 179 immediate expensing. And QIP now includes roofs, HVAC, fire protection systems, alarm systems and security systems placed in service after the building was placed in service.
You can deduct as much as $1.02 million for QIP and other qualified assets placed in service before January 1, not to exceed your amount of taxable income from business activity. Once you place in service more than $2.55 million in qualifying property, the Sec. 179 deduction begins phasing out on a dollar-for-dollar basis. Additional limitations may apply.
2. Making the most of retirement plans. If you don’t already have a retirement plan, you still have time to establish a new plan, such as a SEP IRA, 401(k) or profit-sharing plans (the deadline for setting up a SIMPLE IRA to make contributions for 2019 tax purposes was October 1, unless your business started after that date). If your circumstances, such as your number of employees, have changed significantly, you also should consider starting a new plan before January 1.
Although retirement plans generally must be started before year-end, you usually can deduct any contributions you make for yourself and your employees until the due date of your tax return. You also might qualify for a tax credit to offset the costs of starting a plan.
3. Timing deductions and income. If your business operates on a cash basis, you can significantly affect your amount of taxable income by accelerating your deductions into 2019 and deferring income into 2020 (assuming you expect to be taxed at the same or a lower rate next year).
For example, you could put recurring expenses normally paid early in the year on your credit card before January 1 — that way, you can claim the deduction for 2019 even though you don’t pay the credit card bill until 2020. In certain circumstances, you also can prepay some expenses, such as rent or insurance and claim them in 2019.
As for income, wait until close to year-end to send out invoices to customers with reliable payment histories. Accrual-basis businesses can take a similar approach, holding off on the delivery of goods and services until next year.
Proceed with caution
Bear in mind that some of these tactics could adversely impact other factors affecting your tax liability, such as the qualified business income deduction. Contact us to make the most of your tax planning opportunities. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Audit season is right around the corner for calendar-year entities. Here’s what your auditor is doing behind the scenes to prepare — and how you can help facilitate the audit planning process.
The big picture
Every audit starts with assessing “audit risk.” This refers to the likelihood that the auditor will issue an adverse opinion when the financial statements are actually in accordance with U.S. Generally Accepted Accounting Principles or (more likely) an unqualified opinion when the opinion should be either modified or adverse.
Auditors can’t test every single transaction, recalculate every estimate or examine every external document. Instead, they tailor their audit procedures and assign audit personnel to keep audit risk as low as possible.
Inherent risk vs. control risk
Auditors evaluate two types of risk:
1. Inherent risk. This is the risk that material departures could occur in the financial statements. Examples of inherent-risk factors include complexity, volume of transactions, competence of the accounting personnel, company size and use of estimates.
2. Control risk. This is the risk that the entity’s internal controls won’t prevent or correct material misstatements in the financial statements.
Separate risk assessments are done at the financial statement level and then for each major account — such as cash, receivables, inventory, fixed assets, other assets, payables, accrued expenses, long-term debt, equity, and revenue and expenses. A high-risk account (say, inventory) might warrant more extensive audit procedures and be assigned to more experienced audit team members than one with lower risk (say, equity).
How auditors assess risk
New risk assessments must be done each year, even if the company has had the same auditor for many years. That’s because internal and external factors may change over time. For example, new government or accounting regulations may be implemented, and company personnel or accounting software may change, causing the company’s risk assessment to change. As a result, audit procedures may vary from year to year or from one audit firm to the next.
The risk assessment process starts with an auditing checklist and, for existing audit clients, last year’s workpapers. But auditors must dig deeper to determine current risk levels. In addition to researching public sources of information, including your company’s website, your auditor may call you with a list of open-ended questions (inquiries) and request a walk-through to evaluate whether your internal controls are operating as designed. Timely responses can help auditors plan their procedures to minimize audit risk.
Audit fieldwork is only as effective as the risk assessment. Evidence obtained from further audit procedures may be ineffective if it’s not properly linked to the assessed risks. So, it’s important for you to help the audit team understand the risks your business is currently facing and the challenges you’ve experienced reporting financial performance, especially as companies implement updated accounting rules in the coming years.
Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you’re adopting a child, or you adopted one this year, there may be significant tax benefits available to offset the expenses. For 2019, adoptive parents may be able to claim a nonrefundable credit against their federal tax for up to $14,080 of “qualified adoption expenses” for each adopted child. (This amount is increasing to $14,300 for 2020.) That’s a dollar-for-dollar reduction of tax — the equivalent, for someone in the 24% marginal tax bracket, of a deduction of over $50,000.
Adoptive parents may also be able to exclude from their gross income up to $14,080 for 2019 ($14,300 for 2020) of qualified adoption expenses paid by an employer under an adoption assistance program. Both the credit and the exclusion are phased out if the parents’ income exceeds certain limits, as explained below.
Adoptive parents may claim both a credit and an exclusion for expenses of adopting a child. But they can’t claim both a credit and an exclusion for the same expense.
Qualified adoption expenses
To qualify for the credit or the exclusion, the expenses must be “qualified.” These are the reasonable and necessary adoption fees, court costs, attorney fees, travel expenses (including amounts spent for meals and lodging) while away from home, and other expenses directly related to the legal adoption of an “eligible child.”
Expenses in connection with an unsuccessful attempt to adopt an eligible child can qualify. However, expenses connected with a foreign adoption (one in which the child isn’t a U.S. citizen or resident) qualify only if the child is actually adopted.
Taxpayers who adopt a child with special needs get a special tax break. They will be deemed to have qualified adoption expenses in the tax year in which the adoption becomes final in an amount sufficient to bring their total aggregate expenses for the adoption up to $14,300 for 2020 ($14,080 for 2019). In other words, they can take the adoption credit or exclude employer-provided adoption assistance up to that amount, whether or not they had $14,300 for 2020 ($14,080 for 2019) of actual expenses.
Phase-out for high-income taxpayers
The credit allowable for 2019 is phased out for taxpayers with adjusted gross income (AGI) of $211,160 ($214,520 for 2020). It is eliminated when AGI reaches $251,160 for 2019 ($254,520 for 2020).
Taxpayer ID number required
The IRS can disallow the credit and the exclusion unless a valid taxpayer identification number (TIN) for the child is included on the return. Taxpayers who are in the process of adopting a child can get a temporary number, called an adoption taxpayer identification number (ATIN), for the child. This enables adoptive parents to claim the credit and exclusion for qualified expenses.
When the adoption becomes final, the adoptive parents must apply for a Social Security number for the child. Once obtained, that number, rather than the ATIN, is used.
We can help ensure that you meet all the requirements to get the full benefit of the tax savings available to adoptive parents. Please contact us if you have any questions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
State law typically specifies the minimum number of directors a not-for-profit must have on its board. But so long as organizations fulfill that requirement, it’s up to them to determine how many total board members they need. Several guidelines can help you arrive at the right number.
Small vs. large
Both small and large boards come with perks and drawbacks. For example, smaller boards allow for easier communication and greater cohesiveness among the members. Scheduling is less complicated, and meetings tend to be shorter and more focused.
Several studies have indicated that group decision making is most effective when the group size is five to eight people. But boards on the small side of this range may lack the experience or diversity necessary to facilitate healthy deliberation and debate. What’s more, members may feel overworked and burn out easily.
Burnout is less likely with a large board where each member shoulders a smaller burden, including when it comes to fundraising. Large boards may include more perspectives and a broader base of professional expertise — for example, financial advisors, community leaders and former clients.
On the other hand, larger boards can lead to disengagement because the members may not feel they have sufficient responsibilities or a voice in discussions and decisions. Larger boards also require more staff support.
What you should weigh
If you’re assembling a board or thinking about resizing, consider:
You may have heard that it’s wise to have an uneven number of board members to avoid 50/50 votes. In such a case, though, the chair can make the decision. Moreover, an issue that produces a 50/50 split usually deserves more discussion.
Downsizing harder than upsizing
If you decide a larger board is in order, recruit new members. Trimming your board is a trickier proposition. For starters, you might need to change your bylaws. Generally, it’s best to set a range for board size in the bylaws, rather than a precise number.
Your bylaws already might call for staggered terms, which makes paring down simpler. As terms end, don’t replace members. Or establish an automatic removal process in which members are removed for missing a specified number of meetings.
An engaging experience
To successfully recruit and retain committed board members, you need to offer an engaging experience. Maintaining an appropriately sized board that makes the most of their talents is the first step.
Contact us with questions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2020. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The concept of “matching” is one of the basic principles of accrual-basis accounting. It requires companies to match expenses (efforts) with revenues (accomplishments) whenever it’s reasonable or practical to do so. This concept applies when companies make advance payments for expenses that will benefit more than one accounting period. Here are some questions small business owners and managers frequently ask about prepaying expenses.
When do prepaid expenses hit the income statement?
It’s common for companies to prepay such expenses as legal fees, advertising costs, insurance premiums, office supplies and rent. Rather than immediately report the full amount of an advance payment as an expense on the income statement, companies that use accrual-basis accounting methods must recognize a prepaid asset on the balance sheet.
A prepaid expense is a current asset that represents an expense the company won’t have to fund in the future. The remaining balance is gradually written off with the passage of time or as it’s consumed. The company then recognizes the reduction as an expense on the income statement.
Why can’t prepaid expenses be deducted immediately?
Immediate expensing of an item that has long-term benefits violates the matching principle under U.S. Generally Accepted Accounting Principles (GAAP).
Deducting prepaid assets in the period they’re paid makes your company look less profitable to lenders and investors, because you’re expensing the costs related to generating revenues that haven’t been earned yet. Immediate expensing of prepaid expenses also causes profits to fluctuate from period to period, making benchmarking performance over time or against competitors nearly impossible.
Does prepaying an expense make sense?
Some service providers — like your insurance carrier or an attorney in a major lawsuit — might require you to pay in advance. However, in many circumstances, prepaying expenses is optional.
There are pros and cons to prepaying. A major downside is that it takes cash away from other potential uses. Put another way, it gives vendors or suppliers interest-free use of your business’s funds. Plus, there’s a risk that the party you prepay won’t deliver what you’ve paid for.
For example, a landlord might terminate a lease — or they might file for bankruptcy, which could require a lengthy process to get your prepayment refunded, and you might not get a refund at all. Banks also might not count prepaids when computing working capital ratios. And since reporting prepaid expenses under GAAP differs slightly from reporting them for federal tax purposes, excessive prepaid activity may create complex differences to reconcile.
With that said, your company might receive a discount for prepaying. And companies without an established credit history, that have poor credit or that contract services with foreign providers, may need to prepay expenses to get favorable terms with their supply chain partners.
For more information
Start-ups and small businesses that are accustomed to using cash-basis accounting may not understand the requirement to capitalize business expenses on the balance sheet. But matching revenues and expenses is a critical part of accrual-basis accounting. Contact us with any questions you may have about reporting and managing prepaid assets. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you’re starting to fret about your 2019 tax bill, there’s good news — you may still have time to reduce your liability. Three strategies are available that may help you cut your taxes before year-end, including:
1. Accelerate deductions/defer income. Certain tax deductions are claimed for the year of payment, such as the mortgage interest deduction. So, if you make your January 2020 payment this month, you can deduct the interest portion on your 2019 tax return (assuming you itemize).
Pushing income into the new year also will reduce your taxable income. If you’re expecting a bonus at work, for example, and you don’t want the income this year, ask if your employer can hold off on paying it until January. If you’re self-employed, you can delay your invoices until late in December to divert the revenue to 2020.
You shouldn’t pursue this approach if you expect to land in a higher tax bracket next year. Also, if you’re eligible for the qualified business income deduction for pass-through entities, you might reduce the amount of that deduction if you reduce your income.
2. Maximize your retirement contributions. What could be better than paying yourself instead of Uncle Sam? Federal tax law encourages individual taxpayers to make the maximum allowable contributions for the year to their retirement accounts, including traditional IRAs and SEP plans, 401(k)s and deferred annuities.
For 2019, you generally can contribute as much as $19,000 to 401(k)s and $6,000 for traditional IRAs. Self-employed individuals can contribute up to 25% of your net income (but no more than $56,000) to a SEP IRA.
3. Harvest your investment losses. Losing money on your investments has a bit of an upside — it gives you the opportunity to offset taxable gains. If you sell underperforming investments before the end of the year, you can offset gains realized this year on a dollar-for-dollar basis.
If you have more losses than gains, you generally can apply up to $3,000 of the excess to reduce your ordinary income. Any remaining losses are carried forward to future tax years.
We can help
The strategies described above are only a sampling of strategies that may be available. Contact us if you have questions about these or other methods for minimizing your tax liability for 2019. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
According to the Society for Human Resource Management, 47% of companies offer a community volunteer program for employees. Chief Executives for Corporate Purpose has found that large companies are even more likely to sponsor volunteer activities: 61% offer paid-release time volunteer programs or a structured corporate volunteer program.
If your not-for-profit suffers from a chronic volunteer shortage or has had to put off large projects for lack of helping hands, such corporate volunteer partnerships can be a boon. Teaming up with a well-known company can also raise your nonprofit’s profile with potential donors and the media. And employees who participate may decide to become permanent volunteers or financial supporters.
Finding a match
The best volunteer partnerships generally are those where the nonprofit’s mission and the company’s core business correlate. For example, an athletic clothing manufacturer is a perfect match for an afterschool soccer league.
Many businesses seek one-day volunteer opportunities that can accommodate all of their employees. If your organization is painting the walls of schools, serving free meals to the needy or setting up for a fundraising event, short-term assistance from an army of volunteers can be a lifesaver.
However, you shouldn’t create work where it doesn’t exist, particularly if coming up with activities or managing volunteers will put a strain on staff resources. Also be wary when companies offer volunteers on short notice. To be successful, corporate volunteer days take planning. For example, you may need to arrange such logistical details as meals or prepare training instructions and educational materials.
If you must turn down an eager corporate volunteer, do so carefully. Explain how the offer may, in fact, cost your nonprofit time and money. Then propose other volunteer opportunities.
Group volunteer days aren’t the only way to take advantage of employees who want to help. Many companies provide paid time for staff to volunteer for the charity of their choice. Other companies make financial contributions to organizations where employees volunteer.
To find companies with volunteer programs, check with the Points of Light Foundation (pointsoflight.org), VolunteerMatch (volunteermatch.org) or regional groups. Once you have a corporate partner, make sure you dedicate time to building the relationship. Think beyond a one-day volunteer event and try to gain an ongoing commitment, such as quarterly — and possibly some financial support, too. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Is your not-for-profit thinking about merging or otherwise restructuring? Recently, the IRS made the process easier for some organizations.
Revising old rules
Under previous IRS rules, tax-exempt organizations were required to file new exemption applications when they made certain changes to their structure. Each change was seen as creating a new legal entity that needed an exemption application.
Originally, restructuring organizations would need to file a final Form 990 under their initial Employer Identification Number (EIN), obtain a new EIN and apply for exemption for the new entity. This required changing the EIN on all bank and investment accounts. In previous guidance, the IRS had eased the rules on obtaining new EINs in many circumstances, but still required new applications for exemption. But under Revenue Procedure 2018-15, certain nonprofits need only report significant organizational changes on their Forms 990.
To avoid having to file a new application, the original organization must be 1) a U.S. corporation or unincorporated association, and 2) exempt as a 501(c) organization. It also must be in good standing in the jurisdiction where it was incorporated or, in the case of an unincorporated association, formed.
The reorganization must:
The resulting, or “surviving,” organization needs to carry out the same exempt purposes as the original organization. If your nonprofit is a 501(c)(3) organization, your new articles of incorporation must continue to satisfy the IRS’s organizational test.
Exceptions and caveats
The new rules don’t apply if the surviving organization is a “disregarded entity” (an entity the IRS doesn’t consider to be separate from its owner for tax purposes), limited liability company, partnership or foreign business entity. Nor do the new rules include reorganizations where the surviving organization obtains a new EIN. Surviving organizations that aren’t covered by the new rules must submit a new exemption application to be recognized as exempt.
Surviving organizations have reporting obligations, too. The IRS still requires survivors to report the restructuring on any required Form 990 for the applicable tax year. In the case of a domestication or reincorporation in a different state, the surviving organization also must report its change of address on Forms 8822-B and 990.
The new rules have reduced the burden for many nonprofit restructurings. But they apply only to federal income tax exemptions. Your state could require additional filings. Contact us for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
With Thanksgiving behind us, the holiday season is in full swing. At this time of year, your business may want to show its gratitude to employees and customers by giving them gifts or hosting holiday parties. It’s a good idea to understand the tax rules associated with these expenses. Are they tax deductible by your business and is the value taxable to the recipients?
Customer and client gifts
If you make gifts to customers and clients, the gifts are deductible up to $25 per recipient per year. For purposes of the $25 limit, you don’t need to include “incidental” costs that don’t substantially add to the gift’s value, such as engraving, gift wrapping, packaging or shipping. Also excluded from the $25 limit is branded marketing collateral — such as small items imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4.
The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (for example, a gift basket for all team members of a customer to share) as long as they’re “reasonable.”
In general, anything of value that you transfer to an employee is included in his or her taxable income (and, therefore, subject to income and payroll taxes) and deductible by your business. But there’s an exception for noncash gifts that constitute a “de minimis” fringe benefit.
These are items small in value and given infrequently that are administratively impracticable to account for. Common examples include holiday turkeys or hams, gift baskets, occasional sports or theater tickets (but not season tickets), and other low-cost merchandise.
De minimis fringe benefits aren’t included in your employee’s taxable income yet they’re still deductible by your business. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts. However, many businesses use an informal cutoff of $75.
Important: Cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income and subject to payroll tax withholding regardless of how small and infrequent.
Throwing a holiday party
Under the Tax Cuts and Jobs Act, certain deductions for business-related meals were reduced and the deduction for business entertainment was eliminated. However, there’s an exception for certain recreational activities, including holiday parties.
Holiday parties are fully deductible (and excludible from recipients’ income) so long as they’re primarily for the benefit of non-highly-compensated employees and their families. If customers, and others also attend, holiday parties may be partially deductible.
Spread good cheer
Contact us if you have questions about giving holiday gifts to employees or customers or throwing a holiday party. We can explain the tax rules. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Goodwill shows up on a company’s balance sheet when the company has been acquired in a business combination. It represents what’s left over after the purchase price in a merger or acquisition is allocated to the company’s tangible assets, identifiable intangible assets and liabilities. Periodically, companies must test goodwill for “impairment” — that is, whether the carrying value on the balance sheet has fallen below its fair value. This assessment can be complicated.
Under current U.S. Generally Accepted Accounting Principles (GAAP), public companies that report goodwill on their balance sheet must test goodwill at least annually for impairment. In lieu of annual impairment testing, private companies may elect to amortize acquired goodwill over a useful life of up to 10 years.
All companies — regardless of whether they’re publicly traded or privately held — must test goodwill for impairment when a triggering event happens. Examples of triggering events that could lower the fair value of goodwill include:
Impairment may also occur if, after an acquisition has been completed, there’s an economic downturn that causes the parent company or the acquired business to lose value. Impairment write-downs reduce the carrying value of goodwill on the balance sheet. They also lower profits reported on the income statement, which may raise a red flag to lenders and investors.
Calculating goodwill impairment was originally a two-step process: First, businesses must figure out whether an impairment exists, and then they must put a dollar figure on it. The second step includes determining the implied fair value of goodwill and comparing it with the carrying amount of goodwill on the balance sheet.
The rules for testing goodwill impairment were simplified in Accounting Standards Update (ASU) No. 2017-04, Intangibles — Goodwill and Other, Simplifying the Test for Goodwill Impairment. The changes go live for fiscal periods starting after:
Early adoption is permitted for testing dates after January 1, 2017. The updated guidance nixes the second step of the impairment test. Instead, a business will perform the impairment test by comparing the fair value of a reporting unit that includes goodwill with its carrying amount.
Who can help?
Few companies employ internal accounting staff with the requisite training and time to handle impairment testing. And most auditors won’t perform valuation services for their audit clients for fear of violating their independence standards. Instead, valuation specialists are often called in to handle these complex assignments. Contact us for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
As we all know, medical services and prescription drugs are expensive. You may be able to deduct some of your expenses on your tax return but the rules make it difficult for many people to qualify. However, with proper planning, you may be able to time discretionary medical expenses to your advantage for tax purposes.
The basic rules
For 2019, the medical expense deduction can only be claimed to the extent your unreimbursed costs exceed 10% of your adjusted gross income (AGI). You also must itemize deductions on your return.
If your total itemized deductions for 2019 will exceed your standard deduction, moving or “bunching” nonurgent medical procedures and other controllable expenses into 2019 may allow you to exceed the 10% floor and benefit from the medical expense deduction. Controllable expenses include refilling prescription drugs, buying eyeglasses and contact lenses, going to the dentist and getting elective surgery.
In addition to hospital and doctor expenses, here are some items to take into account when determining your allowable costs:
1. Health insurance premiums. This item can total thousands of dollars a year. Even if your employer provides health coverage, you can deduct the portion of the premiums that you pay. Long-term care insurance premiums are also included as medical expenses, subject to limits based on age.
2. Transportation. The cost of getting to and from medical treatments counts as a medical expense. This includes taxi fares, public transportation, or using your own car. Car costs can be calculated at 20¢ a mile for miles driven in 2019, plus tolls and parking. Alternatively, you can deduct certain actual costs, such as for gas and oil.
3. Eyeglasses, hearing aids, dental work, prescription drugs and professional fees. Deductible expenses include the cost of glasses, hearing aids, dental work, psychiatric counseling and other ongoing expenses in connection with medical needs. Purely cosmetic expenses don’t qualify. Prescription drugs (including insulin) qualify, but over-the-counter aspirin and vitamins don’t. Neither do amounts paid for treatments that are illegal under federal law (such as marijuana), even if state law permits them. The services of therapists and nurses can qualify as long as they relate to a medical condition and aren’t for general health. Amounts paid for certain long-term care services required by a chronically ill individual also qualify.
4. Smoking-cessation and weight-loss programs. Amounts paid for participating in smoking-cessation programs and for prescribed drugs designed to alleviate nicotine withdrawal are deductible. However, nonprescription nicotine gum and patches aren’t. A weight-loss program is deductible if undertaken as treatment for a disease diagnosed by a physician. Deductible expenses include fees paid to join a program and attend periodic meetings. However, the cost of food isn’t deductible.
You can deduct the medical costs that you pay for dependents, such as your children. Additionally, you may be able to deduct medical costs you pay for other individuals, such as an elderly parent. If you have questions about medical expense deductions, contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
At this time of year, many business owners ask if there’s anything they can do to save tax for the year. Under current tax law, there are two valuable depreciation-related tax breaks that may help your business reduce its 2019 tax liability. To benefit from these deductions, you must buy eligible machinery, equipment, furniture or other assets and place them into service by the end of the tax year. In other words, you can claim a full deduction for 2019 even if you acquire assets and place them in service during the last days of the year.
The Section 179 deduction
Under Section 179, you can deduct (or expense) up to 100% of the cost of qualifying assets in Year 1 instead of depreciating the cost over a number of years. For tax years beginning in 2019, the expensing limit is $1,020,000. The deduction begins to phase out on a dollar-for-dollar basis for 2019 when total asset acquisitions for the year exceed $2,550,000.
Sec. 179 expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It’s also available for:
The Sec. 179 deduction amount and the ceiling limit are significantly higher than they were a few years ago. In 2017, for example, the deduction limit was $510,000, and it began to phase out when total asset acquisitions for the tax year exceeded $2.03 million.
The generous dollar ceiling that applies this year means that many small and medium sized businesses that make purchases will be able to currently deduct most, if not all, of their outlays for machinery, equipment and other assets. What’s more, the fact that the deduction isn’t prorated for the time that the asset is in service during the year makes it a valuable tool for year-end tax planning.
Businesses can claim a 100% bonus first year depreciation deduction for machinery and equipment bought new or used (with some exceptions) if purchased and placed in service this year. The 100% deduction is also permitted without any proration based on the length of time that an asset is in service during the tax year.
It’s important to note that Sec. 179 expensing and bonus depreciation may also be used for business vehicles. So buying one or more vehicles before December 31 may reduce your 2019 tax liability. But, depending on the type of vehicle, additional limits may apply.
Businesses should consider buying assets now that qualify for the liberalized depreciation deductions. Please contact us if you have questions about depreciation or other tax breaks. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Working capital is the difference between a company’s current assets and current liabilities. For a business to thrive, its working capital must be greater than zero. A positive balance enables the company to meet its short-term cash flow needs and grow.
But too much working capital can be a sign of inefficient management. In general, you want to generate as much income as possible from the money that’s tied up in receivables, inventory, payables and other working capital accounts. Here’s how to find the sweet spot between too little and too much working capital.
Current assets are those that can be easily converted into cash within a 12-month period. Conversely, current liabilities include any obligations due within 12 months, including accounts payable, accrued expenses and notes payable.
In addition to calculating the difference between these two amounts, management may calculate the current ratio (current assets ÷ current liabilities) and the acid-test ratio (cash, receivables and investments ÷ current liabilities). A company’s working capital ratios can be compared over time or against competitors to help gauge performance.
You can also compute turnover ratios for receivables, inventory and payables. For example, the days-in-receivables ratio equals the average accounts receivable balance divided by annual sales times 365 days. This tells you, on average, how long it takes the company to collect customer invoices.
There are three main goals of working capital management:
Maintaining a positive working capital balance requires identifying patterns of activity related to line items within the current asset and liability sections.
Suppose your company’s current ratio has fallen from 1.5 to 1.2. Is this good or bad? That depends on your circumstances. You’ll need to identify the reasons it’s fallen to determine whether the decline is a sign of an impending cash flow shortage. Often the answer lies in three working capital accounts: 1) accounts receivable, 2) inventory, and 3) accounts payable.
For example, when it comes to collecting from customers, how much time elapses between the recognition of an accounts receivable and its collection? Are certain customers habitually slower to pay than others?
Inventory has significant carrying costs, including storage, insurance, interest, pilferage, and the potential for damage and obsolescence. Has your company established target inventory levels? If so, who within the organization monitors compliance? To avoid running out of materials, companies often hold too much inventory. And it’s often financed through trade debt, which can prove costly over the long term.
With respect to the payment of accounts payable, does your company pay according to the credit terms offered by the vendor? Are there penalties for paying past those terms? It might be time for your company to renegotiate its payment terms.
We can help
Working capital management is as much art as it is science. Contact us to help determine the optimal level of working capital based on the nature of your business. We can help you brainstorm ways to fortify your financial position and operate more efficiently. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
For tax purposes, December 31 means more than New Year’s Eve celebrations. It affects the filing status box that will be checked on your tax return for the year. When you file your return, you do so with one of five filing statuses, which depend in part on whether you’re married or unmarried on December 31.
More than one filing status may apply, and you can use the one that saves the most tax. It’s also possible that your status options could change during the year.
Here are the filing statuses and who can claim them:
Head of household status
Head of household status is generally more favorable than filing as a single taxpayer. To qualify, you must “maintain a household” that, for more than half the year, is the principal home of a “qualifying child” or other relative that you can claim as your dependent.
A “qualifying child” is defined as someone who:
Different rules may apply if a child’s parents are divorced. Also, a child isn’t a “qualifying child” if he or she is married and files jointly or isn’t a U.S. citizen or resident.
Maintaining a household
For head of household filing status, you’re considered to maintain a household if you live in it for the tax year and pay more than half the cost of running it. This includes property taxes, mortgage interest, rent, utilities, property insurance, repairs, upkeep, and food consumed in the home. Don’t include medical care, clothing, education, life insurance or transportation.
Under a special rule, you can qualify as head of household if you maintain a home for a parent of yours even if you don’t live with the parent. To qualify, you must be able to claim the parent as your dependent.
You must generally be unmarried to claim head of household status. If you’re married, you must generally file as either married filing jointly or married filing separately, not as head of household. However, if you’ve lived apart from your spouse for the last six months of the year and a qualifying child lives with you and you “maintain” the household, you’re treated as unmarried. In this case, you may be able to qualify as head of household.
If you have questions about your filing status, contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
A hypothetical not-for-profit staffer named Britney had maxed out her personal credit cards. So when her car needed repairs, she reached for her employer’s card. She reasoned that she would come up with the money to pay the bill before her boss ever saw a statement. Britney didn’t come up with the money. But lucky for her, her boss didn’t review the card statement that month. When Britney needed to buy holiday gifts, she reached for her work card again — and again. By the time her boss finally noticed the illicit charges, Britney had spent more than $5,000.
This kind of credit card misuse or fraud is more common in nonprofits than you may think. But if you write and enforce a strong card use policy at your organization, you can help prevent Britney’s and her boss’s mistakes.
Who needs one?
Your policy should start with who has the right to a card. Nonprofits commonly issue cards to their executive directors, program directors and office managers (or other employees responsible for buying supplies). Before issuing a card to other staffers, consider whether they really need it. Most can pay out of pocket and submit reimbursement requests. However, if employees travel or entertain donors regularly on your nonprofit’s behalf, it may make sense to give them cards.
Just ensure that cardholders understand the rules. Explicitly say (even if it seems obvious) that they can’t use the card for personal expenses, and list prohibited uses such as cash advances and electronic cash transfers, as well as charges over a specified amount. State that reimbursement for returns of goods or services must be credited directly to the card account. Employees shouldnever accept cash or refunds directly.
What’s management’s role?
Manager involvement is essential to helping prevent credit card abuse. Require employees to seek preapproval prior to incurring any credit card charge. Stress that unauthorized purchases (and related late fees and interest) will become the employee’s responsibility. Employees should be required to provide documentation (such as itemized receipts) to their authorizing supervisor for review.
Supervisors need to indicate their approval of the charges by a signature and date on the receipts or on a standardized expense form. Your accounting department should reconcile monthly credit card statements, and the statements should be reviewed by an executive or board member.
How do you enforce it?
Make sure staffers understand the possible consequences of violating your credit card policy, including employment termination and criminal prosecution. To ensure there’s no misunderstanding, require employees to acknowledge that they’ve read the policy and agree to follow it in writing before they receive a card.
If your company faces the need to “remediate” or clean up environmental contamination, the money you spend can be deductible on your tax return as ordinary and necessary business expenses. Of course, you want to claim the maximum immediate income tax benefits possible for the expenses you incur.
These expenses may include the actual cleanup costs, as well as expenses for environmental studies, surveys and investigations, fees for consulting and environmental engineering, legal and professional fees, environmental “audit” and monitoring costs, and other expenses.
Current deductions vs. capitalized costs
Unfortunately, every type of environmental cleanup expense cannot be currently deducted. Some cleanup costs must be capitalized. But, generally, cleanup costs are currently deductible to the extent they cover:
On the other hand, remediation costs generally have to be capitalized if the remediation:
However, parts of these types of remediation costs may qualify for a current deduction. It depends on the facts and circumstances of your situation. For example, in one case, the IRS required a taxpayer to capitalize the costs of surveying for contamination various sites that proved to be contaminated, but allowed a current deduction for the costs of surveying the sites that proved to be uncontaminated.
Maximize the tax breaks
In addition to federal tax deductions, there may be state or local tax incentives involved in cleaning up contaminated property. The tax treatment for the expenses can be complex. If you have environmental cleanup expenses, we can help plan your efforts to maximize the deductions available. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Change-in-control events — like merger and acquisition (M&A) transactions — don’t happen every day. If you’re currently in the market to merge with or buy a business, you might not be aware of updated financial reporting guidance that took effect in November 2014. The changes provide greater flexibility to post-M&A accounting.
Pushdown accounting is optional
Accounting Standards Update (ASU) No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force), made pushdown accounting optional when there’s a change-in-control event. The update applies to all companies, both public and private.
Pushdown accounting refers to the practice of adjusting an acquired company’s standalone financial statements to reflect the acquirer’s accounting basis rather than the target’s historical costs. Typically, this means stepping up the target’s net assets to fair value and, to the extent the purchase price exceeds fair value, recognizing the excess as goodwill. Previously, U.S. Generally Accepted Accounting Principles (GAAP) provided little guidance on when pushdown accounting might be appropriate.
For public companies, Securities and Exchange Commission (SEC) guidance generally prohibited pushdown accounting unless the acquirer obtained at least an 80% interest in the target and required it when the acquirer’s interest reached 95%. The SEC has rescinded portions of its pushdown accounting guidance, bringing it in line with the FASB’s updated standard.
To push down or not?
Under the updated guidance, all acquired companies may decide if they should apply pushdown accounting. Whether it’s appropriate depends on a company’s circumstances. For some companies, there may be advantages to reporting assets and liabilities at fair value and adopting consistent accounting policies for both parent and subsidiary. Other companies may prefer not to apply pushdown accounting to avoid the negative impact on earnings, often associated with a step-up to fair value.
After pushdown accounting is applied to a change-in-control event, the election is irrevocable. Acquired companies that apply pushdown accounting in their standalone financial statements should include disclosures in the current reporting period to help users evaluate its effects.
We can help
If you’re contemplating an M&A deal, we can help you decide whether pushdown accounting is a smart choice for reporting your transaction. Whichever option you choose, our accounting pros also can help you comply with financial reporting requirements under GAAP. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com.
You can reduce taxes and save for retirement by contributing to a tax-advantaged retirement plan. If your employer offers a 401(k) or Roth 401(k) plan, contributing to it is a taxwise way to build a nest egg.
If you’re not already contributing the maximum allowed, consider increasing your contribution rate between now and year end. Because of tax-deferred compounding (tax-free in the case of Roth accounts), boosting contributions sooner rather than later can have a significant impact on the size of your nest egg at retirement.
With a 401(k), an employee elects to have a certain amount of pay deferred and contributed by an employer on his or her behalf to the plan. The contribution limit for 2019 is $19,000. Employees age 50 or older by year end are also permitted to make additional “catch-up” contributions of $6,000, for a total limit of $25,000 in 2019.
The IRS just announced that the 401(k) contribution limit for 2020 will increase to $19,500 (plus the $6,500 catch-up contribution).
A traditional 401(k)
A traditional 401(k) offers many benefits, including these:
Take a look at your contributions for this year. If your current contribution rate will leave you short of the limit, try to increase your contribution rate through the end of the year to get as close to that limit as you can afford. Keep in mind that your paycheck will be reduced by less than the dollar amount of the contribution, because the contributions are pretax — so, income tax isn’t withheld.
Employers may also include a Roth option in their 401(k) plans. If your employer offers this, you can designate some or all of your contributions as Roth contributions. While such contributions don’t reduce your current MAGI, qualified distributions will be tax- free.
Roth 401(k) contributions may be especially beneficial for higher-income earners, because they don’t have the option to contribute to a Roth IRA. Your ability to make a Roth IRA contribution in 2019 will be reduced if your adjusted gross income (AGI) in 2019 exceeds:
Your ability to contribute to a Roth IRA in 2019 will be eliminated entirely if you’re a married-filing-jointly filer and your 2019 AGI equals or exceeds $203,000. The cutoff for single filers is $137,000 or more.
How much and which type
Do you have questions about how much to contribute or the best mix between regular and Roth 401(k) contributions? Contact us. We can discuss the tax and retirement-saving considerations in your situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com.
Accounting for contributions and grants has often proven complicated for not-for-profits, especially when they come with donor-imposed conditions. But 2018 guidance from the Financial Accounting Standards Board (FASB) provided some much-needed clarification of earlier instructions.
Traditionally, nonprofits have taken varying approaches to characterizing grants and similar contracts as exchange transactions (also known as reciprocal transactions) or contributions (nonreciprocal transactions). The new guidance makes the process relatively simple. To determine how to treat a grant or similar contract, assess whether the “provider” receives commensurate value for the assets it’s transferring. If so, treat the grant or contract as an exchange transaction.
If the provider doesn’t receive commensurate value, determine whether the asset transfer is a payment from a third-party payer for an existing transaction between you and an identified customer (for example, payments made under Medicare). If it is, the transaction isn’t a contribution, and other accounting guidance would apply. If it isn’t, the transaction is accounted for as a contribution.
Distinguishing between conditional and unconditional contributions has been the other main challenge for nonprofits. But the new rules stipulate that a conditional contribution includes:
Unconditional contributions are recognized when received. However, conditional contributions aren’t recognized until you overcome the barriers to entitlement. To determine whether you must overcome a barrier to receive a contribution, consider:
The new rules also provide a simultaneous release option, which allows you to classify unconditional donor-restricted contributions directly in “net assets without donor restrictions” if the restriction is satisfied in the same period that the revenue is recognized.
Already in effect
The FASB’s Accounting Standards Update No. 2018-08 already affects most nonprofits. It takes effect for most organizations that are recipients of funds for annual reporting periods starting after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The rules generally take effect one year later for organizations that are resource providers.
Note that, as a result of this guidance, you may find yourself accounting for more grants and similar contracts as contributions than you have in the past. If you aren’t sure what this means for your financial statements, loan covenants and other matters, contact us. Sam Brown, CPA, Inc., Troy, Ohio,
A month after the new year begins, your business may be required to comply with rules to report amounts paid to independent contractors, vendors and others. You may have to send 1099-MISC forms to those whom you pay nonemployee compensation, as well as file copies with the IRS. This task can be time consuming and there are penalties for not complying, so it’s a good idea to begin gathering information early to help ensure smooth filing.
There are many types of 1099 forms. For example, 1099-INT is sent out to report interest income and 1099-B is used to report broker transactions and barter exchanges. Employers must provide a Form 1099-MISC for nonemployee compensation by January 31, 2020, to each noncorporate service provider who was paid at least $600 for services during 2019. (1099-MISC forms generally don’t have to be provided to corporate service providers, although there are exceptions.)
A copy of each Form 1099-MISC with payments listed in box 7 must also be filed with the IRS by January 31. “Copy A” is filed with the IRS and “Copy B” is sent to each recipient.
There are no longer any extensions for filing Form 1099-MISC late and there are penalties for late filers. The returns will be considered timely filed if postmarked on or before the due date.
A few years ago, the deadlines for some of these forms were later. But the earlier January 31 deadline for 1099-MISC was put in place to give the IRS more time to spot errors on tax returns. In addition, it makes it easier for the IRS to verify the legitimacy of returns and properly issue refunds to taxpayers who are eligible to receive them.
Hopefully, you’ve collected W-9 forms from independent contractors to whom you paid $600 or more this year. The information on W-9s can be used to help compile the information you need to send 1099-MISC forms to recipients and file them with the IRS. Here’s a link to the Form W-9 if you need to request contractors and vendors to fill it out: target="_blank">https://bit.ly/2NQvJ5O.
Form changes coming next year
In addition to payments to independent contractors and vendors, 1099-MISC forms are used to report other types of payments. As described above, Form 1099-MISC is filed to report nonemployment compensation (NEC) in box 7. There may be separate deadlines that report compensation in other boxes on the form. In other words, you may have to file some 1099-MISC forms earlier than others. But in 2020, the IRS will be requiring “Form 1099-NEC” to end confusion and complications for taxpayers. This new form will be used to report 2020 nonemployee compensation by February 1, 2021.
Help with compliance
But for nonemployee compensation for 2019, your business will still use Form 1099-MISC. If you have questions about your reporting requirements, contact us. Sam Brown, CPA, Inc., Troy, Ohio,
Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Most businesses report financial performance using U.S. Generally Accepted Accounting Principles (GAAP). But the income-tax-basis format can save time and money for some private companies. Here’s information to help you choose the financial reporting framework that will work for your situation.
GAAP is the most common financial reporting standard in the United States. The Securities and Exchange Commission (SEC) requires public companies to follow it — they don’t have a choice. Many lenders expect large private borrowers to follow suit, because GAAP is familiar and consistent.
However, compliance with GAAP can be time-consuming and costly, depending on the level of assurance provided in the financial statements. So, some private companies opt to report financial statements using an “other comprehensive basis of accounting” (OCBOA) method. The most common OCBOA method is the tax-basis format.
Departing from GAAP can result in significant differences in financial results. Why? GAAP is based on the principle of conservatism, which prevents companies from overstating profits and asset values. This runs contrary to what the IRS expects from for-profit businesses. Tax laws generally tend to favor accelerated gross income recognition and won’t allow taxpayers to deduct expenses until the amounts are known and other deductibility requirements have been met. So, reported profits tend to be higher under tax-basis methods than under GAAP.
There are also differences in terminology. Under GAAP, companies report revenues, expenses and net income. Conversely, tax-basis entities report gross income, deductions and taxable income. Their nontaxable items typically appear as separate line items or are disclosed in a footnote.
Capitalization and depreciation of fixed assets is another noteworthy difference. Under GAAP, the cost of a fixed asset (less its salvage value) is capitalized and systematically depreciated over its useful life. For tax purposes, fixed assets are depreciated under the Modified Accelerated Cost Recovery System (MACRS), which generally results in shorter lives than under GAAP. Salvage value isn’t subtracted for tax purposes, but Section 179 and bonus depreciation are subtracted before computing MACRS deductions.
Other reporting differences exist for inventory, pensions, leases, start-up costs and accounting for changes and errors. In addition, companies record allowances for bad debts, sales returns, inventory obsolescence and asset impairment under GAAP. But these allowances generally aren’t permitted under tax law.
Departing from GAAP
GAAP has become increasingly complex in recent years. So some companies would prefer tax-basis reporting, if it’s appropriate for financial statement users.
For example, tax-basis financials might work for a business that’s owned, operated and financed by individuals closely involved in day-to-day operations who understand its financial position. But GAAP statements typically work better if the company has unsecured debt or numerous shareholders who own minority interests. Likewise, prospective buyers may prefer to perform due diligence on GAAP financial statements — or they may be public companies that are required to follow GAAP.
Tax-basis reporting makes sense for certain types of businesses. But for other businesses, tax-basis financial statements may result in missing or even misleading information. We can help you evaluate the pros and cons and choose the appropriate reporting framework for your situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
There’s a tax-advantaged way for people to save for the needs of family members with disabilities — without having them lose eligibility for government benefits to which they’re entitled. It can be done though an Achieving a Better Life Experience (ABLE) account, which is a tax-free account that can be used for disability-related expenses.
ABLE accounts can be created by eligible individuals to support themselves, by family members to support their dependents, or by guardians for the benefit of the individuals for whom they’re responsible.
Eligible individuals must be blind or disabled — and must have become so before turning age 26. They also must be entitled to benefits under the Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) programs. Alternatively, an individual can become eligible if a disability certificate is filed with the IRS for him or her.
Here are some other key factors:
We can help with the options
There are many choices. ABLE accounts are established under state programs. An account may be opened under any state’s program (if the state allows out-of-state participants). The funds in an account can be invested in a variety of options and the account’s investment directions can be changed up to twice a year. Contact us if you’d like more details about setting up or maintaining an ABLE account, Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com..
Your not-for-profit may have paid little attention to the European Union’s (EU’s) General Data Protection Regulation (GDPR), which took effect May 25, 2018. The GDPR revises standards for privacy rights, information security and compliance in the EU. Yet it might also apply to U.S.-based organizations, such as your not-for-profit.
Big steps beyond
GDPR requirements are comprehensive and go far beyond existing U.S. privacy standards. They address:
Organizations must notify the appropriate EU authority within 72 hours after becoming aware of a data breach. By contrast, U.S. states’ breach notification laws require notification “without unreasonable delay,” with the shortest timing at 30 days, while the Health Information Portability and Accountability Act (HIPAA) allows 60 days.
The regulations define “personal data” broadly to include such identifiers as name, address, Social Security or tax identification number, and email address. Location data and online identifiers such as cookies or IP addresses are also considered personal data.
Notably, GDPR rules apply to entities outside the EU that process or hold the personal data of “data subjects” who are physically in the EU. It doesn’t matter where the processing takes place or whether the subjects are EU residents.
Rights of individuals
To comply with the GDPR, your nonprofit must obtain consent from individuals to collect their personal data. This means the person takes affirmative action, such as clicking on an “I agree” statement, and the personal data you already possess isn’t “grandfathered in.” You must obtain consent on that data or purge it completely from your systems (including employees’ spreadsheets and Outlook contact lists).
You also must disclose to individuals the data you collect on them upon request, so you’ll need to keep close track of such information. And if individuals ask to be forgotten, you must delete all of their data or anonymize it.
Proceed with caution
A serious violation of the GDPR can bring a penalty as high as 20 million euros (about $23 million) or 4% of the violator’s annual revenue. Questions remain about enforcement in the United States, but that’s no excuse not to abide by the rules and develop a compliance plan now. Contact us if you have questions, Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com..
One of the most laborious tasks for small businesses is managing payroll. But it’s critical that you not only withhold the right amount of taxes from employees’ paychecks but also that you pay them over to the federal government on time.
If you willfully fail to do so, you could personally be hit with the Trust Fund Recovery Penalty, also known as the 100% penalty. The penalty applies to the Social Security and income taxes required to be withheld by a business from its employees’ wages. Since the taxes are considered property of the government, the employer holds them in “trust” on the government’s behalf until they’re paid over.
The reason the penalty is sometimes called the “100% penalty” is because the person liable for the taxes (called the “responsible person”) can be personally penalized 100% of the taxes due. Accordingly, the amounts the IRS seeks when the penalty is applied are usually substantial, and the IRS is aggressive in enforcing it.
The penalty can be imposed on any person “responsible” for the collection and payment of the taxes. This has been broadly defined to include a corporation’s officers, directors, and shareholders under a duty to collect and pay the tax, as well as a partnership’s partners or any employee of the business under such a duty. Even voluntary board members of tax-exempt organizations, who are generally exempt from responsibility, can be subject to this penalty under certain circumstances. Responsibility has even been extended in some cases to professional advisors.
According to the IRS, being a responsible person is a matter of status, duty and authority. Anyone with the power to see that the taxes are paid may be responsible. There is often more than one responsible person in a business, but each is at risk for the entire penalty. Although taxpayers held liable may sue other responsible persons for their contributions, this is an action they must take entirely on their own after they pay the penalty. It isn’t part of the IRS collection process.
The net can be broadly cast. You may not be directly involved with the withholding process in your business. But let’s say you learn of a failure to pay over withheld taxes and you have the power to have them paid. Instead, you make payments to creditors and others. You have now become a responsible person.
How the IRS defines “willfulness”
For actions to be willful, they don’t have to include an overt intent to evade taxes. Simply bowing to business pressures and paying bills or obtaining supplies instead of paying over withheld taxes due to the government is willful behavior for these purposes. And just because you delegate responsibilities to someone else doesn’t necessarily mean you’re off the hook.
In addition, the corporate veil won’t shield corporate owners from the 100% penalty. The liability protections that owners of corporations — and limited liability companies — typically have don’t apply to payroll tax debts.
If the IRS assesses the penalty, it can file a lien or take levy or seizure action against the personal assets of a responsible person.
Avoiding the penalty
You should never allow any failure to withhold taxes from employees, and no “borrowing” from withheld amounts should ever be allowed in your business — regardless of the circumstances. All funds withheld must be paid over on time.
If you aren’t already using a payroll service, consider hiring one. This can relieve you of the burden of withholding and paying the proper amounts, as well as handling the recordkeeping. Contact us for more information, Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com.
Whether it’s hard hats and drills on a jobsite, iPads in an office or RFID readers in a warehouse, small tools and equipment have a tendency to disappear at many companies. The cost of lost, damaged and stolen items can quickly add up, consuming profits and cash flow. What can you do to manage these items more effectively and create accountability among workers?
Technology to the rescue
Electronic bar-code technology that’s used to track inventory can also be used to label, coordinate, trace and catalog fixed assets in real time. These systems usually involve bar codes displayed on polyurethane labels on each tool or machine. The labels are designed to hold up under repeated on-the-job wear and tear.
These systems come with handheld devices that you can use to scan the bar codes when assigning tools and accepting returns. Tracking software sends the pertinent information to a database that can also be used for browsing, billing and running reports. In addition, the program records repair histories and maintenance schedules.
The cost of bar-code technology varies, depending on the number of features included in the system configuration. How complex a system you’ll need will depend on the number of items you’re looking to track. But if you’re already using this technology to manage inventory, there may be economies of scale by choosing a system that can handle both types of assets.
Bar-code technology also has the power to improve management efficiency. How? You can let employees know that, if the system shows that the tools they’ve checked out haven’t been returned, the employee or the job they’re working on could be charged for the missing item. Thus, employees will more closely monitor and protect these items to avoid paying for lost items or having a project go over budget.
The right system may also reduce your legal liability. In some industries, federal regulations or union rules may require workers to wear safety gear, such as goggles, hard hats and respirators. A formal tracking system allows you to show that you issued employees the proper equipment, which could in turn limit your accident liability.
To take bar-code tracking to the next level, integrate it into your accounting system. For example, you might assign tools by employee name, job code, project number, date, time, location or other criteria. Then you can generate a report of employees or projects where specific tools are being used.
In turn, you’ll foster an atmosphere of accountability by making managers and employees more responsible for these assets. There’s no better way to drive home a point about wasted assets or money than to sit down with employees and show them, in dollars and cents, how a tool is being misused.
Bar-code technology isn’t new, but it’s become more cost effective and robust. Even if you’ve been working with this technology for several years, it’s time to consider upgrades that you might have missed — or new vendors with tighter security measures or innovative features.
For help evaluating your current system or investing in a new one, contact your CPA. He or she has helped other companies implement this technology and knows industry best practices and potential pitfalls to avoid.
Are you charitably minded and have a significant amount of money in an IRA? If you’re age 70½ or older, and don’t need the money from required minimum distributions, you may benefit by giving these amounts to charity.
IRA distribution basics
A popular way to transfer IRA assets to charity is through a tax provision that allows IRA owners who are 70½ or older to give up to $100,000 per year of their IRA distributions to charity. These distributions are called qualified charitable distributions, or QCDs. The money given to charity counts toward the donor’s required minimum distributions (RMDs), but doesn’t increase the donor’s adjusted gross income or generate a tax bill.
So while QCDs are exempt from federal income taxes, other traditional IRA distributions are taxable (either wholly or partially depending on whether you’ve made any nondeductible contributions over the years).
Unlike regular charitable donations, QCDs can’t be claimed as itemized deductions.
Keeping the donation out of your AGI may be important because doing so can:
In addition, keep in mind that charitable contributions don’t yield a tax benefit for those individuals who no longer itemize their deductions (because of the larger standard deduction under the Tax Cuts and Jobs Act). So those who are age 70½ or older and are receiving RMDs from IRAs may gain a tax advantage by making annual charitable contributions via a QCD from an IRA. This charitable contribution will reduce RMDs by a commensurate amount, and the amount of the reduction will be tax-free.
There’s a $100,000 limit on total QCDs for any one year. But if you and your spouse both have IRAs set up in your respective names, each of you is entitled to a separate $100,000 annual QCD limit, for a combined total of $200,000.
The QCD strategy can be a smart tax move for high-net-worth individuals over 70½ years old. If you’re interested in this opportunity, don’t wait until year end to act. Contact us for more information.
To properly fulfill their fiduciary duties, your not-for-profit’s board needs certain information. And it’s up to the executive director and managers to ensure they have it. This doesn’t mean you have to share every internal email, memo or phone message. Board members are busy and you don’t want to bog them down with superfluous reading material. However, there are several types of information you must share so that they can make informed decisions.
Financial data and filings
The first is financial information. To fully understand your nonprofit’s position, the board must receive copies of your Form 990. The board president or treasurer should review this document and approve it before it’s filed.
The board also must get the results of any audit you’ve conducted, salary information for key staff and monthly and quarterly financial reports showing income and expenses. If your organization provides directors and officers insurance, provide proof to board members.
Strategic information includes reports on your nonprofit’s work, such as how programs are being carried out and how they’re used, progress on event timelines, and membership statistics. If your organization collects information from the audience it serves through formal or informal means, provide at least an executive summary of your findings to your board.
Occasionally sharing with the board articles that relate to your nonprofit’s mission, locations or audiences also may be useful.
Board member info
To help foster teamwork and commitment to the cause, ask that members share brief bios and other relevant background information. Also publicly share thank-yous when board members make special efforts — whether those efforts are individual (such as securing an event sponsor) or group (performing due diligence on a new executive director).
How do you know whether a piece of information should be shared with your board? Ultimately, if it’s something that will help them serve your nonprofit, it’s something you should share.
The right entity choice can make a difference in the tax bill you owe for your business. Although S corporations can provide substantial tax advantages over C corporations in some circumstances, there are plenty of potentially expensive tax problems that you should assess before making the decision to convert from a C corporation to an S corporation.
Here’s a quick rundown of four issues to consider:
LIFO inventories. C corporations that use last-in, first-out (LIFO) inventories must pay tax on the benefits they derived by using LIFO if they convert to S corporations. The tax can be spread over four years. This cost must be weighed against the potential tax gains from converting to S status.
Built-in gains tax. Although S corporations generally aren’t subject to tax, those that were formerly C corporations are taxed on built-in gains (such as appreciated property) that the C corporation has when the S election becomes effective, if those gains are recognized within five years after the conversion. This is generally unfavorable, although there are situations where the S election still can produce a better tax result despite the built-in gains tax.
Passive income. S corporations that were formerly C corporations are subject to a special tax. That tax kicks in if their passive investment income (including dividends, interest, rents, royalties, and stock sale gains) exceeds 25% of their gross receipts, and the S corporation has accumulated earnings and profits carried over from its C corporation years. If that tax is owed for three consecutive years, the corporation’s election to be an S corporation terminates. You can avoid the tax by distributing the accumulated earnings and profits, which would be taxable to shareholders. Or you might want to avoid the tax by limiting the amount of passive income.
Unused losses. If your C corporation has unused net operating losses, they can’t be used to offset its income as an S corporation and can’t be passed through to shareholders. If the losses can’t be carried back to an earlier C corporation year, it will be necessary to weigh the cost of giving up the losses against the tax savings expected to be generated by the switch to S status.
These are only some of the factors to consider when a business switches from C to S status. For example, shareholder-employees of S corporations can’t get all of the tax-free fringe benefits that are available with a C corporation. And there may be issues for shareholders who have outstanding loans from their qualified plans. These factors have to be taken into account in order to understand the implications of converting from C to S status.
Contact us. We can explain how these factors will affect your company’s situation and come up with strategies to minimize taxes.
The use of so-called “profits interest” awards as a tool to attract and retain skilled workers has increased, as more companies are being structured as limited liability companies (LLCs), rather than as corporations. But accounting complexity has caused some private companies to shy away from these arrangements. Fortunately, relief from the Financial Accounting Standards Board (FASB) may be coming soon.
New twist on equity compensation
Corporations tend to award traditional stock options. But profits interests are used exclusively by LLCs. As the name suggests, these arrangements provide recipients with a share of the company’s future profits. Under existing U.S. Generally Accepted Accounting Principles (GAAP), these transactions may be classified as:
The classification is determined by the specific terms and features of the profits interest. In most cases, the fair value of the award must be recorded as an income statement expense. Profits interest can also result in the recognition of a liability on the balance sheet and require footnote disclosures.
Need for simplification
Profits interest arrangements can accomplish a variety of business objectives. Though they’re most often awarded to employees, profits interests can also be given to investors, third-party service providers and other individuals.
These awards are usually issued in exchange for future services, without direct payment or financial investment. Various terms and features can be incorporated into a profits interest. For example, these awards often have contingency features, such as vesting requirements, participation thresholds, the occurrence of certain events, limited time periods, expiration dates and forfeiture provisions. In turn, this variability can cause additional complexity compared to other forms of equity compensation and require special valuation techniques.
“Profits interest continues to come up as an area private companies are struggling with,” said Candace Wright, Chair of the Private Company Council (PCC) during a meeting with the FASB earlier this year. Private companies have been clamoring for practical expedients and additional guidance from the FASB on such issues as acceptable valuation methods, audit techniques and disclosure requirements.
Work in progress
Simplification of the financial reporting guidance would be welcome news for employers, employees and other stakeholders. Contact us for help reporting these transactions under existing U.S. GAAP or for an update on the latest developments from the FASB.
If you’re planning to sell assets at a loss to offset gains that have been realized during the year, it’s important to be aware of the “wash sale” rule.
How the rule works
Under this rule, if you sell stock or securities for a loss and buy substantially identical stock or securities back within the 30-day period before or after the sale date, the loss can’t be claimed for tax purposes. The rule is designed to prevent taxpayers from using the tax benefit of a loss without parting with ownership in any significant way. Note that the rule applies to a 30-day period before or after the sale date to prevent “buying the stock back” before it’s even sold. (If you participate in any dividend reinvestment plans, the wash sale rules may be inadvertently triggered when dividends are reinvested under the plan, if you’ve separately sold some of the same stock at a loss within the 30-day period.)
Keep in mind that the rule applies even if you repurchase the security in a tax-advantaged retirement account, such as a traditional or Roth IRA.
Although the loss can’t be claimed on a wash sale, the disallowed amount is added to the cost of the new stock. So, the disallowed amount can be claimed when the new stock is finally disposed of (other than in a wash sale).
Here’s an example
Let’s say you buy 500 shares of XYZ Inc. for $10,000 and sell them on November 5 for $3,000. On November 29, you buy 500 shares of XYZ again for $3,200. Since the shares were “bought back” within 30 days of the sale, the wash sale rule applies. Therefore, you can’t claim a $7,000 loss. Your basis in the new 500 shares is $10,200: the actual cost plus the $7,000 disallowed loss.
If only a portion of the stock sold is bought back, only that portion of the loss is disallowed. So, in the above example, if you’d only bought back 300 of the 500 shares (60%), you would be able to claim 40% of the loss on the sale ($2,800). The remaining $4,200 loss that is disallowed under the wash sale rule would be added to your cost of the 300 shares.
If you’ve cashed in some big gains in 2019, you may be looking for unrealized losses in your portfolio so you can sell those investments before year end. By doing so, you can offset your gains with your losses and reduce your 2019 tax liability. But don’t run afoul of the wash sale rule. Contact us if you have any questions.
Some of your not-for-profit’s communications are of interest only to a select group of your supporters. But your organization’s annual report is for all stakeholders — donors, grantmakers, clients, volunteers, watchdog groups and the government.
Some report elements are nonnegotiable, such as financial statements. But you also have plenty of creative license to make your report engaging and memorable for its wide-ranging audience.
First things first
Most nonprofit annual reports consist of several standard sections, starting with the Chairman of the Board’s letter. This executive summary should provide an overview of your nonprofit’s activities, accomplishments and anything else worth highlighting. Next is the directors and officers list. The biggest task here is to make sure all names, professional affiliations and designations are accurate and spelled correctly.
Then there’s the financial information section, which generally is subdivided into three sections:
You can make your financial statements easier to understand by creating an abbreviated version with a synopsis that quickly gets to the heart of the matter. Where applicable, use simple graphs, diagrams and other visual aids to highlight specific points.
Meat of the matter
A “Description” is the other major section in a typical annual report, and it’s where you can — and should — get creative. First, explain your organization’s mission, goals and strategies for reaching those goals. Then, describe who benefits from your organization’s services and how they contribute to the community.
So that your report does justice to this work, include client testimonials where those you’ve helped tell their own story in a personal way. Or create a timeline that enables readers to see the progress you’ve made toward a long-term goal.
Your annual report should be as visually exciting as it is interesting to read, with engaging photos, arresting graphics and innovative layouts. Make sure your graphic designer has experience with annual reports — preferably those of nonprofits — and understands the brand, values and image your organization wants to convey.
Even if you’re proud of the finished product, make sure you survey stakeholders. Or convene a small focus group to find out what your report’s readers liked — and what they didn’t find as effective. Then apply these insights to next year’s effort.
Is your business depreciating over a 30-year period the entire cost of constructing the building that houses your operation? If so, you should consider a cost segregation study. It may allow you to accelerate depreciation deductions on certain items, thereby reducing taxes and boosting cash flow. And under current law, the potential benefits of a cost segregation study are now even greater than they were a few years ago due to enhancements to certain depreciation-related tax breaks.
Business buildings generally have a 39-year depreciation period (27.5 years for residential rental properties). Most times, you depreciate a building’s structural components, including walls, windows, HVAC systems, elevators, plumbing and wiring, along with the building. Personal property — such as equipment, machinery, furniture and fixtures — is eligible for accelerated depreciation, usually over five or seven years. And land improvements, such as fences, outdoor lighting and parking lots, are depreciable over 15 years.
Often, businesses allocate all or most of their buildings’ acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. In some cases — computers or furniture, for example — the distinction between real and personal property is obvious. But the line between the two is frequently less clear. Items that appear to be “part of a building” may in fact be personal property, like removable wall and floor coverings, removable partitions, awnings and canopies, window treatments, signs and decorative lighting.
In addition, certain items that otherwise would be treated as real property may qualify as personal property if they serve more of a business function than a structural purpose. This includes reinforced flooring to support heavy manufacturing equipment, electrical or plumbing installations required to operate specialized equipment, or dedicated cooling systems for data processing rooms.
Identifying and substantiating costs
A cost segregation study combines accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. Although the relative costs and benefits of a cost segregation study depend on your particular facts and circumstances, it can be a valuable investment.
Speedier depreciation tax breaks
The Tax Cuts and Jobs Act (TCJA) enhances certain depreciation-related tax breaks, which may also enhance the benefits of a cost segregation study. Among other things, the act permanently increased limits on Section 179 expensing, which allows you to immediately deduct the entire cost of qualifying equipment or other fixed assets up to specified thresholds.
The TCJA also expanded 15-year-property treatment to apply to qualified improvement property. Previously this break was limited to qualified leasehold-improvement, retail-improvement and restaurant property. And it temporarily increased first-year bonus depreciation to 100% (from 50%).
Making favorable depreciation changes
Fortunately, it isn’t too late to get the benefit of speedier depreciation for items that were incorrectly assumed to be part of your building for depreciation purposes. You don’t have to amend your past returns (or meet a deadline for claiming tax refunds) to claim the depreciation that you could have already claimed. Instead, you can claim that depreciation by following procedures, in connection with the next tax return that you file, that will result in “automatic” IRS consent to a change in your accounting for depreciation.
Cost segregation studies can yield substantial benefits, but they’re not right for every business. We must judge whether a study will result in overall tax savings greater than the costs of the study itself. To find out whether this would be worthwhile for you, contact us.
In financial reporting, investors and business owners tend to focus on four key metrics: 1) revenue, 2) net income, 3) total assets and 4) net worth. But, when it comes to gauging short-term financial performance and creditworthiness, the trump card is cash flow.
If a business doesn’t have enough cash on hand to pay payroll, rent and other bills, it can spell disaster — no matter how profitable the company is or how fast it’s growing. That’s why you can’t afford to cast aside the statement of cash flows and the important insight it can provide.
The statement of cash flows reveals clues about a company’s ability to manage cash. It shows changes in balance sheet items from one accounting period to the next. Special attention should be given to significant balance changes.
For example, if accounts receivable were $1 million in 2018 and $2 million in 2019, the change would be reported as a cash outflow of $1 million. That’s because more money was tied up in receivables in 2019 than in 2018. An increase in receivables is common for growing businesses, because receivables generally grow in proportion to revenue. But a mounting receivables balance also might signal cash management inefficiencies. Additional financial information — such as an aging schedule — might reveal significant write-offs.
Continually reporting negative cash flows from operations can also signal danger. There’s a limit to how much money a company can get from selling off its assets, issuing new stock or taking on more debt. A red flag should go up when operating cash outflows consistently outpace operating inflows. It can signal weaknesses, such as out-of-control growth, poor inventory management, mounting costs and weak customer demand.
Categorizing cash flows
The statement of cash flows typically consists of three sections:
1. Cash flows from operations. This section converts accrual net income to cash provided or used by operations. All income-related items flow through this part of the cash flow statement, such as net income; gains (or losses) on asset sales; depreciation and amortization; and net changes in accounts receivable, inventory, prepaid assets, accrued expenses and payables.
2. Cash flows from investing activities. If a company buys or sells property, equipment or marketable securities, the transaction shows up here. This section could reveal whether a company is divesting assets for emergency funds or whether it’s reinvesting in future operations.
3. Cash flows from financing activities. This shows transactions with investors and lenders. Examples include Treasury stock purchases, additional capital contributions, debt issuances and payoffs, and dividend payments.
Below these three categories is the schedule of noncash investing and financing transactions. This portion of the cash flow statement summarizes significant transactions in which cash did not directly change hands: for example, like-kind exchanges or assets purchased directly with loan proceeds.
Keep a watchful eye
Effective cash management can be the difference between staying afloat and filing for bankruptcy — especially in an unpredictable economy. Contact us to help identify potential problems and find solutions to shore up inefficiencies and shortfalls.
There are several ways to save for your child’s or grandchild’s education, including with a Coverdell Education Savings Account (ESA). Although for federal tax purposes there’s no upfront deduction for contributions made to an ESA, the earnings on the contributions grow tax-free. In addition, no tax is due when the funds in the account are distributed, to the extent the amounts withdrawn don’t exceed the child’s qualified education expenses.
Qualified expenses include higher education tuition, fees, books and room, as well as elementary and secondary school expenses.
The annual limit that can be contributed to a child’s ESA is $2,000 per year — from all contributors for all ESAs for the same child. The maximum dollar amount that any individual can contribute is phased out if the contributor’s adjusted gross income (with certain modifications) exceeds $95,000 ($190,000 for married joint filers).
However, this phaseout is easily avoided. A child can contribute to his or her own ESA, so a parent or other person whose contribution may be limited by the phaseout rule can give the money to an ESA as custodian for the child. Under those circumstances, the child is considered to be the contributor and, if the child’s adjusted gross income is below $95,000, the phaseout won’t apply.
Contributions that exceed $2,000 in total for a child for a year are subject to a 6% penalty tax until the excess (plus earnings) are withdrawn.
How long can you make ESA contributions? They can be made until a child reaches age 18 (but this age limit doesn’t apply to a beneficiary with special needs who requires additional time to complete his or her education). A beneficiary doesn’t have to be your own child.
Taking money out
Withdrawals from an ESA during a year that exceed the child’s qualified education expenses for that year are included in the child’s income (to the extent of the earnings portion of the distribution) and are also subject to an additional 10% tax.
Tax-free transfers or rollovers of account balances from an ESA benefiting one beneficiary to another account benefiting another person are allowed, if the new beneficiary hasn’t reached 30, and is a member of the family of the old beneficiary. (The age limit doesn’t apply to a beneficiary with special needs.)
If you’re interested in discussing a Coverdell ESA, or other education planning options, please contact us.
If your not-for-profit owns its own facility, it likely will have more control of work space than if you lease. However, ownership carries risks — and leasing can provide several advantages. If you’re trying to make a buy-or-lease decision, be sure to weigh the following factors.
Equity in owning
Buying a facility allows your nonprofit to build equity, and it can stabilize your cash flow and presence in the community. Owning can also be important if you want to accommodate special needs and configure and equip your space to certain specifications. For example, a physical therapy center might need to buy a facility because it plans to construct a swimming pool and locker rooms.
But when buying, it’s easy to bite off more than you can chew. Some organizations fail to project negative scenarios such as a funding drop or local government assessments. And there’s the risk of plummeting resale values. If you bought, what would happen if the neighborhood surrounding your building changed or if it were no longer near your client base?
Flexibility in leasing
Leasing office space or a facility can offer more flexibility than ownership. Say you’re uncertain about your client base and your organization could experience substantial growth or decline. It’s far easier to move when your lease expires than to sell real estate.
Perhaps you can secure an attractive long-term lease, one that guarantees only modest rent increases, and allows (and sometimes finances) reconfiguring the space to meet your needs. Another lease plus: Most repair headaches — and expenses — will be your landlord’s.
On the other hand, monthly rent can take a big bite from your budget with little return, and the cost can increase dramatically when it’s time to renew your lease. Fire insurance and real estate taxes also can be the renter’s responsibility if you have what’s called “a triple net lease.”
Sometimes it’s difficult to decide whether to lease or buy the space you need for operations. In such cases, cost analysis can help you make an informed decision.
On the buying side, consider the property’s:
On the leasing side, gather information on the projected lease term, rate and renewal options available. Also estimate how much interest could accrue on the capital you would spend on a down payment, if you invested that money. Contact us for help crunching the numbers.
Given the escalating cost of employee health care benefits, your business may be interested in providing some of these benefits through an employer-sponsored Health Savings Account (HSA). For eligible individuals, HSAs offer a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs. Here are the key tax benefits:
Who is eligible?
To be eligible for an HSA, an individual must be covered by a “high deductible health plan.” For 2019, a “high deductible health plan” is one with an annual deductible of at least $1,350 for self-only coverage, or at least $2,700 for family coverage. For self-only coverage, the 2019 limit on deductible contributions is $3,500. For family coverage, the 2019 limit on deductible contributions is $7,000. Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits cannot exceed $6,750 for self-only coverage or $13,500 for family coverage.
An individual (and the individual’s covered spouse, as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2019 of up to $1,000.
If an employer contributes to the HSA of an eligible individual, the employer’s contribution is treated as employer-provided coverage for medical expenses under an accident or health plan and is excludable from an employee’s gross income up to the deduction limitation. There’s no “use-it-or-lose-it” provision, so funds can be built up for years. An employer that decides to make contributions on its employees’ behalf must generally make comparable contributions to the HSAs of all comparable participating employees for that calendar year. If the employer doesn’t make comparable contributions, the employer is subject to a 35% tax on the aggregate amount contributed by the employer to HSAs for that period.
HSA distributions can be made to pay for qualified medical expenses, which generally mean those expenses that would qualify for the medical expense itemized deduction. They include expenses such as doctors’ visits, prescriptions, chiropractic care and premiums for long-term care insurance.
If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it’s made after reaching age 65, or in the event of death or disability.
As you can see, HSAs offer a flexible option for providing health care coverage, but the rules are somewhat complex. Contact us if you’d like to discuss offering this benefit to your employees.
Did you know that the Financial Accounting Standards Board (FASB) recently extended the simplified private-company accounting alternatives to not-for-profit organizations? Many merging nonprofits, including educational institutions and hospitals, welcome these practical expedients. Here are the details.
Alternative for goodwill
The first alternative accounting method allows for the amortization of goodwill on a straight-line basis over 10 years (or less if a shorter useful life is more appropriate). It applies only to:
Once an alternative has been elected, the organization must apply all the alternative’s subsequent measurement, derecognition, presentation and disclosure requirements to existing goodwill and all future additions to goodwill that fall within the scope of the accounting alternative.
Upon adoption of the accounting alternative, the organization must decide whether to test goodwill at either the entity level or the reporting unit level. However, annual impairment testing isn’t required under the alternative. Rather, testing for impairment is required only if a triggering event occurs that indicates that the fair value of the nonprofit entity (or the reporting unit) may be below its carrying amount.
Alternative for identifiable intangible assets
The second accounting alternative allows a nonprofit organization to bypass the separate recognition of noncompete agreements and customer-related intangible assets unless they can be sold or licensed independently from other assets of a business. In other words, such items would be considered part of goodwill. Nonprofits that elect this alternative would recognize fewer intangible assets in a business combination.
It applies to nonprofit organizations that are required to recognize or consider fair value of intangible assets when:
If an organization decides to elect the accounting alternative for accounting for identifiable intangible assets, it also must adopt the accounting alternative for goodwill. However, a nonprofit that elects to adopt the accounting alternative for goodwill isn’t required to adopt the accounting alternative for accounting for identifiable intangible assets.
Effective date and transition
Nonprofits can immediately elect to use these alternative reporting methods. If elected, the goodwill accounting alternative should be applied prospectively to all existing goodwill and for all new goodwill generated in acquisitions. And the alternative for accounting for identifiable intangible assets should be applied prospectively upon the occurrence of the first transaction within the scope of the alternative. Contact us for more information. Our accounting professionals can help determine if these alternatives are right for your organization.
“Thousands of people have lost millions of dollars and their personal information to tax scams,” according to the IRS. Criminals can contact victims through regular mail, telephone calls and email messages. Here are just two of the scams the tax agency has seen in recent months.
If you receive a text, letter, email or phone call purporting to be from the IRS, keep in mind that the IRS never calls taxpayers demanding immediate payment using a specific method of payment (such as a wire transfer or prepaid debit card). In general, the IRS sends bills or notices to taxpayers and gives them time to respond with questions or appeals. The tax agency also doesn’t threaten taxpayers with arrest.
In addition, the IRS doesn’t initiate contact by email, text message or social media channels to request information. Most contacts are initiated though regular mail delivered by the U.S. Postal Service. The IRS does use authorized private collection agencies to collect some overdue tax bills but these agencies also follow the same rules.
In some special circumstances, the IRS does call taxpayers or come to their homes or businesses. For example, the IRS may tour a business as part of an audit or during a criminal investigation. But even in those cases, taxpayers will generally receive several mailed IRS notices before the visit. And the IRS never demands that payment be made to any source other than the “United States Treasury.”
What to do if you’re contacted
You can contact us if the IRS gets in touch with you. If the contact involves a phone call, hang up immediately. You can forward an email or other tax-related scam to the IRS at firstname.lastname@example.org. To report an IRS impersonation scam, visit the Treasury Inspector General for Tax Administration at target="_blank">https://bit.ly/1ClYZbP. Be aware that criminals keep evolving their scams in an effort to steal people’s money and personal information. Remain on alert.
It’s no secret that this is a challenging time for charitable fundraising. In its annual Giving USA 2019 report, the Giving USA Foundation noted a decrease in individual and household giving, blaming such impersonal factors as tax law changes and a wobbly stock market.
So why not fight back by making personal appeals to supporters? Requests from friends or family members have traditionally been significant donation drivers. Even in the age of social media “influencers,” prospective donors are more likely to contribute to the causes championed by people they actually know and trust.
The dedicated members of your board can be particularly effective fundraisers. But make sure they have the information and training necessary to be successful when reaching out to their networks.
When making a personal appeal to prospective donors, your board members should:
Meet in person. Letters and email can help save time, but face-to-face appeals are more effective. This is especially true if your nonprofit offers donors something in exchange for their attention. For instance, they’re more likely to be swayed at an informal coffee hour or after-work cocktail gathering hosted by a board member.
Humanize the cause. Say that your charity raises money for cancer treatment. If board members have been impacted by the disease, they might want to relate their personal experiences as a means of illustrating why they support the organization’s work.
Highlight benefits. Even when appealing to potential donors’ philanthropic instincts, it’s important to mention other possible benefits. For example, if your organization is trying to encourage local business owners to attend a charity event, board members should promote the event’s networking opportunities and public recognition (if applicable).
Consider equipping board members with a wish list of specific items or services your nonprofit needs. Some of their friends or family members may not be able to support your cause with a monetary donation but can contribute goods (such as auction items) or in-kind services (such as technology expertise).
If you’re concerned about declining donations and need help finding new revenue streams, contact us for ideas.
As an employer, you must pay federal unemployment (FUTA) tax on amounts up to $7,000 paid to each employee as wages during the calendar year. The rate of tax imposed is 6% but can be reduced by a credit (described below). Most employers end up paying an effective FUTA tax rate of 0.6%. An employer taxed at a 6% rate would pay FUTA tax of $420 for each employee who earned at least $7,000 per year, while an employer taxed at 0.6% pays $42.
Unlike FICA taxes, only employers — and not employees — are liable for FUTA tax. Most employers pay both federal and a state unemployment tax. Unemployment tax rates for employers vary from state to state. The FUTA tax may be offset by a credit for contributions paid into state unemployment funds, effectively reducing (but not eliminating) the net FUTA tax rate.
However, the amount of the credit can be reduced — increasing the effective FUTA tax rate —for employers in states that borrowed funds from the federal government to pay unemployment benefits and defaulted on repaying the loan.
Some services performed by an employee aren’t considered employment for FUTA purposes. Even if an employee’s services are considered employment for FUTA purposes, some compensation received for those services — for example, most fringe benefits — aren’t subject to FUTA tax.
Recognizing the insurance principle of taxing according to “risk,’’ states have adopted laws permitting some employers to pay less. Your unemployment tax bill may be influenced by the number of former employees who’ve filed unemployment claims with the state, the current number of employees you have and the age of your business. Typically, the more claims made against a business, the higher the unemployment tax bill.
Here are four ways to help control your unemployment tax costs:
1. If your state permits it, “buy down” your unemployment tax rate. Some states allow employers to annually buy down their rate. If you’re eligible, this could save you substantial unemployment tax dollars.
2. Hire conservatively and assess candidates. Your unemployment payments are based partly on the number of employees who file unemployment claims. You don’t want to hire employees to fill a need now, only to have to lay them off if business slows. A temporary staffing agency can help you meet short-term needs without permanently adding staff, so you can avoid layoffs.
It’s often worth having job candidates undergo assessments before they’re hired to see if they’re the right match for your business and the position available. Hiring carefully can increase the likelihood that new employees will work out.
3. Train for success. Many unemployment insurance claimants are awarded benefits despite employer assertions that the employees failed to perform adequately. This may occur because the hearing officer concludes the employer didn’t provide the employee with enough training to succeed in the job.
4. Handle terminations carefully. If you must terminate an employee, consider giving him or her severance as well as outplacement benefits. Severance pay may reduce or delay the start of unemployment insurance benefits. Effective outplacement services may hasten the end of unemployment insurance benefits, because a claimant finds a new job.
If you have questions about unemployment taxes and how you can reduce them, contact us. We’d be pleased to help.
Technology is altering the traditional approach to internal audits. Instead of reviewing reams of paperwork, today’s auditor is learning to use electronic records. In turn, going paperless facilitates a concept known as “continuous auditing,” where internal auditors continually gather data to support their procedures. Here’s how your business can modernize this process.
Targeting specific areas
Not every functional area of your company lends itself to paperless and continuous auditing. To determine whether sufficient, timely and accurate electronic data exists, you’ll need to review the systems that store and generate your company’s data.
For example, if a portion of your inventory accounting processes still relies on paper, it may not present an ideal candidate for paperless and continuous auditing. Alternatively, if your accounts payable (AP) process functions entirely on electronic records, it’s logical to include AP in the continuous audit program.
Planning the program
Before you can adopt a continuous audit program, you must determine:
Then you can design your program accordingly. For example, if you plan to continuously audit the AP process and you’re concerned about occupational fraud, you may decide to put a rule in place that looks for the creation of vendors whose address matches that of an employee.
From a practical perspective, it’s important to document how often you plan to sample the data that the continuous audit program makes available. Keep in mind that a daily review of the output often generates the greatest benefit.
To help ensure accountability, a process must exist to review and evaluate the audit output. For example, if the review of employee payroll data uncovers unusual payroll disbursements, a process must exist to investigate those discrepancies.
The individual who should be responsible for reviewing the data will depend on the size and structure of your company. It could fall to the internal audit department, someone within the fraud team or a department manager.
Time for change?
Robust internal audits help management correct operational issues quickly, which prevents money from being wasted and risks from spiraling out of control. If implemented correctly, paperless and continuous auditing can improve your company’s internal audit and oversight abilities while also reducing its costs. Contact us for help converting paper records to an electronic format, as well as planning and implementing a continuous internal audit program that targets the optimal areas of your business operations.
As we head toward the gift-giving season, you may be considering giving gifts of cash or securities to your loved ones. Taxpayers can transfer substantial amounts free of gift taxes to their children and others each year through the use of the annual federal gift tax exclusion. The amount is adjusted for inflation annually. For 2019, the exclusion is $15,000.
The exclusion covers gifts that you make to each person each year. Therefore, if you have three children, you can transfer a total of $45,000 to them this year (and next year) free of federal gift taxes. If the only gifts made during the year are excluded in this way, there’s no need to file a federal gift tax return. If annual gifts exceed $15,000, the exclusion covers the first $15,000 and only the excess is taxable. Further, even taxable gifts may result in no gift tax liability thanks to the unified credit (discussed below).
Note: this discussion isn’t relevant to gifts made from one spouse to the other spouse, because these gifts are gift tax-free under separate marital deduction rules.
Gifts by married taxpayers
If you’re married, gifts to individuals made during a year can be treated as split between you and your spouse, even if the cash or gift property is actually given to an individual by only one of you. By “gift-splitting,” up to $30,000 a year can be transferred to each person by a married couple, because two annual exclusions are available. For example, if you’re married with three children, you and your spouse can transfer a total of $90,000 each year to your children ($30,000 × 3). If your children are married, you can transfer $180,000 to your children and their spouses ($30,000 × 6).
If gift-splitting is involved, both spouses must consent to it. We can assist you with preparing a gift tax return (or returns) to indicate consent.
“Unified” credit for taxable gifts
Even gifts that aren’t covered by the exclusion, and that are therefore taxable, may not result in a tax liability. This is because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $11,400,000 (for 2019). However, to the extent you use this credit against a gift tax liability, it reduces (or eliminates) the credit available for use against the federal estate tax at your death.
Giving gifts of appreciated assets
Let’s say you own stocks and other marketable securities (outside of your retirement accounts) that have skyrocketed in value since they were acquired. A 15% or 20% tax rate generally applies to long-term capital gains. But there’s a 0% long-term capital gains rate for those in lower tax brackets. Even if your income is high, your family members in lower tax brackets may be able to benefit from the 0% long-term capital gains rate. Giving them appreciated stock instead of cash might allow you to eliminate federal tax liability on the appreciation, or at least significantly reduce it. The recipients can sell the assets at no or a low federal tax cost. Before acting, make sure the recipients won’t be subject to the “kiddie tax,” and consider any gift and generation-skipping transfer (GST) tax consequences.
Annual gifts are only one way to transfer wealth to your loved ones. There may be other effective tax and estate planning tools. Contact us before year end to discuss your options.
One of the worst things that can happen to a not-for-profit organization is to have its tax-exempt status revoked. Among other consequences, the nonprofit may lose credibility with supporters and the public, and donors will no longer be able to make tax-exempt contributions.
Although loss of exempt status isn’t common, certain activities can increase your risk significantly. These include ignoring the IRS’s private benefit and private inurement provisions. Here’s what you need to know to avoid reaping an excess benefit from your organization’s transactions.
Understand private inurement
A private benefit is any payment or transfer of assets made, directly or indirectly, by your nonprofit that’s:
If any of your nonprofit’s net earnings inure to the benefit of an individual, the IRS won’t view your nonprofit as operating primarily to further its tax-exempt purpose.
The private inurementrules extend the private benefit prohibition to your organization’s “insiders.” The term “insider” or “disqualified person” generally refers to any officer, director, individual or organization (as well as their family members and organizations they control) who’s in a position to exert significant influence over your nonprofit’s activities and finances. A violation occurs when a transaction that ultimately benefits the insider is approved.
Make reasonable payments
Of course, the rules don’t prohibit all payments, such as salaries and wages, to an insider. You simply need to make sure that any payment is reasonable relative to the services or goods provided. In other words, the payment must be made with your nonprofit’s tax-exempt purpose in mind.
To ensure you can later prove that any transaction was reasonable and made for a valid exempt purpose, formally document all payments made to insiders. Also ensure that board members understand their duty of care. This refers to a board member’s responsibility to act in good faith, in your organization’s best interest, and with such care that proper inquiry, skill and diligence has been exercised in the performance of duties.
Avoid negative consequences
To ensure your nonprofit doesn’t participate in an excess benefit transaction, educate staffers and board members about the types of activities and transactions they must avoid. Stress that individuals involved could face significant excise tax penalties. For more information, please contact us.
Many business owners ask: How can I avoid an IRS audit? The good news is that the odds against being audited are in your favor. In fiscal year 2018, the IRS audited approximately 0.6% of individuals. Businesses, large corporations and high-income individuals are more likely to be audited but, overall, audit rates are historically low.
There’s no 100% guarantee that you won’t be picked for an audit, because some tax returns are chosen randomly. However, completing your returns in a timely and accurate fashion with our firm certainly works in your favor. And it helps to know what might catch the attention of the IRS.
Audit red flags
A variety of tax-return entries may raise red flags with the IRS and may lead to an audit. Here are a few examples:
Certain types of deductions may be questioned by the IRS because there are strict recordkeeping requirements for them ― for example, auto and travel expense deductions. In addition, an owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can catch the IRS’s eye, especially if the business is structured as a corporation.
How to respond
If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS won’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.
Many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the harshest version, the field audit, requires meeting with one or more IRS auditors. (Note: Ignore unsolicited email messages about an audit. The IRS doesn’t contact people in this manner. These are scams.)
Keep in mind that the tax agency won’t demand an immediate response to a mailed notice. You’ll be informed of the discrepancies in question and given time to prepare. You’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.
If the IRS chooses you for an audit, our firm can help you:
Don’t panic if you’re contacted by the IRS. Many audits are routine. By taking a meticulous, proactive approach to how you track, document and file your company’s tax-related information, you’ll make an audit much less painful and even decrease the chances that one will happen in the first place.
Business assets are generally reported at the lower of cost or market value. Under this accounting principle, certain assets are reported at fair value, such as asset retirement obligations and derivatives.
Fair value also comes into play in M&A transactions. That is, if one company acquires another, the buyer must allocate the purchase price of the target company to its assets and liabilities. This allocation requires the valuation of identifiable intangible assets that weren’t on the target company’s balance sheet, such as brands, patents, customer lists and goodwill.
What is fair value?
Under U.S. Generally Accepted Accounting Principles (GAAP), fair value is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Though this term is similar to “fair market value,” which is defined in IRS Revenue Ruling 59-60, the terms aren’t synonymous.
The FASB chose the term “fair value” to prevent companies from applying IRS regulations or guidance and U.S. Tax Court precedent when valuing assets and liabilities for financial reporting purposes.
The FASB’s use of the term “market participants” refers to buyers and sellers in the item’s principal market. This market is entity specific and may vary among companies.
What goes into a fair value estimate?
When valuing an asset, there are three general valuation approaches: cost, income and market. For financial reporting purposes, fair value should first be based on quoted prices in active markets for identical assets and liabilities. When that information isn’t available, fair value should be based on observable market data, such as quoted prices for similar items in active markets.
In the absence of observable market data, fair value should be based on unobservable inputs. Examples include cash-flow projections prepared by management or other internal financial data.
While a CFO or controller can enlist the help of outside valuation specialists to estimate fair value, a company’s management is ultimately responsible for fair value estimates. So, it’s important to understand the assumptions, methods and models underlying a fair value estimate. Management also must implement adequate internal controls over fair value measurements, impairment charges and disclosures.
Valuation pros needed
Asset valuations are typically outside the comfort zone of in-house accounting personnel, so it pays to hire an outside specialist who will get it right. We can help you evaluate subjective inputs and methods, as well as recommend additional controls over the process to ensure that you’re meeting your financial reporting responsibilities.
You may have Series EE savings bonds that were bought many years ago. Perhaps you store them in a file cabinet or safe deposit box and rarely think about them. You may wonder how the interest you earn on EE bonds is taxed. And if they reach final maturity, you may need to take action to ensure there’s no loss of interest or unanticipated tax consequences.
Series EE Bonds dated May 2005 and after earn a fixed rate of interest. Bonds purchased between May 1997 and April 30, 2005, earn a variable market-based rate of return.
Paper Series EE bonds were sold at half their face value. For example, if you own a $50 bond, you paid $25 for it. The bond isn’t worth its face value until it has matured. (The U.S. Treasury Department no longer issues EE bonds in paper form.) Electronic Series EE Bonds are sold at face value and are worth their full value when available for redemption.
The minimum term of ownership is one year, but a penalty is imposed if the bond is redeemed in the first five years. The bonds earn interest for 30 years.
How they’re taxed
Series EE bonds don’t pay interest currently. Instead, the accrued interest is reflected in the redemption value of the bond. The U.S. Treasury issues tables showing the redemption values.
The interest on EE bonds isn’t taxed as it accrues unless the owner elects to have it taxed annually. If an election is made, all previously accrued but untaxed interest is also reported in the election year. In most cases, this election isn’t made so bond holders receive the benefits of tax deferral.
If the election to report the interest annually is made, it will apply to all bonds and for all future years. That is, the election cannot be made on a bond-by-bond or year-by-year basis. However, there’s a procedure under which the election can be canceled.
If the election isn’t made, all of the accrued interest is finally taxed when the bond is redeemed or otherwise disposed of (unless it was exchanged for a Series HH bond). The bond continues to accrue interest even after reaching its face value, but at “final maturity” (after 30 years) interest stops accruing and must be reported.
Note: Interest on EE bonds isn’t subject to state income tax. And using the money for higher education may keep you from paying federal income tax on your interest.
Deferral won’t last forever
One of the principal reasons for buying EE bonds is the fact that interest can build up without having to currently report or pay tax on it. Unfortunately, the law doesn’t allow for this tax-free buildup to continue indefinitely. When the bonds reach final maturity, they stop earning interest.
Series EE bonds issued in January 1989 reached final maturity after 30 years, in January 2019. That means that not only have they stopped earning interest, but all of the accrued and as yet untaxed interest is taxable in 2019.
If you own EE bonds (paper or electronic), check the issue dates on your bonds. If they’re no longer earning interest, you probably want to redeem them and put the money into something more lucrative. Contact us if you have any questions about the taxability of savings bonds, including Series HH and Series I bonds.
Who would defraud a kids’ organization? The answer, unfortunately, is that trusted adults sometimes steal from not-for-profits benefiting children. Youth sports leagues and teams, for example, are ripe for fraud. Cash transactions are common, and coaches and board members usually are volunteers with little accountability.
If you or your children are involved in a youth sports league, here’s what you can do to ensure that its funds support the kids, not thieves.
By far the most important step leagues can take is to segregate duties. This means that no single individual receives, records and deposits funds coming in, pays bills and reconciles bank statements.
So one person might handle deposits and payments, another would receive and reconcile bank statements and a third would monitor the budget. Also, every payment (or at least payments over a certain threshold) should be signed by two individuals. If your league has credit or debit cards, someone who isn’t an authorized card user should be assigned to review the statements.
Some simple steps
Other procedures can help prevent fraud. For example, if your league still uses paper registrations and accepts payment by cash or check, look into electronic payment options. Cash can be pocketed in the blink of an eye, and checks can be diverted to thieves’ own accounts. But with online registration, payments are deposited directly into the league’s account.
Also, monitor your league’s treasurer. People in this position are the most likely youth sports league officials to commit fraud because they have the easiest access to funds and the ability to cover their tracks. No one person should stay in the treasurer position for more than a couple of years. If funds are available, your league might consider hiring a part-time bookkeeper who will report directly to the board.
The treasurer should submit a report to the board of directors for every board meeting, with bank statements attached. And your board should receive and review financial reports at least quarterly — including when the league isn’t in season.
What fraud perpetrators hope
You may have a hard time believing that anyone in your community would steal from a youth organization. But that’s just what fraud perpetrators hope you’ll think. So put some basic fraud controls in place; then sit back and enjoy the game!
These days, most businesses need a website to remain competitive. It’s an easy decision to set one up and maintain it. But determining the proper tax treatment for the costs involved in developing a website isn’t so easy.
That’s because the IRS hasn’t released any official guidance on these costs yet. Consequently, you must apply existing guidance on other costs to the issue of website development costs.
Hardware and software
First, let’s look at the hardware you may need to operate a website. The costs involved fall under the standard rules for depreciable equipment. Specifically, once these assets are up and running, you can deduct 100% of the cost in the first year they’re placed in service (before 2023). This favorable treatment is allowed under the 100% first-year bonus depreciation break.
In later years, you can probably deduct 100% of these costs in the year the assets are placed in service under the Section 179 first-year depreciation deduction privilege. However, Sec. 179 deductions are subject to several limitations.
For tax years beginning in 2019, the maximum Sec. 179 deduction is $1.02 million, subject to a phaseout rule. Under the rule, the deduction is phased out if more than a specified amount of qualified property is placed in service during the year. The threshold amount for 2019 is $2.55 million.
There’s also a taxable income limit. Under it, your Sec. 179 deduction can’t exceed your business taxable income. In other words, Sec. 179 deductions can’t create or increase an overall tax loss. However, any Sec. 179 deduction amount that you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable limits).
Similar rules apply to purchased off-the-shelf software. However, software license fees are treated differently from purchased software costs for tax purposes. Payments for leased or licensed software used for your website are currently deductible as ordinary and necessary business expenses.
Software developed internally
If your website is primarily for advertising, you can also currently deduct internal website software development costs as ordinary and necessary business expenses.
An alternative position is that your software development costs represent currently deductible research and development costs under the tax code. To qualify for this treatment, the costs must be paid or incurred by December 31, 2022.
A more conservative approach would be to capitalize the costs of internally developed software. Then you would depreciate them over 36 months.
Third party payments
Some companies hire third parties to set up and run their websites. In general, payments to third parties are currently deductible as ordinary and necessary business expenses.
Before business begins
Start-up expenses can include website development costs. Up to $5,000 of otherwise deductible expenses that are incurred before your business commences can generally be deducted in the year business commences. However, if your start-up expenses exceed $50,000, the $5,000 current deduction limit starts to be chipped away. Above this amount, you must capitalize some, or all, of your start-up expenses and amortize them over 60 months, starting with the month that business commences.
We can help
We can determine the appropriate treatment for these costs for federal income tax purposes. Contact us if you have questions or want more information.
Audited financial statements come with a special bonus: a “management letter” that recommends ways to improve your business. That’s free advice from financial pros who’ve seen hundreds of businesses at their best (and worst) and who know which strategies work (and which don’t). If you haven’t already implemented changes based on last year’s management letter, there’s no time like the present to improve your business operations.
Auditing standards require auditors to communicate in writing about “material weaknesses or significant deficiencies” that are discovered during audit fieldwork.
The AICPA defines material weakness as “a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.” Likewise, a significant deficiency is defined as “a deficiency, or a combination of deficiencies, in internal control that is … important enough to merit attention by those charged with governance.”
Auditors may unearth less-severe weaknesses and operating inefficiencies during the course of an audit. Reporting these items is optional, but they’re often included in the management letter.
Looking beyond internal controls
Auditors may observe a wide range of issues during audit fieldwork. An obvious example is internal control shortfalls. But other issues covered in a management letter may relate to:
Management letters are usually organized by functional area: production, warehouse, sales and marketing, accounting, human resources, shipping/receiving and so forth. The write-up for each deficiency includes an observation (including a cause, if observed), financial and qualitative impacts, and a recommended course of action.
Striving for continuous improvement
Too often, management letters are filed away with the financial statements — and the same issues are reported in the management letter year after year. But proactive business owners and management recognize the valuable insight contained in these letters and take corrective action soon after they’re received. Contact us to help get the ball rolling before the start of next year’s audit.
We all know the cost of college is expensive. The latest figures from the College Board show that the average annual cost of tuition and fees was $10,230 for in-state students at public four-year universities — and $35,830 for students at private not-for-profit four-year institutions. These amounts don’t include room and board, books, supplies, transportation and other expenses that a student may incur.
Two tax credits
Fortunately, the federal government offers two sizable tax credits for higher education costs that you may be able to claim:
1. The American Opportunity credit. This tax break generally provides the biggest benefit to most taxpayers. The American Opportunity credit provides a maximum benefit of $2,500. That is, you may qualify for a credit equal to 100% of the first $2,000 of expenses for the year and 25% of the next $2,000 of expenses. It applies only to the first four years of postsecondary education and is available only to students who attend at least half time.
Basically, tuition, course materials and fees qualify for this credit. The credit is per eligible student and is subject to phaseouts based on modified adjusted gross income (MAGI). For 2019, the MAGI phaseout ranges are:
2. The Lifetime Learning credit. This credit equals 20% of qualified education expenses for up to $2,000 per tax return. There are fewer restrictions to qualify for this credit than for the American Opportunity credit.
The Lifetime Learning credit can be applied to education beyond the first four years, and qualifying students may attend school less than half time. The student doesn’t even need to be part of a degree program. So, the credit works well for graduate studies and part-time students who take a qualifying course at a local college to improve job skills. It applies to tuition, fees and materials.
It’s also subject to phaseouts based on MAGI, however. For 2019, the MAGI phaseout ranges are:
Note: You can’t claim either the American Opportunity Credit or the Lifetime Learning Credit for the same student or for the same expense in the same year.
Credit for what you’ve paid
So which higher education tax credit is right for you? A number of factors need to be reviewed before determining the answer to that question. Contact us for more information about how to take advantage of tax-favored ways to save or pay for college.
Many not-for-profit organizations use fundraising methods that cross state boundaries. If your nonprofit is one of them, it may need to register in multiple jurisdictions. But keep in mind that registration requirements vary — sometimes dramatically — from state to state. So be sure to determine your obligations before you invest time and money in registering.
The critical activity
How do you know if your nonprofit needs to register in other states? The critical activity is soliciting donations, not receiving them.So if your charity receives occasional contributions from out-of-state donors, you may not need to register in those states if you never asked for the contributions.However, email and text blasts and social media appeals are likely to be considered multistate solicitations.
Even so, a handful of state don’t require certain nonprofits to register. For example, they may exempt houses of worship as well as nonprofits with total annual income under certain thresholds. Other states may require charities to register but exempt them annual filing. All of the states have varying rules, income thresholds, exceptions, registration fees and fines for violations. Even the agencies that regulate charities differ by state.
No easy way
Unfortunately, there isn’t a simple way to register with every state. Most states require you to complete a general information form and submit it with:
Registration fees range from $0 to $2,000.
First-time registrants can use a Unified Registration Statement in most states. However, even those states mandate that annual renewals and reports be submitted using individual state forms.
If your nonprofit fails to register in states where it raises funds, the consequences can be severe.Your organization, officers and board members could face civil and criminal penalties. Your charity might lose its ability to solicit funds in certain states or even lose its tax-exempt status with the IRS. Nonprofits must alsolist the states where they’re registered on their Form 990s.
For some nonprofits — particularly smaller organizations — cross-state registration requirements and potential penalties may lead them to limit fundraising to their own states. Contact us for help determining your registration obligations.
Do you want to withdraw cash from your closely held corporation at a low tax cost? The easiest way is to distribute cash as a dividend. However, a dividend distribution isn’t tax-efficient, since it’s taxable to you to the extent of your corporation’s “earnings and profits.” But it’s not deductible by the corporation.
Fortunately, there are several alternative methods that may allow you to withdraw cash from a corporation while avoiding dividend treatment. Here are five ideas:
1. Capital repayments. To the extent that you’ve capitalized the corporation with debt, including amounts that you’ve advanced to the business, the corporation can repay the debt without the repayment being treated as a dividend. Additionally, interest paid on the debt can be deducted by the corporation. This assumes that the debt has been properly documented with terms that characterize debt and that the corporation doesn’t have an excessively high debt-to-equity ratio. If not, the “debt” repayment may be taxed as a dividend. If you make cash contributions to the corporation in the future, consider structuring them as debt to facilitate later withdrawals on a tax-advantaged basis.
2. Salary. Reasonable compensation that you, or family members, receive for services rendered to the corporation is deductible by the business. However, it’s also taxable to the recipient. The same rule applies to any compensation (in the form of rent) that you receive from the corporation for the use of property. In either case, the amount of compensation must be reasonable in relation to the services rendered or the value of the property provided. If it’s excessive, the excess will be nondeductible and treated as a corporate distribution.
3. Loans. You may withdraw cash from the corporation tax-free by borrowing money from it. However, to avoid having the loan characterized as a corporate distribution, it should be properly documented in a loan agreement or a note and be made on terms that are comparable to those on which an unrelated third party would lend money to you. This should include a provision for interest and principal. All interest and principal payments should be made when required under the loan terms. Also, consider the effect of the corporation’s receipt of interest income.
4. Fringe benefits. Consider obtaining the equivalent of a cash withdrawal in fringe benefits that are deductible by the corporation and not taxable to you. Examples are life insurance, certain medical benefits, disability insurance and dependent care. Most of these benefits are tax-free only if provided on a nondiscriminatory basis to other employees of the corporation. You can also establish a salary reduction plan that allows you (and other employees) to take a portion of your compensation as nontaxable benefits, rather than as taxable compensation.
5. Property sales. You can withdraw cash from the corporation by selling property to it. However, certain sales should be avoided. For example, you shouldn’t sell property to a more than 50% owned corporation at a loss, since the loss will be disallowed. And you shouldn’t sell depreciable property to a more than 50% owned corporation at a gain, since the gain will be treated as ordinary income, rather than capital gain. A sale should be on terms that are comparable to those on which an unrelated third party would purchase the property. You may need to obtain an independent appraisal to establish the property’s value.
If you’re interested in discussing any of these ideas, contact us. We can help you get the maximum out of your corporation at the minimum tax cost.
More than half of recent college graduates plan to start a business someday, according to the results of a survey published in August by the American Institute of Certified Public Accountants (AICPA). Unfortunately, the AICPA estimates that only half of new businesses survive the five-year mark, and only about one in three reach the 10-year mark.
What can you do to improve your start-up’s odds of success? Comprehensive, realistic budgets can help entrepreneurs navigate the challenges that lie ahead.
3 financial statements
Many businesses base their budgets on the prior year’s financial results. But start-ups lack historical financial statements, which can make budgeting difficult.
In your first year of operation, it’s helpful to create an annual budget that forecasts all three financial statements on a monthly basis:
1. The income statement. Start your annual budget by estimating how much you expect to sell each month. Then estimate direct costs (such as materials, labor, sales tax and shipping) based on that sales volume. Many operating costs, such as rent, salaries and insurance, will be fixed over the short run.
Once you spread overhead costs over your sales, it’s unlikely that you’ll report a net profit in your first year of operation. Profitability takes time and hard work! Once you turn a profit, however, remember to save room in your budget for income taxes.
2. The balance sheet. To start generating revenue, you’ll also need equipment and marketing materials (including a website). Other operating assets (like accounts receivable and inventory) typically move in tandem with revenue. How will you finance these assets? Entrepreneurs may invest personal funds, receive money from other investors or take out loans. These items fall under liabilities and equity on the balance sheet.
3. The statement of cash flows. This report tracks sources and uses of cash from operating, investing and financing activities. Essentially, it shows how your business will make ends meet each month. In addition to acquiring assets, start-ups need cash to cover fixed expenses each month.
By forecasting these statements on a monthly basis, you can identify when cash shortfalls, as well as seasonal peaks and troughs, are likely to occur.
Budgeting isn’t a static process. Each month, entrepreneurs must compare actual results to the budget — and then adjust the budget based on what they’ve learned. For instance, you may have underbudgeted or overbudgeted on some items and, thus, spent more or less than you anticipated.
Some variances may be the result of macroeconomic forces. For example, increased government regulation, new competition or an economic downturn can adversely affect your budget. Although these items may be outside of an entrepreneur’s control, it’s important to identify them early and develop a contingency plan before variances spiral out of control.
An accounting professional can help your start-up put together a realistic budget based on industry benchmarks and demand for your products and services in the marketplace. A CPA-prepared budget can serve as more than just a management tool — it also can be presented to lenders and investors who want to know more about your start-up’s operations.
In addition to the difficult personal issues that divorce entails, several tax concerns need to be addressed to ensure that taxes are kept to a minimum and that important tax-related decisions are properly made. Here are four issues to understand if you are in the process of getting a divorce.
A range of other issues
These are just some of the issues you may have to deal with if you’re getting a divorce. In addition, you must decide how to file your tax return (single, married filing jointly, married filing separately or head of household). You may need to adjust your income tax withholding and you should notify the IRS of any new address or name change. There are also estate planning considerations. We can help you work through all of the financial issues involved in divorce.
Borrowing isn’t just for businesses. Many not-for-profits borrow money for major capital purchases, new program funding and even to manage current cash flow. But if you’re hoping to borrow, it’s important to understand that there are likely to be obstacles ahead, including finding a lender that offers reasonable rates.
Maybe you’ve already determined that your nonprofit needs a loan and can handle the risks of borrowing. Before making the case to lenders, ensure you have a realistic repayment plan, current financial statements, collateral to secure the loan, a proven history of prudent financial management and your board’s support.
The odds of qualifying for a loan are better if you’ve already established a relationship (such as having a business checking account) with the lender. Your reason for applying also plays a big part in the decision. Seeking money to make a major purchase or to stabilize cash flow with a line of credit is more likely to be successful than applying for a loan to start a new program.
Even if you succeed in getting a loan, lender covenants may prevent you from borrowing for other purposes until your existing debt is paid off. This can limit strategic flexibility.
While plenty of banks are willing to make term loans or lines of credit available to nonprofits, your organization may not want, or be able, to pay the interest rates attached to them. Fortunately, there are other options, including:
Community foundations. Short-term loans may be available from local nonprofit foundations or funds, such as the Fund for the City of New York or the Chicago Community Trust, or from national groups such as the Nonprofits Assistance Fund. Generally, these organizations charge low interest rates — and, in some cases, no interest at all.
Board members. There are no legal obstacles to borrowing from a board member, but these loans merit caution. To avoid IRS scrutiny, the board member must charge interest at or below market rate, the entire board (absent the lender) must vote to approve the loan, and you must report the loan on your Form 990.
Government bonds. Because these bonds’ income isn’t subject to federal income tax, your nonprofit may be able to borrow at a lower-than-market interest rate. However, fees associated with structuring and issuing the bond could offset interest-rate advantages.
You may think your organization has a good rationale for borrowing, but that doesn’t mean lenders — or your supporters — will agree. If a large portion of your budget is tied up in debt repayment, that can affect how the public, including prospective donors, perceives your organization. Contact us for help weighing this critical decision and finding a lender.
Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2019. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
Has your organization received any public or private grants to fund its growth? Grants sometimes require an independent audit by a qualified accounting firm. Here’s what grant recipients should know to help facilitate matters and ensure compliance at all levels.
Federal awards require compliance with the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (also known as 2 CFR Part 200). This guidance requires any entity that expends $750,000 or more of federal assistance received for its operations to undergo a “single audit,” which is a rigorous, organizationwide examination.
To provide grant recipients with the latest guidance on compliance, the Office of Management and Budget (OMB) releases an annual compliance supplement. It covers compliance requirements for a dozen areas when performing a single audit:
The supplement also includes sections dedicated to agency program requirements, including clusters of programs that share common compliance requirements.
Your auditor will assess whether your organization has sufficient internal controls in each of the 12 areas. To help ensure compliance, your organization should clearly document decisions and processes, as well as provide a clear audit trail of activity.
Other levels of compliance
The requirements for state, local and private sector grants vary significantly. But compliance generally hinges on the following, regardless of the source providing the funding:
In addition, your auditor will evaluate whether your organization is willing to adapt to regulatory changes. For example, has it adopted new grant controls to accommodate best practices or legislative changes?
We can help
If juggling multiple levels of grant compliance seems overwhelming, contact us to learn how to streamline your approach. We can help your organization improve its ability to satisfy grant requirements at multiple levels.
If you’re self-employed and don’t have withholding from paychecks, you probably have to make estimated tax payments. These payments must be sent to the IRS on a quarterly basis. The third 2019 estimated tax payment deadline for individuals is Monday, September 16. Even if you do have some withholding from paychecks or payments you receive, you may still have to make estimated payments if you receive other types of income such as Social Security, prizes, rent, interest, and dividends.
You must make sufficient federal income tax payments long before the April filing deadline through withholding, estimated tax payments, or a combination of the two. If you fail to make the required payments, you may be subject to an underpayment penalty, as well as interest.
In general, you must make estimated tax payments for 2019 if both of these statements apply:
If you’re a sole proprietor, partner or S corporation shareholder, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.
Quarterly due dates
Estimated tax payments are spread out through the year. The due dates are April 15, June 15, September 15 and January 15 of the following year. However, if the date falls on a weekend or holiday, the deadline is the next business day (which is why the third deadline is September 16 this year).
Estimated tax is calculated by factoring in expected gross income, taxable income, deductions and credits for the year. The easiest way to pay estimated tax is electronically through the Electronic Federal Tax Payment System. You can also pay estimated tax by check or money order using the Estimated Tax Payment Voucher or by credit or debit card.
Most individuals make estimated tax payments in four installments. In other words, you can determine the required annual payment, divide the number by four and make four equal payments by the due dates. But you may be able to make smaller payments under an “annualized income method.” This can be useful to people whose income isn’t uniform over the year, perhaps because of a seasonal business. For example, let’s say your income comes exclusively from a business that you operate in a beach town during June, July and August. In this case, with the annualized income method, no estimated payment would be required before the usual September 15 deadline. You may also want to use the annualized income method if a large portion of your income comes from capital gains on the sale of securities that you sell at various times during the year.
Determining the correct amount
Contact us if you think you may be eligible to determine your estimated tax payments under the annualized income method, or you have any other questions about how the estimated tax rules apply to you.
When you receive a personal gift from a friend or family member — even if it’s not something you particularly want — you accept the gift and thank the person. The same isn’t always true of gifts given to your not-for-profit. Gifts should be examined, and, possibly, refused.
Why? There are many reasons, from space limitations to unsuitability to your mission. It’s never easy to say “no” to a generous donor. But a gift acceptance policy can make the decision and process easier.
A gift acceptance policy provides an objective way to decline a gift but still maintain a good relationship with the contributor. Your nonprofit’s staffers can explain to donors that a previously set policy prohibits you from accepting certain gifts — in other words, “it’s nothing personal.”
For example, if a donor offers tangible personal property such as an art collection, it may need insurance, special display cases or offsite storage. This could require your organization to incur substantial out-of-pocket costs. You can simply explain to the donor that your policy doesn’t allow you to accept gifts that cost money to maintain.
Getting it down
Before drafting your policy, think about the types of gifts you want to accept and which ones you should refuse. In general, gifts that conflict with your organization’s mission fall in the latter category. And gifts with certain donor restrictions (such as how they can be used) may simply be unmanageable given your mission’s scope or staffing resources.
Most organizations welcome publicly traded securities because they’re easy to convert to cash. But closely held stock can be hard to value and sell. Split interest gifts, where the donor transfers an asset to your organization but draws income from the asset or receives a remainder interest at some point in the future, can also be difficult to manage. These gifts usually require financial expertise and involve obligations to the donor or the donor’s family.
Your policy should not only describe the kinds of gifts that are acceptable, but also how they’ll be valued, managed and, if necessary, disposed of. Be sure to indicate which types of gifts need to be reviewed by your attorney — for example, real estate, because it could have property liens and other encumbrances.
Ask your attorney and financial advisor to review your policy before giving it to your board for approval. Then review it annually. Over time, your capacity to accept certain gifts may change and require revisions to your policy.
If you’re a small business owner or you’re involved in a start-up, you may want to set up a tax-favored retirement plan for yourself and any employees. Several types of plans are eligible for tax advantages.
One of the best-known retirement plan options is the 401(k) plan. It provides for employer contributions made at the direction of employees. Specifically, the employee elects to have a certain amount of pay deferred and contributed by the employer on his or her behalf to an individual account. Employee contributions can be made on a pretax basis, saving employees current income tax on the amount contributed.
Employers may, or may not, provide matching contributions on behalf of employees who make elective deferrals to 401(k) plans. Establishing and operating a 401(k) plan means some up-front paperwork and ongoing administrative effort. Matching contributions may be subject to a vesting schedule. 401(k) plans are subject to testing requirements, so that highly compensated employees don’t contribute too much more than non-highly compensated employees. However, these tests can be avoided if you adopt a “safe harbor” 401(k) plan.
Within limits, participants can borrow from a 401(k) account (assuming the plan document permits it).
For 2019, the maximum amount you can contribute to a 401(k) is $19,000, plus a $6,000 “catch-up” amount for those age 50 or older as of December 31, 2019.
Other tax-favored plans
Of course, a 401(k) isn’t your only option. Here’s a quick rundown of two other alternatives that are simpler to set up and administer:
1. A Simplified Employee Pension (SEP) IRA. For 2019, the maximum amount of deductible contributions that you can make to an employee’s SEP plan, and that he or she can exclude from income, is the lesser of 25% of compensation or $56,000. Your employees control their individual IRAs and IRA investments.
2. A SIMPLE IRA. SIMPLE stands for “savings incentive match plan for employees.” A business with 100 or fewer employees can establish a SIMPLE. Under one, an IRA is established for each employee, and the employer makes matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The maximum amount you can contribute to a SIMPLE in 2019 is $13,000, plus a $3,000 “catch-up” amount if you’re age 50 or older as of December 31, 2019.
Annual contributions to a SEP plan and a SIMPLE are controlled by special rules and aren’t tied to the normal IRA contribution limits. Neither type of plan requires annual filings or discrimination testing. You can’t borrow from a SEP plan or a SIMPLE.
These are only some of the retirement savings options that may be available to your business. We can discuss the alternatives and help find the best option for your situation.
What’s the purpose of a corporation? For the last 50 years, the answer was “to maximize shareholder value.” But, on August 19, CEOs of 181 leading U.S. businesses, including Amazon, Apple, General Motors and Walmart, pledged to broaden the scope.
Beyond shareholder value
Putting shareholders first was the doctrine of University of Chicago economist Milton Friedman. In 1970, he famously wrote that “the social responsibility of business is to increase its profits.” While this mindset has enriched large shareholders, it’s also had negative consequences, including pay disparities between executives and frontline workers, layoffs and pollution.
Last year, Chairman of the Business Roundtable Jamie Dimon launched a project to update its principles. The new version of its Principles of Corporate Governance looks beyond delivering value to shareholders. It also recognizes the importance of:
For many business leaders who signed the new statement of purpose, these objectives represent a fundamental change in longstanding business principles. “Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term. These modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans,” said Chairman Dimon.
What you can do
Translating the statement’s lofty principles into concrete business practices will be challenging, especially if the changes cause earnings to fall over the short run. The key will be getting investor and lender buy-in by effectively communicating the link between adopting so-called “sustainable” business practices and building long-term shareholder value.
For example, identifying and successfully navigating sustainability issues can add value by building trust with stakeholders, providing improved access to capital and reduced borrowing costs, and enhancing customer and employee loyalty. Tracking sustainability also helps companies identify ways to reduce their energy consumption, streamline their supply chains, eliminate waste and operate more efficiently.
Conversely, aggressive tax strategies and regulatory violations can lead to fines, remedial costs and reputational damage. And the sale of toxic or unsafe products can result in product liability lawsuits, recalls and boycotts.
Disclosing the changes
Do your company’s financial statements include sustainability disclosures? Though they’re currently voluntary under U.S. Generally Accepted Accounting Principles (GAAP) and the financial reporting rules of the Securities and Exchange Commission (SEC), they can be worthwhile. These disclosures provide insight into various nonfinancial issues, such as:
Our auditors can help you draft disclosures that explain your sustainability efforts to stakeholders in a clear, objective manner and establish links to financial performance. Contact us for more information.
As teachers head back for a new school year, they often pay for various expenses for which they don’t receive reimbursement. Fortunately, they may be able to deduct them on their tax returns. However, there are limits on this special deduction, and some expenses can’t be written off.
For 2019, qualifying educators can deduct some of their unreimbursed out-of-pocket classroom costs under the educator expense deduction. This is an “above-the-line” deduction, which means you don’t have to itemize your deductions in order to claim it.
Here are some details about the educator expense deduction:
Educators should keep receipts when they make eligible expenses and note the date, amount and purpose of each purchase.
Teachers or professors may see advertisements for job-related courses in out-of-town or exotic locations. You may have wondered whether traveling to these courses is tax-deductible on teachers’ tax returns. The bad news is that, for tax years 2018–2025, it isn’t, because the outlays are employee business expenses.
Prior to 2018, employee business expenses could be claimed as miscellaneous itemized deductions. However, under the Tax Cuts and Jobs Act, miscellaneous itemized deductions aren’t deductible by individuals for tax years 2018–2025.
Most not-for-profit board members are unpaid volunteers. They’ve agreed to serve because they care about your mission and the impact your organization is making. You owe it to them to make the job as easy as possible — starting with well-organized board meetings that are only as long as necessary.
Setting the agenda
The key to effective board meetings is good planning. Once the meeting date is set, your executive director and board chair should prepare an agenda. To ensure the meeting will cover all pressing concerns, email board members to ask if there’s anything they want to add.
For each item, the agenda should provide a timetable and assign responsibility to specific members. Include at least one board vote to reinforce a sense of purpose and accomplishment, but be careful not to cram too much into your agenda. Otherwise, the meeting is likely to feel rushed and some items may need to be postponed to a future meeting.
Distribute a board packet at least one to two days before the meeting. This packetshould consist of the agenda, minutes from the previous meeting and materials relevant to new agenda items, such as financial statements and project proposals.
Keeping things moving
Start with a short premeeting reception that allows members to chat. Some board members have little time to spare, but most will welcome the opportunity to get to know their colleagues. Staff should help facilitate communication by introducing any new members to the group and ensuring people mingle.
During the meeting itself, your executive director and board chair should stick to the agenda and keep things moving. This means imposing a time limit on discussions and calling time when necessary — particularly if one or two individuals are dominating the conversation.
Encourage a vote after a reasonable period. But if your organization requires a consensus (as opposed to a majority vote), the board may not be able to reach a decision in one meeting. If members need more time to think about or research an issue, postpone the decision to a future date and move on.
Finally, end the meeting on a positive note: Remind board members why they’re there and thank them for their time.
Board meetings can’t be effective if there’s no follow-up. Find answers and supporting materials for any questions that might have arisen during the meeting and make sure unresolved items are placed on the next meeting’s agenda.
Also ensure that board members are fulfilling their commitments to your organization and fellow members. If their busy schedules are impeding them, step in and help. If the issue continues, consider replacing the board member.
The average company’s balance sheet understates its value by 80%, according to Sarah Tomolonius, co-founder of the Sustainability Investment Leadership Council. Why? Intangible assets aren’t recorded on the balance sheet under U.S. Generally Accepted Accounting Principles (GAAP), unless they’re acquired from a third party.
Instead, GAAP generally calls for the costs associated with creating and maintaining these valuable assets to be expensed as they’re incurred — even though they provide future economic benefits.
Eye on intangibles
Many companies rely on intangible assets to generate revenue, and they often contribute significant value to the companies that own them. Examples of identifiable intangibles include:
In a business combination, acquired intangible assets are reported at fair value. When a company is purchased, any excess purchase price that isn’t allocated to identifiable tangible and intangible assets and liabilities is allocated to goodwill.
Acquired goodwill and other indefinite-lived intangibles are tested at least annually for impairment under GAAP. But private companies may elect to amortize them over a period not to exceed 10 years. Impairment testing also may be required when a triggering event happens, such as the loss of a major customer or introduction of new technology that makes the company’s offerings obsolete.
Inquiring minds want to know
Investors are interested in the fair value of acquired goodwill because it enables them to see how a business combination fared in the long run. But what about intangibles that are developed in-house?
At a sustainability conference earlier in May, Tomolonius said that businesses are more sustainable when they’re guided by a complete understanding of their assets, both tangible and intangible. Assigning values to internally generated intangibles can be useful in various decision-making scenarios, including obtaining financing, entering into licensing and joint venture arrangements, negotiating mergers and acquisitions, and settling shareholder disputes.
Calls for change
For more than a decade, there have been calls for accounting reforms related to intangible assets, with claims that internally generated intangibles are the new drivers of economic activity and should be reflected in balance sheets. Proponents of changing the rules argue that keeping these assets off the balance sheet forces investors to rely more on nonfinancial tools to assess a company’s value and sustainability.
It’s unlikely that the accounting rules for reporting internally generated intangibles will change anytime soon, however. In a quarterly report released in August, Financial Accounting Standards Board (FASB) member Gary Buesser pointed to challenges the issue would pose, including the difficulty of recognizing and measuring the assets, costs to companies, and limited usefulness of the resulting information to investors. Buesser explained that “the information would be highly subjective, require forward looking estimates, and would probably not be comparable across companies.”
Want to learn more about your “untouchable” intangible assets? We can help you identify them and estimate their value, using objective, market-based appraisal techniques. Contact us for more information.
If you’re like many people, you’ve worked hard to accumulate a large nest egg in your traditional IRA (including a SEP-IRA). It’s even more critical to carefully plan for withdrawals from these retirement-savings vehicles.
Knowing the fine points of the IRA distribution rules can make a significant difference in how much you and your family will get to keep after taxes. Here are three IRA areas to understand:
Keep more of your money
Prudently planning how to take money out of your traditional IRA can mean more money for you and your heirs. Keep in mind that Roth IRAs operate under a different set of rules than traditional IRAs. Contact us to review your traditional and Roth IRAs, and to analyze other aspects of your retirement planning.
You may think that only large, well-endowed not-for-profits require the advice of an investment manager. But even smaller nonprofits with modest endowments — particularly smaller nonprofits that don’t have in-house financial expertise — can benefit from hiring an investment professional.
Finding qualified candidates
Finding the right investment consultant for your organization starts with identifying a pool of qualified candidates with proven track records. Ask for referrals from local private foundations (possibly ones that have funded you in the past) or other area nonprofits. Also, members of your board may know investment managers they can recommend. Qualified candidates should have experience working with nonprofit endowments.
Request detailed proposals from candidates on how they’d manage your investments — as well as how they wish to be compensated for their services. Generally, investment managers charge clients based on one (or a combination) of three structures: 1) fees or commissions on trades; 2) a percentage of the asset values they’re managing; or 3) an hourly rate. Many nonprofits prefer that their investment manager’s compensation be based on asset value or hours, rather than commissions.
After reviewing the candidates’ proposals and checking their references, allow search committee members to talk to other nonprofit leaders to gauge their satisfaction level with your short list. Then select two or three people to interview.
Members of your board’s investment or finance committee should interview the candidates carefully. They should look for someone who closely follows market movements and trends, has a thorough understanding of different types of investments, and is capable of creating and managing a balanced portfolio that can grow without incurring excessive risk. Understanding the candidates’ investment processes, along with their long-term results, is essential.
Other desirable qualities include experience assisting investment committees in drafting and changing investment policies and an ability to clearly explain the processes and considerations behind their investment decisions. To get at some of these issues, committee members might ask candidates their advice for an organization that’s more (or less) risk averse than a traditional nonprofit. Or based on what they know of your organization, what changes to the current investment strategy might they propose?
Good candidates should express empathy toward the kinds of problems facing your organization and suggest investment solutions specific to your nonprofit. And they should have the time to properly manage your investments. Ask how many hours per month they anticipate spending on your account and whether they’d be able to attend off-hour meetings, if necessary.
Trusting your choice
Finally, consider how much you trust the candidate. Don’t engage an investment manager for your nonprofit unless you’d wholeheartedly trust the person to handle your personal life savings. For advisor recommendations, contact us.
The use of a company vehicle is a valuable fringe benefit for owners and employees of small businesses. This benefit results in tax deductions for the employer as well as tax breaks for the owners and employees using the cars. (And of course, they get the nontax benefits of driving the cars!) Even better, recent tax law changes and IRS rules make the perk more valuable than before.
Here’s an example
Let’s say you’re the owner-employee of a corporation that’s going to provide you with a company car. You need the car to visit customers, meet with vendors and check on suppliers. You expect to drive the car 8,500 miles a year for business. You also expect to use the car for about 7,000 miles of personal driving, including commuting, running errands and weekend trips with your family. Therefore, your usage of the vehicle will be approximately 55% for business and 45% for personal purposes. You want a nice car to reflect positively on your business, so the corporation buys a new luxury $50,000 sedan.
Your cost for personal use of the vehicle will be equal to the tax you pay on the fringe benefit value of your 45% personal mileage. By contrast, if you bought the car yourself to be able to drive the personal miles, you’d be out-of-pocket for the entire purchase cost of the car.
Your personal use will be treated as fringe benefit income. For tax purposes, your corporation will treat the car much the same way it would any other business asset, subject to depreciation deduction restrictions if the auto is purchased. Out-of-pocket expenses related to the car (including insurance, gas, oil and maintenance) are deductible, including the portion that relates to your personal use. If the corporation finances the car, the interest it pays on the loan would be deductible as a business expense (unless the business is subject to business-interest limitation under the tax code).
In contrast, if you bought the auto yourself, you wouldn’t be entitled to any deductions. Your outlays for the business-related portion of your driving would be unreimbursed employee business expenses that are nondeductible from 2018 to 2025 due to the suspension of miscellaneous itemized deductions under the Tax Cuts and Jobs Act. And if you financed the car yourself, the interest payments would be nondeductible.
And finally, the purchase of the car by your corporation will have no effect on your credit rating.
Providing an auto for an owner’s or key employee’s business and personal use comes with complications and paperwork. Personal use will have to be tracked and valued under the fringe benefit tax rules and treated as income. This article only explains the basics.
Despite the necessary valuation and paperwork, a company-provided car is still a valuable fringe benefit for business owners and key employees. It can provide them with the use of a vehicle at a low tax cost while generating tax deductions for their businesses. We can help you stay in compliance with the rules and explain more about this prized perk.
Operating a business as an S corporation may provide many advantages, including limited liability for owners and no double taxation (at least at the federal level). Self-employed people may also be able to lower their exposure to Social Security and Medicare taxes if they structure their businesses as S corps for federal tax purposes. But not all businesses are eligible — and with changes under the Tax Cuts and Jobs Act, S corps may not be as appealing as they once were.
Compare and contrast
The main reason why businesses elect S corp status is to obtain the limited liability of a corporation and the ability to pass corporate income, losses, deductions and credits through to shareholders. In other words, S corps generally avoid double taxation of corporate income — once at the corporate level and again when it’s distributed to shareholders. Instead, tax items pass through to the shareholders’ personal returns, and they pay tax at their individual income tax rates.
But double taxation may be less of a concern today due to the 21% flat income tax rate that now applies to C corporations. Meanwhile, the top individual income tax rate is 37%. S corp owners may be able to take advantage of the qualified business income (QBI) deduction, which can be equal to as much as 20% of QBI.
In order to assess S corp status, you have to run the numbers with your tax advisor, and factor in state taxes to determine which structure will be the most beneficial for you and your business.
S corp qualifications
If you decide to go the S corp route, make sure you qualify and will stay qualified. To be eligible to elect to be an S corp or to convert, your business must:
In addition, certain businesses are ineligible, such as financial institutions and insurance companies.
Base compensation on what’s reasonable
Another important consideration when electing S status is shareholder compensation. One strategy for paying less in Social Security and Medicare employment taxes is to pay modest salaries to yourself and any other S corp shareholder-employees. Then, pay out the remaining corporate cash flow (after you’ve retained enough in the company’s accounts to sustain normal business operations) as federal-employment-tax-free cash distributions.
However, the IRS is on the lookout for S corps that pay shareholder-employees unreasonably low salaries to avoid paying employment taxes and then make distributions that aren’t subject to those taxes.
Paying yourself a modest salary will work if you can prove that your salary is reasonable based on market levels for similar jobs. Otherwise, you run the risk of the IRS auditing your business and imposing back employment taxes, interest and penalties. We can help you decide on a salary and gather proof that it’s reasonable.
Consider all angles
Contact us if you think being an S corporation might help reduce your tax bill while still providing liability protection. We can help with the mechanics of making an election or making a conversion, under applicable state law, and then handling the post-conversion tax issues.
It’s important for franchisors to periodically audit individual franchisees. These routine “check-ups” are especially valuable in a store’s early years of operations or if performance starts to deteriorate. They can be used to detect symptoms of unhealthy performance and treat problems before they spiral out of control.
Focus on royalty payments
Royalties are a franchisor’s primary source of income. Because royalties are typically based on a percentage of revenue, auditors pay close attention to the franchisee’s revenue reporting process.
To test whether revenue has been accurately reported, auditors trace transactions from the point-of-sale to:
If the revenue trail doesn’t hold up, further investigation may be required. In addition to vouching a representative sample of randomly selected sales transactions, auditors use analytical techniques to compare key metrics for an individual franchisee against benchmarks for franchises of a similar size and others in your franchise system. Any discrepancies from these benchmarks raise a red flag that the franchisee may have underreported revenue to minimize royalty payments.
Standard operating procedures
Beyond testing revenue, auditors spend extensive time examining whether the franchisee has complied with the franchise agreement. They consider such questions as:
Failure to comply with such terms compromises future revenue and the reputation of your brand. So, areas of noncompliance should be identified during the audit — and corrected as soon as possible.
Analyzing a franchisee’s books and records can only reveal so much. There’s no substitute for meeting face-to-face with the owner-operator.
Site visits give the auditor an opportunity to assess business operations from the customer’s perspective, evaluate the condition of equipment and the morale of workers, and interview the management team. These inquiries help the auditor understand how the business operates and investigate any anomalies unearthed during testing and analytical procedures.
Hiring an outside auditor to enforce the audit provisions of your franchise agreement brings objectivity and financial expertise to the process. In addition to auditing a franchisee’s financial statements, our team can follow up on any compliance issues unearthed by the audit. Contact us for more information.
When a married couple files a joint tax return, each spouse is “jointly and severally” liable for the full amount of tax on the couple’s combined income. Therefore, the IRS can come after either spouse to collect the entire tax — not just the part that’s attributed to one spouse or the other. This includes any tax deficiency that the IRS assesses after an audit, as well as any penalties and interest. (However, the civil fraud penalty can be imposed only on spouses who’ve actually committed fraud.)
In some cases, spouses are eligible for “innocent spouse relief.” This generally involves individuals who were unaware of a tax understatement that was attributable to the other spouse.
To qualify, you must show not only that you didn’t know about the understatement, but that there was nothing that should have made you suspicious. In addition, the circumstances must make it inequitable to hold you liable for the tax. This relief is available even if you’re still married and living with your spouse.
In addition, spouses may be able to limit liability for any tax deficiency on a joint return if they’re widowed, divorced, legally separated or have lived apart for at least one year.
Election to limit liability
If you make this election, the tax items that gave rise to the deficiency will be allocated between you and your spouse as if you’d filed separate returns. For example, you’d generally be liable for the tax on any unreported wage income only to the extent that you earned the wages.
The election won’t provide relief from your spouse’s tax items if the IRS proves that you knew about the items when you signed the return — unless you can show that you signed the return under duress. Also, the limitation on your liability is increased by the value of any assets that your spouse transferred to you in order to avoid the tax.
An “injured” spouse
In addition to innocent spouse relief, there’s also relief for “injured” spouses. What’s the difference? An injured spouse claim asks the IRS to allocate part of a joint refund to one spouse. In these cases, an injured spouse has all or part of a refund from a joint return applied against past-due federal tax, state tax, child or spousal support, or a federal nontax debt (such as a student loan) owed by the other spouse. If you’re an injured spouse, you may be entitled to recoup your share of the refund.
Whether, and to what extent, you can take advantage of the above relief depends on the facts of your situation. If you’re interested in trying to obtain relief, there’s paperwork that must be filed and deadlines that must be met. We can assist you with the details.
Also, keep “joint and several liability” in mind when filing future tax returns. Even if a joint return results in less tax, you may choose to file a separate return if you want to be certain of being responsible only for your own tax. Contact us with any questions or concerns.
How well do you listen to your not-for-profit’s supporters? If you don’t engage in “social listening,” your efforts may not be good enough. This marketing communications strategy is popular with for-profit companies, but can just as easily help nonprofits attract and retain donors, volunteers and members.
Social media monitoring
Social listening starts with monitoring social media sites such as Facebook, Twitter, LinkedIn and Instagram for mentions of your organization and related keywords. But to take full advantage of this strategy, you also must engage with topics that interest your supporters and interact with “influencers,” who can extend your message by sharing it with their audiences.
Influencers don’t have to be celebrities with millions of followers. Connecting with a group of influencers who each have only several hundred followers can expand your reach exponentially. For example, a conservation organization might follow and interact with a popular rock climber or other outdoor enthusiast to reach that person’s followers.
Targeting your messages
To use social listening, develop a list of key terms related to your organization and its mission, programs and campaigns. You’ll want to treat this as a “living document,” updating it as you launch new initiatives. Then “listen” for these terms on social media. Several free online tools are available to perform this monitoring, including Google Alerts, Twazzup and Social Mention.
When your supporters or influencers use the terms, you can send them a targeted message with a call to action, such as a petition, donation solicitation or event announcement. Your call to action could be as simple as asking them to share your content.
You can also use trending hashtags (a keyword or phrase that’s currently popular on social media) to keep your communications relevant and leverage current events on a real-time basis. Always be on the lookout for creative ways to join conversations while promoting your organization or campaign.
Actively seeking opportunity
Most nonprofits have a presence on social media. But if your organization isn’t actively listening to and communicating with people on social media sites, you’re only a partial participant. Fortunately, social listening is an easy and inexpensive way to engage and become engaged.
In the past few months, many businesses and employers nationwide have received “no-match” letters from the Social Security Administration (SSA). The purpose of these letters is to alert employers if there’s a discrepancy between the agency’s files and data reported on W-2 forms, which are given to employees and filed with the IRS. Specifically, they point out that an employee’s name and Social Security number (SSN) don’t match the government’s records.
According to the SSA, the purpose of the letters is to “advise employers that corrections are needed in order for us to properly post” employees’ earnings to the correct records. If a person’s earnings are missing, the worker may not qualify for all of the Social Security benefits he or she is entitled to, or the benefit received may be incorrect. The no-match letters began going out in the spring of 2019.
Why discrepancies occur
There are a number of reasons why names and SSNs don’t match. They include typographical errors when inputting numbers and name changes due to marriage or divorce. And, of course, employees could intentionally give the wrong information to employers, as is sometimes the case with undocumented workers.
Some lawmakers, including Democrats on the U.S. House Ways and Means Committee, have expressed opposition to no-match letters. In a letter to the SSA Commissioner, they wrote that, under “the current immigration enforcement climate,” employers might “mistakenly believe that the no-match letter indicates that workers lack immigration status and will fire these workers — even those who can legally work in the United States.”
How to proceed
If you receive a no-match letter telling you that an employee’s name and SSN don’t match IRS records, the SSA gives the following advice:
The SSA notes that the IRS is responsible for any penalties associated with W-2 forms that have incorrect information. If you have questions, contact us or check out these frequently asked questions from the SSA: https://bit.ly/2Yv87M6