Private companies and most nonprofits were supposed to implement updated revenue recognition guidance in fiscal year 2019 and updated lease guidance in fiscal year 2021. In the midst of the novel coronavirus (COVID-19) crisis, the Financial Accounting Standards Board (FASB) has decided to give certain entities an extra year to make the changes, if they need it.
Expanded deferral option
On April 8, the FASB agreed to issue a proposal that would have postponed the effective dates for the revenue recognition guidance for franchisors only and the lease guidance for private companies and nonprofit organizations that haven’t already adopted them. In a surprise move, on May 20, the FASB voted to extend the delay for the revenue rules beyond franchisors to all privately owned companies and nonprofits that haven’t adopted the changes. FASB members affirmed a similar delay on the lease rules.
The optional “timeout” is designed to help resource-strapped private companies, the nation’s largest business demographic, better navigate reporting hurdles amid the COVID-19 crisis. A final standard will be issued in early June.
Under the changes, all private companies and nonprofits that haven’t yet filed financial statements applying the updated revenue recognition rules can opt to wait to apply them until annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020. Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), replaces hundreds of pieces of industry-specific rules with a principles-based five step model for reporting revenue.
FASB members extended the revenue deferral to more private companies and nonprofits to help those that were in the process of closing their books when the COVID-19 crisis hit. Private entities told the board that having to adopt the standards amid the work upheaval created by the pandemic layered on unforeseen challenges. In today’s conditions, compliance may need to take a backseat to operational issues.
Last year, the FASB deferred ASU No. 2016-02, Leases (Topic 842), for private companies from 2020 to 2021. This standard requires companies to report — for the first time — the full magnitude of their long-term lease obligations on the balance sheet.
The FASB’s recent deferral will allow private companies and private nonprofits that haven’t already adopted the updated lease rules to wait to apply them until fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Public nonprofits that haven’t yet filed financial statements applying the updated lease rules can opt to wait to apply the changes until fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
The new revenue recognition and lease accounting rules will require major changes to your organization’s systems and procedures. If you haven’t yet adopted these rules, we can help facilitate the transition. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The economic impact of the novel coronavirus (COVID-19) is unprecedented and many taxpayers with student loans have been hard hit.
The Coronavirus Aid, Relief and Economic Security (CARES) Act contains some assistance to borrowers with federal student loans. Notably, federal loans were automatically placed in an administrative forbearance, which allows borrowers to temporarily stop making monthly payments. This payment suspension is scheduled to last until September 30, 2020.
Tax deduction rules
Despite the suspension, borrowers can still make payments if they choose. And borrowers in good standing made payments earlier in the year and will likely make them later in 2020. So can you deduct the student loan interest on your tax return?
The answer is yes, depending on your income and subject to certain limits. The maximum amount of student loan interest you can deduct each year is $2,500. The deduction is phased out if your adjusted gross income (AGI) exceeds certain levels.
For 2020, the deduction is phased out for taxpayers who are married filing jointly with AGI between $140,000 and $170,000 ($70,000 and $85,000 for single filers). The deduction is unavailable for taxpayers with AGI of $170,000 ($85,000 for single filers) or more. Married taxpayers must file jointly to claim the deduction.
The interest must be for a “qualified education loan,” which means debt incurred to pay tuition, room and board, and related expenses to attend a post-high school educational institution. Certain vocational schools and post-graduate programs also may qualify.
The interest must be on funds borrowed to cover qualified education costs of the taxpayer, his or her spouse or a dependent. The student must be a degree candidate carrying at least half the normal full-time workload. Also, the education expenses must be paid or incurred within a reasonable time before or after the loan is taken out.
It doesn’t matter when the loan was taken out or whether interest payments made in earlier years on the loan were deductible or not. And no deduction is allowed to a taxpayer who can be claimed as a dependent on another taxpayer’s return.
The deduction is taken “above the line.” In other words, it’s subtracted from gross income to determine AGI. Thus, it’s available even to taxpayers who don’t itemize deductions.
Taxpayers should keep records to verify eligible expenses. Documenting tuition isn’t likely to pose a problem. However, take care to document other qualifying expenditures for items such as books, equipment, fees, and transportation. Documenting room and board expenses should be simple if a student lives in a dormitory. Student who live off campus should maintain records of room and board expenses, especially when there are complicating factors such as roommates.
Contact us if you have questions about deducting student loan interest or for information on other tax breaks related to paying for college. Sam Brown, CPA, Inc, Troy, Ohio, www.sbcpaohio.com
One of the strongest predictors of a not-for-profit’s long-term survival is multiple revenue streams. Many organizations with only one or two found that out that the hard way when they failed during the 2008 recession. The same is likely to be true for nonprofits that do — or don’t — survive the current novel coronavirus (COVID-19) crisis.
Road map to diversification
Financially stable nonprofits have a good mix of revenue sources, with no one source accounting for more than 25% or 30% of the budget. If you aren’t there, take steps to achieve the proper mix:
Perform and present your initial evaluation. Your board should evaluate current revenue streams as well as future plans and associated expenses. You can help board members understand the benefits of diversification by presenting them with multiple scenarios where costs are compared to revenues with and without current revenue sources. Nudge reluctant directors to embrace greater diversification by showing them how eliminating a revenue stream could jeopardize your mission.
Determine additional revenue sources. Consider a wide range of potential sources, weighing the pros and cons of each, including implications for staffing and other resources, accounting processes, unrelated business income taxes and your organization’s exempt status. In addition, assess how well aligned potential sources are with your mission. For example, has that foundation grant you’re thinking about pursuing ever been awarded to another nonprofit serving your population? Does the company that has proposed a joint venture engage in practices that don’t jibe with your nonprofit’s values.
Develop strategies for each new source. You don’t want to put all your eggs in one basket, but you also don’t want to depend on too many “baskets,” because each new revenue stream will require its own strategy. Executing too many implementation plans can strain resources. Therefore, each plan should include initial and ongoing budgets, as well as any new systems, procedures and marketing campaigns that will be needed. It also should have a timeline.
Review and adjust as necessary. Take the time at the end of every month — don’t wait until year end — to closely review each revenue source. Is it living up to expectations? Is it costing more than expected or falling short of revenue projections?
Patience is crucial
The current pandemic environment has curtailed everything from major gifts to corporate giving, fundraising events to individual donations and foundation grants, so your nonprofit is likely hurting even if you have multiple revenue sources. But as society and the economy begin to recover, look for ways to make your organization more resilient. Diversification is an excellent way to do it. Contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The IRS recently released the 2021 inflation-adjusted amounts for Health Savings Accounts (HSAs).
An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).
In general, a high deductible health plan (HDHP) is a plan that has an annual deductible that isn’t less than $1,000 for self-only coverage and $2,000 for family coverage. In addition, the sum of the annual deductible and other annual out-of-pocket expenses required to be paid under the plan for covered benefits (but not for premiums) cannot exceed $5,000 for self-only coverage, and $10,000 for family coverage.
Within specified dollar limits, an above-the-line tax deduction is allowed for an individual's contribution to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.
Inflation adjustments for 2021 contributions
In Revenue Procedure 2020-32, the IRS released the 2021 inflation-adjusted figures for contributions to HSAs, which are as follows:
Annual contribution limitation. For calendar year 2021, the annual contribution limitation for an individual with self-only coverage under a HDHP is $3,600. For an individual with family coverage, the amount is $7,200. This is up from $3,550 and $7,100, respectively, for 2020.
High deductible health plan defined. For calendar year 2021, an HDHP is a health plan with an annual deductible that isn’t less than $1,400 for self-only coverage or $2,800 for family coverage (these amounts are unchanged from 2020). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) can’t exceed $7,000 for self-only coverage or $14,000 for family coverage (up from $6,900 and $13,800, respectively, for 2020).
A variety of benefits
There are many advantages to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate year after year tax free and be withdrawn tax free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term-care insurance. In addition, an HSA is "portable." It stays with an account holder if he or she changes employers or leaves the work force. For more information about HSAs, contact your employee benefits and tax advisor. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Many people are currently working from home to help prevent the spread of the novel coronavirus (COVID-19). Your external auditors are no exception. Fortunately, in recent years, most audit firms have been investing in technology and training to facilitate remote audit procedures. These efforts have helped lower audit costs, enhance flexibility and minimize disruptions to business operations. But auditors haven’t faced a situation where everything might have to be done remotely — until now.
Re-engineering the audit process
Traditionally, audit fieldwork has involved a team of auditors camping out for weeks (or even months) in a conference room at the headquarters of the company being audited. Thanks to technological advances — including cloud storage, smart devices, teleconferencing, drones with cameras and secure data-sharing platforms — audit firms have been gradually expanding their use of remote audit procedures.
But remote auditing still isn’t ideal for everything. The American Institute of Certified Public Accountants (AICPA) has identified the following aspects of audit work that may present challenges when done remotely:
Internal controls testing. Auditing standards require an understanding of how employees process transactions plus testing to determine whether controls are adequately designed and effective. If employees now work from home, your company’s control environment and risks may have changed from prior periods.
Inventory observations. Auditors usually visit the company’s facilities to observe physical inventory counting procedures and compare independent test counts to the company’s accounting records. Stay-at-home policies during the pandemic (whether government-imposed or company-imposed) may prevent both external auditors and company personnel from conducting physical counts.
Management inquiries. Auditors are trained to observe body language and judge the dynamics between co-workers as they interview company personnel to assess fraud risks.
Lending a hand
Moving to a remote audit format requires flexibility, including a willingness to embrace the technology needed to exchange, review and analyze relevant documents. You can facilitate this transition by:
Being responsive to electronic requests. Answer all remote requests from your auditors in a timely manner. If a key employee will be out of the office for an extended period, give the audit team the contact information for the key person’s backup.
Giving employees access to the requisite software. Before remote auditors start “fieldwork,” ask for a list of software and platforms that will be used to interact and share documents with in-house personnel. Provide the appropriate employees with access and authorization to share audit-related data from your company’s systems. Work with IT specialists to address any security concerns they may have about sharing data with the remote auditors.
Tracking audit progress. Ask the engagement partner to explain how the firm will track the performance of its remote auditors and communicate the team’s progress to in-house accounting personnel.
Ready or not
Remote working arrangements have suddenly become the “new normal” in these trying times. Contact us to discuss ways to manage remote auditing challenges and continue to report your company’s financial results in a timely, transparent manner. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Nearly everyone has heard about the Economic Impact Payments (EIPs) that the federal government is sending to help mitigate the effects of the coronavirus (COVID-19) pandemic. The IRS reports that in the first four weeks of the program, 130 million individuals received payments worth more than $200 billion.
However, some people are still waiting for a payment. And others received an EIP but it was less than what they were expecting. Here are some answers why this might have happened.
If you’re under a certain adjusted gross income (AGI) threshold, you’re generally eligible for the full $1,200 ($2,400 for married couples filing jointly). In addition, if you have a “qualifying child,” you’re eligible for an additional $500.
Here are some of the reasons why you may receive less:
Your child isn’t eligible. Only children eligible for the Child Tax Credit qualify for the additional $500 per child. That means you must generally be related to the child, live with them more than half the year and provide at least half of their support. A qualifying child must be a U.S. citizen, permanent resident or other qualifying resident alien; be under the age of 17 at the end of the year for the tax return on which the IRS bases the payment; and have a Social Security number or Adoption Taxpayer Identification Number.
Note: A dependent college student doesn’t qualify for an EIP, and even if their parents may claim him or her as a dependent, the student normally won’t qualify for the additional $500.
You make too much money. You’re eligible for a full EIP if your AGI is up to: $75,000 for individuals, $112,500 for head of household filers and $150,000 for married couples filing jointly. For filers with income above those amounts, the payment amount is reduced by $5 for each $100 above the $75,000/$112,500/$150,000 thresholds.
You’re eligible for a reduced payment if your AGI is between: $75,000 and $99,000 for an individual; $112,500 and $136,500 for a head of household; and $150,000 and $198,000 for married couples filing jointly. Filers with income exceeding those amounts with no children aren’t eligible and won’t receive payments.
You have some debts. The EIP is offset by past-due child support. And it may be reduced by garnishments from creditors. Federal tax refunds, including EIPs, aren’t protected from garnishment by creditors under federal law once the proceeds are deposited into a bank account.
If you receive an incorrect amount
These are only a few of the reasons why an EIP might be less than you expected. If you receive an incorrect amount and you meet the criteria to receive more, you may qualify to receive an additional amount early next year when you file your 2020 federal tax return. We can evaluate your situation when we prepare your return. And if you’re still waiting for a payment, be aware that the IRS is still mailing out paper EIPs and announced that they’ll continue to go out over the next few months. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Charitable contributions aren’t always eligible for tax deductions — even when the not-for-profit recipient is tax exempt and the donor itemizes. Take “quid pro quo” donations. These transactions occur when your organization receives a payment that includes a contribution and you provide the donor with goods or services valued for less than the total payment. Let’s take a closer look.
Quid pro quo arrangements create an obligation for your nonprofit. If you receive more than $75 and you provide a benefit to the donor, you must advise the donor that it’s a quid pro quo contribution. In such cases, provide written notice to donors that they can deduct only the amount in excess of the value of the goods or services they receive in return. Also provide donors with a good faith estimate of the value of the goods or services provided in return.
This written acknowledgment must be provided when the donation is solicited or when it’s received. For example, if you’re holding a charity dinner each ticket sold should disclose the tax-deductible portion of the ticket price. Additionally, the disclosure must be in a readily visible format — in other words, no small print. Examples can be found in IRS Publication 1771, “Charitable Contributions — Substantiation and Disclosure Requirements.”
Valuing goods and services
Before you can inform donors of the value of goods or services, you must put a price on them. Let’s say your nonprofit hosts a dinner for top donors at a high-end restaurant and pays for their meals. The donors then make large gifts. Here, determining value is fairly simple. The amount your organization paid for the meal would be considered the fair market value, and only the amount of the contributions in excess of this value would be tax-deductible for the donor.
But what if your charity sponsors a gala dinner with live music where the banquet facility discounts the food and the band performs gratis — both as contributions to your organization? To establish the value to be reported to donors, determine what it would cost someone to attend a similar event. In this instance, you’d need to research comparable costs at local restaurants or hotels for a dinner with entertainment. Or you could ask the banquet facility and the band to tell you what they normally charge customers that aren’t charities.
For donated auction items, ask what a willing buyer would pay for them in an “arm’s length” transaction — that is, in the marketplace. Report each item’s value on the item bid cards.
There are some exceptions to these quid pro quo rules. But in most cases, nonprofits risk financial penalties if they fail to furnish proper acknowledgment and disclosure to donors. Contact us if you have questions or need clarification. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The IRS has issued guidance clarifying that certain deductions aren’t allowed if a business has received a Paycheck Protection Program (PPP) loan. Specifically, an expense isn’t deductible if both:
The CARES Act allows a recipient of a PPP loan to use the proceeds to pay payroll costs, certain employee healthcare benefits, mortgage interest, rent, utilities and interest on other existing debt obligations.
A recipient of a covered loan can receive forgiveness of the loan in an amount equal to the sum of payments made for the following expenses during the 8-week “covered period” beginning on the loan’s origination date: 1) payroll costs, 2) interest on any covered mortgage obligation, 3) payment on any covered rent, and 4) covered utility payments.
The law provides that any forgiven loan amount “shall be excluded from gross income.”
So the question arises: If you pay for the above expenses with PPP funds, can you then deduct the expenses on your tax return?
The tax code generally provides for a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Covered rent obligations, covered utility payments, and payroll costs consisting of wages and benefits paid to employees comprise typical trade or business expenses for which a deduction generally is appropriate. The tax code also provides a deduction for certain interest paid or accrued during the taxable year on indebtedness, including interest paid or incurred on a mortgage obligation of a trade or business.
No double tax benefit
In IRS Notice 2020-32, the IRS clarifies that no deduction is allowed for an expense that is otherwise deductible if payment of the expense results in forgiveness of a covered loan pursuant to the CARES Act and the income associated with the forgiveness is excluded from gross income under the law. The Notice states that “this treatment prevents a double tax benefit.”
More possibly to come
Two members of Congress say they’re opposed to the IRS stand on this issue. Senate Finance Committee Chair Chuck Grassley (R-IA) and his counterpart in the House, Ways and Means Committee Chair Richard E. Neal (D-MA), oppose the tax treatment. Neal said it doesn’t follow congressional intent and that he’ll seek legislation to make certain expenses deductible. Stay tuned. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Sustainability reports explain the impact of an organization’s activities on the economy, environment and society. During the novel coronavirus (COVID-19) pandemic, stakeholders continue to expect robust, transparent sustainability reports, with a stronger emphasis on the social and economic impacts of the company’s current operations than on environmental matters.
Investors, lenders and even the public at large may pressure companies to issue these supplemental reports. But the information they provide isn’t based on U.S. Generally Accepted Accounting Principles (GAAP). So, is it worth the time and effort? One way to make your company’s report more meaningful and reliable is to obtain an external audit of it.
What is a sustainability report?
In general, a sustainability report focuses on a company’s values and commitment to operating in a sustainable way. It provides a mechanism for communicating sustainability goals and how the company plans to meet them. The report also guides management when evaluating corporate actions and their impact on the economy, environment and society.
During the COVID-19 crisis, stakeholders want to know how your company is handling such issues as public health and safety, supply chain disruptions, strategic resilience and human resources. For example:
Stakeholders want assurance that companies are engaged in responsible corporate governance in their COVID-19 responses. Sustainability reports can showcase good corporate citizenship during these challenging times.
Why do you need an external audit?
There aren’t currently any mandatory attestation requirements for sustainability reporting. That means companies can produce reports without engaging an external auditor to review the document for its accuracy and integrity. However, without independent, external oversight, stakeholders may view sustainability reports with a significant degree of skepticism. That’s where audits come into play.
Many organizations have developed standardized sustainability frameworks, including the:
External auditors can verify whether sustainability reports meet the appropriate standards, and, if not, adjust them accordingly. In addition, numerous attestation standards govern the audit of a sustainability report, including those from the American Institute of Certified Public Accountants, the International Standard on Assurance Engagements and the International Organization for Standardization.
Many companies agree that a sustainability report is an important part of their communications with stakeholders. But there’s little consensus on the approach, topics or non-GAAP metrics that should appear in sustainability reports. We understand the standards that apply to these supplemental reports and can help you report sustainability matters in a reliable, transparent manner. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Do you want to save more for retirement on a tax-favored basis? If so, and if you qualify, you can make a deductible traditional IRA contribution for the 2019 tax year between now and the extended tax filing deadline and claim the write-off on your 2019 return. Or you can contribute to a Roth IRA and avoid paying taxes on future withdrawals.
You can potentially make a contribution of up to $6,000 (or $7,000 if you were age 50 or older as of December 31, 2019). If you’re married, your spouse can potentially do the same, thereby doubling your tax benefits.
The deadline for 2019 traditional and Roth contributions for most taxpayers would have been April 15, 2020. However, because of the novel coronavirus (COVID-19) pandemic, the IRS extended the deadline to file 2019 tax returns and make 2019 IRA contributions until July 15, 2020.
Of course, there are some ground rules. You must have enough 2019 earned income (from jobs, self-employment, etc.) to equal or exceed your IRA contributions for the tax year. If you’re married, either spouse can provide the necessary earned income.
Also, deductible IRA contributions are reduced or eliminated if last year’s modified adjusted gross income (MAGI) is too high.
Two contribution types
If you haven’t already maxed out your 2019 IRA contribution limit, consider making one of these three types of contributions by the deadline:
1. Deductible traditional. With traditional IRAs, account growth is tax-deferred and distributions are subject to income tax. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k), the contribution is fully deductible on your 2019 tax return. If you or your spouse do participate in an employer-sponsored plan, your deduction is subject to the following MAGI phaseout:
Taxpayers with MAGIs within the applicable range can deduct a partial contribution. But those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.
2. Roth. Roth IRA contributions aren’t deductible, but qualified distributions — including growth — are tax-free, if you satisfy certain requirements.
Your ability to contribute, however, is subject to a MAGI-based phaseout:
You can make a partial contribution if your 2019 MAGI is within the applicable range, but no contribution if it exceeds the top of the range.
3. Nondeductible traditional. If your income is too high for you to fully benefit from a deductible traditional or a Roth contribution, you may benefit from a nondeductible contribution to a traditional IRA. The account can still grow tax-deferred, and when you take qualified distributions, you’ll only be taxed on the growth.
Because of the extended deadline, you still have time to make traditional and Roth IRA contributions for 2019 (and you can also contribute for 2020). This is a powerful way to save for retirement on a tax-advantaged basis. Contact us to learn more. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The novel coronavirus (COVID-19) crisis has put enormous financial stress on many not-for-profits — whether they’re temporarily shut down or actively fighting the pandemic. If cash flow has dried up, your organization may need to do more than trim expenses. Here’s how to assess your financial condition and take appropriate action.
Put your board in charge
Ask your board of directors to lead your review and retrenchment efforts. In addition to having oversight experience and financial expertise, board members have a passion for your organization and will do whatever they can to assist. They may already have employer backing for your nonprofit, and those companies may be willing to step up their financial support. Or board members may be able to tap their social networks.
The first order of business should be to review programs relative to your nonprofit’s mission. If you identify one that isn’t critical to your mission and is a drain on cash balances and staff resources, consider cutting it. Terminating a non-mission-critical program frees up funds for other initiatives or administrative necessities. If you can redirect clients to similar programs offered by other organizations, such changes can be made without a break in service.
Your board may also be able to liberate cash from your investment portfolio. Your nonprofit may have investments or idle assets that aren’t generating operating income — for example, donated real estate, collections and other nonmarketable holdings. Divesting these possessions can raise critical operating funds.
Look to your endowment
Another potential source of operating funds is your organization’s permanently restricted endowment funds. Under the Uniform Prudent Management of Institutional Funds Act (UPMIFA), you may be able to spend what was once considered the untouchable original principal (or historical balance) of funds.
Access generally is available when the donor of the original gift is silent about restrictions or hasn’t specified that UPMIFA provisions don’t apply. In some cases, an original condition or restriction may no longer be practicable or possible to achieve. Your nonprofit should consult an attorney to learn whether this is an option.
If UPMIFA provisions don’t open up a source of funds, there’s another potential route — approach the original donor. Your organization can ask the donor to lift all or some of the spending restrictions so you may use a portion of the funds for operating costs.
We can help
These are only a few possible solutions for struggling nonprofits. If you know your nonprofit is in trouble, but don’t know how to start fixing it, contact us. We can work with your board to assess your situation and determine the best way to move forward. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
In light of the novel coronavirus (COVID-19) pandemic, many businesses are interested in donating to charity. In order to incentivize charitable giving, the Coronavirus Aid, Relief and Economic Security (CARES) Act made some liberalizations to the rules governing charitable deductions. Here are two changes that affect businesses:
The limit on charitable deductions for corporations has increased. Before the CARES Act, the total charitable deduction that a corporation could generally claim for the year couldn’t exceed 10% of corporate taxable income (as determined with several modifications for these purposes). Contributions in excess of the 10% limit are carried forward and may be used during the next five years (subject to the 10%-of-taxable-income limitation each year).
What changed? Under the CARES Act, the limitation on charitable deductions for corporations (generally 10% of modified taxable income) doesn’t apply to qualifying contributions made in 2020. Instead, a corporation’s qualifying contributions, reduced by other contributions, can be as much as 25% of taxable income (modified). No connection between the contributions and COVID-19 activities is required.
The deduction limit on food inventory has increased. At a time when many people are unemployed, your business may want to contribute food inventory to qualified charities. In general, a business is entitled to a charitable tax deduction for making a qualified contribution of “apparently wholesome food” to an organization that uses it for the care of the ill, the needy or infants.
“Apparently wholesome food” is defined as food intended for human consumption that meets all quality and labeling standards imposed by federal, state, and local laws and regulations, even though it may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.
Before the CARES Act, the aggregate amount of such food contributions that could be taken into account for the tax year generally couldn’t exceed 15% of the taxpayer’s aggregate net income for that tax year from all trades or businesses from which the contributions were made. This was computed without regard to the charitable deduction for food inventory contributions.
What changed? Under the CARES Act, for contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations. For other business taxpayers, it increases from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.
CARES Act questions
Be aware that in addition to these changes affecting businesses, the CARES Act also made changes to the charitable deduction rules for individuals. Contact us if you have questions about making charitable donations and securing a tax break for them. We can explain the rules and compute the maximum deduction for your generosity. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Imagine this scenario: A company’s controller is hospitalized for the novel coronavirus (COVID-19), and she’s the only person inside the company who knows how its accounting and payroll software works. She also is the only person with check signing authority, besides the owner, who is in lockdown at his second home out of state. Meanwhile, payroll needs to be processed soon and unpaid bills are piling up.
Of course the health of the controller is what’s most important, but this situation also highlights the importance of cross-training your staff to handle critical tasks. Doing so offers numerous benefits that generally outweigh the investment in the time it takes to get employees up to speed.
Whether due to illness, resignation, vacation or family leave, accounting personnel may sometimes be unavailable to perform their job duties. The most obvious benefit to cross-training is having a knowledgeable, flexible staff who can rise to the occasion when a staff member is out.
Another benefit is that cross-training nurtures a team-oriented environment. If a staff member has a vested interest in the jobs of others, he or she likely will better understand the department’s overall business processes — and this, ultimately, both improves productivity and encourages collaboration.
Cross-training also facilitates internal promotions because employees will already know the challenges of, and skills needed for, an open position. In addition, cross-trained employees are generally better-rounded and feel more useful.
Additionally, the accounting department is at high risk for fraud, especially payment tampering and billing scams, according to the 2020 Report to the Nations by the Association of Certified Fraud Examiners (ACFE). If employees are familiar with each other’s duties and take over when a co-worker calls in sick or takes vacation, it creates a system of checks and balances that may help deter dishonest behaviors. Cross-training, plus mandatory vacation policies and regular job rotation, equals strong internal controls in the accounting department.
How to cross-train?
The best way to cross-train is usually to have employees take turns at each other’s jobs. The learning itself need not be overly in-depth. Just knowing the basic, everyday duties of a co-worker’s position can help tremendously in the event of a lengthy or unexpected absence.
Whether personnel switch duties for one day or one week, they’ll be better prepared to take over important responsibilities when the time arises. Also, encourage your CFO and controller to informally “reverse-train” within the department. This will prepare them to fill in or train others in the event of an unexpected employee loss or absence.
When to start?
Regardless of when your accounting team returns to the office, get started with cross-training now — much training can be done virtually if necessary. Then make it an ongoing process. We can help you cross-train your accounting personnel to minimize business interruptions and deter fraud, along with implementing other internal control procedures. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The coronavirus (COVID-19) pandemic has affected many Americans’ finances. Here are some answers to questions you may have right now.
My employer closed the office and I’m working from home. Can I deduct any of the related expenses?
Unfortunately, no. If you’re an employee who telecommutes, there are strict rules that govern whether you can deduct home office expenses. For 2018–2025 employee home office expenses aren’t deductible. (Starting in 2026, an employee may deduct home office expenses, within limits, if the office is for the convenience of his or her employer and certain requirements are met.)
Be aware that these are the rules for employees. Business owners who work from home may qualify for home office deductions.
My son was laid off from his job and is receiving unemployment benefits. Are they taxable?
Yes. Unemployment compensation is taxable for federal tax purposes. This includes your son’s state unemployment benefits plus the temporary $600 per week from the federal government. (Depending on the state he lives in, his benefits may be taxed for state tax purposes as well.)
Your son can have tax withheld from unemployment benefits or make estimated tax payments to the IRS.
The value of my stock portfolio is currently down. If I sell a losing stock now, can I deduct the loss on my 2020 tax return?
It depends. Let’s say you sell a losing stock this year but earlier this year, you sold stock shares at a gain. You have both a capital loss and a capital gain. Your capital gains and losses for the year must be netted against one another in a specific order, based on whether they’re short-term (held one year or less) or long-term (held for more than one year).
If, after the netting, you have short-term or long-term losses (or both), you can use them to offset up to $3,000 ordinary income ($1,500 for married taxpayers filing separately). Any loss in excess of this limit is carried forward to later years, until all of it is either offset against capital gains or deducted against ordinary income in those years, subject to the $3,000 limit.
I know the tax filing deadline has been extended until July 15 this year. Does that mean I have more time to contribute to my IRA?
Yes. You have until July 15 to contribute to an IRA for 2019. If you’re eligible, you can contribute up to $6,000 to an IRA, plus an extra $1,000 “catch-up” amount if you were age 50 or older on December 31, 2019.
What about making estimated payments for 2020?
The 2020 estimated tax payment deadlines for the first quarter (due April 15) and the second quarter (due June 15) have been extended until July 15, 2020.
These are only some of the tax-related questions you may have related to COVID-19. Contact us if you have other questions or need more information about the topics discussed above. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Limited staff and financial resources during the novel coronavirus (COVID-19) pandemic may have your not-for-profit looking for new ways to achieve your mission. Partnering with a like-minded organization potentially enables you to pool funds, staff and supporters — temporarily or permanently.
2 primary arrangements
There are many types of partnership arrangements between nonprofit organizations. But the two terms you’ll hear most often are:
1. Strategic alliance. This is a blanket term typically used to represent a wide range of affiliations. A strategic alliance can involve a relationship with another nonprofit, a for-profit or a governmental entity. Such alliances can take the form of joint programming, collective impact collaborations, cost sharing and many other arrangements.
2. Joint venture. A joint venture is a specific type of strategic alliance involving a contractual arrangement with another nonprofit, a for-profit entity or a governmental agency. The two entities become engaged in a solitary enterprise without incorporating or forming a legal partnership. A joint venture is otherwise similar to a business partnership, except that the relationship typically has a single focus and is often temporary.
No matter what type of alliance you make, many of the considerations are the same. To select the appropriate partnership model, examine your motivation for linking up. Do you want to save money by sharing administrative expenses? Will the union enable you to expand your reach? Will the collaboration involve a single initiative or involve multiple projects over a long period?
Sharing goals and expectations
The best alliances involve partners with similar goals and expectations — including financial ones. Ask, for example, whether your prospective collaborator has the necessary means. An alliance between a nonprofit and another entity, regardless of type, is like any business partnership: Your partner should have a good net asset balance and be able to live up to its financial commitments.
Then, make sure your values align. Does the entity have similar ethics and strong internal controls? Two working as one requires openness and trust between the parties. Remember, you’ll be sharing credit and responsibility. Also ask how donors — particularly corporate donors — will feel about your alliance. Be prepared to explain your newly defined or broadened target groups and causes.
If your nonprofit has shied away from alliances because you safeguard your autonomy, today’s challenging conditions may provide a new incentive to team up. We can help you weigh the pros and cons of an alliance and analyze a potential partner’s financial situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The Coronavirus Aid, Relief, and Economic Security (CARES) Act eliminates some of the tax-revenue-generating provisions included in a previous tax law. Here’s a look at how the rules for claiming certain tax losses have been modified to provide businesses with relief from the novel coronavirus (COVID-19) crisis.
Basically, you may be able to benefit by carrying a net operating loss (NOL) into a different year — a year in which you have taxable income — and taking a deduction for it against that year’s income. The CARES Act includes favorable changes to the rules for deducting NOLs. First, it permanently eases the taxable income limitation on deductions.
Under an unfavorable provision included in the Tax Cuts and Jobs Act (TCJA), an NOL arising in a tax year beginning in 2018 and later and carried over to a later tax year couldn’t offset more than 80% of the taxable income for the carryover year (the later tax year), calculated before the NOL deduction. As explained below, under the TCJA, most NOLs arising in tax years ending after 2017 also couldn’t be carried back to earlier years and used to offset taxable income in those earlier years. These unfavorable changes to the NOL deduction rules were permanent — until now.
For tax years beginning before 2021, the CARES Act removes the TCJA taxable income limitation on deductions for prior-year NOLs carried over into those years. So NOL carryovers into tax years beginning before 2021 can be used to fully offset taxable income for those years.
For tax years beginning after 2020, the CARES Act allows NOL deductions equal to the sum of:
As you can see, this is a complex rule. But it’s more favorable than what the TCJA allowed and the change is permanent.
Carrybacks allowed for certain losses
Under another unfavorable TCJA provision, NOLs arising in tax years ending after 2017 generally couldn’t be carried back to earlier years and used to offset taxable income in those years. Instead, NOLs arising in tax years ending after 2017 could only be carried forward to later years. But they could be carried forward for an unlimited number of years. (There were exceptions to the general no-carryback rule for losses by farmers and property/casualty insurance companies).
Under the CARES Act, NOLs that arise in tax years beginning in 2018 through 2020 can be carried back for five years.
Important: If it’s beneficial, you can elect to waive the carryback privilege for an NOL and, instead, carry the NOL forward to future tax years. In addition, barring a further tax-law change, the no-carryback rule will come back for NOLs that arise in tax years beginning after 2020.
Past year opportunities
These favorable CARES Act changes may affect prior tax years for which you’ve already filed tax returns. To benefit from the changes, you may need to file an amended tax return. Contact us to learn more. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Financial statements aren’t particularly meaningful without a relevant basis of comparison. There are two types of “benchmarks” that a company’s financials can be compared to — its own historical performance and the performance of other comparable businesses.
Before you conduct a benchmarking study, however, it’s important to make normalizing adjustments to avoid any misleading comparisons. This is especially important when looking at periods that include atypical financial results due to the novel coronavirus (COVID-19) pandemic. But there are a variety of factors that require normalizing adjustments.
Some normalizing adjustments are needed to distinguish between historical results that represent potential ongoing earning power and those that don’t. A one-time revenue (or expense) or gain (or loss) will temporarily distort the company’s results. To more accurately reflect the company’s future earnings potential, you would add back expenses and losses (or subtract the revenues and gains) that aren’t expected to recur.
For example, if a retailer temporarily closed its brick-and-mortar stores during the COVID-19 pandemic, you’d add back the temporary losses to get a clearer picture of operating performance under normal conditions. Likewise, if a company won a $10 million lawsuit, you’d subtract the gain. Other nonrecurring items might include discontinued product lines or expenses incurred in an acquisition.
Other normalizing adjustments compensate for the use of different accounting methods. Because companies’ accounting practices vary widely, comparing them without adjusting their financial statements is like comparing apples to oranges.
Even within the broad confines of Generally Accepted Accounting Principles (GAAP), it’s rare for two companies to follow exactly the same accounting practices. When comparing a company’s results to industry benchmarks, you need to understand how they report transactions.
A small firm, for example, might report earnings when cash is received (cash basis accounting), but its competitor might record a sale when it sends out the invoice (accrual basis accounting). Differences in inventory reporting, pension reserves, depreciation methods, tax accounting practices and cost capitalization vs. expensing policies also are common.
Another type of normalizing adjustment focuses on closely held businesses. They often pay owners based on the company’s cash flow or the owners’ personal needs, not on the market value of services the owners provide. Small businesses also may employ family members, conduct business with affiliates and extend loans to company insiders.
To get a clearer picture of the company’s performance, you’ll need to identify all related-party transactions and inquire whether they occur at “arm’s length.” Also consider reconciling for unusual perquisites provided to insiders, such as season tickets to sporting events, college tuition or company vehicles.
We can help
To complicate matters, normalizing adjustments can affect multiple accounts. While most normalizing adjustments are made to the income statement, some may flow through to the balance sheet. Our accounting professionals can help with these critical adjustments to a company’s financial statements, enabling you to make better-informed business decisions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The coronavirus (COVID-19) pandemic has caused the value of some retirement accounts to decrease because of the stock market downturn. But if you have a traditional IRA, this downturn may provide a valuable opportunity: It may allow you to convert your traditional IRA to a Roth IRA at a lower tax cost.
The key differences
Here’s what makes a traditional IRA different from a Roth IRA:
Traditional IRA. Contributions to a traditional IRA may be deductible, depending on your modified adjusted gross income (MAGI) and whether you (or your spouse) participate in a qualified retirement plan, such as a 401(k). Funds in the account can grow tax deferred.
On the downside, you generally must pay income tax on withdrawals. In addition, you’ll face a penalty if you withdraw funds before age 59½ — unless you qualify for a handful of exceptions — and you’ll face an even larger penalty if you don’t take your required minimum distributions (RMDs) after age 72.
Roth IRA. Roth IRA contributions are never deductible. But withdrawals — including earnings — are tax-free as long as you’re age 59½ or older and the account has been open at least five years. In addition, you’re allowed to withdraw contributions at any time tax- and penalty-free. You also don’t have to begin taking RMDs after you reach age 72.
However, the ability to contribute to a Roth IRA is subject to limits based on your MAGI. Fortunately, no matter how high your income, you’re eligible to convert a traditional IRA to a Roth. The catch? You’ll have to pay income tax on the amount converted.
This is where the “benefit” of a stock market downturn comes in. If your traditional IRA has lost value, converting to a Roth now rather than later will minimize your tax hit. Plus, you’ll avoid tax on future appreciation when the market goes back up.
It’s important to think through the details before you convert. Some of the questions to ask when deciding whether to make a conversion include:
Do you have money to pay the tax bill? If you don’t have enough cash on hand to cover the taxes owed on the conversion, you may have to dip into your retirement funds. This will erode your nest egg. The more money you convert and the higher your tax bracket, the bigger the tax hit.
What’s your retirement horizon? Your stage of life may also affect your decision. Typically, you wouldn’t convert a traditional IRA to a Roth IRA if you expect to retire soon and start drawing down on the account right away. Usually, the goal is to allow the funds to grow and compound over time without any tax erosion.
Keep in mind that converting a traditional IRA to a Roth isn’t an all-or-nothing deal. You can convert as much or as little of the money from your traditional IRA account as you like. So, you might decide to gradually convert your account to spread out the tax hit over several years.
Of course, there are more issues that need to be considered before executing a Roth IRA conversion. If this sounds like something you’re interested in, contact us to discuss with us whether a conversion is right for you. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The novel coronavirus (COVID-19) pandemic has forced many of us to work differently — whether it’s isolated at home or in-person wearing facial masks and other protective gear. Even if your not-for-profit’s board of directors usually meets in person, current events strongly suggest the need for a Plan B. Here are some best practices for holding virtual board meetings.
With many board members under continued stay-at-home or quarantine orders, virtual meetings can enable more people to attend and your board to achieve a quorum. But before you set up a Zoom, WebEx or other online video meeting, check your state’s laws. Some states, for example, allow nonprofit boards to hold teleconferences but not videoconferences. Your organization’s bylaws might also prohibit virtual meetings.
Even if your state’s laws and nonprofits’ bylaws give you the go-ahead, consider potential communication issues. For example, in teleconferences, participants won’t be able to read each other’s facial expressions and body language. Even in videoconferences, board members may be unable to observe these cues as easily as they could in person — potentially leading to misunderstandings or conflicts.
In addition, the chair might find it difficult to shepherd discussion, especially if your board is bigger. Confidentiality is a concern, too. You must be able to trust that participants are alone and that their family members aren’t listening in to the conversation.
Get member buy-in
Don’t spring a virtual meeting on board members without first discussing with them the implications of such a change. Some board members may prefer to wait until stay-at-home orders are lifted and delay a meeting rather than conduct one remotely.
You’ll also need to ensure that all participants have the equipment they need. Test the system you’ve decided to use ahead of time and establish backup plans in the event of technological failures. Also, plan to send board members any supporting materials well in advance of your meeting and make them available online during the event.
Recognize that voting on any issue will need to be verbal and not anonymous, with each board member identifying himself or herself. Also, straightforward issues — such as updates from development staff or the formal approval of a policy — are better suited to virtual discussion than potentially controversial ones. Of course, given current circumstances, your board may have no choice but to consider emergency measures via tele- or videoconference.
Lean on your board
Board members have likely already been in touch as your nonprofit confronts pandemic-related challenges. However you decide to hold board meetings, make sure you’re in constant touch with your directors and soliciting their advice when any difficult decisions need to be made. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
As a result of the coronavirus (COVID-19) crisis, your business may be using independent contractors to keep costs low. But you should be careful that these workers are properly classified for federal tax purposes. If the IRS reclassifies them as employees, it can be an expensive mistake.
The question of whether a worker is an independent contractor or an employee for federal income and employment tax purposes is a complex one. If a worker is an employee, your company must withhold federal income and payroll taxes, pay the employer’s share of FICA taxes on the wages, plus FUTA tax. Often, a business must also provide the worker with the fringe benefits that it makes available to other employees. And there may be state tax obligations as well.
These obligations don’t apply if a worker is an independent contractor. In that case, the business simply sends the contractor a Form 1099-MISC for the year showing the amount paid (if the amount is $600 or more).
No uniform definition
Who is an “employee?” Unfortunately, there’s no uniform definition of the term.
The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors. But other factors are also taken into account.
Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Section 530. In general, this protection applies only if an employer:
Note: Section 530 doesn’t apply to certain types of technical services workers. And some categories of individuals are subject to special rules because of their occupations or identities.
Asking for a determination
Under certain circumstances, you may want to ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.
Businesses should consult with us before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and inadvertently trigger an employment tax audit.
It may be better to properly treat a worker as an independent contractor so that the relationship complies with the tax rules.
Be aware that workers who want an official determination of their status can also file Form SS-8. Disgruntled independent contractors may do so because they feel entitled to employee benefits and want to eliminate self-employment tax liabilities.
If a worker files Form SS-8, the IRS will send a letter to the business. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return the form to the IRS, which will render a classification decision.
Contact us if you receive such a letter or if you’d like to discuss how these complex rules apply to your business. We can help ensure that none of your workers are misclassified. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The novel coronavirus (COVID-19) pandemic has adversely affected the global economy. Companies of all sizes in all industries are faced with closures of specific locations or complete shutdowns; employee layoffs, furloughs or restrictions on work; liquidity issues; and disruptions to their supply chains and customers. These negative impacts have brought the “going concern” issue to the forefront.
One-year look-forward period
Financial statements are generally prepared under the assumption that the entity will remain a going concern. That is, it’s expected to continue to generate a positive return on its assets and meet its obligations in the ordinary course of business.
Under Accounting Standards Codification Topic 205, Presentation of Financial Statements — Going Concern, the continuation of an entity as a going concern is presumed as the basis for reporting unless liquidation becomes imminent. Even if liquidation isn’t imminent, conditions and events may exist that, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern.
Management is responsible for evaluating the going concern assumption. Going concern issues arise when it’s probable that the entity won’t be able to meet its obligations as they become due within one year after the date the financial statements are issued — or available to be issued. (The alternate date prevents financial statements from being held for several months after year end to see if the company survives.)
Making the call
The going concern assumption is evaluated when preparing annual and interim financial statements under U.S. Generally Accepted Accounting Principles (GAAP). The evaluation is based on qualitative and quantitative information about relevant conditions and events that are known (or reasonably knowable) at the time the evaluation is made.
Examples of warning signs that an entity’s long-term viability may be questionable include:
If management concludes that there’s substantial doubt about the entity’s ability to continue as a going concern, it must consider whether mitigation plans can be effectively implemented within the one-year look-forward period to alleviate the going concern issues.
Reporting going concern issues
Few businesses will escape negative repercussions of the COVID-19 crisis. If your business is struggling, contact us to discuss the going concern assessment. Our auditors can help you understand how the evaluation will affect your balance sheet and disclosures. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Millions of eligible Americans have already received their Economic Impact Payments (EIPs) via direct deposit or paper checks, according to the IRS. Others are still waiting. The payments are part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Here are some answers to questions you may have about EIPs.
Who’s eligible to get an EIP?
Eligible taxpayers who filed their 2018 or 2019 returns and chose direct deposit of their refunds automatically receive an Economic Impact Payment. You must be a U.S. citizen or U.S. resident alien and you can’t be claimed as a dependent on someone else’s tax return. In general, you must also have a valid Social Security number and have adjusted gross income (AGI) under a certain threshold.
The IRS also says that automatic payments will go to people receiving Social Security retirement or disability benefits and Railroad Retirement benefits.
How much are the payments?
EIPs can be up to $1,200 for individuals, or $2,400 for married couples, plus $500 for each qualifying child.
How much income must I have to receive a payment?
You don’t need to have any income to receive a payment. But for higher income people, the payments phase out. The EIP is reduced by 5% of the amount that your AGI exceeds $75,000 ($112,500 for heads of household or $150,000 for married joint filers), until it’s $0.
The payment for eligible individuals with no qualifying children is reduced to $0 once AGI reaches:
Each of these threshold amounts increases by $10,000 for each additional qualifying child. For example, because families with one qualifying child receive an additional $500 Payment, their $1,700 Payment ($2,900 for married joint filers) is reduced to $0 once adjusted gross income reaches:
How will I know if money has been deposited into my bank account?
The IRS stated that it will send letters to EIP recipients about the payment within 15 days after they’re made. A letter will be sent to a recipient’s last known address and will provide information on how the payment was made and how to report any failure to receive it.
Is there a way to check on the status of a payment?
The IRS has introduced a new “Get My Payment” web-based tool that will: show taxpayers either their EIP amount and the scheduled delivery date by direct deposit or paper check, or that a payment hasn’t been scheduled. It also allows taxpayers who didn’t use direct deposit on their last-filed return to provide bank account information. In order to use the tool, you must enter information such as your Social Security number and birthdate. You can access it here: https://bit.ly/2ykLSwa
I tried the tool and I got the message “payment status not available.” Why?
Many people report that they’re getting this message. The IRS states there are many reasons why you may see this. For example, you’re not eligible for a payment or you’re required to file a tax return and haven’t filed yet. In some cases, people are eligible but are still getting this message. Hopefully, the IRS will have it running seamlessly soon. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
As unemployment and financial insecurity become widespread during the novel coronavirus (COVID-19) crisis, many not-for-profit donors find themselves unable to provide monetary support to favorite charities. Instead, your organization may receive offers of gifts in kind (GIK) or donated services. Although you likely welcome these gifts, you may be unsure about how to record and value them. Here’s a brief summary.
Gifts take many forms
GIKs generally are pieces of tangible property or property rights. They can take many forms, including: free or discounted use of facilities; free advertising; collections, such as artwork to display; and property, such as office furniture or medical supplies.
To record GIKs, determine whether the item can be used to carry out your mission or sold to fund operations. In other words, does it have a value to your nonprofit? If so, it should be recorded as a donation and a related receivable once it’s unconditionally pledged to your organization.
To value the gift, assess its fair value — or what your organization would pay to buy it from an unrelated third party. In many cases, it’s easy to assign a fair value to property. But when the gift is a collection or something that doesn’t otherwise have a readily determinable market value, its fair value is more difficult to assign. For smaller gifts, you may need to rely on a good faith estimate from the donor. But if the value is more than $5,000, the donor must obtain an independent appraisal for tax purposes.
Ask questions about donations
To determine the fair value of a donated service, ask whether it meets one of the following two criteria:
First, does the service create a nonfinancial asset (in other words, a tangible asset) or enhance a nonfinancial asset that already exists? Such services are capitalized at fair value on the date of the donation.
Second, does the service require specialized skills, is it provided by someone with those skills and would the service have been purchased if it hadn’t been donated? Such services are accounted for by recording contribution income for its fair value. You also must record it as a related expense, in the same amount, for the professional service provided.
These are just the basics. For more information about handling GIKs and donated services, contact us. Also ask us about tax breaks, government assistance and other COVID-19-related aid for nonprofits. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The law providing relief due to the coronavirus (COVID-19) pandemic contains a beneficial change in the tax rules for many improvements to interior parts of nonresidential buildings. This is referred to as qualified improvement property (QIP). You may recall that under the Tax Cuts and Jobs Act (TCJA), any QIP placed in service after December 31, 2017 wasn’t considered to be eligible for 100% bonus depreciation. Therefore, the cost of QIP had to be deducted over a 39-year period rather than entirely in the year the QIP was placed in service. This was due to an inadvertent drafting mistake made by Congress.
But the error is now fixed. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. It now allows most businesses to claim 100% bonus depreciation for QIP, as long as certain other requirements are met. What’s also helpful is that the correction is retroactive and it goes back to apply to any QIP placed in service after December 31, 2017. Unfortunately, improvements related to the enlargement of a building, any elevator or escalator, or the internal structural framework continue to not qualify under the definition of QIP.
In the current business climate, you may not be in a position to undertake new capital expenditures — even if they’re needed as a practical matter and even if the substitution of 100% bonus depreciation for a 39-year depreciation period significantly lowers the true cost of QIP. But it’s good to know that when you’re ready to undertake qualifying improvements that 100% bonus depreciation will be available.
And, the retroactive nature of the CARES Act provision presents favorable opportunities for qualifying expenditures you’ve already made. We can revisit and add to documentation that you’ve already provided to identify QIP expenditures.
For not-yet-filed tax returns, we can simply reflect the favorable treatment for QIP on the return.
If you’ve already filed returns that didn’t claim 100% bonus depreciation for what might be QIP, we can investigate based on available documentation as discussed above. We will evaluate what your options are under Revenue Procedure 2020-25, which was just released by the IRS.
If you have any questions about how you can take advantage of the QIP provision, don’t hesitate to contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020, contains several tax-related provisions for businesses hit by the novel coronavirus (COVID-19) crisis. Those provisions will also have an impact on financial reporting.
Companies that issue financial statements under U.S. Generally Accepted Accounting Principles (GAAP) are required to follow Accounting Standards Codification (ASC) Topic 740, Income Taxes. This complicated guidance requires companies to report the effects of new tax laws in the period they’re enacted. As a result, companies — especially those that issue quarterly financial statements or that have fiscal year ends in the coming months — are scrambling to interpret the business tax relief measures under the new law.
Overview of business tax law changes
The CARES Act suspends several revenue-generating provisions of the Tax Cuts and Jobs Act (TCJA). These changes aim to help improve operating cash flow for businesses during the COVID-19 crisis. Specifically, the new law temporarily scales back TCJA deduction limitations on:
The CARES Act also accelerates the recovery of credits for prior-year corporate alternative minimum tax (AMT) liability. And it fixes a TCJA drafting error for real estate qualified improvement property (QIP). The fix retroactively allows a 15-year depreciation period for QIP, making it eligible for first-year bonus depreciation in tax years after the TCJA took effect. The correction allows businesses to choose between first-year bonus depreciation for QIP expenditures and 15-year depreciation.
These changes are subject to numerous rules and restrictions. So, it’s not always clear whether a business will benefit from a particular change. In some cases, businesses may need to file amended federal income tax returns to take advantage of retroactive changes in the law. In addition, a company’s tax obligations may be impacted by relief measures provided in the states and countries where it operates.
Impact on financial reporting
Under ASC 740, companies must adjust deferred tax assets and liabilities for the effect of a change in tax laws or tax rates. On the income statement side, the adjustment is included in income from continuing operations.
If your business follows U.S. GAAP, you’ll need to account for the effect of the CARES Act on deferred tax assets and liabilities for interim and annual reporting periods that include March 27, 2020 (the date the law was signed by President Trump). Also, certain provisions, such as the modified NOL and business interest deduction rules, may impact a company’s current taxes payable. Unfortunately, some companies may have difficulty accurately forecasting income or loss in the current period due to the economic disruptions caused by COVID-19.
In the coming months, the Financial Accounting Standards Board (FASB) plans to focus on supporting businesses as they navigate the impact of the COVID-19 crisis and providing guidance to clarify financial reporting issues as they arise. We are atop the latest developments and can help guide you through your tax and financial reporting challenges. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
In the midst of the coronavirus (COVID-19) pandemic, Americans are focusing on their health and financial well-being. To help with the impact facing many people, the government has provided a range of relief. Here are some new announcements made by the IRS.
More deadlines extended
As you probably know, the IRS postponed the due dates for certain federal income tax payments — but not all of them. New guidance now expands on the filing and payment relief for individuals, estates, corporations and others.
Under IRS Notice 2020-23, nearly all tax payments and filings that would otherwise be due between April 1 and July 15, 2020, are now postponed to July 15, 2020. Most importantly, this would include any fiscal year tax returns due between those dates and any estimated tax payments due between those dates, such as the June 15 estimated tax payment deadline for individual taxpayers.
Economic Impact Payments for nonfilers
You have also likely heard about the cash payments the federal government is making to individuals under certain income thresholds. The Coronavirus Aid, Relief, and Economic Security (CARES) Act will provide an eligible individual with a cash payment equal to the sum of: $1,200 ($2,400 for eligible married couples filing jointly) plus $500 for each qualifying child. Eligibility is based on adjusted gross income (AGI).
On its Twitter account, the IRS announced that it deposited the first Economic Impact Payments into taxpayers’ bank accounts on April 11. “We know many people are anxious to get their payments; we’ll continue issuing them as fast as we can,” the tax agency added.
The IRS has announced additional details about these payments:
This only describes new details in a couple of the COVID-19 assistance provisions. Members of Congress are discussing another relief package so additional help may be on the way. We’ll keep you updated. Contact us if you have tax or financial questions during this challenging time. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
One of the many challenges of operating a not-for-profit organization during the coronavirus (COVID-19) pandemic is that just when you desperately need financial support, many donors are unable to help. Widespread unemployment, stock market volatility and general uncertainty make even dependable donors reluctant to part with their money.
Then there’s the fact that donors are receiving a staggering number of charitable solicitations right now. If your nonprofit doesn’t directly serve constituencies harmed by COVID-19, your appeals are likely to go to the bottom of donors’ piles. Here are some ideas for keeping your organization’s needs top of mind.
Avoid mass appeals
Now is generally not the time to make mass appeals for donations. If you do contact your entire mailing list, use the opportunity to express concern for your supporters’ well-being and to update them on how your organization is faring under the circumstances. Also let donors know that charitable donations made in 2020 are deductible up to $300, even if donors don’t itemize.
To keep supporters engaged, stay on top of your social media accounts. Use Twitter, Facebook and other platforms to announce program suspensions and reopening dates and to share success stories — either recent or, if your nonprofit is temporarily closed, from the past.
Reach out to significant donors in person. Obviously, face-to-face meetings are out of the question, so give major supporters a phone call or arrange for a videoconference. Be sensitive to donors’ financial challenges and prepare to be flexible. If donors express the desire to help but can’t commit to an amount right now, suggest they might want to make a multi-year gift or include your nonprofit in their estate plans.
Donors might also be able to provide your group with professional services — such as PR expertise or legal advice — or be willing to contribute an item to an online fundraising auction. It’s a great time to learn more about major donors and ask them how they want to help, now and in the future. You may be surprised by their answers.
Chances are these supporters are well established in the community and have friends and colleagues they can introduce to your nonprofit. If these well-connected donors aren’t already on your board, invite them to become members — or ask them to chair a future event.
Resist the temptation
Although you may be tempted to throw yourself on the mercy of donors, desperate appeals may not be wise right now. Donors generally want to invest in fiscally sound nonprofits that will be around for the long haul. So long as your nonprofit has adequate operating reserves and a contingency plan, you should be able to weather the current storm. Contact us if you need help getting over any hurdles in the meantime. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The IRS has issued guidance providing relief from failure to make employment tax deposits for employers that are entitled to the refundable tax credits provided under two laws passed in response to the coronavirus (COVID-19) pandemic. The two laws are the Families First Coronavirus Response Act, which was signed on March 18, 2020, and the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, which was signed on March 27, 2020.
Employment tax penalty basics
The tax code imposes a penalty for any failure to deposit amounts as required on the date prescribed, unless such failure is due to reasonable cause rather than willful neglect.
An employer’s failure to deposit certain federal employment taxes, including deposits of withheld income taxes and taxes under the Federal Insurance Contributions Act (FICA) is generally subject to a penalty.
COVID-19 relief credits
Employers paying qualified sick leave wages and qualified family leave wages required by the Families First Act, as well as qualified health plan expenses allocable to qualified leave wages, are eligible for refundable tax credits under the Families First Act.
Specifically, provisions of the Families First Act provide a refundable tax credit against an employer’s share of the Social Security portion of FICA tax for each calendar quarter, in an amount equal to 100% of qualified leave wages paid by the employer (plus qualified health plan expenses with respect to that calendar quarter).
Additionally, under the CARES Act, certain employers are also allowed a refundable tax credit under the CARES Act of up to 50% of the qualified wages, including allocable qualified health expenses if they are experiencing:
This credit is limited to $10,000 per employee over all calendar quarters combined.
An employer paying qualified leave wages or qualified retention wages can seek an advance payment of the related tax credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
The Families First Act and the CARES Act waive the penalty for failure to deposit the employer share of Social Security tax in anticipation of the allowance of the refundable tax credits allowed under the two laws.
IRS Notice 2020-22 provides that an employer won’t be subject to a penalty for failing to deposit employment taxes related to qualified leave wages or qualified retention wages in a calendar quarter if certain requirements are met. Contact us for more information about whether you can take advantage of this relief.
More breaking news
Be aware the IRS also just extended more federal tax deadlines. The extension, detailed in Notice 2020-23, involves a variety of tax form filings and payment obligations due between April 1 and July 15. It includes estimated tax payments due June 15 and the deadline to claim refunds from 2016. The extended deadlines cover individuals, estates, corporations and others. In addition, the guidance suspends associated interest, additions to tax, and penalties for late filing or late payments until July 15, 2020. Previously, the IRS postponed the due dates for certain federal income tax payments. The new guidance expands on the filing and payment relief. Contact us if you have questions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Efforts to contain the spread of the novel coronavirus (COVID-19) have led to suspension of many economic activities, putting unprecedented strain on businesses. The Securities and Exchange Commission (SEC) recently issued guidance to help public companies provide investors and other stakeholders with useful, accurate financial statement disclosures in today’s uncertain marketplace.
New disclosure guidance
On March 25, the SEC issued interpretive guidance, Coronavirus (COVID-19), CF Disclosure Guidance: Topic No. 9. It highlights best practices in disclosing the risks and effects of the COVID-19 pandemic.
The guidance recommends using a principles-based disclosure system rooted on the concept of materiality. This means companies should disclose information that a reasonable person would find important in the total mix of information considered when making a decision to sell or buy a company’s stock.
The SEC guidance offers the following 10 questions for companies to consider when making COVID-19-related disclosures:
This list of open-ended questions isn’t intended to be exhaustive. Each company will need to customize COVID-19-related disclosures using forward-looking information that’s based on assumptions about what may or may not happen in the future. In many situations, the impact will depend on factors beyond management’s control and knowledge.
We can help
The SEC has separately provided 45-day relief for certain reports that need to be filed by public companies. This will give management extra breathing room to assess the evolving situation and estimate the probable effects of the pandemic. Contact us for assistance crafting COVID-19 disclosures in these unprecedented conditions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
As we all try to keep ourselves, our loved ones, and our communities safe from the coronavirus (COVID-19) pandemic, you may be wondering about some of the recent tax changes that were part of a tax law passed on March 27.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act contains a variety of relief, notably the “economic impact payments” that will be made to people under a certain income threshold. But the law also makes some changes to retirement plan rules and provides a new tax break for some people who contribute to charity.
Waiver of 10% early distribution penalty
IRAs and employer sponsored retirement plans are established to be long-term retirement planning accounts. As such, the IRS imposes a penalty tax of an additional 10% if funds are distributed before reaching age 59½. (However, there are some exceptions to this rule.)
Under the CARES Act, the additional 10% tax on early distributions from IRAs and defined contribution plans (such as 401(k) plans) is waived for distributions made between January 1 and December 31, 2020 by a person who (or whose family) is infected with COVID-19 or is economically harmed by it. Penalty-free distributions are limited to $100,000, and may, subject to guidelines, be re-contributed to the plan or IRA. Income arising from the distributions is spread out over three years unless the employee elects to turn down the spread-out.
Employers may amend defined contribution plans to provide for these distributions. Additionally, defined contribution plans are permitted additional flexibility in the amount and repayment terms of loans to employees who are qualified individuals.
Waiver of required distribution rules
Depending on when you were born, you generally must begin taking annual required minimum distributions (RMDs) from tax-favored retirement accounts — including traditional IRAs, SEP accounts and 401(k)s — when you reach age 70½ or 72. These distributions also are subject to federal and state income taxes. (However, you don’t need to take RMDs from Roth IRAs.)
Under the CARES Act, RMDs that otherwise would have to be made in 2020 from defined contribution plans and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner’s having turned age 70½ in 2019.
New charitable deduction tax breaks
The CARES Act makes significant liberalizations to the rules governing charitable deductions including:
The CARES Act goes far beyond what is described here. The new law contains many different types of tax and financial relief meant to help individuals and businesses cope with the fallout. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Although most not-for-profits have been hurt by the coronavirus (COVID-19) pandemic, your organization’s specific challenges probably depend on your mission, constituency and other factors. For example, social distancing rules have forced most arts organization to temporarily shut down and furlough employees. Many social services charities, on the other hand, have remained open and are struggling to meet surging demand for services.
What unites the nonprofit sector right now is financial insecurity. Without reserves and a resilient revenue model, you may be unable to continue operations. Here’s how your leadership needs to act to keep your organization afloat.
First, determine your nonprofit’s cash position and how long you can continue operating if no new revenue comes in. If you’ve built an emergency reserve fund, you may be able to continue for six or more months. Unfortunately, most charities have much thinner cash cushions — perhaps only enough to cover a few weeks of bills.
Next assess (or reassess) future cash flows. Say, for example, that your mental health clinic uses a fee-for-services model, but your out-of-work clients can no longer afford the fees. Or perhaps your school raises 30% of its annual income with a gala that you’ve had to reschedule from April to October. You’re probably looking at some big shortfalls.
Be careful not to underestimate cash needs — particularly if demand for services has increased. Assume that funding sources that were already shaky will evaporate and that usually reliable donors won’t be able to come to your rescue due to competing demands and their own financial concerns.
Now look for alternative sources of financial support. If you haven’t already, see if your nonprofit qualifies for a loan under the federal government’s new Paycheck Protection Program. Loans to nonprofits with less than 500 employees can be forgiven so long as you keep people on the payroll and adhere to other guidelines.
Community foundations are another key source of emergency funding. More than 250 community foundations in all 50 states have created COVID-19 relief funds. Built for speed and flexibility, these funds have already announced $64 million in grants to local nonprofits directly addressing the crisis. Many private foundations and government funders have also stepped up to the plate by removing grant restrictions. Get in touch with current grantmakers to see if they can help ease burdens and increase monetary support.
Now is also the time to touch base with restricted gift donors. Explain that by removing restrictions, they enable your nonprofit to deploy funds where they’re most needed now. Finally, let all donors know that federal tax rules have been relaxed for certain charitable contributions.
It’s impossible to predict how long and severe the COVID-19 crisis will be, so prepare your organization for a tough fight. Contact us for help assessing your financial position and for advice about the new tax provisions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbpaohio.com
The recently enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 pandemic. The employee retention credit is available to employers, including nonprofit organizations, with operations that have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings.
The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.
IRS issues FAQs
The IRS has now released FAQs about the credit. Here are some highlights.
How is the credit calculated? The credit is 50% of qualifying wages paid up to $10,000 in total. So the maximum credit for an eligible employer for qualified wages paid to any employee is $5,000.
Wages paid after March 12, 2020, and before Jan. 1, 2021, are eligible for the credit. Therefore, an employer may be able to claim it for qualified wages paid as early as March 13, 2020. Wages aren’t limited to cash payments, but also include part of the cost of employer-provided health care.
When is the operation of a business “partially suspended” for the purposes of the credit?The operation of a business is partially suspended if a government authority imposes restrictions by limiting commerce, travel or group meetings due to COVID-19 so that the business still continues but operates below its normal capacity.
Example: A state governor issues an executive order closing all restaurants and similar establishments to reduce the spread of COVID-19. However, the order allows establishments to provide food or beverages through carry-out, drive-through or delivery. This results in a partial suspension of businesses that provided sit-down service or other on-site eating facilities for customers prior to the executive order.
Is an employer required to pay qualified wages to its employees? No. The CARES Act doesn’t require employers to pay qualified wages.
Is a government employer or self-employed person eligible?No.Government employers aren’t eligible for the employee retention credit. Self-employed individuals also aren’t eligible for the credit for self-employment services or earnings.
Can an employer receive both the tax credits for the qualified leave wages under the Families First Coronavirus Response Act (FFCRA) and the employee retention credit under the CARES Act? Yes, but not for the same wages. The amount of qualified wages for which an employer can claim the employee retention credit doesn’t include the amount of qualified sick and family leave wages for which the employer received tax credits under the FFCRA.
Can an eligible employer receive both the employee retention credit and a loan under the Paycheck Protection Program? No. An employer can’t receive the employee retention credit if it receives a Small Business Interruption Loan under the Paycheck Protection Program, which is authorized under the CARES Act. So an employer that receives a Paycheck Protection loan shouldn’t claim the employee retention credit.
For more information
The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law on March 27. Among other economic relief measures, the new law allows large public banks to temporarily postpone the controversial current expected credit loss (CECL) standard. Here are the details.
Updated accounting rules
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, in response to the financial crisis of 2007–2008. The updated CECL standard relies on estimates of probable future losses. By contrast, existing guidance relies on an incurred-loss model to recognize losses.
In general, the updated standard will require entities to recognize losses on bad loans earlier than under current U.S. Generally Accepted Accounting Principles (GAAP). It’s scheduled to go into effect for most public companies in 2020. In October 2019, the deadline for smaller reporting companies was extended from 2021 to 2023, and, for private entities and nonprofits, it was extended from 2022 to 2023.
Option to delay
Under the CARES Act, large public insured depository institutions (including credit unions), bank holding companies, and their affiliates have the option of postponing implementation of the CECL standard until the earlier of:
Many public banks have made significant investments in systems and processes to comply with the CECL standard, and they’ve communicated with investors about the changes. So, some may decide to stay the course. But many large banks are expected to take advantage of the option to delay implementation.
Congress decided to provide a temporary reprieve from implementing the changes for a variety of reasons. Notably, the COVID-19 pandemic has created a volatile, uncertain lending environment that may result in significant credit losses for some banks.
To measure those losses, banks must forecast into the foreseeable future to predict losses over the life of a loan and immediately book those losses. But making estimates could prove challenging in today’s unprecedented market conditions. And, once a credit loss has been recognized, it generally can’t be recouped on the financial statements. Plus, there’s some concern that the CECL model would cause banks to needlessly hold more capital and curb lending when borrowers need it most.
So far, the FASB hasn’t delayed the CECL standard. But the COVID-19 crisis has front-loaded concerns about the CECL standard, prompting critics in both the House and Senate to step up their efforts to block the standard. Contact us for the latest developments on this issue. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
A new law signed by President Trump on March 27 provides a variety of tax and financial relief measures to help Americans during the coronavirus (COVID-19) pandemic. This article explains some of the tax relief for individuals in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Individual cash payments
Under the new law, an eligible individual will receive a cash payment equal to the sum of: $1,200 ($2,400 for eligible married couples filing jointly) plus $500 for each qualifying child. Eligibility is based on adjusted gross income (AGI).
Individuals who have no income, as well as those whose income comes entirely from Social Security benefits, are also eligible for the payment.
The AGI thresholds will be based on 2019 tax returns, or 2018 returns if you haven’t yet filed your 2019 returns. For those who don’t qualify on their most recently filed tax returns, there may be another option to receive some money. An individual who isn’t an eligible individual for 2019 may be eligible for 2020. The IRS won’t send cash payments to him or her. Instead, the individual will be able to claim the credit when filing a 2020 return.
The income thresholds
The amount of the payment is reduced by 5% of AGI in excess of:
But there is a ceiling that leaves some taxpayers ineligible for a payment. Under the rules, the payment is completely phased-out for a single filer with AGI exceeding $99,000 and for joint filers with no children with AGI exceeding $198,000. For a head of household with one child, the payment is completely phased out when AGI exceeds $146,500.
Most eligible individuals won’t have to take any action to receive a cash payment from the IRS. The payment may be made into a bank account if a taxpayer filed electronically and provided bank account information. Otherwise, the IRS will mail the payment to the last known address.
Other tax provisions
There are several other tax-related provisions in the CARES Act. For example, a distribution from a qualified retirement plan won’t be subject to the 10% additional tax if you’re under age 59 ½ — as long as the distribution is related to COVID-19. And the new law allows charitable deductions, beginning in 2020, for up $300 even if a taxpayer doesn’t itemize deductions.
These are only a few of the tax breaks in the CARES Act. We’ll cover additional topics in coming weeks. In the meantime, please contact us if you have any questions about your situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
On March 27, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. How is this massive $2 trillion recovery package poised to help your not-for-profit organization? It depends on your group’s size, financial condition and other factors. But most nonprofits affected by the coronavirus (COVID-19) outbreak are eligible for some relief under the CARES Act.
Paycheck Protection Program (PPC)
This $349 billion loan program (administered by the Small Business Administration) is intended to help U.S. employers, including nonprofits, keep workers on their payrolls. To potentially qualify, you must be a 501(c)(3) or 501(c)(19) organization with less than 500 full- or part-time employees. PPC loans can be as large as $10 million. But most organizations will receive smaller amounts — usually equal to 2.5 times their average monthly payroll costs.
If you receive a loan through the program, proceeds may be used only for paying certain expenses, including:
You can’t use these loans to pay your mortgage principal or to prepay mortgage interest.
Perhaps the most reassuring aspect of PPC loans is that they can be forgiven — so long as you follow the rules. To have your full loan amount forgiven (except for loan interest), you must retain employees and not reduce their regular salary or wages more than 25%. If you’ve already laid off staffers, rehiring them by June 30 may enable you to qualify for full loan forgiveness.
Industry Stabilization Fund (ISF)
Nonprofits with more than 500 employees, such as hospitals and educational institutions, may be eligible for ISF low-interest loans. When applying for one, you’ll be required to certify (among other things) that loan proceeds will be used to retain (or rehire) at least 90% of your workforce at full pay and benefits through at least September 30.
Unlike PPP loans, ISF loans won’t be forgiven. However, you aren’t required to pay principal or interest for at least the first six months after receiving an ISF loan. There’s a 2% interest-rate cap on these loans.
If you’d like to apply for financial assistance under the CARES Act, talk directly to your bank. And contact us for help navigating the many provisions of recent legislation — including other lending programs, emergency grants and new payroll tax breaks. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
On March 27, President Trump signed into law another coronavirus (COVID-19) law, which provides extensive relief for businesses and employers. Here are some of the tax-related provisions in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
Employee retention credit
The new law provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis.
Employer eligibility. The credit is available to employers with operations that have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also provided to employers that have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.
The credit isn’t available to employers receiving Small Business Interruption Loans under the new law.
Wage eligibility. For employers with an average of 100 or fewer full-time employees in 2019, all employee wages are eligible, regardless of whether an employee is furloughed. For employers with more than 100 full-time employees last year, only the wages of furloughed employees or those with reduced hours as a result of closure or reduced gross receipts are eligible for the credit.
No credit is available with respect to an employee for whom the employer claims a Work Opportunity Tax Credit.
The term “wages” includes health benefits and is capped at the first $10,000 paid by an employer to an eligible employee. The credit applies to wages paid after March 12, 2020 and before January 1, 2021.
The IRS has authority to advance payments to eligible employers and to waive penalties for employers who don’t deposit applicable payroll taxes in anticipation of receiving the credit.
Payroll and self-employment tax payment delay
Employers must withhold Social Security taxes from wages paid to employees. Self-employed individuals are subject to self-employment tax.
The CARES Act allows eligible taxpayers to defer paying the employer portion of Social Security taxes through December 31, 2020. Instead, employers can pay 50% of the amounts by December 31, 2021 and the remaining 50% by December 31, 2022.
Self-employed people receive similar relief under the law.
Temporary repeal of taxable income limit for NOLs
Currently, the net operating loss (NOL) deduction is equal to the lesser of 1) the aggregate of the NOL carryovers and NOL carrybacks, or 2) 80% of taxable income computed without regard to the deduction allowed. In other words, NOLs are generally subject to a taxable-income limit and can’t fully offset income.
The CARES Act temporarily removes the taxable income limit to allow an NOL to fully offset income. The new law also modifies the rules related to NOL carrybacks.
Interest expense deduction temporarily increased
The Tax Cuts and Jobs Act (TCJA) generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income.
The CARES Act temporarily and retroactively increases the limit on the deductibility of interest expense from 30% to 50% for tax years beginning in 2019 and 2020. There are special rules for partnerships.
Bonus depreciation for qualified improvement property
The TCJA amended the tax code to allow 100% additional first-year bonus depreciation deductions for certain qualified property. The TCJA eliminated definitions for 1) qualified leasehold improvement property, 2) qualified restaurant property, and 3) qualified retail improvement property. It replaced them with one category called qualified improvement property (QIP). A general 15-year recovery period was intended to have been provided for QIP. However, that period failed to be reflected in the language of the TCJA. Therefore, under the TCJA, QIP falls into the 39-year recovery period for nonresidential rental property, making it ineligible for 100% bonus depreciation.
The CARES Act provides a technical correction to the TCJA, and specifically designates QIP as 15-year property for depreciation purposes. This makes QIP eligible for 100% bonus depreciation. The provision is effective for property placed in service after December 31, 2017.
Careful planning required
This article only explains some of the relief available to businesses. Additional relief is provided to individuals. Be aware that other rules and limits may apply to the tax breaks described here. Contact us if you have questions about your situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Thanks to the Internet and social media, we’re bombarded daily with all kinds of information. As a result, most people prefer clear, concise snippets of data over lengthy text. Have your financial statements kept up with today’s data-consumption trends?
Show and tell
Humans are visual learners. In business, the use of so-called “infographics” started with product marketing. Combining images with written text, these data visualizations can draw readers in and evoke emotion. They can breathe life into content that could otherwise be considered boring or dry.
Annual reports are traditionally lengthy and text heavy. So, businesses are now using visual aids to present critical financial information to investors and other stakeholders. In this context, infographics help stakeholders digest complex information and retain key points.
In financial reporting
Examples of data visualizations that might be appropriate in financial reporting include:
Time-series line graphs. These visual aids can be used to show financial metrics, such as revenue and cost of sales, over time. They can help stakeholders identify trends, like seasonality and rates of growth (or decline), that can be used to interrupt historical performance and project it into the future.
Bar graphs. Here, data is grouped into rectangular bars in lengths proportionate to the values they represent so data can be compared and contrasted. A company might use this type of infographic to show revenue by product line or geographic region to determine what (or who) is selling the most.
Pie charts. These circular models show parts of a whole, dividing data into slices like a pizza. They might be used in financial reporting to show the composition of a company’s operating expenses to use in budgeting or cost-cutting projects.
Effective visualizations avoid “chart junk.” That is, unnecessary elements — such as excessive use of color, icons or text — that detract from the value of the data presentation. Ideally, each infographic should present one or two ideas, simply and concisely. The information also should be timely and relevant. Too many infographics can become just as overwhelming to a reader as too much text.
Beyond annual reports
In addition to using infographics in financial statements, management may decide to create data visualizations for other financial purposes, such as:
Nonprofits can also use infographics to create an emotional connection with donors. If effective, this outreach may encourage additional contributions for the nonprofit’s cause.
Let’s get visual
Infographics can’t completely replace text in financial statements, but they can be used to supplement the financials by highlighting key issues and accomplishments. Certain entities, such as nonprofits and private businesses, generally have more flexibility in how they present their financial data than public ones do. Contact us to help decide on the optimal visual aids to drive home key points in an effective, organized manner. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Taxpayers now have more time to file their tax returns and pay any tax owed because of the coronavirus (COVID-19) pandemic. The Treasury Department and IRS announced that the federal income tax filing due date is automatically extended from April 15, 2020, to July 15, 2020.
Taxpayers can also defer making federal income tax payments, which are due on April 15, 2020, until July 15, 2020, without penalties and interest, regardless of the amount they owe. This deferment applies to all taxpayers, including individuals, trusts and estates, corporations and other non-corporate tax filers as well as those who pay self-employment tax. They can also defer their initial quarterly estimated federal income tax payments for the 2020 tax year (including any self-employment tax) from the normal April 15 deadline until July 15.
No forms to file
Taxpayers don’t need to file any additional forms to qualify for the automatic federal tax filing and payment relief to July 15. However, individual taxpayers who need additional time to file beyond the July 15 deadline, can request a filing extension by filing Form 4868. Businesses who need additional time must file Form 7004. Contact us if you need assistance filing these forms.
If you expect a refund
Of course, not everybody will owe the IRS when they file their 2019 tax returns. If you’re due a refund, you should file as soon as possible. The IRS has stated that despite the COVID-19 outbreak, most tax refunds are still being issued within 21 days.
New law passes, another on the way
On March 18, 2020, President Trump signed the “Families First Coronavirus Response Act,” which provides a wide variety of relief related to COVID-19. It includes free testing, waivers and modifications of Federal nutrition programs, employment-related protections and benefits, health programs and insurance coverage requirements, and related employer tax credits and tax exemptions.
If you’re an employee, you may be eligible for paid sick leave for COVID-19 related reasons. Here are the specifics, according to the IRS:
As of this writing, Congress was working on passing another bill that would provide additional relief, including checks that would be sent to Americans under certain income thresholds. We will keep you updated about any developments. In the meantime, please contact us with any questions or concerns about your tax or financial situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Whether your not-for-profit is newly deluged with demand for services or you’ve closed doors temporarily, it’s important to keep up with legislation responding to the coronavirus (COVID-19) crisis. On March 18, the Families First Coronavirus Response Act was signed into law to provide American workers affected by the pandemic with extended sick and family leave benefits.
The new law applies to your nonprofit if you have fewer than 500 employees, although you may be exempt if you have fewer than 50. Here are some details.
3 things to know
There are three important components of the new law:
1. Paid sick leave. If a staffer is ill, is instructed to be isolated by a physician or government authority or is caring for a sick family member or child whose school has closed, your organization must provide two weeks of paid leave. Pay part-time workers based on their average hours over a two-week period. Benefits are capped at $511 per day and $5,110 total for employees on leave because of their own health issue, or $200 per day and $2,000 total to care for others.
2. Job-protected leave. You must provide 12 weeks of job-protected leave for employees who need to take care of a child due to the closure of a school or day care center. This provision updates existing rules under the Family and Medical Leave Act. Employers are now required to pay workers two-thirds of their regular wages, not to exceed $200 per day and $10,000 total. You aren’t required to pay employees during the first 10 days off; however, they may choose to use accrued time off benefits at this time.
3. Employer payroll tax credits. To help employers pay for time off, the law enables tax credits. You may claim a 100% refundable payroll tax credit on wages associated with paid sick and medical leave and other expenditures associated with health benefit contributions. Additional wages paid to staffers due to the law’s leave requirement aren’t subject to the employer portion of the payroll tax.
Congress has also provided $1 billion in emergency grants to states to process and pay unemployment insurance benefits. So if you need to lay off staffers during the extended COVID-19 crisis, this provision can help them manage the financial burden.
Of course, more is likely to be needed. Legislators are currently working out a deal to provide furloughed and laid-off workers with direct financial assistance as well as loans and other financial support for employers. Keep your eye on the news.
If you have questions about how the Families First Act applies to your nonprofit, please contact us. Also, because many nonprofits operate on thin margins at the best of times, you may worry about staying afloat. We can analyze your position and help you come up with possible survival strategies. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Businesses across the country are being affected by the coronavirus (COVID-19). Fortunately, Congress recently passed a law that provides at least some relief. In a separate development, the IRS has issued guidance allowing taxpayers to defer any amount of federal income tax payments due on April 15, 2020, until July 15, 2020, without penalties or interest.
On March 18, the Senate passed the House's coronavirus bill, the Families First Coronavirus Response Act. President Trump signed the bill that day. It includes:
Tax filing and payment extension
In Notice 2020-18, the IRS provides relief for taxpayers with a federal income tax payment due April 15, 2020. The due date for making federal income tax payments usually due April 15, 2020 is postponed to July 15, 2020.
Important: The IRS announced that the 2019 income tax filing deadline will be moved to July 15, 2020 from April 15, 2020, because of COVID-19.
Treasury Department Secretary Steven Mnuchin announced on Twitter, “we are moving Tax Day from April 15 to July 15. All taxpayers and businesses will have this additional time to file and make payments without interest or penalties.”
Previously, the U.S. Treasury Department and the IRS had announced that taxpayers could defer making income tax payments for 2019 and estimated income tax payments for 2020 due April 15 (up to certain amounts) until July 15, 2020. Later, the federal government stated that you also don’t have to file a return by April 15.
Of course, if you’re due a tax refund, you probably want to file as soon as possible so you can receive the refund money. And you can still get an automatic filing extension, to October 15, by filing IRS Form 4868. Contact us with any questions you have about filing your return.
Any amount can be deferred
In Notice 2020-18, the IRS stated: “There is no limitation on the amount of the payment that may be postponed.” (Previously, the IRS had announced dollar limits on the tax deferrals but then made a new announcement on March 21 that taxpayers can postpone payments “regardless of the amount owed.”)
In Notice 2020-18, the due date is postponed only for federal income tax payments for 2019 normally due on April 15, 2020 and federal estimated income tax payments (including estimated payments on self-employment income) due on April 15, 2020 for the 2020 tax year.
As of this writing, the IRS hasn’t provided a payment extension for the payment or deposit of other types of federal tax (including payroll taxes and excise taxes).
This only outlines the basics of the federal tax relief available at the time this was written. New details are coming out daily. Be aware that many states have also announced tax relief related to COVID-19. And Congress is working on more legislation that will provide additional relief, including sending checks to people under a certain income threshold and providing relief to various industries and small businesses.
We’ll keep you updated. In the meantime, contact us with any questions you have about your situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Traditionally, audit procedures for private companies tend to focus on the balance sheet. That is, auditors evaluate whether the book values of the company’s assets are overstated and its liabilities are understated. However, the income statement needs attention, too, especially in light of the updated guidance on recognizing revenue from contracts and the potential for misstatement.
New guidance in effect
In 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. The revenue recognition standard erases reams of industry-specific accounting guidance and provides a five-step model for recognizing revenue for most businesses worldwide. The updated guidance went into effect in fiscal year 2018 for public companies and in fiscal year 2019 for private ones.
In many cases, the revenue a company reports under the new guidance won’t differ much from what it reported under the old rules. But the timing of when a company can record revenues may be affected, particularly for long-term, multi-part arrangements. The result is a recognition process that offers fewer bright-line rules and more judgment calls compared to the old rules.
Potential for misstatement
For many companies, revenue is one of the largest financial statement accounts. It has a major effect on operating results and presents a significant fraud risk.
According to the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, improper revenue recognition is the most common method used to falsify financial statement information. Common methods of improperly boosting revenue include creating fictitious transactions or recording revenue prematurely. The risk of material misstatement — either due to fraud or unintentional error — is particularly high as companies implement ASU 2014-09.
Audit procedures that are relevant for testing revenue vary from company to company. Expect your auditors to ask questions about your company, its environment and its internal controls. This includes becoming familiar with its key products and services and the contractual terms of its sales transactions. With this knowledge, the auditor can identify key terms of standardized contracts and evaluate the effects of nonstandard terms.
For instance, with construction-type or production-type contracts, auditors might test:
Auditors also must evaluate accounting cutoffs to decide whether the company recognized revenue in the correct period. A typical cutoff procedure might involve testing sales transactions by comparing sales data for a sufficient period before and after year end to sales invoices, shipping documentation, or other evidence. This helps auditors determine whether revenue recognition criteria were met and sales were recorded in the proper period.
A custom approach
Contact us to discuss revenue testing approaches given the risks associated with revenue reporting and the recent changes to accounting standards for revenue recognition. We can help you get it right. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you have a life insurance policy, you probably want to make sure that the life insurance benefits your family will receive after your death won’t be included in your estate. That way, the benefits won’t be subject to the federal estate tax.
Under the estate tax rules, life insurance will be included in your taxable estate if either:
The first situation is easy to avoid. You can just make sure your estate isn’t designated as beneficiary of the policy.
The second situation is more complicated. It’s clear that if you’re the owner of the policy, the proceeds will be included in your estate regardless of the beneficiary. However, simply having someone else possess legal title to the policy won’t prevent this result if you keep so-called “incidents of ownership” in the policy. If held by you, the rights that will cause the proceeds to be taxed in your estate include:
Keep in mind that merely having any of the above powers will cause the proceeds to be taxed in your estate even if you never exercise the power.
If life insurance is obtained to fund a buy-sell agreement for a business interest under a “cross-purchase” arrangement, it won’t be taxed in your estate (unless the estate is named as beneficiary). For example, say Andrew and Bob are partners who agree that the partnership interest of the first of them to die will be bought by the surviving partner. To fund these obligations, Andrew buys a life insurance policy on Bob’s life. Andrew pays all the premiums, retains all incidents of ownership, and names himself as beneficiary. Bob does the same regarding Andrew. When the first partner dies, the insurance proceeds aren’t taxed in the first partner’s estate.
Life insurance trusts
An irrevocable life insurance trust (ILIT) is an effective vehicle that can be set up to keep life insurance proceeds from being taxed in the insured’s estate. Typically, the policy is transferred to the trust along with assets that can be used to pay future premiums. Alternatively, the trust buys the insurance with funds contributed by the insured person. So long as the trust agreement gives the insured person none of the ownership rights described above, the proceeds won’t be included in his or her estate.
The three-year rule
If you’re considering setting up a life insurance trust with a policy you own now or you just want to assign away your ownership rights in a policy, contact us to help you make these moves. Unless you live for at least three years after these steps are taken, the proceeds will be taxed in your estate. For policies in which you never held incidents of ownership, the three-year rule doesn’t apply. Don’t hesitate to contact us with any questions about your situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
It’s all too easy to let not-for-profit programs that have outlived their effectiveness to continue, even as they consume budget resources. To help ensure your resources are being deployed efficiently and effectively, consider using the tradition of spring cleaning to review and, potentially, replace older programs.
Go to the sources
Instead of relying on old assumptions about your programs’ effectiveness, perform new research. Start by surveying participants, members, donors, employees, volunteers and community leaders about which of your nonprofit’s programs are the most — and least — effective and why.
You may get mixed responses regarding the same program, so consider their source. Employees and volunteers who work directly with program participants are more likely to know if your current efforts are off target than is a donor who attends a fundraising event once a year.
Use the right measurements
If you don’t already have goals for each program, you need to set them. Also put in place an evaluation system with metrics that are strategic, realistic and timely. For example, a charity that provides tutoring to high school students in low-income neighborhoods might measure the program’s success by considering exam and class grades and graduation rates as well as the students’ and teachers’ feedback.
Apply several measures, including subjective ones, before deciding to cut or fund a program. Numerical data might suggest that a program isn’t worth the money spent on it, but those who benefit from the program may be so vocal about its success that eliminating it could harm your reputation.
If you meet resistance from major donors and other influential stakeholders, reassure them that you value their input. Provide them with numbers that illustrate the ineffectiveness of current programs and projections for possible replacements.
Make it better
It’s usually easier to identify obsolete programs than to decide on new ones. If one of your programs is clearly ineffective and another is wildly exceeding expectations, the decision to redeploy funds is simple.
Keep in mind that new programs can be variations of old ones, but they must better serve your basic mission, values and goals. Also, no matter how much good programs do, they can’t be successful if they overspend. For every new program, make a tight budget and stick to it. You might want to start small and, if your soft launch gets positive results, simply revise your budget.
What to keep
Naturally, programs that continue to further your nonprofit’s mission and meet constituents’ needs should stay in place. But your nonprofit likely harbors a few cobwebs that should be cleared to make way for more effective initiatives. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Do you own a business but haven’t gotten around to setting up a tax-advantaged retirement plan? Fortunately, it’s not too late to establish one and reduce your 2019 tax bill. A Simplified Employee Pension (SEP) can still be set up for 2019, and you can make contributions to it that you can deduct on your 2019 income tax return. Even better, SEPs keep administrative costs low.
Deadlines for contributions
A SEP can be set up as late as the due date (including extensions) of your income tax return for the tax year for which the SEP first applies. That means you can establish a SEP for 2019 in 2020 as long as you do it before your 2019 return filing deadline. You have until the same deadline to make 2019 contributions and still claim a potentially substantial deduction on your 2019 return.
Generally, most other types of retirement plans would have to have been established by December 31, 2019, in order for 2019 contributions to be made (though many of these plans do allow 2019 contributions to be made in 2020).
Contributions are optional
With a SEP, you can decide how much to contribute each year. You aren’t required to make any certain minimum contributions annually.
However, if your business has employees other than you:
The contributions go into SEP-IRAs established for each eligible employee. As the employer, you’ll get a current income tax deduction for contributions you make on behalf of your employees. Your employees won’t be taxed when the contributions are made, but at a later date when distributions are made — usually in retirement.
For 2019, the maximum contribution that can be made to a SEP-IRA is 25% of compensation (or 20% of self-employed income net of the self-employment tax deduction), subject to a contribution cap of $56,000. (The 2020 cap is $57,000.)
How to proceed
To set up a SEP, you complete and sign the simple Form 5305-SEP (“Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement”). You don’t need to file Form 5305-SEP with the IRS, but you should keep it as part of your permanent tax records. A copy of Form 5305-SEP must be given to each employee covered by the SEP, along with a disclosure statement.
Although there are rules and limits that apply to SEPs beyond what we’ve discussed here, SEPs generally are much simpler to administer than other retirement plans. Contact us with any questions you have about SEPs and to discuss whether it makes sense for you to set one up for 2019 (or 2020). Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The coronavirus (COVID-19) outbreak — officially a pandemic as of March 11 — has prompted global health concerns. But you also may be worried about how it will affect your business and its financial statements for 2019 and beyond.
Close up on financial reporting
The duration and full effects of the COVID-19 outbreak are yet unknown, but the financial impacts are already widespread. When preparing financial statements, consider whether this outbreak will have a material effect on your company’s:
Also monitor your customers’ credit standing. A decline may affect a customer’s ability to pay its outstanding balance, and, in turn, require you to reevaluate the adequacy of your allowance for bad debts.
Additionally, risks related to the COVID-19 may be reported as critical audit matters (CAMs) in the auditor’s report. If your company has an audit committee, this is an excellent time to engage in a dialog with them.
Disclosure requirements and best practices
How should your company report the effects of the COVID-19 outbreak on its financial statements? Under U.S. Generally Accepted Accounting Principles (GAAP), companies must differentiate between two types of subsequent events:
1. Recognized subsequent events. These events provide additional evidence about conditions, such as bankruptcy or pending litigation, that existed at the balance sheet date. The effects of these events generally need to be recorded directly in the financial statements.
2. Nonrecognized subsequent events. These provide evidence about conditions, such as a natural disaster, that didn’t exist at the balance sheet. Rather, they arose after that date but before the financial statements are issued (or available to be issued). Such events should be disclosed in the footnotes to prevent the financial statements from being misleading. Disclosures should include the nature of the event and an estimate of its financial effect (or disclosure that such an estimate can’t be made).
The World Health Organization didn’t declare the COVID-19 outbreak a public health emergency until January 30, 2020. However, events that caused the outbreak had occurred before the end of 2019. So, the COVID-19 risk was present in China on December 31, 2019. Accordingly, calendar-year entities may need to recognize the effects in their financial statements for 2019 and, if applicable, the first quarter of 2020.
There are many unknowns about the spread and severity of the COVID-19 outbreak. We can help navigate this potential crisis and evaluate its effects on your financial statements. Contact us for the latest developments. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you made large gifts to your children, grandchildren or other heirs last year, it’s important to determine whether you’re required to file a 2019 gift tax return. And in some cases, even if it’s not required to file one, it may be beneficial to do so anyway.
Who must file?
Generally, you must file a gift tax return for 2019 if, during the tax year, you made gifts:
Keep in mind that you’ll owe gift tax only to the extent that an exclusion doesn’t apply and you’ve used up your lifetime gift and estate tax exemption ($11.4 million for 2019). As you can see, some transfers require a return even if you don’t owe tax.
Who might want to file?
No gift tax return is required if your gifts for 2019 consisted solely of gifts that are tax-free because they qualify as:
But if you transferred hard-to-value property, such as artwork or interests in a family-owned business, you should consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.
April 15 deadline
The gift tax return deadline is the same as the income tax filing deadline. For 2019 returns, it’s April 15, 2020 — or October 15, 2020, if you file for an extension. But keep in mind that, if you owe gift tax, the payment deadline is April 15, regardless of whether you file for an extension. If you’re not sure whether you must (or should) file a 2019 gift tax return, contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Every nonprofit needs an executive search plan. Even if you aren’t facing an imminent vacancy, your organization is smart to prepare for what can be a long process. In fact, executive searches generally take several months — even if you end up hiring someone already known to your nonprofit. So make plans now.
Start by forming a search team made up of board members. Even if your current executive director isn’t leaving, the existence of a committee enables members to stay abreast of compensation trends and be on the lookout for potential successors to current executives.
One of your team’s objectives is to determine whether you’ll want to hire an executive search firm. The decision will hinge on many factors, including the position’s complexity and responsibility level. But before outsourcing a search, you’ll want to look around. The best person for the job may be a current board member, employee or volunteer.
To ensure the team will be ready to act when necessary, keep comprehensive, up-to-date job descriptions for key executive positions. They should detail the knowledge, skills, abilities and attitudes required. Your organization’s strategic goals should also be integrated into the descriptions. As part of ongoing succession planning efforts, your search team needs to periodically re-evaluate these descriptions. If, for example, your nonprofit is moving in a new direction, your next leader might need a different set of skills and experiences.
Also, think about how you’ll conduct the executive interview process. Who will be involved? What format will you use (such as one-on-one or group interviews)? Also prepare some thoughtful questions that reflect your organization’s needs and culture.
Different compensation philosophies
Although you may not be ready to discuss specific numbers, your nonprofit’s board and the search team should discuss and arrive at a common philosophy about compensation. Factors that influence compensation decisions include:
Consider whether your goal is to compensate in line with similar regional or national organizations, or with similar positions in the for-profit sector. Also, determine whether compensation will be fixed or have a variable pay component, such as bonuses or incentive pay.
Make it effective
Hiring the right executive is too important to leave until you’re under the gun. With a written plan, you can rest assured your organization is ready to conduct an effective search — whenever it becomes necessary. Contact us for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you’re the owner of an incorporated business, you probably know that there’s a tax advantage to taking money out of a C corporation as compensation rather than as dividends. The reason is simple. A corporation can deduct the salaries and bonuses that it pays executives, but not its dividend payments. Therefore, if funds are withdrawn as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is taxed only once, to the employee who receives it.
However, there’s a limit on how much money you can take out of the corporation this way. Under tax law, compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion isn’t deductible and, if paid to a shareholder, may be taxed as if it were a dividend. The IRS is generally more interested in unreasonable compensation payments made to someone “related” to a corporation, such as a shareholder or a member of a shareholder’s family.
How much compensation is reasonable?
There’s no simple formula. The IRS tries to determine the amount that similar companies would pay for comparable services under similar circumstances. Factors that are taken into account include:
There are some concrete steps you can take to make it more likely that the compensation you earn will be considered “reasonable,” and therefore deductible by your corporation. For example, you can:
Planning ahead can help avoid problems. Contact us if you’d like to discuss this further. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The rules for reporting leasing transactions are changing. Though these changes have been delayed until 2021 for private companies (and nonprofits), it’s important to know the possible effects on your financial statements as you renew leases or enter into new lease contracts. In some cases, you might decide to modify lease terms to avoid having to report leasing liabilities on your balance sheet. Or you might opt to buy (rather than lease) property to sidestep being subject to the complex disclosure requirements.
In 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases. The effective date for calendar year-end public companies was January 1, 2019. Last fall, the FASB deferred the effective date for private companies and not-for-profit organizations from 2020 to 2021.
The updated guidance requires companies to report long-term leased assets and leased liabilities on their balance sheets, as well as to provide expanded footnote disclosures. Increases in debt could, in turn, cause some companies to trip their loan covenants.
Updated lease terms
The updated standard applies only to leases of more than 12 months. To avoid having to apply the new guidance, some companies are switching over to short-term leases.
Others are incorporating evergreen clauses into their leases, where either party can cancel at any time after 30 days. An evergreen lease wouldn’t technically be considered a lease under the accounting rules — even if the lessee renewed on a monthly basis for 20 years. This might not be the best approach from a financial perspective, however, because the lessor would likely charge a higher price for the transaction. There’s also a risk that short-term and evergreen leases won’t be renewed at some point.
Lease vs. buy
The updated standard is also causing organizations to reevaluate their decisions about whether to lease or buy equipment and real estate. Under the previous accounting rules, a major upside to leasing was how the transactions were reported under Generally Accepted Accounting Principles (GAAP). Essentially, operating leases were reported as a business expense that was omitted from the balance sheet. This was a major upside for organizations with substantial debt. Under the updated guidance, lease obligations will show up as liabilities, similar to purchased assets that are financed with traditional bank loans. Reporting leases also will require expanded footnote disclosures.
The changes in the lease accounting rules might persuade you to buy property instead of lease it. Before switching over, consider the other benefits leasing has to offer. Notably, leases don’t require a large down payment or excess borrowing capacity. In addition, leases provide significant flexibility in case there’s an economic downturn or technological advances render an asset obsolete.
When deciding whether to lease or buy a fixed asset, there are a multitude of factors to consider, with no universal “right” choice. Contact us to discuss the pros and cons of leasing in light of the updated accounting guidance. We can help you take the approach that best suits your circumstances. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you own a home, the interest you pay on your home mortgage may provide a tax break. However, many people believe that any interest paid on their home mortgage loans and home equity loans is deductible. Unfortunately, that’s not true.
First, keep in mind that you must itemize deductions in order to take advantage of the mortgage interest deduction.
Deduction and limits for “acquisition debt”
A personal interest deduction generally isn’t allowed, but one kind of interest that is deductible is interest on mortgage “acquisition debt.” This means debt that’s: 1) secured by your principal home and/or a second home, and 2) incurred in acquiring, constructing or substantially improving the home. You can deduct interest on acquisition debt on up to two qualified residences: your primary home and one vacation home or similar property.
The deduction for acquisition debt comes with a stipulation. From 2018 through 2025, you can’t deduct the interest for acquisition debt greater than $750,000 ($375,000 for married filing separately taxpayers). So if you buy a $2 million house with a $1.5 million mortgage, only the interest you pay on the first $750,000 in debt is deductible. The rest is nondeductible personal interest.
Higher limit before 2018 and after 2025
Beginning in 2026, you’ll be able to deduct the interest for acquisition debt up to $1 million ($500,000 for married filing separately). This was the limit that applied before 2018.
The higher $1 million limit applies to acquisition debt incurred before Dec. 15, 2017, and to debt arising from the refinancing of pre-Dec. 15, 2017 acquisition debt, to the extent the debt resulting from the refinancing doesn’t exceed the original debt amount. Thus, taxpayers can refinance up to $1 million of pre-Dec. 15, 2017 acquisition debt, and that refinanced debt amount won’t be subject to the $750,000 limitation.
The limit on home mortgage debt for which interest is deductible includes both your primary residence and your second home, combined. Some taxpayers believe they can deduct the interest on $750,000 for each mortgage. But if you have a $700,000 mortgage on your primary home and a $500,000 mortgage on your vacation place, the interest on $450,000 of the total debt will be nondeductible personal interest.
“Home equity loan” interest
“Home equity debt,” as specially defined for purposes of the mortgage interest deduction, means debt that: is secured by the taxpayer’s home, and isn’t “acquisition indebtedness” (meaning it wasn’t incurred to acquire, construct or substantially improve the home). From 2018 through 2025, there’s no deduction for home equity debt interest. Note that interest may be deductible on a “home equity loan,” or a “home equity line of credit,” if that loan fits the tax law’s definition of “acquisition debt” because the proceeds are used to substantially improve or construct the home.
Home equity interest after 2025
Beginning with 2026, home equity debt up to certain limits will be deductible (as it was before 2018). The interest on a home equity loan will generally be deductible regardless of how you use the loan proceeds.
Thus, taxpayers considering taking out a home equity loan— one that’s not incurred to acquire, construct or substantially improve the home — should be aware that interest on the loan won’t be deductible. Further, taxpayers with outstanding home equity debt (again, meaning debt that’s not incurred to acquire, construct or substantially improve the home) will currently lose the interest deduction for interest on that debt.
Contact us with questions or if you would like more information about the mortgage interest deduction. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
A majority of large U.S. companies offer matching gift programs to boost the impact of their employees’ charitable gifts. Double the Donation estimates that $2 to $3 billion is donated through matching gift programs every year. At the same time, between $4 and $7 billion in matching gift funds goes unclaimed annually. Is your not-for-profit doing everything it can to claim its share of this pool of corporate gifts?
Most matching programs are managed by HR departments, which provide employees with matching gift forms. Typically, the employer sends the completed forms, along with the matched donations, to the charity the employee has chosen. Dollar-for-dollar matching is most common among participating corporations, but some companies offer more, others less. Many employers match donations to any nonprofit, but some are more restrictive.
To encourage increased matching gifts, draw up a list of employers in your area that offer matching. Typically, you can find this information in annual reports, on company websites or by calling companies’ HR, PR or community relations departments. If the company operates a foundation, its matching program may run through that entity.
Once you have a comprehensive and accurate list, post it on your website’s donation page. Also use the list to reach out to existing donors you know work for those companies. All of your nonprofit’s solicitations should encourage supporters to check with their employers about the availability of matching.
Making your own matches
If, despite your nonprofit’s best efforts, matching gifts only occasionally trickle in, consider creating your own matching pool. Ask board members and major supporters to match donations during a certain time period, for certain populations or for a minimum donation amount. For instance, your board might match all donations from new contributors in February or a major donor might commit to match gifts made at your annual gala.
Also keep in mind that some charitable foundations will match gifts to jump-start a fundraising effort or major campaign. Such an arrangement might be easier to set up than securing a large employer to donate to your organization.
Studies have found that people are more likely to donate — and donate larger amounts — to nonprofits if a matching gift is available. Make sure you have a plan to encourage this type of giving. If you need more ideas for raising revenue to more effectively execute your mission, contact us. Sam Brown CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you’re a business owner, be aware that a recent tax law extended a credit for hiring individuals from one or more targeted groups. Employers can qualify for a valuable tax credit known as the Work Opportunity Tax Credit (WOTC).
The WOTC was set to expire on December 31, 2019. But a new law passed late last year extends it through December 31, 2020.
Generally, an employer is eligible for the credit for qualified wages paid to qualified members of these targeted groups: 1) members of families receiving assistance under the Temporary Assistance for Needy Families program, 2) veterans, 3) ex-felons, 4) designated community residents, 5) vocational rehabilitation referrals, 6) summer youth employees, 7) members of families in the Supplemental Nutritional Assistance Program, 8) qualified Supplemental Security Income recipients, 9) long-term family assistance recipients and 10) long-term unemployed individuals.
For each employee, there’s a minimum requirement that the employee has completed at least 120 hours of service for the employer. The credit isn’t available for certain employees who are related to the employer or work more than 50% of the time outside of a trade or business of the employer (for example, a maid working in the employer’s home). Additionally, the credit generally isn’t available for employees who’ve previously worked for the employer.
There are different rules and credit amounts for certain employees. The maximum credit available for the first-year wages is $2,400 for each employee, $4,000 for long-term family assistance recipients, and $4,800, $5,600 or $9,600 for certain veterans. Additionally, for long-term family assistance recipients, there’s a 50% credit for up to $10,000 of second-year wages, resulting in a total maximum credit, over two years, of $9,000.
For summer youth employees, the wages must be paid for services performed during any 90-day period between May 1 and September 15. The maximum WOTC credit available for summer youth employees is $1,200 per employee.
Here are a few other rules:
Make sure you qualify
Because of these rules, there may be circumstances when the employer might elect not to have the WOTC apply. There are some additional rules that, in limited circumstances, prohibit the credit or require an allocation of it. Contact us with questions or for more information about your situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Accounts receivables are classified under current assets on the balance sheet if you expect to collect them within a year or within the operating cycle, whichever is longer. However, unless your company sells goods or services exclusively for cash, some of its receivables inevitably will be uncollectible. That’s why it’s important to record an allowance for doubtful accounts (also known as “bad debts”). These allowances are subjective, especially in uncertain economic times.
Estimating the allowance
When it comes to writing off bad debts for financial reporting purposes, companies generally use one of these two methods:
1. The direct write-off method. Some companies record write-offs only when a specific account has been deemed uncollectible, which is called the direct write-off method. Although it’s easy and convenient, this method fails to match bad debt expense to the period’s sales. It may also overstate the value of accounts receivable on the balance sheet.
2. The allowance method. Many companies turn to the allowance method to properly match revenues and expenses. Here the company estimates uncollectible accounts as a percentage of sales or total outstanding receivables. The allowance shows up as a contra-asset to offset receivables on the balance sheet and as bad debt expense to offset sales on the income statement.
The allowance is based on factors such as the amount of bad debts in prior periods, general economic conditions and receivables aging. Some companies also include allowances for returns, unearned discounts and finance charges.
Comparing estimates to collections
How do you assess whether your allowance seems reasonable? An obvious place to begin is the company’s aging schedule. The older a receivable is, the harder it is to collect. If you have a significant percentage of receivables that are older than three months, you might need to consider increasing your allowance.
In addition, auditing standards recommend comparing prior estimates for doubtful accounts with actual write-offs. Each accounting period, the ratio of bad debts expense to actual write-offs should be close to 1. If a business has several periods in which the ratio is lower than 1, the company may be low-balling its estimate and overvaluing receivables.
Exhaustion rate is another metric to consider. This is how long the beginning-of-year allowance will cover actual write-offs. Assume that a company reported an allowance for doubtful accounts of $50,000 as of January 1, 2019, and subsequently writes off $30,000 in 2019 and $40,000 in 2020. The exhaustion rate would be 1.5 years ($50,000 - $30,000 = $20,000 left for 2020; $20,000/$40,000 = 0.5 years).
If your allowance takes several years to deplete, it’s probably too high. But if you burn through your allowance in just a couple of months, you might consider increasing the allowance — or taking proactive measures to improve collections.
Contact your CPA if your company’s bad debts are on the rise or if your allowance for doubtful accounts seems out of whack. Armed with years of experience and knowledge of industry best practices, he or she can help assess the situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you’re a parent, or if you’re planning on having children, you know that it’s expensive to pay for their food, clothes, activities and education. Fortunately, there’s a tax credit available for taxpayers with children under the age of 17, as well as a dependent credit for older children.
Recent tax law changes
Changes made by the Tax Cuts and Jobs Act (TCJA) make the child tax credit more valuable and allow more taxpayers to be able to benefit from it. These changes apply through 2025.
Prior law: Before the TCJA kicked in for the 2018 tax year, the child tax credit was $1,000 per qualifying child. But it was reduced for married couples filing jointly by $50 for every $1,000 (or part of $1,000) by which their adjusted gross income (AGI) exceeded $110,000 ($75,000 for unmarried taxpayers). To the extent the $1,000-per-child credit exceeded a taxpayer’s tax liability, it resulted in a refund up to 15% of earned income (wages or net self-employment income) above $3,000. For taxpayers with three or more qualifying children, the excess of the taxpayer’s Social Security taxes for the year over the taxpayer’s earned income credit for the year was refundable. In all cases, the refund was limited to $1,000 per qualifying child.
Current law. Starting with the 2018 tax year, the TCJA doubled the child tax credit to $2,000 per qualifying child under 17. It also allows a $500 credit (per dependent) for any of your dependents who aren’t qualifying children under 17. There’s no age limit for the $500 credit, but tax tests for dependency must be met. Under the TCJA, the refundable portion of the credit is increased to a maximum of $1,400 per qualifying child. In addition, the earned threshold is decreased to $2,500 (from $3,000 under prior law), which has the potential to result in a larger refund. The $500 credit for dependents other than qualifying children is nonrefundable.
More parents are eligible
The TCJA also substantially increased the “phase-out” thresholds for the credit. Starting with the 2018 tax year, the total credit amount allowed to a married couple filing jointly is reduced by $50 for every $1,000 (or part of a $1,000) by which their AGI exceeds $400,000 (up from the prior threshold of $110,000). The threshold is $200,000 for other taxpayers. So, if you were previously prohibited from taking the credit because your AGI was too high, you may now be eligible to claim the credit.
In order to claim the credit for a qualifying child, you must include the child’s Social Security number (SSN) on your tax return. Under prior law, you could also use an individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN). If a qualifying child doesn’t have an SSN, you won’t be able to claim the $1,400 credit, but you can claim the $500 credit for that child using an ITIN or an ATIN. The SSN requirement doesn’t apply for non-qualifying-child dependents, but you must provide an ITIN or ATIN for each dependent for whom you’re claiming a $500 credit.
The changes made by the TCJA generally make these credits more valuable and more widely available to many parents.
If you have children and would like to determine if these tax credits can benefit you, please contact us or ask about them when we prepare your tax return. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Real-Time Strategic Planning (RTSP) offers not-for-profits a fluid approach to identifying, understanding and acting on challenges and opportunities to advance their missions. Is this process right for your organization? Let’s take a look.
What is it, exactly?
RTSP was first introduced by nonprofit consultant David La Piana as “a coordinated set of actions designed to create and sustain a competitive advantage in achieving a nonprofit’s mission.” A successful nonprofit plan requires three levels of strategy: organizational, programmatic and operational, using these building blocks of strategy formation:
1. Understand your identity. Ask the following: What is your organization’s mission and impact? What do you do (programs and services), where (geographic scope) and for whom (constituents, clients or customers)? And how do you pay for it?
2. Identify your competitive advantage. What strengths do you leverage to differentiate your organization from others and compete effectively for resources and clients? This step requires analyzing other organizations in the same geographic area that offer similar programs, to similar constituents, with similar funding sources.
3. Know how you’ll make decisions. Develop a “strategy screen” composed of the criteria you’ll use to choose courses of actions. A strategy screen might consider, for example, if an option advances your mission and enhances your competitive advantage. It also considers if you have the capacity to carry out and pay for the option.
4. Define the right strategic questions. Many questions naturally arise when presented with an opportunity, but they aren’t all strategic. Identify the strategic questions that must be answered now and sort operational questions (for example, “Will we be able to hire more employees to execute our plan?”) from strategic questions (“What are the implications for our mission?”).
What about “competitive advantage?”
One of the most important components of RTSP is competitive advantage. In general, competitive advantage is the ability to advance your mission by 1) using a unique asset — or strength — no competitor in your area possesses, or 2) having outstanding execution of programs or services. Your competitive advantage must be something clients and funders value, for example:
To make comparative judgments, of course, you need to identify and understand your competitors and their strengths. “Competitor” in this context isn’t necessarily a negative term. Your competitors often are organizations you collaborate with. Nonetheless, you’re also likely competing for donors, media coverage, board members, employees, volunteers or clients.
Nonprofits that implement RTSP have the tools to align their daily actions with their organization’s overall strategy and can work toward having a clear vision of their long-term direction. Contact us for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you’re self-employed and work out of an office in your home, you may be entitled to home office deductions. However, you must satisfy strict rules.
If you qualify, you can deduct the “direct expenses” of the home office. This includes the costs of painting or repairing the home office and depreciation deductions for furniture and fixtures used there. You can also deduct the “indirect” expenses of maintaining the office. This includes the allocable share of utility costs, depreciation and insurance for your home, as well as the allocable share of mortgage interest, real estate taxes and casualty losses.
In addition, if your home office is your “principal place of business,” the costs of traveling between your home office and other work locations are deductible transportation expenses, rather than nondeductible commuting costs. And, generally, you can deduct the cost (reduced by the percentage of non-business use) of computers and related equipment that you use in your home office, in the year that they’re placed into service.
You can deduct your expenses if you meet any of these three tests:
Principal place of business. You’re entitled to deductions if you use your home office, exclusively and regularly, as your principal place of business. Your home office is your principal place of business if it satisfies one of two tests. You satisfy the “management or administrative activities test” if you use your home office for administrative or management activities of your business, and you meet certain other requirements. You meet the “relative importance test” if your home office is the most important place where you conduct business, compared with all the other locations where you conduct that business.
Meeting place. You’re entitled to home office deductions if you use your home office, exclusively and regularly, to meet or deal with patients, clients, or customers. The patients, clients or customers must physically come to the office.
Separate structure. You’re entitled to home office deductions for a home office, used exclusively and regularly for business, that’s located in a separate unattached structure on the same property as your home. For example, this could be in an unattached garage, artist’s studio or workshop.
You may also be able to deduct the expenses of certain storage space for storing inventory or product samples. If you’re in the business of selling products at retail or wholesale, and if your home is your sole fixed business location, you can deduct home expenses allocable to space that you use to store inventory or product samples.
The amount of your home office deductions is subject to limitations based on the income attributable to your use of the office, your residence-based deductions that aren’t dependent on use of your home for business (such as mortgage interest and real estate taxes), and your business deductions that aren’t attributable to your use of the home office. But any home office expenses that can’t be deducted because of these limitations can be carried over and deducted in later years.
Selling the home
Be aware that if you sell — at a profit — a home that contains (or contained) a home office, there may be tax implications. We can explain them to you.
Pin down the best tax treatment
Proper planning can be the key to claiming the maximum deduction for your home office expenses. Contact us if you’d like to discuss your situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Roughly half of CFOs believe an economic recession will hit by the end of 2020, and about three-quarters expect a recession by mid-2021, according to the 2019 year-end Duke University/CFO Global Business Outlook survey. In light of these bearish predictions, many businesses are currently planning for the next recession. Are you? Here are four steps to help your company strengthen its balance sheet against a possible downturn.
1. Identify what’s most important
The balance sheet shows your company’s financial condition — its assets vs. liabilities — at a specific point in time. Some line items are more critical to your success than others. For example, inventory is a top priority for retailers, and accounts receivable is important to professional service firms.
A “common-sized” balance sheet can help you determine what’s most relevant. This type of statement presents each account as a percentage of total assets. Items that represent the highest percentages are generally the ones that warrant the most attention.
2. Analyze ratios
Ratios compare line items on your company’s financial statements. They may be grouped into four categories: 1) profitability, 2) solvency, 3) asset management, and 4) leverage. While profitability ratios focus on the income statement, the others assess items on the balance sheet.
For example, the current ratio (current assets ÷ current liabilities) is a solvency measure that helps assess whether your company has enough current assets to meet current obligations over the short run. Conversely, the days-in-receivables ratio (accounts receivable ÷ annual sales × 365 days) is an asset management ratio that gauges how efficiently you’re collecting receivables. And the debt-to-equity ratio (interest-bearing debt ÷ equity) focuses on your company’s use of debt vs. equity to finance growth.
3. Set goals
The common-sized balance sheet and ratios can be used to create “goals” for each key line item. What’s right depends on the nature of your business and industry benchmarks.
For example, you may strive to meet the following goals over the next year:
4. Forecast the impact
Once you’ve set goals, devise a plan to achieve them. For example, you might cut fixed costs or forgo buying equipment to build up your cash reserves. In turn, stockpiling cash — along with improving collections — might help boost your current ratio.
Part of your plan should be forecasting how the changes will filter through the financial statements. This exercise can help you determine whether your goals are realistic. For example, if you decide to build up cash reserves, it might be difficult to simultaneously pay down debt. You can generate only a limited amount of incremental cash in a year. Forecasting can help pinpoint the shortcomings of your plans.
We can help
Markets are cyclical. So, it’s only a matter of time before another downturn happens. We can help you take steps to position your organization to weather the next storm — whenever it arrives. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Married couples often wonder whether they should file joint or separate tax returns. The answer depends on your individual tax situation.
It generally depends on which filing status results in the lowest tax. But keep in mind that, if you and your spouse file a joint return, each of you is “jointly and severally” liable for the tax on your combined income. And you’re both equally liable for any additional tax the IRS assesses, plus interest and most penalties. This means that the IRS can come after either of you to collect the full amount.
Although there are provisions in the law that offer relief, they have limitations. Therefore, even if a joint return results in less tax, you may want to file separately if you want to only be responsible for your own tax.
In most cases, filing jointly offers the most tax savings, especially when the spouses have different income levels. Combining two incomes can bring some of it out of a higher tax bracket. For example, if one spouse has $75,000 of taxable income and the other has just $15,000, filing jointly instead of separately can save $2,512.50 for 2020.
Filing separately doesn’t mean you go back to using the “single” rates that applied before you were married. Instead, each spouse must use “married filing separately” rates. They’re less favorable than the single rates.
However, there are cases when people save tax by filing separately. For example:
One spouse has significant medical expenses. For 2019 and 2020, medical expenses are deductible only to the extent they exceed 7.5% of adjusted gross income (AGI). If a medical expense deduction is claimed on a spouse’s separate return, that spouse’s lower separate AGI, as compared to the higher joint AGI, can result in larger total deductions.
Some tax breaks are only available on a joint return. The child and dependent care credit, adoption expense credit, American Opportunity tax credit and Lifetime Learning credit are only available to married couples on joint returns. And you can’t take the credit for the elderly or the disabled if you file separately unless you and your spouse lived apart for the entire year. You also may not be able to deduct IRA contributions if you or your spouse were covered by an employer retirement plan and you file separate returns. You also can’t exclude adoption assistance payments or interest income from series EE or Series I savings bonds used for higher education expenses.
Social Security benefits may be taxed more. Benefits are tax-free if your “provisional income” (AGI with certain modifications plus half of your Social Security benefits) doesn’t exceed a “base amount.” The base amount is $32,000 on a joint return, but zero on separate return (or $25,000 if the spouses didn’t live together for the whole year).
No hard and fast rules
The decision you make on your federal tax return may affect your state or local income tax bill, so the total tax impact should be compared. There’s often no simple answer to whether a couple should file separate returns. A number of factors must be examined. We can look at your tax bill jointly and separately. Contact us to prepare your return or if you have any questions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Outside financial audits may seem like an extravagance to not-for-profits working to contain costs and focus on their mission. But undergoing regular audits allows your organization to identify risks early and act quickly to prevent problems. Independent audits also provide valuable reassurance to donors. Fortunately, you can reduce the cost of external audits with good preparation.
Draft an RFP
Start by drafting a request for proposal (RFP) from prospective auditors. The RFP should describe your organization, its programs, major funding sources and the type of service you need. Once you select an auditor, the firm will provide an engagement letter outlining the scope of services to be performed and assign responsibility for various tasks to your staff or the auditors.
The preaudit meeting with your auditors comes next. Finance staff and management should attend, as well as representatives from your board of directors or audit committee. Those involved will draw up a timeline for the work, and the auditors can answer any questions about the information they’ll need.
During this meeting, inform the auditors of any changes in your nonprofit’s activities since you first met. Also communicate new or eliminated programs, new grant reporting requirements, and changes to internal controls and staff.
Collecting and organizing the documentation auditors need before they arrive saves them time and saves you money. Usually auditors will provide a list of documents — such as financial statements, accounting records, physical inventories and investment-related documents — and the date when each item is needed. Keeping accurate, complete and up-to-date records throughout the year will make this step much easier. And you’ll benefit from staying abreast of changes to the Financial Accounting Standards Board’s rules for nonprofits.
Auditors also need relevant organizational records such as articles of incorporation; financial policies; exemption letters; board meeting minutes; grant agreements, pledges and other funding documents; contracts; leases; and insurance policies. They usually appreciate having a current organizational chart, too. You should gather support for the footnote disclosures, as well. This includes documentation of significant estimates, pending litigation, restricted contributions and related-party transactions.
Don’t wait for auditors to find problems and ask questions. You can expedite the process and reduce costs when you identify and address issues before they’re raised by auditors.
After making year-end closing entries, reconcile all your schedules and workpapers to the trial balance and review for obvious anomalies. Double-check manual journal entries, accrual calculations, entries that require estimates, and in-kind donation valuations. Compare actual figures with budgeted ones and be ready to explain any significant variances.
Process can be affirming
Annual independent audits don’t have to be stressful. If you devote proper time and attention to accounting throughout the year, you may even find audits affirming. Contact us with your audit questions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Do you conduct your business as a sole proprietorship or as a wholly owned limited liability company (LLC)? If so, you’re subject to both income tax and self-employment tax. There may be a way to cut your tax bill by using an S corporation.
Self-employment tax basics
The self-employment tax is imposed on 92.35% of self-employment income at a 12.4% rate for Social Security up to a certain maximum ($137,700 for 2020) and at a 2.9% rate for Medicare. No maximum tax limit applies to the Medicare tax. An additional 0.9% Medicare tax is imposed on income exceeding $250,000 for married couples ($125,000 for married persons filing separately) and $200,000 in all other cases.
Similarly, if you conduct your business as a partnership in which you’re a general partner, in addition to income tax you are subject to the self-employment tax on your distributive share of the partnership’s income. On the other hand, if you conduct your business as an S corporation, you’ll be subject to income tax, but not self-employment tax, on your share of the S corporation’s income.
An S corporation isn’t subject to tax at the corporate level. Instead, the corporation’s items of income, gain, loss and deduction are passed through to the shareholders. However, the income passed through to the shareholder isn’t treated as self-employment income. Thus, by using an S corporation, you may be able to avoid self-employment income tax.
Salary must be reasonable
However, be aware that the IRS requires that the S corporation pay you reasonable compensation for your services to the business. The compensation is treated as wages subject to employment tax (split evenly between the corporation and the employee), which is equivalent to the self-employment tax. If the S corporation doesn’t pay you reasonable compensation for your services, the IRS may treat a portion of the S corporation’s distributions to you as wages and impose Social Security taxes on the amount it considers wages.
There’s no simple formula regarding what is considered reasonable compensation. Presumably, reasonable compensation is the amount that unrelated employers would pay for comparable services under similar circumstances. There are many factors that should be taken into account in making this determination.
Converting from a C to an S corp
There can be complications if you convert a C corporation to an S corporation. A “built-in gains tax” may apply when appreciated assets held by the C corporation at the time of the conversion are subsequently disposed of. However, there may be ways to minimize its impact.
As explained above, an S corporation isn’t normally subject to tax, but when a C corporation converts to S corporation status, the tax law imposes a tax at the highest corporate rate (21%) on the net built-in gains of the corporation. The idea is to prevent the use of an S election to escape tax at the corporate level on the appreciation that occurred while the corporation was a C corporation. This tax is imposed when the built-in gains are recognized (in other words, when the appreciated assets are sold or otherwise disposed of) during the five-year period after the S election takes effect (referred to as the “recognition period”).
Consider all issues
Contact us if you’d like to discuss the factors involved in conducting your business as an S corporation, including the built-in gains tax and how much the business should pay you as compensation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Auditors use various procedures to verify the amounts reported on your financial statements. In addition to reviewing original source documents and comparing trends from prior years, they may reach out to third parties — such as customers and lenders — to confirm that outstanding balances and estimates agree with their records. Here are answers to questions you may have about audit confirmations.
When are they used?
External confirmations received directly by the auditor from third parties are generally considered to be more reliable than audit evidence generated internally by your company. Auditors may, for example, send paper or electronic confirmations to customers to verify accounts receivable and to financial institutions to confirm notes payable. They also may choose to substantiate cash, inventory, consigned merchandise, long-term contracts, accounts payable, contingent liabilities, and related-party and unusual transactions.
Before wrapping up audit procedures, a letter also will be sent to your attorney, asking whether the information provided about any pending litigation is accurate and complete. Your attorney’s response can help determine whether a legal situation has a material impact on the company’s financial statements.
What are the options?
The types of confirmations used vary depending on the situation and the nature of your company’s operations. Three forms of confirmations include:
1. Positive. This type asks recipients to reply directly to the auditor and make a positive statement about whether they agree or disagree with the information included.
2. Negative. This type asks recipients to reply directly to the auditor only if they disagree with the information presented on the confirmation.
3. Blank. This type doesn’t state the amount (or other information) on the request. Instead, recipients are asked to complete the confirmation form and return it to the auditor.
Some banks no longer respond to confirmation letters mailed through the U.S. Postal Service. Instead, they respond only to electronic requests. These may be in the form of an email submitted directly to the respondent by the auditor or a request submitted through a designated third-party provider.
How can you help?
You can facilitate the confirmation process by approving your auditor’s requests in a timely manner. However, there may be situations when you object to the use of confirmation procedures. When this happens, discuss the matter with your auditor and provide corroborating evidence to support your reasoning. If the reason for the refusal is considered valid, your auditor will apply alternative procedures and possibly ask for a special representation in the management representation letter regarding the reasons for not confirming.
Auditors also might ask your staff about confirmation recipients who aren’t responding to requests or exceptions found during the confirmation process. This may include discrepancies over the information provided in the request, as well as responses received indirectly, oral responses and restrictive language contained in a response. Your staff can help the audit team determine whether a misstatement has occurred — and adjust the financial statements accordingly.
Simple but effective
Audit confirmations can be a powerful tool, enhancing audit quality and efficiency. Let’s work together to ensure the confirmation process goes smoothly. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Perhaps you’re an investor in mutual funds or you’re interested in putting some money into them. You’re not alone. The Investment Company Institute estimates that 56.2 million households owned mutual funds in mid-2017. But despite their popularity, the tax rules involved in selling mutual fund shares can be complex.
If you sell appreciated mutual fund shares that you’ve owned for more than one year, the resulting profit will be a long-term capital gain. As such, the maximum federal income tax rate will be 20%, and you may also owe the 3.8% net investment income tax.
When a mutual fund investor sells shares, gain or loss is measured by the difference between the amount realized from the sale and the investor’s basis in the shares. One difficulty is that certain mutual fund transactions are treated as sales even though they might not be thought of as such. Another problem may arise in determining your basis for shares sold.
What’s considered a sale
It’s obvious that a sale occurs when an investor redeems all shares in a mutual fund and receives the proceeds. Similarly, a sale occurs if an investor directs the fund to redeem the number of shares necessary for a specific dollar payout.
It’s less obvious that a sale occurs if you’re swapping funds within a fund family. For example, you surrender shares of an Income Fund for an equal value of shares of the same company’s Growth Fund. No money changes hands but this is considered a sale of the Income Fund shares.
Another example: Many mutual funds provide check-writing privileges to their investors. However, each time you write a check on your fund account, you’re making a sale of shares.
Determining the basis of shares
If an investor sells all shares in a mutual fund in a single transaction, determining basis is relatively easy. Simply add the basis of all the shares (the amount of actual cash investments) including commissions or sales charges. Then add distributions by the fund that were reinvested to acquire additional shares and subtract any distributions that represent a return of capital.
The calculation is more complex if you dispose of only part of your interest in the fund and the shares were acquired at different times for different prices. You can use one of several methods to identify the shares sold and determine your basis.
As you can see, mutual fund investing can result in complex tax situations. Contact us if you have questions. We can explain in greater detail how the rules apply to you. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
A key fiduciary duty of your not-for-profit’s board of directors is to oversee and monitor the organization’s financial health. Some financial warning signs — such as the loss of a major funder — may jump out immediately. But other red flags can be more subtle. Here are some of them.
Certain budget-related issues may hint at rocky financial times to come. Having no budget is a flashing red light and suggests an undisciplined approach to fiscal matters. But assuming management has submitted a budget, your board should ensure it’s in line with board-developed and approved strategies.
Once a budget has been okayed, the board needs to compare it to actual results for unexplained variances. Some discrepancies are bound to happen, but staff should explain significant differences. There may be a reasonable explanation, such as program expansion, funding changes or macroeconomic factors. But your board should be wary of overspending in one program that’s funded by another. Dips into your nonprofit’s reserves, unplanned borrowing or raiding of an endowment might also mark the beginning of a financially unsustainable cycle.
Financial statement problems
Untimely, inconsistent financial statements — or statements that aren’t prepared using U.S. Generally Accepted Accounting Principles (GAAP) or another accounting basis — can lead to poor decision-making and undermine your nonprofit’s reputation. They also could signal understaffing, poor internal controls and efforts to conceal mismanagement or fraud.
Ideally, your board should receive financial statements within 30 days of the close of a period. Larger organizations are generally expected to engage experts to perform annual audits, with the whole board or audit committee selecting the auditing firm.
Subtle signs of trouble
Not all red flags are found in a nonprofit’s numbers. For example, if long-standing, passionate supporters express doubts about an organization’s finances, board members need to take them seriously. Boards also should note if development staff begin reaching out to historically major donors outside of the usual fundraising cycle.
An overreaching executive director is further cause for concern. For instance, an executive might insist on choosing an auditor or make strategic or spending decisions without board input and guidance. Such power grabs could signal dishonesty or financial instability.
Board members have a special role to play when it comes to a nonprofit’s financial well-being. Make sure your board understands the information they receive and can spot irregularities and warning signs. Contact us for help. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Many people who launch small businesses start out as sole proprietors. Here are nine tax rules and considerations involved in operating as that entity.
1. You may qualify for the pass-through deduction. To the extent your business generates qualified business income, you are eligible to claim the 20% pass-through deduction, subject to limitations. The deduction is taken “below the line,” meaning it reduces taxable income, rather than being taken “above the line” against your gross income. However, you can take the deduction even if you don’t itemize deductions and instead claim the standard deduction.
2. Report income and expenses on Schedule C of Form 1040. The net income will be taxable to you regardless of whether you withdraw cash from the business. Your business expenses are deductible against gross income and not as itemized deductions. If you have losses, they will generally be deductible against your other income, subject to special rules related to hobby losses, passive activity losses and losses in activities in which you weren’t “at risk.”
3. Pay self-employment taxes. For 2020, you pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your net earnings from self-employment of up to $137,700, and Medicare tax only at a 2.9% rate on the excess. An additional 0.9% Medicare tax (for a total of 3.8%) is imposed on self-employment income in excess of $250,000 for joint returns; $125,000 for married taxpayers filing separate returns; and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.
4. Make quarterly estimated tax payments. For 2019, these are due April 15, June 15, September 15 and January 15, 2021.
5. You may be able to deduct home office expenses. If you work from a home office, perform management or administrative tasks there, or store product samples or inventory at home, you may be entitled to deduct an allocable portion of some costs of maintaining your home. And if you have a home office, you may be able to deduct expenses of traveling from there to another work location.
6. You can deduct 100% of your health insurance costs as a business expense. This means your deduction for medical care insurance won’t be subject to the rule that limits medical expense deductions.
7. Keep complete records of your income and expenses. Specifically, you should carefully record your expenses in order to claim all the tax breaks to which you’re entitled. Certain expenses, such as automobile, travel, meals, and office-at-home expenses, require special attention because they’re subject to special recordkeeping rules or deductibility limits.
8. If you hire employees, you need to get a taxpayer identification number and withhold and pay employment taxes.
9. Consider establishing a qualified retirement plan. The advantage is that amounts contributed to the plan are deductible at the time of the contribution and aren’t taken into income until they’re are withdrawn. Because many qualified plans can be complex, you might consider a SEP plan, which requires less paperwork. A SIMPLE plan is also available to sole proprietors that offers tax advantages with fewer restrictions and administrative requirements. If you don’t establish a retirement plan, you may still be able to contribute to an IRA.
If you want additional information regarding the tax aspects of your new business, or if you have questions about reporting or recordkeeping requirements, please contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Finding the right person to head up your company’s finance and accounting department can be challenging in today’s tight labor market. While it may be tempting to simply promote an existing employee, external candidates may offer fresh ideas and skills that take your financial reporting to the next level. Here are four traits to put on your wish list.
1. Leadership and strategy experience
The finance and accounting department provides critical feedback on how your company is performing and is expected to perform in the future. That information helps the rest of the management team make critical business decisions.
The CFO must provide timely, relevant financial data to other departments — including information technology, operations, sales and supply chain logistics — to help improve how the business operates. He or she also must be able to drum up cross-departmental support for major initiatives. If you operate overseas or plan to expand there soon, experience operating and reporting in a global context would be a bonus.
2. Command of the basics
Your CFO must have a working knowledge of finance and accounting fundamentals, such as:
Accounting rules and tax law have undergone major changes in recent years. Candidates should understand the business provisions of the Tax Cuts and Jobs Act, as well as the impact of updated accounting standards on reporting revenue, leases and credit losses. It’s also helpful to have experience with managerial accounting and cost-cutting initiatives.
3. Previous employment in public accounting
Many CFOs start off their careers in public accounting for good reason: They learn about a broad range of accounting, tax and consulting projects in many different industries.
This experience positions candidates for leadership roles in the private sector. Former CPAs know how the auditing process works and can implement procedures to support that process within your organization. They’ve also seen the best (and worst) business practices in the real world. This insight can help your company seize opportunities — and avoid potential pitfalls.
4. Forensic and technology skills
CFOs sometimes need to examine the business from a forensic perspective. That could include overseeing a fraud investigation, evaluating compliance with new or updated government regulations, or remediating a data breach.
In turn, the prevalence of cyberattacks has made technology skills increasingly important for CFOs. Candidates should know how to protect against loss of sensitive data, including customer credit card numbers and company financial data and intangible assets. Candidates also must have a working knowledge of accounting systems and how they operate in the cloud.
As your business evolves, so too must the role of the CFO. We can help you evaluate candidates to find the right mix of skills and experience for your finance and accounting department. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you’re getting ready to file your 2019 tax return, and your tax bill is higher than you’d like, there may still be an opportunity to lower it. If you qualify, you can make a deductible contribution to a traditional IRA right up until the Wednesday, April 15, 2020, filing date and benefit from the resulting tax savings on your 2019 return.
Do you qualify?
You can make a deductible contribution to a traditional IRA if:
For 2019, if you’re a joint tax return filer covered by an employer plan, your deductible IRA contribution phases out over $103,000 to $123,000 of modified AGI. If you’re single or a head of household, the phaseout range is $64,000 to $74,000 for 2019. For married filing separately, the phaseout range is $0 to $10,000. For 2019, if you’re not an active participant in an employer-sponsored retirement plan, but your spouse is, your deductible IRA contribution phases out with modified AGI of between $193,000 and $203,000.
Deductible IRA contributions reduce your current tax bill, and earnings within the IRA are tax deferred. However, every dollar you take out is taxed in full (and subject to a 10% penalty before age 59 1/2, unless one of several exceptions apply).
IRAs often are referred to as “traditional IRAs” to distinguish them from Roth IRAs. You also have until April 15 to make a Roth IRA contribution. But while contributions to a traditional IRA are deductible, contributions to a Roth IRA aren’t. However, withdrawals from a Roth IRA are tax-free as long as the account has been open at least five years and you’re age 59 1/2 or older.
Here are a couple other IRA strategies that might help you save tax.
1. Turn a nondeductible Roth IRA contribution into a deductible IRA contribution. Did you make a Roth IRA contribution in 2019? That may help you years down the road when you take tax-free payouts from the account. However, the contribution isn’t deductible. If you realize you need the deduction that a traditional IRA contribution provides, you can change your mind and turn that Roth IRA contribution into a traditional IRA contribution via the “recharacterization” mechanism. The traditional IRA deduction is then yours if you meet the requirements described above.
2. Make a deductible IRA contribution, even if you don’t work. In general, you can’t make a deductible traditional IRA contribution unless you have wages or other earned income. However, an exception applies if your spouse is the breadwinner and you manage the home front. In this case, you may be able to take advantage of a spousal IRA.
How much can you contribute?
For 2019 if you’re qualified, you can make a deductible traditional IRA contribution of up to $6,000 ($7,000 if you’re 50 or over).
In addition, small business owners can set up and contribute to a Simplified Employee Pension (SEP) plan up until the due date for their returns, including extensions. For 2019, the maximum contribution you can make to a SEP account is $56,000.
If you’d like more information about whether you can contribute to an IRA or SEP, contact us or ask about it when we’re preparing your return. We’d be happy to explain the rules and help you save the maximum tax-advantaged amount for retirement. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The deductibility of most charitable gifts hasn’t changed since passage of the Tax Cuts and Jobs Act, but some recordkeeping requirements have. Helping your donors who itemize deductions understand the rules and benefits of their gifts can strengthen your not-for-profit’s ties with them — and may help increase contributions.
Generally, donors can deduct total contributions of money or property up to 60% of their adjusted gross income. The amount of the allowable deduction varies, but cash donations are 100% deductible if the donor maintains proof (such as bank records or thank-you letters from your nonprofit).
Donations of ordinary-income property usually are limited to the donor’s tax basis in the property (usually the purchase price). Specifically, donors can deduct the property’s fair market value (FMV) less the amount that would be ordinary income or short-term capital gains if they sold the property at FMV. Property is ordinary-income property when donors would recognize ordinary income or short-term capital gains if they sold it at FMV on the date of donation.
When FMV applies
Donors of capital gains property usually can deduct the property’s FMV. Property is considered capital gains property if the donor would have recognized long-term capital gains had he or she sold it at FMV on the donation date. This includes capital assets held more than one year. But in some circumstances, such as when the donation is intellectual property, only the donor’s tax basis of the property may be deducted.
If your nonprofit uses tangible donated property for its tax-exempt purpose — for example, a museum displays a donated painting — the donor can deduct its fair market value. But if the property is put to an unrelated use (a hospital sells the donated painting) the deduction is limited to the donor’s basis in the property.
For donations of property, the substantiation requirements depend on the deductible value. If someone donates an item worth:
In general, only donations of the full ownership interest in property are deductible. The right to use property is considered a contribution of less than the donor’s entire interest in the property. But there are some situations in which a donor can receive a deduction for a partial-interest donation, such as with a qualified conservation contribution.
Donors can’t claim a deduction for the donation of their professional services. However, related out-of-pocket costs, such as supplies and miles driven, are deductible as charitable contributions.
Look out for their interests
Take time to make sure your donors understand the tax implications of their gifts. It can help them avoid unpleasant surprises down the road — and keep them loyal to your nonprofit. Contact us with questions. Sa, Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Are you an employer who owns a business where tipping is customary for providing food and beverages? You may qualify for a tax credit involving the Social Security and Medicare (FICA) taxes that you pay on your employees’ tip income.
How the credit works
The FICA credit applies with respect to tips that your employees receive from customers in connection with the provision of food or beverages, regardless of whether the food or beverages are for consumption on or off the premises. Although these tips are paid by customers, they’re treated for FICA tax purposes as if you paid them to your employees. Your employees are required to report their tips to you. You must withhold and remit the employee’s share of FICA taxes, and you must also pay the employer’s share of those taxes.
You claim the credit as part of the general business credit. It’s equal to the employer’s share of FICA taxes paid on tip income in excess of what’s needed to bring your employee’s wages up to $5.15 per hour. In other words, no credit is available to the extent the tip income just brings the employee up to the $5.15 per hour level, calculated monthly. If you pay each employee at least $5.15 an hour (excluding tips), you don’t have to be concerned with this calculation.
Note: A 2007 tax law froze the per-hour amount at $5.15, which was the amount of the federal minimum wage at that time. The minimum wage is now $7.25 per hour but the amount for credit computation purposes remains $5.15.
How it works
Example: A waiter works at your restaurant. He’s paid $2 an hour plus tips. During the month, he works 160 hours for $320 and receives $2,000 in cash tips which he reports to you.
The waiter’s $2 an hour rate is below the $5.15 rate by $3.15 an hour. Thus, for the 160 hours worked, he or she is below the $5.15 rate by $504 (160 times $3.15). For the waiter, therefore, the first $504 of tip income just brings him up to the minimum rate. The rest of the tip income is $1,496 ($2,000 minus $504). The waiter’s employer pays FICA taxes at the rate of 7.65% for him. Therefore, the employer’s credit is $114.44 for the month: $1,496 times 7.65%.
While the employer’s share of FICA taxes is generally deductible, the FICA taxes paid with respect to tip income used to determine the credit can’t be deducted, because that would amount to a double benefit. However, you can elect not to take the credit, in which case you can claim the deduction.
Get the credit you’re due
If your business pays FICA taxes on tip income paid to your employees, the tip tax credit may be valuable to you. Other rules may apply. Contact us if you have any questions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Contingent liabilities reflect amounts that your business might owe if a specific “triggering” event happens in the future. Sometimes companies are unclear when they’re required to report a contingent liability on their financial statements under U.S. Generally Accepted Accounting Principles (GAAP). Here are the basics.
What are contingent liabilities?
Operating a business comes with a degree of uncertainty. For example, a company might be involved in a legal dispute that could result in the payment of a settlement based on a verdict reached in a court. However, at the time of the company’s financial statements, whether there will be a settlement liability and the date and amount of any settlement have yet to be determined. This is an example of a contingent liability that may or may not materialize in the future.
Other examples of contingent liabilities are 1) warranties triggered by product deficiencies, and 2) a pending government investigation. Conversion of a contingent liability to an expense depends on a specific triggering event.
Recording a contingent liability is a noncash transaction, because it has no initial impact on cash flow. Instead, the creation of a contingent liability notifies stakeholders of a potential liability that could materialize in the future. This is consistent with the need to fully disclose material items with a likelihood of impacting a company’s finances in the future.
When should you record a contingent liability?
A contingent liability can be categorized as:
Remote losses typically don’t require disclosure in your financial statements. If a loss is reasonably possible, you would add a note about it to the company’s financial statements. The same approach applies when the loss is probable, but it remains impossible to estimate the magnitude with any degree of certainty.
On the other hand, if a loss becomes probable and can be reasonably estimated, your company would report a contingent liability on the balance sheet and a loss on the income statement. If the amount fluctuates and you can estimate the revised amount with confidence, you should update the amount recorded in the financial statements accordingly. The contingent liability remains on the balance sheet until your company pays it off.
A gray area
Determining whether a liability is remote, reasonably possible or probable and estimating losses are subjective areas of financial reporting. External auditors are on the lookout for new contingencies that aren’t yet recorded. They also will evaluate whether existing loss estimates are still reasonable. During audit fieldwork, be ready to provide supporting documentation to your auditors and, if necessary, work with them to adjust your financial statements to reflect any changes in the circumstances surrounding your contingent liabilities.
Contact us with questions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Right now, you may be more concerned about your 2019 tax bill than you are about your 2020 tax situation. That’s understandable because your 2019 individual tax return is due to be filed in less than three months.
However, it’s a good idea to familiarize yourself with tax-related amounts that may have changed for 2020. For example, the amount of money you can put into a 401(k) plan has increased and you may want to start making contributions as early in the year as possible because retirement plan contributions will lower your taxable income.
Note: Not all tax figures are adjusted for inflation and even if they are, they may be unchanged or change only slightly each year due to low inflation. In addition, some tax amounts can only change with new tax legislation.
So below are some Q&As about tax-related figures for this year.
How much can I contribute to an IRA for 2020?
If you’re eligible, you can contribute $6,000 a year into a traditional or Roth IRA, up to 100% of your earned income. If you’re age 50 or older, you can make another $1,000 “catch up” contribution. (These amounts are the same as they were for 2019.)
I have a 401(k) plan through my job. How much can I contribute to it?
For 2020, you can contribute up to $19,500 (up from $19,000) to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re age 50 or older.
I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them?
In 2020, the threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc. is $2,200 (up from $2,100 in 2019).
How much do I have to earn in 2020 before I can stop paying Social Security on my salary?
The Social Security tax wage base is $137,700 for this year (up from $132,900 last year). That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)
I didn’t qualify to itemize deductions on my last tax return. Will I qualify for 2020?
The Tax Cuts and Jobs Act eliminated the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2020, the standard deduction amount is $24,800 for married couples filing jointly (up from $24,400). For single filers, the amount is $12,400 (up from $12,200) and for heads of households, it’s $18,650 (up from $18,350). So if the amount of your itemized deductions (such as charitable gifts and mortgage interest) are less than the applicable standard deduction amount, you won’t itemize for 2020.
How much can I give to one person without triggering a gift tax return in 2020?
The annual gift exclusion for 2020 is $15,000 and is unchanged from last year. This amount is only adjusted in $1,000 increments, so it typically only increases every few years.
Your tax picture
These are only some of the tax figures that may apply to you. For more information about your tax picture, or if you have questions, don’t hesitate to contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Do you associate enterprise risk management (ERM) with for-profit businesses? This systemic approach to risk reduction can be just as effective when adopted by nonprofit organizations. Even organizations with limited resources can — and should — use an ERM process to combat threats.
ERM is a comprehensive program that considers an organization’s entire portfolio of risks. Rather than attacking every risk equally, ERM compares risks and strategically deploys resources depending on their likelihood and potential impact.
You might also have different tolerances for different kinds of threats — for example, be mildly cautious about reputational risks and very averse to financial risks. With ERM, you can contain those risks with the greatest potential impact and respond nimbly to others.
Using it effectively
Experienced financial advisors and risk-management consultants can help you set up an ERM program. Generally, you’ll want to start by establishing a risk management governance structure with assigned roles and responsibilities. Your nonprofit’s executives and board should define the organization’s risk tolerance and make clear its commitment to the program.
Next, your organization will want to:
Assemble a cross-departmental committee to develop the program. Different departments may have different perspectives on certain risks. For example, a finance manager might think inaccurate reporting of program information is less consequential because it’s unlikely to affect revenues or expenses. Your public relations manager may disagree, arguing that such errors could affect how donors and other supporters view your nonprofit.
Conduct a risk assessment. The committee’s first task is to identify risks. It shouldn’t rely on its own knowledge, but should conduct interviews with management and staff and, possibly, clients. Then, the committee will be ready to rank risks based on your organization’s tolerance and their potential impact. Which are most likely to occur? Which could cause the most harm? The bottom line: Which threats are most likely to prevent you from accomplishing your mission?
Create and implement a plan. Once risks are identified and prioritized, the committee can devise a plan to mitigate them appropriately. For each risk, it should determine whether to accept, reduce or avoid it. And it should implement controls, processes and procedures accordingly. The committee is then charged with rolling out the plan. This should include communicating it throughout the organization.
Review and revise. ERM is an ongoing process, with continual monitoring of key risks and key performance indicators to ensure appropriate adjustments. Be sure to update your initial risk assessment to reflect organizational changes (for example, new staff or services), as well as changes in the legal and regulatory environment.
Once it’s established, you should be able to manage an ERM program with internal staff and board input. So, it’s a fairly cost-effective method of containing threats. Talk to us about adopting ERM. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
An array of tax-related limits that affect businesses are annually indexed for inflation, and many have increased for 2020. Here are some that may be important to you and your business.
Social Security tax
The amount of employees’ earnings that are subject to Social Security tax is capped for 2020 at $137,700 (up from $132,900 for 2019).
Other employee benefits
These are only some of the tax limits that may affect your business and additional rules may apply. If you have questions, please contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Construction contractors, professional service firms, specialty manufacturers and other companies that work on large projects often struggle with job costing. Full cost allocations are essential to gauging whether you’re making money on each job. But some companies simply lump indirect job costs into overhead or fail to use meaningful cost drivers, thereby skewing their profit reports. Here’s what you should know to avoid this pitfall and get a clearer picture of your company’s profitability.
Indirect job costs vs. overhead costs
The Financial Accounting Standards Board defines job costs as “the sum of the applicable expenditures and charges directly or indirectly incurred in bringing [a job] to its existing condition and location.” These may include direct costs, such as labor and materials, and indirect costs. The latter can be divided into two groups:
Costs identified with more than one job. These typically consist of benefits for frontline workers, workers’ compensation insurance and insurance to minimize the company’s liability risks. This category also may include company vehicle costs, such as gasoline, maintenance and repair expenses, and equipment depreciation.
Costs that are only indirectly related to jobs. Common examples of these indirect costs include project manager salaries and benefits, cell phone bills, payroll service fees, and vehicle tracking and monitoring systems.
Indirect costs and overhead are often confused. The term “overhead” refers to costs related to running your company that you can’t attribute directly or indirectly to a project. They tend to be consistent over time. It’s important to not include overhead costs, such as office rent, when identifying indirect costs.
Using a cost driver
You can systematically allocate indirect job costs using a “cost driver.” Two common cost drivers are labor hours and dollars.
For example, suppose liability insurance for an engineering firm costs $100,000 annually. That amount divided by 12 months is $8,333 a month. To follow the allocation process through to completion, you would tabulate the billable hours for each job on a monthly schedule. Then, perhaps with your accountant’s help, you could divvy up that $8,333 each month to put those dollars onto that month’s active jobs pro rata. Now that $100,000 is no longer overhead — those dollars are indirect job costs.
Once indirect costs are allocated and included in the reports given to managers tracking the progress of cash outflows to their jobs, your company’s management team can discuss how to avert upcoming cash flow problems. This can buy you some time to make corrections.
Monitoring the bottom line
We can find meaningful methods of allocating job costs to help evaluate your company’s profitability. Contact us for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Many taxpayers make charitable gifts — because they’re generous and they want to save money on their federal tax bills. But with the tax law changes that went into effect a couple years ago and the many rules that apply to charitable deductions, you may no longer get a tax break for your generosity.
Are you going to itemize?
The Tax Cuts and Jobs Act (TCJA), signed into law in 2017, didn’t put new limits on or suspend the charitable deduction, like it did with many other itemized deductions. Nevertheless, it reduces or eliminates the tax benefits of charitable giving for many taxpayers.
Itemizing saves tax only if itemized deductions exceed the standard deduction. Through 2025, the TCJA significantly increases the standard deduction. For 2020, it is $24,800 for married couples filing jointly (up from $24,400 for 2019), $18,650 for heads of households (up from $18,350 for 2019), and $12,400 for singles and married couples filing separately (up from $12,200 for 2019).
Back in 2017, these amounts were $12,700, $9,350, $6,350 respectively. The much higher standard deduction combined with limits or suspensions on some common itemized deductions means you may no longer have enough itemized deductions to exceed the standard deduction. And if that’s the case, your charitable donations won’t save you tax.
To find out if you get a tax break for your generosity, add up potential itemized deductions for the year. If the total is less than your standard deduction, your charitable donations won’t provide a tax benefit.
You might, however, be able to preserve your charitable deduction by “bunching” donations into alternating years. This can allow you to exceed the standard deduction and claim a charitable deduction (and other itemized deductions) every other year.
What is the donation deadline?
To be deductible on your 2019 return, a charitable gift must have been made by December 31, 2019. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” The delivery date depends in part on what you donate and how you donate it. For example, for a check, the delivery date is the date you mailed it. For a credit card donation, it’s the date you make the charge.
Are there other requirements?
If you do meet the rules for itemizing, there are still other requirements. To be deductible, a donation must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions.
And there are substantiation rules to prove you made a charitable gift. For a contribution of cash, check, or other monetary gift, regardless of amount, you must maintain a bank record or a written communication from the organization you donated to that shows its name, plus the date and amount of the contribution. If you make a charitable contribution by text message, a bill from your cell provider containing the required information is an acceptable substantiation. Any other type of written record, such as a log of contributions, isn’t sufficient.
Do you have questions?
We can answer any questions you may have about the deductibility of charitable gifts or changes to the standard deduction and itemized deductions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
According to the Center for Effective Philanthropy, practically all not-for-profits in the United States solicit feedback from their clients when designing programs and services. However, resource constraints — lack of adequate staffing, funding and sophisticated technology — may mean that they don’t collect data as often as they’d like or use it as well as they could.
If you’d like to collect more, and more meaningful, feedback from the beneficiaries of your nonprofit’s services, here are five suggestions:
1. Use every opportunity. Each encounter with a client is an opportunity to solicit feedback. So include online surveys with your email newsletters, request feedback on your website and pull aside clients when working in the field. When you receive verbal feedback, follow up in writing so you have a record of the conversation and can easily share it with others in your organization.
2. Take full advantage of social media. Platforms such as Facebook, Twitter and LinkedIn are free, easily accessible and frequent destinations for many of your clients. Use any available survey tools, regularly invite viewers to leave comments about your posts — or even ask them to recommend or write a review of your nonprofit. Also provide an email address or SMS number for texts so that clients can contact you directly.
3. Don’t neglect the “off-liners.” Depending on the population you serve (for example, lower income or elderly people), not all clients may have easy internet access or social media accounts. Keep paper surveys, and even an old-fashioned suggestion box, handy in your office.
4. Show your appreciation. Let your clients know that you’re listening. Thank them for every communication and, when possible, let them know how you’re using their feedback to address shortcomings and make improvements. In some cases, you may want to schedule one-on-one meetings or focus groups where you can discuss plans in greater detail and let clients know how valuable they are to the decision-making process.
5. Find funding. If budgetary limitations are preventing you from seeking client feedback, look for financing. For example, the Fund for Shared Insight matches nonprofits seeking to improve client feedback loops with foundations giving grants for such research.
Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
This year, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business decreased by one-half cent, to 57.5 cents per mile. As a result, you might claim a lower deduction for vehicle-related expense for 2020 than you can for 2019.
Calculating your deduction
Businesses can generally deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases depreciation write-offs on vehicles are subject to certain limits that don’t apply to other types of business assets.
The cents-per-mile rate comes into play if you don’t want to keep track of actual vehicle-related expenses. With this approach, you don’t have to account for all your actual expenses, although you still must record certain information, such as the mileage for each business trip, the date and the destination.
Using the mileage rate is also popular with businesses that reimburse employees for business use of their personal vehicles. Such reimbursements can help attract and retain employees who drive their personal vehicles extensively for business purposes. Why? Under the Tax Cuts and Jobs Act, employees can no longer deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.
If you do use the cents-per-mile rate, be aware that you must comply with various rules. If you don’t, the reimbursements could be considered taxable wages to the employees.
The rate for 2020
Beginning on January 1, 2020, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 57.5 cents per mile. It was 58 cents for 2019 and 54.5 cents for 2018.
The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the mileage rate midyear.
Factors to consider
There are some situations when you can’t use the cents-per-mile rate. In some cases, it partly depends on how you’ve claimed deductions for the same vehicle in the past. In other cases, it depends on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.
As you can see, there are many factors to consider in deciding whether to use the mileage rate to deduct vehicle expenses. We can help if you have questions about tracking and claiming such expenses in 2020 — or claiming them on your 2019 income tax return. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
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.