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Against the odds, savings rate rises

Posted by Admin Posted on Jan 15 2021

Paycheck Protection Program 2.0

Posted by Admin Posted on Jan 15 2021

Assessing and mitigating key person risks

Posted by Admin Posted on Jan 15 2021



Auditing standards require a year-end risk assessment. One potential source of risk may be a small business’s reliance on the owner and other critical members of its management team. If a so-called “key person” unexpectedly becomes incapacitated or dies, it could disrupt day-to-day operations, alarm customers, lenders and suppliers, and drain working capital reserves.

Common among small businesses

No one is indispensable. But filling the shoes of a founder, visionary or rainmaker who unexpectedly leaves a business is sometimes challenging. These risks are usually associated with small businesses, but they can also impact large multinationals.

Consider the stock price fluctuations that Apple experienced following the death of innovator Steve Jobs. Fortunately for Apple and its investors, it possessed a well-trained, innovative workforce, a backlog of groundbreaking technology and significant capital to continue to prosper. But other businesses aren’t so lucky. Some small firms take years to fully recover from the sudden loss of a key person.

Factors to consider

Does your business rely heavily on key people, or is its management team sufficiently decentralized? The answer requires an evaluation of your management team. Key people typically:

  • Handle broad duties,
  • Possess specialized training,
  • Have extensive experience, or
  • Make significant contributions to annual sales.

Other factors to consider include whether an individual has signed personal guarantees in relation to the business and the depth and qualification of other management team members. Generally, companies that sell products are better able to withstand the loss of a key person than are service businesses. On the other hand, a product-based company that relies heavily on technology may be at risk if a key person possesses specialized technical knowledge.

Personal relationships are also a critical factor. If customers and suppliers deal primarily with one key person and that person leaves the company, they may decide to do business with another company. It’s easier for a business to retain customer relationships when they’re spread among several people within the company.

Ways to lower your risk

Your auditor’s risk assessment can help determine accounts and issues that may require special attention during audit fieldwork. The assessment can also be used to help you shore up potential vulnerabilities.

Training and mentoring programs can help empower others to take over a key person’s responsibilities and relationships in case of death or a departure from the business. Likewise, a solid succession plan can help smooth the transition.

Also consider external replacement options. This exercise can help you understand how much it would cost to hire someone with the same knowledge, skills and business acumen as the key person. In addition, a key person life insurance policy can help the company fund a search for a replacement or weather a business interruption following the loss of a key person.

We can help

Key person risks are a real — and potentially significant — possibility, especially for small businesses with limited operating history and charismatic, innovative leaders. Contact us to help identify key people and brainstorm ways to lower the risks associated with them. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2021

Educate yourself about the revised tax benefits for higher education

Posted by Admin Posted on Jan 15 2021



Attending college is one of the biggest investments that parents and students ever make. If you or your child (or grandchild) attends (or plans to attend) an institution of higher learning, you may be eligible for tax breaks to help foot the bill.

The Consolidated Appropriations Act, which was enacted recently, made some changes to the tax breaks. Here’s a rundown of what has changed.

Deductions vs. credits

Before the new law, there were tax breaks available for qualified education expenses including the Tuition and Fees Deduction, the Lifetime Learning Credit and the American Opportunity Tax Credit.

Tax credits are generally better than tax deductions. The difference? A tax deduction reduces your taxable income while a tax credit reduces the amount of taxes you owe on a dollar-for-dollar basis.

First, let’s look at the deduction

For 2020, the Tuition and Fees Deduction could be up to $4,000 at lower income levels or up to $2,000 at middle income levels. If your 2020 modified adjusted gross income (MAGI) allows you to be eligible, you can claim the deduction whether you itemize or not. Here are the income thresholds:

  • For 2020, a taxpayer with a MAGI of up to $65,000 ($130,000 for married filing jointly) could deduct qualified expenses up to $4,000.
  • For 2020, a taxpayer with a MAGI between $65,001 and $80,000 ($130,001 and $160,000 for married filing jointly) could deduct up to $2,000.
  • For 2020, the allowable 2020 deduction was phased out and was zero if your MAGI was more than $80,000 ($160,000 for married filing jointly).

As you’ll see below, the Tuition and Fees Deduction is not available after the 2020 tax year.

Two credits aligned

Before the new law, an unfavorable income phase-out rule applied to the Lifetime Learning Credit, which can be worth up to $2,000 per tax return annually. For 2021 and beyond, the new law aligns the phase-out rule for the Lifetime Learning Credit with the more favorable phase-out rule for the American Opportunity Tax Credit, which can be worth up to $2,500 per student each year. The CAA also repeals the Tuition and Fees Deduction for 2021 and later years. Basically, the law trades the old-law write-off for the more favorable new-law Lifetime Learning Credit phase-out rule.

Under the CAA, both the Lifetime Learning Credit and the American Opportunity Tax Credit are phased out for 2021 and beyond between a MAGI of $80,001 and $90,000 for unmarried individuals ($160,001 and $180,000 for married couples filing jointly). Before the new law, the Lifetime Learning Credit was phased out for 2020 between a MAGI of $59,001 and $69,000 for unmarried individuals ($118,001 and $138,000 married couples filing jointly).

Best for you

Talk with us about which of the two remaining education tax credits is the most beneficial in your situation. Each of them has its own requirements. There are also other education tax opportunities you may be able to take advantage of, including a Section 529 tuition plan and a Coverdell Education Savings Account. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2021

Nonprofits: Get the word out in 2021

Posted by Admin Posted on Jan 15 2021



Many not-for-profits have been too busy trying to stay afloat to put a lot of resources and energy into public relations. But as the new year begins, you might start thinking about how you’ll promote your organization, mission and programming in 2021. Here are five suggestions:

1. Report regularly. Raise your nonprofit’s profile by releasing news releases often rather than just occasionally. The addition of a key staff member, an operational milestone, a new grant you’ve received or the kick-off of a fundraising campaign, can warrant a press release. Social media platforms are especially useful for publicizing news less formally — not to mention quickly.

2. Choose the best outlet. Focus on outlets that are most likely to use your press releases such as local television stations that cover community news. Get to know producers, editors and publication and broadcast schedules. By taking the time, you can pinpoint the most suitable outlets for your news.

3. Tell a good story. Human beings are naturally attracted to compelling narratives and are more likely to remember stories than disconnected facts. Work with your communications team to craft a story that dramatizes your nonprofit’s challenges and features real constituents. Your story will resonate if you focus on situations many people have experienced — such as mourning the death of a family member or struggling to find a new job.

4. Time it right. When it comes to good publicity, timing can be everything. You might increase your odds of coverage by submitting requests to certain outlets at the start of new publication cycles. Another tactic is to host an event or release an important announcement on a typically slow news day. Also connect your mission and programs to current events. Over the past year, many nonprofits have pivoted to address pandemic-related needs. Such pivots call for publicity so you can keep current supporters on board and attract new support.

5. Stay close to home. Providing a local angle on an issue of national importance will increase your appeal to the media. Whenever possible, offer an expert source from your organization who can talk knowledgeably about the local impact of a national story. By positioning yourself and your organization as an authority and noting trends and other interesting items, you can grab attention.

As nonprofits recover from an incredibly challenging period, they need to place new emphasis on public relations. It’s not enough to hold on to your supporter base — you also need to grow it. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2021

Can your business benefit from the enhanced Employee Retention Tax Credit?

Posted by Admin Posted on Jan 15 2021



COVID-19 has shut down many businesses, causing widespread furloughs and layoffs. Fortunately, employers that keep workers on their payrolls are eligible for a refundable Employee Retention Tax Credit (ERTC), which was extended and enhanced in the latest law.

Background on the credit

The CARES Act, enacted in March of 2020, created the ERTC. The credit:

    • Equaled 50% of qualified employee wages paid by an eligible employer in an applicable 2020 calendar quarter,
    • Was subject to an overall wage cap of $10,000 per eligible employee, and
    • Was available to eligible large and small employers.

 

The Consolidated Appropriations Act, enacted December 27, 2020, extends and greatly enhances the ERTC. Under the CARES Act rules, the credit only covered wages paid between March 13, 2020, and December 31, 2020. The new law now extends the covered wage period to include the first two calendar quarters of 2021, ending on June 30, 2021.

In addition, for the first two quarters of 2021 ending on June 30, the new law increases the overall covered wage ceiling to 70% of qualified wages paid during the applicable quarter (versus 50% under the CARES Act). And it increases the per-employee covered wage ceiling to $10,000 of qualified wages paid during the applicable quarter (versus a $10,000 annual ceiling under the original rules).

Interaction with the PPP

In a change retroactive to March 12, 2020, the new law also stipulates that the employee retention credit can be claimed for qualified wages paid with proceeds from Paycheck Protection Program (PPP) loans that aren’t forgiven.

What’s more, the new law liberalizes an eligibility rule. Specifically, it expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility.

We can help

These are just some of the changes made to the ERTC, which rewards employers that can afford to keep workers on the payroll during the COVID-19 crisis. Contact us for more information about this tax saving opportunity. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2021

Organize your tax documents now

Posted by Admin Posted on Jan 08 2021

New law provides option to delay implementing the updated CECL standard

Posted by Admin Posted on Jan 08 2021



The Consolidated Appropriations Act (CAA), signed into law on December 27, 2020, includes a variety of economic relief measures. One such measure allows certain banks and credit unions to temporarily postpone implementation of 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). Originally, it was scheduled to go into effect for most public companies in 2020.

This is the third time the CECL has been delayed. In October 2019, the FASB extended the deadlines for smaller reporting companies (SRCs) from 2021 to 2023, and for private entities and nonprofits from 2022 to 2023. In March 2020, the CARES Act gave large banks the option to delay CECL reporting by a year.

New delay

Under the CAA, 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:

  • The end of the national emergency declaration related to the COVID-19 crisis, or
  • December 31, 2022.

This is an extension from December 31, 2020. Many public banks have already 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 choose not to take advantage of this option to delay implementation — but many banks will hold off.

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.

Stay tuned

These are uncertain times, and the FASB may feel pressure from stakeholders to provide additional relief to help companies during the COVID-19 pandemic. Contact us for the latest developments on this issue or to help implement the new CECL model. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2021

The COVID-19 relief law: What’s in it for you?

Posted by Admin Posted on Jan 08 2021



The new COVID-19 relief law that was signed on December 27, 2020, contains a multitude of provisions that may affect you. Here are some of the highlights of the Consolidated Appropriations Act, which also contains two other laws: the COVID-related Tax Relief Act (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act (TCDTR).

 

Direct payments

The law provides for direct payments (which it calls recovery rebates) of $600 per eligible individual ($1,200 for a married couple filing a joint tax return), plus $600 per qualifying child. The U.S. Treasury Department has already started making these payments via direct bank deposits or checks in the mail and will continue to do so in the coming weeks.

The credit payment amount is phased out at a rate of $5 per $100 of additional income starting at $150,000 of modified adjusted gross income for marrieds filing jointly and surviving spouses, $112,500 for heads of household, and $75,000 for single taxpayers.

Medical expense tax deduction

The law makes permanent the 7.5%-of-adjusted-gross-income threshold on medical expense deductions, which was scheduled to increase to 10% of adjusted gross income in 2021. The lower threshold will make it easier to qualify for the medical expense deduction.

Charitable deduction for non-itemizers

For 2020, individuals who don’t itemize their deductions can take up to a $300 deduction per tax return for cash contributions to qualified charitable organizations. The new law extends this $300 deduction through 2021 for individuals and increases it to $600 for married couples filing jointly. Taxpayers who overstate their contributions when claiming this deduction are subject to a 50% penalty (previously it was 20%).

Allowance of charitable contributions

In response to the pandemic, the limit on cash charitable contributions by an individual in 2020 was increased to 100% of the individual’s adjusted gross income (AGI). (The usual limit is 60% of adjusted gross income.) The new law extends this rule through 2021.

Energy tax credit

A credit of up to $500 is available for purchases of qualifying energy improvements made to a taxpayer’s main home. However, the $500 maximum allowance must be reduced by any credits claimed in earlier years. The law extends this credit, which was due to expire at the end of 2020, through 2021.

Other energy-efficient provisions

There are a few other energy-related provisions in the new law. For example, the tax credit for a qualified fuel cell motor vehicle and the two-wheeled plug-in electric vehicle were scheduled to expire in 2020 but have been extended through the end of 2021.

There’s also a valuable tax credit for qualifying solar energy equipment expenditures for your home. For equipment placed in service in 2020, the credit rate is 26%. The rate was scheduled to drop to 22% for equipment placed in service in 2021 before being eliminated for 2022 and beyond.

Under the new law, the 26% credit rate is extended to cover equipment placed in service in 2021 and 2022 and the law also extends the 22% rate to cover equipment placed in service in 2023. For 2024 and beyond, the credit is scheduled to vanish.

Maximize tax breaks

These are only a few tax breaks contained in the massive new law. We’ll make sure that you claim all the tax breaks you’re entitled to when we prepare your tax return. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2021

How well do your nonprofit’s development and accounting departments communicate?

Posted by Admin Posted on Jan 08 2021



Your accounting and development departments are central to the continued financial health of your not-for-profit. So what happens when communication between these two functions break down? It could result in conflict between staffers, inaccurate financial statements and, in a worst-case scenario, the forfeiture of grant funds. Here’s how you can encourage collaboration.

Note different accounting methods

Make sure staffers understand that accounting and development typically record their financial information differently. Development may use a cash basis of accounting, while accounting records contributions, grants, donations and pledges in accordance with Generally Accepted Accounting Principles (GAAP). This means that they produce numbers that vary but that nonetheless are both correct.

Let’s say a donor makes a payment in March 2021 on a pledge made in December 2020. The development department will enter the amount of the payment as a receipt in its donor database in March. But accounting will record the payment against the pledge receivable that was recorded as revenue when the pledge was made in December. Receipt of the check won’t result in any new revenue in March because the accounting department recorded the revenue in December. Both departments’ figures for March 2021 (and for December 2020) will be accurate, but they’ll disagree with each other.

Enforce clear protocols

Your nonprofit should try to reconcile its accounting and development schedules at least monthly. It also needs clear protocols for communicating important activity — or both departments, and your organization, could experience negative consequences.

If, for example, development fails to inform accounting about grants on a timely basis, the latter won’t be aware of the grants’ financial reporting requirements and could forfeit funds for noncompliance. If the accounting department doesn’t record grants or pledges in the proper financial period according to GAAP, your organization could run into significant issues during an audit — which could jeopardize funding.

Prioritize communication

Schedule meetings so that accounting representatives can educate development staff about what information it needs, when it needs it and the consequences of not receiving that information. For its part, development should provide accounting with ample notice about prospective activity such as pending grant applications and proposed capital campaigns.

Development should also present status reports on different types of giving — including gifts, grants and pledges. This is especially important for those items received in multiple payments, because accounting may need to discount them when recording them on financial statements.

Two-way road

Whether your nonprofit can count its staffers on two hands or has hundreds of employees, coordination between departments can easily break down. Contact us about establishing policies and procedures that promote the efficient communication of financial information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2021

New law doubles business meal deductions and makes favorable PPP loan changes

Posted by Admin Posted on Jan 08 2021



The COVID-19 relief bill, signed into law on December 27, 2020, provides a further response from the federal government to the pandemic. It also contains numerous tax breaks for businesses. Here are some highlights of the Consolidated Appropriations Act of 2021 (CAA), which also includes other laws within it.

Business meal deduction increased

The new law includes a provision that removes the 50% limit on deducting business meals provided by restaurants and makes those meals fully deductible.

As background, ordinary and necessary food and beverage expenses that are incurred while operating your business are generally deductible. However, for 2020 and earlier years, the deduction is limited to 50% of the allowable expenses.

The new legislation adds an exception to the 50% limit for expenses of food or beverages provided by a restaurant. This rule applies to expenses paid or incurred in calendar years 2021 and 2022.

The use of the word “by” (rather than “in”) a restaurant clarifies that the new tax break isn’t limited to meals eaten on a restaurant’s premises. Takeout and delivery meals from a restaurant are also 100% deductible.

Note: Other than lifting the 50% limit for restaurant meals, the legislation doesn’t change the rules for business meal deductions. All the other existing requirements continue to apply when you dine with current or prospective customers, clients, suppliers, employees, partners and professional advisors with whom you deal with (or could engage with) in your business.

Therefore, to be deductible:

  • The food and beverages can’t be lavish or extravagant under the circumstances, and
  • You or one of your employees must be present when the food or beverages are served.

If food or beverages are provided at an entertainment activity (such as a sporting event or theater performance), either they must be purchased separately from the entertainment or their cost must be stated on a separate bill, invoice or receipt. This is required because the entertainment, unlike the food and beverages, is nondeductible.

PPP loans

The new law authorizes more money towards the Paycheck Protection Program (PPP) and extends it to March 31, 2021. There are a couple of tax implications for employers that received PPP loans:

  1. Clarifications of tax consequences of PPP loan forgiveness. The law clarifies that the non-taxable treatment of PPP loan forgiveness that was provided by the 2020 CARES Act also applies to certain other forgiven obligations. Also, the law makes clear that taxpayers, whose PPP loans or other obligations are forgiven, are allowed deductions for otherwise deductible expenses paid with the proceeds. In addition, the tax basis and other attributes of the borrower’s assets won’t be reduced as a result of the forgiveness.
  2. Waiver of information reporting for PPP loan forgiveness. Under the CAA, the IRS is allowed to waive information reporting requirements for any amount excluded from income under the exclusion-from-income rule for forgiveness of PPP loans or other specified obligations. (The IRS had already waived information returns and payee statements for loans that were guaranteed by the Small Business Administration).

Much more

These are just a couple of the provisions in the new law that are favorable to businesses. The CAA also provides extensions and modifications to earlier payroll tax relief, allows changes to employee benefit plans, includes disaster relief and much more. Contact us if you have questions about your situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2021

Advantages of adopting interim reporting

Posted by Admin Posted on Jan 06 2021

Can you qualify for a medical expense tax deduction?

Posted by Admin Posted on Jan 02 2021



You may be able to deduct some of your medical expenses, including prescription drugs, on your federal tax return. However, the rules make it hard for many people to qualify. But with proper planning, you may be able to time discretionary medical expenses to your advantage for tax purposes.

Itemizers must meet a threshold

For 2020, the medical expense deduction can only be claimed to the extent your unreimbursed costs exceed 7.5% of your adjusted gross income (AGI). This threshold amount is scheduled to increase to 10% of AGI for 2021. You also must itemize deductions on your return in order to claim a deduction.

If your total itemized deductions for 2020 will exceed your standard deduction, moving or “bunching” nonurgent medical procedures and other controllable expenses into 2020 may allow you to exceed the 7.5% floor and benefit from the medical expense deduction. Controllable expenses include refilling prescription drugs, buying eyeglasses and contact lenses, going to the dentist and getting elective surgery.

In addition to hospital and doctor expenses, here are some items to take into account when determining your allowable costs:

  • Health insurance premiums. This item can total thousands of dollars a year. Even if your employer provides health coverage, you can deduct the portion of the premiums that you pay. Long-term care insurance premiums are also included as medical expenses, subject to limits based on age.
  • Transportation. The cost of getting to and from medical treatments counts as a medical expense. This includes taxi fares, public transportation, or using your own car. Car costs can be calculated at 17¢ a mile for miles driven in 2020, plus tolls and parking. Alternatively, you can deduct certain actual costs, such as for gas and oil.
  • Eyeglasses, hearing aids, dental work, prescription drugs and more. Deductible expenses include the cost of glasses, hearing aids, dental work, psychiatric counseling and other ongoing expenses in connection with medical needs. Purely cosmetic expenses don’t qualify. Prescription drugs (including insulin) qualify, but over-the-counter aspirin and vitamins don’t. Neither do amounts paid for treatments that are illegal under federal law (such as medical marijuana), even if state law permits them. The services of therapists and nurses can qualify as long as they relate to a medical condition and aren’t for general health. Amounts paid for certain long-term care services required by a chronically ill individual also qualify.
  • Smoking-cessation and weight-loss programs. Amounts paid for participating in smoking-cessation programs and for prescribed drugs designed to alleviate nicotine withdrawal are deductible. However, nonprescription nicotine gum and patches aren’t. A weight-loss program is deductible if undertaken as treatment for a disease diagnosed by a physician. Deductible expenses include fees paid to join a program and attend periodic meetings. However, the cost of food isn’t deductible.

Costs for dependents

You can deduct the medical costs that you pay for dependents, such as your children. Additionally, you may be able to deduct medical costs you pay for other individuals, such as an elderly parent. Contact us if you have questions about medical expense deductions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Valuing noncash donations: A cheat sheet

Posted by Admin Posted on Jan 02 2021



Many not-for-profits experience a flood of last-minute donations at the end of the year. Although cash is easy to value, valuing noncash property donations is trickier. If you’re struggling to assign amounts to contributions — either for a donor or your own records — review this cheat sheet.

Price on the open market

Most noncash donations are valued based on their fair market value (FMV) — generally, the price that property would sell for on the open market. For example, if a donor contributes used clothes, the FMV would be the price that typical buyers pay for clothes of the same age, condition, style and use.

If the property is subject to any type of restriction on use, the FMV must reflect it. So, if a donor stipulates that a painting must be displayed, not sold, that restriction affects its value. Restrictions on the use of real estate can dramatically affect the value of such gifts — for example, land that isn’t eligible for commercial development.

3 relevant factors

According to the IRS, there are three particularly relevant FMV factors. The first is the cost or selling price. This is the amount the donor paid for the item or the actual selling price received by your organization. But because market conditions can change, the cost or price becomes less important the further in time the purchase or sale was from the contribution date.

Another factor is comparable sales, or the sales price of property similar to the donated property. The IRS may give more or less weight to a comparable sale depending on the similarity between the property sold and the donated property, time of the sale, circumstances of the sale and market conditions.

Finally, there’s replacement cost. FMV should consider the cost of buying or creating property similar to the donated item. However, the replacement cost must have a reasonable relationship with the FMV.

Inventory exception

Inventory generally is subject to different valuation rules. Businesses that contribute inventory can usually deduct the smaller of its FMV on the day of the contribution or the inventory’s “basis.”

The basis is any cost incurred for the inventory in an earlier year that the business would otherwise include in its opening inventory for the year of the contribution. If the cost of donated inventory isn’t included in the opening inventory, its basis is zero and the business can’t claim a deduction.

It’s important to note that even if a donor can’t deduct a noncash donation (including a piece of tangible property or property rights), you may need to record the donation on your financial statements. Such donations should be recognized at their fair value or what it would cost for you to buy the donation outright. Contact us for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

The right entity choice: Should you convert from a C to an S corporation?

Posted by Admin Posted on Jan 02 2021



The best choice of entity can affect your business in several ways, including the amount of your tax bill. In some cases, businesses decide to switch from one entity type to another. Although S corporations can provide substantial tax benefits over C corporations in some circumstances, there are potentially costly tax issues that you should assess before making the decision to convert from a C corporation to an S corporation.

Here are four issues to consider:

1. LIFO inventories. C corporations that use last-in, first-out (LIFO) inventories must pay tax on the benefits they derived by using LIFO if they convert to S corporations. The tax can be spread over four years. This cost must be weighed against the potential tax gains from converting to S status.

2. Built-in gains tax. Although S corporations generally aren’t subject to tax, those that were formerly C corporations are taxed on built-in gains (such as appreciated property) that the C corporation has when the S election becomes effective, if those gains are recognized within five years after the conversion. This is generally unfavorable, although there are situations where the S election still can produce a better tax result despite the built-in gains tax.

3. Passive income. S corporations that were formerly C corporations are subject to a special tax. It kicks in if their passive investment income (including dividends, interest, rents, royalties, and stock sale gains) exceeds 25% of their gross receipts, and the S corporation has accumulated earnings and profits carried over from its C corporation years. If that tax is owed for three consecutive years, the corporation’s election to be an S corporation terminates. You can avoid the tax by distributing the accumulated earnings and profits, which would be taxable to shareholders. Or you might want to avoid the tax by limiting the amount of passive income.

4. Unused losses. If your C corporation has unused net operating losses, they can’t be used to offset its income as an S corporation and can’t be passed through to shareholders. If the losses can’t be carried back to an earlier C corporation year, it will be necessary to weigh the cost of giving up the losses against the tax savings expected to be generated by the switch to S status.

Other considerations

When a business switches from C to S status, these are only some of the factors to consider. For example, shareholder-employees of S corporations can’t get all of the tax-free fringe benefits that are available with a C corporation. And there may be issues for shareholders who have outstanding loans from their qualified plans. These factors have to be taken into account in order to understand the implications of converting from C to S status.

If you’re interested in an entity conversion, contact us. We can explain what your options are, how they’ll affect your tax bill and some possible strategies you can use to minimize taxes. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Dock your retirement plan in a “safe harbor”

Posted by Admin Posted on Dec 28 2020

Red flags of deadbeat debtors

Posted by Admin Posted on Dec 28 2020



Unfortunately, many businesses have experienced problems with collections during the COVID-19 pandemic. Accounts receivable are a major item on most companies’ balance sheets. Slow-paying — or even nonpaying — customers or clients adversely affect cash flow. Proactive measures can help identify collections issues early and remedy them before they spiral out of control.

Recognize the warning signs

To stay on top of collections, be aware of the following red flags:

Anonymous clients. Some prospective customers don’t seem to exist anywhere other than, say, a vague email address. This is a sign to move cautiously. It’s not too much to expect that even start-up businesses have some sort of online presence, a physical address, and a working email address and phone number.

Empty assurances. One warning sign is clients who ask that work on their product or service start immediately, but without providing assurances that payment will be forthcoming. In some industries, it might be common practice for suppliers to provide goods or services, and follow up with invoices later. When that’s not the case, however, consider the lack of credible assurances to be a warning sign. That’s especially true if a prospective customer is vague on the budget for a project.

Future earnings as payment. Customers who promise some portion of future earnings as payment may be legitimate. But, before you begin work, nail down the terms and decide if the potential reward compensates for the risk.

Perpetual nitpicking. A client who regularly finds fault with minor details of a project may keep it from ever getting off the ground. While clients have a right to expect the level of quality promised at the outset of a project, those who seem to continually search for reasons to criticize products or services may be using their purported dissatisfaction to avoid paying for their purchase.

Take precautionary measures

If you’re skeptical you’ll be able to collect from a customer, it’s wise to ask for a retainer or deposit up front before starting a project. You can also request progress payments while the project is in process. Additional steps that can help expedite collections include:

  • Following up with a firm, but tactful, email when an invoice is overdue.
  • Moving to a phone call if follow-up emails aren’t generating a response.
  • Trying to contact the customer’s accounts payable staff or business manager, if previous follow-up efforts aren’t working.

If you have clients that continue to withhold payment after these steps, it may be time to take legal action. When it’s necessary to pursue missing payments, persistence pays off.

Need help?

Delinquent payments and write-offs can damage your company’s operations and profitability. Contact us if your business is experiencing collections issues. We can help you sort out your options. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Your taxpayer filing status: You may be eligible to use more than one

Posted by Admin Posted on Dec 26 2020



When it comes to taxes, December 31 is more than just New Year’s Eve. That date will affect the filing status box that will be checked on your 2020 tax return. When filing a return, you do so with one of five tax filing statuses. In part, they depend on whether you’re married or unmarried on December 31.

More than one filing status may apply, and you can use the one that saves the most tax. It’s also possible that your status could change during the year.

Here are the filing statuses and who can claim them:

  • Single. This is generally used if you’re unmarried, divorced or legally separated under a divorce or separate maintenance decree governed by state law.
  • Married filing jointly. If you’re married, you can file a joint tax return with your spouse. If your spouse passes away, you can generally file a joint return for that year.
  • Married filing separately. As an alternative to filing jointly, married couples can choose to file separate tax returns. In some cases, this may result in less tax owed.
  • Head of household. Certain unmarried taxpayers may qualify to use this status and potentially pay less tax. Special requirements are described below.
  • Qualifying widow(er) with a dependent child. This may be used if your spouse died during one of the previous two years and you have a dependent child. Other conditions also apply.

How to qualify as “head of household”

In general, head of household status is more favorable than filing as a single taxpayer. To qualify, you must “maintain a household” that, for more than half the year, is the principal home of a “qualifying child” or other relative that you can claim as your dependent.

A “qualifying child” is defined as one who:

  1. Lives in your home for more than half the year,
  2. Is your child, stepchild, foster child, sibling, stepsibling or a descendant of any of these,
  3. Is under 19 years old or under age 24 if enrolled as a student, and
  4. Doesn’t provide over half of his or her own support for the year.

If a child’s parents are divorced, different rules may apply. Also, a child isn’t eligible to be a “qualifying child” if he or she is married and files a joint tax return or isn’t a U.S. citizen or resident.

There are other head of household requirements. You’re considered to maintain a household if you live in it for the tax year and pay more than half the cost. This includes property taxes, mortgage interest, rent, utilities, property insurance, repairs, upkeep, and food consumed in the home. Don’t include medical care, clothing, education, life insurance or transportation.

Under a special rule, you can qualify as head of household if you maintain a home for a parent even if you don’t live with him or her. To qualify, you must claim the parent as your dependent.

Determining marital status

You must generally be unmarried to claim head of household status. If you’re married, you must generally file as either married filing jointly or married filing separately — not as head of household. However, if you’ve lived apart from your spouse for the last six months of the year, a qualifying child lives with you and you “maintain” the household, you’re treated as unmarried. In this case, you may qualify as head of household.

Contact us if you have questions about your filing status. Or ask us when we prepare your return. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

How to keep your nonprofit’s members in the fold

Posted by Admin Posted on Dec 26 2020



If your charity or association depends financially on membership fees, you know that non-renewals are cause for concern. During this time of economic and occupational insecurity, you may be experiencing membership drop-offs and some anxiety about your organization’s future. How can you help retain members and attract new ones to your not-for-profit? By focusing on needs, providing value and prioritizing engagement.

Ask about their needs

It may seem pretty basic, but to keep members you may have to offer something they need: for example, education, networking opportunities, research, discounts or credentials. And the only sure way to get a handle on what your members need is to ask them.

Accomplish this through formal surveys, focus groups and online polls as well as by simply asking your members when you talk with them. How are your products and services meeting their needs? What do they need that you’re not providing? Needs aren’t static, and a lot has changed over the past year. So check in with members on an ongoing basis.

Consider your value proposition

Offering the right mix of products and services is important. But you also must emphasize your organization’s value proposition. This is the unique experience that your members have when they interact with your nonprofit and its offerings.

Try making an emotional appeal that taps into the intangibles of being part of your group. Depending on your mission, you might tout the value of individuals banding together to create a powerful voice for change, the chance to help improve the conditions in your community or the ability to network with local or industry leaders.

Create engagement avenues

Members who are deeply involved will stick with your organization. Create as many avenues as you can for members to participate, for example, as board and committee members, event managers, or publication contributors.

Treat your members as individuals whenever possible. Always address correspondence to them specifically (never to “member at large”) and consider offering them personalized content when they visit your website. Also make sure that it’s easy to renew membership through your website and that the renewal process enables multiyear memberships — possibly at a discounted rate.

Revenue streams

If your nonprofit is struggling under its current revenue model (for example, a heavy dependence on membership fees), contact us. We can help find sustainable revenue streams that enable stability and longevity. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Q1 tax calendar: Key deadlines for businesses and other employers

Posted by Admin Posted on Dec 26 2020



Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2021. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

January 15

  • Pay the final installment of 2020 estimated tax.
  • Farmers and fishermen: Pay estimated tax for 2020.

February 1 (The usual deadline of January 31 is a Sunday)

  • File 2020 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
  • Provide copies of 2020 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.
  • File 2020 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS.
  • File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2020. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
  • File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2020. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944, “Employer’s Annual Federal Tax Return.”)
  • File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2020 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

March 1 (The usual deadline of February 28 is a Sunday)

  • File 2020 Forms 1099-MISC with the IRS if: 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is March 31.)

March 16

  • If a calendar-year partnership or S corporation, file or extend your 2020 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2020 contributions to pension and profit-sharing plans.
  • Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Looking for a last-minute holiday gift?

Posted by Admin Posted on Dec 19 2020

ICFR assessment and attestation: Are you in compliance with the rules?

Posted by Admin Posted on Dec 19 2020



Each year, public companies must assess the effectiveness of their internal controls over financial reporting (ICFR) under Section 404(a) of the Sarbanes-Oxley Act (SOX). In some cases, private companies should follow suit.

In addition, a public company’s independent auditors are generally required to provide an attestation report on management’s assessment of ICFR under Sec. 404(b). But some smaller entities may be exempt.

Assessment guidance

Adherence to Sec. 404(a) is required only of public companies. However, it may be recommended for some larger private companies — particularly if management is planning to go public or sell the business to a public company.

SOX adherence can make a private business more attractive to public companies, which can result in a higher sale price. Compliance with SOX can also improve the company’s reputation with investors, lenders and the public by demonstrating that its financial reporting is transparent.

Attestation exemptions

Proponents of Sec. 404(b) argue that the auditor attestation requirement has led to improvements in the quality of financial reporting and have fought efforts to provide exemptions. But two exemptions are available:

  1. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 instructed the Securities and Exchange Commission (SEC) to permanently exempt nonaccelerated filers from Sec. 404(b). Nonaccelerated filers are defined as companies with a public float of less than $75 million on the last business day of their most recent second fiscal quarter.
  2. The JOBS Act of 2012 gave emerging growth companies (EGCs) a five-year reprieve from compliance with Section 404(b) following an initial public offering (IPO). But if a company surpasses $1 billion in annual revenue, it will lose its EGC status sooner, after the end of the fiscal year in which it reached that milestone. EGC status also will be lost if it issues more than $1 billion in nonconvertible debt over a three-year period or reaches a public float of $700 million.

SRC vs. accelerated filers

In 2018, the SEC expanded its definition of smaller reporting companies (SRCs) from companies with a public float of less than $75 million to those with a public float of less than $250 million. This change allowed nearly 1,000 more companies to qualify for the lighter set of disclosure rules available to SRCs.

But, the SEC’s expanded definition of SRCs did not raise the public float thresholds for when a company qualifies as an accelerated filer. This means the $75 million threshold still applies in relation to the Sec. 404(b) exemption. Some members of the SEC favored raising the accelerated filer threshold to $250 million to expand the number of companies that would be exempt from Sec. 404(b). But, based on feedback from auditors and investor advocate groups, the SEC decided to keep the threshold at $75 million.

Got questions?

Some smaller public companies — and large private companies considering an IPO or sale — may be unclear about the ICFR assessment and attestation requirements under SOX. Contact us for questions about the rules or for information regarding best practices in internal controls. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

The next estimated tax deadline is January 15 if you have to make a payment

Posted by Admin Posted on Dec 19 2020



If you’re self-employed and don’t have withholding from paychecks, you probably have to make estimated tax payments. These payments must be sent to the IRS on a quarterly basis. The fourth 2020 estimated tax payment deadline for individuals is Friday, January 15, 2021. Even if you do have some withholding from paychecks or payments you receive, you may still have to make estimated payments if you receive other types of income such as Social Security, prizes, rent, interest, and dividends.

Pay-as-you-go system

You must make sufficient federal income tax payments long before the April filing deadline through withholding, estimated tax payments, or a combination of the two. If you fail to make the required payments, you may be subject to an underpayment penalty, as well as interest.

In general, you must make estimated tax payments for 2020 if both of these statements apply:

  1. You expect to owe at least $1,000 in tax after subtracting tax withholding and credits, and
  2. You expect withholding and credits to be less than the smaller of 90% of your tax for 2020 or 100% of the tax on your 2019 return — 110% if your 2019 adjusted gross income was more than $150,000 ($75,000 for married couples filing separately).

If you’re a sole proprietor, partner or S corporation shareholder, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.

Quarterly due dates

Estimated tax payments are spread out through the year. The due dates are April 15, June 15, September 15 and January 15 of the following year. However, if the date falls on a weekend or holiday, the deadline is the next business day.

Estimated tax is calculated by factoring in expected gross income, taxable income, deductions and credits for the year. The easiest way to pay estimated tax is electronically through the Electronic Federal Tax Payment System. You can also pay estimated tax by check or money order using the Estimated Tax Payment Voucher or by credit or debit card.

Seasonal businesses

Most individuals make estimated tax payments in four installments. In other words, you can determine the required annual payment, divide the number by four and make four equal payments by the due dates. But you may be able to make smaller payments under an “annualized income method.” This can be useful to people whose income isn’t uniform over the year, perhaps because of a seasonal business. You may also want to use the annualized income method if a large portion of your income comes from capital gains on the sale of securities that you sell at various times during the year.

Determining the correct amount

Contact us if you think you may be eligible to determine your estimated tax payments under the annualized income method, or you have any other questions about how the estimated tax rules apply to you. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Nonprofit endowments require knowledge and resources

Posted by Admin Posted on Dec 19 2020



If the events of 2020 have taught not-for-profits anything, it’s that financial reserves are essential to long-term survival. An endowment is different from operating reserves and generally is designed to provide steady income to a nonprofit while its core investments grow untouched. But that steady income can be a financial safeguard in times of crisis.

So if your organization doesn’t have an endowment, or if you’ve neglected to build on an existing one, you might want to focus on it as soon as your nonprofit is back in fighting shape. Just make sure you understand the regulations governing spending and have the resources to manage investments.

UPMIFA provisions

For most nonprofit endowments, a significant portion of assets are restricted funds. But for funds that aren’t restricted, organizations generally must conform to provisions of the Uniform Prudent Management of Institutional Funds Act (UPMIFA). Among other things, the UPMIFA allows nonprofits to include appreciation of invested funds as part of what is “spendable” in addition to realized gains, interest and dividends.

It also provides guidance for “prudent” decisions, suggesting that spending more than 7% of an endowment in any one year isn’t prudent. And the UPMIFA makes it easier for nonprofits to identify new uses for older and smaller endowments that may be dedicated to obsolete or impractical purposes.

Define your percentage

Your spending policy will need to define how much of your endowment fund’s income can be spent on operations each year. Generally, this is defined as a percentage (between 4% and 7%) of a rolling average of endowment investments. A rolling average helps even out the ups and downs of market returns and prevents the endowment’s contribution to any one budget year from being significantly lower than contributions to other years.

However, this approach doesn’t address whether your endowment fund will be able to maintain a similar level of funding for future operations. Also, because investment returns usually don’t correspond to the inflation rates that affect your operating budget, your spending policy should be based on more than recent returns. To factor inflation into your spending policy, you might start with a relatively conservative, inflation-free investment rate of return. Then adjust it for inflation to arrive at a spending rate you can apply on a year-by-year basis.

Increase spending power

An endowment can help preserve your nonprofit, even when economic storms threaten to shut it down. But be sure you work with experienced advisors to establish your endowment if you don’t have one and for ongoing investment guidance and UPMIFA compliance help. Sam Brown CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Drive more savings to your business with the heavy SUV tax break

Posted by Admin Posted on Dec 19 2020



Are you considering replacing a car that you’re using in your business? There are several tax implications to keep in mind.

A cap on deductions

Cars are subject to more restrictive tax depreciation rules than those that apply to other depreciable assets. Under so-called “luxury auto” rules, depreciation deductions are artificially “capped.” So is the alternative Section 179 deduction that you can claim if you elect to expense (write-off in the year placed in service) all or part of the cost of a business car under the tax provision that for some assets allows expensing instead of depreciation. For example, for most cars that are subject to the caps and that are first placed in service in calendar year 2020 (including smaller trucks or vans built on a truck chassis that are treated as cars), the maximum depreciation and/or expensing deductions are:

  • $18,100 for the first tax year in its recovery period (2020 for calendar year taxpayers);
  • $16,100 for the second tax year;
  • $9,700 for the third tax year; and
  • $5,760 for each succeeding tax year.

The effect is generally to extend the number of years it takes to fully depreciate the vehicle.

The heavy SUV strategy

Because of the restrictions for cars, you might be better off from a tax standpoint if you replace your business car with a heavy sport utility vehicle (SUV), pickup or van. That’s because the caps on annual depreciation and expensing deductions for passenger automobiles don’t apply to trucks or vans (and that includes SUVs). What type of SUVs qualify? Those that are rated at more than 6,000 pounds gross (loaded) vehicle weight.

This means that in most cases you’ll be able to write off the entire cost of a new heavy SUV used entirely for business purposes as 100% bonus depreciation in the year you place it into service. And even if you elect out of bonus depreciation for the heavy SUV (which generally would apply to the entire depreciation class the SUV belongs in), you can elect to expense under Section 179 (subject to an aggregate dollar limit for all expensed assets), the cost of an SUV up to an inflation-adjusted limit ($25,900 for an SUV placed in service in tax years beginning in 2020). You’d then depreciate the remainder of the cost under the usual rules without regard to the annual caps.

Potential caveats

The tax benefits described above are all subject to adjustment for non-business use. Also, if business use of an SUV doesn’t exceed 50% of total use, the SUV won’t be eligible for the expensing election, and would have to be depreciated on a straight-line method over a six-tax-year period.

Contact us if you’d like more information about tax breaks when you buy a heavy SUV for business. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

About that gift …

Posted by Admin Posted on Dec 11 2020

Lowdown on charge card liability

Posted by Admin Posted on Dec 11 2020

Put your company’s financial statements to work for you

Posted by Admin Posted on Dec 11 2020



It’s almost time for calendar-year businesses to prepare their year-end financial statements. If used correctly, these reports can be a valuable management tool. Use them in benchmarking and forecasting to be proactive, not reactive, to market changes.

1. Benchmarking

Historical financial statements can be used to evaluate the company’s current performance vs. past performance or industry norms. A comprehensive benchmarking study includes the following elements:

Size. This is usually in terms of annual revenue, total assets or market share.

Growth. This shows how much the company’s size has changed from previous periods.

Liquidity. Working capital ratios help assess how easily assets can be converted into cash and whether current assets are sufficient to cover current liabilities.

Profitability. This section evaluates whether the business is making money from operations — before considering changes in working capital accounts, investments in capital expenditures and financing activities.

Turnover. Such ratios as total asset turnover (revenue divided by total assets) or inventory turnover (cost of sales divided by inventory) show how effectively the company manages its assets.

Leverage. This refers to how the company finances its operations — through debt or equity. Each has pros and cons.

No universal benchmarks apply to all types of businesses. So, it’s important to seek data sorted by industry, size and geographic location, if possible. To understand what’s normal for businesses like yours, consider such sources as trade journals, conventions or local roundtable meetings. Your accountant can also provide access to benchmarking studies they use during audits, reviews and consulting engagements.

2. Forecasting

Historical financial statements also may serve as the starting point for forecasting, which is a critical part of strategic planning. Comprehensive business plans include forecasted balance sheets, income statements and statements of cash flows.

Many items in your forecasts will be derived from revenue. For example, variable expenses and working capital accounts are often assumed to grow in tandem with revenue. Other items, such as rent and management salaries, are fixed over the short run. These items may need to increase in steps over the long run. For example, if a company is currently at (or near) full capacity, it may eventually need to expand its factory or purchase equipment to grow.

By tracking sources and uses of cash on the forecasted statement of cash flows, management can identify when cash shortfalls might happen and plan how to make up the difference. For example, the company might need to draw on its line of credit, lay off workers, reduce inventory levels or improve its collections. In turn, these changes will flow through to the company’s forecasted balance sheet.

For more information

Let’s take your financial statements to the next level! We can help you benchmark your company’s performance and create forecasts from your year-end financial statements. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Maximize your 401(k) plan to save for retirement

Posted by Admin Posted on Dec 11 2020



Contributing to a tax-advantaged retirement plan can help you reduce taxes and save for retirement. If your employer offers a 401(k) or Roth 401(k) plan, contributing to it is a smart way to build a substantial sum of money.

If you’re not already contributing the maximum allowed, consider increasing your contribution rate. Because of tax-deferred compounding (tax-free in the case of Roth accounts), boosting contributions can have a major impact on the size of your nest egg at retirement.

With a 401(k), an employee makes an election to have a certain amount of pay deferred and contributed by an employer on his or her behalf to the plan. The contribution limit for 2020 is $19,500. Employees age 50 or older by year end are also permitted to make additional “catch-up” contributions of $6,500, for a total limit of $26,000 in 2020.

The IRS recently announced that the 401(k) contribution limits for 2021 will remain the same as for 2020.

If you contribute to a traditional 401(k)

A traditional 401(k) offers many benefits, including:

  • Contributions are pretax, reducing your modified adjusted gross income (MAGI), which can also help you reduce or avoid exposure to the 3.8% net investment income tax.
  • Plan assets can grow tax-deferred — meaning you pay no income tax until you take distributions.
  • Your employer may match some or all of your contributions pretax.

If you already have a 401(k) plan, take a look at your contributions. Try to increase your contribution rate to get as close to the $19,500 limit (with an extra $6,500 if you’re age 50 or older) as you can afford. Keep in mind that your paycheck will be reduced by less than the dollar amount of the contribution, because the contributions are pretax — so, income tax isn’t withheld.

If you contribute to a Roth 401(k)

Employers may also include a Roth option in their 401(k) plans. If your employer offers this, you can designate some or all of your contributions as Roth contributions. While such contributions don’t reduce your current MAGI, qualified distributions will be tax-free.

Roth 401(k) contributions may be especially beneficial for higher-income earners, because they don’t have the option to contribute to a Roth IRA. Your ability to make a Roth IRA contribution for 2021 will be reduced if your adjusted gross income (AGI) in 2021 exceeds:

  • $198,000 (up from $196,000 for 2020) for married joint-filing couples, or
  • $125,000 (up from $124,000 for 2020) for single taxpayers.

Your ability to contribute to a Roth IRA in 2021 will be eliminated entirely if you’re a married joint filer and your 2021 AGI equals or exceeds $208,000 (up from $206,000 for 2020). The 2021 cutoff for single filers is $140,000 or more (up from $139,000 for 2020).

The best mix

Contact us if you have questions about how much to contribute or the best mix between traditional and Roth 401(k) contributions. We can discuss the tax and retirement-saving strategies in your situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Nonprofits: How to acknowledge donor gifts

Posted by Admin Posted on Dec 11 2020



Holiday-inspired generosity and the desire to reduce tax liability makes the end of the year a busy time for charitable giving. According to Network for Good and other sources, approximately 30% of charitable gifts are made in December alone. For nonprofits, an important part of processing these donations is sending thank-you letters that acknowledge gifts. To ensure your letters contain everything they should, here’s a refresher course.

The basics and more

The IRS mandates that taxpayers substantiate single contributions of $250 or more with written acknowledgments from donation recipients. You can help build good relationships with donors by providing them with all of the information they need in a timely manner.

Along with the basics, such as your nonprofit’s name, the amount and date of the donation, make sure your acknowledgment letters state whether donors received anything in exchange for their gifts. For example, you might state that no goods or services were provided to the donor. If donors did receive something, you may need to provide a description and good faith estimate of the value of the goods or services. Religious organizations may want to say that any goods or services provided consisted entirely of intangible religious benefits.

If your state requires it, also include a tax-exempt status statement with your organization’s Employer Identification Number. And if a donor made a noncash contribution, briefly describe the contribution in your acknowledgement letter.

Details, details

Referring to such acknowledgements as “letters,” is, of course, a convention. The IRS leaves it up to nonprofits to decide on the appropriate medium for donation acknowledgments, be it a letter, postcard, email or text.

Donation letters must be sent contemporaneously with the donation. According to the IRS, this means that supporters receive them by the earlier of:

  1. The date they actually file their income tax returns for the year of the contribution, or
  2. The due date of the return.

However, you’ll probably earn greater donor goodwill by sending acknowledgments within a few days of receiving a donation.

Don’t make a habit of it

You probably won’t lose your tax-exempt status for forgetting to send one donor acknowledgment letter. But you don’t want to make a habit of it or force donors to follow up with you to get the tax information they need. Contact us if you need help with tax or compliance issues. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

The QBI deduction basics and a year-end tax tip that might help you qualify

Posted by Admin Posted on Dec 11 2020



If you own a business, you may wonder if you’re eligible to take the qualified business income (QBI) deduction. Sometimes this is referred to as the pass-through deduction or the Section 199A deduction.

The QBI deduction:

  • Is available to owners of sole proprietorships, single member limited liability companies (LLCs), partnerships, and S corporations, as well as trusts and estates.
  • Is intended to reduce the tax rate on QBI to a rate that’s closer to the corporate tax rate.
  • Is taken “below the line.” In other words, it reduces your taxable income but not your adjusted gross income.
  • Is available regardless of whether you itemize deductions or take the standard deduction.

Taxpayers other than corporations may be entitled to a deduction of up to 20% of their QBI. For 2020, if taxable income exceeds $163,300 for single taxpayers, or $326,600 for a married couple filing jointly, the QBI deduction may be limited based on different scenarios. These include whether the taxpayer is engaged in a service-type of trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business.

The limitations are phased in. For example, the phase-in for 2020 applies to single filers with taxable income between $163,300 and $213,300 and joint filers with taxable income between $326,600 and $426,600.

For tax years beginning in 2021, the inflation-adjusted threshold amounts will be $164,900 for single taxpayers, and $329,800 for married couples filing jointly.

Year-end planning tip

Some taxpayers may be able to achieve significant savings with respect to this deduction, by deferring income or accelerating deductions at year end so that they come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2020. Depending on your business model, you also may be able to increase the deduction by increasing W-2 wages before year end. The rules are quite complex, so contact us with questions and consult with us before taking steps. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

It’s time to think about “harvesting” appreciated stocks

Posted by Admin Posted on Dec 04 2020

Year-end SWOT analysis can uncover risks

Posted by Admin Posted on Dec 04 2020



As your company plans for the coming year, management should assess your strengths, weaknesses, opportunities and threats. A SWOT analysis identifies what you’re doing right (and wrong) and what outside forces could impact performance in a positive (or negative) manner. A current assessment may be particularly insightful, because market conditions have changed significantly during the year — and some changes may be permanent.

Inventorying strengths and weaknesses

Start your analysis by identifying internal strengths and weaknesses keeping in mind the customer’s perspective. Strengths represent potential areas for boosting revenues and building value, including core competencies and competitive advantages. Examples might include a strong brand or an exceptional sales team.

It’s important to unearth the source of each strength. When strengths are largely tied to people, rather than the business itself, consider what might happen if a key person suddenly left the business. To offset key person risks, consider purchasing life insurance policies on key people, initiating noncompete agreements and implementing a formal succession plan.

Alternatively, weaknesses represent potential risks and should be minimized or eliminated. They might include low employee morale, weak internal controls, unreliable quality or a location with poor accessibility. Often weaknesses are evaluated relative to the company’s competitors.

Anticipating opportunities and threats

The next part of a SWOT analysis looks externally at what’s happening in the industry, economy and regulatory environment. Opportunities are favorable external conditions that could increase revenues and value if the company acts on them before its competitors do.

Threats are unfavorable conditions that might prevent your company from achieving its goals. They might come from the economy, technological changes, competition and government regulations, including COVID-19-related operating restrictions. The idea is to watch for and minimize existing and potential threats.

Think like an auditor

During a financial statement audit, your accountant conducts a risk assessment. That assessment can provide a meaningful starting point for your SWOT analysis. Contact us for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Employees: Don’t forget about your FSA funds

Posted by Admin Posted on Dec 04 2020



Many employees take advantage of the opportunity to save taxes by placing funds in their employer’s health or dependent care flexible spending arrangements (FSAs). As the end of 2020 nears, here are some rules and reminders to keep in mind.

Health FSAs

A pre-tax contribution of $2,750 to a health FSA is permitted in both 2020 and 2021. You save taxes because you use pre-tax dollars to pay for medical expenses that might not be deductible. For example, they wouldn’t be deductible if you don’t itemize deductions on your tax return. Even if you do itemize, medical expenses must exceed a certain percentage of your adjusted gross income in order to be deductible. Additionally, the amounts that you contribute to a health FSA aren’t subject to FICA taxes.

Your plan should have a listing of qualifying items and any documentation from a medical provider that may be needed to get a reimbursement for these items.

To avoid any forfeiture of your health FSA funds because of the “use-it-or-lose-it” rule, you must incur qualifying medical expenditures by the last day of the plan year (Dec. 31 for a calendar year plan), unless the plan allows an optional grace period. A grace period can’t extend beyond the 15th day of the third month following the close of the plan year (March 15 for a calendar year plan).

An additional exception to the use-it-or lose-it rule permits health FSAs to allow a carryover of a participant’s unused health FSA funds of up to $550. Amounts carried forward under this rule are added to the up-to-$2,750 amount that you elect to contribute to the health FSA for 2021. An employer may allow a carryover or a grace period for an FSA, but not both features.

Examining your year-to-date expenditures now will also help you to determine how much to set aside for next year. Don’t forget to reflect any changed circumstances in making your calculation.

Dependent care FSAs

Some employers also allow employees to set aside funds on a pre-tax basis in dependent care FSAs. A $5,000 maximum annual contribution is permitted ($2,500 for a married couple filing separately).

These FSAs are for a dependent-qualifying child under age 13, or a dependent or spouse who is physically or mentally incapable of self-care and who has the same principal place of abode as the taxpayer for more than half of the tax year.

Like health FSAs, dependent care FSAs are subject to a use-it-or-lose-it rule, but only the grace period relief applies, not the up-to-$550 forfeiture exception. Thus, now is a good time to review expenditures to date and to project amounts to be set aside for next year.

Note: Because of COVID-19, the IRS has temporarily allowed employees to take certain actions in 2020 related to their health care and dependent care FSAs. For example, employees may be permitted to make prospective mid-year elections and changes. Ask your HR department if your plan allows these actions if you believe they would be beneficial in your situation. Other rules and exceptions may apply.

Contact us if you’d like to discuss FSAs in greater detail. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Nonprofit boards must remain vigilant as long as the crisis continues

Posted by Admin Posted on Dec 04 2020



It’s been a tough year for not-for-profits. Many have experienced an increased demand for services just as revenues have plummeted. Until the COVID-19 pandemic is over, your organization’s board of directors will likely play a special role in ensuring that it remains on track financially. In particular, the board should focus on two issues:

1. Budget variances

Each month, the board should compare your nonprofit’s budget to actual results and look for unexplained variances. Some discrepancies are bound to happen in this tumultuous time, but your staff should be able to explain all significant differences thoroughly.

There may be reasonable explanations for changes in incoming revenue and expenses, such as increased program demands, funding changes or event cancellations. When necessary, the board should direct management to modify activities to mitigate negative variances or institute cost-saving measures. Board members also should keep an eye open for overspending in one program that’s funded by another. And they should watch for dips in the organization’s “rainy day” fund (its “reserves”), the raiding of an endowment or unplanned borrowing.

2. Consistency of financial statements

Inconsistent financial statements — or statements that aren’t prepared using U.S. Generally Accepted Accounting Principles (GAAP) — can lead to poor decision-making. It also can make it difficult to obtain funding or financing or compare your organization’s metrics to those of other nonprofits in the same niche. If your organization isn’t using GAAP (or another comprehensive basis of accounting), it may be time to implement it.

For larger nonprofits, the board or audit committee also should insist on annual audits and expect to select the audit firm. Members of the responsible group, such as an audit committee, should communicate directly with auditors before and during the process. All board members should have the opportunity to review and question the audit report.

Additionally, your audit firm may provide a management comment letter that reflects issues noted during the audit and opportunities for improvements in accounting, internal controls and operations. The board should carefully consider these recommendations and determine if suggested changes will lead your organization to a stronger financial footing.

Other warning signs

Your board should also be alert to other potentially troubling signs — for example, if members start hearing from long-standing supporters who are worried about your nonprofit’s finances. Also, the board should make sure that your executive director adheres to expense limits, even if a program’s needs unexpectedly expand. Going outside of budget or policy guidelines should require board approval.

Contact us for additional advice about your board’s fiscal role and for help restoring financial order following a disruptive period. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Small businesses: Cash in on depreciation tax savers

Posted by Admin Posted on Dec 04 2020



As we approach the end of the year, it’s a good time to think about whether your business needs to buy business equipment and other depreciable property. If so, you may benefit from the Section 179 depreciation tax deduction for business property. The election provides a tax windfall to businesses, enabling them to claim immediate deductions for qualified assets, instead of taking depreciation deductions over time.

Even better, the Sec. 179 deduction isn’t the only avenue for immediate tax write-offs for qualified assets. Under the 100% bonus depreciation tax break, the entire cost of eligible assets placed in service in 2020 can be written off this year.

But to benefit for this tax year, you need to buy and place qualifying assets in service by December 31.

What qualifies?

The Sec. 179 deduction applies to tangible personal property such as machinery and equipment purchased for use in a trade or business, and, if the taxpayer elects, qualified real property. It’s generally available on a tax year basis and is subject to a dollar limit.

The annual deduction limit is $1.04 million for tax years beginning in 2020, subject to a phaseout rule. Under the rule, the deduction is phased out (reduced) if more than a specified amount of qualifying property is placed in service during the tax year. The amount is $2.59 million for tax years beginning in 2020. (Note: Different rules apply to heavy SUVs.)

There’s also a taxable income limit. If your taxable business income is less than the dollar limit for that year, the amount for which you can make the election is limited to that taxable income. However, any amount you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable dollar limit, the phaseout rule, and the taxable income limit).

In addition to significantly increasing the Sec. 179 deduction, the TCJA also expanded the definition of qualifying assets to include depreciable tangible personal property used mainly in the furnishing of lodging, such as furniture and appliances.

The TCJA also expanded the definition of qualified real property to include qualified improvement property and some improvements to nonresidential real property, such as roofs; heating, ventilation and air-conditioning equipment; fire protection and alarm systems; and security systems.

What about bonus depreciation?

With bonus depreciation, businesses are allowed to deduct 100% of the cost of certain assets in the first year, rather than capitalize them on their balance sheets and gradually depreciate them. (Before the Tax Cuts and Jobs Act, you could deduct only 50% of the cost of qualified new property.)

This tax break applies to qualifying assets placed in service between September 28, 2017, and December 31, 2022 (by December 31, 2023, for certain assets with longer production periods and for aircraft). After that, the bonus depreciation percentage is reduced by 20% per year, until it’s fully phased out after 2026 (or after 2027 for certain assets described above).

Bonus depreciation is allowed for both new and used qualifying assets, which include most categories of tangible depreciable assets other than real estate.

Important: When both 100% first-year bonus depreciation and the Sec. 179 deduction are available for the same asset, it’s generally more advantageous to claim 100% bonus depreciation, because there are no limitations on it.

Need assistance?

These favorable depreciation deductions may deliver tax-saving benefits to your business on your 2020 return. Contact us if you have questions, or you want more information about how your business can maximize the deductions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Turkey prices are higher this year — but it’s all good

Posted by Admin Posted on Nov 30 2020

How COVID-19 could impact year-end inventory counts

Posted by Admin Posted on Nov 30 2020



Many businesses are closed or are limiting third-party access as COVID-19 surges across the United States. These restrictions could still be in place at year end — a time when external auditors traditionally observe physical inventory counts for calendar-year entities. Here’s how you can identify and overcome the challenges associated with inventory counts during the pandemic.

What’s expected to change?

Companies conduct manual counts at the end of the accounting period to ensure that the inventory balance reflected on their balance sheet matches what’s held on-site in raw materials, work-in-progress and finished goods. The extent to which your counting procedures will need to change during the COVID-19 crisis depends on your circumstances.

For example, you may need to make only minimal changes to protect employees and third parties, if your inventory is stored in one warehouse and requires only a small team to conduct the count. Possible safety measures might include:

  • Requiring employees to wear personal protective equipment,
  • Providing hand sanitizer and disinfectant spray, and
  • Setting up counting stations and other procedures to facilitate social distancing and capacity restrictions.

In some extreme situations (for example, if local stay-at-home mandates have been issued), your management team may decide to delay or even forgo an inventory count. If you face this situation, document the reasoning for your decision and share it with your auditors, board of directors and audit committee.

Be prepared for these groups to suggest alternative ways to conduct an inventory count. They might also request that your team identify an alternate date to conduct the count. If the count date is significantly later than the financial statement date, the audit team will pay close attention to how the count differed from what’s recorded in your inventory records.

What if your auditor can’t attend a physical count?

There are several reasons your auditor might be unable to observe your physical count in person, including government restrictions and company or audit firm policies designed to mitigate the spread of COVID-19. If this happens, you and your audit team will need to devise alternate ways to gather audit evidence pertaining to your company’s inventory.

The options available depend on the accuracy and integrity of your company’s inventory records, coupled with the auditor’s previous experience and observations related to your company’s inventory counts. For example, your auditors could use the inventory balance associated with the last count they observed, coupled with subsequent sales and purchases data to roll forward and generate a new inventory balance.

Alternatively, some companies use cycle count procedures. This is a form of sampling that involves counting a small amount of inventory on a regular basis and making corrections to the inventory system. These counting methods can circumvent the need for an annual inventory count.

Technology to the rescue

If you proceed with an inventory count, don’t overlook technology and its ability to document the existence of inventory and its location. For example, those involved in the inventory count could wear body cameras with GPS capabilities, or auditors could use drones, to observe the count in real-time. Additionally, those conducting the count can refer to video footage after the fact to verify the amounts they document during the process. Contact us to discuss the best approach to verify your year-end inventory levels. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Steer clear of the wash sale rule if you’re selling stock by year end

Posted by Admin Posted on Nov 27 2020



Are you thinking about selling stock shares at a loss to offset gains that you’ve realized during 2020? If so, it’s important not to run afoul of the “wash sale” rule.

IRS may disallow the loss

Under this rule, if you sell stock or securities for a loss and buy substantially identical stock or securities back within the 30-day period before or after the sale date, the loss can’t be claimed for tax purposes. The rule is designed to prevent taxpayers from using the tax benefit of a loss without parting with ownership in any significant way. Note that the rule applies to a 30-day period before or after the sale date to prevent “buying the stock back” before it’s even sold. (If you participate in any dividend reinvestment plans, it’s possible the wash sale rule may be inadvertently triggered when dividends are reinvested under the plan, if you’ve separately sold some of the same stock at a loss within the 30-day period.)

The rule even applies if you repurchase the security in a tax-advantaged retirement account, such as a traditional or Roth IRA.

Although the loss can’t be claimed on a wash sale, the disallowed amount is added to the cost of the new stock. So, the disallowed amount can be claimed when the new stock is finally disposed of in the future (other than in a wash sale).

An example to illustrate

Let’s say you bought 500 shares of ABC Inc. for $10,000 and sold them on November 5 for $3,000. On November 30, you buy 500 shares of ABC again for $3,200. Since the shares were “bought back” within 30 days of the sale, the wash sale rule applies. Therefore, you can’t claim a $7,000 loss. Your basis in the new 500 shares is $10,200: the actual cost plus the $7,000 disallowed loss.

If only a portion of the stock sold is bought back, only that portion of the loss is disallowed. So, in the above example, if you’d only bought back 300 of the 500 shares (60%), you’d be able to claim 40% of the loss on the sale ($2,800). The remaining $4,200 loss that’s disallowed under the wash sale rule would be added to your cost of the 300 shares.

If you’ve cashed in some big gains in 2020, you may be looking for unrealized losses in your portfolio so you can sell those investments before year end. By doing so, you can offset your gains with your losses and reduce your 2020 tax liability. But be careful of the wash sale rule. We can answer any questions you may have. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Principles to guide your nonprofit’s relationship with donors

Posted by Admin Posted on Nov 27 2020



In 1993, a consortium of philanthropic organizations came up with the Donor Bill of Rights to guide not-for-profits in their interactions with financial supporters. For the most part, the basic principles remain valid. But over the past quarter century, some in the nonprofit and donor communities have suggested amendments and additional “rights.” If you aren’t already familiar with the Bill, it’s a good idea to review it and recent updates while thinking about ways you might improve your organization’s relationship with donors.

Bill of Rights

The original list states that donors have these 10 rights:

  1. To be informed of the organization’s mission, how it intends to use donated resources and its capacity to use donations effectively for their intended purposes.
  2. To be informed of who’s serving on the organization’s governing board, and to expect the board to exercise prudent judgment in its stewardship responsibilities.
  3. To have access to the organization’s most recent financial statements.
  4. To be assured gifts will be used for the purposes for which they were given.
  5. To receive appropriate acknowledgment and recognition.
  6. To be assured that donation information is handled with respect and confidentiality to the extent provided by law.
  7. To expect that relationships between individuals representing organizations and donors will be professional.
  8. To be informed whether fundraisers are volunteers, employees of the organization or hired solicitors.
  9. To have the opportunity for donors’ names to be deleted from mailing lists that an organization may intend to share.
  10. To feel free to ask questions and receive prompt, truthful and forthright answers.

List update

Obviously, a lot has changed since 1993. Notably, web-based and digital communications have largely replaced traditional methods of getting the word out. And new technologies, including mobile devices and apps, have changed how many supporters donate. The 2019 eDonor Bill of Rights, assembled by the Association of Fundraising Professionals, addresses this new world.

Among the additions to the original list are technology-specific items. For example, nonprofits are advised to provide secure donation methods that protect personal information and to enable supporters to opt out of data lists and email solicitations. Charities are also encouraged to provide donors with communication channels other than email and web-based apps.

One item that isn’t technology-related is an increasingly important obligation that nonprofits have to donors: To inform them that “a contribution entitles the donor to a tax deduction, and of all limits on such deduction based on applicable laws.” You can read the entire amended Bill at afpglobal.org/principles-edonor-bill-rights. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

The importance of S corporation basis and distribution elections

Posted by Admin Posted on Nov 27 2020



S corporations can provide tax advantages over C corporations in the right circumstances. This is true if you expect that the business will incur losses in its early years because shareholders in a C corporation generally get no tax benefit from such losses. Conversely, as an S corporation shareholder, you can deduct your percentage share of these losses on your personal tax return to the extent of your basis in the stock and any loans you personally make to the entity.

Losses that can’t be deducted because they exceed your basis are carried forward and can be deducted by you when there’s sufficient basis.

Therefore, your ability to use losses that pass through from an S corporation depends on your basis in the corporation’s stock and debt. And, basis is important for other purposes such as determining the amount of gain or loss you recognize if you sell the stock. Your basis in the corporation is adjusted to reflect various events such as distributions from the corporation, contributions you make to the corporation and the corporation’s income or loss.

Adjustments to basis

However, you may not be aware that several elections are available to an S corporation or its shareholders that can affect the basis adjustments caused by distributions and other events. Here is some information about four elections:

  1. An S corporation shareholder may elect to reverse the normal order of basis reductions and have the corporation’s deductible losses reduce basis before basis is reduced by nondeductible, noncapital expenses. Making this election may permit the shareholder to deduct more pass-through losses.
  2. An election that can help eliminate the corporation’s accumulated earnings and profits from C corporation years is the “deemed dividend election.” This election can be useful if the corporation isn’t able to, or doesn’t want to, make an actual dividend distribution.
  3. If a shareholder’s interest in the corporation terminates during the year, the corporation and all affected shareholders can agree to elect to treat the corporation’s tax year as having closed on the date the shareholder’s interest terminated. This election affords flexibility in the allocation of the corporation’s income or loss to the shareholders and it may affect the category of accumulated income out of which a distribution is made.
  4. An election to terminate the S corporation’s tax year may also be available if there has been a disposition by a shareholder of 20% or more of the corporation’s stock within a 30-day period. 

Contact us if you would like to go over how these elections, as well as other S corporation planning strategies, can help maximize the tax benefits of operating as an S corporation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

2020 has been a banner year for startups. Go figure.

Posted by Admin Posted on Nov 20 2020

Cutoffs: What counts in 2020 vs. 2021

Posted by Admin Posted on Nov 20 2020



As year end approaches, it’s a good idea for calendar-year entities to review the guidelines for recognizing revenue and expenses. There are specific rules regarding accounting cutoffs under U.S. Generally Accepted Accounting Principles (GAAP). Strict observance of these rules is generally the safest game plan.

The basics

Companies that follow GAAP must use the accrual method of accounting, not the cash method. That means revenues and expenses must be matched to the periods in which they were earned or incurred. The end of the period serves as a “cutoff” for recognizing revenue and expenses. For a calendar-year business, the cutoff is December 31.

However, some companies may be tempted to play timing games to lower taxes or boost financial results. The temptation might be especially high in 2020, as many companies struggle during the COVID-19 pandemic.

Now or later

Test your understanding of the cutoff rules with these two hypothetical situations:

  1. As of December 31, a calendar-year, accrual-basis auto dealership has verbally negotiated a deal on an SUV. But the customer hasn’t yet signed all the paperwork. Should the sale be reported in 2020 or 2021?
  2. On December 30, a calendar-year, accrual-basis retailer pays its rent bill for January. Rent is due on the first day of the month. Can the store deduct the extra month’s rent in 2020 to help lower its tax bill?

In both examples, the transactions should be reported in 2021, not 2020. In the first example, even if the customer takes the car home for the weekend, it doesn’t matter; there’s still the possibility the customer could back out of the deal. The dealership can’t report the transaction in 2020 revenue until the customer has signed the paperwork and paid for the vehicle with cash or financing.

Audit procedures

If your financial statements are audited, your CPA will enforce strict cutoff rules — and likely reverse any items that were reported inaccurately. Audit procedures may include reviewing customer contracts and returns reported near year end. Auditors also may compare expenses as a percentage of revenues from period to period to identify timing errors. And they may vouch expenses to invoices and contracts for accuracy.

It never reflects favorably — in the eyes of investor or lenders — when auditors adjust year-end financial statements for inaccurate observation of cutoffs. Don’t give cause for others to wonder about your operations.

Timing is critical

Contact us if you need help understanding the rules on when to record revenue or expenses. We can help you comply with the rules and minimize financial statement adjustments during your audit. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Taking distributions from a traditional IRA

Posted by Admin Posted on Nov 20 2020



Although planning is needed to help build the biggest possible nest egg in your traditional IRA (including a SEP-IRA and SIMPLE-IRA), it’s even more critical that you plan for withdrawals from these tax-deferred retirement vehicles. There are three areas where knowing the fine points of the IRA distribution rules can make a big difference in how much you and your family will keep after taxes:

Early distributions. What if you need to take money out of a traditional IRA before age 59½? For example, you may need money to pay your child’s education expenses, make a down payment on a new home or meet necessary living expenses if you retire early. In these cases, any distribution to you will be fully taxable (unless nondeductible contributions were made, in which case part of each payout will be tax-free). In addition, distributions before age 59½ may also be subject to a 10% penalty tax. However, there are several ways that the penalty tax (but not the regular income tax) can be avoided, including a method that’s tailor-made for individuals who retire early and need to draw cash from their traditional IRAs to supplement other income.

Naming beneficiaries. The decision concerning who you want to designate as the beneficiary of your traditional IRA is critically important. This decision affects the minimum amounts you must generally withdraw from the IRA when you reach age 72, who will get what remains in the account at your death, and how that IRA balance can be paid out. What’s more, a periodic review of the individual(s) you’ve named as IRA beneficiaries is vital. This helps assure that your overall estate planning objectives will be achieved in light of changes in the performance of your IRAs, as well as in your personal, financial and family situation.

Required minimum distributions (RMDs). Once you attain age 72, distributions from your traditional IRAs must begin. If you don’t withdraw the minimum amount each year, you may have to pay a 50% penalty tax on what should have been paid out — but wasn’t. However, for 2020, the CARES Act suspended the RMD rules — including those for inherited accounts — so you don’t have to take distributions this year if you don’t want to. Beginning in 2021, the RMD rules will kick back in unless Congress takes further action. In planning for required distributions, your income needs must be weighed against the desirable goal of keeping the tax shelter of the IRA going for as long as possible for both yourself and your beneficiaries.

Traditional versus Roth

It may seem easier to put money into a traditional IRA than to take it out. This is one area where guidance is essential, and we can assist you and your family. Contact us to conduct a review of your traditional IRAs and to analyze other aspects of your retirement planning. We can also discuss whether you can benefit from a Roth IRA, which operate under a different set of rules than traditional IRAs. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Using footnotes to disclose your nonprofit’s financial information

Posted by Admin Posted on Nov 20 2020



Does anyone actually read footnotes? If they’re financial statement footnotes, the answer is usually “yes.” Footnotes can provide donors, governmental supporters and other stakeholders with critical information about your not-for-profit. So it’s important to work with your CPA to make sure your footnotes are accurate and thorough.

Operations and accounting policy snapshot

One important set of footnotes is the summary of significant accounting policies. This includes two sections. The first is a brief description of your operations (featuring your chief purpose and sources of revenue). The second is a list of the significant accounting policies that have been applied in preparing your statements.

Your summary should outline specific policies such as:

  • The accounting method you used,
  • Classification of cash equivalents,
  • Fixed asset capitalization levels,
  • Depreciation methods,
  • Uncertain tax positions,
  • Recognition of contributions and grants as revenue, and
  • Recognition of in-kind contributions.

Investment lowdown

Footnotes are also used to disclose information related to investments. This includes the types of investments held, the carrying amounts for each major type of investment you own and the current year income.

You also must disclose any related-party transactions such as those between board members, senior management and major donors. Include the nature of the relationships between the parties, the dollar amount of the transactions and any amounts owed to or from the related parties as of the date of the financial statements.

Note existing contingencies

Your footnotes should further cover any reasonably possible loss contingencies. Contingencies are existing conditions that could create an obligation in the future and that arise from past transactions or events. Disclose the nature of a contingency and provide an estimate of the loss (or state that an estimate can’t be made).

Contingencies might include:

  • Pending or threatened lawsuits,
  • Claims against your organization,
  • Costs already incurred where reimbursement could be disallowed under a government grant, or
  • IRS examinations related to tax-exempt status, unrelated business income and excise taxes.

Be sure to disclose any time that your organization hasn’t used funds in compliance with donor restrictions.

Your statements’ footnotes should also disclose information that allows users to compare the total amount of fundraising costs with related proceeds. If a ratio of fundraising expenses to funds raised is disclosed, you should cite the method used to calculate it.

Get help

As you can see, most financial statement footnotes contain technical information best prepared by an accounting professional. Let us help you with your financials. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Health Savings Accounts for your small business

Posted by Admin Posted on Nov 20 2020



Small business owners are well aware of the increasing cost of employee health care benefits. As a result, your business may be interested in providing some of these benefits through an employer-sponsored Health Savings Account (HSA). Or perhaps you already have an HSA. It’s a good time to review how these accounts work since the IRS recently announced the relevant inflation-adjusted amounts for 2021.

The basics of HSAs

For eligible individuals, HSAs offer a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs. Here are the key tax benefits:

  • Contributions that participants make to an HSA are deductible, within limits.
  • Contributions that employers make aren’t taxed to participants.
  • Earnings on the funds within an HSA aren’t taxed, so the money can accumulate year after year tax free.
  • HSA distributions to cover qualified medical expenses aren’t taxed.
  • Employers don’t have to pay payroll taxes on HSA contributions made by employees through payroll deductions.

Key 2020 and 2021 amounts

To be eligible for an HSA, an individual must be covered by a “high deductible health plan.” For 2020, a “high deductible health plan” is one with an annual deductible of at least $1,400 for self-only coverage, or at least $2,800 for family coverage. For 2021, these amounts are staying the same.

For self-only coverage, the 2020 limit on deductible contributions is $3,550. For family coverage, the 2020 limit on deductible contributions is $7,100. For 2021, these amounts are increasing to $3,600 and $7,200, respectively. Additionally, for 2020, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits cannot exceed $6,900 for self-only coverage or $13,800 for family coverage. For 2021, these amounts are increasing to $7,000 and $14,000.

An individual (and the individual’s covered spouse, as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2020 and 2021 of up to $1,000.

Contributing on an employee’s behalf

If an employer contributes to the HSA of an eligible individual, the employer’s contribution is treated as employer-provided coverage for medical expenses under an accident or health plan and is excludable from an employee’s gross income up to the deduction limitation. There’s no “use-it-or-lose-it” provision, so funds can be built up for years. An employer that decides to make contributions on its employees’ behalf must generally make comparable contributions to the HSAs of all comparable participating employees for that calendar year. If the employer doesn’t make comparable contributions, the employer is subject to a 35% tax on the aggregate amount contributed by the employer to HSAs for that period.

Paying for eligible expenses

HSA distributions can be made to pay for qualified medical expenses. This generally means those expenses that would qualify for the medical expense itemized deduction. They include expenses such as doctors’ visits, prescriptions, chiropractic care and premiums for long-term care insurance.

If funds are withdrawn from the HSA for any other reason, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it’s made after reaching age 65, or in the event of death or disability.

As you can see, HSAs offer a flexible option for providing health care coverage, but the rules are somewhat complex. Contact us with questions or if you’d like to discuss offering this benefit to your employees. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Valuing a pandemic-scarred business

Posted by Admin Posted on Nov 13 2020

How to minimize turnover in your accounting department

Posted by Admin Posted on Nov 13 2020



The demand for qualified accounting and finance personnel has grown, as business owners struggle to manage unpredictable cash flows, increased costs, and new government policies and financial aid packages. Plus, the potential job market for these professionals has expanded, thanks to technological changes that now allow them to transcend geographic boundaries and work from virtually anywhere.

High turnover can lead to major problems: It can lower productivity, delay financial reporting and decision-making, and even trigger a snowball effect among the remaining team members. Plus, recruiting and training replacements can be costly and time-consuming.

Some turnover is natural in every department. But if the voluntary departure rate in your accounting department has become excessive, it may be time to consider these four corrective measures:

1. Strengthen bonds with employees

Happy employees feel valued, challenged and connected to their employer. Owners and executives should take time to connect with the people who work behind the scenes, including members of the accounting team, to find out how they view their role and the company.

Ask internal accounting personnel to share their career aspirations. Then, where possible, provide them with the support to realize those goals. Setting aside the time to connect and listen to employees can go a long way toward improving retention.

2. Work closely with human resources

By partnering with HR, the accounting department can improve its ability to nurture and retain key employees. For example, HR can help create and implement a flexible scheduling program or administer an employee satisfaction survey with the accounting department. Or, if a specific employee is a flight risk, HR can help address the individual’s concerns and re-engage him or her in the team.

3. Remember remote employees

The accounting department is well-suited for remote work, even beyond the COVID-19 crisis. But it’s not right for everyone. Some employees will adapt to it quickly, while others may struggle or need to come into the office occasionally, especially when closing the books at the end of the accounting period.

Keep the lines of communication open with remote accounting personnel. In addition to regular videoconferencing check-in meetings, provide them with office supplies, intranet resources and access to your company’s networks. Without these types of support, it’s easy for remote workers to become disengaged.

4. Uncover the root causes for departures

If you lose your controller, CFO or another key member of your accounting team, make it a teachable moment. Conduct exit interviews to learn why the employee is leaving.

During those discussions, ask open-ended questions that allow the individual to share his or her experiences at your company. Also resist the temptation to challenge his or her statements or entice the individual to stay. The goal is to encourage the individual to share freely without fear of repercussions or being made to feel guilty.

Your accounting team is a critical asset

From financial statements and tax returns to budgets and forecasts, the accounting department provides valuable insight into how your company is performing and what strategic direction makes sense for the future. As fellow accountants, we can be a helpful source of ideas to retain your current staff and recruit new members. Contact us for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

How Series EE savings bonds are taxed

Posted by Admin Posted on Nov 13 2020



Many people have Series EE savings bonds that were purchased many years ago. Perhaps they were given to your children as gifts or maybe you bought them yourself and put them away in a file cabinet or safe deposit box. You may wonder: How is the interest you earn on EE bonds taxed? And if they reach final maturity, what action do you need to take to ensure there’s no loss of interest or unanticipated tax consequences?

Fixed or variable interest

Series EE Bonds dated May 2005, and after, earn a fixed rate of interest. Bonds purchased between May 1997 and April 30, 2005, earn a variable market-based rate of return.

Paper Series EE bonds were sold at half their face value. For example, if you own a $50 bond, you paid $25 for it. The bond isn’t worth its face value until it matures. (The U.S. Treasury Department no longer issues EE bonds in paper form.) Electronic Series EE Bonds are sold at face value and are worth their full value when available for redemption.

The minimum term of ownership is one year, but a penalty is imposed if the bond is redeemed in the first five years. The bonds earn interest for 30 years.

Interest generally accrues until redemption

Series EE bonds don’t pay interest currently. Instead, the accrued interest is reflected in the redemption value of the bond. The U.S. Treasury issues tables showing the redemption values.

The interest on EE bonds isn’t taxed as it accrues unless the owner elects to have it taxed annually. If an election is made, all previously accrued but untaxed interest is also reported in the election year. In most cases, this election isn’t made so bond holders receive the benefits of tax deferral.

If the election to report the interest annually is made, it will apply to all bonds and for all future years. That is, the election cannot be made on a bond-by-bond or year-by-year basis. However, there’s a procedure under which the election can be canceled.

If the election isn’t made, all of the accrued interest is finally taxed when the bond is redeemed or otherwise disposed of (unless it was exchanged for a Series HH bond). The bond continues to accrue interest even after reaching its face value, but at “final maturity” (after 30 years) interest stops accruing and must be reported.

Note: Interest on EE bonds isn’t subject to state income tax. And using the money for higher education may keep you from paying federal income tax on your interest.

Reaching final maturity

One of the main reasons for buying EE bonds is the fact that interest can build up without having to currently report or pay tax on it. Unfortunately, the law doesn’t allow for this tax-free buildup to continue indefinitely. When the bonds reach final maturity, they stop earning interest.

Series EE bonds issued in January 1990 reached final maturity after 30 years, in January 2020. That means that not only have they stopped earning interest, but all of the accrued and as yet untaxed interest is taxable in 2020.

If you own EE bonds (paper or electronic), check the issue dates on your bonds. If they’re no longer earning interest, you probably want to redeem them and put the money into something more profitable. Contact us if you have any questions about savings bond taxation, including Series HH and Series I bonds. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Smart nonprofit leaders know how to delegate

Posted by Admin Posted on Nov 13 2020



Delegation ideally gives not-for-profit executives time to focus on mission critical tasks and provides growth opportunities to staffers. However, you need to approach delegation strategically. This means assigning the right tasks to the right staffers — and following up on assigned work to ensure it’s completed to your standards.

Projects and people

First, consider potential tasks that could be delegated. You should try to devote your time to the projects that are the most valuable to your organization and can best benefit from your talents. For example, public speaking engagements and meetings with major donors are probably best left to you and other upper-level executives. On the other hand, prime delegation candidates are tasks that frequently reoccur, such as sending membership renewal notices, and jobs that require a specific skill in which you have minimal or no expertise, such as reconciling bank accounts.

Before you delegate a task to an employee, consider the person’s main job responsibilities and experience and how those correlate with the project. At the same time, keep in mind that employees may welcome opportunities to test their wings in a new area or take on greater responsibility. Before assigning new tasks, check staffers’ schedules to confirm that they actually have time to do the job well.

Making and managing the assignment

When handing off a task, be clear about goals, expectations, deadlines and details. Explain why you chose the individual and what the project means to the organization as a whole. Also let employees know if they have any latitude to bring their own methods and processes to the task. A fresh pair of eyes might see a new and better way of accomplishing it.

Keep in mind that delegation doesn’t mean dumping a project on someone and then washing your hands of it. Ultimately, you’re responsible for the task’s completion, even if you assign it to someone else. So stay involved by monitoring the employee’s progress and providing coaching and feedback as necessary. Remember, however, there’s a fine line between remaining available for questions and micromanaging.

Credit where credit is due

A good delegator never takes credit for someone else’s work. Be sure you generously — and publicly — give credit where credit is due. This could mean verbal praise in a meeting, a note of thanks in a newsletter or a letter to the person’s manager.

Contact us for more ideas about managing your organization efficiently and cost-effectively. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Do you want to withdraw cash from your closely held corporation at a low tax cost?

Posted by Admin Posted on Nov 13 2020



Owners of closely held corporations are often interested in easily withdrawing money from their businesses at the lowest possible tax cost. The simplest way is to distribute cash as a dividend. However, a dividend distribution isn’t tax-efficient, since it’s taxable to you to the extent of your corporation’s “earnings and profits.” And it’s not deductible by the corporation.

Other strategies

Fortunately, there are several alternative methods that may allow you to withdraw cash from a corporation while avoiding dividend treatment. Here are five strategies to consider:

  • Capital repayments. To the extent that you’ve capitalized the corporation with debt, including amounts that you’ve advanced to the business, the corporation can repay the debt without the repayment being treated as a dividend. Additionally, interest paid on the debt can be deducted by the corporation. This assumes that the debt has been properly documented with terms that characterize debt and that the corporation doesn’t have an excessively high debt-to-equity ratio. If not, the “debt” repayment may be taxed as a dividend. If you make future cash contributions to the corporation, consider structuring them as debt to facilitate later withdrawals on a tax-advantaged basis.
  • Compensation. Reasonable compensation that you, or family members, receive for services rendered to the corporation is deductible by the business. However, it’s also taxable to the recipient(s). This same rule applies to any compensation (in the form of rent) that you receive from the corporation for the use of property. In both cases, the compensation amount must be reasonable in terms of the services rendered or the value of the property provided. If it’s considered excessive, the excess will be a nondeductible corporate distribution.
  • Loans. You can withdraw cash tax free from the corporation by borrowing money from it. However, to prevent having the loan characterized as a corporate distribution, it should be properly documented in a loan agreement or note. It should also be made on terms that are comparable to those in which an unrelated third party would lend money to you, including a provision for interest and principal. Also, consider what the corporation’s receipt of interest income will mean.
  • Fringe benefits. You may want to obtain the equivalent of a cash withdrawal in fringe benefits, which aren’t taxable to you and are deductible by the corporation. Examples include life insurance, certain medical benefits, disability insurance and dependent care. Most of these benefits are tax-free only if provided on a nondiscriminatory basis to other corporation employees. You can also establish a salary reduction plan that allows you (and other employees) to take a portion of your compensation as nontaxable benefits, rather than as taxable compensation.
  • Property sales. You can withdraw cash from the corporation by selling property to it. However, certain sales should be avoided. For example, you shouldn’t sell property to a more than 50%-owned corporation at a loss, since the loss will be disallowed. And you shouldn’t sell depreciable property to a more than 50%-owned corporation at a gain, since the gain will be treated as ordinary income, rather than capital gain. A sale should be on terms that are comparable to those in which an unrelated third party would purchase the property. You may need to obtain an independent appraisal to establish the property’s value.

Minimize taxes

If you’re interested in discussing any of these ideas, contact us. We can help you get the most out of your corporation at the lowest tax cost. www.sbcpaohio.com

© 2020

How Americans are redefining “giving”

Posted by Admin Posted on Nov 06 2020

Preparing for the possibility of a remote audit

Posted by Admin Posted on Nov 06 2020



The coming audit season might be much different than seasons of yore. As many companies continue to operate remotely during the COVID-19 pandemic, audit procedures are being adjusted accordingly. Here’s what might change as auditors work on your company’s 2020 year-end financial statements.

Eye on technology

Fortunately, when the pandemic hit, many accounting firms already had invested in staff training and technology to work remotely. For example, they were using cloud computing, remote access, videoconferencing software and drones with cameras. These technologies were intended to reduce business disruptions and costs during normal operating conditions. But they’ve also helped firms adapt while businesses are limiting face-to-face contact to prevent the spread of COVID-19.

When social distancing measures went into effect in the United States around mid-March, many calendar-year audits for 2019 were already done. As we head into the next audit season, be prepared for the possibility that most procedures — from year-end inventory observations to management inquiries and audit testing — to be performed remotely. Before the start of next year’s audit, discuss which technologies your audit team will be using to conduct inquiries, access and verify data, and perform testing procedures.

Emphasis on high-risk areas

During a remote audit, expect your accountant to target three critical areas to help minimize the risk of material misstatement:

1. Internal controls. Historically, auditors have relied on the effectiveness of a client’s controls and testing of controls. Now, they must evaluate how transactions are being processed by employees who work remotely, rather than on-site as in prior periods. Specifically, your auditor will need to consider whether modified controls have been adequately designed and put into place and whether they’re operating effectively.

2. Fraud and financial misstatement. During fieldwork, auditors interview key managers and those charged with governance about fraud risks. These inquiries are most effective when done in person, because auditors can read body language and, if more than one person is present during an interview, judge the dynamics in a room. Auditors may request video conferences to help overcome the shortcomings of inquiries done over the phone or via email.

3. Physical inventory counts. Normally, auditors go where inventory is located and observe the counting process. They also perform independent test counts and check them against the inventory records. Depending on the COVID-19 situation at the time of an audit, auditors may be unable to travel to the company’s facilities, and employees might not be there physically to perform the counts. Drones, videoconferencing and live video feeds from a warehouse’s security cameras may be suitable alternatives to on-site observations.

Modified reports

In some cases, audit firms may be unable to perform certain procedures remotely, due to technology limitations or insufficient access to data needed to comply with all the requirements of the auditing standards. In those situations, your auditor might decide to issue a modified audit report with scope restrictions and limitations. Contact your CPA for more information about remote auditing and possible modifications to your company’s audit report. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Disability income: How is it taxed?

Posted by Admin Posted on Nov 06 2020



Many Americans receive disability income. You may wonder if — and how — it’s taxed. As is often the case with tax questions, the answer is … it depends.

The key factor is who paid for the benefit. If the income is paid directly to you by your employer, it’s taxable to you as ordinary salary would be. (Taxable benefits are also subject to federal income tax withholding, although depending on the employer’s disability plan, in some cases aren’t subject to the Social Security tax.)

Frequently, the payments aren’t made by the employer but by an insurance company under a policy providing disability coverage or, under an arrangement having the effect of accident or health insurance. If this is the case, the tax treatment depends on who paid for the coverage. If your employer paid for it, then the income is taxed to you just as if paid directly to you by the employer. On the other hand, if it’s a policy you paid for, the payments you receive under it aren’t taxable.

Even if your employer arranges for the coverage, (in other words, it’s a policy made available to you at work), the benefits aren’t taxed to you if you pay the premiums. For these purposes, if the premiums are paid by the employer but the amount paid is included as part of your taxable income from work, the premiums are treated as paid by you.

A couple of examples

Let’s say your salary is $1,000 a week ($52,000 a year). Additionally, under a disability insurance arrangement made available to you by your employer, $10 a week ($520 for the year) is paid on your behalf by your employer to an insurance company. You include $52,520 in income as your wages for the year: the $52,000 paid to you plus the $520 in disability insurance premiums. In this case, the insurance is treated as paid for by you. If you become disabled and receive benefits, they aren’t taxable income to you.

Now, let’s look at an example with the same facts as above. Except in this case, you include only $52,000 in income as your wages for the year because the amount paid for the insurance coverage qualifies as excludable under the rules for employer-provided health and accident plans. In this case, the insurance is treated as paid for by your employer. If you become disabled and receive benefits, they are taxable income to you.

Note: There are special rules in the case of a permanent loss (or loss of the use) of a part or function of the body, or a permanent disfigurement.

Social Security benefits

This discussion doesn’t cover the tax treatment of Social Security disability benefits. These benefits may be taxed to you under different rules.

How much coverage is needed?

In deciding how much disability coverage you need to protect yourself and your family, take the tax treatment into consideration. If you’re buying the policy yourself, you only have to replace your after tax, “take-home” income because your benefits won’t be taxed. On the other hand, if your employer pays for the benefit, you’ll lose a percentage to taxes. If your current coverage is insufficient, you may wish to supplement an employer benefit with a policy you take out.

Contact us if you’d like to discuss this in more detail. Sam Brown CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

How much insurance does your nonprofit need to mitigate risk?

Posted by Admin Posted on Nov 06 2020



A warning if your not-for-profit organization is looking for expenses to cut: Don’t skimp on insurance. Should your nonprofit experience a fire, major theft or other calamity, you’ll be glad you have the coverage. Of course, you may also be required by your state, certain funders, lenders and your own bylaws to carry adequate insurance. Donors certainly expect you to protect their investment in your nonprofit by managing risk with insurance. But to ensure you’re not wasting money, consider what you need — and what you might not.

General liability is critical

Many kinds of insurance coverage are available, but it’s unlikely your organization needs all of them. One type you do need is a general liability policy for accidents and injuries suffered on your property by clients, volunteers, suppliers, visitors and anyone other than employees. Your state also likely mandates unemployment insurance as well as workers’ compensation coverage.

Property insurance that covers theft and damage to your buildings, furniture, fixtures, supplies and other physical assets is essential, too. When buying a property insurance policy, make sure it covers the replacement cost of assets, rather than their current market value (which is likely to be much lower).

Depending on your nonprofit’s operations and assets, consider such optional policies as automobile, product liability, fraud/employee dishonesty, business interruption, umbrella coverage, and directors and officers’ liability. Insurance also is available to cover risks associated with special events. Before purchasing a separate policy, however, check whether your nonprofit’s general liability insurance extends to special events.

Setting priorities

Because you’re likely to be working with a limited budget, prioritize the risks that pose the greatest threats. Then discuss with your financial and insurance advisors the kinds — and amounts — of coverage that will mitigate those risks.

Be careful you don’t assume insurance alone will address your nonprofit’s exposure. Your objective should be to never actually need insurance benefits. To that end, put in place internal controls and other risk-avoidance policies such as new employee orientations and ongoing training.

It’s about responsibility

Your nonprofit is responsible for securing the safety of its physical assets, your employees and (in many cases) individuals who participate in your programs. Contact us to discuss how insurance can fit into your larger risk management plan. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Tax responsibilities if your business is closing amid the pandemic

Posted by Admin Posted on Nov 06 2020



Unfortunately, the COVID-19 pandemic has forced many businesses to shut down. If this is your situation, we’re here to assist you in any way we can, including taking care of the various tax obligations that must be met.

Of course, a business must file a final income tax return and some other related forms for the year it closes. The type of return to be filed depends on the type of business you have. Here’s a rundown of the basic requirements.

Sole Proprietorships. You’ll need to file the usual Schedule C, “Profit or Loss from Business,” with your individual return for the year you close the business. You may also need to report self-employment tax. 

Partnerships. A partnership must file Form 1065, “U.S. Return of Partnership Income,” for the year it closes. You also must report capital gains and losses on Schedule D. Indicate that this is the final return and do the same on Schedules K-1, “Partner’s Share of Income, Deductions, Credits, Etc.”

All Corporations. Form 966, “Corporate Dissolution or Liquidation,” must be filed if you adopt a resolution or plan to dissolve a corporation or liquidate any of its stock.

C Corporations. File Form 1120, “U.S. Corporate Income Tax Return,” for the year you close. Report capital gains and losses on Schedule D. Indicate this is the final return.

S Corporations. File Form 1120-S, “U.S. Income Tax Return for an S Corporation” for the year of closing. Report capital gains and losses on Schedule D. The “final return” box must be checked on Schedule K-1.

All Businesses. Other forms may need to be filed to report sales of business property and asset acquisitions if you sell your business.

Employees and contract workers

If you have employees, you must pay them final wages and compensation owed, make final federal tax deposits and report employment taxes. Failure to withhold or deposit employee income, Social Security and Medicare taxes can result in full personal liability for what’s known as the Trust Fund Recovery Penalty.

If you’ve paid any contractors at least $600 during the calendar year in which you close your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.”

Other tax issues

If your business has a retirement plan for employees, you’ll want to terminate the plan and distribute benefits to participants. There are detailed notice, funding, timing and filing requirements that must be met by a terminating plan. There are also complex requirements related to flexible spending accounts, Health Savings Accounts, and other programs for your employees.

We can assist you with many other complicated tax issues related to closing your business, including Paycheck Protection Plan (PPP) loans, the COVID-19 employee retention tax credit, employment tax deferral, debt cancellation, use of net operating losses, freeing up any remaining passive activity losses, depreciation recapture, and possible bankruptcy issues.

We can advise you on the length of time you need to keep business records. You also must cancel your Employer Identification Number (EIN) and close your IRS business account.

If your business is unable to pay all the taxes it owes, we can explain the available payment options to you. Contact us to discuss these issues and get answers to any questions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Businesses: Time to bust a tax move

Posted by Admin Posted on Oct 30 2020

How effectively does your business manage risk?

Posted by Admin Posted on Oct 30 2020



From natural disasters and government shutdowns to cyberattacks and fraud, risks abound in today’s volatile, uncertain marketplace. While some level of risk is inevitable when operating a business, proactive owners and executives apply an enterprise risk management (ERM) framework to manage it more effectively.

Evolving framework

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) was formed in July 1985 to combat fraudulent financial reporting. The panel is a joint initiative of the American Institute of Certified Public Accountants, Financial Executives International, Institute of Internal Auditors, American Accounting Association and Institute of Management Accountants.

COSO first published its Enterprise Risk Management — Integrated Framework in 2004. Companies aren’t generally required by law or regulations to apply an ERM framework. But they often choose to use COSO’s ERM framework to enhance their ability to manage uncertainty, consider how much risk to accept and improve understanding of opportunities as they strive to increase and preserve stakeholder value.

Through periodic updates, COSO aims to capture today’s best practices and help management attain better value from their ERM programs. The ERM framework was revamped in 2017 to address questions about how risk management should be incorporated with an organization’s management of its strategy. That update included five components: 1) governance and culture, 2) strategy and objective setting, 3) performance, 4) review and revision, and 5) information, communication and reporting.

The framework was modified again in 2018 to address sustainability issues. Specifically, COSO’s Guidance for Applying ERM to Environmental, Social and Governance (ESG)-related Risks highlights ESG risks, as well as opportunities to enhance resiliency as organizations confront new and developing risks, such as extreme weather events or product safety recalls.

In December 2019, COSO published Managing Cyber Risk in a Digital Age. This guidance addresses how companies can apply COSO’s framework to protect against cyberattacks. These attacks have been on the rise in 2020, in part, because people are increasingly reliant on the Internet for working, learning and interacting during the COVID-19 pandemic. And home networks tend to be more vulnerable to cyberattacks than in-office networks.

Broad scope

Many people are unclear what the term “ERM” means. ERM encompasses more than taking an inventory of risks — it’s an enterprise-wide process. Internal control is just one small part of ERM — it also may include, for example, strategy setting, governance, communicating with stakeholders and measuring performance. These principles apply at all business levels, across all functions and to organizations of any size.

The ERM framework is designed to help management anticipate risk so they can get ahead of it, with an understanding that change creates opportunities, not simply the potential for crises. In short, ERM helps increase positive outcomes and reduce negative surprises that come from risk-taking activities.

ERM in the new normal

Market conditions in 2020 have been unprecedented, and more uncertainty lies ahead. Our accounting professionals can help you identify and optimize risks. Contact us to discuss cost-effective ERM practices to make your business more resilient and responsive in the future. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Divorcing couples should understand these 4 tax issues

Posted by Admin Posted on Oct 30 2020



When a couple is going through a divorce, taxes are probably not foremost in their minds. But without proper planning and advice, some people find divorce to be an even more taxing experience. Several tax concerns need to be addressed to ensure that taxes are kept to a minimum and that important tax-related decisions are properly made. Here are four issues to understand if you’re in the midst of a divorce.

Issue 1: Alimony or support payments. For alimony under divorce or separation agreements that are executed after 2018, there’s no deduction for alimony and separation support payments for the spouse making them. And the alimony payments aren’t included in the gross income of the spouse receiving them. (The rules are different for divorce or separation agreements executed before 2019.)

Issue 2: Child support. No matter when a divorce or separation instrument is executed, child support payments aren’t deductible by the paying spouse (or taxable to the recipient).

Issue 3: Your residence. Generally, if a married couple sells their home in connection with a divorce or legal separation, they should be able to avoid tax on up to $500,000 of gain (as long as they’ve owned and used the residence as their principal residence for two of the previous five years). If one spouse continues to live in the home and the other moves out (but they both remain owners of the home), they may still be able to avoid gain on the future sale of the home (up to $250,000 each), but special language may have to be included in the divorce decree or separation agreement to protect the exclusion for the spouse who moves out.

If the couple doesn’t meet the two-year ownership and use tests, any gain from the sale may qualify for a reduced exclusion due to unforeseen circumstances.

Issue 4: Pension benefits. A spouse’s pension benefits are often part of a divorce property settlement. In these cases, the commonly preferred method to handle the benefits is to get a “qualified domestic relations order” (QDRO). This gives one spouse the right to share in the pension benefits of the other and taxes the spouse who receives the benefits. Without a QDRO the spouse who earned the benefits will still be taxed on them even though they’re paid out to the other spouse.

More to consider

These are just some of the issues you may have to deal with if you’re getting a divorce. In addition, you must decide how to file your tax return (single, married filing jointly, married filing separately or head of household). You may need to adjust your income tax withholding and you should notify the IRS of any new address or name change. If you own a business, you may have to pay your spouse a share. There are also estate planning considerations. Contact us to help you work through the financial issues involved in divorce. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Nonprofits: Internal audits still matter

Posted by Admin Posted on Oct 30 2020



Fraud doesn’t simply take a vacation during crises, such as the COVID-19 pandemic. If your not-for-profit’s internal controls aren’t effective, crooked individuals can find ways to exploit them and steal from your organization — even if they’re working remotely. Other threats, such as financial shortfalls, might also loom.

So it’s important to continue to schedule internal audits. Comprehensive independent audits help assure stakeholders that your nonprofit is ready for anything that might come its way — including opportunities.

Looking for vulnerabilities

On its most basic level, the internal audit function provides assurance of compliance with a nonprofit’s internal controls and their effectiveness in mitigating financial and operational risk. Potential risks include fraud, insufficient funds to support programming and reputational damage.

Internal auditors, whether they’re staff members or outside consultants, start by identifying a nonprofit’s vulnerabilities and prioritizing them from high to low. Through testing and other methods, they:

  • Assess the effectiveness of internal controls,
  • Evaluate compliance with laws, regulations and contracts,
  • Document their results in reports that include recommended improvements, and
  • Follow up on management’s remediation actions to eliminate identified risks and assist external auditors, when applicable.

The effectiveness of the internal audit function hinges on auditor independence. Auditors should be independent from management and all areas they review to avoid bias or a conflict of interest. Auditors should report directly to the board of directors or its audit committee.

More to offer

Although the internal audit function is often viewed mainly through the prism of compliance and internal controls, it has a lot to offer beyond risk assessments and audit plans. Savvy nonprofits have begun to tap internal audit for strategic purposes. For example, auditors may serve as internal consultants, providing insights gathered while performing compliance and assessment work. While reviewing invoices, they could discover a way to streamline invoice processing.

A familiarity with an organization’s inner workings also affords internal auditors with an unusual perspective for evaluating strategic opportunities. Does your nonprofit have a financial weakness that could undermine plans for continuing current programs or launching new ones? Your internal auditor probably knows the answer.

Ask for more

With their cross-departmental perspective, internal auditors can help anticipate and mitigate a variety of risks, improve processes and help evaluate your nonprofit’s strategies. Social distancing guidelines can make in-person audits challenging right now. But we have strategies for conducting thorough audits while also protecting the safety of audit participants. Contact us for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

New business? It’s a good time to start a retirement plan

Posted by Admin Posted on Oct 30 2020



If you recently launched a business, you may want to set up a tax-favored retirement plan for yourself and your employees. There are several types of qualified plans that are eligible for these tax advantages:

  • A current deduction from income to the employer for contributions to the plan,
  • Tax-free buildup of the value of plan investments, and
  • The deferral of income (augmented by investment earnings) to employees until funds are distributed.

There are two basic types of plans.

Defined benefit pension plans

defined benefit plan provides for a fixed benefit in retirement, based generally upon years of service and compensation. While defined benefit plans generally pay benefits in the form of an annuity (for example, over the life of the participant, or joint lives of the participant and his or her spouse), some defined benefit plans provide for a lump sum payment of benefits. In certain “cash balance plans,” the benefit is typically paid and expressed as a cash lump sum.

Adoption of a defined benefit plan requires a commitment to fund it. These plans often provide the greatest current deduction from income and the greatest retirement benefit, if the business owners are nearing retirement. However, the administrative expenses associated with defined benefit plans (for example, actuarial costs) can make them less attractive than the second type of plan.

Defined contribution plans

defined contribution plan provides for an individual account for each participant. Benefits are based solely on the amount contributed to the participant’s account and any investment income, expenses, gains, losses and forfeitures (usually from departing employees) that may be allocated to a participant’s account. Profit-sharing plans and 401(k)s are defined contribution plans.

A 401(k) plan provides for employer contributions made at the direction of an employee under a salary reduction agreement. Specifically, the employee elects to have a certain amount of pay deferred and contributed by the employer on his or her behalf to the plan. Employee contributions can be made either:

  1. On a pre-tax basis, saving employees current income tax on the amount contributed, or
  2. On an after-tax basis. This includes Roth 401(k) contributions (if permitted), which will allow distributions (including earnings) to be made to the employee tax-free in retirement, if conditions are satisfied.

Automatic-deferral provisions, if adopted, require employees to opt out of participation.

An employer may, or may not, provide matching contributions on behalf of employees who make elective deferrals to the plan. Matching contributions may be subject to a vesting schedule. While 401(k) plans are subject to testing requirements, so that “highly compensated” employees don’t contribute too much more than non-highly-compensated employees, these tests can be avoided if you adopt a “safe harbor” 401(k) plan. A highly compensated employee in 2020 is defined as one who earned more than $130,000 in the preceding year.

There are other types of tax-favored retirement plans within these general categories, including employee stock ownership plans (ESOPs).

Other plans

Small businesses can also adopt a Simplified Employee Pension (SEP), and receive similar tax advantages to “qualified” plans by making contributions on behalf of employees. And a business with 100 or fewer employees can establish a Savings Incentive Match Plan for Employees (SIMPLE). Under a SIMPLE, generally an IRA is established for each employee and the employer makes matching contributions based on contributions elected by employees.

There may be other options. Contact us to discuss the types of retirement plans available to you. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Should you file an amended tax return?

Posted by Admin Posted on Oct 23 2020

Best practices when forecasting cash flow

Posted by Admin Posted on Oct 23 2020



Cash flow is a top concern for most businesses today. Cash flow forecasts can help you predict potential shortfalls and proactively address working capital gaps. They can also help avoid late payments, identify late-paying customers and find alternative sources of funding when cash is tight. To keep your company’s cash flow positive, consider applying these four best practices.

1. Identify peak needs

Many businesses are cyclical, and their cash flow needs may vary by month or season. Trouble can arise when an annual budget doesn’t reflect, for example, three months of peak production in the summer to fill holiday orders followed by a return to normal production in the fall.

For seasonal operations — such as homebuilders, farms, landscaping companies, recreational facilities and many nonprofits — using a one-size-fits-all approach can throw budgets off, sometimes dramatically. It’s critical to identify peak sales and production times, forecast your cash flow needs and plan accordingly.

2. Account for everything

Effective cash flow management requires anticipating and capturing every expense and incoming payment, as well as — to the greatest extent possible — the exact timing of each payable and receivable. But pinpointing exact costs and expenditures for every day of the week can be challenging.

Companies can face an array of additional costs, overruns and payment delays. Although inventorying all possible expenses can be a tedious and time-consuming exercise, it can help avoid problems down the road.

3. Seek sources of contingency funding

As your business expands or contracts, a dedicated line of credit with a bank can help meet your cash flow needs, including any periodic cash shortages. Interest rates on these credit lines can be comparatively high compared to other types of loans. So, lines of credit typically are used to cover only short-term operational costs, such as payroll and supplies. They also may require significant collateral and personal guarantees from the company’s owners.

4. Identify potential obstacles

For most companies, the biggest cash flow obstacle is slow collections from customers. Your business should invoice customers in a timely manner and offer easy, convenient ways for customers to pay (such as online bill pay). For new customers, it’s important to perform a thorough credit check to avoid delayed payments and write-offs.

Another common obstacle is poor resource management. Redundant machinery, misguided investments and oversize offices are just a few examples of poorly managed expenses and overhead that can negatively affect cash flow.

Adjusting as you grow and adapt

Your company’s cash flow needs today likely aren’t what they were three years ago — or even six months ago. And they’ll probably change as you continue to adjust to the new normal. That’s why it’s important to make cash flow forecasting an integral part of your overall business planning. We can help. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Buying and selling mutual fund shares: Avoid these tax pitfalls

Posted by Admin Posted on Oct 23 2020



If you invest in mutual funds, be aware of some potential pitfalls involved in buying and selling shares.

Surprise sales

You may already have made taxable “sales” of part of your mutual fund investment without knowing it.

One way this can happen is if your mutual fund allows you to write checks against your fund investment. Every time you write a check against your mutual fund account, you’ve made a partial sale of your interest in the fund. Thus, except for funds such as money market funds, for which share value remains constant, you may have taxable gain (or a deductible loss) when you write a check. And each such sale is a separate transaction that must be reported on your tax return.

Here’s another way you may unexpectedly make a taxable sale. If your mutual fund sponsor allows you to make changes in the way your money is invested — for instance, lets you switch from one fund to another fund — making that switch is treated as a taxable sale of your shares in the first fund.

Recordkeeping

Carefully save all the statements that the fund sends you — not only official tax statements, such as Forms 1099-DIV, but the confirmations the fund sends you when you buy or sell shares or when dividends are reinvested in new shares. Unless you keep these records, it may be difficult to prove how much you paid for the shares, and thus, you won’t be able to establish the amount of gain that’s subject to tax (or the amount of loss you can deduct) when you sell.

You also need to keep these records to prove how long you’ve held your shares if you want to take advantage of favorable long-term capital gain tax rates. (If you get a year-end statement that lists all your transactions for the year, you can just keep that and discard quarterly or other interim statements. But save anything that specifically says it contains tax information.)

Recordkeeping is simplified by rules that require funds to report the customer’s basis in shares sold and whether any gain or loss is short-term or long-term. This is mandatory for mutual fund shares acquired after 2011, and some funds will provide this to shareholders for shares they acquired earlier, if the fund has the information.

Timing purchases and sales

If you’re planning to invest in a mutual fund, there are some important tax consequences to take into account in timing the investment. For instance, an investment shortly before payment of a dividend is something you should generally try to avoid. Your receipt of the dividend (even if reinvested in additional shares) will be treated as income and increase your tax liability. If you’re planning a sale of any of your mutual fund shares near year-end, you should weigh the tax and the non-tax consequences in the current year versus a sale in the next year.

Identify shares you sell

If you sell fewer than all of the shares that you hold in the same mutual fund, there are complicated rules for identifying which shares you’ve sold. The proper application of these rules can reduce the amount of your taxable gain or qualify the gain for favorable long-term capital gain treatment.

Contact us if you’d like to find out more about tax planning for buying and selling mutual fund shares. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Why your nonprofit must make time for accountability

Posted by Admin Posted on Oct 23 2020



“Accountability” may seem like one of those popular management concepts you know would be nice to implement if your not-for-profit had the time and budget. But not only is accountability essential to your nonprofit’s health and efficacy — affecting everything from donations to grants, hiring to volunteering, board fiduciary duty to employee morale — it’s also easy to adopt.

Start with laws and rules

Accountability starts by complying with all applicable laws and rules. Make sure new staffers and board members understand these as well as your nonprofit’s code of conduct. In fact, ask employees and board members to sign an ethical code — and hold them to it.

As your organization pursues its mission, it must do so fairly and in the best interests of its constituents and community. Your status as a nonprofit means you’re obligated to use your resources to support your mission and benefit the community you serve. Evaluate programs accordingly, both in respect to the activities and their outcomes.

Put governance front and center

There can be no accountability without good governance. This starts with your nonprofit’s executives and managers, who must be accountable for failures as well as successes. But ultimately, governance is your board’s responsibility. Your board needs to understand the importance of its fiduciary duty and focus on the big picture, not the process-oriented details best handled at the staff or committee level.

For example, management might prepare internal financial statements and review performance against approved budgets on a quarterly basis. But it will present these statements to the board (or its audit or finance committee) for review and approval. Your board is also responsible for establishing and regularly assessing financial performance measurements.

Make your efforts public

Communication is a big part of accountability. Your annual report, for example, is designed to summarize the year’s activities and detail your nonprofit’s financial position. But the report’s list of board members, management staff and other key employees can be just as important. Stakeholders want to be able to assign responsibility for results to actual names.

Your nonprofit’s Form 990 also provides the public with an overview of your organization’s programs, finances, governance, compliance and compensation methods. Notably, charity watchdog groups use 990 information to help them evaluate nonprofits on fiscal responsibility, charitable impact and other qualities.

Ongoing process

Implementing accountability isn’t a one-time act but an ongoing process. Consider accountability when evaluating staffers, volunteers and, especially, board members. Contact us for more ideas about running an ethical and effective organization. Sam Brown, CPA, Inc., Troy, Ohio, wwww.sbcpaohio.com

© 2020

The 2021 “Social Security wage base” is increasing

Posted by Admin Posted on Oct 23 2020



If your small business is planning for payroll next year, be aware that the “Social Security wage base” is increasing.

The Social Security Administration recently announced that the maximum earnings subject to Social Security tax will increase from $137,700 in 2020 to $142,800 in 2021.

For 2021, the FICA tax rate for both employers and employees is 7.65% (6.2% for Social Security and 1.45% for Medicare).  

For 2021, the Social Security tax rate is 6.2% each for the employer and employee (12.4% total) on the first $142,800 of employee wages. The tax rate for Medicare is 1.45% each for the employee and employer (2.9% total). There’s no wage base limit for Medicare tax so all covered wages are subject to Medicare tax.

In addition to withholding Medicare tax at 1.45%, an employer must withhold a 0.9% additional Medicare tax from wages paid to an employee in excess of $200,000 in a calendar year.

Employees working more than one job

You may have employees who work for your business and who also have a second job. They may ask if you can stop withholding Social Security taxes at a certain point in the year because they’ve already reached the Social Security wage base amount. Unfortunately, you generally can’t stop the withholding, but the employees will get a credit on their tax returns for any excess withheld.

Older employees 

If your business has older employees, they may have to deal with the “retirement earnings test.” It remains in effect for individuals below normal retirement age (age 65 to 67 depending on the year of birth) who continue to work while collecting Social Security benefits. For affected individuals, $1 in benefits will be withheld for every $2 in earnings above $18,960 in 2021 (up from $18,240 in 2020).

For working individuals collecting benefits who reach normal retirement age in 2021, $1 in benefits will be withheld for every $3 in earnings above $46,920 (up from $48,600 in 2020), until the month that the individual reaches normal retirement age. After that month, there’s no limit on earnings.

Contact us if you have questions. We can assist you with the details of payroll taxes and keep you in compliance with payroll laws and regulations. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

How much Americans are spending on Halloween this year

Posted by Admin Posted on Oct 16 2020

Avoiding conflicts of interest with auditors

Posted by Admin Posted on Oct 16 2020



A conflict of interest could impair your auditor’s objectivity and integrity and potentially compromise you company’s financial statements. That’s why it’s important to identify and manage potential conflicts of interest.

What is a conflict of interest?

According to the America Institute of Certified Public Accountants (AICPA), “A conflict of interest may occur if a member performs a professional service for a client and the member or his or her firm has a relationship with another person, entity, product or service that could, in the member’s professional judgment, be viewed by the client or other appropriate parties as impairing the member’s objectivity.” Companies should be on the lookout for potential conflicts when:

  • Hiring an external auditor,
  • Upgrading the level of assurance from a compilation or review to an audit, and
  • Using the auditor for a non-audit purposes, such as investment advisory services and human resource consulting.

Determining whether a conflict of interest exists requires an analysis of facts. Some conflicts may be obvious, while others may require in-depth scrutiny.

For example, if an auditor recommends an accounting software to an audit client and receives a commission from the software provider, a conflict of interest likely exists. Why? While the software may suit the company’s needs, the payment of a commission calls into question the auditor’s motivation in making the recommendation. That’s why the AICPA prohibits an audit firm from accepting commissions from a third party when it involves a company the firm audits.

Now consider a situation in which a company approaches an audit firm to provide assistance in a legal dispute with another company that’s an existing audit client. Here, given the inside knowledge the audit firm possesses of the company it audits, a conflict of interest likely exists. The audit firm can’t serve both parties to the lawsuit and comply with the AICPA’s ethical and professional standards.

How can auditors prevent potential conflicts?

AICPA standards require audit firms to be vigilant about avoiding potential conflicts. If a potential conflict is unearthed, audit firms have the following options:

  • Seek guidance from legal counsel or a professional body on the best path forward,
  • Disclose the conflict and secure consent from all parties to proceed,
  • Segregate responsibilities within the firm to avoid the potential for conflict, and/or
  • Decline or withdraw from the engagement that’s the source of the conflict.

Ask your auditors about the mechanisms the firm has put in place to identify and manage potential conflicts of interest before and during an engagement. For example, partners and staff members are usually required to complete annual compliance-related questionnaires and participate in education programs that cover conflicts of interest. Firms should monitor conflicts regularly, because circumstances may change over time, for example, due to employee turnover or M&A activity.

For more information

Conflicts of interest are one of the gray areas in auditing. But it’s an issue our firm takes seriously and proactively safeguards against. If you suspect that a conflict exists, contact us to discuss the matter and determine the most appropriate way to handle it. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

What tax records can you throw away?

Posted by Admin Posted on Oct 16 2020



October 15 is the deadline for individual taxpayers who extended their 2019 tax returns. (The original April 15 filing deadline was extended this year to July 15 due to the COVID-19 pandemic.) If you’re finally done filing last year’s return, you might wonder: Which tax records can you toss once you’re done? Now is a good time to go through old tax records and see what you can discard.

The general rules

At minimum, you should keep tax records for as long as the IRS has the ability to audit your tax return or assess additional taxes, which generally is three years after you file your return. This means you potentially can get rid of most records related to tax returns for 2016 and earlier years.

However, the statute of limitations extends to six years for taxpayers who understate their adjusted gross income (AGI) by more than 25%. What constitutes an understatement may go beyond simply not reporting items of income. So a general rule of thumb is to save tax records for six years from filing, just to be safe.

Keep some records longer

You need to hang on to some tax-related records beyond the statute of limitations. For example:

  • Keep the tax returns themselves indefinitely, so you can prove to the IRS that you actually filed a legitimate return. (There’s no statute of limitations for an audit if you didn’t file a return or if you filed a fraudulent one.)
  • Retain W-2 forms until you begin receiving Social Security benefits. Questions might arise regarding your work record or earnings for a particular year, and your W-2 helps provide the documentation needed.
  • Keep records related to real estate or investments for as long as you own the assets, plus at least three years after you sell them and report the sales on your tax return (or six years if you want extra protection).
  • Keep records associated with retirement accounts until you’ve depleted the accounts and reported the last withdrawal on your tax return, plus three (or six) years.

Other reasons to retain records

Keep in mind that these are the federal tax record retention guidelines. Your state and local tax record requirements may differ. In addition, lenders, co-op boards and other private parties may require you to produce copies of your tax returns as a condition to lending money, approving a purchase or otherwise doing business with you.

Contact us if you have questions or concerns about recordkeeping. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Candid communication can help ease nonprofit staffers’ anxiety

Posted by Admin Posted on Oct 16 2020



It would be an understatement to say 2020 has been challenging. Leaders of not-for-profits still standing are justified in worrying about strained budgets and their ability to deliver on their organization’s promises during a pandemic, financial crisis and time of social and political upheaval.

Staffers are likely to be just as concerned about the future of your organization and its constituents. Understandably given the current high unemployment rate, many are also worried about their own job security. Now more than ever, you need to be as open and transparent as possible.

Get personal

Even if your organization is weathering the storm reasonably well, your employees may still be anxious. Be open with them about where you stand now and how you expect your nonprofit to fare financially in the coming year. You may want to provide some personal opinions to build rapport and ease anxiety. But your core focus should be on the facts and how you’re responding to and anticipating events.

Just knowing that leadership is listening and has a plan is enough to help some people go back to focusing on their work. However, employees must feel confident that your plan is well considered and likely to be effective. They also need to know that you’re being candid with them. Solicit staffers’ questions and answer them truthfully, even if the only thing you can say at the time is “I don’t know.”

Difficult times can have the upside of providing a rallying point for the whole organization. If you need to make budget cuts, ask for suggestions and make individuals personally responsible for specific tasks.

Be proactive about bad news

Whether the fear is actually voiced, layoffs will be on staffers’ minds. Before they even ask, broach the subject to show you understand their concerns. Just be careful not to make promises you might not be able to keep. Although it’s fine to talk about the steps you’ll take to try to avoid layoffs, most leaders would be remiss to categorically deny that layoffs are a current or future option.

It’s not enough to hold one meeting about the state of your nonprofit’s finances and then go back to business as usual. Keep staffers informed with frequent updates, using the methods that are most efficient given your workforce’s location. Face-to-face video conferences are best for announcing big developments to remote workers.

Don’t risk poor morale

What are the risks if you don’t communicate effectively with staffers? Anxiety and poor morale can crush productivity. And although the job market is tight, top performers might decide to seek positions elsewhere at a time you desperately need them. For help bolstering your struggling nonprofit’s finances, contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Understanding the passive activity loss rules

Posted by Admin Posted on Oct 16 2020



Are you wondering if the passive activity loss rules affect business ventures you’re engaged in — or might engage in?

If the ventures are passive activities, the passive activity loss rules prevent you from deducting expenses that are generated by them in excess of their income. You can’t deduct the excess expenses (losses) against earned income or against other nonpassive income. Nonpassive income for this purpose includes interest, dividends, annuities, royalties, gains and losses from most property dispositions, and income from certain oil and gas property interests. So you can’t deduct passive losses against those income items either.

Any losses that you can’t use aren’t lost. Instead, they’re carried forward, indefinitely, to tax years in which your passive activities generate enough income to absorb the losses. To the extent your passive losses from an activity aren’t used up in this way, you’ll be allowed to use them in the tax year in which you dispose of your interest in the activity in a fully taxable transaction, or in the tax year you die.

Passive vs. material

Passive activities are trades, businesses or income-producing activities in which you don’t “materially participate.” The passive activity loss rules also apply to any items passed through to you by partnerships in which you’re a partner, or by S corporations in which you’re a shareholder. This means that any losses passed through to you by partnerships or S corporations will be treated as passive, unless the activities aren’t passive for you.

For example, let’s say that in addition to your regular professional job, you’re a limited partner in a partnership that cleans offices. Or perhaps you’re a shareholder in an S corp that operates a manufacturing business (but you don’t participate in the operations).

If you don’t materially participate in the partnership or S corporation, those activities are passive. On the other hand, if you “materially participate,” the activities aren’t passive (except for rental activities, discussed below), and the passive activity rules won’t apply to the losses. To materially participate, you must be involved in the operations on a regular, continuous and substantial basis.

The IRS uses several tests to establish material participation. Under the most frequently used test, you’re treated as materially participating in an activity if you participate in it for more than 500 hours in the tax year. While other tests require fewer hours, all the tests require you to establish how you participated and the amount of time spent. You can establish this by any reasonable means such as contemporaneous appointment books, calendars, time reports or logs.

Rental activities

Rental activities are automatically treated as passive, regardless of your participation. This means that, even if you materially participate in them, you can’t deduct the losses against your earned income, interest, dividends, etc. There are two important exceptions:

  • You can deduct up to $25,000 of losses from rental real estate activities (even though they’re passive) against earned income, interest, dividends, etc., if you “actively participate” in the activities (requiring less participation than “material participation”) and if your adjusted gross income doesn’t exceed specified levels.
  • If you qualify as a “real estate professional” (which requires performing substantial services in real property trades or businesses), your rental real estate activities aren’t automatically treated as passive. So losses from those activities can be deducted against earned income, interest, dividends, etc., if you materially participate.

Contact us if you’d like to discuss how these rules apply to your business. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

A tale of two real estate markets

Posted by Admin Posted on Oct 10 2020

More time: FASB delays long-term insurance standard … again

Posted by Admin Posted on Oct 10 2020



On September 30, the Financial Accounting Standards Board (FASB) finalized a rule to defer the effective date of the updated long-term insurance standard for a second time. The deferral will give insurers more time to properly implement the changes amid the COVID-19 pandemic.

Need for change

After 12 years of work, the FASB issued Accounting Standards Update (ASU) No. 2018-12, Financial Services — Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, in August 2018 to improve and simplify the highly complex, nuanced reporting requirements for long-term insurance policies. The rules were designed to simplify targeted areas in reporting life insurance, disability income, long-term care and annuity payouts.

Specifically, the update requires insurers to:

  • Review annually the assumptions they make about their policyholders, and
  • Update the liabilities on their balance sheets if the assumptions change.

Under the updated guidance, insurance companies must measure updated liabilities using a standardized, market-observable discount interest rate based on the yield from an upper-medium-grade, fixed-income instrument. The method required by ASU No. 2018-12 is a more conservative approach than one used for insurance policies under existing guidance.

Requests for deferral

When the updated standard was issued, the original effective dates were fiscal years beginning after December 15, 2020, for public companies and a year later for private companies. In November 2019, the FASB postponed the standard’s effective dates from 2021 to 2022 for public companies and from 2022 to 2024 for smaller reporting companies (SRCs), private companies and not-for-profit organizations. This delay was designed to give insurance companies more time to update their software and methodology, train their staff, and conduct educational outreach to investors.

In March, the American Council of Life Insurers (ACLI), the trade organization that represents the sector, requested an additional delay, citing unprecedented challenges stemming from the COVID-19 crisis. The ACLI told the FASB that the impacts of the pandemic continue to escalate, with little clarity about how long the capital markets may persist within their current turbulent state.

During a recent meeting, the FASB voted 6-to-1 to postpone the effective date from 2022 to 2023 for large public companies and from 2024 to 2025 for other organizations.

We can help

The FASB has been sympathetic to companies that have been trying to navigate major accounting rule changes during these uncertain times. In addition to deferring the updated rules for long-term insurance contracts, the FASB in May postponed the effective dates for the updated revenue recognition and lease rules for certain entities. Contact us for more information about impending deadlines or for help implementing accounting rule changes that affect your organization. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

There may be relief from tax liability for “innocent spouses”

Posted by Admin Posted on Oct 10 2020



If you file a joint tax return with your spouse, you should be aware of your individual liability. And if you’re getting divorced, you should know that there may be relief available if the IRS comes after you for certain past-due taxes.

What’s “joint and several” liability?

When a married couple files a joint tax return, each spouse is “jointly and severally” liable for the full tax amount on the couple’s combined income. That means the IRS can come after either spouse to collect the entire tax — not just the part that’s attributed to one spouse or the other. Liability includes any tax deficiency that the IRS assesses after an audit, as well as penalties and interest. (However, the civil fraud penalty can be imposed only on spouses who’ve actually committed fraud.)

When are spouses “innocent?”

In some cases, spouses are eligible for “innocent spouse relief.” This generally involves individuals who didn’t know about a tax understatement that was attributable to the other spouse.

To be eligible, you must show that you were unaware of the understatement and there was nothing that should have made you suspicious. In addition, the circumstances must make it inequitable to hold you liable for the tax. This relief may be available even if you’re still married and living with your spouse.

In addition, spouses may be able to limit liability for a tax deficiency on a joint return if they’re widowed, divorced, legally separated or have lived apart for at least one year.

How can liability be limited?

In some cases, a spouse can elect to limit liability for a deficiency on a joint return to just his or her allocable portion of the deficiency. If you make this election, the tax items that gave rise to the deficiency will be allocated between you and your spouse as if you’d filed separate returns.

The election won’t provide relief from your spouse’s tax items if the IRS proves that you knew about the items when you signed the tax return — unless you can show that you signed it under duress. Also, liability will be increased by the value of any assets that your spouse transferred to you in order to avoid the tax.

What is an “injured” spouse?

In addition to innocent spouse relief, there’s also relief for “injured” spouses. What’s the difference? An injured spouse claim asks the IRS to allocate part of a joint tax refund to one spouse. In these cases, one spouse has all or part of a refund from a joint return applied against certain past-due taxes, child or spousal support, or federal nontax debts (such as student loans) owed by the other spouse. If you’re an injured spouse, you may be entitled to recoup your refund share.

Whether, and to what extent, you can take advantage of the above relief depends on your situation. If you’re interested in trying to obtain relief, there’s paperwork that must be filed and deadlines that must be met. We can assist you with the details.

Also, keep “joint and several liability” in mind when filing future tax returns. Even if a joint return results in less tax, you may want to file a separate return if you want to be responsible only for your own tax. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Your nonprofit may have a license to print money

Posted by Admin Posted on Oct 10 2020



In this pandemic year, many not-for-profits are scrambling to find new sources of revenue to replace donor contributions and other lost income. If this sounds like your charity, you might want to consider licensing your name and brand to a for-profit business.

Ensuring success

When licensing arrangements work, both charities and companies can experience significant benefits. One example is AARP, which licenses its name to a variety of companies, including UnitedHealthcare, The Hartford and ExxonMobil. But such arrangements can also cause problems. For example, if a product “endorsed” by a nonprofit is found to be ineffective or harmful, the nonprofit may suffer by association. By the same token, a nonprofit mired in controversy could harm the public perception of a product or service bearing its name.

To ensure a license arrangement doesn’t become a public relations problem, thoroughly research any potential partner’s business, products and the backgrounds of its principals. Also confirm that your mission and values align. If you determine that a potential licensee’s products or services have the potential to undermine your brand, take a pass — no matter how high the promised royalties.

Look before you leap

Work with your attorney to include certain provisions in any license agreement. Specify how the licensee can use your name and brand, mandate quality control standards and detail termination rights. And realize that signing the agreement doesn’t end your responsibility — you’ll need to actively monitor the licensee’s use of your name and intellectual property throughout the agreement period. If it sounds like all this will require additional staff time, you’re right.

In fact, the resource-intensive nature of licensing leads some nonprofits to outsource the work. Outsourcing allows your organization to focus on its mission, but you’ll probably pay upfront fees, a monthly retainer and a percentage of the royalties that your consultant secures. So it’s important to crunch the numbers and make sure your license arrangement is worth this expense and effort.

Don’t forget the tax implications of licensing. Nonprofits enjoy a royalty exclusion that generally exempts licensing revenues from unrelated business income taxes (UBIT). But certain arrangements can jeopardize this. You can’t receive compensation based on your licensee’s net sales — only on gross sales. And you must play a passive role, meaning you don’t actively provide services to the licensee.

Make a positive impression

Any licensing arrangement your nonprofit enters into should generate revenue and, probably even more important, promote a positive impression of your brand. To ensure you meet both goals, consult an attorney about legal details and us for financial advice.  Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

The easiest way to survive an IRS audit is to get ready in advance

Posted by Admin Posted on Oct 10 2020



IRS audit rates are historically low, according to the latest data, but that’s little consolation if your return is among those selected to be examined. But with proper preparation and planning, you should fare well.

In fiscal year 2019, the IRS audited approximately 0.4% of individuals. Businesses, large corporations and high-income individuals are more likely to be audited but, overall, all types of audits are being conducted less frequently than they were a decade ago.

There’s no 100% guarantee that you won’t be picked for an audit, because some tax returns are chosen randomly. However, the best way to survive an IRS audit is to prepare for one in advance. On an ongoing basis you should systematically maintain documentation — invoices, bills, cancelled checks, receipts, or other proof — for all items to be reported on your tax returns. Keep all your records in one place. And it helps to know what might catch the attention of the IRS. 

Audit hot spots

Certain types of tax-return entries are known to the IRS to involve inaccuracies so they may lead to an audit. Here are a few examples:

  • Significant inconsistencies between tax returns filed in the past and your most current tax return,
  • Gross profit margin or expenses markedly different from those of other businesses in your industry, and
  • Miscalculated or unusually high deductions. 

Certain types of deductions may be questioned by the IRS because there are strict recordkeeping requirements for them — for example, auto and travel expense deductions. In addition, an owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can catch the IRS’s eye, especially if the business is structured as a corporation.

Responding to a letter

If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS doesn’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.

Many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the harshest version, the field audit, requires meeting with one or more IRS auditors. (Note: Ignore unsolicited email messages about an audit. The IRS doesn’t contact people in this manner. These are scams.)

Keep in mind that the tax agency won’t demand an immediate response to a mailed notice. You’ll be informed of the discrepancies in question and given time to prepare. You’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.

If the IRS chooses you for an audit, our firm can help you:

  • Understand what the IRS is disputing (it’s not always clear),
  • Gather the specific documents and information needed, and
  • Respond to the auditor’s inquiries in the most expedient and effective manner.

The IRS normally has three years within which to conduct an audit, and often an audit doesn’t begin until a year or more after you file a return. Don’t panic if you’re contacted by the IRS. Many audits are routine. By taking a meticulous, proactive approach to how you track, document and file your company’s tax-related information, you’ll make an audit much less painful and even decrease the chances that one will happen in the first place. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Captive insurance shouldn’t keep you up at night

Posted by Admin Posted on Oct 02 2020

Gifts in kind: New reporting requirements for nonprofits

Posted by Admin Posted on Oct 02 2020



On September 17, the Financial Accounting Standards Board (FASB) issued an accounting rule that will provide more detailed information about noncash contributions charities and other not-for-profit organizations receive known as “gifts in kind.” Here are the details.

Need for change

Gifts in kind can play an important role in ensuring a charity functions effectively. They may include various goods, services and time. Examples of contributed nonfinancial assets include:

  • Fixed assets, such as land, buildings and equipment,
  • The use of fixed assets or utilities,
  • Materials and supplies, such as food, clothing or pharmaceuticals,
  • Intangible assets, and
  • Recognized contributed services.

Increased scrutiny by state charity officials and legislators over how charities use and report gifts in kind prompted the FASB to beef up the disclosure requirements. Specifically, some state legislators have been concerned about the potential for charities to overvalue gifts in kind and use the figures to prop up financial information to appear more efficient than they really are. Other worries include the potential for a nonprofit to hide wasteful use of its resources.

Enhanced transparency

Accounting Standards Update (ASU) 2020-07, Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets, aims to give donors better information without causing nonprofits too much cost to provide the information.

The updated standard will provide more prominent presentation of gifts in kind by requiring nonprofits to show contributed nonfinancial assets as a separate line item in the statement of activities, apart from contributions of cash and other financial assets. It also calls for enhanced disclosures about the valuation of those contributions and their use in programs and other activities.

Specifically, nonprofits will be required to split out the amount of contributed nonfinancial assets it receives by category and in footnotes to financial statements. For each category, the nonprofit will be required to disclose the following:

  • Qualitative information about whether contributed nonfinancial assets were either monetized or used during the reporting period and, if used, a description of the programs or other activities in which those assets were used,
  • The nonprofit’s policy (if any) for monetizing rather than using contributed nonfinancial assets,
  • A description of any associated donor restrictions,
  • A description of the valuation techniques and inputs used to arrive at a fair value measure, in accordance with the requirements in Topic 820, Fair Value Measurement, at initial recognition, and
  • The principal market (or most advantageous market) used to arrive at a fair value measurement if it is a market in which the recipient nonprofit is prohibited by donor restrictions from selling or using the contributed nonfinancial asset.

The new rule won’t change the recognition and measurement requirements for those assets, however.

Coming soon

ASU 2020-07 takes effect for annual periods after June 15, 2021, and interim periods within fiscal years after June 15, 2022. Retrospective application is required, and early application is permitted. Contact us for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Why it’s important to plan for income taxes as part of your estate plan

Posted by Admin Posted on Oct 02 2020



As a result of the current estate tax exemption amount ($11.58 million in 2020), many estates no longer need to be concerned with federal estate tax. Before 2011, a much smaller amount resulted in estate plans attempting to avoid it. Now, because many estates won’t be subject to estate tax, more planning can be devoted to saving income taxes for your heirs.

While saving both income and transfer taxes has always been a goal of estate planning, it was more difficult to succeed at both when the estate and gift tax exemption level was much lower. Here are some strategies to consider.

Plan gifts that use the annual gift tax exclusion. One of the benefits of using the gift tax annual exclusion to make transfers during life is to save estate tax. This is because both the transferred assets and any post-transfer appreciation generated by those assets are removed from the donor’s estate.

As mentioned, estate tax savings may not be an issue because of the large estate exemption amount. Further, making an annual exclusion transfer of appreciated property carries a potential income tax cost because the recipient receives the donor’s basis upon transfer. Thus, the recipient could face income tax, in the form of capital gains tax, on the sale of the gifted property in the future. If there’s no concern that an estate will be subject to estate tax, even if the gifted property grows in value, then the decision to make a gift should be based on other factors.

For example, gifts may be made to help a relative buy a home or start a business. But a donor shouldn’t gift appreciated property because of the capital gain that could be realized on a future sale by the recipient. If the appreciated property is held until the donor’s death, under current law, the heir will get a step-up in basis that will wipe out the capital gain tax on any pre-death appreciation in the property’s value.

Take spouses’ estates into account. In the past, spouses often undertook complicated strategies to equalize their estates so that each could take advantage of the estate tax exemption amount. Generally, a two-trust plan was established to minimize estate tax. “Portability,” or the ability to apply the decedent’s unused exclusion amount to the surviving spouse’s transfers during life and at death, became effective for estates of decedents dying after 2010. As long as the election is made, portability allows the surviving spouse to apply the unused portion of a decedent’s applicable exclusion amount (the deceased spousal unused exclusion amount) as calculated in the year of the decedent’s death. The portability election gives married couples more flexibility in deciding how to use their exclusion amounts.

Be aware that some estate exclusion or valuation discount strategies to avoid inclusion of property in an estate may no longer be worth pursuing. It may be better to have the property included in the estate or not qualify for valuation discounts so that the property receives a step-up in basis. For example, the special use valuation — the valuation of qualified real property used for farming or in a business on the basis of the property’s actual use, rather than on its highest and best use — may not save enough, or any, estate tax to justify giving up the step-up in basis that would otherwise occur for the property.

Contact us if you want to discuss these strategies and how they relate to your estate plan. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Should you reach out to “effective altruists?”

Posted by Admin Posted on Oct 02 2020



Effective altruism is commonly described as a philosophy that uses evidence and reasoning to determine the most effective ways to benefit others. Not all donors are aware of effective altruism, but the concept is growing in popularity. To determine whether your not-for-profit should try to reach out to its adherents, learn a little more about the philosophy, its potential advantages and what critics claim are its weaknesses.

Strategic giving

To appeal to effective altruists, you first must understand what drives them. Effective altruism (also known as “strategic giving”) doesn’t focus on how effective a nonprofit is with its funds. Rather, it looks at how effective donors can be with their money and time. Instead of being guided by what makes them feel good, altruists use evidence-based data and reasoning to determine how to make the biggest impact.

Effective altruists generally consider a cause to be high impact if it’s:

  • Large in scale (it affects many people by a great amount),
  • Generally neglected (few people are working on it), and
  • Highly solvable (additional resources will make a big dent).

Because they strive to get the most bang for their bucks, some effective altruists focus on nonprofits that help people in the developing world. So, instead of donating to a U.S. school, an altruist interested in education might donate to an organization that provides nutrition to children in poor countries — because improving their diets also will improve their ability to learn.

The UNICEF-USA-backed K.I.N.D.: Kids in Need of Desks campaign is another example of such a cause. A $110 donation provides four school children in Malawi with desks so that they don’t have to learn while sitting on the ground.

Some skepticism

Effective altruism isn’t without its skeptics. Some argue, for example, that planting doubt in the minds of would-be donors over whether they’re making the right choices could deter them from giving at all. Pressuring them to do additional research also might dissuade them.

Others question whether the focus on measurable outcomes results in a bias against social movements and arts organizations, whose results are harder to measure. Some organizations work to eliminate broader problems, such as income inequality or oppression, where progress isn’t easily quantified. The critics assert that effective altruism’s approach does little to tackle the societal issues behind many of these problems.

Critics also point out that an evidence-based approach ignores the role that emotional connection plays in charitable donations. When it comes to choosing which organizations to support, givers’ hearts frequently matter more than their heads.

Don’t ignore it

Despite some potential flaws in the philosophy, ignoring the effective altruism movement would likely be a mistake. So look for ways to incorporate its message into your donor materials and be prepared to discuss how your organization fits into the altruistic model should a donor bring it up. Contact us for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

The tax rules for deducting the computer software costs of your business

Posted by Admin Posted on Oct 02 2020



Do you buy or lease computer software to use in your business? Do you develop computer software for use in your business, or for sale or lease to others? Then you should be aware of the complex rules that apply to determine the tax treatment of the expenses of buying, leasing or developing computer software.

Purchased software

Some software costs are deemed to be costs of “purchased” software, meaning software that’s either:

  • Non-customized software available to the general public under a non-exclusive license or
  • Acquired from a contractor who is at economic risk should the software not perform. 

The entire cost of purchased software can be deducted in the year that it’s placed into service. The cases in which the costs are ineligible for this immediate write-off are the few instances in which 100% bonus depreciation or Section 179 small business expensing isn’t allowed or when a taxpayer has elected out of 100% bonus depreciation and hasn’t made the election to apply Sec. 179 expensing. In those cases, the costs are amortized over the three-year period beginning with the month in which the software is placed in service. Note that the bonus depreciation rate will begin to be phased down for property placed in service after calendar year 2022.

If you buy the software as part of a hardware purchase in which the price of the software isn’t separately stated, you must treat the software cost as part of the hardware cost. Therefore, you must depreciate the software under the same method and over the same period of years that you depreciate the hardware. Additionally, if you buy the software as part of your purchase of all or a substantial part of a business, the software must generally be amortized over 15 years.

Leased software

You must deduct amounts you pay to rent leased software in the tax year they’re paid, if you’re a cash-method taxpayer, or the tax year for which the rentals are accrued, if you’re an accrual-method taxpayer. However, deductions aren’t generally permitted before the years to which the rentals are allocable. Also, if a lease involves total rentals of more than $250,000, special rules may apply.

Software developed by your business

Some software is deemed to be “developed” (designed in-house or by a contractor who isn’t at risk if the software doesn’t perform). For tax years beginning before calendar year 2022, bonus depreciation applies to developed software to the extent described above. If bonus depreciation doesn’t apply, the taxpayer can either deduct the development costs in the year paid or incurred or choose one of several alternative amortization periods over which to deduct the costs. For tax years beginning after calendar year 2021, generally the only allowable treatment will be to amortize the costs over the five-year period beginning with the midpoint of the tax year in which the expenditures are paid or incurred.

If following any of the above rules requires you to change your treatment of software costs, it will usually be necessary for you to obtain IRS consent to the change.

Contact us

We can assist you in applying the tax rules for treating computer software costs in the way that is most advantageous for you. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

This year, do-gooders are also do-wellers

Posted by Admin Posted on Sept 25 2020

Why face-to-face meetings with your auditor are important

Posted by Admin Posted on Sept 25 2020



Remote audit procedures can help streamline the audit process and protect the parties from health risks during the COVID-19 crisis. However, seeing people can be essential when it comes to identifying and assessing fraud risks during a financial statement audit. Virtual face-to-face meetings can be the solution.

Asking questions

Auditing standards require auditors to identify and assess the risks of material misstatement due to fraud and to determine overall and specific responses to those risks. Specific areas of inquiry under Clarified Statement on Auditing Standards (AU-C) Section 240, Consideration of Fraud in a Financial Statement Audit include:

  • Whether management has knowledge of any actual, suspected or alleged fraud,
  • Management’s process for identifying, responding to and monitoring the fraud risks in the entity,
  • The nature, extent and frequency of management’s assessment of fraud risks and the results of those assessments,
  • Any specific fraud risks that management has identified or that have been brought to its attention, and
  • The classes of transactions, account balances or disclosures for which a fraud risk is likely to exist.

In addition, auditors will inquire about management’s communications, if any, to those charged with governance about the management team’s process for identifying and responding to fraud risks, and to employees on its views on appropriate business practices and ethical behavior.

Seeing is believing

Traditionally, auditors require in-person meetings with managers and others to discuss fraud risks. That’s because a large part of uncovering fraud involves picking up on nonverbal cues of dishonesty. In a face-to-face interview, the auditor can, for example, observe signs of stress on the part of the interviewee in responding to the question.

However, during the COVID-19 pandemic, in-person meetings may give rise to safety concerns, especially if either party is an older adult or has underlying medical conditions that increase the risk for severe illness from COVID-19 (or lives with a person who’s at high risk). In-person meetings with face masks also aren’t ideal from an audit perspective, because they can muffle speech and limit the interviewer’s ability to observe facial expressions.

A videoconference can help address both of these issues. Though some people may prefer the simplicity of telephone or audioconferences, the use of up-to-date videoconferencing technology can help retain the visual benefits of in-person interviews. For example, high-definition videoconferencing equipment can allow auditors to detect slight physical changes, such as smirks, eyerolls, wrinkled brows and even beads of sweat. These nonverbal cues may be critical to assessing an interviewee’s honesty and reliability.

Risky business

Evaluating fraud risks is a critical part of your auditor’s responsibilities. You can facilitate this process by anticipating the types of questions your auditor will ask and ensuring your managers and accounting personnel are all familiar with how videoconferencing technology works. Contact us for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Can investors who manage their own portfolios deduct related expenses?

Posted by Admin Posted on Sept 25 2020



In some cases, investors have significant related expenses, such as the cost of subscriptions to financial periodicals and clerical expenses. Are they tax deductible? Under the Tax Cut and Jobs Act, these expenses aren’t deductible through 2025 if they’re considered expenses for the production of income. But they are deductible if they’re considered trade or business expenses. (For tax years before 2018, production-of-income expenses were deductible, but were included in miscellaneous itemized deductions, which were subject to a 2%-of-adjusted-gross-income floor.)

In order to deduct investment-related expenses as business expenses, you must figure out if you’re an investor or a trader — and be aware that it’s more advantageous (and difficult) to qualify for trader status.

To qualify, you must be engaged in a trade or business. The U.S. Supreme Court held many years ago that an individual taxpayer isn’t engaged in a trade or business merely because the individual manages his or her own securities investments, regardless of the amount of the investments or the extent of the work required.

However, if you can show that your investment activities rise to the level of carrying on a trade or business, you may be considered a trader engaged in a trade or business, rather than an investor. As a trader, you’re entitled to deduct your investment-related expenses as business expenses. A trader is also entitled to deduct home-office expenses if the home office is used exclusively on a regular basis as the trader’s principal place of business. An investor, on the other hand, isn’t entitled to home-office deductions since the investment activities aren’t a trade or business.

Since the Supreme Court’s decision, there has been extensive litigation on the issue of whether a taxpayer is a trader or investor. The U.S. Tax Court has developed a two-part test that must be satisfied in order for a taxpayer to be a trader. Under this two-part test, a taxpayer’s investment activities are considered a trade or business only if both of the following are true:

  • The taxpayer’s trading is substantial (in other words, sporadic trading isn’t a trade or business), and
  • The taxpayer seeks to profit from short-term market swings, rather than from long-term holding of investments.

So, the fact that a taxpayer’s investment activities are regular, extensive and continuous isn’t in itself sufficient for determining that a taxpayer is a trader. In order to be considered a trader, you must show that you buy and sell securities with reasonable frequency in an effort to profit on a short-term basis. In one case, even a taxpayer who made more than 1,000 trades a year with trading activities averaging about $16 million annually was held to be an investor because the holding periods for stocks sold averaged about one year.

Contact us if you have questions about whether your investment-related expenses are deductible. We can also help explain how to help keep capital gains taxes low when you sell investments. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Collective impact initiatives: All for one and one for all

Posted by Admin Posted on Sept 25 2020



Collective impact initiatives are growing among not-for-profits. Such initiatives are about more than collaboration. They represent the commitment of a group of organizations to a common agenda for solving a specific social problem. This group can include the nonprofits themselves, government agencies, businesses and constituent communities. Should your nonprofit participate in collective impact?

5 requirements

Adherents of collective impact typically cite five requirements that together promote an initiative’s success:

1. A common agenda. Participants must have a shared vision for change based on a common understanding of their goals and the problem. Everyone doesn’t have to agree on every facet of the problem, but differences must be resolved to preempt splintered efforts.

2. A backbone. Collective impact requires a separate organization with its own infrastructure. This provides a “backbone” for the project. Because participants alone aren’t likely to have the extra resources needed to handle all logistical and administrative details, the entity needs its own dedicated staff.

3. Agreed-upon metrics. Participants should decide how success will be measured and reported. Each member of the group must take the same approach to data collection and metrics to ensure the continued alignment of efforts, foster accountability and facilitate information sharing.

4. Working to your strengths. Collective impact depends on stakeholders working together in an overarching plan. But that doesn’t mean they all must do the same thing. Rather, each participant should pursue the activities at which it excels, in a way that both supports and coordinates with those of fellow participants.

5. Meeting regularly. Perhaps the biggest challenge to collective impact is the need for trust among stakeholders. This grows gradually by meeting regularly. Over time, participants share information and solve problems and learn to recognize and appreciate their individual roles and their common motivation.

Evaluating success

Collective impact programs generally are too complicated and unpredictable to evaluate on outcomes alone. Instead, look at your initiative holistically and consider all parts of the puzzle. For example, how effective is the initiative’s changemaking process, including its structure and operations? How are influencers of the targeted issues changing and helping to further progress toward ultimate goals.

Consider, too, the initiative’s stage. An early-stage evaluation might focus more on structure and operations, while a later-stage assessment may look at progress toward goals.

Consider your situation

If your nonprofit is thinking about joining a collective action initiative, make sure the group is set up to follow the five requirements listed above. Also make sure you have the resources necessary to participate. We can help evaluate your situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Business website costs: How to handle them for tax purposes

Posted by Admin Posted on Sept 25 2020



The business use of websites is widespread. But surprisingly, the IRS hasn’t yet issued formal guidance on when Internet website costs can be deducted.

Fortunately, established rules that generally apply to the deductibility of business costs, and IRS guidance that applies to software costs, provide business taxpayers launching a website with some guidance as to the proper treatment of the costs.

Hardware or software?

Let’s start with the hardware you may need to operate a website. The costs involved fall under the standard rules for depreciable equipment. Specifically, once these assets are up and running, you can deduct 100% of the cost in the first year they’re placed in service (before 2023). This favorable treatment is allowed under the 100% first-year bonus depreciation break.

In later years, you can probably deduct 100% of these costs in the year the assets are placed in service under the Section 179 first-year depreciation deduction privilege. However, Sec. 179 deductions are subject to several limitations.

For tax years beginning in 2020, the maximum Sec. 179 deduction is $1.04 million, subject to a phaseout rule. Under the rule, the deduction is phased out if more than a specified amount of qualified property is placed in service during the year. The threshold amount for 2020 is $2.59 million.

There’s also a taxable income limit. Under it, your Sec. 179 deduction can’t exceed your business taxable income. In other words, Sec. 179 deductions can’t create or increase an overall tax loss. However, any Sec. 179 deduction amount that you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable limits).

Similar rules apply to purchased off-the-shelf software. However, software license fees are treated differently from purchased software costs for tax purposes. Payments for leased or licensed software used for your website are currently deductible as ordinary and necessary business expenses.

Was the software developed internally?

An alternative position is that your software development costs represent currently deductible research and development costs under the tax code. To qualify for this treatment, the costs must be paid or incurred by December 31, 2022.

A more conservative approach would be to capitalize the costs of internally developed software. Then you would depreciate them over 36 months.

If your website is primarily for advertising, you can also currently deduct internal website software development costs as ordinary and necessary business expenses.

Are you paying a third party?

Some companies hire third parties to set up and run their websites. In general, payments to third parties are currently deductible as ordinary and necessary business expenses.

What about before business begins?

Start-up expenses can include website development costs. Up to $5,000 of otherwise deductible expenses that are incurred before your business commences can generally be deducted in the year business commences. However, if your start-up expenses exceed $50,000, the $5,000 current deduction limit starts to be chipped away. Above this amount, you must capitalize some, or all, of your start-up expenses and amortize them over 60 months, starting with the month that business commences. 

Need Help?

We can determine the appropriate treatment of website costs for federal income tax purposes. Contact us if you have questions or want more information.  Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Social Security: Choppy waters or smooth sailing?

Posted by Admin Posted on Sept 18 2020

How to report COVID-19-related debt restructuring

Posted by Admin Posted on Sept 18 2020



Today, many banks are working with struggling borrowers on loan modifications. Recent guidance from the Financial Accounting Standards Board (FASB) confirms that short-term modifications due to the COVID-19 pandemic won’t be subject to the complex accounting rules for troubled debt restructurings (TDRs). Here are the details.

Accounting for TDRs

Under Accounting Standards Codification (ASC) Topic 310-40, Receivables — Troubled Debt Restructurings by Creditors, a debt restructuring is considered a TDR if:

  • The borrower is troubled, and
  • The creditor, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession it wouldn’t otherwise consider.

Banks generally must account for TDRs as impaired loans. Impairment is typically measured using the discounted cash flow method. Under this method, the bank calculates impairment as the decline in the present value of future cash flows resulting from the modification, discounted at the original loan’s contractual interest rate. This calculation may be further complicated if the contractual rate is variable.

Under U.S. Generally Accepted Accounting Principles (GAAP), examples of loan modifications that may be classified as a TDR include:

  • A reduction of the stated interest rate for the remaining original life of the debt,
  • An extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk,
  • A reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement, and
  • A reduction of accrued interest.

The concession to a troubled borrower may include a restructuring of the loan terms to alleviate the burden of the borrower’s near-term cash requirements, such as a modification of terms to reduce or defer cash payments to help the borrower attempt to improve its financial condition.

Recent guidance

Earlier this year, the FASB confirmed that short-term modifications made in good faith to borrowers experiencing short-term operational or financial problems as a result of COVID-19 won’t automatically be considered TDRs if the borrower was current on making payments before the relief. Borrowers are considered current if they’re less than 30 days past due on their contractual payments at the time a modification program is implemented.

The relief applies to short-term modifications from:

  • Payment deferrals,
  • Extensions of repayment terms,
  • Fee waivers, and
  • Other payment delays that are insignificant compared to the amount due from the borrower or to the original maturity/duration of the debt.

In addition, loan modifications or deferral programs mandated by a federal or state government in response to COVID-19, such as financial institutions being required to suspend mortgage payments for a period of time, won’t be within the scope of ASC Topic 310-40.

For more information

The COVID-19 pandemic is an unprecedented situation that continues to present challenges to creditors and borrowers alike. Contact your CPA for help accounting for loan modifications and measuring impairment, if necessary.  Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Tax implications of working from home and collecting unemployment

Posted by Admin Posted on Sept 18 2020



COVID-19 has changed our lives in many ways, and some of the changes have tax implications. Here is basic information about two common situations.

1. Working from home.

Many employees have been told not to come into their workplaces due to the pandemic. If you’re an employee who “telecommutes” — that is, you work at home, and communicate with your employer mainly by telephone, videoconferencing, email, etc. — you should know about the strict rules that govern whether you can deduct your home office expenses.

Unfortunately, employee home office expenses aren’t currently deductible, even if your employer requires you to work from home. Employee business expense deductions (including the expenses an employee incurs to maintain a home office) are miscellaneous itemized deductions and are disallowed from 2018 through 2025 under the Tax Cuts and Jobs Act.

However, if you’re self-employed and work out of an office in your home, you can be eligible to claim home office deductions for your related expenses if you satisfy the strict rules.

2. Collecting unemployment

Millions of Americans have lost their jobs due to COVID-19 and are collecting unemployment benefits. Some of these people don’t know that these benefits are taxable and must be reported on their federal income tax returns for the tax year they were received. Taxable benefits include the special unemployment compensation authorized under the Coronavirus Aid, Relief and Economic Security (CARES) Act.

In order to avoid a surprise tax bill when filing a 2020 income tax return next year, unemployment recipients can have taxes withheld from their benefits now. Under federal law, recipients can opt to have 10% withheld from their benefits to cover part or all their tax liability. To do this, complete Form W4-V, Voluntary Withholding Request, and give it to the agency paying benefits. (Don’t send it to the IRS.)

We can help

We can assist you with advice about whether you qualify for home office deductions, and how much of these expenses you can deduct. We can also answer any questions you have about the taxation of unemployment benefits as well as any other tax issues that you encounter as a result of COVID-19.  Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

When should you pay nonprofit board members?

Posted by Admin Posted on Sept 18 2020



Most for-profit companies compensate the directors who serve on their boards. But not-for-profit board members generally serve on a voluntary basis. However, there are circumstances in which you might want to consider compensating those who serve on your board.

Advantages and drawbacks

Board member compensation comes with several pros and cons to consider. Your organization might, for example, find it worthwhile to offer compensation to attract individuals who are: prominent or bring highly specialized expertise; are expected to invest significant time and effort; or who represent diverse backgrounds.

Also, if your nonprofit has a business model that competes with for-profit organizations, such as a nonprofit hospital, board compensation may be appropriate. In general, providing compensation can improve board member performance and promote professionalism. It may incentivize meeting attendance and accountability.

But there are several drawbacks. First, it can look bad. Donors expect their funds to go to program services, and board compensation represents resources diverted from your organization’s mission. Further, there are legal and IRS implications. For example, in some states volunteer board members are protected from legal liability, while compensated members may not be.

Compliance matters

If you decide to compensate board members, make sure your arrangement complies with the Internal Revenue Code’s private inurement and excess benefit regulations, as well as the IRS rules about “reasonable compensation.” Failure to do so can result in excise taxes, penalties and even the loss of your tax-exempt status.

Independent directors, an independent governance or compensation committee, or an independent consultant should set the amount of, or formula for, board compensation. Whoever sets the amount should be guided by a formal compensation policy and make the amount comparable to that paid by similar nonprofits.

Put it in your policy

Make sure your compensation policy includes four elements:

  1. How compensating board members benefits your organization (for example, by allowing it to attract a member with financial expertise).
  2. Which members are eligible for compensation (the chair, the officers or all members).
  3. How compensation is structured (for instance, flat or per-meeting fee).
  4. Expectations for board members in exchange for compensation, such as meeting attendance, qualifications and experience.

Also document all compensation discussions. This includes your board’s formal vote approving the policy and compensation amounts.

Arriving at an amount

If you decide to compensate board members, you may find the most difficult aspect is arriving at an amount. Contact us for help. We can make suggestions based on what comparable organizations pay as well as the nature of your nonprofit and its revenues. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

2020 Q4 tax calendar: Key deadlines for businesses and other employers

Posted by Admin Posted on Sept 18 2020



Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2020. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

Thursday, October 15

  • If a calendar-year C corporation that filed an automatic six-month extension:
    • File a 2019 income tax return (Form 1120) and pay any tax, interest and penalties due.
    • Make contributions for 2019 to certain employer-sponsored retirement plans.

Monday, November 2

  • Report income tax withholding and FICA taxes for third quarter 2020 (Form 941) and pay any tax due. (See exception below under “November 10.”)

Tuesday, November 10

  • Report income tax withholding and FICA taxes for third quarter 2020 (Form 941), if you deposited on time (and in full) all of the associated taxes due.

Tuesday, December 15

  • If a calendar-year C corporation, pay the fourth installment of 2020 estimated income taxes.

Thursday, December 31

  • Establish a retirement plan for 2020 (generally other than a SIMPLE, a Safe-Harbor 401(k) or a SEP).

Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Tax relief for victims of natural disasters

Posted by Admin Posted on Sept 11 2020

On-time financial reporting is key in times of crisis

Posted by Admin Posted on Sept 11 2020



Many companies are struggling as a result of shutdowns and restructurings during the COVID-19 crisis. To add insult to injury, some have also fallen victim to arson, looting or natural disasters in 2020.

Lenders and investors want to know how your business has weathered these adverse conditions and where it currently stands. While stakeholders understand that it’s been a tough year for many sectors of the economy, they may presume the worst if you’re late issuing your financial statements. Here are some assumptions people could make when your financial statements are late.

Your business is failing

No one wants to be the bearer of bad news. Deferred financial reporting can lead lenders and investors to presume that the company isn’t going to recover from the economic downturn — and that a bankruptcy filing may be in the works.

Even if your 2020 results have fallen below historical levels or what was forecast at the beginning of the year, issuing your financial statements on time can help reassure stakeholders. They want to know that you’re on top of what’s happening and you’re taking steps to recover.

Management is ineffective

Some stakeholders may assume that your management team is hopelessly disorganized and can’t pull together the requisite data to finish the financials. Late financials are common when the accounting department is understaffed or a major accounting rule change has gone into effect. Both are very real possibilities today.

Delayed statements may also signal that management doesn’t consider financial reporting a priority. This lackadaisical mindset implies that no one is monitoring financial performance throughout the year.

Internal controls are weak

A strong system of internal controls is your company’s first line of defense against fraud. A key component of strong internal controls is management review and internal audits.

If financial statements aren’t timely or prioritized by the company’s owners, unscrupulous employees may see it as a golden opportunity to steal from the company. Fraud is more difficult to hide if you insist on timely financial statements and take the time to review them.

Let’s work together

Sometimes delays in financial reporting happen because management realizes that the company has violated its loan covenants — and they’re worried that the bank will call the loan when they review the financials. In today’s unprecedented conditions, however, many lenders are willing to temporarily waive covenant violations and even restructure debt — if the company can show a good faith effort to preserve cash flow, make timely loan payments and revise its business model, if possible.

We can help you prepare timely financial reports — and forecast how your business will perform in the coming months. Being proactive and forthcoming can help preserve goodwill with lenders and investors. Contact us for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Homebuyers: Can you deduct seller-paid points?

Posted by Admin Posted on Sept 11 2020




Despite the COVID-19 pandemic, the National Association of Realtors (NAR) reports that existing home sales and prices are up nationwide, compared with last year. One of the reasons is the pandemic: “With the sizable shift in remote work, current homeowners are looking for larger homes…” according to NAR’s Chief Economist Lawrence Yun.

If you’re buying a home, or you just bought one, you may wonder if you can deduct mortgage points paid on your behalf by the seller. Yes, you can, subject to some important limitations described below.

Points are upfront fees charged by a mortgage lender, expressed as a percentage of the loan principal. Points, which may be deductible if you itemize deductions, are normally the buyer’s obligation. But a seller will sometimes sweeten a deal by agreeing to pay the points on the buyer’s mortgage loan.

In most cases, points a buyer pays are a deductible interest expense. And IRS says that seller-paid points may also be deductible.

Suppose, for example, that you bought a home for $600,000. In connection with a $500,000 mortgage loan, your bank charged two points, or $10,000. The seller agreed to pay the points in order to close the sale.

You can deduct the $10,000 in the year of sale. The only disadvantage is that your tax basis is reduced to $590,000, which will mean more gain if — and when — you sell the home for more than that amount. But that may not happen until many years later, and the gain may not be taxable anyway. You may qualify for an exclusion for up to $250,000 ($500,000 for a married couple filing jointly) of gain on the sale of a principal residence.

Some limitations

There are some important limitations on the rule allowing a deduction for seller-paid points. The rule doesn’t apply:

  • To points that are allocated to the part of a mortgage above $750,000 ($375,000 for marrieds filing separately) for tax years 2018 through 2025 (above $1 million for tax years before 2018 and after 2025);
  • To points on a loan used to improve (rather than buy) a home;
  • To points on a loan used to buy a vacation or second home, investment property or business property; and
  • To points paid on a refinancing, home equity loan or line of credit.

Your situation

We can review with you in more detail whether the points in your home purchase are deductible, as well as discuss other tax aspects of your transaction. Sam Brown, CPA, Inc., Troy, Ohio www.sbcpaohio.com

© 2020

What to do when the audit ends

Posted by Admin Posted on Sept 11 2020



Financial audits conducted by outside experts are among the most effective tools for revealing risks in not-for-profits. They help assure donors and other stakeholders about your stability — so long as you respond to the results appropriately. In fact, failing to act on issues identified in an audit could threaten your organization’s long-term viability.

Working with the draft

Once outside auditors complete their work, they typically present a draft report to an organization’s audit committee, executive director and senior financial staffers. Those individuals should take the time to review the draft before it’s presented to the board of directors.

Your organization’s audit committee and management also should meet with the auditors prior to the board presentation. Often auditors will provide a management letter (also called “communication with those charged with governance”), highlighting operational areas and controls that need improvement. Your nonprofit’s team can respond to these comments, indicating ways they plan to improve the organization’s operations and controls, to be included in the final letter. The audit committee also can use the meeting to ensure the audit is properly comprehensive.

Executive director’s role

One important audit committee task is to obtain your executive director’s impression of the auditors and audit process. Were the auditors efficient, or did they perform or require redundant work? Did they demonstrate the requisite expertise, skills and understanding? Were they disruptive to operations? Consider this input when deciding whether to retain the same firm for the next audit.

The committee also might want to seek feedback from employees who worked most closely with auditors. In addition to feedback on the auditors, they may have suggestions on how to streamline the process for the next audit.

No material misrepresentation

The final audit report will state whether your organization’s financial statements present its financial position in accordance with U.S. accounting principles. The statements must be presented without any inaccuracies or “material” — meaning significant — misrepresentation.

The auditors also will identify, in a separate letter, specific concerns about material internal control issues. Adequate internal controls are critical for preventing, catching and remedying misstatements that could compromise the integrity of financial statements. The auditors’ other suggestions, presented in the management letter, should include your organization’s responses.

If the auditors find your internal controls weak, promptly shore them up. You could, for example, implement new controls or new accounting practices.

Contact us if you have questions about audits and post-audit procedures. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Employers have questions and concerns about deferring employees’ Social Security taxes

Posted by Admin Posted on Sept 11 2020



The IRS has provided guidance to employers regarding the recent presidential action to allow employers to defer the withholding, deposit and payment of certain payroll tax obligations.

The three-page guidance in Notice 2020-65 was issued to implement President Trump’s executive memorandum signed on August 8.

Private employers still have questions and concerns about whether, and how, to implement the optional deferral. The President’s action only defers the employee’s share of Social Security taxes; it doesn’t forgive them, meaning employees will still have to pay the taxes later unless Congress acts to eliminate the liability. (The payroll services provider for federal employers announced that federal employees will have their taxes deferred.) 

Deferral basics

President Trump issued the memorandum in light of the COVID-19 crisis. He directed the U.S. Secretary of the Treasury to use his authority under the tax code to defer the withholding, deposit and payment of certain payroll tax obligations.

For purposes of the Notice, “applicable wages” means wages or compensation paid to an employee on a pay date beginning September 1, 2020, and ending December 31, 2020, but only if the amount paid for a biweekly pay period is less than $4,000, or the equivalent amount with respect to other pay periods.

The guidance postpones the withholding and remittance of the employee share of Social Security tax until the period beginning on January 1, 2021, and ending on April 30, 2021. Penalties, interest and additions to tax will begin to accrue on May 1, 2021, for any unpaid taxes.

“If necessary,” the guidance states, an employer “may make arrangements to collect the total applicable taxes” from an employee. But it doesn’t specify how.

Be aware that under the CARES Act, employers can already defer paying their portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022. 

Many employers opting out

Several business groups have stated that their members won’t participate in the deferral. For example, the U.S. Chamber of Commerce and more than 30 trade associations sent a letter to members of Congress and the U.S. Department of the Treasury calling the deferral “unworkable.”

The Chamber is concerned that employees will get a temporary increase in their paychecks this year, followed by a decrease in take-home pay in early 2021. “Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year… Therefore, many of our members will likely decline to implement deferral, choosing instead to continue to withhold and remit to the government the payroll taxes required by law,” the group explained.

Businesses are also worried about having to collect the taxes from employees who may quit or be terminated before April 30, 2021. And since some employees are asking questions about the deferral, many employers are also putting together communications to inform their staff members about whether they’re going to participate. If so, they’re informing employees what it will mean for next year’s paychecks.

How to proceed

Contact us if you have questions about the deferral and how to proceed at your business.  Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

What percentage of voters rank the economy as their top issue?

Posted by Admin Posted on Sept 04 2020

Reporting discontinued operations today

Posted by Admin Posted on Sept 04 2020



Marketplace changes during the COVID-19 crisis have caused many companies to make major strategic shifts in their operations — and some changes are expected to be permanent. In certain cases, these pivot strategies may need to be reported under the complex discontinued operations rules under U.S. Generally Accepted Accounting Principles.

What are discontinued operations?

The scope of what’s reported as discontinued operations was narrowed by Accounting Standards Update (ASU) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Since the updated guidance went into effect in 2015, the disposal of a component (including business activities) must be reported in discontinued operations only if the disposal represents a “strategic shift” that has or will have a major effect on the company’s operations and financial results.

A component comprises operations and cash flows that can be clearly distinguished, both operationally and for financial reporting purposes, from the rest of the company. It could be a reportable segment, an operating segment, a reporting unit, a subsidiary or an asset group.

Examples of a qualifying strategic shift include disposal of a major geographic area, a line of business or an equity method investment. When such a strategic shift occurs, a company must present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections of the balance sheet.

On the income statement, the results of discontinued operations are reported separately (net of income tax) from continuing operations in both the current and comparative periods. Allocating costs between discontinued and continuing operations is often challenging because only direct costs may be associated with a discontinued operation.

What disclosures are required?

Under GAAP, companies also must provide detailed disclosures when reporting discontinued operations. The goal is to show the financial effect of such a shift to the users of the entity’s financial statements — allowing them to better understand continuing operations.

The following disclosures must be made for the periods in which the operating results of the discontinued operation are presented in the income statement:

  • The major classes of line items constituting the pretax profit or loss of the discontinued operation,
  • Either 1) the total operating and investing cash flows of the discontinued operation, or 2) the depreciation, amortization, capital expenditures, and significant operating and investing noncash items of the discontinued operation, and
  • If the discontinued operation includes a noncontrolling interest, the pretax profit or loss attributable to the parent.

Additional disclosures may be required if the company plans significant continuing involvement with a discontinued operation or if a disposal doesn’t qualify for discontinued operations reporting.

Unfamiliar territory

Today’s conditions — including shifts to work-from-home arrangements, domestic supply chains and online distribution methods — have disrupted traditional business models in many sectors of the economy. These kinds of strategic changes don’t happen often, and in-house personnel may be unfamiliar with the latest guidance when preparing your company’s year-end financial statements. Contact us to help ensure you’re in compliance. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Back-to-school tax breaks on the books

Posted by Admin Posted on Sept 04 2020



Despite the COVID-19 pandemic, students are going back to school this fall, either remotely, in-person or under a hybrid schedule. In any event, parents may be eligible for certain tax breaks to help defray the cost of education.

Here is a summary of some of the tax breaks available for education.

1. Higher education tax credits. Generally, you may be able to claim either one of two tax credits for higher education expenses — but not both.

  • With the American Opportunity Tax Credit (AOTC), you can save a maximum of $2,500 from your tax bill for each full-time college or grad school student. This applies to qualified expenses including tuition, room and board, books and computer equipment and other supplies. But the credit is phased out for moderate-to-upper income taxpayers. No credit is allowed if your modified adjusted gross income (MAGI) is over $90,000 ($180,000 for joint filers).
  • The Lifetime Learning Credit (LLC) is similar to the AOTC, but there are a few important distinctions. In this case, the maximum credit is $2,000 instead of $2,500. Furthermore, this is the overall credit allowed to a taxpayer regardless of the number of students in the family. However, the LLC is also phased out under income ranges even lower than the AOTC. You can’t claim the credit if your MAGI is $68,000 or more ($136,000 or more if you file a joint return).

For these reasons, the AOTC is generally preferable to the LLC. But parents have still another option.

2. Tuition-and-fees deduction. As an alternative to either of the credits above, parents may claim an above-the-line deduction for tuition and related fees. This deduction is either $4,000 or $2,000, depending on the taxpayer’s MAGI, before it is phased out. No deduction is allowed for MAGI above $80,000 for single filers and $160,000 for joint filers.

The tuition-and-fees deduction, which has been extended numerous times, is currently scheduled to expire after 2020. However, it’s likely to be revived again by Congress.

In addition to these tax breaks, there are other ways to save and pay for college on a tax advantaged basis. These include using Section 529 plans and Coverdell Education Savings Accounts. There are limits on contributions to these saving vehicles.

Note: Thanks to a provision in the Tax Cuts and Jobs Act, a 529 plan can now be used to pay for up to $10,000 annually for a child’s tuition at a private or religious elementary or secondary school.

Final lesson

Typically, parents are able to take advantage of one or more of these tax breaks, even though some benefits are phased out above certain income levels. Contact us to maximize the tax breaks for your children’s education. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Private foundations need strong conflict-of-interest policies

Posted by Admin Posted on Sept 04 2020



Does your private foundation have a detailed conflict-of-interest policy? If it doesn’t — and if it doesn’t follow the policy closely — you could face IRS attention that results in penalties and even the revocation of your tax-exempt status. Here’s how to prevent accusations of self-dealing.

Who’s disqualified?

Conflict-of-interest policies are critical for all not-for-profits. But foundations are subject to stricter rules and must go the extra mile to avoid anything that might be perceived as self-dealing. Specifically, transactions between private foundations and disqualified persons are prohibited.

The IRS casts a wide net when defining “disqualified persons,” including substantial contributors, managers, officers, directors, trustees and people with large ownership interests in corporations or partnerships that make substantial contributions to the foundation. Their family members are disqualified, too. In addition, when a disqualified person owns more than 35% of a corporation or partnership, that business is considered disqualified.

What transactions are prohibited?

Prohibited transactions can be hard to identify because there are many exceptions. But, in general, you should ensure that disqualified persons don’t engage in: selling, exchanging or leasing property; making or receiving loans or extending credit; providing or receiving goods, services or facilities; and receiving compensation or reimbursed expenses. Disqualified persons also shouldn’t agree to pay money or property to government officials on your behalf.

What happens if you violate the rules? Your foundation’s manager and the disqualified person may be subject to an initial excise tax (5% and 10%, respectively) of the amount involved and, if the transaction isn’t corrected quickly, an additional tax of up to 200% of the amount. Although liability is limited for foundation managers ($40,000 for any one act), self-dealing individuals enjoy no such limits. In some cases, private foundations that engage in self-dealing lose their tax-exempt status.

What’s off-limits?

Your foundation likely has good intentions, but that may not protect you. For example, you might assume that transactions with insiders are acceptable so long as they benefit your foundation. But you’d be wrong. Most activities that the IRS describes as self-dealing are off-limits.

Because the rules can be complicated, talk with us before executing any transaction that could violate IRS rules. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

5 key points about bonus depreciation

Posted by Admin Posted on Sept 04 2020



Under current law, 100% bonus depreciation will be phased out in steps for property placed in service in calendar years 2023 through 2027. Thus, an 80% rate will apply to property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, and a 0% rate will apply in 2027 and later years.

For certain aircraft (generally, company planes) and for the pre-January 1, 2027 costs of certain property with a long production period, the phaseout is scheduled to take place a year later, from 2024 to 2028.

Of course, Congress could pass legislation to extend or revise the above rules.

2. Bonus depreciation is available for new and most used property

In the past, used property didn’t qualify. It currently qualifies unless: 

  • The taxpayer previously used the property and
  • The property was acquired in certain forbidden transactions (generally acquisitions that are tax free or from a related person or entity).

3. Taxpayers should sometimes make the election to turn down bonus depreciation 

Taxpayers can elect to reject bonus depreciation for one or more classes of property. The election out may be useful for sole proprietorships, and business entities taxed under the rules for partnerships and S corporations, that want to prevent “wasting” depreciation deductions by applying them against lower-bracket income in the year property was placed in service — instead of against anticipated higher bracket income in later years.

Note that business entities taxed as “regular” corporations (in other words, non-S corporations) are taxed at a flat rate.

4. Bonus depreciation is available for certain building improvements

Before the 2017 Tax Cuts and Jobs Act (TCJA), bonus depreciation was available for two types of real property: 

  • Land improvements other than buildings, for example fencing and parking lots, and
  • “Qualified improvement property,” a broad category of internal improvements made to non-residential buildings after the buildings are placed in service.

The TCJA inadvertently eliminated bonus depreciation for qualified improvement property.

However, the 2020 Coronavirus Aid, Relief and Economic Security Act (CARES Act) made a retroactive technical correction to the TCJA. The correction makes qualified improvement property placed in service after December 31, 2017, eligible for bonus depreciation.

5. 100% bonus depreciation has reduced the importance of “Section 179 expensing”

If you own a smaller business, you've likely benefited from Sec. 179 expensing. This is an elective benefit that — subject to dollar limits — allows an immediate deduction of the cost of equipment, machinery, off-the-shelf computer software and some building improvements. Sec. 179 has been enhanced by the TCJA, but the availability of 100% bonus depreciation is economically equivalent and has greatly reduced the cases in which Sec. 179 expensing is useful.

We can help

The above discussion touches only on some major aspects of bonus depreciation. This is a complex area with tax implications for transactions other than simple asset acquisitions. Contact us if you have any questions about how to proceed in your situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

NEW Retirement

Posted by Admin Posted on Aug 28 2020

NEW Education

Posted by Admin Posted on Aug 28 2020

NEW Deductions

Posted by Admin Posted on Aug 28 2020

Who got Paycheck Protection Program loans and for how much?

Posted by Admin Posted on Aug 28 2020

How qualified retirement plan rules affect COVID-19-related layoffs and rehires

Posted by Admin Posted on Aug 28 2020



Has your organization laid off employees this year because of the COVID-19 pandemic, but you plan to rehire some of them before the end of 2020? Or maybe you already have? If so, and you offer a qualified retirement plan, the IRS recently issued an important clarification regarding whether partial termination of a qualified plan occurs under such circumstances.

Partial plan termination

According to Internal Revenue Code Section 411(d)(3), a qualified plan must provide that, upon its “partial termination,” the rights of all affected employees to benefits accrued to the date of the partial termination are nonforfeitable. This applies to the extent a plan is funded on that date or to amounts credited to the account.

The IRS determines whether a partial termination of a qualified plan has occurred (and the time of the termination) by looking at the facts and circumstances of each case. Facts and circumstances include:

  • The exclusion, by reason of a plan amendment or employer-initiated severance, of a group of employees who have previously been covered by the plan, and
  • Plan amendments that adversely affect the rights of employees to vest in benefits under the plan.

Impact of COVID-19

The clarification provided by the IRS comes in the form of a question and answer. The agency asks, “Are employees who participated in a business’s qualified retirement plan, then laid off because of COVID-19 and rehired by the end of 2020, treated as having an employer-initiated severance from employment for purposes of determining whether a partial termination of the plan occurred?” The IRS answers:

Generally, no. Subject to the facts and circumstances of each case, participating employees generally are not treated as having an employer-initiated severance from employment for purposes of calculating the turnover rate used to help determine whether a partial termination has occurred during an applicable period, if they’re rehired by the end of that period. That means participating employees terminated due to the COVID-19 pandemic and rehired by the end of 2020 generally would not be treated as having an employer-initiated severance from employment for purposes of determining whether a partial termination of the retirement plan occurred during the 2020 plan year.

(Emphasis added.)

Easy to overlook

The COVID-19 crisis has led many employers to temporarily reduce the size of their workforces with the hope of bringing back some employees when safe and feasible. One easy-to-overlook way this is affecting organizations is the compliance impact on employee benefits. Please contact us for assistance in understanding the qualified plan rules. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Will You Have to Pay Tax on Your Social Security Benefits?

Posted by Admin Posted on Aug 28 2020



If you’re getting close to retirement, you may wonder: Are my Social Security benefits going to be taxed? And if so, how much will you have to pay?

It depends on your other income. If you’re taxed, between 50% and 85% of your benefits could be taxed. (This doesn’t mean you pay 85% of your benefits back to the government in taxes. It merely that you’d include 85% of them in your income subject to your regular tax rates.)

Crunch the numbers

To determine how much of your benefits are taxed, first determine your other income, including certain items otherwise excluded for tax purposes (for example, tax-exempt interest). Add to that the income of your spouse, if you file joint tax returns. To this, add half of the Social Security benefits you and your spouse received during the year. The figure you come up with is your total income plus half of your benefits. Now apply the following rules:

1. If your income plus half your benefits isn’t above $32,000 ($25,000 for single taxpayers), none of your benefits are taxed.

2. If your income plus half your benefits exceeds $32,000 but isn’t more than $44,000, you will be taxed on one half of the excess over $32,000, or one half of the benefits, whichever is lower.

Here’s an example

For example, let’s say you and your spouse have $20,000 in taxable dividends, $2,400 of tax-exempt interest and combined Social Security benefits of $21,000. So, your income plus half your benefits is $32,900 ($20,000 + $2,400 +1/2 of $21,000). You must include $450 of the benefits in gross income (1/2 ($32,900 − $32,000)). (If your combined Social Security benefits were $5,000, and your income plus half your benefits were $40,000, you would include $2,500 of the benefits in income: 1/2 ($40,000 − $32,000) equals $4,000, but 1/2 the $5,000 of benefits ($2,500) is lower, and the lower figure is used.)

Important: If you aren’t paying tax on your Social Security benefits now because your income is below the floor, or you’re paying tax on only 50% of those benefits, an unplanned increase in your income can have a triple tax cost. You’ll have to pay tax on the additional income, you’ll have to pay tax on (or on more of ) your Social Security benefits (since the higher your income the more of your Social Security benefits that are taxed), and you may get pushed into a higher marginal tax bracket.

For example, this situation might arise if you receive a large distribution from an IRA during the year or you have large capital gains. Careful planning might be able to avoid this negative tax result. You might be able to spread the additional income over more than one year, or liquidate assets other than an IRA account, such as stock showing only a small gain or stock with gain that can be offset by a capital loss on other shares.

If you know your Social Security benefits will be taxed, you can voluntarily arrange to have the tax withheld from the payments by filing a Form W-4V. Otherwise, you may have to make estimated tax payments. Contact us for assistance or more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

How nonprofits should classify their workers for tax purposes

Posted by Admin Posted on Aug 28 2020



Employees or independent contractors? It’s not only for-profit companies that struggle with the question of how to classify workers for federal tax purposes. Not-for-profit organizations must withhold and pay Social Security, Medicare and unemployment taxes for employees, but not for contractors. (There may also be state tax responsibilities.) But be careful before you decide that most of your staffers must be contractors. The IRS may not agree.

What counts?

When determining whether a worker is an employee or contactor, the IRS looks at whether an employer has the right to direct or control how the person does his or her work. In general, it’s not necessary that your nonprofit directs or controls how work is done — it just matters whether it has the right to do so. The existence of detailed instructions, training on specific procedures and methods, and evaluation systems generally will support a finding that an employment relationship exists.

Evidence that your nonprofit has the right to control the economic aspects of a staffer’s work also indicates an employment relationship. The IRS is more likely to deem individuals as contractors if they:

  • Incur significant unreimbursed expenses,
  • Have a major investment in their self-employed businesses with the potential of a profit or loss,
  • Provide tools or supplies for the job, and
  • Are available to work for other companies or clients.

The IRS also considers payment methods. Independent contractors typically are paid a flat fee for the contract or job, while employees generally are guaranteed a regular wage amount for an hourly, weekly or biweekly period.

Relationship type matters

How do you and the worker regard your relationship? For example, if you provide traditional employee benefits — such as health and disability insurance, a retirement plan and paid vacation days — it signals your intent to treat him or her as an employee. Note, though, that the lack of benefits alone doesn’t necessarily mean a worker is an independent contractor.

The duration of the relationship is relevant, too. Is it expected to continue indefinitely or only for the run of a specific project or period? Similarly, if workers provide services that are a critical part of your operations, your nonprofit is more likely to have the right to control their activities. Thus, these workers are more likely to be classified as employees.

Learning more

If you’re still not such whether a worker is an employee or an independent contractor, see IRS Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” But contact us before filing this form. We can help you document reasons supporting your decision for treating a worker as an independent contractor or employee.  Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

CARES Act made changes to excess business losses

Posted by Admin Posted on Aug 28 2020



The Coronavirus Aid, Relief and Economic Security (CARES) Act made changes to excess business losses. This includes some changes that are retroactive and there may be opportunities for some businesses to file amended tax returns.

If you hold an interest in a business, or may do so in the future, here is more information about the changes.

Deferral of the excess business loss limits

The Tax Cuts and Jobs Act (TCJA) provided that net tax losses from active businesses in excess of an inflation-adjusted $500,000 for joint filers, or an inflation-adjusted $250,000 for other covered taxpayers, are to be treated as net operating loss (NOL) carryforwards in the following tax year. The covered taxpayers are individuals, estates and trusts that own businesses directly or as partners in a partnership or shareholders in an S corporation.

The $500,000 and $250,000 limits, which are adjusted for inflation for tax years beginning after calendar year 2018, were scheduled under the TCJA to apply to tax years beginning in calendar years 2018 through 2025. But the CARES Act has retroactively postponed the limits so that they now apply to tax years beginning in calendar years 2021 through 2025.

The postponement means that you may be able to amend:

  1. Any filed 2018 tax returns that reflected a disallowed excess business loss (to allow the loss in 2018) and
  2. Any filed 2019 tax returns that reflect a disallowed 2019 loss and/or a carryover of a disallowed 2018 loss (to allow the 2019 loss and/or eliminate the carryover).

Note that the excess business loss limits also don’t apply to tax years that begin in 2020. Thus, such a 2020 year can be a window to start a business with large up-front-deductible items (for example capital items that can be 100% deducted under bonus depreciation or other provisions) and be able to offset the resulting net losses from the business against investment income or income from employment (see below).

Changes to the excess business loss limits 

The CARES Act made several retroactive corrections to the excess business loss rules as they were originally stated in the 2017 TCJA.

Most importantly, the CARES Act clarified that deductions, gross income or gain attributable to employment aren’t taken into account in calculating an excess business loss. This means that excess business losses can’t shelter either net taxable investment income or net taxable employment income. Be aware of that if you’re planning a start-up that will begin to generate, or will still be generating, excess business losses in 2021.

Another change provides that an excess business loss is taken into account in determining any NOL carryover but isn’t automatically carried forward to the next year. And a generally beneficial change states that excess business losses don’t include any deduction under the tax code provisions involving the NOL deduction or the qualified business income deduction that effectively reduces income taxes on many businesses. 

And because capital losses of non-corporations can’t offset ordinary income under the NOL rules:

  • Capital loss deductions aren’t taken into account in computing the excess business loss and
  • The amount of capital gain taken into account in computing the loss can’t exceed the lesser of capital gain net income from a trade or business or capital gain net income.

Contact us with any questions you have about this or other tax matters. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Do you need umbrella insurance?

Posted by Admin Posted on Aug 21 2020

Promoting and reporting diversity

Posted by Admin Posted on Aug 21 2020



Increasing diversity is a key initiative at many companies in 2020. This movement goes beyond social responsibility — it can lead to better-informed decision-making, improved productivity and enhanced value. Congress has also jumped on the diversity-and-inclusion bandwagon: Legislation is in the works that would require public companies to expand their disclosures about diversity.

Good for business

Even though it’s not reported on the balance sheet, an assembled workforce is one of your most valuable business assets. From the boardroom to the production line, people are essential to converting hard assets into revenue. However, the tone of any organization starts at the top, where key decisions are made.

Academic research has found that boards with diverse members have better financial reporting quality and are more likely to hold management accountable for poor financial performance. This concept also extends to private companies: Management teams with people from diverse backgrounds and functional areas expand the business’s abilities to respond to growth opportunities and potential threats.

Bills to expand disclosures

The Securities and Exchange Commission (SEC) currently requires limited disclosures on boardroom diversity. Under current SEC rules, a public company must disclose whether and how it considers diversity in identifying board of director nominees. However, the rules don’t provide a definition of diversity.

In recent years, the SEC rules have been criticized for failing to provide useful information to investors. Critics want broader rules that provide more information about corporate board diversity.

In response, Congress is currently considering legislation to expand the SEC disclosure requirements. In November 2019, the House passed the Improving Corporate Governance Through Diversity Act. It would require public companies’ proxy materials to disclose additional diversity information on directors and board nominees.

The Senate introduced a similar bill in March 2020. In addition to expanding proxy statement disclosures, the Senate’s Diversity in Corporate Leadership Act would set up a diversity advisory group within the SEC to recommend ways to increase “gender, racial and ethnic diversity” on public company boards. The group would be tasked with studying strategies to improve diversity on boards of directors and would be required within nine months of its creation to report its findings and recommendations to the SEC, the Senate Banking Committee and the House Financial Services Committee.

In late July, a coalition of industry groups that included the American Bankers Association and U.S. Chamber of Commerce urged the Senate Banking Committee to pass the bill. “Our associations and members support efforts to increase gender, racial, and ethnic diversity on corporate boards of directors, as diversity has become increasingly important to institutional investors, pension funds, and other stakeholders,” the groups said.

Be a leader, not a follower

For now, Congressional legislation on diversity matters appears to have taken a backseat to more pressing matters related to the COVID-19 pandemic. In the meantime, many companies are planning to voluntarily expand their disclosures for 2020. We can help assess your level of boardroom or management team diversity — and provide cutting-edge disclosures that showcase your commitment to race, gender and ethnic diversity in the workplace.  Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

What happens if an individual can’t pay taxes

Posted by Admin Posted on Aug 21 2020



While you probably don’t have any problems paying your tax bills, you may wonder: What happens in the event you (or someone you know) can’t pay taxes on time? Here’s a look at the options.

Most importantly, don’t let the inability to pay your tax liability in full keep you from filing a tax return properly and on time. In addition, taking certain steps can keep the IRS from instituting punitive collection processes.

Common penalties

The “failure to file” penalty accrues at 5% per month or part of a month (to a maximum of 25%) on the amount of tax your return shows you owe. The “failure to pay” penalty accrues at only 0.5% per month or part of a month (to 25% maximum) on the amount due on the return. (If both apply, the failure to file penalty drops to 4.5% per month (or part) so the combined penalty remains at 5%.) The maximum combined penalty for the first five months is 25%. Thereafter, the failure to pay penalty can continue at 0.5% per month for 45 more months. The combined penalties can reach 47.5% over time in addition to any interest.

Undue hardship extensions

Keep in mind that an extension of time to file your return doesn’t mean an extension of time to pay your tax bill. A payment extension may be available, however, if you can show payment would cause “undue hardship.” You can avoid the failure to pay penalty if an extension is granted, but you’ll be charged interest. If you qualify, you’ll be given an extra six months to pay the tax due on your return. If the IRS determines a “deficiency,” the undue hardship extension can be up to 18 months and in exceptional cases another 12 months can be added.

Borrowing money

If you don’t think you can get an extension of time to pay your taxes, borrowing money to pay them should be considered. You may be able to get a loan from a relative, friend or commercial lender. You can also use credit or debit cards to pay a tax bill, but you’re likely to pay a relatively high interest rate and possibly a fee.

Installment agreement

Another way to defer tax payments is to request an installment payment agreement. This is done by filing a form and the IRS charges a fee for installment agreements. Even if a request is granted, you’ll be charged interest on any tax not paid by its due date. But the late payment penalty is half the usual rate (0.25% instead of 0.5%), if you file by the due date (including extensions).

The IRS may terminate an installment agreement if the information provided in applying is inaccurate or incomplete or the IRS believes the tax collection is in jeopardy. The IRS may also modify or terminate an installment agreement in certain cases, such as if you miss a payment or fail to pay another tax liability when it’s due.

Avoid serious consequences

Tax liabilities don’t go away if left unaddressed. It’s important to file a properly prepared return even if full payment can’t be made. Include as large a partial payment as you can with the return and work with the IRS as soon as possible. The alternative may include escalating penalties and having liens assessed against your assets and income. Down the road, the collection process may also include seizure and sale of your property. In many cases, these nightmares can be avoided by taking advantage of options offered by the IRS.  Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Financial dashboards can steer your nonprofit toward financial success

Posted by Admin Posted on Aug 21 2020



Not-for-profits increasingly are adopting a corporate world tool: financial dashboards. A dashboard is a summary of an organization’s progress toward a specific goal over time — or a snapshot of its current situation. Dashboards are designed to help boards and other constituents visualize important metrics, or key performance indicators (KPIs). But to facilitate informed, timely decisions, it’s critical to select the right KPIs.

Choosing the right KPIs

A nonprofit’s financial KPIs will depend largely on factors such as its revenue streams, key expense factors, budget and strategic goals. To include the most useful metrics, identify your organization’s “business” drivers and solicit input from your audience.

Additionally, determine which factors affect the reliability of your revenue streams — and which influence expense levels. Then create KPIs that monitor those factors. Think, too, about the level at which you want to track your KPIs. You could monitor them by individual program or function, or at the organizational level.

Looking at an example

Say that a performing arts organization’s board is concerned about financial stability and liquidity. The nonprofit’s primary business drivers are proper pricing and maximum attendance. Its dashboard might include KPIs such as an increase or decrease in operating results, the level of liquid unrestricted net assets, current debt ratio (total liabilities / total assets), and progress toward a desired number of months’ cash on hand (cash on hand + current unrestricted investments / average monthly expenses). The organization also would want to monitor the number of tickets sold and average revenue per performance.

Over time, this nonprofit likely would need to adjust its KPIs as its strategies, priorities or programs change. As many organizations have learned recently, what was “key” last year isn’t necessarily key in today’s challenging environment.

Considering popular KPIs

Certain KPIs are popular among nonprofits. These include:

Current ratio. This reflects your organization’s ability to satisfy debts coming due within the year. Divide current assets by current liabilities. A ratio of “1” or more generally means you can meet those obligations.

Projected year-end cash. Based on the current cash position plus budgeted cash flows through the end of the fiscal year, this projects liquidity and ability to satisfy upcoming commitments.

Year-to-date revenue and expense. This KPI measures actual results against a budget and lets you know separately if revenues and expenses are in line with expectations or within a reasonable range.

Program efficiency ratio. The ratio assesses an organization’s mission efficiency by showing the amount of funding that goes to programs vs. administrative or other expenses. Calculate it by dividing a program’s expenses by its overall expenses.

Meaningful metrics

By providing a target such as budgeted amounts, chronological trends or external benchmarks, you’ll make the metrics more meaningful for your audiences. Contact us for help creating a dashboard with appropriate KPIs. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

The President’s action to defer payroll taxes: What does it mean for your business?

Posted by Admin Posted on Aug 21 2020



On August 8, President Trump signed four executive actions, including a Presidential Memorandum to defer the employee’s portion of Social Security taxes for some people. These actions were taken in an effort to offer more relief due to the COVID-19 pandemic.

The action only defers the taxes, which means they’ll have to be paid in the future. However, the action directs the U.S. Treasury Secretary to “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.”

Legislative history

On March 18, 2020, President Trump signed into law the Families First Coronavirus Response Act. A short time later, President Trump signed into law the Coronavirus, Aid, Relief and Economic Security (CARES) Act. Both laws contain economic relief provisions for employers and workers affected by the COVID-19 crisis.

The CARES Act allows employers to defer paying their portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022.

New bill talks fall apart 

Discussions of another COVID-19 stimulus bill between Democratic leaders and White House officials broke down in early August. As a result, President Trump signed the memorandum that provides a payroll tax deferral for many — but not all — employees.

The memorandum directs the U.S. Treasury Secretary to defer withholding, deposit and payment of the tax on wages or compensation, as applicable, paid during the period of September 1, 2020, through December 31, 2020. This means that the employee’s share of Social Security tax will be deferred for that time period.

However, the memorandum contains the following two conditions:

  • The deferral is available with respect to any employee, the amount of whose wages or compensation, as applicable, payable during any biweekly pay period generally is less than $4,000, calculated on a pretax basis, or the equivalent amount with respect to other pay periods; and 
  • Amounts will be deferred without any penalties, interest, additional amount, or addition to the tax. 

The Treasury Secretary was ordered to provide guidance to implement the memorandum.

Legal authority

The memorandum (and the other executive actions signed on August 8) note that they’ll be implemented consistent with applicable law. However, some are questioning President Trump’s legal ability to implement the employee Social Security tax deferral.

Employer questions

Employers have questions and concerns about the payroll tax deferral. For example, since this is only a deferral, will employers have to withhold more taxes from employees’ paychecks to pay the taxes back, beginning January 1, 2021? Without a law from Congress to actually forgive the taxes, will employers be liable for paying them back? What if employers can’t get their payroll software changed in time for the September 1 start of the deferral? Are employers and employees required to take part in the payroll tax deferral or is it optional?

Contact us if you have questions about how to proceed. And stay tuned for more details about this action and any legislation that may pass soon.  Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

The sweet sound of financial success

Posted by Admin Posted on Aug 14 2020

3 steps to “stress test” your business

Posted by Admin Posted on Aug 14 2020



During the COVID-19 crisis, you can’t afford to lose sight of other ongoing risk factors, such as cyberthreats, fraud, emerging competition and natural disasters. A so-called “stress test” can help reveal blind spots that threaten to disrupt your business. A comprehensive stress test requires the following three steps.

1. Identify the risks your business faces

Here are the main types of risks to consider:

  • Operational risks (based on the inner workings of the company),
  • Financial risks (involving how the company manages its finances, including the threat of fraud and the effectiveness of internal control procedures),
  • Compliance risks (related to issues that might attract the attention of government regulators, such as environmental agencies and the IRS), and
  • Strategic risks (regarding the company’s market focus and its ability to respond to changes in customer preferences).

If you’ve conducted a risk analysis in prior years, beware: Current risk factors may be different due to changes in market conditions, business operations and technology. For example, if your business pivoted to more online orders or remote working arrangements during the pandemic, it may now be more exposed to cyberattacks than it previously was.

2. Establish a risk management strategy

Meet with managers from all functional lines of business — including sales and marketing, human resources, operations, procurement, IT, and finance and accounting — to discuss the risks that have been identified. The goal is to improve your team’s understanding of business threats and to brainstorm ways to manage those risks.

For example, if your company operates in an area prone to natural disasters, such as earthquakes or wildfires, you should have a disaster recovery plan in place. Review copies of the disaster recovery plan and ask when it was last updated.

In addition to asking for feedback about identified risks, encourage managers to share any additional risk factors and projections regarding the potential financial impact. Their frontline experience can be eye-opening, especially during these unprecedented times.

3. Review and update your strategy

Managing risk is a continuous process. After creating your initial risk mitigation strategy, your management team should meet periodically to review whether it’s working. If it isn’t, brainstorm ways to fortify it.

For example, if your company’s disaster recovery plan has been activated recently, ask your management team to assess its effectiveness. Then consider making changes based on that assessment.

Need help?

While risk is part of operating a business, some organizations are more prepared to handle the unexpected than others. To ensure your company falls into the “more prepared” category, implement a stress test. We can help you assess current risks and develop a plan that’s right for you. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

More parents may owe “nanny tax” this year, due to COVID-19

Posted by Admin Posted on Aug 14 2020



In the COVID-19 era, many parents are hiring nannies and babysitters because their daycare centers and summer camps have closed. This may result in federal “nanny tax” obligations.

Keep in mind that the nanny tax may apply to all household workers, including housekeepers, babysitters, gardeners or others who aren’t independent contractors.

If you employ someone who’s subject to the nanny tax, you aren’t required to withhold federal income taxes from the individual’s pay. You only must withhold if the worker asks you to and you agree. (In that case, ask the nanny to fill out a Form W-4.) However, you may have other withholding and payment obligations.

Withholding FICA and FUTA

You must withhold and pay Social Security and Medicare taxes (FICA) if your nanny earns cash wages of $2,200 or more (excluding food and lodging) during 2020. If you reach the threshold, all of the wages (not just the excess) are subject to FICA.

However, if your nanny is under 18 and childcare isn’t his or her principal occupation, you don’t have to withhold FICA taxes. Therefore, if your nanny is really a student/part-time babysitter, there’s no FICA tax liability.

Both employers and household workers have an obligation to pay FICA taxes. Employers are responsible for withholding the worker’s share of FICA and must pay a matching employer amount. FICA tax is divided between Social Security and Medicare. Social Security tax is 6.2% for the both the employer and the worker (12.4% total). Medicare tax is 1.45% each for both the employer and the worker (2.9% total).

If you prefer, you can pay your nanny’s share of Social Security and Medicare taxes, instead of withholding it from pay.

Note: It’s unclear how these taxes will be affected by the executive order that President Trump signed on August 8, which allows payroll taxes to be deferred from September 1 through December 31, 2020.

You also must pay federal unemployment (FUTA) tax if you pay $1,000 or more in cash wages (excluding food and lodging) to your worker in any calendar quarter of this year or last year. FUTA tax applies to the first $7,000 of wages. The maximum FUTA tax rate is 6%, but credits reduce it to 0.6% in most cases. FUTA tax is paid only by the employer.

Reporting and paying

You pay nanny tax by increasing your quarterly estimated tax payments or increasing withholding from your wages — rather than making an annual lump-sum payment.

You don’t have to file any employment tax returns, even if you’re required to withhold or pay tax (unless you own a business, see below). Instead, you report employment taxes on Schedule H of your tax return.

On your return, you include your employer identification number (EIN) when reporting employment taxes. The EIN isn’t the same as your Social Security number. If you need an EIN, you must file Form SS-4.

However, if you own a business as a sole proprietor, you must include the taxes for your nanny on the FICA and FUTA forms (940 and 941) that you file for your business. And you use the EIN from your sole proprietorship to report the taxes. You also must provide your nanny with a Form W-2.

Recordkeeping

Maintain careful tax records for each household employee. Keep them for at least four years from the later of the due date of the return or the date the tax was paid. Records include: employee name, address, Social Security number; employment dates; wages paid; withheld FICA or income taxes; FICA taxes paid by you for your worker; and copies of forms filed.

Contact us for help or with questions about how to comply with these requirements. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Should your nonprofit accept that new grant?

Posted by Admin Posted on Aug 14 2020



Current financial pressures mean that your not-for-profit probably can’t afford to pass up offers of support. Yet you need to be careful about blindly accepting grants. Smaller nonprofits that don’t have formal grant evaluation processes are at risk of accepting grants with unmanageable burdens and costs. But large organizations also need to be careful because they have significantly more grant opportunities — including for grants that are outside their current expertise and experience.

Here’s how accepting the wrong grant may backfire in costly and time-consuming ways.

Administrative burdens

Some grants could result in excessive administrative burdens. For example, you could be caught off guard by the reporting requirements that come with a grant as small as $5,000. You might not have staff with the requisite reporting experience, or you may lack the processes and controls to collect the necessary data. Often government funds passed through to your nonprofit still carry the requirements that are associated with the original funding, which can be quite extensive.

Grants that go outside your organization’s original mission can pose problems, too. Managing the grant may involve a steep learning curve. You could even face an IRS challenge to your exempt status.

Cost inefficiencies

Another risk is cost inefficiencies. A grant can create unforeseen expenses that undermine its face value. For example, new grants from either federal or foundation sources may have explicit administrative requirements your organization must satisfy.

Additionally, your nonprofit might run up expenses to complete the program that aren’t allowable or reimbursable under the grant. Before saying “yes” to a grant, net all these costs against the original grant amount to determine its true benefit.

Lost opportunities

For any unreimbursed costs associated with new grants, consider other ways your organization might spend that money (and staff resources). Could you get more mission-related bang for your buck if you spend it on existing programs?

Quantifying the benefit of a new grant or program can be equally or more challenging than identifying its costs. Evaluate every program to quantify its impact on your mission. This will allow you to answer the critical question when evaluating a potential grant: Are there existing programs that can be expanded using the same funds to yield a greater benefit to your mission?

Do your homework

Grants from the government or a foundation can help your nonprofit expand its reach and improve its effectiveness in both the short and long term. But they also can hamstring your organizations in unexpected ways. Contact us for help or more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

The possible tax consequences of PPP loans

Posted by Admin Posted on Aug 14 2020



If your business was fortunate enough to get a Paycheck Protection Program (PPP) loan taken out in connection with the COVID-19 crisis, you should be aware of the potential tax implications.

PPP basics

The Coronavirus Aid, Relief and Economic Security (CARES) Act, which was enacted on March 27, 2020, is designed to provide financial assistance to Americans suffering during the COVID-19 pandemic. The CARES Act authorized up to $349 billion in forgivable loans to small businesses for job retention and certain other expenses through the PPP. In April, Congress authorized additional PPP funding and it’s possible more relief could be part of another stimulus law.

The PPP allows qualifying small businesses and other organizations to receive loans with an interest rate of 1%. PPP loan proceeds must be used by the business on certain eligible expenses. The PPP allows the interest and principal on the PPP loan to be entirely forgiven if the business spends the loan proceeds on these expense items within a designated period of time and uses a certain percentage of the PPP loan proceeds on payroll expenses.

An eligible recipient may have a PPP loan forgiven in an amount equal to the sum of the following costs incurred and payments made during the covered period:

  1. Payroll costs;
  2. Interest (not principal) payments on covered mortgage obligations (for mortgages in place before February 15, 2020);
  3. Payments for covered rent obligations (for leases that began before February 15, 2020); and
  4. Certain utility payments.

An eligible recipient seeking forgiveness of indebtedness on a covered loan must verify that the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage, make payments on a covered lease or make eligible utility payments.

Cancellation of debt income

In general, the reduction or cancellation of non-PPP indebtedness results in cancellation of debt (COD) income to the debtor, which may affect a debtor’s tax bill. However, the forgiveness of PPP debt is excluded from gross income. Your tax attributes (net operating losses, credits, capital and passive activity loss carryovers, and basis) wouldn’t generally be reduced on account of this exclusion.

Expenses paid with loan proceeds

The IRS has stated that expenses paid with proceeds of PPP loans can’t be deducted, because the loans are forgiven without you having taxable COD income. Therefore, the proceeds are, in effect, tax-exempt income. Expenses allocable to tax-exempt income are nondeductible, because deducting the expenses would result in a double tax benefit.

However, the IRS’s position on this issue has been criticized and some members of Congress have argued that the denial of the deduction for these expenses is inconsistent with legislative intent. Congress may pass new legislation directing IRS to allow deductions for expenses paid with PPP loan proceeds.

PPP Audits

Be aware that leaders at the U.S. Treasury and the Small Business Administration recently announced that recipients of Paycheck Protection Program (PPP) loans of $2 million or more should expect an audit if they apply for loan forgiveness. This safe harbor will protect smaller borrowers from PPP audits based on good faith certifications. However, government leaders have stated that there may be audits of smaller PPP loans if they see possible misuse of funds.

Contact us with any further questions you might have on PPP loan forgiveness. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Raising money-smart kids

Posted by Admin Posted on Aug 10 2020

Forecasting financial results for a start-up business

Posted by Admin Posted on Aug 10 2020



There’s a bright side to today’s unprecedented market conditions: Agile people may discover opportunities to start new business ventures. Start-ups need a comprehensive business plan, including detailed financial forecasts, to drum up capital from investors and lenders. Entrepreneurs may also use forecasts as yardsticks for evaluating and improving performance over time.

However, forecasting can be challenging for a business with no track record, especially during today’s unprecedented conditions. Here’s an objective approach to developing forecasts based on realistic, market-based assumptions.

Starting point

Revenue is a critical line item in the forecast, because it drives many other accounts, such as direct costs, accounts receivable and inventory. To create a credible estimate of your start-up’s revenue-generating potential, consider the following questions:

  • What’s the size of the potential market?
  • How many competitors are vying for market share? What positioning strategies will the start-up use to compete?
  • How will the start-up price its products and services? Will its prices fall below, match or surpass those of competitors?
  • How will the start-up distribute products or services?
  • How many customers can the start-up support with its existing infrastructure? How will the start-up scale its operations to meet forecasted increases in demand?

It’s generally a good idea to develop multiple revenue scenarios — best, worst and most likely case. Then weight each scenario based on how likely it is to happen.

Costs and investments

Next, the costs directly attributable to producing revenue, such as materials, utilities and labor, need to be identified and quantified. These variable costs are typically stated as a percentage of forecasted revenue.

Some expenses — such as rent, insurance and administrative salaries — are fixed. That is, they remain constant over the short run, though they often have limited capacity. For example, you might need to add office space and headcount once a start-up grows beyond a certain level.

Besides expenses that are recorded on the income statement, start-ups may need working capital to ramp up operations. They may also need to invest in fixed assets, such as equipment, furniture and software. These expenditures are typically capitalized (reported) on the balance sheet and gradually depreciated their useful lives.

Finally, it’s time to focus on the missing puzzle piece: financing. You may need an initial round of capital to acquire (or produce) inventory, purchase essential assets and generate buzz about your new offering. Plus, start-ups often need ongoing access to capital — such as a revolving line of credit — to help fund the cash conversion cycle as the business grows.

Don’t let a competitor beat you to the punch!

Time is of the essence if you want to capitalize on emerging opportunities. So that you can focus on starting the business, we can help create an objective, defensible financial forecast for your start-up and benchmark your forecasted results against other successful businesses. This diligence will help impress prospective investors and lenders — and build value over the long run.  Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

The tax implications of employer-provided life insurance

Posted by Admin Posted on Aug 10 2020



Does your employer provide you with group term life insurance? If so, and if the coverage is higher than $50,000, this employee benefit may create undesirable income tax consequences for you.

“Phantom income”

The first $50,000 of group term life insurance coverage that your employer provides is excluded from taxable income and doesn’t add anything to your income tax bill. But the employer-paid cost of group term coverage in excess of $50,000 is taxable income to you. It’s included in the taxable wages reported on your Form W-2 — even though you never actually receive it. In other words, it’s “phantom income.”

What’s worse, the cost of group term insurance must be determined under a table prepared by IRS even if the employer’s actual cost is less than the cost figured under the table. Under these determinations, the amount of taxable phantom income attributed to an older employee is often higher than the premium the employee would pay for comparable coverage under an individual term policy. This tax trap gets worse as the employee gets older and as the amount of his or her compensation increases.

Check your W-2

What should you do if you think the tax cost of employer-provided group term life insurance is undesirably high? First, you should establish if this is actually the case. If a specific dollar amount appears in Box 12 of your Form W-2 (with code “C”), that dollar amount represents your employer’s cost of providing you with group-term life insurance coverage in excess of $50,000, less any amount you paid for the coverage. You’re responsible for federal, state and local taxes on the amount that appears in Box 12 and for the associated Social Security and Medicare taxes as well.

But keep in mind that the amount in Box 12 is already included as part of your total “Wages, tips and other compensation” in Box 1 of the W-2, and it’s the Box 1 amount that’s reported on your tax return

Consider some options

If you decide that the tax cost is too high for the benefit you’re getting in return, you should find out whether your employer has a “carve-out” plan (a plan that carves out selected employees from group term coverage) or, if not, whether it would be willing to create one. There are several different types of carve-out plans that employers can offer to their employees.

For example, the employer can continue to provide $50,000 of group term insurance (since there’s no tax cost for the first $50,000 of coverage). Then, the employer can either provide the employee with an individual policy for the balance of the coverage, or give the employee the amount the employer would have spent for the excess coverage as a cash bonus that the employee can use to pay the premiums on an individual policy.

Contact us if you have questions about group term coverage or how much it is adding to your tax bill.  Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

How to codify your nonprofit’s ethics

Posted by Admin Posted on Aug 10 2020



Does your not-for-profit have a code of ethical conduct? According to the Association of Certified Fraud Examiners, establishing and enforcing an ethical code is associated with 50% lower fraud losses. Codes of conduct aren’t just about fraud prevention, though. Holding staffers and board members to an ethical code helps your nonprofit communicate its values to the public and reassures supporters.

Practicing ideals

Your organization probably already has a mission statement that explains its values and goals. So why would you also need a code of ethics? Think of it as a statement about how you practice ideals. A code not only guides your organization’s day-to-day operations but also your employees’ and board members’ conduct.

The first step in creating a code is determining your values. To that end, review your strategic plan and mission statement to identify the ideals specific to your organization. Then look at peer nonprofits to see which values you share, such as fairness, justice and commitment to the community. Also consider ethical and successful behaviors in your industry. For example, if your staff must be licensed, you may want to incorporate those requirements into your written code.

Documenting expectations

Now you’re ready to document your expectations and the related policies for your staff and board members. Most nonprofits should address such general areas as mission, governance, legal compliance and conflicts of interest.

But depending on the type and size of your organization, also consider addressing the responsible stewardship of funds; openness and disclosure; inclusiveness and diversity; program evaluation; and professional integrity. For each topic, discuss how your nonprofit will abide by the law, be accountable to the public and responsibly handle resources.

Communicating the code

When the code of ethics is final, your board must formally approve it. To implement and communicate it to staffers, present hypothetical examples of situations that they might encounter. For example, what should an employee do if a board member exerts pressure to use his or her company as a vendor? Also address real-life scenarios and how your organization handled them.

To help ensure accountability, ask staffers and board members to sign the code of ethical conduct. Instruct them to report any suspicions or concerns to a supervisor or HR or via a confidential reporting mechanism, such as a fraud hotline.

Contact us with questions or if you need assistance to create an ethical culture. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

File cash transaction reports for your business — on paper or electronically

Posted by Admin Posted on Aug 10 2020



Does your business receive large amounts of cash or cash equivalents? You may be required to submit forms to the IRS to report these transactions.

Filing requirements

Each person engaged in a trade or business who, in the course of operating, receives more than $10,000 in cash in one transaction, or in two or more related transactions, must file Form 8300. Any transactions conducted in a 24-hour period are considered related transactions. Transactions are also considered related even if they occur over a period of more than 24 hours if the recipient knows, or has reason to know, that each transaction is one of a series of connected transactions.

To complete a Form 8300, you will need personal information about the person making the cash payment, including a Social Security or taxpayer identification number.

You should keep a copy of each Form 8300 for five years from the date you file it, according to the IRS.

Reasons for the reporting

Although many cash transactions are legitimate, the IRS explains that “information reported on (Form 8300) can help stop those who evade taxes, profit from the drug trade, engage in terrorist financing and conduct other criminal activities. The government can often trace money from these illegal activities through the payments reported on Form 8300 and other cash reporting forms.”

What’s considered “cash”

For Form 8300 reporting, cash includes U.S. currency and coins, as well as foreign money. It also includes cash equivalents such as cashier’s checks (sometimes called bank checks), bank drafts, traveler’s checks and money orders.

Money orders and cashier’s checks under $10,000, when used in combination with other forms of cash for a single transaction that exceeds $10,000, are defined as cash for Form 8300 reporting purposes.

Note: Under a separate reporting requirement, banks and other financial institutions report cash purchases of cashier’s checks, treasurer’s checks and/or bank checks, bank drafts, traveler’s checks and money orders with a face value of more than $10,000 by filing currency transaction reports.

E-filing and batch filing

Businesses required to file reports of large cash transactions on Form 8300 should know that in addition to filing on paper, e-filing is an option. The form is due 15 days after a transaction and there’s no charge for the e-file option. Businesses that file electronically get an automatic acknowledgment of receipt when they file.

The IRS also reminds businesses that they can “batch file” their reports, which is especially helpful to those required to file many forms.

Setting up an account

To file Form 8300 electronically, a business must set up an account with FinCEN’s BSA E-Filing System. For more information, interested businesses can also call the BSA E-Filing Help Desk at 866-346-9478 (Monday through Friday from 8 am to 6 pm EST) or email them at BSAEFilingHelp@fincen.gov. Contact us with any questions or for assistance.  Sam Brown, CPA, Troy, Ohio, www.sbcpaohio.com

 

© 2020

You don’t have to be a detective to find fraud

Posted by Admin Posted on July 31 2020

Reporting CAMs in the COVID-19 era

Posted by Admin Posted on July 31 2020



Starting in 2019, auditors’ reports for certain public companies must contain a new element: critical audit matters (CAMs). The requirement was in effect for audits of large accelerated filers (with market values of $700 million or more) in fiscal years ending on or after June 30, 2019. It goes into effect for smaller public companies in fiscal years ending on or after December 15, 2020.

Regardless of where you are in the implementation process, anticipating the CAMs that will appear in your auditor’s report may be especially challenging given the uncertainty caused by the COVID-19 crisis.

The basics

The auditor’s report offers an opinion as to whether the financial statements fairly present the company’s financial position, results of operations and cash flows in conformity with U.S. Generally Accepted Accounting Principles or another applicable financial reporting framework. In 2017, the Public Company Accounting Oversight Board (PCAOB) expanded the pass-fail format of the auditor’s report.

The PCAOB rule requires auditors to describe CAMs, which are matters that, from the auditor’s point of view, require especially challenging, subjective or complex judgment. CAMs aren’t necessarily meant to reflect negatively on the company or indicate that the auditor found a misstatement or internal control deficiencies. But they can raise a red flag to stakeholders.

Close-up on CAMs

When identifying CAMs, the auditor must:

  • Describe the principal considerations that led the auditor to determine that the matter is a CAM,
  • Describe how the CAM was addressed in the audit, and
  • Refer to the relevant financial statement accounts or disclosures that relate to the CAM.

In May, research firm Audit Analytics reported that the four most common CAMs in auditors’ reports issued for large accelerated filers through April 30, 2020, were: 1) goodwill and intangible assets, 2) revenue recognition, 3) structure events (valuation of acquiring assets), and 4) income taxes. Together, these topics accounted for more than half of all CAMs. These matters are expected to continue to present auditing challenges during the COVID-19 crisis.

Moving target

CAMs may change from year to year, based on audit complexity, changing risk environments and new accounting standards. Each year, auditors determine and communicate CAMs in connection with the audit of the company’s financial statements for the current period.

A significant event — such as a cybersecurity breach, a hurricane or the COVID-19 pandemic — may cause the auditor to report new CAMs. Though such an event itself may not be a CAM, it may be a principal consideration in the auditor’s determination of whether a CAM exists. And such events may affect how CAMs were addressed in the audit.

No surprises

Management and the audit committee should know what to expect when the financial statements are delivered. A dry run before year end can help you anticipate the CAMs that will appear on your auditor’s report for fiscal year 2020, so you can provide clear, consistent messaging to stakeholders. Contact us for more information.  Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Are scholarships tax-free or taxable?

Posted by Admin Posted on July 31 2020



COVID-19 is changing the landscape for many schools this fall. But many children and young adults are going back, even if it’s just for online learning, and some parents will be facing tuition bills. If your child has been awarded a scholarship, that’s cause for celebration! But be aware that there may be tax implications.

Scholarships (and fellowships) are generally tax-free for students at elementary, middle and high schools, as well as those attending college, graduate school or accredited vocational schools. It doesn’t matter if the scholarship makes a direct payment to the individual or reduces tuition.

Tuition and related expenses

However, for a scholarship to be tax-free, certain conditions must be satisfied. A scholarship is tax-free only to the extent it’s used to pay for:

  • Tuition and fees required to attend the school and
  • Fees, books, supplies and equipment required of all students in a particular course.

For example, if a computer is recommended but not required, buying one wouldn’t qualify. Other expenses that don’t qualify include the cost of room and board, travel, research and clerical help.

To the extent a scholarship award isn’t used for qualifying items, it’s taxable. The recipient is responsible for establishing how much of an award is used for tuition and eligible expenses. Maintain records (such as copies of bills, receipts and cancelled checks) that reflect the use of the scholarship money.

Award can’t be payment for services

Subject to limited exceptions, a scholarship isn’t tax-free if the payments are linked to services that your child performs as a condition for receiving the award, even if the services are required of all degree candidates. Therefore, a stipend your child receives for required teaching, research or other services is taxable, even if the child uses the money for tuition or related expenses.

What if you, or a family member, is an employee of an education institution that provides reduced or free tuition? A reduction in tuition provided to you, your spouse or your dependents by the school at which you work isn’t included in your income and isn’t subject to tax.

Returns and recordkeeping

If a scholarship is tax-free and your child has no other income, the award doesn’t have to be reported on a tax return. However, any portion of an award that’s taxable as payment for services is treated as wages. Estimated tax payments may have to be made if the payor doesn’t withhold enough tax. Your child should receive a Form W-2 showing the amount of these “wages” and the amount of tax withheld, and any portion of the award that’s taxable must be reported, even if no Form W-2 is received.

These are just the basic rules. Other rules and limitations may apply. For example, if your child’s scholarship is taxable, it may limit other higher education tax benefits to which you or your child are entitled. As we approach the new school year, best wishes for your child’s success in school. And please contact us if you wish to discuss these or other tax matters further.  Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Financial reporting for nonprofits that have teamed up

Posted by Admin Posted on July 31 2020



Not-for-profits sometimes team up with other entities to boost efficiency, save money and better serve both organizations’ constituencies. This can be a smart move — so long as your accounting staff knows how to report the activities of the two organizations. How you handle reporting depends on the nature of your new relationship.

Collaborative arrangements

The simplest relationship between nonprofits for accounting purposes may be a collaborative arrangement. These typically are contractual agreements in which two or more organizations actively participate in a joint operating activity.

The nonprofit that’s considered the “principal” for the transaction should report costs incurred and revenues generated from transactions with third parties on a gross basis in a statement of activities. The principal is usually the entity that has control of the goods or services provided in the transaction. Payments between participants are presented according to their “nature,” following accounting guidance for the type of revenue or expense the transaction involves. Participants in collaborative arrangements also must make certain financial statement disclosures, such as the purpose of the arrangement.

Acquisitions and mergers

Another collaborative option is for the board of one organization to cede control of its operations to another entity as part of its decision to engage in a cooperative activity. This is an acquisition, and no new legal entity is created. The remaining organization is considered the acquirer and must determine how to record the acquisition based on the fair value of the acquired nonprofit’s assets and liabilities.

If the value of the assets net of the liabilities received is greater than the amount paid in the acquisition, the difference should be recorded as a contribution. If the value is lower than the price paid by the acquirer, the difference is generally recorded as goodwill. But, if the operations of the acquired organization are expected to be predominantly supported by contributions and return on investments, the difference should be recorded as a separate charge in the acquirer’s statement of activities.

If it’s your nonprofit that cedes control of its operations to another entity, that organization may need to consolidate your organization (including the cooperative activity) beginning on the “acquisition” date. If your nonprofit will present separate financial statements, you must determine whether to establish a new basis for reporting assets and liabilities based on the other entity’s basis.

Finally, what if your organization merges with another and forms a new legal entity? In such situations, the two entities’ assets and liabilities are combined as of the merger date.

Avoid complications

Financial reporting practices must change when you collaborate with another entity. But these rules can be complicated, so contact us with your questions.  Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Why do partners sometimes report more income on tax returns than they receive in cash?

Posted by Admin Posted on July 31 2020



If you’re a partner in a business, you may have come across a situation that gave you pause. In a given year, you may be taxed on more partnership income than was distributed to you from the partnership in which you’re a partner.

Why is this? The answer lies in the way partnerships and partners are taxed. Unlike regular corporations, partnerships aren’t subject to income tax. Instead, each partner is taxed on the partnership’s earnings — whether or not they’re distributed. Similarly, if a partnership has a loss, the loss is passed through to the partners. (However, various rules may prevent a partner from currently using his share of a partnership’s loss to offset other income.)

Separate entity

While a partnership isn’t subject to income tax, it’s treated as a separate entity for purposes of determining its income, gains, losses, deductions and credits. This makes it possible to pass through to partners their share of these items.

A partnership must file an information return, which is IRS Form 1065. On Schedule K of Form 1065, the partnership separately identifies income, deductions, credits and other items. This is so that each partner can properly treat items that are subject to limits or other rules that could affect their correct treatment at the partner’s level. Examples of such items include capital gains and losses, interest expense on investment debts and charitable contributions. Each partner gets a Schedule K-1 showing his or her share of partnership items.

Basis and distribution rules ensure that partners aren’t taxed twice. A partner’s initial basis in his partnership interest (the determination of which varies depending on how the interest was acquired) is increased by his share of partnership taxable income. When that income is paid out to partners in cash, they aren’t taxed on the cash if they have sufficient basis. Instead, partners just reduce their basis by the amount of the distribution. If a cash distribution exceeds a partner’s basis, then the excess is taxed to the partner as a gain, which often is a capital gain.

Here’s an example

Two individuals each contribute $10,000 to form a partnership. The partnership has $80,000 of taxable income in the first year, during which it makes no cash distributions to the two partners. Each of them reports $40,000 of taxable income from the partnership as shown on their K-1s. Each has a starting basis of $10,000, which is increased by $40,000 to $50,000. In the second year, the partnership breaks even (has zero taxable income) and distributes $40,000 to each of the two partners. The cash distributed to them is received tax-free. Each of them, however, must reduce the basis in his partnership interest from $50,000 to $10,000.

Other rules and limitations

The example and details above are an overview and, therefore, don’t cover all the rules. For example, many other events require basis adjustments and there are a host of special rules covering noncash distributions, distributions of securities, liquidating distributions and other matters. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

 

© 2020

Employee engagement reaches record highs

Posted by Admin Posted on July 24 2020

Drive success with dashboard reports

Posted by Admin Posted on July 24 2020



Timely, relevant financial data is critical to managing a business in today’s unprecedented conditions. Similar to the control panel in a vehicle or machine, dashboard reports provide a real-time snapshot of how your business is performing.

Why you need a dashboard report

Everything in a dashboard report can typically be found elsewhere in the company’s financial reporting systems, just in a less user-friendly format. Rather than report new information, a dashboard report captures the most critical data, based on the nature of the business. It can provide an early warning system for potential problems, allowing you to pivot as needed to minimize losses and jump on emerging opportunities in the marketplace.

To maximize the effectiveness of dashboard reports, make them accessible to managers across your organization via the company’s internal website or weekly email blasts. Widespread, easy access will allow your management team to quickly identify trends that require immediate attention. Additionally, businesses that are struggling during a reorganization or debt restructuring sometimes share these reports with their lenders as a condition of their continued support.

Metrics that matter

When deciding which information to target, look at your company’s loan covenants — lenders usually have a good sense of which metrics are worth monitoring. Then conduct your own risk assessment. What’s relevant varies depending on your industry, general economic conditions and the nature of your business operations.

In addition to tracking cash balances and receipts, most dashboard reports include the following ratios:

  • Gross margin [(revenue – cost of sales) / revenue],
  • Current ratio (current assets / current liabilities), and
  • Interest coverage ratio (earnings before interest and taxes / interest expense).

From here, consider adding a handful of company- or industry-specific performance metrics. For example, a warehouse might report daily shipments and inventory turnover. A hotel that’s struggling to reopen might provide a schedule of net operating income, average room rates and vacancy rates compared to the previous week or month. A law firm might report each partner’s realization rate.

A diagnostic test

Comprehensive financial statements are the best source of information about your company’s long-term stability and profitability — especially for external stakeholders. But dashboard reporting is critical for internal purposes, too. These reports can help assess a sudden change in market conditions, interim performance or potential downward trend in your financial performance. Contact us to help you compile a meaningful dashboard reporting process for your organization. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Main Street Lending Program now open to nonprofit applicants

Posted by Admin Posted on July 24 2020



Last week, the Federal Reserve announced that not-for-profit organizations now may apply for loans under the $600 billion Main Street Lending Program. Previously open only to for-profit businesses with more than 100 employees, the program offers low-interest loans with relatively relaxed repayment terms. If your organization needs funding to keep operating during this difficult period, a Main Street loan may be an option.

The Basics

Initially, the Main Street program offered loans through three credit facilities but has added two more specifically for nonprofits: Nonprofit Organization New Loan Facility and Nonprofit Expanded Loan Facility. The difference between the two is that the Expanded Facility makes larger loans to qualified applicants, such as universities and hospitals.

Eligible banks accept applications and extend loans, but the Fed takes a 95% stake in them. Like the Paycheck Protection Act, Main Street is funded in part by CARES Act funds. It is designed to help keep organizations operating and able to retain and hire employees.

Rules for applicants

To qualify for a Main Street loan, nonprofit organizations must be tax exempt and have:

  • A minimum of 10 employees,
  • Been in operation for at least five years,
  • Less than a $3 billion endowment,
  • Total non-donation revenues equal to 60% of expenses or more, 2017 through 2019,
  • 2019 operating margin of 2% or more,
  • Cash on hand for 60 days,
  • A debt repayment capacity of greater than 55%.

Loans have a five-year term and interest rate of LIBOR plus 3%. Interest payments are deferred for one year. Loan size depends, of course, on the size and financial health of your nonprofit, but amounts generally run from $250,000 to $300 million.

Right for you?

Even if your nonprofit has never taken out a loan, it may be necessary now during the COVID-19 crisis. But you’ll need to think carefully about your nonprofit’s ability to repay any loan. We can help evaluate your creditworthiness and repayment capacity. We can also suggest alternate funding options, including other loan programs. Contact us.  Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Even if no money changes hands, bartering is a taxable transaction

Posted by Admin Posted on July 24 2020



During the COVID-19 pandemic, many small businesses are strapped for cash. They may find it beneficial to barter for goods and services instead of paying cash for them. If your business gets involved in bartering, remember that the fair market value of goods that you receive in bartering is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties.

For example, if a computer consultant agrees to exchange services with an advertising agency, both parties are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there is contrary evidence.

In addition, if services are exchanged for property, income is realized. For example, if a construction firm does work for a retail business in exchange for unsold inventory, it will have income equal to the fair market value of the inventory. Another example: If an architectural firm does work for a corporation in exchange for shares of the corporation’s stock, it will have income equal to the fair market value of the stock. 

Joining a club

Many businesses join barter clubs that facilitate barter exchanges. In general, these clubs use a system of “credit units” that are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members.

Bartering is generally taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,000 credit units one year, and that each unit is redeemable for $1 in goods and services. In that year, you’ll have $2,000 of income. You won’t pay additional tax if you redeem the units the next year, since you’ve already been taxed once on that income.

If you join a barter club, you’ll be asked to provide your Social Security number or employer identification number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club will withhold tax from your bartering income at a 24% rate.

Forms to file

By January 31 of each year, a barter club will send participants a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services and credits that you received from exchanges during the previous year. This information will also be reported to the IRS.

Many benefits

By bartering, you can trade away excess inventory or provide services during slow times, all while hanging onto your cash. You may also find yourself bartering when a customer doesn’t have the money on hand to complete a transaction. As long as you’re aware of the federal and state tax consequences, these transactions can benefit all parties. Contact us if you need assistance or would like more information.  Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

 

© 2020

Do you have advance directives?

Posted by Admin Posted on July 21 2020

External audits offer many benefits to nonprofits

Posted by Admin Posted on July 21 2020



Your nonprofit organization may be required to hire an independent outside CPA to audit its books, depending on its annual gross receipts and other factors. Even when external audits aren’t mandated, however, they’re often recommended. These audits can provide assurance to donors and other stakeholders that your organization is operating with integrity and within acceptable accounting guidelines.

Internal audits

Most nonprofits conduct internal audits on a regular basis, perhaps quarterly or annually. These audits are typically performed by a board member or a member of the organization’s staff. The objective is to review the organization’s financial statements, accounting policies and spending habits.

Internal audits promote fiscal responsibility and are essential to good governance. But they’re often conducted by people who don’t have extensive audit training and who have a vested interest in issuing a clean bill of health.

External audits

Outside auditors may be in a better position to determine whether your statements offer a fair picture of your finances. In an external audit, a CPA examines your organization’s financial statements and issues an opinion on whether those statements adhere to Generally Accepted Accounting Principles (GAAP) or another reporting framework.

To support this opinion, the auditor tests underlying records such as your nonprofit’s bank reconciliations, accounts payable records and contribution classifications. The auditor also evaluates your organization’s internal controls, including procedures for fraud prevention and detection.

This type of audit is completely separate from an internal audit. Though external audits are optional for nonprofits in some states, they’re required in others. Be sure you learn the rules that apply to your organization.

Preparing for the audit

You can facilitate external audit fieldwork by anticipating information requests and inquiries from your auditor. He or she will ask for various financial documents, including:

  • Financial statements,
  • Bank correspondence,
  • Budgets,
  • Board meeting minutes, and
  • Payroll, accounts receivable and accounts payable records.

Your auditor also may ask to review records related to loans, leases, grants, donations and fundraising activities. In addition, be ready to answer questions about such issues as how money and other resources are received and spent, what the organization does to comply with applicable laws, and how financial transactions are recorded.

We can help

Internal audits are essential. But they’re no substitute for an external audit by a qualified CPA, especially in light of the major changes to GAAP in recent years and increasing government scrutiny of nonprofits. Contact us to discuss whether you’re required to obtain an external audit under state or federal guidelines. Even if your organization isn’t required to submit CPA-audited statements, you’re sure to benefit from the expertise of an independent financial professional. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Take advantage of a “stepped-up basis” when you inherit property

Posted by Admin Posted on July 21 2020




If you’re planning your estate, or you’ve recently inherited assets, you may be unsure of the “cost” (or “basis”) for tax purposes.

Fair market value rules

Under the fair market value basis rules (also known as the “step-up and step-down” rules), an heir receives a basis in inherited property equal to its date-of-death value. So, for example, if your grandfather bought ABC Corp. stock in 1935 for $500 and it’s worth $5 million at his death, the basis is stepped up to $5 million in the hands of your grandfather’s heirs — and all of that gain escapes federal income tax forever.

The fair market value basis rules apply to inherited property that’s includible in the deceased’s gross estate, and those rules also apply to property inherited from foreign persons who aren’t subject to U.S. estate tax. It doesn’t matter if a federal estate tax return is filed. The rules apply to the inherited portion of property owned by the inheriting taxpayer jointly with the deceased, but not the portion of jointly held property that the inheriting taxpayer owned before his or her inheritance. The fair market value basis rules also don’t apply to reinvestments of estate assets by fiduciaries.

Step up, step down or carryover

It’s crucial for you to understand the fair market value basis rules so that you don’t pay more tax than you’re legally required to.

For example, in the above example, if your grandfather decides to make a gift of the stock during his lifetime (rather than passing it on when he dies), the “step-up” in basis (from $500 to $5 million) would be lost. Property that has gone up in value acquired by gift is subject to the “carryover” basis rules. That means the person receiving the gift takes the same basis the donor had in it (just $500), plus a portion of any gift tax the donor pays on the gift.

A “step-down” occurs if someone dies owning property that has declined in value. In that case, the basis is lowered to the date-of-death value. Proper planning calls for seeking to avoid this loss of basis. Giving the property away before death won’t preserve the basis. That’s because when property that has gone down in value is the subject of a gift, the person receiving the gift must take the date of gift value as his basis (for purposes of determining his or her loss on a later sale). Therefore, a good strategy for property that has declined in value is for the owner to sell it before death so he or she can enjoy the tax benefits of the loss.

These are the basic rules. Other rules and limits may apply. For example, in some cases, a deceased person’s executor may be able to make an alternate valuation election. Contact us for tax assistance when estate planning or after receiving an inheritance. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

To find new revenue opportunities, think like an auditor

Posted by Admin Posted on July 15 2020



Want to increase your not-for-profit’s revenue? First try analyzing current income as a professional auditor might. Then, you can apply your conclusions to setting annual goals, preparing your budget and managing other aspects of your organization.

Compare contributions

Compare the donation dollars raised inpast years to pinpoint trends. For example, have individual contributions been increasing over the past five years? What campaigns have you implemented during that period? You might go beyond the totals and determine if the number of major donors has grown.

Also estimate what portion of contributions is restricted. If a large percentage of donations are tied up in restricted funds, you might want to re-evaluate your gift acceptance policy or fundraising materials.

Measure grants

Grants can vary dramatically in size and purpose — from covering operational costs, to launching a program, to funding client services. Pay attention to trends here, too. Did one funder supply 50% of total revenue in 2015, 75% in 2016, and 80% last year?

A growing reliance on a single funding source is a red flag to auditors and it should be to you, too. In this case, if funding stopped, your organization might be forced to close its doors.

Assess fees

Fees from clients, joint venture partners or other third parties can be similar to fees that for-profit organizations earn. They’re generally considered exchange transactions because the client receives a product or service of value in exchange for its payment.

Sometimes fees are charged on a sliding scale based on income or ability to pay. In other cases, fees are subject to legal limitations set by government agencies. You’ll need to assess whether these services are paying for themselves.

Membership dues

If your nonprofit is a membership organization and charges dues, determine whether membership has grown or declined in recent years. How does this compare with your peers? Do you suspect that dues income will decline? You might consider dropping dues altogether and restructuring. If so, examine other income sources for growth potential.

By performing these exercises, you should be able to gain a basic understanding of where funds are coming from and where greater potential lies. For specific tips and help applying revenue data strategically, contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Businesses: Get ready for the new Form 1099-NEC

Posted by Admin Posted on July 15 2020



There’s a new IRS form for business taxpayers that pay or receive nonemployee compensation.

Beginning with tax year 2020, payers must complete Form 1099-NEC, Nonemployee Compensation, to report any payment of $600 or more to a payee.

Why the new form?

Prior to 2020, Form 1099-MISC was filed to report payments totaling at least $600 in a calendar year for services performed in a trade or business by someone who isn’t treated as an employee. These payments are referred to as nonemployee compensation (NEC) and the payment amount was reported in box 7.

Form 1099-NEC was reintroduced to alleviate the confusion caused by separate deadlines for Form 1099-MISC that report NEC in box 7 and all other Form 1099-MISC for paper filers and electronic filers. The IRS announced in July 2019 that, for 2020 and thereafter, it will reintroduce the previously retired Form 1099-NEC, which was last used in the 1980s.

What businesses will file?

Payers of nonemployee compensation will now use Form 1099-NEC to report those payments.

Generally, payers must file Form 1099-NEC by January 31. For 2020 tax returns, the due date will be February 1, 2021, because January 31, 2021, is on a Sunday. There’s no automatic 30-day extension to file Form 1099-NEC. However, an extension to file may be available under certain hardship conditions.

Can a business get an extension?

Form 8809 is used to file for an extension for all types of Forms 1099, as well as for other forms. The IRS recently released a draft of Form 8809. The instructions note that there are no automatic extension requests for Form 1099-NEC. Instead, the IRS will grant only one 30-day extension, and only for certain reasons.

Requests must be submitted on paper. Line 7 lists reasons for requesting an extension. The reasons that an extension to file a Form 1099-NEC (and also a Form W-2, Wage and Tax Statement) will be granted are:

  • The filer suffered a catastrophic event in a federally declared disaster area that made the filer unable to resume operations or made necessary records unavailable.
  • A filer’s operation was affected by the death, serious illness or unavoidable absence of the individual responsible for filing information returns.
  • The operation of the filer was affected by fire, casualty or natural disaster.
  • The filer was “in the first year of establishment.”
  • The filer didn’t receive data on a payee statement such as Schedule K-1, Form 1042-S, or the statement of sick pay required under IRS regulations in time to prepare an accurate information return.

Need help?

If you have questions about filing Form 1099-NEC or any tax forms, contact us. We can assist you in staying in compliance with all rules. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

 

© 2020

Why now might be a good time to buy a business

Posted by Admin Posted on July 10 2020

Reporting embedded leases

Posted by Admin Posted on July 10 2020



In 2016, the Financial Accounting Standards Board (FASB) published guidance that requires major changes to how leases are reported on financial statements. One area of the guidance that’s especially complicated relates to “embedded” leases.

Updated guidance

Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), requires organizations to report on the balance sheet the assets and liabilities associated with leasing office space, vehicles and other assets. Public companies implemented the updated guidance in 2019.

In June, the FASB extended the effective date for ASU 2016-02 for private companies and not-for-profit organizations. The one-year deferral is welcome news for smaller organizations that have been trying to get a handle on the complex new rules during the COVID-19 crisis.

Hidden in the fine print

In some cases, a contract that qualifies as a lease doesn’t have the word “lease” written across the top. Instead, a lease may be embedded in a contract’s terms.

Unless private companies and nonprofits adopted the changes early, they’re currently expensing operating lease payments as they’re incurred, as per prior guidance. Carving out embedded leases from supply or service contracts wasn’t a big deal under those rules; the costs would be classified as operating expenses either way. But the updated guidance requires service contract payments to continue being expensed while embedded leases are reported on the balance sheet.

The updated guidance is clear about the identification and criteria for an embedded lease: A contract contains a lease if it conveys the right to control the use of an identified asset in exchange for cash or other consideration. This includes the right to obtain substantially all the economic benefits from the asset for a specific period.

Equipment leases may be buried in supply and service contracts with equipment manufacturers. Likewise, lease agreements may contain nonlease components, such as maintenance and property taxes.

Implementation solutions

During the implementation phase for the updated guidance, you’ll need to train other departments, such as procurement, sales, operations and information technology, to recognize when contract terms convey the right to control the use of a specific asset. After implementation, you’ll need to execute controls or processes to identify embedded leases when contracts are signed.

To simplify matters, consider adopting the practical expedient in the updated accounting guidance that allows lessors to combine lease and nonlease components. While this treatment will increase the lease liability reported on your balance sheet, simplified reporting may be worthwhile, depending on the size and duration of the embedded leases.

Contact us

For private companies and private not-for-profits, the updated lease guidance now goes into effect for fiscal years beginning after December 15, 2021 (or interim periods beginning after December 15, 2022). For public not-for-profits, the updated guidance now goes into effect for fiscal years beginning after December 15, 2019, including interim reporting periods.

A one-year deferral isn’t an excuse to procrastinate. The issue of embedded leases shows how implementing the updated guidance can be challenging and may require significant changes to systems and procedures. We can help. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

After you file your tax return: 3 issues to consider

Posted by Admin Posted on July 10 2020



The tax filing deadline for 2019 tax returns has been extended until July 15 this year, due to the COVID-19 pandemic. After your 2019 tax return has been successfully filed with the IRS, there may still be some issues to bear in mind. Here are three considerations.

1. Some tax records can now be thrown away

You should keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file your return. So you can generally get rid of most records related to tax returns for 2016 and earlier years. (If you filed an extension for your 2016 return, hold on to your records until at least three years from when you filed the extended return.)

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You’ll need to hang on to certain tax-related records longer. For example, keep the actual tax returns indefinitely, so you can prove to the IRS that you filed a legitimate return. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)

When it comes to retirement accounts, keep records associated with them until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years if you want to be extra safe.)

2. You can check up on your refund

The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Get Your Refund Status” to find out about yours. You’ll need your Social Security number, filing status and the exact refund amount.

3. You can file an amended return if you forgot to report something

In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later. So for a 2019 tax return that you file on July 15, 2020, you can generally file an amended return until July 15, 2023.

However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.

We can help

Contact us if you have questions about tax record retention, your refund or filing an amended return. We’re not just available at tax filing time — we’re here all year!  Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

An advisory board can complement your nonprofit’s board of directors

Posted by Admin Posted on July 10 2020



Your not-for-profit has a board of directors — so why would it need an additional advisory board? There are a few reasons. Some organizations assemble advisory boards to provide expertise for a specific project, such as a fundraising campaign. Other organizations use them to give roles to major donors and prestigious supporters who may not be a good fit for a governing board. Here are some other ways to use an advisory board and how to set one up.

Opening the door

Look at your general board members’ demographics and collective profile. Does it lack representation from certain groups — particularly relative to the communities that your organization serves? An advisory board offers an opportunity to add diversity to your leadership. Also consider the skills current board members bring to the table. If your board of directors lacks extensive fundraising or grant writing experience, for example, an advisory board can help fill gaps.

Adding advisory board members can also open the door to funding opportunities. If, for example, your nonprofit is considering expanding its geographic presence, it makes sense to find an advisory board member from outside your current area. That person might be connected with business leaders and be able to introduce board members to appropriate people in his or her community.

Creating a pool

The advisory role is a great way to get people involved who can’t necessarily make the time commitment that a regular board position would require. It also might appeal to recently retired individuals or stay-at-home parents wanting to get involved with a nonprofit on a limited basis.

This also can be an ideal way to “test out” potential board members. If a spot opens on your current board and some of your advisory board members are interested in making a bigger commitment, you’ll have a ready pool of informed individuals from which to choose.

Understanding their role

It’s important that advisory board members understand the role they’ll play. They aren’t involved in the governance of your organization and can’t introduce motions or vote on them. But they can propose ideas, make recommendations and influence voting board members. Often, advisory board members organize campaigns and manage short-term projects.

Advisory boards usually are disbanded after a project is complete. You may also want to consider eliminating an advisory board if it begins to require too much staff time and your organization can’t provide the support it needs. For more information on effective nonprofit governance, contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Steer clear of the Trust Fund Recovery Penalty

Posted by Admin Posted on July 10 2020



If you own or manage a business with employees, you may be at risk for a severe tax penalty. It’s called the “Trust Fund Recovery Penalty” because it applies to the Social Security and income taxes required to be withheld by a business from its employees’ wages.

Because the taxes are considered property of the government, the employer holds them in “trust” on the government’s behalf until they’re paid over. The penalty is also sometimes called the “100% penalty” because the person liable and responsible for the taxes will be penalized 100% of the taxes due. Accordingly, the amounts IRS seeks when the penalty is applied are usually substantial, and IRS is very aggressive in enforcing the penalty.

Far-reaching penalty

The Trust Fund Recovery Penalty is among the more dangerous tax penalties because it applies to a broad range of actions and to a wide range of people involved in a business.

Here are some answers to questions about the penalty so you can safely stay clear of it.

Which actions are penalized? The Trust Fund Recovery Penalty applies to any willful failure to collect, or truthfully account for, and pay over Social Security and income taxes required to be withheld from employees’ wages.

Who is at risk? The penalty can be imposed on anyone “responsible” for collection and payment of the tax. This has been broadly defined to include a corporation’s officers, directors and shareholders under a duty to collect and pay the tax as well as a partnership’s partners, or any employee of the business with such a duty. Even voluntary board members of tax-exempt organizations, who are generally excepted from responsibility, can be subject to this penalty under certain circumstances. In addition, in some cases, responsibility has been extended to family members close to the business, and to attorneys and accountants.

IRS says responsibility is a matter of status, duty and authority. Anyone with the power to see that the taxes are (or aren’t) paid may be responsible. There’s often more than one responsible person in a business, but each is at risk for the entire penalty. Although a taxpayer held liable can sue other responsible people for contribution, this is an action he or she must take entirely on his or her own after he or she pays the penalty. It isn’t part of the IRS collection process.

Here’s how broadly the net can be cast: You may not be directly involved with the payroll tax withholding process in your business. But if you learn of a failure to pay over withheld taxes and have the power to pay them but instead make payments to creditors and others, you become a responsible person.

What’s considered “willful?” For actions to be willful, they don’t have to include an overt intent to evade taxes. Simply bending to business pressures and paying bills or obtaining supplies instead of paying over withheld taxes that are due the government is willful behavior. And just because you delegate responsibilities to someone else doesn’t necessarily mean you’re off the hook. Your failure to take care of the job yourself can be treated as the willful element.

 

Avoiding the penalty

You should never allow any failure to withhold and any “borrowing” from withheld amounts — regardless of the circumstances. All funds withheld must also be paid over to the government. Contact us for information about the penalty and making tax payments. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

 

 

© 2020

Free credit reports – now weekly

Posted by Admin Posted on July 05 2020

Accounting for cloud computing arrangements

Posted by Admin Posted on July 05 2020



The costs to set up cloud computing services can be significant, and many companies would prefer not to immediately expense these setup costs. Updated guidance on accounting for cloud computing costs aims to reduce differences in the accounting treatment for these arrangements. In a nutshell, the changes will spread more of the costs of implementing a cloud computing contract over the contract’s life than under existing guidance.

Old rules

Accounting Standards Update (ASU) No. 2015-05, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, differentiated between agreements involving a software license and those involving a hosted service. However, it didn’t discuss how to record the associated implementation costs, which lead to differences in the accounting treatment.

Under ASU 2015-05, when a cloud computing arrangement doesn’t include a software license, the arrangement must be accounted for as a service contract. This means businesses must expense the costs as incurred.

On the other hand, when an arrangement does include such a license, the customer must account for the software license by recognizing an intangible asset. To the extent that the payments attributable to the software license are made over time, a liability is also recognized.

New rules

ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, instructs companies to apply the same approach to the capitalization of implementation costs associated with the adoption of a cloud computing agreement and an on-premises software license.

When companies implement ASU 2018-15, they can capitalize and amortize certain costs associated with the application-development phase over the duration of the hosting arrangement. However, companies should expense costs incurred during the preliminary project and post-implementation phases.

Implementation guidance

Implementing the updated guidance will require the following steps:

Identify cloud computing arrangements. Each line of business, as well as the supply chain management and payables departments, should be instructed to notify the accounting department of any new cloud computing agreements.

Decide whether to capitalize or expense implementation costs. ASU 2018-15 requires that companies follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset and which to expense.

Forecast the financial implications. For each contract, model the impact on your company’s financial statements. Because the standard allows for the deferral of implementation costs vs. expensing the costs as incurred, there will be a corresponding impact on your company’s financial ratios.

Need help?

Public companies must start the implementation process now to ensure compliance for annual reporting periods beginning on or after December 15, 2019. Private companies and nonprofits have an extra year to comply — or they may choose to adopt the changes early to spread more set-up costs over the duration of their contracts. If you’re unsure how to account for cloud computing arrangement, contact us.  Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Some people are required to return Economic Impact Payments that were sent erroneously

Posted by Admin Posted on July 05 2020



The IRS and the U.S. Treasury had disbursed 160.4 million Economic Impact Payments (EIPs) as of May 31, 2020, according to a new report. These are the payments being sent to eligible individuals in response to the economic threats caused by COVID-19. The U.S. Government Accountability Office (GAO) reports that $269.3 billion of EIPs have already been sent through a combination of electronic transfers to bank accounts, paper checks and prepaid debit cards.

Eligible individuals receive $1,200 or $2,400 for a married couple filing a joint return. Individuals may also receive up to an additional $500 for each qualifying child. Those with adjusted gross income over a threshold receive a reduced amount.

Deceased individuals

However, the IRS says some payments were sent erroneously and should be returned. For example, the tax agency says an EIP made to someone who died before receipt of the payment should be returned. Instructions for returning the payment can be found here: https://bit.ly/31ioZ8W

The entire EIP should be returned unless it was made to joint filers and one spouse hadn’t died before receipt. In that case, you only need to return the EIP portion made to the decedent. This amount is $1,200 unless your adjusted gross income exceeded $150,000. If you cannot deposit the payment because it was issued to both spouses and one spouse is deceased, return the check as described in the link above. Once the IRS receives and processes your returned payment, an EIP will be reissued.

The GAO report states that almost 1.1 million payments totaling nearly $1.4 billion had been sent to deceased individuals, as of April 30, 2020. However, these figures don’t “reflect returned checks or rejected direct deposits, the amount of which IRS and the Treasury are still determining.”

In addition, the IRS states that EIPs sent to incarcerated individuals should be returned.

Payments that don’t have to be returned

The IRS notes on its website that some people receiving an erroneous payment don’t have to return it. For example, if a child’s parents who aren’t married to each other both get an additional $500 for the same qualifying child, one of them isn’t required to pay it back.

But each parent should keep Notice 1444, which the IRS will mail to them within 15 days after the EIP is made, with their 2020 tax records.

Some individuals still waiting

Be aware that the government is still sending out EIPs. If you believe you’re eligible for one but haven’t received it, you will be able to claim your payment when you file your 2020 tax return.

If you need the payment sooner, you can call the IRS EIP line at 800-919-9835 but the Treasury Department notes that “call volumes are high, so call times may be longer than anticipated.”  Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Appealing to the next generation of supporters

Posted by Admin Posted on July 05 2020



Factors such as wealth level, education and even whether people volunteer, probably will tell you more about potential donors than their generation. But some broad generalizations about age can help not-for-profits target particular groups for support. The newest generation of adults belong to what’s being called Generation Z, and it’s possible to draw some conclusions about this otherwise diverse demographic.

Charitably inclined digital natives

Members of Generation Z typically are either in school or just beginning to launch careers. According to a study conducted by one market research firm, their contributions represent only about 2% of total giving. And their average donation tops out at $341 per year. Yet approximately 44% of Gen Zers have given to charity and they may be more driven to pursue social impact than earlier generations at their age. Many young people are hyperaware of what’s going on both in the world and their own communities.

As digital natives immersed in social media, Gen Zers make good peer-to-peer fundraisers. You might be able to harness the energy of this generation by sponsoring fun runs and similar events that require participants to solicit funds from friends and family members.

Many in this demographic volunteer or perform paid work for more politically oriented causes that they see affecting their own lives, such as gun control, climate change and racial inequality. Consider, for example, the teenagers and young adults who mobilized ongoing gun control campaigns in the wake of the Parkland shooting. Or the Black Lives Matter protests that have been largely led by young adults.

Content tailored to their interests

To reach Gen Z, forget Facebook and even Twitter. Teens and young adults favor platforms such as Snapchat, Instagram and TikTok, so you may need to develop different types of content for these more visual channels. The good news is that younger people tend to be more receptive to digital ads than their parents. But they expect outreach to be narrowly tailored to their interests, so be sure you rely on good data.

Members of Generation Z usually want to be more involved in charitable causes than earlier generations. They may not be satisfied with making one-time donations to nonprofits they barely know. To provide young adults with hands-on roles, create formal volunteer programs and consider setting up a junior board of directors.

Big dividends

Although most young adults aren’t in a position to make major donations now, you should regard this group as your nonprofit’s future. Cultivating their support and loyalty can pay big dividends down the road. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Haven’t filed your 2019 business tax return yet? There may be ways to chip away at your bill

Posted by Admin Posted on July 05 2020



The extended federal income tax deadline is coming up fast. As you know, the IRS postponed until July 15 the payment and filing deadlines that otherwise would have fallen on or after April 1, 2020, and before July 15.

Retroactive COVID-19 business relief

The Coronavirus Aid, Relief and Economic Security (CARES) Act, which passed earlier in 2020, includes some retroactive tax relief for business taxpayers. The following four provisions may affect a still-unfiled tax return — or you may be able to take advantage of them on an amended return if you already filed.

Liberalized net operating losses (NOLs). The CARES Act allows a five-year carryback for a business NOL that arises in a tax year beginning in 2018 through 2020. Claiming 100% first-year bonus depreciation on an affected year’s return can potentially create or increase an NOL for that year. If so, the NOL can be carried back, and you can recover some or all of the income tax paid for the carryback year. This factor could cause you to favor claiming 100% first-year bonus depreciation on an unfiled return.

Since NOLs that arise in tax years beginning in 2018 through 2020 can be carried back five years, an NOL that’s reported on a still-unfiled return can be carried back to an earlier tax year and allow you to recover income tax paid in the carry-back year. Because federal income tax rates were generally higher in years before the Tax Cuts and Jobs Act (TCJA) took effect, NOLs carried back to those years can be especially beneficial.

Qualified improvement property (QIP) technical corrections. QIP is generally defined as an improvement to an interior portion of a nonresidential building that’s placed in service after the date the building was first placed in service. The CARES Act includes a retroactive correction to the TCJA. The correction allows much faster depreciation for real estate QIP that’s placed in service after the TCJA became law.

Specifically, the correction allows 100% first-year bonus depreciation for QIP that’s placed in service in 2018 through 2022. Alternatively, you can depreciate QIP placed in service in 2018 and beyond over 15 years using the straight-line method.

Suspension of excess business loss disallowance. An “excess business loss” is a loss that exceeds $250,000 or $500,000 for a married couple filing a joint tax return. An unfavorable TCJA provision disallowed current deductions for excess business losses incurred by individuals in tax years beginning in 2018 through 2025. The CARES Act suspends the excess business loss disallowance rule for losses that arise in tax years beginning in 2018 through 2020.

Liberalized business interest deductions. Another unfavorable TCJA provision generally limited a taxpayer’s deduction for business interest expense to 30% of adjusted taxable income (ATI) for tax years beginning in 2018 and later. Business interest expense that’s disallowed under this limitation is carried over to the following tax year.

In general, the CARES Act temporarily and retroactively increases the limitation from 30% to 50% of ATI for tax years beginning in 2019 and 2020. (Special rules apply to partnerships and LLCs that are treated as partnerships for tax purposes.)  

Assessing the opportunities

These are just some of the possible tax opportunities that may be available if you haven’t yet filed your 2019 tax return. Other rules and limitations may apply. Contact us for help determining how to proceed in your situation.  Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

 

 

© 2020

5 questions your audit committee should ask now

Posted by Admin Posted on June 26 2020

Establishing your company’s risk appetite

Posted by Admin Posted on June 26 2020



The Committee of Sponsoring Organizations of the Treadway Commission (COSO) recently published new guidance on how companies can promote “risk appetite” as part of decision-making. It’s especially relevant in today’s uncertain marketplace.

Digesting the new guidance

The COSO guidance, “Risk Appetite — Critical to Success: Using Risk Appetite to Thrive in a Changing Word,” explains that management must learn how to anticipate and understand their risk when change happens. It defines risk appetite as, “The types and amount of risk, on a broad level, an organization is willing to accept in pursuit of value.”

This definition is intentionally broad to apply across an organization. The risk appetite may differ within various parts of your organization to remain relevant in changing business conditions. When establishing your risk appetite, the goal is to enhance long-term growth and innovation.

“Risk appetite is a fundamental part of setting strategy and objectives, providing context as the organization pursues a given level of performance,” said COSO Chairman Paul Sobel. He stressed the importance of recognizing that the choice of strategies and objectives requires an understanding of the appetite for risk.

In volatile times — like during the COVID-19 pandemic or when facing regulatory uncertainty from a contentious upcoming election — a business may need to alter its risk appetite to take advantage of growth opportunities as market conditions evolve.

Combining the ingredients

COSO lists six things to remember:

  1. Risk appetite is not a separate framework.
  2. Risk appetite and risk tolerance are different.
  3. Risk appetite applies to more than the financial services industry.
  4. Risk appetite is at the heart of decision-making.
  5. Risk appetite is much more than a metric.
  6. Risk appetite helps increase transparency.

Risk appetite applies through development of strategy and objective-setting. It focuses on overall goals of the business. Risk tolerance, on the other hand, applies to the execution of strategy and focuses on objectives and variation from plan.

To be effective, your company’s risk appetite should permeate its culture. To get the message out across the organization, management should consider creating an appetite statement that includes measurable benchmarks. For example, you might say, “ABC Co. isn’t comfortable accepting more than a 10% probability that it will incur losses of more than $200,000 in pursuit of emerging market opportunities.”

The choice of language and length of an appetite statement will vary by organization. Some statements require several sentences to balance brevity with clarity.

Recipe for success

Taking risks is essential to growing your business. However, risks can’t go unchecked. Setting and understanding risk appetite is an important element of corporate governance, strategic planning and decision-making. We can help you better understand and apply this concept, communicate your risk appetite to stakeholders and monitor progress. Contact us for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

What qualifies as a “coronavirus-related distribution” from a retirement plan?

Posted by Admin Posted on June 26 2020



As you may have heard, the Coronavirus Aid, Relief and Economic Security (CARES) Act allows “qualified” people to take certain “coronavirus-related distributions” from their retirement plans without paying tax.

So how do you qualify? In other words, what’s a coronavirus-related distribution?

Early distribution basics

In general, if you withdraw money from an IRA or eligible retirement plan before you reach age 59½, you must pay a 10% early withdrawal tax. This is in addition to any tax you may owe on the income from the withdrawal. There are several exceptions to the general rule. For example, you don’t owe the additional 10% tax if you become totally and permanently disabled or if you use the money to pay qualified higher education costs or medical expenses

New exception

Under the CARES Act, you can take up to $100,000 in coronavirus-related distributions made from an eligible retirement plan between January 1 and December 30, 2020. These coronavirus-related distributions aren’t subject to the 10% additional tax that otherwise generally applies to distributions made before you reach age 59½.

What’s more, a coronavirus-related distribution can be included in income in installments over a three-year period, and you have three years to repay it to an IRA or plan. If you recontribute the distribution back into your IRA or plan within three years of the withdrawal date, you can treat the withdrawal and later recontribution as a totally tax-free rollover.

In new guidance (Notice 2020-50) the IRS explains who qualifies to take a coronavirus-related distribution. A qualified individual is someone who:

  • Is diagnosed (or whose spouse or dependent is diagnosed) with COVID-19 after taking a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or
  • Experiences adverse financial consequences as a result of certain events. To qualify under this test, the individual (or his or her spouse or member of his or her household sharing his or her principal residence) must:
    • Be quarantined, be furloughed or laid off, or have work hours reduced due to COVID-19;
    • Be unable to work due to a lack of childcare because of COVID-19;
    • Experience a business that he or she owns or operates due to COVID-19 close or have reduced hours;
    • Have pay or self-employment income reduced because of COVID-19; or
    • Have a job offer rescinded or start date for a job delayed due to COVID-19.

Favorable rules

As you can see, the rules allow many people — but not everyone — to take retirement plan distributions under the new exception. If you decide to take advantage of it, be sure to keep good records to show that you qualify. Be careful: You’ll be taxed on the coronavirus-related distribution amount that you don’t recontribute within the three-year window. But you won’t have to worry about owing the 10% early withdrawal penalty if you’re under 59½. Other rules and restrictions apply. Contact us if you have questions or need assistance. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Regaining your tax-exempt status if you failed to file Form 990s

Posted by Admin Posted on June 26 2020



There are many ways for a not-for-profit organization to lose its tax-exempt status — including participating in lobbying and campaign activities, receiving excessive unrelated business income and allowing board members to financially benefit from their positions. But the most common reason nonprofits lose their status is failure to file an annual Form 990 or 990-N for three consecutive years. If your organization has landed on the IRS’s revocation list for this reason, don’t panic. The process for reinstatement is relatively simple.

Getting good with the IRS

Assuming you lost your exempt status for failing to file, you can regain it with another filing. Contact us about submitting either Form 1023, “Application for Recognition of Exemption Under Section 501(c)(3)” or Form 1024, “Application for Recognition of Exemption Under Section 501(a),” based on your type of nonprofit.

Unless you apply for retroactive reinstatement, all of your organization’s activities between the revocation and the reinstatement date will be considered taxable. And all contributions made during that period won’t be deductible by donors. You may apply for retroactive reinstatement, effective the date of the automatic revocation, by filing the applicable form within 15 months or the later of the date of 1) the IRS revocation letter, or 2) the date the IRS posted your organization’s name on its website.

Providing reasonable cause

When you file the correct form, attach a detailed statement that provides reasonable cause for failing to file required returns in each of the three consecutive years. You should state the facts that led to each failure and the continual failure, discovery of the failures and steps taken to avoid or mitigate them.

You will also need to attach:

  • A statement that describes safeguards put in place and steps taken to avoid future failures.
  • Evidence to support all material aspects of those two statements.
  • Properly completed and executed paper tax returns for all taxable years during and after the three-year period your organization failed to file.
  • An original declaration dated and signed by an authorized person in your organization such as an officer or director. (See IRS Notice 2011-44 for the required wording.)

To expedite your application, write “AUTOMATICALLY REVOKED” at the top of the form and envelope and include the specified fee.

Serious repercussions

Losing your tax-exempt status can have serious repercussions. You’d likely owe corporate tax on any revenue as well as back taxes and penalties, and donors can no longer make tax-exempt gifts. So if your nonprofit’s status has been revoked, address the matter immediately. Contact us for help. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Launching a business? How to treat start-up expenses on your tax return

Posted by Admin Posted on June 26 2020



While the COVID-19 crisis has devastated many existing businesses, the pandemic has also created opportunities for entrepreneurs to launch new businesses. For example, some businesses are being launched online to provide products and services to people staying at home.

Entrepreneurs often don’t know that many expenses incurred by start-ups can’t be currently deducted. You should be aware that the way you handle some of your initial expenses can make a large difference in your tax bill.

How expenses must be handled

If you’re starting or planning a new enterprise, keep these key points in mind:

  • Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.
  • Under the Internal Revenue Code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. As you know, $5,000 doesn’t get you very far today! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.
  • No deductions or amortization deductions are allowed until the year when “active conduct” of your new business begins. Generally, that means the year when the business has all the pieces in place to begin earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Did the activity actually begin?

 

 

Expenses that qualify

In general, start-up expenses include all amounts you spend to:

  • Investigate the creation or acquisition of a business,
  • Create a business, or
  • Engage in a for-profit activity in anticipation of that activity becoming an active business.

To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example is money you spend analyzing potential markets for a new product or service.

To qualify as an “organization expense,” the expenditure must be related to creating a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.

Thinking ahead 

If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the elections described above. Recordkeeping is critical. Contact us about your start-up plans. We can help with the tax and other aspects of your new business. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

 

 

© 2020

For additional funding, take a stroll down main street

Posted by Admin Posted on June 19 2020

Employee benefit plan flexibility — with a catch

Posted by Admin Posted on June 19 2020

Asset impairment is expected to hit 2020 financial statements

Posted by Admin Posted on June 19 2020



Some companies are expected to report impairment losses in fiscal year 2020 because of the COVID-19 crisis. Depending on the nature of your operations and assets, the pandemic could be considered a “triggering event” that warrants interim impairment testing.

Examples of assets that may become impaired include long-lived assets (such as equipment and real estate), acquired goodwill and other intangibles (such as customer lists and brands). Here’s what you should know if your organization’s balance sheet includes these types of assets.

What’s a triggering event?

Under U.S. Generally Accepted Accounting Principles (GAAP), goodwill testing must be performed at least annually for public companies that report goodwill on their balance sheet, and for private companies and not-for-profit organizations that don’t elect to amortize goodwill. Goodwill also must be tested for impairment “if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.” This situation is referred to as a so-called “triggering event.”

There are no bright-line rules for which events trigger a goodwill impairment test. However, the accounting rules outline the following elements to consider:

  • Macroeconomic conditions, such as a deterioration in general economic conditions, limitations on accessing capital and fluctuations in foreign exchange rates,
  • Industry and market considerations, such as an increased competitive environment, a change in the market for an entity’s products or services, and a regulatory or political development,
  • Cost factors, such as increases in raw materials or labor rates,
  • Overall financial performance trends, such as negative or declining cash flows or a decline in revenue compared with prior periods, and
  • Other relevant events specific to the entity or reporting unit, such as changes in management, key personnel, strategy or customers; contemplation of bankruptcy; or litigation.

For public companies, a sustained decrease in share price — considered in both absolute terms and relative to peers — may qualify as a triggering event.

Entities that follow GAAP also should consider whether to test their other intangibles and long-lived assets for impairment. Triggering events for these assets are similar to those considered for goodwill. Triggering events must be evaluated within the context of your specific organization.

To test or not to test?

Private entities and nonprofits that have elected the accounting alternative to amortize goodwill don’t get a break from impairment testing when a triggering event occurs. Given the current economic environment, some business and not-for-profit entities are unexpected to conclude that it’s necessary to perform interim impairment tests for goodwill and other assets.

However, impairment testing isn’t a foregone conclusion. During the pandemic, some organizations may experience an increase in demand and profitability for their products and services, despite the overall decline in the macroeconomic conditions of the overall economy. These entities may not be required to perform interim impairment tests.

How to report and measure losses

If an asset is impaired, the amount reported on the balance sheet for that asset is reduced to its fair value. In addition, a loss is reported under other operating income and expenses on the income statement, reducing the organization’s earnings by a proportionate amount.

Quantifying impairment can be complicated in today’s uncertain marketplace. Estimating fair value may require external market analyses and complex discounted cash flow techniques. We can help you get it right. Contact us for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

If you’re selling your home, don’t forget about taxes

Posted by Admin Posted on June 19 2020



Traditionally, spring and summer are popular times for selling a home. Unfortunately, the COVID-19 crisis has resulted in a slowdown in sales. The National Association of Realtors (NAR) reports that existing home sales in April decreased year-over-year, 17.2% from a year ago. One bit of good news is that home prices are up. The median existing-home price in April was $286,800, up 7.4% from April 2019, according to the NAR.

If you’re planning to sell your home this year, it’s a good time to review the tax considerations.

Some gain is excluded

If you’re selling your principal residence, and you meet certain requirements, you can exclude up to $250,000 ($500,000 for joint filers) of gain. Gain that qualifies for the exclusion is also excluded from the 3.8% net investment income tax.

To be eligible for the exclusion, you must meet these tests:

  • The ownership test. You must have owned the property for at least two years during the five-year period ending on the sale date.
  • The use test. You must have used the property as a principal residence for at least two years during the same five-year period. (Periods of ownership and use don’t need to overlap.)

In addition, you can’t use the exclusion more than once every two years.

Larger gains

What if you have more than $250,000/$500,000 of profit when selling your home? Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, provided you owned the home for at least a year. If you didn’t, the gain will be considered short term and subject to your ordinary-income rate, which could be more than double your long-term rate.

Here are two other tax considerations when selling a home:

  1. Keep track of your basis. To support an accurate tax basis, be sure to maintain complete records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use.
  2. Be aware that you can’t deduct a loss. If you sell your principal residence at a loss, it generally isn’t deductible. But if a portion of your home is rented out or used exclusively for your business, the loss attributable to that part may be deductible.

If you’re selling a second home (for example, a beach house), it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 like-kind exchange. In addition, you may be able to deduct a loss.

For many people, their homes are their most valuable asset. So before selling yours, make sure you understand the tax implications. We can help you plan ahead to minimize taxes and answer any questions you have about your home sale. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Nonprofits: Carefully navigate the upcoming election

Posted by Admin Posted on June 19 2020



The 2020 presidential election is fast approaching and your not-for-profit has a stake in its outcome. But that doesn’t mean your organization is free to participate in campaign activities. In general, Section 501(c)(3)s risk losing their tax-exempt status if they participate in campaigning. However, there’s more nuance in the rules than you might suspect.

5 potential traps

Tax-exempt organizations can’t directly or indirectly act in federal, state or local campaigns either for or against a candidate or party. Here are several examples of activities that are generally off-limits:

1. Supporting a candidate or party for election. Your organization can’t get behind or oppose a declared candidate or third-party movement, engage in efforts to draft candidates, or perform advance exploratory work for a candidate or party.

2. Contributing to a campaign or endorsing a candidate. This includes direct financial support and indirect support, such as having your staff make calls on a candidate’s behalf.

3. Providing monetary support. Organizations are barred from donating funds to a candidate or party, and they can’t use another event to raise funds. Section 501(c)(3) not-for-profits are also barred from making loans to candidates or parties.

4. Offering support for support. You can’t ask for “support” from a candidate, political party or other political organization in exchange for your endorsement.

5. Distributing materials. Your nonprofit can’t distribute campaign materials or anything that tells recipient how to vote. This includes online communications.

5 acceptable activities

Of course, there are ways your nonprofit can participate in elections. For example, you can:

1. Sponsor a candidate appearance. If a candidate is invited for nonpolitical reasons — say, as a supporter of your charitable mission — make sure the appearance doesn’t turn into a campaign stop or fundraiser.

2. Hold a debate. If your nonprofit hosts a candidate forum, invite all the candidates, have an independent panel prepare the questions and provide every candidate with equal speaking opportunities. An impartial moderator should state that the views expressed within the debate don’t represent those of your organization.

3. Advocate a political issue. You can try to sway candidates to your way of thinking and encourage them to take a public stand. But you can’t endorse any of them.

4. Help build party platform planks. Your nonprofit can deliver testimony to a party’s platform committee, so long as you clarify that the testimony is strictly educational.

5. Launch a “get out the vote” drive. The drive must be designed solely to educate the public about voting and can’t promote or oppose a candidate or party.

Avoid penalties

Campaign-related offenses are punishable by revocation of tax-exempt status, but first-time offenders may be able to negotiate a less severe penalty. For example, you might agree to change procedures and stipulate that the violation won’t occur again. If your nonprofit spent funds on the banned activity, the IRS may impose excise taxes.

If you’re unsure about the acceptability of a proposed election-related activity, contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Good records are the key to tax deductions and trouble-free IRS audits

Posted by Admin Posted on June 19 2020



If you operate a small business, or you’re starting a new one, you probably know you need to keep records of your income and expenses. In particular, you should carefully record your expenses in order to claim the full amount of the tax deductions to which you’re entitled. And you want to make sure you can defend the amounts reported on your tax returns if you’re ever audited by the IRS or state tax agencies.

Certain types of expenses, such as automobile, travel, meals and office-at-home expenses, require special attention because they’re subject to special recordkeeping requirements or limitations on deductibility.

It’s interesting to note that there’s not one way to keep business records. In its publication “Starting a Business and Keeping Records,” the IRS states: “Except in a few cases, the law does not require any specific kind of records. You can choose any recordkeeping system suited to your business that clearly shows your income and expenses.”

That being said, many taxpayers don’t make the grade when it comes to recordkeeping. Here are three court cases to illustrate some of the issues.

 

 

Case 1: Without records, the IRS can reconstruct your income

If a taxpayer is audited and doesn’t have good records, the IRS can perform a “bank-deposits analysis” to reconstruct income. It assumes that all money deposited in accounts during a given period is taxable income. That’s what happened in the case of the business owner of a coin shop and precious metals business. The owner didn’t agree with the amount of income the IRS attributed to him after it conducted a bank-deposits analysis.

But the U.S. Tax Court noted that if the taxpayer kept adequate records, “he could have avoided the bank-deposits analysis altogether.” Because he didn’t, the court found the bank analysis was appropriate and the owner underreported his business income for the year. (TC Memo 2020-4)

Case 2: Expenses must be business related

In another case, an independent insurance agent’s claims for a variety of business deductions were largely denied. The Tax Court found that he had documentation in the form of cancelled checks and credit card statements that showed expenses were paid. But there was no proof of a business purpose.

For example, he made utility payments for natural gas, electricity, water and sewer, but the records didn’t show whether the services were for his business or his home. (TC Memo 2020-25)

Case number 3: No records could mean no deductions

In this case, married taxpayers were partners in a travel agency and owners of a marketing company. The IRS denied their deductions involving auto expenses, gifts, meals and travel because of insufficient documentation. The couple produced no evidence about the business purpose of gifts they had given. In addition, their credit card statements and other information didn’t detail the time, place, and business relationship for meal expenses or indicate that travel was conducted for business purposes.

“The disallowed deductions in this case are directly attributable to (the taxpayer’s) failure to maintain adequate records,“ the court stated. (TC Memo 2020-7)

We can help

Contact us if you need assistance retaining adequate business records. Taking a meticulous, proactive approach to how you keep records can protect your deductions and help make an audit much less painful. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

 

 

© 2020

How COVID-19 may have affected consumer behavior

Posted by Admin Posted on June 12 2020

Is it time to outsource finance and accounting?

Posted by Admin Posted on June 12 2020



Outsourcing may appeal to organizations that are currently struggling with mounting overhead costs during the COVID-19 crisis. By outsourcing, you convert certain fixed overhead costs associated with compensating and supporting employees into variable costs that can be scaled back in an economic downturn — or dialed up in times of growth and transition.

One department that’s ripe with outsourcing opportunities is finance and accounting. There are many external providers of such specialized, time-consuming services as payroll processing, tax preparation and bookkeeping. You can even outsource your controller or CFO function. But do the benefits of outsourcing these tasks outweigh the potential downsides?

Recognize the upsides

Outsourcing finance and accounting functions allows you to work with financial professionals of varying levels of experience and expertise tailored to the functions they’ll perform. These responsibilities could include:

  • Processing payables, receivables and cash transactions,
  • Reconciling accounts at each month-end,
  • Preparing financial statements, budgets and forecasts,
  • Assisting with tax and financial reporting requirements, and
  • Communicating financial matters to your shareholders and/or board of directors.

Depending on your needs and budget, you can outsource the tasks that make sense for your organization. You also may benefit from occasionally using other firm experts — investment advisors, HR and IT support, and valuation specialists, as necessary.

Another benefit that many smaller organizations derive in working with external accounting and financial service providers is reduced fees for year-end audit and tax services — because of the professional attention to accounting and finance functions received throughout the year. And most of the accounting questions that typically arise in an audit already will have been resolved.

Be aware of the trade-offs

Cost is a top concern when outsourcing these functions. But keep in mind that, with an outside firm, you pay only for the amount and level of services you require.

For example, an in-house accountant may spend some time doing work that someone at a lower pay level could handle equally well. Outsourcing also will spare your organization the expenses associated with a regular employee, such as payroll taxes, health insurance, paid leave and training to stay atop any tax law or regulatory changes and continuing education requirements.

If you use an outsider to perform the duties of your CFO or controller, that person may not be at your immediate disposal whenever a financial question arises. Meetings with the CPA firm will need to be planned and scheduled. You’ll also need to determine how financial data will flow between your company and the accountant who’s providing these services. Some tasks may be difficult to perform remotely.

To outsource or not to outsource?

Outsourcing finance and accounting functions is a smart move for many organizations — but it’s not right for everyone. Contact us to discuss the pros and cons of using this strategy in your organization. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Seniors: Can you deduct Medicare premiums?

Posted by Admin Posted on June 12 2020



If you’re age 65 and older, and you have basic Medicare insurance, you may need to pay additional premiums to get the level of coverage you want. The premiums can be costly, especially if you’re married and both you and your spouse are paying them. But there may be a silver lining: You may qualify for a tax break for paying the premiums.

Tax deductions for Medicare premiums

You can combine premiums for Medicare health insurance with other qualifying health care expenses for purposes of claiming an itemized deduction for medical expenses on your tax return. This includes amounts for “Medigap” insurance and Medicare Advantage plans. Some people buy Medigap policies because Medicare Parts A and B don’t cover all their health care expenses. Coverage gaps include co-payments, co-insurance, deductibles and other costs. Medigap is private supplemental insurance that’s intended to cover some or all gaps.

Many people no longer itemize

Qualifying for a medical expense deduction may be difficult for a couple of reasons. For 2020 (and 2019), you can deduct medical expenses only if you itemize deductions and only to the extent that total qualifying expenses exceeded 7.5% of AGI.

The Tax Cuts and Jobs Act nearly doubled the standard deduction amounts for 2018 through 2025. As a result, fewer individuals are claiming itemized deductions. For 2020, the standard deduction amounts are $12,400 for single filers, $24,800 for married couples filing jointly and $18,650 for heads of household. (For 2019, these amounts were $12,200, $24,400 and $18,350, respectively.)

However, if you have significant medical expenses, including Medicare health insurance premiums, you may itemize and collect some tax savings.

Note: Self-employed people and shareholder-employees of S corporations can generally claim an above-the-line deduction for their health insurance premiums, including Medicare premiums. So, they don’t need to itemize to get the tax savings from their premiums.

Medical expense deduction basics

In addition to Medicare premiums, you can deduct various medical expenses, including those for dental treatment, ambulance services, dentures, eyeglasses and contacts, hospital services, lab tests, qualified long-term care services, prescription medicines and others.

There are also many items that Medicare doesn’t cover that can be written off for tax purposes, if you qualify. In addition, you can deduct transportation expenses to get to medical appointments. If you go by car, you can deduct a flat 17-cents-per-mile rate for 2020 (down from 20 cents for 2019), or you can keep track of your actual out-of-pocket expenses for gas, oil and repairs.

We can help

Contact us if you have additional questions about Medicare coverage options or claiming medical expense deductions on your personal tax return. We can help determine the optimal overall tax-planning strategy based on your situation.  Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Rebuilding your nonprofit’s board

Posted by Admin Posted on June 12 2020



In times of turmoil, your board of directors should be your not-for-profit’s rock-solid foundation. But what if your board is understaffed or simply doesn’t provide the leadership your nonprofit requires? Think about rebuilding it — and the sooner the better. Financial, public health and other challenges are likely to remain a reality for the foreseeable future.

Assess what you have

Start the rebuilding effort by assessing your current board. Ask the following questions:

Does the board have too few, too many or the right number of members? The right board size depends on many factors, including your organization’s size and complexity of operations.

Does its makeup represent a range of diversity and inclusiveness? Diversity can cover gender, race, religion, geography, age, expertise and other factors. Inclusiveness is how well the board’s makeup mirrors your organization’s mission.

How does each member align with your nonprofit’s mission? Ask members to provide personal statements that define their passion for your cause and your nonprofit’s specific approach to the cause.

How does each member contribute? Some nonprofits ask board members to sign contracts outlining their commitment — including the time they’ll commit, the funds they promise to donate or raise, and the duties they’ll perform. If you choose to have your board members sign such a contract, you’ll want to make sure they hold up their end of the bargain.

Before recruiting new members, identify the talents your organization needs — for example financial expertise or local government experience. In general, qualified board members are enthusiastic about your mission, are good team players and are willing to commit the time to attend all or most board functions. Good communications and public speaking skills are desirable.

Find qualified candidates

Just as you would for a paid leadership position, assemble a pool of candidates for each board seat. In many organizations, current board members supply candidates’ names. If you’re finding it difficult to find the right people, try these strategies:

  • When making public appearances, mention that you’re looking for people interested in becoming active volunteers or board members.
  • Ask friends, business colleagues and family members whether they know someone who would be a good candidate.
  • Advertise in a local newspaper, alumni newsletter and your nonprofit’s newsletter.
  • Consider whether any current volunteers are qualified to serve as board members.
  • Invite 20 community leaders to an informational luncheon to learn about your organization and ask each to recommend a potential board member.

After you’ve identified a group of prospective candidates, have each fill out an application that outlines at least some of your expectations. Also invite prospects to attend a board meeting to meet current members, see how the board functions, and be interviewed one-on-one.

Select the best

This process should provide you with enough information to select the best candidates and assemble a board capable of meeting current and future challenges. But if you’re still struggling with governance issues, contact us for advice. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Rioting damage at your business? You may be able to claim casualty loss deductions

Posted by Admin Posted on June 12 2020



The recent riots around the country have resulted in many storefronts, office buildings and business properties being destroyed. In the case of stores or other businesses with inventory, some of these businesses lost products after looters ransacked their property. Windows were smashed, property was vandalized, and some buildings were burned to the ground. This damage was especially devastating because businesses were reopening after the COVID-19 pandemic eased.

A commercial insurance property policy should generally cover some, or all, of the losses. (You may also have a business interruption policy that covers losses for the time you need to close or limit hours due to rioting and vandalism.) But a business may also be able to claim casualty property loss or theft deductions on its tax return. Here’s how a loss is figured for tax purposes:

Your adjusted basis in the property
MINUS
Any salvage value 
MINUS 
Any insurance or other reimbursement you receive (or expect to receive).

 

 

Losses that qualify

A casualty is the damage, destruction or loss of property resulting from an identifiable event that is sudden, unexpected or unusual. It includes natural disasters, such as hurricanes and earthquakes, and man-made events, such as vandalism and terrorist attacks. It does not include events that are gradual or progressive, such as a drought.

For insurance and tax purposes, it’s important to have proof of losses. You’ll need to provide information including a description, the cost or adjusted basis as well as the fair market value before and after the casualty. It’s a good time to gather documentation of any losses including receipts, photos, videos, sales records and police reports.

Finally, be aware that the tax code imposes limits on casualty loss deductions for personal property that are not imposed on business property. Contact us for more information about your situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Student loan debt by the numbers

Posted by Admin Posted on June 08 2020

5 steps to streamline the month-end close

Posted by Admin Posted on June 08 2020



Many companies struggle to close the books at the end of the month. The month-end close requires accounting personnel to round up data from across the organization. Under normal conditions, this process can strain internal resources.

However, in recent years the accounting and tax rules have undergone major changes — many of which your personnel and software may not be ready to handle. This state of flux may be pushing your accounting department to its breaking point. Fortunately, there are five simple ways to make your monthly closing process more efficient.

1. Create a standardized, repeatable process. Gathering accounting data involves many moving parts throughout the organization. To minimize the stress, aim for a consistent approach that applies standard operating procedures and robust checklists. This minimizes the use of ad-hoc processes and helps ensure consistency when reporting financial data month after month.

2. Allow time for data analysis. Too often, the accounting department dedicates most of the time allocated to closing the books to the mechanics of the process. But spending some time analyzing the data for integrity and accuracy is critical. Examples of review procedures include:

  • Reconciling amounts in a ledger to source documents (such as invoices, contracts or bank records),
  • Testing a random sample of transactions for accuracy,
  • Benchmarking monthly results against historical performance or industry standards, and
  • Assigning multiple workers to perform the same tasks simultaneously.

Without adequate due diligence, the probability of errors (or fraud) in the financial statements increases. Failure to evaluate the data can result in more time being spent correcting errors that could have been caught with a simple review, before they’re memorialized in your financial records.

3. Adopt a continuous improvement mindset. Workers who are actively involved in closing out the books often may be best equipped to recognize trouble spots and bottlenecks. Brainstorm as a team, then assign responsibility for adopting changes to an employee with the follow-through and authority to drive change in your organization.

4. Build flexibility into your staffing model. Often accounting departments require certain specialized staff to be present during the month-end close. If an employee is unavailable, the department may be shorthanded and unable to complete critical tasks. Implementing a cross-training program for key steps can help minimize frustration and delays. It may also help identify inefficiencies in the financial reporting process.

5. Minimize manual processes. Your accounting department may rely on manual processes to extract, manipulate and report data. Manual processes create opportunities for errors and omissions in the financial records. Fortunately, modern accounting software can automate certain routine, repeatable tasks, such as invoicing, accounts payable management and payroll administration. In some cases, you’ll need to upgrade your current accounting package to take full advantage of the power of automation.

Keep it simple

Closing the books doesn’t have to be a stressful, labor-intensive chore. We can help you simplify the process and give your accounting staff more time to focus on value-added tasks that take your company’s financial reporting to the next level. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

A nonworking spouse can still have an IRA

Posted by Admin Posted on June 08 2020



It’s often difficult for married couples to save as much as they need for retirement when one spouse doesn’t work outside the home — perhaps so that spouse can take care of children or elderly parents. In general, an IRA contribution is allowed only if a taxpayer has compensation. However, an exception involves a “spousal” IRA. It allows a contribution to be made for a nonworking spouse.

Under the spousal IRA rules, the amount that a married couple can contribute to an IRA for a nonworking spouse in 2020 is $6,000, which is the same limit that applies for the working spouse.

Two main benefits

As you may be aware, IRAs offer two types of benefits for taxpayers who make contributions to them.

  1. Contributions of up to $6,000 a year to an IRA may be tax deductible.
  2. The earnings on funds within the IRA are not taxed until withdrawn. (Alternatively, you may make contributions to a Roth IRA. There’s no deduction for Roth IRA contributions, but, if certain requirements are met, distributions are tax-free.)

As long as the couple together has at least $12,000 of earned income, $6,000 can be contributed to an IRA for each, for a total of $12,000. (The contributions for both spouses can be made to either a regular IRA or a Roth IRA, or split between them, as long as the combined contributions don’t exceed the $12,000 limit.)

Catching up

In addition, individuals who are age 50 or older can make “catch-up” contributions to an IRA or Roth IRA in the amount of $1,000. Therefore, in 2020, for a taxpayer and his or her spouse, both of whom will have reached age 50 by the end of the year, the combined limit of the deductible contributions to an IRA for each spouse is $7,000, for a combined deductible limit of $14,000.

There’s one catch, however. If, in 2020, the working spouse is an active participant in either of several types of retirement plans, a deductible contribution of up to $6,000 (or $7,000 for a spouse who will be 50 by the end of the year) can be made to the IRA of the non-participant spouse only if the couple’s AGI doesn’t exceed $104,000. This limit is phased out for AGI between $196,000 and $206,000.

Contact us if you’d like more information about IRAs or you’d like to discuss retirement planning. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

The latest news on nonprofit fraud is here

Posted by Admin Posted on June 08 2020



Every two years, the Association of Certified Fraud Examiners (ACFE) publishes what has become the definitive guide for preventing and detecting workplace fraud. The recently released Report to the Nations: 2020 Global Study on Occupational Fraud and Abuse draws conclusions from more than 2,500 fraud incidents — including 191 in not-for-profit organizations.

In fact, this year’s report devotes a special section to fraud in nonprofits. Although nonprofit fraud isn’t necessarily worse than fraud in for-profit companies, it can be different in important ways.

Fewer resources

According to the ACFE report, the median loss for defrauded nonprofits is $75,000, considerably less than the $125,000 median for all organizations. However, nonprofits generally have much less to lose than, say, the average bank or manufacturer.

Indeed, it’s a general lack of financial and staff resources — in addition to less vigorous oversight and enforcement of internal controls — that may make nonprofits fertile ground for fraud. Although many try to foster a trusting, familial culture, this can lead to risky lapses. Executives and managers may, for example, override internal controls, allow unproven staffers to accept cash donations, rubber-stamp expense reimbursement reports or neglect to segregate accounting duties.

Controls and cost

The ACFE found that nonprofits adhere at lower rates than for-profit companies to four primary internal controls:

  • Surprise audits,
  • Formal fraud risk assessments,
  • Management review, and
  • Maintaining an internal audit function.

Some of these controls can be costly, of course. But not all effective antifraud measures are expensive. According to the study, adopting a code of conduct is the control most closely associated with lower fraud losses in all types of organizations. Writing a code and requiring staffers to read and sign it can reduce losses by as much as 50%.

Corruption is common

As with all types of organizations, nonprofits most often fall victim to corruption schemes (41% of cases), with financial statement fraud being relatively rare (11%). Although corruption is associated with lower losses than financial statement fraud (a $200,000 median loss vs. $954,000 median loss in all organizations), conflicts of interest, bribery and other forms of corruption can destroy a nonprofit’s reputation — and its future.

Most nonprofit fraud schemes are found out when someone says something. Approximately 40% are revealed by tips from staffers, board members, vendors, clients and the public. To make whistleblowing as easy as possible, consider establishing an anonymous fraud hotline. And because tips via email and online forms have become more common in recent years, the ACFE recommends offering multiple communication channels.

Act on the data

No doubt you’ve thought about your nonprofit’s fraud risk. But if you haven’t put controls in place and ensured they’re followed consistently, your organization could become yet another statistic. Talk to us about cost-effective ways to protect your nonprofit’s resources. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

Business meal deductions: The current rules amid proposed changes

Posted by Admin Posted on June 08 2020

www.sbcpaohio.com

Restaurants and entertainment venues have been hard hit by the novel coronavirus (COVID-19) pandemic. One of the tax breaks that President Trump has proposed to help them is an increase in the amount that can be deducted for business meals and entertainment.

It’s unclear whether Congress would go along with enhanced business meal and entertainment deductions. But in the meantime, let’s review the current rules.

Before the pandemic hit, many businesses spent money “wining and dining” current or potential customers, vendors and employees. The rules for deducting these expenses changed under the Tax Cuts and Jobs Act (TCJA), but you can still claim some valuable write-offs. And keep in mind that deductions are available for business meal takeout and delivery.

One of the biggest changes is that you can no longer deduct most business-related entertainment expenses. Beginning in 2018, the TCJA disallows deductions for entertainment expenses, including those for sports events, theater productions, golf outings and fishing trips.

50% meal deductions

Currently, you can deduct 50% of the cost of food and beverages for meals conducted with business associates. However, you need to follow three basic rules in order to prove that your expenses are business related:

  1. The expenses must be “ordinary and necessary” in carrying on your business. This means your food and beverage costs are customary and appropriate. They shouldn’t be lavish or extravagant.
  2. The expenses must be directly related or associated with your business. This means that you expect to receive a concrete business benefit from them. The principal purpose for the meal must be business. You can’t go out with a group of friends for the evening, discuss business with one of them for a few minutes, and then write off the check.
  3. You must be able to substantiate the expenses. There are requirements for proving that meal and beverage expenses qualify for a deduction. You must be able to establish the amount spent, the date and place where the meals took place, the business purpose and the business relationship of the people involved.

It’s a good idea to set up detailed recordkeeping procedures to keep track of business meal costs. That way, you can prove them and the business connection in the event of an IRS audit.

Other considerations

What if you spend money on food and beverages at an entertainment event? The IRS has clarified that taxpayers can still deduct 50% of food and drink expenses incurred at entertainment events, but only if business was conducted during the event or shortly before or after. The food-and-drink expenses should also be “stated separately from the cost of the entertainment on one or more bills, invoices or receipts,” according to the guidance.

Another related tax law change involves meals provided to employees on the business premises. Before the TCJA, these meals provided to an employee for the convenience of the employer were 100% deductible by the employer. Beginning in 2018, meals provided for the convenience of an employer in an on-premises cafeteria or elsewhere on the business property are only 50% deductible. After 2025, these meals won’t be deductible at all.

Plan ahead

As you can see, the treatment of meal and entertainment expenses became more complicated after the TCJA. It’s possible the deductions could increase substantially under a new stimulus law, if Congress passes one. We’ll keep you updated. In the meantime, we can answer any questions you may have concerning business meal and entertainment deductions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com

© 2020

5 reasons to make work-from-home permanent

Posted by Admin Posted on May 29 2020

Revenue recognition and leases: FASB gives certain entities more time

Posted by Admin Posted on May 29 2020

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.

Revenue recognition

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.

Leases

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.

Contact us

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

© 2020

Student loan interest: Can you deduct it on your tax return?

Posted by Admin Posted on May 29 2020



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.

Other requirements

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.

Document expenses

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

© 2020

To survive the current crisis, your nonprofit needs multiple revenue sources

Posted by Admin Posted on May 29 2020



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

© 2020

IRS releases 2021 amounts for Health Savings Accounts

Posted by Admin Posted on May 29 2020



The IRS recently released the 2021 inflation-adjusted amounts for Health Savings Accounts (HSAs). 

HSA basics

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

© 2020

COVID-19 and our economic future

Posted by Admin Posted on May 22 2020

Overcoming the challenges of remote auditing during the COVID-19 crisis

Posted by Admin Posted on May 22 2020



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

© 2020

Did you get an Economic Impact Payment that was less than you expected?

Posted by Admin Posted on May 22 2020



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.

Basic amounts

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

© 2020

When nonprofit contributions are quid pro quo

Posted by Admin Posted on May 22 2020



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.

Meeting obligations

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.

Risking penalties

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

© 2020

Fortunate enough to get a PPP loan? Forgiven expenses aren’t deductible

Posted by Admin Posted on May 22 2020



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 payment of the expense results in forgiveness of a loan made under the PPP, and
  • The income associated with the forgiveness is excluded from gross income under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

PPP basics

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.”

Deductible expenses

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

© 2020

Making the COVID-19 crisis less taxing for retailers

Posted by Admin Posted on May 15 2020

Asked and answered: Reopening your business

Posted by Admin Posted on May 15 2020

Independent assurance inspires confidence in sustainability reports

Posted by Admin Posted on May 15 2020



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:

  • How is the company treating employees during the crisis?
  • Are workers being laid off or furloughed — or is management implementing executive pay cuts to retain its workforce?
  • What is the company doing to ensure its facilities are safe for workers and customers?
  • Is the company donating to charities and encouraging employees to participate in philanthropic activities during the crisis, such as volunteering at food pantries and donating blood?

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:

  • Carbon Disclosure Project (CDP),
  • Dow Jones Sustainability Index (DJSI),
  • Global Initiative for Sustainability Ratings (GISR),
  • Global Reporting Initiative (GRI),
  • International Integrated Reporting Council (IIRC),
  • Sustainability Accounting Standards Board (SASB), and
  • United Nations’ Sustainable Development Goals (SDG).

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.

Need help?

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

© 2020

There’s still time to make a deductible IRA contribution for 2019

Posted by Admin Posted on May 15 2020



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:

  • For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
    • For a spouse who participated in 2019: $103,000–$123,000.
    • For a spouse who didn’t participate in 2019: $193,000-$203,000.
  • For single and head-of-household taxpayers participating in an employer-sponsored plan: $64,000–$74,000.

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:

  • For married taxpayers filing jointly: $193,000–$203,000.
  • For single and head-of-household taxpayers: $122,000–$137,000.

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.

Act soon

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

© 2020

Is your nonprofit’s tap running dry?

Posted by Admin Posted on May 15 2020

 



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

© 2020

Business charitable contribution rules have changed under the CARES Act

Posted by Admin Posted on May 15 2020



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,