An external audit is less stressful and less intrusive if you anticipate your auditor’s document requests. Auditors typically ask clients to provide similar documents year after year. They’ll accept copies or client-prepared schedules for certain items, such as bank reconciliations and fixed asset ledgers. To verify other items, such as leases, invoices and bank statements, they’ll want to see original source documents.
What does change annually is the sample of transactions that auditors randomly select to test your account balances. The element of surprise is important because it keeps bookkeepers honest.
Accounting personnel can also prepare for audit inquiries by comparing last year’s financial statements to the current ones. Auditors generally ask about any line items that have changed materially. A “materiality” rule of thumb for small businesses might be an inquiry about items that change by more than, say, 10% or $10,000.
For example, if advertising fees (or sales commissions) increased by 20% in 2021, it may raise a red flag, especially if it didn’t correlate with an increase in revenue. Be ready to explain why the cost went up and provide invoices (or payroll records) for auditors to review.
In addition, auditors may start asking unexpected questions when a new accounting rule is scheduled to go into effect. For example, private companies and nonprofits must implement new rules for reporting long-term lease contracts starting in 2022. So companies that provide comparative financial statements should start gathering additional information about their leases in 2021 to meet the disclosure requirements for next year.
Minimize audit adjustments
Ideally, management should learn from the adjusting journal entries auditors make at the end of audit fieldwork each year. These adjustments correct for accounting errors, unrealistic estimates and omissions. Often internally prepared financial statements need similar adjustments, year after year, to comply with U.S. Generally Accepted Accounting Principles (GAAP).
For example, auditors may need to prompt clients to write off bad debts, evaluate repair and supply accounts for capitalizable items, and record depreciation expense and accruals. Making routine adjustments before the auditor arrives may save time and reduce discrepancies between the preliminary and final financial statements.
You can also reduce audit adjustments by asking your auditor about any major transactions or complicated accounting rules before the start of fieldwork. For instance, you might be uncertain how to account for a recent acquisition or classify a shareholder advance.
An external audit doesn’t have to be time-consuming or disruptive. The key is to prepare, so that audit fieldwork will run smoothly. Contact us to discuss any concerns as you prepare your preliminary year-end statements. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The Infrastructure Investment and Jobs Act (IIJA) was signed into law on November 15, 2021. It includes new information reporting requirements that will generally apply to digital asset transactions starting in 2023. Cryptocurrency exchanges will be required to perform intermediary Form 1099 reporting for cryptocurrency transactions.
Existing reporting rules
If you have a stock brokerage account, whenever you sell stock or other securities, you receive a Form 1099-B after the end of the year. Your broker uses the form to report transaction details such as sale proceeds, relevant dates, your tax basis and the character of gains or losses. In addition, if you transfer stock from one broker to another broker, the old broker must furnish a statement with relevant information, such as tax basis, to the new broker.
Digital asset broker reporting
The IIJA expands the definition of brokers who must furnish Forms 1099-B to include businesses that are responsible for regularly providing any service accomplishing transfers of digital assets on behalf of another person (“crypto exchanges”). Thus, any platform on which you can buy and sell cryptocurrency will be required to report digital asset transactions to you and the IRS after the end of each year.
Sometimes you may have a transfer transaction that isn’t a sale or exchange. For example, if you transfer cryptocurrency from your wallet at one crypto exchange to your wallet at another crypto exchange, the transaction isn’t a sale or exchange. For that transfer, as with stock, the old crypto exchange will be required to furnish relevant digital asset information to the new crypto exchange. Additionally, if the transfer is to an account maintained by a party that isn’t a crypto exchange (or broker), the IIJA requires the old crypto exchange to file a return with the IRS. It’s anticipated that such a return will include generally the same information that’s furnished in a broker-to-broker transfer.
Digital asset definition
For the reporting requirements, a “digital asset” is any digital representation of value that’s recorded on a cryptographically secured distributed ledger or similar technology. (The IRS can modify this definition.) As it stands, the definition will capture most cryptocurrencies as well as potentially include some non-fungible tokens (NFTs) that are using blockchain technology for one-of-a-kind assets like digital artwork.
Cash transaction reporting
You may know that when a business receives $10,000 or more in cash in a transaction, it is required to report the transaction, including the identity of the person from whom the cash was received, to the IRS on Form 8300. The IIJA will require businesses to treat digital assets like cash for purposes of this requirement.
When reporting begins
These reporting rules will apply to information reporting that’s due after December 31, 2023. For Form 1099-B reporting, this means that applicable transactions occurring after January 1, 2023, will be reported. Whether the IRS will refine the form for digital assets, or come up with a new form, is not known yet. Form 8300 reporting of cash transactions will presumably follow the same effective dates.
If you use a crypto exchange, and it hasn’t already collected a Form W-9 from you seeking your taxpayer identification number, expect it to do so. The transactions subject to the reporting will include not only selling cryptocurrencies for fiat currencies (like U.S. dollars), but also exchanging cryptocurrencies for other cryptocurrencies. And keep in mind that a reporting intermediary doesn’t always have accurate information, especially with a new type of reporting. Contact us with any questions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Contending with a large outpouring of support sounds like a problem any not-for-profit would embrace. But, in fact, it’s possible to become overwhelmed by supporter interest and donations — particularly if your organization is small or relatively new. Expanded tax deductions for charitable gifts made in 2021 may boost giving this holiday season. Make sure you’re prepared.
Don’t let your site get overwhelmed
Disaster-relief charities, such as the Red Cross, have long dealt with sudden cash influxes. For example, during major hurricanes in recent years, some nonprofit websites became overloaded and went offline because so many users were visiting them. Sites had to be moved to more powerful servers to handle the increased traffic.
So make sure you track website hits, as well as phone and email inquiries, to set a “baseline.” That way, you’ll be able to recognize a surge of interest when it begins. Also, know your system’s ultimate capacity so you can enact a contingency plan should it approach critical mass.
Prepare your troops
Having an “early warning system” is only one part of being prepared. You also need to be able to mobilize your troops in a hurry. Do you know how to reach all of your board members at any time? Can you efficiently organize volunteers when you need extra hands quickly? Make sure you have an up-to-date contact list of board members. You also can benefit from having a process, such as a phone tree or group text distribution list, to communicate with your board quickly and efficiently.
When it comes to volunteers, assign one or more emergency volunteer coordinators to call and quickly train people when you need them. Be sure to conduct a mock emergency with staff and volunteers to learn where you’re prepared to ramp up and where you’re not.
Handle the media carefully
A surge in donor interest could mean a surge in media attention. Although it might be tempting to say, “not now, we’re busy,” don’t pass up the opportunity to publicize your organization’s mission and the work that’s garnering all the attention.
In most cases, the immediate surge of interest eventually wanes. Before that happens, start to build lasting relationships with new donors and media contacts. Inform them about the work your organization does under “normal” circumstances and suggest ways to get them involved.
For help and advice
If your financial and accounting staffers aren’t accustomed to handling a sudden surge in donations, you may need outside assistance to process gifts. Contact us for help and advice. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The Employee Retention Credit (ERC) was a valuable tax credit that helped employers survive the COVID-19 pandemic. A new law has retroactively terminated it before it was scheduled to end. It now only applies through September 30, 2021 (rather than through December 31, 2021) — unless the employer is a “recovery startup business.”
The Infrastructure Investment and Jobs Act, which was signed by President Biden on November 15, doesn’t have many tax provisions but this one is important for some businesses.
If you anticipated receiving the ERC based on payroll taxes after September 30 and retained payroll taxes, consult with us to determine how and when to repay those taxes and address any other compliance issues.
The American Institute of Certified Public Accountants (AICPA) is asking Congress to direct the IRS to waive payroll tax penalties imposed as a result of the ERC sunsetting. Some employers may face penalties because they retained payroll taxes believing they would receive the credit. Affected businesses will need to pay back the payroll taxes they retained for wages paid after September 30, the AICPA explained. Those employers may also be subject to a 10% penalty for failure to deposit payroll taxes withheld from employees unless the IRS waives the penalties.
The IRS is expected to issue guidance to assist employers in handling any compliance issues.
The ERC was originally enacted in March of 2020 as part of the CARES Act. The goal was to encourage employers to retain employees during the pandemic. Later, Congress passed other laws to extend and modify the credit and make it apply to wages paid before January 1, 2022.
An eligible employer could claim the refundable credit against its share of Medicare taxes (1.45% rate) equal to 70% of the qualified wages paid to each employee (up to a limit of $10,000 of qualified wages per employee per calendar quarter) in the third and fourth calendar quarters of 2021.
For the third and fourth quarters of 2021, a recovery startup business is an employer eligible to claim the ERC. Under previous law, a recovery startup business was defined as a business that:
However, recovery startup businesses are subject to a maximum total credit of $50,000 per quarter for a maximum credit of $100,000 for 2021.
The ERC was retroactively terminated by the new law to apply only to wages paid before October 1, 2021, unless the employer is a recovery startup business. Therefore, for wages paid in the fourth quarter of 2021, other employers can’t claim the credit.
In terms of the availability of the ERC for recovery startup businesses in the fourth quarter, the new law also modifies the recovery startup business definition. Now, a recovery startup business is one that began operating after February 15, 2020, and has average annual gross receipts of less than $1 million. Other changes to recovery startup businesses may also apply.
What to do now?
If you have questions about how to proceed now to minimize penalties, contact us. We can explain the options. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Are you thinking about merging with or acquiring a business? CPA-prepared financial statements can provide valuable insight into historical financial results. But an independent quality of earnings (QOE) report can be another valuable tool in the due diligence process. It looks beyond the quantitative information provided by the seller’s financial statements.
These reports can help buyers who want more detailed information — and help justify a discounted offer price for acquisition targets that face excessive threats and risks. Conversely, when these reports are included in the offer package, it can add credibility to the seller’s historical and prospective financial statements. They may also help justify a premium asking price for businesses that are positioned to leverage emerging opportunities and key strengths.
QOE analyses can be performed on financial statements that have been prepared in-house, as well as those that have been compiled, reviewed or audited by a CPA firm. Rather than focus on historical results and compliance with U.S. Generally Accepted Accounting Principles (GAAP), QOE reports focus on how much cash flow the company is likely to generate for investors in the future.
Examples of issues that a QOE report might uncover:
A QOE report typically analyzes the individual components of earnings (that is, revenue and expenses) on a month-to-month basis. This helps determine whether earnings are sustainable. It also can identify potential risks and opportunities, both internal and external, that could affect the company’s ability to operate as a going concern.
EBITDA vs. QOE
It’s common in M&A due diligence for buyers to focus on earnings before interest, taxes, depreciation and amortization (EBITDA) for the trailing 12 months. Though EBITDA is often a good starting point for assessing earnings quality, it may need to be adjusted for such items as nonrecurring items, above- or below-market owners’ compensation, discretionary expenses, and differences in accounting methods used by the company compared to industry peers.
In addition, QOE reports usually entail detailed ratio and trend analysis to identify unusual activity. Additional procedures can help determine whether changes are positive or negative.
For example, an increase in accounts receivable could result from revenue growth (a positive indicator) or a buildup of uncollectible accounts (a negative indicator). If it’s the former, the gross margin on incremental revenue should be analyzed to determine if the new business is profitable — or if the revenue growth results from aggressive price cuts or a temporary change in market conditions.
Fortunately, the scope and format of QOE reports can be customized, because they’re not bound by prescriptive guidance from the American Institute of Certified Public Accountants. Contact us for more information about how you can use an independent QOE report in the M&A process. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Do you have a tax-saving flexible spending account (FSA) with your employer to help pay for health or dependent care expenses? As the end of 2021 nears, there are some rules and reminders to keep in mind.
An account for health expenses
A pre-tax contribution of $2,750 to a health FSA is permitted in 2021. This amount is increasing to $2,850 for 2022. You save taxes in these accounts 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 employer’s plan should have a listing of qualifying items and any documentation from a medical provider that may be needed to get reimbursed for these items.
FSAs generally have a “use-it-or-lose-it” rule, which means you must incur qualifying medical expenditures by the last day of the plan year (December 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). What if you don’t spend the money before the last day allowed? You forfeit it.
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.
Take a look at your year-to-date expenditures now. It will show you what you still need to spend and will also help you to determine how much to set aside for next year if there’s still time. Don’t forget to reflect any changed circumstances in making your calculation.
What are some ways to use up the money? Before year end (or the extended date, if permitted), schedule certain elective medical procedures, visit the dentist or buy new eyeglasses.
An account for dependent care expenses
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 who is 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 you 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. Therefore, it’s a good time to review your expenses to date and project amounts to be set aside for 2022.
Other rules and exceptions may apply. Your HR department can answer any questions about your specific plan. We can answer any questions you have about the tax implications. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
To remain financially afloat and retain staffers, many not-for-profit organizations took advantage of government loan programs in 2020 and 2021. But nonprofits shouldn’t think about borrowing only as an emergency solution. If, for example, your nonprofit is in good shape and wants to make a major capital purchase or launch a new program, you may want to consider borrowing.
Position for success
Before you start talking to lenders, you need several items in place. Ensure you have a realistic repayment plan, current financial statements, collateral to secure the loan and a proven history of prudent financial management. Also, your board’s complete support is critical.
If you’ve already established a relationship (such as having a business checking account) with the lender, the odds of qualifying for a loan are better. Your reason for applying for a loan also plays a big part in the lender’s decision. Seeking money to make a major purchase or to stabilize cash flow with a line of credit is more likely to be successful than applying for a loan to start a new program.
Note that even if you succeed in getting a loan, lender covenants may prevent you from borrowing for other purposes until your existing debt is paid off. This can limit strategic flexibility.
Some banks are willing to make term loans or lines of credit available to nonprofits, but your organization may not want, or be able, to pay the interest rates attached to them. Fortunately, there are other options, including community foundations. Local foundations or funds, such as the Chicago Community Trust, Arizona Community Foundation and Cleveland Foundation often provide loans to qualified nonprofits. Short-term loans may also be available from the Nonprofits Assistance Fund. Generally, these organizations charge low interest rates — and, in some cases, no interest at all.
Another potential loan source is your board of directors. There are no legal obstacles to borrowing from a board member, but these loans merit caution. To avoid IRS scrutiny, the board member must charge interest at or below market rate, the entire board (absent the lender) must vote to approve the loan, and you must report the loan on your Form 990.
And some larger nonprofits issue government bonds. Because these bonds’ income isn’t subject to federal income tax, your nonprofit may be able to borrow at a lower-than-market interest rate. However, fees associated with structuring and issuing the bond could offset interest-rate advantages.
Although interest rates currently are low, they’re expected to rise in coming months. So if you’re thinking of applying for a loan from a traditional source, consider acting soon. Contact us to discuss your borrowing plans. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
With Thanksgiving just around the corner, the holiday season will soon be here. At this time of year, your business may want to show its gratitude to employees and customers by giving them gifts or hosting holiday parties again after a year of forgoing them due to the pandemic. It’s a good time to brush up on the tax rules associated with these expenses. Are they tax deductible by your business and is the value taxable to the recipients?
Gifts to customers
If you give gifts to customers and clients, they’re deductible up to $25 per recipient per year. For purposes of the $25 limit, you don’t need to include “incidental” costs that don’t substantially add to the gift’s value. These costs include engraving, gift wrapping, packaging and shipping. Also excluded from the $25 limit is branded marketing items — such as those imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4.
The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (for example, a gift basket for all team members of a customer to share) as long as the costs are “reasonable.”
Gifts to employees
In general, anything of value that you transfer to an employee is included in his or her taxable income (and, therefore, subject to income and payroll taxes) and deductible by your business. But there’s an exception for noncash gifts that constitute a “de minimis” fringe benefit.
These are items that are small in value and given infrequently that are administratively impracticable to account for. Common examples include holiday turkeys, hams, gift baskets, occasional sports or theater tickets (but not season tickets) and other low-cost merchandise.
De minimis fringe benefits aren’t included in an employee’s taxable income yet they’re still deductible by your business. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts. However, many businesses use an informal cutoff of $75.
Cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income and subject to payroll tax withholding regardless of how small and infrequent.
Throw a holiday party
In general, holiday parties are fully deductible (and excludible from recipients’ income). And for calendar years 2021 and 2022, a COVID-19 relief law provides a temporary 100% deduction for expenses of food or beverages “provided by” a restaurant to your workplace. Previously, these expenses were only 50% deductible. Entertainment expenses are still not deductible.
The use of the words “provided by” a restaurant clarifies that the tax break for 2021 and 2022 isn’t limited to meals eaten on a restaurant’s premises. Takeout and delivery meals from a restaurant are also generally 100% deductible. So you can treat your on-premises staff to some holiday meals this year and get a full deduction.
Show your holiday spirit
Contact us if you have questions about the tax implications of giving holiday gifts or throwing a holiday party. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Auditing standards require external auditors to consider potential fraud risks by watching out for conditions that provide the opportunity to commit fraud. Unfortunately, conditions during the COVID-19 pandemic may have increased your company’s fraud risks. For example, more employees may be working remotely than ever before. And some workers may be experiencing personal financial distress — due to reduced hours, decreased buying power or the loss of a spouse’s income — that could cause them to engage in dishonest behaviors.
Financial statement auditors must maintain professional skepticism regarding the possibility that a material misstatement due to fraud may be present throughout the audit process. Specifically, Statement on Auditing Standards (SAS) No. 99, Consideration of Fraud in a Financial Statement Audit, requires auditors to consider potential fraud risks before and during the information-gathering process. Business owners and managers may find it helpful to understand how this process works — even if their financial statements aren’t audited.
Doubling down on fraud risks
During planning procedures, auditors must conduct brainstorming sessions about fraud risks. In a financial reporting context, auditors are primarily concerned with two types of fraud:
1. Asset misappropriation. Employees may steal tangible assets, such as cash or inventory, for personal use. The risk of theft may be heightened if internal controls have been relaxed during the pandemic. For example, some companies have waived the requirement for two signatures on checks, and others have reduced oversight during physical inventory counts.
2. Financial misstatement. Intentional misstatements, including omissions of amounts or disclosures in financial statements, may be used to deceive people who rely on your company’s financial statements. For example, managers who are unable to meet their financial goals may be tempted to book fictitious revenue to preserve their year-end bonuses. Or a CFO may alter fair value estimates to avoid reporting impairment of goodwill and other intangibles and triggering a loan covenant violation.
Identifying risk factors
Auditors must obtain an understanding of the entity and its environment, including internal controls, in order to identify the risks of material misstatement due to fraud. They must presume that, if given the opportunity, companies will improperly recognize revenue and management will attempt to override internal controls.
Examples of fraud risk factors that auditors consider include:
Auditors also watch for questionable journal entries that dishonest employees could use to hide their impropriety. These entries might, for example, be made to intracompany accounts, on the last day of the accounting period or with limited descriptions. Once fraud risks have been assessed, audit procedures must be planned and performed to obtain reasonable assurance that the financial statements are free from misstatement.
Auditors generally aren’t required to investigate fraud. But they are required to communicate fraud risk findings to the appropriate level of management, who can then take actions to prevent fraud in their organizations. If conditions exist that make it impractical to plan an audit in a way that will adequately address fraud risks, an auditor may even decide to withdraw from the engagement.
Contact us to discuss your concerns about heightened fraud risks during the pandemic and ways we can adapt our audit procedures for emerging or increased fraud risk factors. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
As we approach the holidays, many people plan to donate to their favorite charities or give money or assets to their loved ones. Here are the basic tax rules involved in these transactions.
Donating to charity
Normally, if you take the standard deduction and don’t itemize, you can’t claim a deduction for charitable contributions. But for 2021 under a COVID-19 relief law, you’re allowed to claim a limited deduction on your tax return for cash contributions made to qualifying charitable organizations. You can claim a deduction of up to $300 for cash contributions made during this year. This deduction increases to $600 for a married couple filing jointly in 2021.
What if you want to give gifts of investments to your favorite charities? There are a couple of points to keep in mind.
First, don’t give away investments in taxable brokerage accounts that are currently worth less than what you paid for them. Instead, sell the shares and claim the resulting capital loss on your tax return. Then, give the cash proceeds from the sale to charity. In addition, if you itemize, you can claim a full tax-saving charitable deduction.
The second point applies to securities that have appreciated in value. These should be donated directly to charity. The reason: If you itemize, donations of publicly traded shares that you’ve owned for over a year result in charitable deductions equal to the full current market value of the shares at the time the gift is made. In addition, if you donate appreciated stock, you escape any capital gains tax on those shares. Meanwhile, the tax-exempt charity can sell the donated shares without owing any federal income tax.
Donating from your IRA
IRA owners and beneficiaries who’ve reached age 70½ are allowed to make cash donations of up to $100,000 a year to qualified charities directly out of their IRAs. You don’t owe income tax on these qualified charitable distributions (QCDs), but you also don’t receive an itemized charitable contribution deduction. Contact your tax advisor if you’re interested in this type of gift.
Gifting assets to family and other loved ones
The principles for tax-smart gifts to charities also apply to gifts to relatives. That is, you should sell investments that are currently worth less than what you paid for them and claim the resulting tax-saving capital losses. Then, give the cash proceeds from the sale to your children, grandchildren or other loved ones.
Likewise, you should give appreciated stock directly to those to whom you want to give gifts. When they sell the shares, they’ll pay a lower tax rate than you would if they’re in a lower tax bracket.
In 2021, the amount you can give to one person without gift tax implications is $15,000 per recipient. The annual gift exclusion is available to each taxpayer. So if you’re married and make a joint gift with your spouse, the exclusion amount is doubled to $30,000 per recipient for 2021.
Make gifts wisely
Whether you’re giving to charity or loved ones this holiday season (or both), it’s important to understand the tax implications of gifts. Contact us if you have questions about the tax consequences of any gifts you’d like to make. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If your not-for-profit was well-established before 2020, it has probably weathered the pandemic and economic stress of the past year-and-a-half better than younger organizations. But as you transition out of “survival” mode, challenges remain, including those faced by most nonprofits, such as finding staffers and fundraising in an inhospitable environment. Then there are obstacles specific to mature nonprofits. Here are some to watch for.
Mature organizations generally are adept at maintaining adequate operating reserves and sufficient cash on hand to support daily operations. Your nonprofit also may already have had in place a planned giving program and endowment that served you well during the pandemic.
But even as your nonprofit has greater program and operational coordination, it may be vulnerable to “mission creep.” This happens when an organization begins to pursue new objectives, often to generate support, rather than sticking to its founding mission and values. For example, you might have expanded your programming during the pandemic, leaving your core efforts understaffed and less able to meet their goals.
“Founder’s syndrome” is another potential pitfall. It happens when a nonprofit grows up — and often beyond its founder — yet the founder refuses to share control and doesn’t recognize when it’s time to depart. The first step to addressing this challenge is to acknowledge and discuss it.
Alliances with other organizations also are common at this stage. Although they can help reinforce your mission focus, they can also spread your resources too thin. Mature nonprofits need to regularly assess alliances to ensure they continue to meet their intended objectives.
Increasing fiscal strength
Above all, established nonprofits need to focus on sustainability. One way to increase fiscal strength is to add members to your board. A mature nonprofit’s brand identity may enable it to attract wealthier and more prestigious board members. Ideally, these members will have more to offer than simply money, such as valuable connections or expertise in a certain area.
As your executive director and staff concentrate on operations, your board should take an even greater leadership role by setting direction and strategic policy. The board may become less open to change, though. (Younger nonprofits tend to have more entrepreneurial, risk-taking board members.)
To help ensure your nonprofit remains strong and successful for many years, regularly assess programs and initiatives and consider eliminating those that no longer contribute to your core mission. Also make sure your strategic plan focuses on the long term and outlines new opportunities, so your organization can keep growing. Contact us for more suggestions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Are you planning to launch a business or thinking about changing your business entity? If so, you need to determine which entity will work best for you — a C corporation or a pass-through entity such as a sole-proprietorship, partnership, limited liability company (LLC) or S corporation. There are many factors to consider and proposed federal tax law changes being considered by Congress may affect your decision.
The corporate federal income tax is currently imposed at a flat 21% rate, while the current individual federal income tax rates begin at 10% and go up to 37%. The difference in rates can be mitigated by the qualified business income (QBI) deduction that’s available to eligible pass-through entity owners that are individuals, estates and trusts.
Note that noncorporate taxpayers with modified adjusted gross income above certain levels are subject to an additional 3.8% tax on net investment income.
Organizing a business as a C corporation instead of as a pass-through entity can reduce the current federal income tax on the business’s income. The corporation can still pay reasonable compensation to the shareholders and pay interest on loans from the shareholders. That income will be taxed at higher individual rates, but the overall rate on the corporation’s income can be lower than if the business was operated as a pass-through entity.
Other tax-related factors should also be considered. For example:
These are only some of the many factors involved in operating a business as a certain type of legal entity. For details about how to proceed in your situation, consult with us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
On October 25, the Financial Accounting Standards Board (FASB) issued a simpler accounting option that will enable private companies to more easily measure certain types of shares they provide to both employees and nonemployees as part of compensation awards. Here are the details.
Many companies award stock options and other forms of share-based payments to workers to promote exceptional performance and reduce cash outflows from employee compensation. But accounting for these payments can be confusing and time-consuming, especially for private companies.
To measure the fair value of stock options under existing U.S. Generally Accepted Accounting Principles (GAAP), companies generally use an option-pricing model that factors in the following six variables:
The first four inputs are fairly straightforward. Private companies may estimate expected stock price volatility using a comparable market-pricing index. But the value of a private company’s stock typically requires an outside appraisal. Whereas public stock prices are usually readily available, private company equity shares typically aren’t actively traded, so observable market prices for those shares or similar shares don’t exist.
To complicate matters further, employee stock options are also subject to Internal Revenue Code Section 409A, which deals with nonqualified deferred compensation. The use of two different pricing methods usually gives rise to deferred tax items on the balance sheet.
Accounting Standards Update (ASU) No. 2021-07, Compensation-Stock Compensation (Topic 718): Determining the Current Price of An Underlying Share for Equity-Classified Share-Based Awards, applies to all equity classified awards under Accounting Standards Codification Topic 718, Stock Compensation.
The updated guidance allows private companies to determine the current price input in accordance with the federal tax rules, thereby aligning the methodology used for book and federal income tax purposes. Sec. 409A is referenced as an example, but the rules also include facts and circumstances identified in Sec. 409A to consider for reasonable valuations. The practical expedient will allow private companies to save on costs, because they’ll no longer have to obtain two independent valuations separately for GAAP and for tax purposes.
Right for your company?
Private companies that take advantage of the practical expedient will need to apply it prospectively for all qualifying awards granted or modified during fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early application, including application in an interim period, is permitted for financial statements that haven’t yet been issued or made available for issuance as of October 25, 2021. Contact your CPA for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Are you considering a move to another state when you retire? Perhaps you want to relocate to an area where your loved ones live or where the weather is more pleasant. But while you’re thinking about how many square feet you’ll need in a retirement home, don’t forget to factor in state and local taxes. Establishing residency for state tax purposes may be more complicated than it initially appears to be.
What are all applicable taxes?
It may seem like a good option to simply move to a state with no personal income tax. But, to make a good decision, you must consider all taxes that can potentially apply to a state resident. In addition to income taxes, these may include property taxes, sales taxes and estate taxes.
If the state you’re considering has an income tax, look at what types of income it taxes. Some states, for example, don’t tax wages but do tax interest and dividends. And some states offer tax breaks for pension payments, retirement plan distributions and Social Security payments.
Is there a state estate tax?
The federal estate tax currently doesn’t apply to many people. For 2021, the federal estate tax exemption is $11.7 million ($23.4 million for a married couple). But some states levy estate tax with a much lower exemption and some states may also have an inheritance tax in addition to (or in lieu of) an estate tax.
How do you establish domicile?
If you make a permanent move to a new state and want to make sure you’re not taxed in the state you came from, it’s important to establish legal domicile in the new location. The definition of legal domicile varies from state to state. In general, domicile is your fixed and permanent home location and the place where you plan to return, even after periods of residing elsewhere.
When it comes to domicile, each state has its own rules. You don’t want to wind up in a worst-case scenario: Two states could claim you owe state income taxes if you establish domicile in the new state but don’t successfully terminate domicile in the old one. Additionally, if you die without clearly establishing domicile in just one state, both the old and new states may claim that your estate owes income taxes and any state estate tax.
The more time that elapses after you change states and the more steps you take to establish domicile in the new state, the harder it will be for your old state to claim that you’re still domiciled there for tax purposes. Some ways to help lock in domicile in a new state are to:
If an income tax return is required in the new state, file a resident return. File a nonresident return or no return (whichever is appropriate) in the old state. We can help file these returns.
Before deciding where you want to live in retirement, do some research and contact us. We can help you avoid unpleasant tax surprises. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If your not-for-profit’s board members don’t have the information they need to make decisions, the repercussions can be severe. Board time can be wasted, voting may be delayed and your organization may be unable to act when it needs to. Worse, board members might make decisions based on faulty information, negatively affecting your mission. Here’s how to prevent such outcomes.
For fiduciary success
To properly fulfill their fiduciary duties, your board needs certain information. The first is financial. To help your board fully understand your nonprofit’s position, provide it with copies of your Form 990. The board president or treasurer should review this document and approve it before it’s filed.
The board also must get the results of any audit you’ve conducted, salary information for key staff, and monthly and quarterly financial reports showing income and expenses. If your organization provides directors and officers insurance, provide proof to board members.
Share and share alike
Board members also need strategic information. This includes reports on your nonprofit’s work, such as how programs are being carried out and how they’re used, progress on event timelines, and membership statistics. If your organization collects information from the audience it serves, provide at least an executive summary of your findings to your board. Occasionally sharing with the board articles that relate to your nonprofit’s mission, locations or audiences also may be useful.
Sharing should go both ways. To help foster teamwork and commitment to the cause, ask that members provide brief bios and other relevant background information. Also publicly share thank-yous when board members make special efforts — whether those efforts are individual (such as securing an event sponsor) or group (performing due diligence on a new executive director).
To prevent board members from wasting time reviewing irrelevant information, funnel all material through your executive director or another senior manager. Only executive-approved material should be provided to board members. If you have questions about your board’s fiduciary role, please contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
With the increasing cost of employee health care benefits, your business may be interested in providing some of these benefits through an employer-sponsored Health Savings Account (HSA). For eligible individuals, an HSA offers a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs. Here are the important tax benefits:
To be eligible for an HSA, an individual must be covered by a “high deductible health plan.” For 2021, 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. (These amounts will remain the same for 2022.) For self-only coverage, the 2021 limit on deductible contributions is $3,600 (increasing to $3,650 for 2022). For family coverage, the 2021 limit on deductible contributions is $7,200 (increasing to $7,300 for 2022). Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits for 2021 cannot exceed $7,000 for self-only coverage or $14,000 for family coverage (increasing to $7,050 and $14,100, respectively, for 2022).
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 2021 and 2022 of up to $1,000.
Contributions from an employer
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. It’s also excludable from an employee’s gross income up to the deduction limitation. Funds can be built up for years because there’s no “use-it-or-lose-it” provision. An employer that decides to make contributions on its employees’ behalf must generally make comparable contributions to the HSAs of all comparable participating employees for that calendar year. If the employer doesn’t make comparable contributions, the employer is subject to a 35% tax on the aggregate amount contributed by the employer to HSAs for that period.
HSA distributions can be made to pay for qualified medical expenses, which generally means expenses that would qualify for the medical expense itemized deduction. Among these expenses are doctors’ visits, prescriptions, chiropractic care and premiums for long-term care insurance.
If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it’s made after reaching age 65, or in the event of death or disability.
HSAs offer a flexible option for providing health care coverage and they may be an attractive benefit for your business. But the rules are somewhat complex. Contact us if you’d like to discuss offering HSAs to your employees. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Graphs, performance dashboards and other visual aids can help managers, investors and lenders digest complex financial information. Likewise, auditors also use visual aids during a financial statement audit to quickly identify trends and anomalies that warrant attention.
Your auditor uses many tools and techniques to validate the accuracy and integrity of your company’s financial records. Data visualization — using a picture to show a relationship between two accounts or how a metric has changed over time — can help improve the efficiency and effectiveness of your audit.
Microsoft Excel and other dedicated data visualization software solutions can be used to generate various graphs and charts that facilitate audit planning. These tools can also help managers and executives understand the nature of the auditor’s testing and inquiry procedures — and provide insight into potential threats and opportunities.
Here are four examples of how auditors might use visualization to leverage your company’s data:
1. Employee activity in the accounting department. Line graphs and pie charts can help auditors analyze the number, timing and value of journal entries completed by each employee in your accounting department. Such analysis may uncover an unfair allocation of work in the department — or employee involvement in adjusting entries outside of their assigned area of responsibility. Managers can then use these tools to reassign work in the accounting department, pursue a fraud investigation or improve internal controls.
2. Activity in accounts prone to fraud and abuse. Auditors closely monitor certain high-risk accounts for fraud and errors. For example, data visualization can shine a spotlight on the timing and magnitude of refunds and discounts, highlight employees involved in each transaction and potentially uncover anomalies for additional scrutiny.
3. Journal entries prior to the end of the accounting period. Auditors analyze and confirm the timing and magnitude of your journal entries leading up to a month-end or year-end close. Timeline charts and other data visualization tools can help auditors understand trends in your company’s activity during a month, quarter or year.
4. Forecast vs. actual. Line graphs and bar charts can show how your company’s actual performance compares to budgets and forecasts. This can help confirm that you’re on track to meet your goals for the period. Conversely, these tools can also uncover significant deviations that require further analysis to determine whether the cause is internal (for instance, fraud or inefficiency) or external (for instance, cost increases or deteriorating market conditions). In some cases, management will need to revise budgets based on the findings of this analysis — and potentially take corrective measures.
Show and tell
Data visualization allows your data to talk. Auditors use these tools to better understand your operations and guide their risk assessment, inquiries and testing procedures. They also use visual aids to explain complex matters and highlight trends and anomalies to management during the audit process. Some graphs and charts can even be added to financial statement disclosures to communicate more effectively with stakeholders. Contact us for more information about using data visualization in your audit and beyond. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Employers offer 401(k) plans for many reasons, including to attract and retain talent. These plans help an employee accumulate a retirement nest egg on a tax-advantaged basis. If you’re thinking about participating in a plan at work, here are some of the features.
Under a 401(k) plan, you have the option of setting aside a certain amount of your wages in a qualified retirement plan. By electing to set cash aside in a 401(k) plan, you’ll reduce your gross income, and defer tax on the amount until the cash (adjusted by earnings) is distributed to you. It will either be distributed from the plan or from an IRA or other plan that you roll your proceeds into after leaving your job.
Your wages or other compensation will be reduced by the amount of pre-tax contributions that you make — saving you current income taxes. But the amounts will still be subject to Social Security and Medicare taxes. If your employer’s plan allows, you may instead make all, or some, contributions on an after-tax basis (these are Roth 401(k) contributions). With Roth 401(k) contributions, the amounts will be subject to current income taxation, but if you leave these funds in the plan for a required time, distributions (including earnings) will be tax-free.
Your elective contributions — either pre-tax or after-tax — are subject to annual IRS limits. For 2021, the maximum amount permitted is $19,500. When you reach age 50, if your employer’s plan allows, you can make additional “catch-up” contributions. For 2021, that additional amount is $6,500. So if you’re 50 or older, the total that you can contribute to all 401(k) plans in 2021 is $26,000. Total employer contributions, including your elective deferrals (but not catch-up contributions), can’t exceed 100% of compensation or, for 2021, $58,000, whichever is less.
Typically, you’ll be permitted to invest the amount of your contributions (and any employer matching or other contributions) among available investment options that your employer has selected. Periodically review your plan investment performance to determine that each investment remains appropriate for your retirement planning goals and your risk specifications.
Getting money out
Another important aspect of these plans is the limitation on distributions while you’re working. First, amounts in the plan attributable to elective contributions aren’t available to you before one of the following events: retirement (or other separation from service), disability, reaching age 59½, hardship, or plan termination. And eligibility rules for a hardship withdrawal are very stringent. A hardship distribution must be necessary to satisfy an immediate and heavy financial need.
As an alternative to taking a hardship or other plan withdrawal while employed, your employer’s 401(k) plan may allow you to receive a plan loan, which you pay back to your account, with interest. Any distribution that you do take can be rolled into another employer’s plan (if that plan permits) or to an IRA. This allows you to continue deferral of tax on the amount rolled over. Taxable distributions are generally subject to 20% federal tax withholding, if not rolled over.
Employers may opt to match contributions up to a certain amount. If your employer matches contributions, you should make sure to contribute enough to receive the full match. Otherwise, you’ll miss out on free money!
These are just the basics of 401(k) plans for employees. For more information, contact your employer. Of course, we can answer any tax questions you may have. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Return requests generally are rare, but occasionally donors may ask your not-for-profit to return their gifts. Are you required to comply? What if you’ve already spent the money? Such requests raise many difficult questions — and even the answers can be complicated. But establishing a return policy can help.
There are several reasons donors commonly ask for their gifts back. For example, a donor may simply have a change of heart. Or the donor may believe your charitable organization is misusing or “wasting” donated funds or that it’s no longer fulfilling its charitable mission. This could involve philosophical differences or a recent trend that the donor dislikes. In some cases, donors argue that their wishes for the funds are being ignored.
There’s no federal law that requires nonprofits to return donations. Individual states have enacted various laws that could come into play, but these generally are vague about returning contributions. They usually assume that a gift is no longer the property of a donor once a charity accepts it. And because nonprofits are expected to act in the public interest, state regulators may rule that returning a donation harms the public good.
When are returns mandatory? One circumstance is when the terms of a donation agreement are substantially violated. If a donor stipulates that money must go directly to hurricane relief and the funds are instead spent on mobile devices for staffers, the charity is legally obligated to return the donation.
Another circumstance is when a nonprofit employee embezzles the donated money or otherwise uses the funds illegally. And, if a donor pays for a ticket to a fundraising event and the event is cancelled, the money must be returned, no questions asked.
Put it in writing
You can head off unwanted return requests by adopting a written donation refund policy. State that most donations aren’t eligible for return and explicitly describe the circumstances under which a donation is eligible for return.
Also document large gifts using a standard agreement form that includes your return policy and consider including a “gift-over clause.” This permits a donor to request that a gift be transferred to another organization if the donor believes it has been misused. Finally, observe best fundraising practices. By adhering to the highest ethical standards, you may be able to avoid misunderstandings and conflict that could result in a refund request.
When to get advice
Instead of waiting for a donation request to occur, take steps to prevent it. But if a donor asks for a smaller donation back, it’s usually best to return it. Larger donations may be harder to return. In this circumstance, talk to your legal and financial advisors — and possibly your state’s nonprofit agency. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The Social Security Administration recently announced that the wage base for computing Social Security tax will increase to $147,000 for 2022 (up from $142,800 for 2021). Wages and self-employment income above this threshold aren’t subject to Social Security tax.
The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees and self-employed workers — one for Old Age, Survivors and Disability Insurance, which is commonly known as the Social Security tax, and the other for Hospital Insurance, which is commonly known as the Medicare tax.
There’s a maximum amount of compensation subject to the Social Security tax, but no maximum for Medicare tax. For 2022, the FICA tax rate for employers is 7.65% — 6.2% for Social Security and 1.45% for Medicare (the same as in 2021).
For 2022, an employee will pay:
For 2022, the self-employment tax imposed on self-employed people is:
More than one employer
What happens if an employee works for your business and has a second job? That employee would have taxes withheld from two different employers. Can the employee ask you to stop withholding Social Security tax once he or she reaches the wage base threshold? Unfortunately, no. Each employer must withhold Social Security taxes from the individual’s wages, even if the combined withholding exceeds the maximum amount that can be imposed for the year. Fortunately, the employee will get a credit on his or her tax return for any excess withheld.
We can help
Contact us if you have questions about payroll tax filing or payments. We can help ensure you stay in compliance. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Interest in environmental, social and governance (ESG) matters has grown significantly during the COVID-19 pandemic. And that momentum may continue under the Biden administration. Currently, about 90% of large public companies voluntarily publish so-called “sustainability reports” that communicate performance on ESG matters, according to a recent report published by the Center for Audit Quality and the American Institute of Certified Public Accountants.
However, the information that sustainability reports provide isn’t based on U.S. Generally Accepted Accounting Principles (GAAP). And there aren’t currently any mandatory attestation requirements for sustainability reporting. An external audit can help ensure transparency and reliability when reporting on ESG matters.
Covering all the bases
The term “sustainability” encompasses a broad range of nonfinancial issues that may affect a company’s financial condition and performance. Media attention on ESG matters has increased public awareness and prompted concerns about how sustainability issues could impact value or increase a company’s risk of litigation.
A sustainability report communicates the company’s sustainability goals and how the company plans to meet them. It focuses on the following three areas:
1. Environmental. This component address how the company manages risks related to climate, natural resource scarcity, pollution and waste. For example, a company may discuss the size of its carbon footprint, efforts to replace fossil fuels with renewable energy sources and overall use of natural resources.
2. Social. This section covers such issues as workplace, health and safety, and consumer product safety risks. Over the last year, interest in human capital issues — such as diversity and inclusion policies — has grown dramatically.
3. Governance. This includes information on boardroom diversity, executive compensation, critical event responsiveness and corporate resiliency. It also may address policies and practices on lobbying, political contributions, bribery and corruption.
During the pandemic, stakeholders may have specific concerns about how your company is handling such issues as public health and safety, supply chain disruptions, strategic resilience, and human resources. 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.
Without independent, external oversight, stakeholders may view sustainability reports with a significant degree of skepticism. That’s where audits come into play.
Many organizations — such as the Global Reporting Initiative, the Sustainability Accounting Standards Board and the Task Force on Climate-related Financial Disclosures — have developed standardized sustainability frameworks. External auditors can verify whether sustainability reports meet the appropriate standards. If not, they can adjust them accordingly.
We can help
ESG factors can affect risk and return. Most companies agree that sustainability information is an important part of their communications with lenders and investors. In some cases, financial statement disclosures that are required under GAAP might not provide enough information to satisfy stakeholder concerns. We can help expand your current disclosures or issue a separate audited sustainability report to position your organization as a leader in ESG matters. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Have you heard of the “nanny tax?” Even if you don’t employ a nanny, it may apply to you. Hiring a house cleaner, gardener or other household employee (who isn’t an independent contractor) may make you liable for federal income and other taxes. You may also have state tax obligations.
If you employ a household worker, you aren’t required to withhold federal income taxes from pay. But you can choose to withhold if the worker requests it. In that case, ask the worker to fill out a Form W-4. However, you may be required to withhold Social Security and Medicare (FICA) taxes and to pay federal unemployment (FUTA) tax.
2021 and 2022 thresholds
In 2021, you must withhold and pay FICA taxes if your household worker earns cash wages of $2,300 or more (excluding the value of food and lodging). The Social Security Administration recently announced that this amount would increase to $2,400 in 2022. If you reach the threshold, all the wages (not just the excess) are subject to FICA.
However, if a nanny is under age 18 and childcare isn’t his or her principal occupation, you don’t have to withhold FICA taxes. So, if you have a part-time student babysitter, there’s no FICA tax liability.
Both an employer and a household worker may have FICA tax obligations. As an employer, you’re responsible for withholding your worker’s FICA share. In addition, you must pay a matching amount. FICA tax is divided between Social Security and Medicare. The Social Security tax rate is 6.2% for the employer and 6.2% for the worker (12.4% total). Medicare tax is 1.45% each for the employer and the worker (2.9% total).
If you want, you can pay your worker’s share of Social Security and Medicare taxes. If you do, your payments aren’t counted as additional cash wages for Social Security and Medicare purposes. However, your payments are treated as additional income to the worker for federal tax purposes, so you must include them as wages on the W-2 form that you must provide.
You also must pay FUTA tax if you pay $1,000 or more in cash wages (excluding food and lodging) to your worker in any calendar quarter. FUTA tax applies to the first $7,000 of wages paid and is only paid by the employer.
Paperwork and payments
You pay household worker obligations by increasing your quarterly estimated tax payments or increasing withholding from wages, rather than making an annual lump-sum payment.
As an employer of a household worker, you don’t have to file employment tax returns, even if you’re required to withhold or pay tax (unless you own your own business). Instead, employment taxes are reported on your tax return on Schedule H.
When you report the taxes on your return, include your employer identification number (not the same as your Social Security number). You must file Form SS-4 to get one.
However, if you own a business as a sole proprietor, you include the taxes for a household worker on the FUTA and FICA forms (940 and 941) that you file for the business. And you use your sole proprietorship EIN to report the taxes.
Recordkeeping is important
Keep related tax records for at least four years from the later of the due date of the return or the date the tax was paid. Records should include the worker’s name, address, Social Security number, employment dates, dates and amount of wages paid and taxes withheld, and copies of forms filed.
Contact us for assistance or questions about how to comply with these requirements. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
According to a recent survey conducted by fundraising platform FrontStream, the vast majority (87%) of Americans say they’re donating to charity in 2021. And almost 20% claim they’re giving more this year than they did in 2020. However, remaining uncertainty surrounding COVID-19 and the economy is making fundraising challenging for many not-for-profits right now.
Social media and mobile apps have made asking for donations easier in some ways. However, one of the most effective strategies for raising money remains the personal appeal. Donors consistently are more likely to give if the request comes from a friend, colleague or family member who’s committed to your mission. Use this fact to put your nonprofit on stronger financial footing.
Board members are usually best
All of your organization’s stakeholders can promote your nonprofit and request support from their contacts. But development staffers aside, board members generally make the most effective fundraisers because they’re knowledgeable about your organization, passionate about your mission and typically have a wide range of contacts in business and philanthropic circles.
You can support their efforts by making sure they have the proper information and training. Consider equipping them with a wish list of specific items or services your nonprofit needs. Keep in mind that not all of their friends or family members may be in a position to make a monetary donation. However, some people may be able to contribute goods (such as auction items) or in-kind services (such as website maintenance).
When making a personal appeal to prospective donors, your board members should, when possible, meet in person. Letters and email can save time, but face-to-face appeals are more effective. This is especially true if your nonprofit offers donors something in exchange for their attention. For instance, they’re more likely to be swayed at an informal coffee hour or cocktail gathering (contingent, of course, on local COVID-19 threats and restrictions).
It’s also important for board members to humanize your cause. Say that your nonprofit raises money for cancer treatment. If board members have been affected by the disease, they might want to relate their personal experiences as a means of illustrating why they support your organization’s work.
Even when appealing to potential donors’ philanthropic instincts, it’s critical to mention other possible benefits. For example, if your nonprofit is trying to encourage business owners to buy ad space in your newsletter, board members could explain that your supporters are a desirable demographic, both in terms of spending power and an eagerness to “buy local.”
Work every channel
Although personal appeals are extremely effective, don’t dismiss any fundraising technique — particularly if it’s low- or no-cost and is easy to use, such as social media. The most successful nonprofits work every available channel to increase interest and donations. Contact us to discuss your fundraising challenges and goals. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If your business is depreciating over a 30-year period the entire cost of constructing the building that houses your operation, you should consider a cost segregation study. It might allow you to accelerate depreciation deductions on certain items, thereby reducing taxes and boosting cash flow. And under current law, the potential benefits of a cost segregation study are now even greater than they were a few years ago due to enhancements to certain depreciation-related tax breaks.
Fundamentals of depreciation
Generally, business buildings have a 39-year depreciation period (27.5 years for residential rental properties). Usually, you depreciate a building’s structural components, including walls, windows, HVAC systems, elevators, plumbing and wiring, along with the building. Personal property — such as equipment, machinery, furniture and fixtures — is eligible for accelerated depreciation, usually over five or seven years. And land improvements, such as fences, outdoor lighting and parking lots, are depreciable over 15 years.
Often, businesses allocate all or most of their buildings’ acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. In some cases — computers or furniture, for example — the distinction between real and personal property is obvious. But the line between the two is frequently less clear. Items that appear to be “part of a building” may in fact be personal property, like removable wall and floor coverings, removable partitions, awnings and canopies, window treatments, signs and decorative lighting.
In addition, certain items that otherwise would be treated as real property may qualify as personal property if they serve more of a business function than a structural purpose. This includes reinforced flooring to support heavy manufacturing equipment, electrical or plumbing installations required to operate specialized equipment, or dedicated cooling systems for data processing rooms.
Classify property into the appropriate asset classes
A cost segregation study combines accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. Although the relative costs and benefits of a cost segregation study depend on your particular facts and circumstances, it can be a valuable investment.
The Tax Cuts and Jobs Act (TCJA) enhances certain depreciation-related tax breaks, which may also enhance the benefits of a cost segregation study. Among other things, the act permanently increased limits on Section 179 expensing, which allows you to immediately deduct the entire cost of qualifying equipment or other fixed assets up to specified thresholds.
The TCJA also expanded 15-year-property treatment to apply to qualified improvement property. Previously this break was limited to qualified leasehold improvement, retail improvement and restaurant property. And it temporarily increased first-year bonus depreciation to 100% (from 50%).
The savings can be substantial
Fortunately, it isn’t too late to get the benefit of speedier depreciation for items that were incorrectly assumed to be part of your building for depreciation purposes. You don’t have to amend your past returns (or meet a deadline for claiming tax refunds) to claim the depreciation that you could have already claimed. Instead, you can claim that depreciation by following procedures, in connection with the next tax return that you file, that will result in “automatic” IRS consent to a change in your accounting for depreciation.
Cost segregation studies can yield substantial benefits, but they’re not right for every business. We can judge whether a study will result in overall tax savings greater than the costs of the study itself. Contact us to find out whether this would be worthwhile for you. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.comw
With the COVID-19 pandemic well into its second year and the start of planning for the upcoming audit season, you may have questions about how to evaluate your company’s going concern status. While some industries appear to have rebounded from the worst of the economic downturn, others continue to struggle with pandemic-related issues, such as rising inflation, along with labor and supply shortages. For some businesses, pre-pandemic conditions may never return, which can make it exceptionally difficult to project future performance.
How auditing standards have changed
Financial statements are generally prepared under the assumption that the entity will remain a going concern. That is, it’s expected to continue to generate a positive return on its assets and meet its obligations in the ordinary course of business.
Under Accounting Standards Codification Topic 205, Presentation of Financial Statements — Going Concern, the continuation of an entity as a going concern is presumed as the basis for reporting unless liquidation becomes imminent. Even if liquidation isn’t imminent, conditions and events may exist that, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern. Today, the responsibility for the going concern assessment falls on management, not the company’s external auditors.
In addition, the time period that the assessment must cover has been extended. Previously, the determination of an entity’s ability to continue as a going concern was based on expectations about its performance for a one-year period from the date of the balance sheet. Now, under Accounting Standards Update No. 2014-15, Presentation of Financial Statements — Going Concern: Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, the assessment is based upon whether it’s probable that the entity won’t be able to meet its obligations as they become due within one year after the date the financial statements are issued — or available to be issued — not the balance sheet date. (The alternate date prevents financial statements from being held for several months after year end to see if the company survives.)
When disclosures are required
In situations where substantial doubt exists, management then must evaluate whether its plans will alleviate substantial doubt. That is, is it probable that the plans will be implemented, and if so, will they be effective at turning around the company’s financial distress?
Disclosures are required indicating that either:
Though management is responsible for making this assessment, auditors will request appropriate evidence to support the going concern disclosure. For example, detailed financial statement projections or a written commitment from a lender or affiliated entity to fully cover the entity’s cash flow requirements might help substantiate management’s assessment. If management doesn’t perform a sufficient evaluation, the auditing standards may require the auditor to report a significant deficiency or a material weakness.
We can help
If your business is continuing to struggle during the pandemic, contact us to discuss your going concern assessment for 2021. Our auditors can help you understand how the evaluation will affect your balance sheet and disclosures. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you’re fortunate enough to own a vacation home, you may want to rent it out for part of the year. What are the tax consequences?
The tax treatment can be complex. It depends on how many days it’s rented and your level of personal use. Personal use includes vacation use by you, your relatives (even if you charge them market rent) and use by nonrelatives if a market rent isn’t charged.
Less than 15 days
If you rent the property out for less than 15 days during the year, it’s not treated as “rental property” at all. In the right circumstances, this can produce revenue and significant tax benefits. Any rent you receive isn’t included in your income for tax purposes. On the other hand, you can only deduct property taxes and mortgage interest — no other operating costs or depreciation. (Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)
If you rent the property out for more than 14 days, you must include the rent received in income. However, you can deduct part of your operating expenses and depreciation, subject to certain rules. First, you must allocate your expenses between the personal use days and the rental days. For example, if the house is rented for 90 days and used personally for 30 days, 75% of the use is rental (90 out of 120 total use days). You’d allocate 75% of your costs such as maintenance, utilities and insurance to rental. You’d also allocate 75% of your depreciation allowance, interest and taxes for the property to rental. The personal use portion of taxes is separately deductible. The personal use part of interest on a second home is also deductible (if eligible) where the personal use exceeds the greater of 14 days or 10% of the rental days. However, depreciation on the personal use portion isn’t allowed.
Claiming a loss
If the rental income exceeds these allocable deductions, you report the rent and deductions to determine the amount of rental income to add to your other income. If the expenses exceed the income, you may be able to claim a rental loss. This depends on how many days you use the house for personal purposes.
Here’s the test: if you use it personally for more than the greater of a) 14 days, or b) 10% of the rental days, you’re using it “too much” and can’t claim your loss. In this case, you can still use your deductions to wipe out rental income, but you can’t create a loss. Deductions you can’t use are carried forward and may be usable in future years. If you’re limited to using deductions only up to the rental income amount, you must use the deductions allocated to the rental portion in this order: 1) interest and taxes, 2) operating costs and 3) depreciation.
If you “pass” the personal use test, you must still allocate your expenses between the personal and rental portions. In this case, however, if your rental deductions exceed rental income, you can claim the loss. (The loss is “passive,” however, and may be limited under passive loss rules.)
These are only the basic rules. There may be other rules if you’re considered a small landlord or real estate professional. Contact us if you have questions. We can help plan your vacation home use to achieve optimal tax results. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
A few years ago, IRS Revenue Procedure 2018-15 changed the rules regarding not-for-profit restructuring. If you’ve participated in a restructuring in the past, you’ll be relieved to know that in many cases it’s now easier. Even so, if recent challenges have led your organization to consider restructuring, it’s important to work with a professional advisor, such as a CPA.
That was then
Under previous IRS rules, tax-exempt organizations were required to file a new exemption application when they made certain changes to their structure. Filing this application created a new legal entity.
To apply for new exempt status, nonprofits had to file a final Form 990 under their initial Employer Identification Number (EIN), obtain a new EIN and apply for exemption for the new entity. In addition to being a time-consuming and often expensive process, the new nonprofit risked failing to receive its tax-exempt status. The process also required changing the EIN on all bank and investment accounts.
This is now
Now in many situations restructuring nonprofits are required only to report significant organizational changes on their Forms 990. To be eligible, the restructuring must satisfy certain conditions. Your organization must be:
And your reorganization must do one of the following: change from an unincorporated association to a corporation; reincorporate a corporation under the laws of another state after dissolving in the original state; file articles of domestication to transfer a corporation to a new state without dissolving in the original state; or merge a corporation with or into another corporation.
The “surviving” organization must carry out the same exempt purpose that the original organization did. For a 501(c)(3) organization, the new articles of incorporation must continue to satisfy the IRS’s organizational test that requires your nonprofit’s organizing documents to limit its purposes and use of its assets to exempt purposes.
Note that there are additional limitations. For example, the new rules don’t apply if your surviving organization is a “disregarded entity,” limited liability company (LLC), partnership or foreign business entity. Also, surviving organizations still have reporting obligations — for instance, to report the restructuring on any required Form 990 for the applicable tax year. And, these rules apply only to federal income tax exemptions. Your state’s laws could require you to file a new exemption application.
For more information and guidance, contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Are employees at your business traveling again after months of virtual meetings? In Notice 2021-52, the IRS announced the fiscal 2022 “per diem” rates that became effective October 1, 2021. Taxpayers can use these rates to substantiate the amount of expenses for lodging, meals and incidental expenses when traveling away from home. (Taxpayers in the transportation industry can use a special transportation industry rate.)
A simplified alternative to tracking actual business travel expenses is to use the high-low per diem method. This method provides fixed travel per diems. The amounts are based on rates set by the IRS that vary from locality to locality.
Under the high-low method, the IRS establishes an annual flat rate for certain areas with higher costs of living. All locations within the continental United States that aren’t listed as “high-cost” are automatically considered “low-cost.” The high-low method may be used in lieu of the specific per diem rates for business destinations. Examples of high-cost areas include Boston, San Francisco and Seattle.
Under some circumstances — for example, if an employer provides lodging or pays the hotel directly — employees may receive a per diem reimbursement only for their meals and incidental expenses. There’s also a $5 incidental-expenses-only rate for employees who don’t pay or incur meal expenses for a calendar day (or partial day) of travel.
If your company uses per diem rates, employees don’t have to meet the usual recordkeeping rules required by the IRS. Receipts of expenses generally aren’t required under the per diem method. But employees still must substantiate the time, place and business purpose of the travel. Per diem reimbursements generally aren’t subject to income or payroll tax withholding or reported on an employee’s Form W-2.
The FY2022 rates
For travel after September 30, 2021, the per diem rate for all high-cost areas within the continental United States is $296. This consists of $222 for lodging and $74 for meals and incidental expenses. For all other areas within the continental United States, the per diem rate is $202 for travel after September 30, 2021 ($138 for lodging and $64 for meals and incidental expenses). Compared to the FY2021 per diems, both the high and low-cost area per diems increased $4.
Important: This method is subject to various rules and restrictions. For example, companies that use the high-low method for an employee must continue using it for all reimbursement of business travel expenses within the continental United States during the calendar year. However, the company may use any permissible method to reimburse that employee for any travel outside the continental United States.
For travel during the last three months of a calendar year, employers must continue to use the same method (per diem or high-low method) for an employee as they used during the first nine months of the calendar year. Also, note that per diem rates can’t be paid to individuals who own 10% or more of the business.
If your employees are traveling, it may be a good time to review the rates and consider switching to the high-low method. It can reduce the time and frustration associated with traditional travel reimbursement. Contact us for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The COVID-19 pandemic is still adversely affecting many businesses and not-for-profit organizations, but the effects vary, depending on the nature of operations and geographic location. Has your organization factored the effects of the pandemic into its financial statements? You might not have considered this question since last year if your organization prepares statements that comply with U.S. Generally Accepted Accounting Principles only at year end.
As we head into audit season for 2021, it’s time to evaluate whether your financial situation has gotten better — or worse — this year. Here are 10 financial statement areas to home in on:
1. Revenue recognition. Assess how changes in customer preferences, contract modifications, discounts, refund concessions, and changes in credit policies or payment terms impact the top line of the income statement. Also consider related collectability of accounts receivable.
2. Government grants. You may account for these grants as revenue or donor-restricted contributions. Government funding programs may have eligibility, documentation, expense tracking and other requirements (such as government audits) that you may need to address.
3. Estimates and fair values. These items are typically based on budgeting and forecasting of revenue, costs and cash flows. Uncertainty may increase the discount rates used in making estimates and decrease the fair values of certain balance sheet items.
4. Investments. Market changes caused by the pandemic may negatively affect the fair values of investments and financial instruments that qualify for hedge accounting.
5. Inventory. It’s possible that certain market conditions — including inflation, reductions in production and supply chain disruptions — may affect the value of raw materials, work-in-progress and finished goods inventory. Consider the need for write-offs due to obsolescence.
In addition, travel and work restrictions may delay, restrict or prevent year-end physical inventory counts. Your external auditors may have to observe counts remotely, which, in turn, may require additional testing procedures during audit fieldwork.
6. Property, plant and equipment. Evaluate changes in useful lives and related deprecation due to changes in business plans. There may also be potential impairment of long-lived assets and leased assets.
7. Goodwill and other intangible assets. Because of COVID-19 triggering events, these items may require impairment testing and write-offs may be needed.
8. Deferred tax assets. Consider the realizability of these assets in light of current year losses and uncertainty about future events, including the impact of possible federal tax law changes.
9. Accrued liabilities. You may need to book additional liabilities this year for employee terminations, changes in benefits and payroll tax payment deferrals. Also consider whether existing contingency accruals are still adequate.
10. Long-term debt. You may have debt classification issues for existing loans if your organization fails to meet its debt covenants. Financial difficulties may result in debt modification or extinguishment. Also evaluate the compliance requirements of the Paycheck Protection Program (PPP) loans and the probability of forgiveness.
This list is a useful starting point for discussions about how the pandemic has affected financial results in 2021. If you have questions about how to report the effects, contact us for guidance. Your preparedness will help facilitate audit fieldwork and minimize adjustments to your in-house financial reports. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you own a valuable piece of art, or other property, you may wonder how much of a tax deduction you could get by donating it to charity.
The answer to that question can be complex because several different tax rules may come into play with such contributions. A charitable contribution of a work of art is subject to reduction if the charity’s use of the work of art is unrelated to the purpose or function that’s the basis for its qualification as a tax-exempt organization. The reduction equals the amount of capital gain you’d have realized had you sold the property instead of giving it to charity.
For example, let’s say you bought a painting years ago for $10,000 that’s now worth $20,000. You contribute it to a hospital. Your deduction is limited to $10,000 because the hospital’s use of the painting is unrelated to its charitable function, and you’d have a $10,000 long-term capital gain if you sold it. What if you donate the painting to an art museum? In that case, your deduction is $20,000.
One or more substantiation rules may apply when donating art. First, if you claim a deduction of less than $250, you must get and keep a receipt from the organization and keep written records for each item contributed.
If you claim a deduction of $250 to $500, you must get and keep an acknowledgment of your contribution from the charity. It must state whether the organization gave you any goods or services in return for your contribution and include a description and good faith estimate of the value of any goods or services given.
If you claim a deduction in excess of $500, but not over $5,000, in addition to getting an acknowledgment, you must maintain written records that include information about how and when you obtained the property and its cost basis. You must also complete an IRS form and attach it to your tax return.
If the claimed value of the property exceeds $5,000, in addition to an acknowledgment, you must also have a qualified appraisal of the property. This is an appraisal that was done by a qualified appraiser no more than 60 days before the contribution date and meets numerous other requirements. You include information about these donations on an IRS form filed with your tax return.
If your total deduction for art is $20,000 or more, you must attach a copy of the signed appraisal. If an item is valued at $20,000 or more, the IRS may request a photo. If an art item has been appraised at $50,000 or more, you can ask the IRS to issue a “Statement of Value” that can be used to substantiate the value.
In addition, your deduction may be limited to 20%, 30%, 50%, or 60% of your contribution base, which usually is your adjusted gross income. The percentage varies depending on the year the contribution is made, the type of organization, and whether the deduction of the artwork had to be reduced because of the unrelated use rule explained above. The amount not deductible on account of a ceiling may be deductible in a later year under carryover rules.
Other rules may apply
Donors sometimes make gifts of partial interests in a work of art. Special requirements apply to these donations. If you’d like to discuss any of these rules, please contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Budgetary shortfalls may have your not-for-profit looking for new sources of support. If those sources are international, be careful. Activities such as soliciting donations, recruiting members and selling products in foreign countries can raise tax and legal issues.
Is there a need?
Before your nonprofit adopts a global strategy, make sure that the need for your services or products is robust enough in target countries to justify the costs of doing business there. For example, what will your competition be like? Ample research is essential before making a decision.
This includes gathering information about the country’s relevant laws and regulations. If you plan to sell products or services there, investigate sales and tax issues thoroughly. If the country engages in free trade, it may be easy to do business there. But if the country isn’t a party to a free trade agreement with the United States, high tariffs might prove an insurmountable obstacle.
Consult with legal and financial advisors as you chart your business plan. Foreign activities also may require analysis to ensure that your American contributors retain their tax deductions and that you don’t jeopardize your organization’s own tax-exempt status.
Have you considered cultural differences?
Your understanding of the target country’s population will be key to your success. Setting up a cultural advisory committee in the United States that includes expatriates is one way to develop insights into your new market. If English isn’t the primary spoken language in the target country, bring a translator along on exploratory visits.
Offering membership to individuals in other countries can be your initial step toward becoming a global organization. Some organizations hold seminars and conferences for these potential new members and even open local offices to establish roots.
If you appoint a member from the target country to your nonprofit’s board, be willing to accept different approaches to issues. Board meetings probably will continue to be held at your U.S. headquarters. But videoconferences and collaborative software can help board members participate fully in meetings regardless of physical location.
Finally, don’t discount the potential impact of currency exchange rates. If the U.S. dollar is weak, it could work to your advantage in selling products and services abroad. On the other hand, a strong dollar will likely go further when leasing foreign property or compensating international staff.
What about travel restrictions?
If your expansion plans include foreign countries, you may have to proceed slowly. Pandemic restrictions still affect international travel and make many formerly simple transactions difficult. Contact us to discuss the tax and financial implications of potential opportunities. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth 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.
Note: Certain tax-filing and tax-payment deadlines may be postponed for taxpayers who reside in or have a business in federally declared disaster areas.
Friday, October 15
Monday, November 1
Wednesday, November 10
Wednesday, December 15
Friday, December 31
Contact us if you’d like more information about the filing requirements and to ensure you’re meeting all applicable deadlines. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Timely financial reporting is key to making informed business decisions. Managers need to know what’s in the pipeline to respond promptly and decisively. Unfortunately, it typically takes several weeks to prepare financial statements under U.S. Generally Accepted Accounting Principles (GAAP). And many companies only produce GAAP financials at the end of the quarter or year. In the meantime, managers may turn their attention to simple “flash” reports.
Made to order
There are no standards to follow when preparing flash reports. But they typically take less than an hour to prepare and rarely exceed one sheet of paper. The goal is to provide management with a snapshot of key financial figures, such as cash balances, accounts receivable aging, collections and payroll, on a weekly basis. Some metrics might even be tracked daily — including sales, shipments and deposits. This is especially critical during seasonal peaks or when a company has recently restructured.
Customization is key. Each company’s flash reports contain different information. For instance, billable hours might be more relevant to a law firm, and machine utilization rates more relevant to a manufacturer.
Flash reports home in on what items matter most and how to draw management’s attention to them. Consider a restaurant, for example. Weekly revenues might be broken down by day of the week or between alcohol and food sales. Restaurateurs also keep close tabs on labor, food and liquor costs, as well as gross margins.
Use with caution
Comparative flash reports identify trends and exceptions that may need corrective action. For example, you might compare the current numbers to the previous week, the same week in the previous year or budgeted amounts.
When a company is starting up, aggressively expanding or struggling, lenders and investors may request copies of flash reports — especially if management has previously failed to meet projections for growth and profitability. But sharing this information can be perilous if stakeholders don’t understand that flash reports are designed for internal purposes only.
Flash reports provide a rough measure of performance and are seldom 100% accurate. Adjustments are often made when preparing GAAP financials. In addition, it’s normal for cash to ebb and flow throughout the month, depending on billing cycles.
Be proactive, not reactive
Managers who rely on stale financial information may be blindsided by unexpected threats and miss out on time-sensitive opportunities. Flash reports, if you understand their limitations, can help bridge the timing gap between daily operations and receipt of GAAP financial statements. Contact us to help you design a flash reporting format that meets your business’s current needs. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Studies have found that more people are engaging in online gambling and sports betting since the pandemic began. And there are still more traditional ways to gamble and play the lottery. If you’re lucky enough to win, be aware that tax consequences go along with your good fortune.
Review the tax rules
Whether you win online, at a casino, a bingo hall, a fantasy sports event or elsewhere, you must report 100% of your winnings as taxable income. They’re reported on the “Other income” line of your 1040 tax return. To measure your winnings on a particular wager, use the net gain. For example, if a $30 bet at the racetrack turns into a $110 win, you’ve won $80, not $110.
You must separately keep track of losses. They’re deductible, but only as itemized deductions. Therefore, if you don’t itemize and take the standard deduction, you can’t deduct gambling losses. In addition, gambling losses are only deductible up to the amount of gambling winnings. Therefore, you can use losses to “wipe out” gambling income but you can’t show a gambling tax loss.
Maintain good records of your losses during the year. Keep a diary in which you indicate the date, place, amount and type of loss, as well as the names of anyone who was with you. Save all documentation, such as checks or credit slips.
Hitting a lottery jackpot
The odds of winning the lottery are slim. But if you don’t follow the tax rules after winning, the chances of hearing from the IRS are much higher.
Lottery winnings are taxable. This is the case for cash prizes and for the fair market value of any noncash prizes, such as a car or vacation. Depending on your other income and the amount of your winnings, your federal tax rate may be as high as 37%. You may also be subject to state income tax.
You report lottery winnings as income in the year, or years, you actually receive them. In the case of noncash prizes, this would be the year the prize is received. With cash, if you take the winnings in annual installments, you only report each year’s installment as income for that year.
If you win more than $5,000 in the lottery or certain types of gambling, 24% must be withheld for federal tax purposes. You’ll receive a Form W-2G from the payer showing the amount paid to you and the federal tax withheld. (The payer also sends this information to the IRS.) If state tax withholding is withheld, that amount may also be shown on Form W-2G.
Since the federal tax rate can currently be up to 37%, which is well above the 24% withheld, the withholding may not be enough to cover your federal tax bill. Therefore, you may have to make estimated tax payments — and you may be assessed a penalty if you fail to do so. In addition, you may be required to make state and local estimated tax payments.
Talk with us
If you’re fortunate enough to win a sizable amount of money, there are other issues to consider, including estate planning. This article only covers the basic tax rules. Different rules apply to people who qualify as professional gamblers. Contact us with questions. We can help you minimize taxes and stay in compliance with all requirements. Sam Brown, CPA, Inc, Troy, Ohio, www.sbcpaohio.com
Since the beginning of the pandemic, financial markets have been riding a roller coaster. This volatility is a good reminder that if your nonprofit has an endowment, it could benefit from management by a professional investment advisor. Here’s how to find a qualified advisor.
Nonprofit experience required
Finding the right investment advisor for your organization starts with identifying a pool of qualified candidates with proven track records. Ask for referrals from local private foundations (possibly ones that have funded you in the past) or other area nonprofits. Also, members of your board may know investment advisors they can recommend. Qualified candidates should have experience working with nonprofit endowments.
Request detailed proposals from candidates on how they’d manage your investments — as well as the fee structure for their services. Generally, investment advisors charge clients based on one (or a combination) of three structures:
After reviewing the candidates’ proposals and checking their references, allow search committee members to talk to other nonprofit leaders to gauge their satisfaction level with your short list. Then select two or three people to interview.
Grow without incurring excessive risk
Members of your board’s investment or finance committee should interview candidates. They should look for someone who closely follows market movements and trends and is capable of creating and managing a balanced portfolio that can grow without incurring excessive risk. Understanding the candidates’ investment processes, along with their long-term results, is essential.
Other desirable qualities include experience assisting investment committees in drafting and changing investment policies and an ability to clearly explain the processes behind their investment decisions. Committee members might ask candidates, based on what they know of your organization, what changes to your endowment’s current investment strategy they might propose.
Good candidates should express empathy toward the kinds of problems your organization faces and suggest investment solutions specific to your nonprofit. And they should have the time to properly manage your investments. Ask how many hours per month they anticipate spending on your account and whether they’d be able to attend off-hour meetings, if necessary.
Finally, consider how much you trust the candidate. Don’t engage an investment advisor for your nonprofit unless you’d wholeheartedly trust the person to handle your own money.
If you’re not sure where to look for a qualified investment advisor, contact us for referrals. Also contact us if you don’t yet have an endowment but would like to establish one. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Low interest rates and other factors have caused global merger and acquisition (M&A) activity to reach new highs in 2021, according to Refinitiv, a provider of financial data. It reports that 2021 is set to be the biggest in M&A history, with the United States accounting for $2.14 trillion worth of transactions already this year. If you’re considering buying or selling a business — or you’re in the process of an M&A transaction — it’s important that both parties report it to the IRS and state agencies in the same way. Otherwise, you may increase your chances of being audited.
If a sale involves business assets (as opposed to stock or ownership interests), the buyer and the seller must generally report to the IRS the purchase price allocations that both use. This is done by attaching IRS Form 8594, “Asset Acquisition Statement,” to each of their respective federal income tax returns for the tax year that includes the transaction.
Here’s what must be reported
If you buy business assets in an M&A transaction, you must allocate the total purchase price to the specific assets that are acquired. The amount allocated to each asset then becomes its initial tax basis. For depreciable and amortizable assets, the initial tax basis of each asset determines the depreciation and amortization deductions for that asset after the acquisition. Depreciable and amortizable assets include:
In addition to reporting the items above, you must also disclose on Form 8594 whether the parties entered into a noncompete agreement, management contract or similar agreement, as well as the monetary consideration paid under it.
What the IRS might examine
The IRS may inspect the forms that are filed to see if the buyer and the seller use different allocations. If the tax agency finds that different allocations are used, auditors may dig deeper and the examination could expand beyond the transaction. So, it’s best to ensure that both parties use the same allocations. Consider including this requirement in your asset purchase agreement at the time of the sale.
The tax implications of buying or selling a business are complex. Price allocations are important because they affect future tax benefits. Both the buyer and the seller need to report them to the IRS in an identical way to avoid unwanted attention. To lock in the best results after an acquisition, consult with us before finalizing any transaction. Sam Brown, CPA, Inc., Troy, Ohio, wwww.sbcpaohio.com
Timely financial data is key to making informed business decisions. Unfortunately, it’s common for managers to struggle with their companies’ accounting systems to get the information they need, when they need it. Often, it takes multiple, confusing steps to enter and extract data specific to customers and/or projects.
Businesses and accounting software solutions evolve over time. So, what worked for your company years ago may not be the optimal solution today. For example, you might prefer a different solution that’s more user-friendly, more sophisticated or customized for your industry niche. Here are four factors — beyond just cost — to consider when evaluating your current accounting system.
1. Remote access
These days, remote access — from the field or from home to facilitate social distancing — remains a priority. Accessing your accounting system remotely allows team members to see real-time project data from anywhere. It also allows direct, daily reporting of key financial information, such as sales figures, labor hours, equipment usage and cash on hand. Managers can then compare this information against budgeted amounts to catch potential problems and adjust as needed.
Modern accounting software can facilitate seamless information sharing with other platforms and existing applications. For instance, your accounting solution should support timecard entry and project management software. It also should be compatible with customer and supplier networks. Likewise, if you outsource payroll to a third party, you should be able to integrate with the provider’s system so it can automatically import pertinent information in a timely manner with minimal manual input.
3. Vendor support
A quality accounting system comes with top-notch customer support, including training and a help desk to solve problems. To assess your current level of support, ask your vendor representative whether you’re maximizing the functionality of your accounting software. The rep should be able to tell you what’s working and what’s not. If the vendor doesn’t respond or provides minimal feedback, it may be time to switch providers.
4. Team buy-in
Changes in technology affect people throughout your organization, so the entire team (or at least key members thereof) should have input on the decision. Gather feedback from the team on which features are “must haves” and which ones are “just wants.” Then work with IT and financial specialists to narrow down the list of prospective vendors to three to five solutions to research in-depth and test drive.
Once you’ve selected a system, it’s important to overcome any fear or confusion about the prospective software. This involves promptly announcing the plans to upgrade the accounting system, giving a rundown of the company’s objectives for doing so and keeping staff updated on the effort’s progress. Once the new system is in place, training is the final piece to the puzzle. More complex systems generally have a learning curve that can be reduced with formal instruction by the vendor.
We can help
If you’re dissatisfied with your current accounting system, contact us. We can do a complete assessment on the effectiveness of your system and how you’re using it. Then we can help you identify other cost-effective solutions that may better fit your operational needs. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Given the escalating cost of health care, there may be a more cost-effective way to pay for it. For eligible individuals, a Health Savings Account (HSA) offers a tax-favorable way to set aside funds (or have an employer do so) to meet future medical needs. Here are the main tax benefits:
To be eligible for an HSA, you must be covered by a “high deductible health plan.” For 2021, 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 self-only coverage, the 2021 limit on deductible contributions is $3,600. For family coverage, the 2021 limit on deductible contributions is $7,200. Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits can’t exceed $7,000 for self-only coverage or $14,000 for family coverage.
An individual (and the individual’s covered spouse) who has reached age 55 before the close of the year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2021 of up to $1,000.
HSAs may be established by, or on behalf of, any eligible individual.
You can deduct contributions to an HSA for the year up to the total of your monthly limitations for the months you were eligible. For 2021, the monthly limitation on deductible contributions for a person with self-only coverage is 1/12 of $3,600. For an individual with family coverage, the monthly limitation on deductible contributions is 1/12 of $7,200. Thus, deductible contributions aren’t limited by the amount of the annual deductible under the high deductible health plan.
Also, taxpayers who are eligible individuals during the last month of the tax year are treated as having been eligible individuals for the entire year for purposes of computing the annual HSA contribution.
However, if an individual is enrolled in Medicare, he or she is no longer eligible under the HSA rules and contributions to an HSA can no longer be made.
On a once-only basis, taxpayers can withdraw funds from an IRA, and transfer them tax-free to an HSA. The amount transferred can be up to the maximum deductible HSA contribution for the type of coverage (individual or family) in effect at the transfer time. The amount transferred is excluded from gross income and isn’t subject to the 10% early withdrawal penalty.
HSA Distributions to cover an eligible individual’s qualified medical expenses, or those of his spouse or dependents, aren’t taxed. Qualified medical expenses for these purposes generally mean those that would qualify for the medical expense itemized deduction. If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it’s made after reaching age 65 or in the event of death or disability.
As you can see, HSAs offer a very flexible option for providing health care coverage, but the rules are somewhat complex. Contact us if you have questions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Whether your not-for-profit is continuing to hold videoconference board meetings or is back to in-person gatherings, you don’t want to waste members’ time. Board meetings need to be long enough to accomplish agenda items and keep your organization on track, but not so long that the meetings become tedious and unproductive. The key is good planning.
Cover pressing concerns
Once you’ve set a meeting date, prepare an agenda. Email board members to ask if there’s anything they want to add. This will help ensure all pressing concerns can be covered and minimize the chances of “surprise” issues hijacking the meeting.
For each item, the agenda should provide a timetable and assign responsibility to specific members. Include at least one board vote to reinforce a sense of purpose and accomplishment, but be careful not to cram too much into your agenda. Otherwise, the meeting is likely to feel rushed and some items may need to be postponed.
Email a board packet at least one to two days before the meeting. This packet should consist of the agenda, minutes from the previous meeting and materials relevant to new agenda items, such as financial statements and project proposals.
Stick to the agenda
Start with a short pre-meeting reception that allows members to chat. Some board members have little time to spare, but most will welcome the opportunity to get to know their colleagues.
Once the meeting starts, your executive director and board chair should stick to the agenda and keep things moving. This means imposing a time limit on discussions and calling time when necessary — particularly if one or two individuals are dominating the conversation.
Encourage a vote after a reasonable period. But if your organization requires a consensus (as opposed to a majority vote), the board may not be able to reach a decision in one meeting. If members need more time to think about an issue, postpone the decision to a future date and move on. Be sure to end the meeting on a positive note by thanking members for their time.
Complete post-meeting tasks
Board meetings can’t be effective if there’s no follow-up. Find answers and supporting materials for any questions that might have arisen during the meeting and make sure unresolved items are placed on the next meeting’s agenda.
Also ensure that board members are fulfilling their commitments to your organization and fellow members. If their busy schedules are impeding them, step in and help. If the issue continues, consider replacing the board member.
Your board members are likely busy professionals who volunteer to serve your nonprofit. Respect their time by focusing on what matters during meetings. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you use an automobile in your trade or business, you may wonder how depreciation tax deductions are determined. The rules are complicated, and special limitations that apply to vehicles classified as passenger autos (which include many pickups and SUVs) can result in it taking longer than expected to fully depreciate a vehicle.
Cents-per-mile vs. actual expenses
First, note that separate depreciation calculations for a passenger auto only come into play if you choose to use the actual expense method to calculate deductions. If, instead, you use the standard mileage rate (56 cents per business mile driven for 2021), a depreciation allowance is built into the rate.
If you use the actual expense method to determine your allowable deductions for a passenger auto, you must make a separate depreciation calculation for each year until the vehicle is fully depreciated. According to the general rule, you calculate depreciation over a six-year span as follows: Year 1, 20% of the cost; Year 2, 32%; Year 3, 19.2%; Years 4 and 5, 11.52%; and Year 6, 5.76%. If a vehicle is used 50% or less for business purposes, you must use the straight-line method to calculate depreciation deductions instead of the percentages listed above.
For a passenger auto that costs more than the applicable amount for the year the vehicle is placed in service, you’re limited to specified annual depreciation ceilings. These are indexed for inflation and may change annually.
Heavy SUVs, pickups, and vans
Much more favorable depreciation rules apply to heavy SUVs, pickups, and vans used over 50% for business, because they’re treated as transportation equipment for depreciation purposes. This means a vehicle with a gross vehicle weight rating (GVWR) above 6,000 pounds. Quite a few SUVs and pickups pass this test. You can usually find the GVWR on a label on the inside edge of the driver-side door.
After-tax cost is what counts
What’s the impact of these depreciation limits on your business vehicle decisions? They change the after-tax cost of passenger autos used for business. That is, the true cost of a business asset is reduced by the tax savings from related depreciation deductions. To the extent depreciation deductions are reduced, and thereby deferred to future years, the value of the related tax savings is also reduced due to time-value-of-money considerations, and the true cost of the asset is therefore that much higher.
The rules are different if you lease an expensive passenger auto used for business. Contact us if you have questions or want more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Related-party transactions and financial connections are a normal part of operating a business. But these arrangements have gotten a bad rap because dishonest people sometimes use them to disguise poor performance or dishonest activities. So, identifying related parties and evaluating your interactions with them are important parts of the external audit process — especially in today’s volatile market conditions.
In an accounting context, the term “related parties” refers to “any party that controls or can significantly influence the management or operating policies of the company to the extent that the company may be prevented from fully pursuing its own interests.” Examples of related parties include:
The auditing standards on related parties target three critical areas:
Auditors strive for an in-depth understanding of every related-party financial relationship and transaction, including their nature, terms and business purpose (or lack thereof). Examples of information that may be gathered during the audit that could reveal undisclosed related parties include information contained on a company’s website, tax filings, corporate life insurance policies, contracts and organizational charts.
Certain types of questionable transactions — such as contracts for below-market goods or services, bill-and-hold arrangements, uncollateralized loans and subsequent repurchase of goods sold — also might signal that a company is engaged in unusual or undisclosed related-party transactions.
Eye on compensation
Executive compensation is a key example of a related-party arrangement that’s subject to heightened scrutiny from auditors. Executives can potentially influence financial reporting and may feel incentives or pressures to meet financial targets. The auditing standards require in-depth inquiry about executive compensation, including performance-based bonuses and stock options.
Auditors also test the accuracy and completeness of management’s reporting for and disclosures of these transactions. But they’re not required to make any recommendations or determinations regarding the reasonableness of compensation arrangements.
Investors, lenders and other stakeholders appreciate companies that present related-party relationships and transactions, openly and completely. You can help facilitate the audit process by being up-front with your auditors about all related-party transactions, even if you don’t think they’re required to be disclosed or consolidated on the company’s financial statements. Contact us for more information about transactions and financial connections that may fall under the related-party accounting rules. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Many homeowners across the country have seen their home values increase recently. According to the National Association of Realtors, the median price of homes sold in July of 2021 rose 17.8% over July of 2020. The median home price was $411,200 in the Northeast, $275,300 in the Midwest, $305,200 in the South and $508,300 in the West.
Be aware of the tax implications if you’re selling your home or you sold one in 2021. You may owe capital gains tax and net investment income tax (NIIT).
If you’re selling your principal residence, and meet certain requirements, you can exclude from tax up to $250,000 ($500,000 for joint filers) of gain.
To qualify for the exclusion, you must meet these tests:
In addition, you can’t use the exclusion more than once every two years.
Gain above the exclusion amount
What if you have more than $250,000/$500,000 of profit? 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.
If you’re selling a second home (such as a vacation home), it isn’t 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.
How does the 3.8% NIIT apply to home sales? If you sell your main home, and you qualify to exclude up to $250,000/$500,000 of gain, the excluded gain isn’t subject to the NIIT.
However, gain that exceeds the exclusion limit is subject to the tax if your adjusted gross income is over a certain amount. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the exclusion, is also subject to the NIIT.
The NIIT applies only if your modified adjusted gross income (MAGI) exceeds: $250,000 for married taxpayers filing jointly and surviving spouses; $125,000 for married taxpayers filing separately; and $200,000 for unmarried taxpayers and heads of household.
Two other tax considerations
As you can see, depending on your home sale profit and your income, some or all of the gain may be tax free. But for higher-income people with pricey homes, there may be a tax bill. We can help you plan ahead to minimize taxes and answer any questions you have about home sales. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Watch out, nonprofit trade associations! If your group is a 501(c)(6) organization, your activities could potentially threaten your tax-exempt status. To ensure you’re in compliance with IRS rules, you need to routinely review your member offerings and any business you might conduct.
Support common interests
Trade associations exist to promote their members’ common interests and improve business conditions or “one or more lines of interest.” Typically, associations get into trouble when they interpret terms such as “promote common interests” and “improve business conditions” too broadly. For example, they might provide customized sales training for only some of their members. But associations don’t qualify for tax-exempt status if they exist only to perform services for individual members.
Another potential violation is engaging in business that’s normally carried out on a for-profit basis. And groups that are primarily social or that exist to promote a hobby generally don’t qualify for 501(c)(6) status.
Don’t favor individual members
To avoid IRS scrutiny, you must be able to differentiate between qualified and nonqualified activities. For example, you are generally allowed to:
But you should limit activities if they benefit specific members rather than your industry or profession as a whole. These might include selling advertising in member publications; facilitating the purchase of supplies for members; and providing workers’ compensation insurance to members. Your association’s “primary purpose” is key. Most 501(c)(6) groups perform some activities that don’t primarily serve common interests. But these activities should be limited in scope and number.
Be careful with unrelated business
Even when certain activities don’t threaten your exempt status, performing services for members can trigger unrelated business income tax (UBIT). Typically, members pay for such services directly, instead of through dues or other common assessments. Depending on the services your association provides and the revenues raised, additional reporting may be required and you may owe UBIT.
Stop and reassess if you’re performing more services, or more substantial ones, for individual members. Instead, you might want to consider forming a separate for-profit organization to offer those services.
It’s not always easy to differentiate between acceptable and unacceptable association activities. To help you remain on the right side of the IRS and preserve your tax-exempt status, contact us with questions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The week of September 13-17 has been declared National Small Business Week by the Small Business Administration. To commemorate the week, here are three tax breaks to consider.
1. Claim bonus depreciation or a Section 179 deduction for asset additions
Under current law, 100% first-year bonus depreciation is available for qualified new and used property that’s acquired and placed in service in calendar year 2021. That means your business might be able to write off the entire cost of some or all asset additions on this year’s return. Consider making acquisitions between now and December 31.
Note: It doesn’t always make sense to claim a 100% bonus depreciation deduction in the first year that qualifying property is placed in service. For example, if you think that tax rates will increase in the future — either due to tax law changes or a change in your income — it might be better to forgo bonus depreciation and instead depreciate your 2021 asset acquisitions over time.
There’s also a Section 179 deduction for eligible asset purchases. The maximum Section 179 deduction is $1.05 million for qualifying property placed in service in 2021. Recent tax laws have enhanced Section 179 and bonus depreciation but most businesses benefit more by claiming bonus depreciation. We can explain the details of these tax breaks and which is right for your business. You don’t have to decide until you file your tax return.
2. Claim bonus depreciation for a heavy vehicle
The 100% first-year bonus depreciation provision can have a sizable, beneficial impact on first-year depreciation deductions for new and used heavy SUVs, pickups and vans used over 50% for business. For federal tax purposes, heavy vehicles are treated as transportation equipment so they qualify for 100% bonus depreciation.
This option is available only when the manufacturer’s gross vehicle weight rating (GVWR) is above 6,000 pounds. You can verify a vehicle’s GVWR by looking at the manufacturer’s label, usually found on the inside edge of the driver’s side door.
Buying an eligible vehicle and placing it in service before the end of the year can deliver a big write-off on this year’s return. Before signing a sales contract, we can help evaluate what’s right for your business.
3. Maximize the QBI deduction for pass-through businesses
A valuable deduction is the one based on qualified business income (QBI) from pass-through entities. For tax years through 2025, the deduction can be up to 20% of a pass-through entity owner’s QBI. This deduction is subject to restrictions that can apply at higher income levels and based on the owner’s taxable income.
For QBI deduction purposes, pass-through entities are defined as sole proprietorships, single-member LLCs that are treated as sole proprietorships for tax purposes, partnerships, LLCs that are treated as partnerships for tax purposes and S corporations. For these taxpayers, the deduction can also be claimed for up to 20% of income from qualified real estate investment trust dividends and 20% of qualified income from publicly traded partnerships.
Because of various limitations on the QBI deduction, tax planning moves can unexpectedly increase or decrease it. For example, strategies that reduce this year’s taxable income can have the negative side-effect of reducing your QBI deduction.
These are only a few of the tax breaks your small business may be able to claim. Contact us to help evaluate your planning options and optimize your tax results. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
In the first half of 2021, there was a surge in financial restatements. The reason relates to guidance issued by the Securities and Exchange Commission, requiring special purpose acquisition companies (SPACs) to report warrants as liabilities. SPACs are shell corporations that are listed on a stock exchange with the purpose of acquiring a private company, thereby making it public without going through the traditional IPO process. Historically, SPACs that offer warrants (which allow investors buy shares at a set price in the future) have reported those instruments as equity.
In this situation, most SPAC investors understood that these restatements were related to a financial reporting technicality that applied to the sector at large, rather than problems with a particular company or transaction. But some restatements aren’t so innocuous.
Close-up on restatements
The Financial Accounting Standards Board defines a restatement as a revision of a previously issued financial statement to correct an error. Whether they’re publicly traded or privately held, businesses may reissue their financial statements for several “mundane” reasons. Like the recent situation with SPACs, managers might have misinterpreted the accounting standards, or they simply may have made minor mistakes and need to correct them.
Leading causes for restatements include:
Reasons to restate results
Often, restatements happen when the company’s financial statements are subjected to a higher level of scrutiny. For example, restatements may occur when a private company converts from compiled financial statements to audited financial statements, decides to file for an initial public offering — or merges with a SPAC. Restatements also may be needed when the owner brings in additional internal (or external) accounting expertise, such as a new controller or audit firm.
In some cases, a financial restatement also can be a sign of incompetence, weak internal controls — or even fraud. Such restatements may signal problems that require corrective actions.
We can help
The restatement process can be time consuming and costly. Regular communication with interested parties — including lenders and investors — can help businesses overcome the negative stigma associated with restatements. Management also needs to reassure stakeholders that the company is in sound financial shape to ensure their continued support.
We can help accounting personnel understand the evolving accounting and tax rules to minimize the risk of restatement. Our staff can also help them effectively manage the restatement process and take corrective actions to minimize the risk of restatement going forward. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Many homeowners across the country have seen their home values increase recently. According to the National Association of Realtors, the median price of homes sold in July of 2021 rose 17.8% over July of 2020. The median home price was $411,200 in the Northeast, $275,300 in the Midwest, $305,200 in the South and $508,300 in the West.
Be aware of the tax implications if you’re selling your home or you sold one in 2021. You may owe capital gains tax and net investment income tax (NIIT).
If you’re selling your principal residence, and meet certain requirements, you can exclude from tax up to $250,000 ($500,000 for joint filers) of gain.
To qualify for the exclusion, you must meet these tests:
In addition, you can’t use the exclusion more than once every two years.
Gain above the exclusion amount
What if you have more than $250,000/$500,000 of profit? 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.
If you’re selling a second home (such as a vacation home), it isn’t 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.
How does the 3.8% NIIT apply to home sales? If you sell your main home, and you qualify to exclude up to $250,000/$500,000 of gain, the excluded gain isn’t subject to the NIIT.
However, gain that exceeds the exclusion limit is subject to the tax if your adjusted gross income is over a certain amount. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the exclusion, is also subject to the NIIT.
The NIIT applies only if your modified adjusted gross income (MAGI) exceeds: $250,000 for married taxpayers filing jointly and surviving spouses; $125,000 for married taxpayers filing separately; and $200,000 for unmarried taxpayers and heads of household.
Two other tax considerations
As you can see, depending on your home sale profit and your income, some or all of the gain may be tax free. But for higher-income people with pricey homes, there may be a tax bill. We can help you plan ahead to minimize taxes and answer any questions you have about home sales. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
You might think that artificial intelligence (AI) is just about using computers to perform complex tasks that otherwise would require human intelligence. That’s part of AI. But several technologies fall under the AI umbrella, including machine learning, natural language processing (NLP) and robotic process automation. Here’s how tools such as these can help nonprofits cut costs and achieve mission-critical objectives.
The term “AI” is sometimes confused with data analytics or the application of intense mathematics. But AI can be used in everyday applications that enable nonprofits to improve program efficacy.
For example, the Crisis Text Line in New York has used AI to analyze millions of text messages to determine the words most associated with a high risk of suicide in the sender. And various animal welfare and environmental organizations have employed AI to combat poaching. PAWS, for example, uses modeling and machine learning to provide park rangers with information that helps them predict and prevent poachers’ actions. Global Fishing Watch has analyzed billions of messages from fishing boats to identify illegal industrial fishing ships.
Health-focused organizations also have adopted AI technologies. For example, Parkinson’s UK has unleashed AI to plow through reams of existing research data to fast-track new treatments.
Putting it into practice
Your nonprofit might be able to use AI in the following areas:
Fundraising. Machine learning can help you analyze your current donor database and develop models that predict donor behavior. For example, chatbots that simulate conversation might handle smaller donations while directing more complicated contributions to humans.
Human resources. AI software can expedite the hiring process. For instance, it can narrow the field and save interviewing time, freeing up HR staff to deal with other issues. AI also might reduce the risk of discrimination claims because human subjectivity may play less of a role in the process.
Communications. Chatbots, NLP and other tools make it easier to maintain efficient and effective communications with internal and external stakeholders — including potential donors and volunteers. You might be able to automate board packets and donation requests to ensure the timely delivery of information.
The initial investment required for AI may seem difficult to justify in uncertain economic times. However, because most nonprofits have similar operational needs, AI developers have created off-the-shelf solutions that can be customized. Grants or collaborative efforts with other nonprofits could also help your nonprofit pay for AI technology. Contact us for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
A business may be able to claim a federal income tax deduction for a theft loss. But does embezzlement count as theft? In most cases it does but you’ll have to substantiate the loss. A recent U.S. Tax Court decision illustrates how that’s sometimes difficult to do.
Basic rules for theft losses
The tax code allows a deduction for losses sustained during the taxable year and not compensated by insurance or other means. The term “theft” is broadly defined to include larceny, embezzlement and robbery. In general, a loss is regarded as arising from theft only if there’s a criminal element to the appropriation of a taxpayer’s property.
In order to claim a theft loss deduction, a taxpayer must prove:
Facts of the recent court case
Years ago, the taxpayer cofounded an S corporation with another shareholder. At the time of the alleged embezzlement, the other original shareholder was no longer a shareholder, and she wasn’t supposed to be compensated by the business. However, according to court records, she continued to manage the S corporation’s books and records.
The taxpayer suffered an illness that prevented him from working for most of the year in question. During this time, the former shareholder paid herself $166,494. Later, the taxpayer filed a civil suit in a California court alleging that the woman had misappropriated funds from the business.
On an amended tax return, the corporation reported a $166,494 theft loss due to the embezzlement. The IRS denied the deduction. After looking at the embezzlement definition under California state law, the Tax Court agreed with the IRS.
The Tax Court stated that the taxpayer didn’t offer evidence that the former shareholder “acted with the intent to defraud,” and the taxpayer didn’t show that the corporation “experienced a theft meeting the elements of embezzlement under California law.”
The IRS and the court also denied the taxpayer’s alternate argument that the corporation should be allowed to claim a compensation deduction for the amount of money the former shareholder paid herself. The court stated that the taxpayer didn’t provide evidence that the woman was entitled to be paid compensation from the corporation and therefore, the corporation wasn’t entitled to a compensation deduction. (TC Memo 2021-66)
How to proceed if you’re victimized
If your business is victimized by theft, embezzlement or internal fraud, you may be able to claim a tax deduction for the loss. Keep in mind that a deductible loss can only be claimed for the year in which the loss is discovered, and that you must meet other tax-law requirements. Keep records to substantiate the claimed theft loss, including when you discovered the loss. If you receive an insurance payment or other reimbursement for the loss, that amount must be subtracted when computing the deductible loss for tax purposes. Contact us with any questions you may have about theft and casualty loss deductions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Many companies have resumed some level of business-related travel and entertainment (T&E) activities — or they plan to do so this fall. Unfortunately, these expense categories may be susceptible to incomplete recordkeeping and even fraud. So, it’s important for companies to implement formal T&E policies to ensure reporting is detailed and legitimate.
Traditionally, executives, salespeople and other workers who travel or entertain customers for business must submit expense reports after each trip or by the end of each month. Once approved by supervisors, expense reports enable workers to get reimbursed for expenses they pay personally. Alternatively, some companies issue corporate credit cards to cover approved T&E expenses.
To comply with financial reporting and tax rules, the following information is usually required on expense reports:
Most companies require travelers to submit copies of original receipts, rather than credit card statements, with their expense reports for T&E items above a predetermined limit (usually $25 or $50). Examples of costs that may qualify for reimbursement are airfare, auto mileage, taxis and ride-sharing services, rental cars, gas and tolls, lodging, tips, business phone calls, wi-fi access charges and meals (with exceptions).
Entertainment expenses — such as football tickets, green fees and fishing excursions — are usually eligible for reimbursement, if permitted by the company’s T&E policy. Plus, they’re deductible for book purposes under U.S. Generally Accepted Accounting Principles (GAAP). But they’re not deductible under current tax law.
Expense accounts gone wild
Completing expense reports is often one of the most dreaded tasks for white-collar professionals. Though the temptation to procrastinate is strong, waiting until the end of the reporting period to submit expense reports can be problematic. It may be difficult to find receipts and remember the details about a business trip that happened weeks or months ago. This can result in errors and omissions when reporting expenses.
Expense account cheating is also common. For example, dishonest workers may overstate expenses, request multiple reimbursements, change numbers on a receipt and otherwise falsify their expense reports. One of the most common fraud methods is to mischaracterize expenses, using legitimate receipts for nonbusiness-related activities.
Getting a handle on spending
Now is a good time to review and possibly upgrade your T&E reporting practices. For example, remind workers what’s considered a “reimbursable” expense, and how often expense reports should be submitted. This prevents misunderstandings and makes punishing infractions, when they occur, easier.
Your company also might want to reinforce its T&E practices by investing in expense tracking software to help managers spot inconsistencies in reporting by subordinates. It’s also important to check for managers who override your company’s T&E policies. Everyone in an organization must be held to the same standards.
Contact us for more information about best practices in reporting T&E expenses. We can help you minimize the risk of errors, omissions and fraud. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
In recent weeks, some Americans have been victimized by hurricanes, severe storms, flooding, wildfires and other disasters. No matter where you live, unexpected disasters may cause damage to your home or personal property. Before the Tax Cuts and Jobs Act (TCJA), eligible casualty loss victims could claim a deduction on their tax returns. But there are now restrictions that make these deductions harder to take.
What’s considered a casualty for tax purposes? It’s a sudden, unexpected or unusual event, such as a hurricane, tornado, flood, earthquake, fire, act of vandalism or a terrorist attack.
More difficult to qualify
For losses incurred through 2025, the TCJA generally eliminates deductions for personal casualty losses, except for losses due to federally declared disasters. For example, during the summer of 2021, there have been presidential declarations of major disasters in parts of Tennessee, New York state, Florida and California after severe storms, flooding and wildfires. So victims in affected areas would be eligible for casualty loss deductions.
Note: There’s an exception to the general rule of allowing casualty loss deductions only in federally declared disaster areas. If you have personal casualty gains because your insurance proceeds exceed the tax basis of the damaged or destroyed property, you can deduct personal casualty losses that aren’t due to a federally declared disaster up to the amount of your personal casualty gains.
Special election to claim a refund
If your casualty loss is due to a federally declared disaster, a special election allows you to deduct the loss on your tax return for the preceding year and claim a refund. If you’ve already filed your return for the preceding year, you can file an amended return to make the election and claim the deduction in the earlier year. This can potentially help you get extra cash when you need it.
This election must be made by no later than six months after the due date (without considering extensions) for filing your tax return for the year in which the disaster occurs. However, the election itself must be made on an original or amended return for the preceding year.
How to calculate the deduction
You must take the following three steps to calculate the casualty loss deduction for personal-use property in an area declared a federal disaster:
Important: Another factor that now makes it harder to claim a casualty loss than it used to be years ago is that you must itemize deductions to claim one. Through 2025, fewer people will itemize, because the TCJA significantly increased the standard deduction amounts. For 2021, they’re $12,550 for single filers, $18,800 for heads of households, and $25,100 for married joint-filing couples.
So even if you qualify for a casualty deduction, you might not get any tax benefit, because you don’t have enough itemized deductions.
These are the rules for personal property. Keep in mind that the rules for business or income-producing property are different. (It’s easier to get a deduction for business property casualty losses.) If you are a victim of a disaster, we can help you understand the complex rules. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Accountable plans reimburse employees for work-related expenses free of federal income and employment taxes. So reimbursement payments aren’t subject to withholding from staffers’ paychecks. Your not-for-profit also benefits because the reimbursements aren’t subject to the employer’s portion of federal employment taxes.
Most prospective employees probably won’t accept a job based on the availability of an accountable plan. But offering one can help you retain valuable workers who submit frequent reimbursement requests.
The IRS stipulates that all expenses covered in an accountable plan have a business connection and be “reasonable.” Additionally, employers can’t reimburse employees more than what they paid for any business expense. And employees must account to you for their expenses and, if an expense allowance was provided, return any excess allowance within a reasonable time period.
Examples of expenses that might qualify for a tax-free reimbursement through an accountable plan include tools and equipment, home office supplies, dues and subscriptions. Certain meal, travel and transportation expenses also qualify.
How do you establish an accountable plan? It isn’t required to be in writing. But formally documenting your plan makes it easier for your nonprofit to prove its validity to the IRS if it’s challenged.
When administering your plan, your nonprofit is responsible for identifying the reimbursement or expense payment and keeping these amounts separate from other amounts, such as wages. The accountable plan must reimburse expenses in addition to an employee’s regular compensation. No matter how informal your nonprofit, you can’t substitute tax-free reimbursements for compensation that employees otherwise would have received.
Keep good records
The IRS also requires employers with accountable plans to keep good records for expenses that are reimbursed. This includes, to the extent applicable, documentation of:
You also should require employees to submit receipts for any expenses of $75 or more and for all lodging unless your nonprofit uses a per diem plan.
Because plans don’t have to be formal, they’re relatively simple to establish. But contact us if you need help setting up an accountable plan. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
In order to prepare for a business audit, an IRS examiner generally does research about the specific industry and issues on the taxpayer’s return. Examiners may use IRS “Audit Techniques Guides (ATGs).” A little-known secret is that these guides are available to the public on the IRS website. In other words, your business can use the same guides to gain insight into what the IRS is looking for in terms of compliance with tax laws and regulations.
Many ATGs target specific industries or businesses, such as construction, aerospace, art galleries, architecture and veterinary medicine. Others address issues that frequently arise in audits, such as executive compensation, passive activity losses and capitalization of tangible property.
IRS auditors need to examine different types of businesses, as well as individual taxpayers and tax-exempt organizations. Each type of return might have unique industry issues, business practices and terminology. Before meeting with taxpayers and their advisors, auditors do their homework to understand various industries or issues, the accounting methods commonly used, how income is received, and areas where taxpayers might not be in compliance.
By using a specific ATG, an auditor may be able to reconcile discrepancies when reported income or expenses aren’t consistent with what’s normal for the industry or to identify anomalies within the geographic area in which the business is located.
Updates and revisions
Some guides were written several years ago and others are relatively new. There is not a guide for every industry. Here are some of the guide titles that have been revised or added this year:
Although ATGs were created to help IRS examiners uncover common methods of hiding income and inflating deductions, they also can help businesses ensure they aren’t engaging in practices that could raise audit red flags. For a complete list of ATGs, visit the IRS website here: http://bit.ly/2rh7umD, Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
In the midst of mounting inflation, supply shortages, geopolitical turmoil, threats of cyberattacks and continuing COVID-19 concerns, public stock prices are expected to fluctuate in the coming months. This situation has unsettled shareholders and makes long-term strategic planning challenging. Now might be a good time to consider getting off the rollercoaster by taking your company out of the public eye.
While public companies enjoy easier access to capital, some small- and mid-market public companies may benefit from delisting. “Going private” stabilizes a company’s value, because it allows management to focus on long-term goals rather than satisfying Wall Street’s demand for short-term profits. Plus, it can reduce compliance costs, lower taxes and eliminate much public and regulatory scrutiny.
But going private can be nearly as complex as going public. So it’s important to understand the financial reporting requirements before you take the plunge.
Among other requirements, a company that’s going private — together with its controlling shareholders and other affiliates — must file detailed disclosures pursuant to Securities and Exchange Commission (SEC) Rule 13e-3.
The SEC scrutinizes such transactions to ensure that unaffiliated shareholders are treated fairly. To comply with SEC Rule 13e-3 and Schedule 13E-3, companies must disclose:
Failure to act with the utmost fairness and transparency can bring harsh consequences. The SEC’s rules are intended to protect shareholders, and some states even have takeover statutes to provide shareholders with dissenters’ rights. Such a transition results in a limited trading market to be able to sell the stock.
Handle with care
Going private certainly isn’t for every public company, and other possible remedies exist for problems such as high compliance costs and corporate governance risk. But if the timing’s right and your shareholders are supportive, going private could be a great way to improve your company’s outlook.
Beware, however, that going-private transactions require diligence to withstand SEC scrutiny and prevent lawsuits. If you’re planning to delist your company’s stock, we can help structure and report your transaction to ensure transparency, procedural fairness and a fair price. Contact us to determine what’s right for your company’s situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Employer-provided life insurance is a coveted fringe benefit. However, if group term life insurance is part of your benefit package, and the coverage is higher than $50,000, there may be undesirable income tax implications.
Tax on income you don’t receive
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 the IRS even if the employer’s actual cost is less than the cost figured under the table. With 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 an employee gets older and as the amount of his or her compensation increases.
Your W-2 has answers
What should you do if you think the tax cost of employer-provided group term life insurance is higher than you’d like? 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
If you decide that the tax cost is too high for the benefit you’re getting in return, 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 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 whether it’s adding to your tax bill. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The typical defrauded not-for-profit loses $75,000 per fraud incident, according to the Association of Certified Fraud Examiners. And that doesn’t account for the negative publicity and subsequent lost donations and support that often follow fraud. Although no preventive measure is 100% effective, strong internal controls can greatly reduce the risk that a crooked staffer or outside criminal will find gaps in your fortress.
Internal controls are policies and procedures that govern everything from accepting cash to signing checks to training staff to keeping your IT network secure. Most nonprofits have at least a rudimentary set of internal controls, but dishonest employees and other criminals can usually find gaps in environments where controls are only somewhat effective or inadequately followed.
Why might nonprofits skimp on controls or enforcement? Typically, they devote the largest chunk of their budgets to programming and may not allocate enough dollars to fraud prevention. This can be especially problematic in organizations where executives or board members indicate that fraud prevention is low on their priority list. Nonprofit boards may also inadvertently enable fraud when they place too much trust in the executive director and fail to challenge that person’s financial representations. Unlike their for-profit counterparts, nonprofit board members may lack financial oversight experience.
Trust is another potential Achilles’ heel. Nonprofits often regard their staff and dedicated volunteers as family. They may allow managers to override internal controls and volunteers to accept cash donations without oversight — both risky activities.
Don’t let your guard down
Some of the most common types of employee theft in nonprofit organizations are check tampering, expense reimbursement fraud and billing schemes. But proper segregation of duties — for example, assigning account reconciliation and fund depositing to two different staff members — is a relatively easy and quite effective method of preventing such fraud. Strong management oversight and confidential fraud hotlines open to all stakeholders can also reduce employee theft.
Indeed, although you should trust staffers, you should also verify what they tell you. Conduct background checks on all prospective hires, as well as volunteers who’ll be handling money or financial records. Also, provide an orientation to new board members to ensure they have a clear understanding of their fiduciary role.
Finally, handle fraud incidents seriously. Many nonprofits choose to quietly fire thieves and sweep their actions under the rug. However, this tends to encourage fraud by telling potential thieves that the consequences of getting caught are relatively minor. If an incident is hushed up, rumors could do more reputational damage than publicly addressing the issue head-on. It’s better to file a police report, consult an attorney and inform major stakeholders about the incident.
If you’re not sure where vulnerabilities lie or how your budget can be stretched to allocate more resources to fraud prevention, contact us. We can help you prioritize the most serious risks and find affordable solutions for closing control gaps. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you’re a business owner and you’re getting a divorce, tax issues can complicate matters. Your business ownership interest is one of your biggest personal assets and in many cases, your marital property will include all or part of it.
Tax-free property transfers
You can generally divide most assets, including cash and business ownership interests, between you and your soon-to-be ex-spouse without any federal income or gift tax consequences. When an asset falls under this tax-free transfer rule, the spouse who receives the asset takes over its existing tax basis (for tax gain or loss purposes) and its existing holding period (for short-term or long-term holding period purposes).
Let’s say that under the terms of your divorce agreement, you give your house to your spouse in exchange for keeping 100% of the stock in your business. That asset swap would be tax-free. And the existing basis and holding periods for the home and the stock would carry over to the person who receives them.
Tax-free transfers can occur before a divorce or at the time it becomes final. Tax-free treatment also applies to post-divorce transfers as long as they’re made “incident to divorce.” This means transfers that occur within:
More tax issues
Later on, there will be tax implications for assets received tax-free in a divorce settlement. The ex-spouse who winds up owning an appreciated asset — when the fair market value exceeds the tax basis — generally must recognize taxable gain when it’s sold (unless an exception applies).
What if your ex-spouse receives 49% of your highly appreciated small business stock? Thanks to the tax-free transfer rule, there’s no tax impact when the shares are transferred. Your ex will continue to apply the same tax rules as if you had continued to own the shares, including carryover basis and carryover holding period. When your ex-spouse ultimately sells the shares, he or she will owe any capital gains taxes. You will owe nothing.
Note that the person who winds up owning appreciated assets must pay the built-in tax liability that comes with them. From a net-of-tax perspective, appreciated assets are worth less than an equal amount of cash or other assets that haven’t appreciated. That’s why you should always take taxes into account when negotiating your divorce agreement.
In addition, the beneficial tax-free transfer rule is now extended to ordinary-income assets, not just to capital-gains assets. For example, if you transfer business receivables or inventory to your ex-spouse in a divorce, these types of ordinary-income assets can also be transferred tax-free. When the asset is later sold, converted to cash or exercised (in the case of nonqualified stock options), the person who owns the asset at that time must recognize the income and pay the tax liability.
Plan ahead to avoid surprises
Like many major life events, divorce can have major tax implications. For example, you may receive an unexpected tax bill if you don’t carefully handle the splitting up of qualified retirement plan accounts (such as a 401(k) plan) and IRAs. And if you own a business, the stakes are higher. We can help you minimize the adverse tax consequences of settling your divorce. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Updated accounting rules for long-term leases took effect in 2019 for public companies. Now, after several deferrals by the Financial Accounting Standards Board (FASB), private companies and private not-for-profit entities must follow suit, starting in fiscal year 2022. The updated guidance requires these organizations to report — for the first time — the full magnitude of their long-term lease obligations on the balance sheet. Here are the details.
In 2019, the FASB deferred Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), to 2021 for private entities. Then, in 2020, the FASB granted another extension to the effective date of the updated leases standard for private firms, because of disruptions to normal business operations during the COVID-19 pandemic.
Currently, the changes for private entities will apply to annual reporting periods beginning after December 15, 2021, and to interim periods within fiscal years beginning after December 15, 2022. Early adoption is also permitted.
Most private organizations have welcomed these deferrals. Implementing the requisite changes to your organization’s accounting practices and systems can be time-consuming and costly, depending on its size, as well as the nature and volume of its leasing arrangements.
The accounting rules that currently apply to private entities require them to record lease obligations on their balance sheets only if the arrangements are considered financing transactions. Few arrangements are recorded, because accounting rules give lessees leeway to arrange the agreements in a way that they can be treated as simple rentals for financial reporting purposes. If an obligation isn’t recorded on a balance sheet, it makes a business look like it is less leveraged than it really is.
The updated guidance calls for major changes to current accounting practices for leases with terms of a year or longer. In a nutshell, ASU 2016-02 requires lessees to recognize on their balance sheets the assets and liabilities associated with all long-term rentals of machines, equipment, vehicles and real estate. The updated guidance also requires additional disclosures about the amount, timing and uncertainty of cash flows related to leases.
Most existing arrangements that currently are reported as leases will continue to be reported as leases under the updated guidance. In addition, the new definition is expected to encompass many more types of arrangements that aren’t reported as leases under current practice. Some of these arrangements may not be readily apparent, for example, if they’re embedded in service contracts or contracts with third-party manufacturers.
You can’t afford to wait until year end to adopt the updated guidance for long-term leases. Many public companies found that the implementation process took significantly more time and effort than they initially expected. Contact us to help evaluate which of your contracts must be reported as lease obligations under the new rules. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
There may be a tax-advantaged way for people to save for the needs of family members with disabilities — without having them lose eligibility for government benefits to which they’re entitled. It can be done though an Achieving a Better Life Experience (ABLE) account, which is a tax-free account that can be used for disability-related expenses.
Who is eligible?
ABLE accounts can be created by eligible individuals to support themselves, by family members to support their dependents, or by guardians for the benefit of the individuals for whom they’re responsible. Anyone can contribute to an ABLE account. While contributions aren’t tax-deductible, the funds in the account are invested and grow free of tax.
Eligible individuals must be blind or disabled — and must have become so before turning age 26. They also must be entitled to benefits under the Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) programs. Alternatively, an individual can become eligible if a disability certificate is filed with the IRS for him or her.
Distributions from an ABLE account are tax-free if used to pay for expenses that maintain or improve the beneficiary’s health, independence or quality of life. These expenses include education, housing, transportation, employment support, health and wellness costs, assistive technology, personal support services, and other IRS-approved expenses.
If distributions are used for nonqualified expenses, the portion of the distribution that represents earnings on the account is subject to income tax — plus a 10% penalty.
Here are some other key factors:
States establish programs
There are many choices. ABLE accounts are established under state programs. An account may be opened under any state’s program (if the state allows out-of-state participants). The funds in an account can be invested in a variety of options and the account’s investment directions can be changed up to twice a year. Contact us if you’d like more details about setting up or maintaining an ABLE account. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Economic instability caused by the pandemic may have your nonprofit scrambling to find funding. But just as important is making internal adjustments that build your nonprofit’s capacity to fulfill its long-term mission. However, you may want to tweak the standard capacity-building process.
Making a case
The National Council of Nonprofits defines “capacity building” as the “many different types of activities that are all designed to improve and enhance a nonprofit’s ability to achieve its mission and sustain itself over time.” It refers to whatever a particular organization needs to reach the next level of maturity — whether operational, financial, programmatic or organizational.
Businesses regularly engage in such macro-level initiatives, but nonprofits tend to take more of a project-level perspective. The result can be instability that undermines the overall organization. However, capacity building can enable your nonprofit to strengthen its organizational infrastructure, including facilities, equipment or functions such as payroll and accounting. For example, you could target your management and governance capacity by formulating a succession plan.
The capacity building process typically begins by identifying an organization’s strengths and weaknesses in a variety of capacities. You might want to launch client surveys or structured self-assessments where various capacities are rated on a scale of 1 to 5.
As an example, your organization might learn that its strengths include leadership from its frontline workers, and its weaknesses include outcome measurement. The next step is to devise methods to mitigate the weaknesses, right? Not necessarily, at least according to research conducted by Stanford Social Innovation Review (SSIR). The researchers say that, while that approach can indeed make poor outcome measurement less glaring two years from now, your nonprofit’s impact on its targeted populations likely won’t have improved much.
Instead, SSIR endorses a strengths- or assets-based route to capacity building. This means that you leverage your strengths, increasing their capacities significantly. So using the earlier example, you’d build on frontline leadership strength by involving worker-leaders in high-level strategic planning. Their in-depth knowledge of day-to-day activities can help shape your vision going forward. Once you’ve made the most of your strengths, you can apply them to address weaknesses in ways that best serve your nonprofit’s needs.
Capacity-building is a worthy pursuit for any nonprofit. But instead of focusing on inadequacies, you may want to concentrate on pumping up your strengths. Contact us for more information and additional management tips. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
What if you decide to, or are asked to, guarantee a loan to your corporation? Before agreeing to act as a guarantor, endorser or indemnitor of a debt obligation of your closely held corporation, be aware of the possible tax consequences. If your corporation defaults on the loan and you’re required to pay principal or interest under the guarantee agreement, you don’t want to be blindsided.
Business vs. nonbusiness
If you’re compelled to make good on the obligation, the payment of principal or interest in discharge of the obligation generally results in a bad debt deduction. This may be either a business or a nonbusiness bad debt deduction. If it’s a business bad debt, it’s deductible against ordinary income. A business bad debt can be either totally or partly worthless. If it’s a nonbusiness bad debt, it’s deductible as a short-term capital loss, which is subject to certain limitations on deductions of capital losses. A nonbusiness bad debt is deductible only if it’s totally worthless.
In order to be treated as a business bad debt, the guarantee must be closely related to your trade or business. If the reason for guaranteeing the corporation loan is to protect your job, the guarantee is considered closely related to your trade or business as an employee. But employment must be the dominant motive. If your annual salary exceeds your investment in the corporation, this tends to show that the dominant motive for the guarantee was to protect your job. On the other hand, if your investment in the corporation substantially exceeds your annual salary, that’s evidence that the guarantee was primarily to protect your investment rather than your job.
Except in the case of job guarantees, it may be difficult to show the guarantee was closely related to your trade or business. You’d have to show that the guarantee was related to your business as a promoter, or that the guarantee was related to some other trade or business separately carried on by you.
If the reason for guaranteeing your corporation’s loan isn’t closely related to your trade or business and you’re required to pay off the loan, you can take a nonbusiness bad debt deduction if you show that your reason for the guarantee was to protect your investment, or you entered the guarantee transaction with a profit motive.
In addition to satisfying the above requirements, a business or nonbusiness bad debt is deductible only if:
Any payment you make on a loan you guaranteed is deductible as a bad debt in the year you make it, unless the agreement (or local law) provides for a right of subrogation against the corporation. If you have this right, or some other right to demand payment from the corporation, you can’t take a bad debt deduction until the rights become partly or totally worthless.
These are only a few of the possible tax consequences of guaranteeing a loan to your closely held corporation. Contact us to learn all the implications in your situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Auditors of public companies started reporting critical audit matters (CAMs) in their audit opinions in 2019. This represents a major change to the pass-fail auditors’ reports that had been in place for decades. Now, accounting rule makers are assessing how this project has fared over the last two years — and whether changes are needed to provide financial statement users with more useful, cost-effective information.
Auditing Standard (AS) 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, requires auditors to add a discussion of CAMs to the audit report. CAMs are defined as matters that:
Under the updated guidance, auditors must identify each CAM, detail the reasons why it was selected and back up their assertions using relevant financial information. The Public Company Accounting Oversight Board (PCAOB) doesn’t provide a list of possible CAMs or prescribe a specific number of CAMs that must be stated in an auditor’s report.
Auditors of large accelerated filers — public companies with market values of $700 million or more — are required to report CAMs for fiscal years ending on or after June 30, 2019. Smaller public companies must report CAMs for fiscal years ending on or after December 15, 2020.
In December 2020, the Center for Audit Quality (CAQ) issued Critical Audit Matters: A Year in Review. It reported that the most frequent categories of CAMs for S&P 100 companies were:
The remaining 49% of CAMs comprised 23 different categories including business combinations, sales returns and allowances, pensions and other post-employment benefits, and asset retirement and environmental obligations. CAMs are expected to change from year to year.
One of the biggest developments in 2020 was the COVID-19 pandemic. While COVID-19 itself isn’t a CAM, the virus’s impact on a material account or disclosure may need to be reported as a CAM. For example, market volatility during the pandemic may have triggered a complex impairment analysis for goodwill.
No changes yet
In June 2021, the Financial Accounting Standards Advisory Council (FASAC) met to evaluate whether updates were needed for the accounting areas that were most frequently referenced as CAMs. Overall, FASAC members concluded that those accounting areas were generally aligned with their expectations. However, there’s a lack of information in financial statement disclosures in certain accounting areas, such as loss contingencies. Research also indicates that CAMs may have a greater influence on less sophisticated investors by highlighting accounting areas that they may have been unaware of.
While AS 3101 hasn’t yet triggered any immediate changes to the accounting rules, some effects of the CAM requirements may take several years to fully manifest or stabilize. The PCAOB plans to publish a more comprehensive post-implementation review of CAMs in 2024. Contact your auditor for the latest developments. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If your child is fortunate enough to be awarded a scholarship, you may wonder about the tax implications. Fortunately, 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.
Requirements for tax-free treatment
However, scholarships are not always tax free. Certain conditions must be satisfied. A scholarship is tax free only to the extent it’s used to pay for:
For example, 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 to pay for tuition and eligible expenses. Maintain records (such as copies of bills, receipts and cancelled checks) that reflect the use of the scholarship money.
Payment for services doesn’t qualify
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, are 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.
What is reported on a tax return?
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 academic year, best wishes for your child’s success in school. Contact us if you’d like to discuss these or other tax matters further. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Starbucks, Nike, Pepsi, Uber and scores of other major companies regularly use cause marketing to burnish their image and reach customers. The not-for-profit organizations that partner with these companies can reap multiple benefits, including financial support and raised awareness of their mission. Cause marketing can take many forms, so it’s important to find both the partner and form that match your nonprofit.
How is it different?
Cause marketing is different from a tax-deductible donation or corporate charitable giving program. When a cause marketing partner provides your organization with funds or services, it’s ideally rewarded with an enhanced public image, greater customer loyalty and other marketing advantages.
With this kind of corporate financing and business expertise backing your nonprofit, you might be able to increase your visibility and educate new audiences about your cause. As members of the public become acquainted with your mission, you can probably expect your volunteer and donor ranks to grow. And new connections with your corporate partner’s customers, vendors, employees and other stakeholders can open up all kinds of avenues for growth.
What forms does it take?
Cause marketing takes several forms. For example, transactional giving programs typically involve online platforms such as iGive and AmazonSmile that enable shoppers to donate a dollar amount or percentage of each purchase to their chosen charities. Or donors may be able to convert customer-loyalty program rewards (such as airline miles) into cash contributions.
Another form is message promotion, where a company uses its resources to promote a cause-focused message — usually one related to its own products. Early in the COVID-19 pandemic, The Body Shop launched its “Time to Care” campaign, which used social media to promote self-care and celebrate health care workers. As part of the initiative, the company partnered with shelters and assisted living communities, donating money and cleaning supplies.
Licensing agreements are another option. A company may pay to use your not-for-profit’s name and branding on its products. For example, AARP has, over the years, licensed its name to several insurance and health care companies. Because these partnerships can have legal complications, they’re recommended for larger, more sophisticated nonprofits.
How do you get started?
Before entering into a cause marketing agreement, carefully research potential partners and partnership forms. Be sure to work with an attorney to negotiate terms with partners and draft agreements. Contact us for help determining the financial potential of cause marketing and the possible tax consequences. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If your business receives large amounts of cash or cash equivalents, you may be required to report these transactions to the IRS.
What are the requirements?
Each person who, in the course of operating a trade or business, receives more than $10,000 in cash in one transaction (or two or more related transactions), must file Form 8300. What is considered a “related transaction?” Any transactions conducted in a 24-hour period. Transactions can also be 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’ll need personal information about the person making the cash payment, including a Social Security or taxpayer identification number.
Why does the government require 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.”
You should keep a copy of each Form 8300 for five years from the date you file it, according to the IRS.
What’s considered “cash” and “cash equivalents?”
For Form 8300 reporting purposes, 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.
Can the forms be filed electronically?
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.
How can we set up an electronic account?
To file Form 8300 electronically, a business must set up an account with FinCEN’s Bank Secrecy Act E-Filing System. For more information, visit: https://bit.ly/3fMMLAu 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). Contact us with any questions or for assistance. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Auditors typically deliver financial statements to calendar-year businesses in the spring. A useful tool that accompanies the annual report is the management letter. It may provide suggestions — based on industry best practices — on how to fortify internal control systems, streamline operations and reduce expenses.
Managers generally appreciate the suggestions found in management letters. But, realistically, they may not have time to implement those suggestions, because they’re focusing on daily business operations. Don’t let this happen at your company!
A management letter may address a broad range of topics, including segregation of duties, account reconciliations, physical asset security, credit policies, employee performance, safety, Internet use and expense reduction. In general, the write-up for each deficiency includes the following elements:
Observation. The auditor describes the condition, identifies the cause (if possible) and explains why it needs improvement.
Impact. This section quantifies the problem’s potential monetary effects and identifies any qualitative effects, such as decreased employee morale or delayed financial reporting.
Recommendation. Here, the auditor suggests a solution or lists alternative approaches if the appropriate course of action is unclear.
Some letters present deficiencies in order of significance or the potential for cost reduction. Others organize comments based on functional area or location.
What elements are required?
AICPA standards specifically require auditors to communicate two types of internal control deficiencies to management in writing:
1. Material weaknesses. These are defined as “a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the organization’s financial statements will not be prevented or detected and corrected on a timely basis.”
2. Significant deficiencies. These are “less severe than a material weakness, yet important enough to merit attention by those charged with governance.”
Operating inefficiencies and other deficiencies in internal control systems aren’t necessarily required to be communicated in writing. However, most auditors include these less significant items in their management letters to inform their clients about risks and opportunities to improve operations.
Have you improved over time?
When you review last year’s management letter, consider comparing it to the letters you received for 2019 (and earlier). Often, the same items recur year after year. Comparing consecutive management letters can help track the results over time. But, be aware: Certain issues may autocorrect — or worsen — based on factors outside of management’s control, such as changes in technology or external market conditions. If you’re unsure how to implement a particular suggestion from your management letter, reach out to your audit team for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you have a parent entering a nursing home, you may not be thinking about taxes. But there are a number of possible tax implications. Here are five.
1. Long-term medical care
The costs of qualified long-term care, including nursing home care, are deductible as medical expenses to the extent they, along with other medical expenses, exceed 7.5% of adjusted gross income (AGI).
Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, and maintenance or personal-care services required by a chronically ill individual that is provided under care administered by a licensed healthcare practitioner.
To qualify as chronically ill, a physician or other licensed healthcare practitioner must certify an individual as unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) for at least 90 days due to a loss of functional capacity or severe cognitive impairment.
2. Long-term care insurance
Premiums paid for a qualified long-term care insurance contract are deductible as medical expenses (subject to limitations explained below) to the extent they, along with other medical expenses, exceed the percentage-of-AGI threshold. A qualified long-term care insurance contract covers only qualified long-term care services, doesn’t pay costs covered by Medicare, is guaranteed renewable and doesn’t have a cash surrender value.
Qualified long-term care premiums are includible as medical expenses up to certain amounts. For individuals over 60 but not over 70 years old, the 2021 limit on deductible long-term care insurance premiums is $4,520, and for those over 70, the 2021 limit is $5,640.
3. Nursing home payments
Amounts paid to a nursing home are deductible as a medical expense if a person is staying at the facility principally for medical, rather than custodial care. If a person isn’t in the nursing home principally to receive medical care, only the portion of the fee that’s allocable to actual medical care qualifies as a deductible expense. But if the individual is chronically ill, all qualified long-term care services, including maintenance or personal care services, are deductible.
If your parent qualifies as your dependent, you can include any medical expenses you incur for your parent along with your own when determining your medical deduction.
4. Head-of-household filing status
If you aren’t married and you meet certain dependency tests for your parent, you may qualify for head-of-household filing status, which has a higher standard deduction and lower tax rates than single filing status. You may be eligible to file as head of household even if the parent for whom you claim an exemption doesn’t live with you.
5. The sale of your parent’s home.
If your parent sells his or her home, up to $250,000 of the gain from the sale may be tax-free. In order to qualify for the $250,000 exclusion, the seller must generally have owned the home for at least two years out of the five years before the sale, and used the home as a principal residence for at least two years out of the five years before the sale. However, there’s an exception to the two-out-of-five-year use test if the seller becomes physically or mentally unable to care for him or herself during the five-year period.
These are only some of the tax issues you may deal with when your parent moves into a nursing home. Contact us if you need more information or assistance. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
No not-for-profit looks forward to annual audits. But regular maintenance and preparation specific to an impending audit can make the process less disruptive. We recommend taking the following steps.
1. Reconcile routinely
You shouldn’t wait until audit time to reconcile accounts — for example, cash, receivables, pledges, payables, accruals and revenues. Reconcile general ledger account balances to supporting schedules (bank reconciliation, receivables and payable aging) monthly or at least quarterly. And don’t forget to reconcile database information provided and maintained by nonaccounting departments, such as contributions, events revenue, registration revenue and sponsorships.
2. Prepare supporting documentation
Collect all supporting documentation before your audit and, if anything is missing, alert auditors immediately. It might be necessary to request duplicate invoices from vendors or ask donors for copies of letters describing restrictions on contributions.
3. Assemble the PBC list items
As part of their planning process, auditors typically compile a Provided by Client (PBC) list of materials they expect you to produce. The list includes a timeline indicating when the auditors need each type of material. Submit everything on the list according to the timeline. If you don’t, you could push back the audit itself and miss your board deadline for completion. Also, to ensure accuracy, perform a self-review of all information before you send it.
4. Be ready to explain variances
Before the auditors arrive, identify major fluctuations in your account balances compared to the previous year. Your auditors will inquire into significant variances in revenues and expenses. Make sure you’re ready to explain them — as well as budget variances — promptly and clearly.
5. Review earlier audits
Audits from previous years provide useful guidance. Check prior years’ audit entries and confirm that you didn’t make the same errors this year. Also confirm that you posted all of the audit entries from the last audit. If you didn’t, your financial statements might be distorted.
Don’t think of audits as a once-a-year obligation. Keep in touch with auditors throughout the year. For example, if you land a new grant or contract and aren’t certain how to properly record it, don’t hesitate to ask your auditors. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Perhaps you operate your small business as a sole proprietorship and want to form a limited liability company (LLC) to protect your assets. Or maybe you are launching a new business and want to know your options for setting it up. Here are the basics of operating as an LLC and why it might be appropriate for your business.
An LLC is somewhat of a hybrid entity because it can be structured to resemble a corporation for owner liability purposes and a partnership for federal tax purposes. This duality may provide the owners with the best of both worlds.
Personal asset protection
Like the shareholders of a corporation, the owners of an LLC (called “members” rather than shareholders or partners) generally aren’t liable for the debts of the business except to the extent of their investment. Thus, the owners can operate the business with the security of knowing that their personal assets are protected from the entity’s creditors. This protection is far greater than that afforded by partnerships. In a partnership, the general partners are personally liable for the debts of the business. Even limited partners, if they actively participate in managing the business, can have personal liability.
The owners of an LLC can elect under the “check-the-box” rules to have the entity treated as a partnership for federal tax purposes. This can provide a number of important benefits to the owners. For example, partnership earnings aren’t subject to an entity-level tax. Instead, they “flow through” to the owners, in proportion to the owners’ respective interests in profits, and are reported on the owners’ individual returns and are taxed only once.
To the extent the income passed through to you is qualified business income, you’ll be eligible to take the Code Section 199A pass-through deduction, subject to various limitations. In addition, since you’re actively managing the business, you can deduct on your individual tax return your ratable shares of any losses the business generates. This, in effect, allows you to shelter other income that you and your spouse may have.
An LLC that’s taxable as a partnership can provide special allocations of tax benefits to specific partners. This can be an important reason for using an LLC over an S corporation (a form of business that provides tax treatment that’s similar to a partnership). Another reason for using an LLC over an S corporation is that LLCs aren’t subject to the restrictions the federal tax code imposes on S corporations regarding the number of owners and the types of ownership interests that may be issued.
Review your situation
In summary, an LLC can give you corporate-like protection from creditors while providing the benefits of taxation as a partnership. For these reasons, you should consider operating your business as an LLC. Contact us to discuss in more detail how an LLC might benefit you and the other owners. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
A complete set of financial statements for your business contains three reports. Each serves a different purpose, but ultimately helps stakeholders — including managers, employees, investors and lenders — evaluate a company’s performance. Here’s an overview of each report and a critical question it answers.
1. Income statement: Is the company growing and profitable?
The income statement (also known as the profit and loss statement) shows revenue, expenses and earnings over a given period. A common term used when discussing income statements is “gross profit,” or the income earned after subtracting the cost of goods sold from revenue. Cost of goods sold includes the cost of labor, materials and overhead required to make a product.
Another important term is “net income.” This is the income remaining after all expenses (including taxes) have been paid.
It’s important to note that growth and profitability aren’t the only metrics that matter. For example, high-growth companies that report healthy top and bottom lines may not have enough cash on hand to pay their bills. Though it may be tempting to just review revenue and profit trends, thorough due diligence looks beyond the income statement.
2. Balance sheet: What does the company own (and owe)?
This report provides a snapshot of the company’s financial health. It tallies assets, liabilities and “net worth.”
Under U.S. Generally Accepted Accounting Principles (GAAP), assets are reported at the lower of cost or market value. Current assets (such as accounts receivable or inventory) are reasonably expected to be converted to cash within a year, while long-term assets (such as plant and equipment) have longer lives. Similarly, current liabilities (such as accounts payable) come due within a year, while long-term liabilities are payment obligations that extend beyond the current year or operating cycle.
Intangible assets (such as patents, customer lists and goodwill) can provide significant value to a business. But internally developed intangibles aren’t reported on the balance sheet. Intangible assets are only reported when they’ve been acquired externally.
Net worth (or owners’ equity) is the extent to which the value of assets exceeds liabilities. If the book value of liabilities exceeds the book value of the assets, net worth will be negative. However, book value may not necessarily reflect market value. Some companies may provide the details of owners’ equity in a separate statement called the statement of retained earnings. It details sales or repurchases of stock, dividend payments and changes caused by reported profits or losses.
3. Cash flow statement: Where is cash coming from and going to?
This statement shows all the cash flowing in and out of your company. For example, your company may have cash inflows from selling products or services, borrowing money and selling stock. Outflows may result from paying expenses, investing in capital equipment and repaying debt.
Typically, cash flows are organized in three categories: operating, investing and financing activities. The bottom of the statement shows the net change in cash during the period. Watch your statement of cash flows closely. To remain in business, companies must continually generate cash to pay creditors, vendors and employees.
Read the fine print
Disclosures at the end of a company’s financial statements provide additional details. Together with the three quantitative reports, these qualitative descriptions can help financial statement users make well-informed business decisions. Contact us for assistance conducting due diligence and benchmarking financial performance. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
More than 43 million student borrowers are in debt with an average of $39,351 each, according to the research group EducationData.org. If you have student loan debt, you may wonder if you can deduct the interest you pay. The answer is yes, subject to certain limits. However, the deduction is phased out if your adjusted gross income exceeds certain levels — and they aren’t as high as the income levels for many other deductions.
Basics of the deduction
The maximum amount of student loan interest you can deduct each year is $2,500. The interest must be for a “qualified education loan,” which means a debt incurred to pay tuition, room and board, and related expenses to attend a post-high school educational institution, including certain vocational schools. Post-graduate programs may also qualify. For example, an internship or residency program leading to a degree or certificate awarded by an institution of higher education, hospital, or health care facility offering post-graduate training can qualify.
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.
For 2021, the deduction is phased out for single taxpayers with AGI between $70,000 and $85,000 ($140,000 and $170,000 for married couples filing jointly). The deduction is unavailable for single taxpayers with AGI of more than $85,000 ($170,000 or married couples filing jointly).
Married taxpayers must file jointly to claim this deduction.
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.
No deduction is allowed to a taxpayer who can be claimed as a dependent on another tax return. For example, let’s say a parent is paying for the college education of a child whom the parent is claiming as a dependent. In this case, the interest deduction is only available for interest the parent pays on a qualifying loan, not for any of the interest the child may pay on a loan the student may have taken out. The child will be able to deduct interest that is paid in later years when he or she is no longer a dependent.
The interest must be on funds borrowed to cover qualified education costs of the taxpayer or his spouse or 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.
Taxpayers must keep records to verify qualifying expenditures. Documenting a tuition expense isn’t likely to pose a problem. However, care should be taken to document other qualifying education-related expenses including books, equipment, fees, and transportation.
Documenting room and board expenses should be straightforward for students living and dining on campus. 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’d like help in determining whether you qualify for this deduction or if you have questions about it. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
When not-for-profits first start up, fundraising can be an ad hoc process, with intense campaigns followed by fallow periods. As organizations grow and acquire staff and support, they generally decide that fundraising needs to be ongoing. But it can be hard to maintain focus and momentum without a strategic fundraising plan. Here’s how to create one.
Building on past experience
The first step to a solid fundraising plan is to form a fundraising committee. This should consist of board members, your executive director and other key staffers. You may also want to include major donors and active community members.
Committee members need to start by reviewing past sources of funding and past fundraising approaches and weighing the advantages and disadvantages of each. Even if your overall fundraising efforts have been less than successful, some sources and approaches may still be worth keeping. Next, brainstorm new donation sources and methods and select those with the greatest fundraising potential.
As part of your plan, outline the roles you expect board members to play in fundraising efforts. For example, in addition to making their own donations, they can be crucial links to corporate and individual supporters.
Developing an action plan
Once the committee has developed a plan for where to seek funds and how to ask for them, it’s time to create a fundraising budget that includes operating expenses, staff costs and volunteer projections. After the plan and budget have board approval, develop an action plan for achieving each objective and assign tasks to specific individuals.
Most important, once you’ve set your plan in motion, don’t let it sit on the shelf. Regularly evaluate the plan and be ready to adapt it to organizational changes and unexpected situations. Although you want to give new fundraising initiatives time to succeed, don’t be afraid to cut your losses if it’s obvious an approach isn’t working.
Maintaining strong cash flow
Don’t wait until your nonprofit’s coffers are nearly dry before firing up a fundraising campaign. Fundraising should be ongoing and constantly evolving. Contact us for advice on maintaining strong cash flow. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Do you play a major role in a closely held corporation and sometimes spend money on corporate expenses personally? These costs may wind up being nondeductible both by an officer and the corporation unless proper steps are taken. This issue is more likely to arise in connection with a financially troubled corporation.
Deductible vs. nondeductible expenses
In general, you can’t deduct an expense you incur on behalf of your corporation, even if it’s a legitimate “trade or business” expense and even if the corporation is financially troubled. This is because a taxpayer can only deduct expenses that are his own. And since your corporation’s legal existence as a separate entity must be respected, the corporation’s costs aren’t yours and thus can’t be deducted even if you pay them.
What’s more, the corporation won’t generally be able to deduct them either because it didn’t pay them itself. Accordingly, be advised that it shouldn’t be a practice of your corporation’s officers or major shareholders to cover corporate costs.
When expenses may be deductible
On the other hand, if a corporate executive incurs costs that relate to an essential part of his or her duties as an executive, they may be deductible as ordinary and necessary expenses related to his or her “trade or business” of being an executive. If you wish to set up an arrangement providing for payments to you and safeguarding their deductibility, a provision should be included in your employment contract with the corporation stating the types of expenses which are part of your duties and authorizing you to incur them. For example, you may be authorized to attend out-of-town business conferences on the corporation’s behalf at your personal expense.
Alternatively, to avoid the complete loss of any deductions by both yourself and the corporation, an arrangement should be in place under which the corporation reimburses you for the expenses you incur. Turn the receipts over to the corporation and use an expense reimbursement claim form or system. This will at least allow the corporation to deduct the amount of the reimbursement.
Contact us if you’d like assistance or would like to discuss these issues further. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Analytical software tools will never fully replace auditors, but they can help auditors do their work more efficiently and effectively. Here’s an overview of how data analytics — such as outlier detection, regression analysis and semantic modeling — can enhance the audit process.
Auditors bring experience and professional skepticism
When it’s appropriate, instead of manually testing a representative data sample, auditors can use analytical software tools to compare an entire data population against selected criteria. This process quickly identifies anomalies hidden in large amounts of data that can be tagged for further examination by auditors during fieldwork. Analytical software tools can test various kinds of data, including accounting, internal communications and documents, and external benchmarking data.
If unusual transactions or trends are found, auditors will investigate them further using the following procedures:
In addition, confirmations and representation letters from attorneys, customers and other external parties may corroborate what management says and external research reveals.
Audit findings may require action
Often, auditors conclude that irregularities have reasonable explanations. For instance, they may be due to an unexpected change in the company’s operations or external market conditions. If a change is expected to continue, it may alter the auditor’s expectations about the company’s operations going forward. Sometimes, a change discovered while auditing one part of the financials may affect audit procedures (including analytics) that will be performed on other accounts.
Alternatively, auditors may attribute some irregularities to inadvertent mistakes or intentional fraud schemes. Auditors usually communicate with the audit committee or the company’s owners as soon as possible if they discover any material errors or fraud. These irregularities might require adjustments to the financial statements. The company also might need to take action to mitigate financial losses and prevent the problem from recurring.
For example, the controller may need additional training on recent changes to the tax and accounting rules. Or management may need to implement additional internal control procedures to safeguard against dishonest behaviors. Or the owner may need to contact the company’s attorney and hire a forensic accountant to perform a formal fraud investigation.
Today, companies generate, process and store massive amounts of electronic data on their networks. Increasingly, auditors are using analytical tools on this data to conduct basic audit procedures, such as vouching transactions and comparing data to external benchmarks. This frees up auditors to focus their efforts on complex transactions, suspicious relationships and high-risk accounts. Contact us for more information about how our auditors use analytical software tools in the field. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you’re planning your estate, or you’ve recently inherited assets, you may be unsure of the “cost” (or “basis”) for tax purposes.
The current rules
Under the current 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 grandmother bought stock in 1935 for $500 and it’s worth $1 million at her death, the basis is stepped up to $1 million in the hands of your grandmother’s heirs — and all of that gain escapes federal income tax.
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.
Gifting before death
It’s crucial to understand the current 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 grandmother decides to make a gift of the stock during her lifetime (rather than passing it on when she dies), the “step-up” in basis (from $500 to $1 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 ($500 in this example), 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.
Change on the horizon?
Be aware that President Biden has proposed ending the ability to step-up the basis for gains in excess of $1 million. There would be exemptions for family-owned businesses and farms. Of course, any proposal must be approved by Congress in order to be enacted.
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. We’ll keep you up to date on any tax law changes. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The global market for human resources outsourcing was approximately $32.8 billion in 2020 and is projected to rise to $45.8 billion by 2027, according to market research company Reportlinker. Should your not-for-profit join the many organizations that have already determined that outsourcing HR makes financial and operational sense? Here’s what you should consider before acting.
Take a hard look
First, decide which segments of the HR function you would farm out. Take a look at:
These are all labor-intensive responsibilities where expertise counts. Transferring all or some of them to the right outside party can vault your organization to a higher level of professionalism and efficiency.
Next, perform a cost-benefit analysis. Even if the cost is more to outsource, you may decide that the extra dollars are worth freeing up staff hours for other initiatives. Factor in the drawbacks to outsourcing. Certain tasks may require an understanding of your organization’s culture and history to be effective. Also think about the impact of letting go HR people currently on staff.
Get buy-in from your staff and board of directors before you decide to vet vendors. When you start screening providers, ask questions about the scope of their service, how long they’ve been in business and how many nonprofit clients they have in your area and sector.
Before deciding on one, make sure you understand what and how it charges — for example, by the hour or on retainer. And be clear about whether services will be provided on-site, off-site or in a combination of the two. It’s also important to set mutual expectations, including what the provider will depend on your staff and board to do. Once you’ve selected a vendor, ask your attorney to review the contract.
Don’t neglect controls
As you should do with all of your nonprofit’s operations, establish new internal controls. For example, designate an internal manager to closely monitor the outsourced work and arrange for that person and another manager (such as your executive director) to review the service’s invoices.
Contact us for HR outsourcing recommendations. We can also help you implement new internal controls that reduce fraud and financial risk. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Despite the COVID-19 pandemic, government officials are seeing a large increase in the number of new businesses being launched. From June 2020 through June 2021, the U.S. Census Bureau reports that business applications are up 18.6%. The Bureau measures this by the number of businesses applying for an Employer Identification Number.
Entrepreneurs often don’t know that many of the 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 federal tax bill.
How to treat expenses for tax purposes
If you’re starting or planning to launch a new business, keep these three rules in mind:
In general, start-up expenses are those you make to:
To qualify 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 be eligible as an “organization expense,” an expense must be related to establishing 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.
If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the election 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
Businesses rely on internal controls to help ensure the accuracy and integrity of their financial statements, as well as prevent fraud, waste and abuse. Given their importance, internal controls are a key area of focus for internal and external auditors.
Many auditors use detailed internal control questionnaires to help evaluate the internal control environment — and ensure a comprehensive assessment. Although some audit teams still use paper-based questionnaires, many now prefer an electronic format. Here’s an overview of the types of questions that may be included and how the questionnaire may be used during an audit.
The contents of internal control questionnaires vary from one audit firm to the next. They also may be customized for a particular industry or business. Most include general questions pertaining to the company’s mission, control environment and compliance situation. There also may be sections dedicated to mission-critical or fraud-prone elements of the company’s operations, such as:
Questionnaires usually don’t take long to complete, because most questions are closed-ended, requiring only yes-or-no answers. For example, a question might ask: Is a physical inventory count conducted annually? However, there also may be space for open-ended responses. For instance, a question might ask for a list of controls that limit physical access to the company’s inventory.
Internal control questionnaires are generally administered using one the following three approaches:
1. Completion by company personnel. Here, management completes the questionnaire independently. The audit team might request the company’s organization chart to ensure that the appropriate individuals are selected to participate. Auditors also might conduct preliminary interviews to confirm their selections before assigning the questionnaire.
2. Completion by the auditor based on inquiry. Under this approach, the auditor meets with company personnel to discuss a particular element of the internal control environment. Then the auditor completes the relevant section of the questionnaire and asks the people who were interviewed to review and validate the responses.
3. Completion by the auditor after testing. Here, the auditor completes the questionnaire after observing and testing the internal control environment. Once auditors complete the questionnaire, they typically ask management to review and validate the responses.
The purpose of the internal control questionnaire is to help the audit team assess your company’s internal control system. Coupled with the audit team’s training, expertise and analysis, the questionnaire can help produce accurate, insightful audit reports. The insight gained from the questionnaire also can add value to your business by revealing holes in the control system that may need to be patched to prevent fraud, waste and abuse. Contact us for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Do you have significant investment-related expenses, including the cost of subscriptions to financial services, home office expenses and clerical costs? Under current tax law, these expenses aren’t deductible through 2025 if they’re considered investment expenses for the production of income. But they’re deductible if they’re considered trade or business expenses.
For years before 2018, production-of-income expenses were deductible, but they were included in miscellaneous itemized deductions, which were subject to a 2%-of-adjusted-gross-income floor. (These rules are scheduled to return after 2025.) If you do a significant amount of trading, you should know which category your investment expenses fall into, because qualifying for trade or business expense treatment is more advantageous now.
In order to deduct your investment-related expenses as business expenses, 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 or the extent of the work required.
A trader vs. an investor
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, who is engaged in a trade or business, rather than an investor, who isn’t. 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 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 test, a taxpayer’s investment activities are considered a trade or business only where both of the following are true:
Profit in the short term
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, 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 rather than a trader because the holding periods for stocks sold averaged about one year.
Contact us if you have questions or would like to figure out whether you’re an investor or a trader for tax purposes. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Your not-for-profit may prefer to avoid activities that subject it to unrelated business income tax (UBIT). But if you accept advertising or sponsorships that aren’t substantially related to your tax-exempt purpose, you may unwittingly expose your organization to UBIT liability. The rules governing these types of support are complicated, so it’s important to have a basic understanding of what is and what isn’t potentially taxable.
Qualified sponsorship dollars: Not taxable
Sponsorship dollars generally aren’t taxed. Qualified sponsorship payments are made by a person (a sponsor) engaged in a trade or business with no arrangement to receive — or expectation of receiving — any substantial benefit from the nonprofit in return for the payment. The IRS allows exempt organizations to use information that’s an established part of a sponsor’s identity, such as logos, slogans, locations, phone numbers and URLs.
There are some exceptions. For example, if the payment amount is contingent upon the level of attendance at an event, broadcast ratings or other factors indicating the quantity of public exposure received, the IRS doesn’t consider it a sponsorship and the payment would likely trigger UBIT.
Providing facilities, services or other privileges to a sponsor — such as complimentary tickets or admission to golf tournaments — doesn’t automatically disallow a payment from being a qualified sponsorship payment. Generally, if the privileges provided aren’t what the IRS considers a “substantial benefit” or if providing them is a related business activity, the payments won’t be subject to UBIT. But when services or privileges provided by an exempt organization to a sponsor are deemed to be substantial, part or all of the sponsorship payment may be taxable.
Advertising payments: Taxable
Payment for advertising a sponsor’s products or services is considered unrelated business income, so it’s subject to UBIT. According to the IRS, advertising includes endorsements, inducements to buy, sell or use products, and messages containing qualitative or comparative language, price information or other indications of value.
Some activities often are misclassified as advertising. Using logos or slogans that are an established part of a sponsor’s identity is not, by itself, advertising. And if your nonprofit distributes or displays a sponsor’s product at an event, whether for free or remuneration, it’s considered use or acknowledgment, not advertising.
Distinctions between taxable advertising and nontaxable sponsorships can be nuanced. So before you seek new income sources, contact us for help determining whether they may subject your nonprofit to UBIT. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
There’s a harsh tax penalty that you could be at risk for paying personally if you own or manage a business with employees. It’s called the “Trust Fund Recovery Penalty” and it applies to the Social Security and income taxes required to be withheld by a business from its employees’ wages.
Because 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 aggressive in enforcing the 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 avoid it.
What 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 exempt from responsibility, can be subject to this penalty under some circumstances. In some cases, responsibility has even been extended to family members close to the business, and to attorneys and accountants.
According to the IRS, 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. 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.
Although a taxpayer held liable can sue other responsible people for contribution, this action must be taken entirely on his or her own after the penalty is paid. It isn’t part of the IRS collection process.
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.
Never borrow from taxes
Under no circumstances should you fail to withhold taxes or “borrow” from withheld amounts. All funds withheld should be paid over to the government on time. Contact us with any questions about making tax payments. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Agility — or the ability to react quickly — is essential to surviving and thriving in today’s competitive landscape. Though agile techniques were originally used in the realm of software development, this concept has many applications in the modern business world, including how companies approach their internal audits. Here’s an overview of agile auditing and why many internal audit teams are jumping on the bandwagon.
Whereas a traditional audit requires extensive planning, fieldwork and reporting, an agile audit moves at a faster pace. An agile audit also allows the audit team to continually refocus their attention and efforts where they’re needed the most.
Agile auditing relies on the following key concepts:
Audit backlogs. The audit team keeps a backlog of reviewed and approved audit programs. As the environment evolves, the audit team can add, remove or reprioritize audit programs within the backlog. This dynamic approach ensures that the audit team focuses on the most pressing issues — and minimizes the likelihood that they’ll waste time on an issue from a previous audit plan that’s no longer relevant.
User stories. Auditors create user stories that are made up of:
Each story corresponds to a unit of work related to the audit. The user is the individual responsible for performing critical tasks related to the story. The action is what the user must do to generate a desired outcome.
For example, a retailer (the user) wants to process credit card payments from customers online (the action), so they can order online (the outcome). Creating a story provides the audit team with an understanding of the user’s requirements and the desired outcome.
Audit sprints. With a story defined, the audit team can deliver their work in sprints. Each sprint is normally completed in one to four weeks. Sprints may include defined tasks and regular check-ins with stakeholders. A sprint has a planning phase and daily “scrums,” which are short meetings with the audit team and stakeholders. Items on the daily agenda include:
Each sprint concludes with the delivery of preliminary results to stakeholders. Reviewing the results of each sprint gradually over the course of the audit helps minimize surprises when the final audit report is submitted to stakeholders.
Agile auditing facilitates more frequent and timelier communications between auditors and stakeholders. This can lead to more robust partnerships and improvements in the accuracy and integrity of audit team’s findings. More frequent communication also allows the audit team and the business to identify and resolve problems quickly.
Contact us for more information. We can help you decide whether you’re ready to transition to a more agile auditing approach and, if so, guide your internal audit team through the implementation process. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The IRS just released its audit statistics for the 2020 fiscal year and fewer taxpayers had their returns examined as compared with prior years. But even though a small percentage of returns are being chosen for audit these days, that will be little consolation if yours is one of them.
Overall, just 0.5% of individual tax returns were audited in 2020. However, as in the past, those with higher incomes were audited at higher rates. For example, in 2020, 2.2% of taxpayers with adjusted gross incomes (AGIs) of between $1 million and $5 million were audited. Among the richest taxpayers, those with AGIs of $10 million and more, 7% of returns were audited in 2020.
These are among the lowest percentages of audits conducted in recent years. However, the Biden administration has announced it would like to raise revenue by increasing tax compliance and enforcement. In other words, audits may be on the rise in coming years.
Prepare in advance
Even though fewer audits were performed in 2020, the IRS will still examine thousands of returns this year. With proper planning, you may fare well even if you’re one of the unlucky ones.
The easiest way to survive an IRS examination is to prepare in advance. On a regular basis, you should systematically maintain documentation — invoices, bills, canceled checks, receipts, or other proof — for all items reported on your tax returns.
It’s possible you didn’t do anything wrong. Just because a return is selected for audit doesn’t mean that an error was made. Some returns are randomly selected based on statistical formulas. For example, IRS computers compare income and deductions on returns with what other taxpayers report. If an individual deducts a charitable contribution that’s significantly higher than what others with similar incomes report, the IRS may want to know why.
Returns can also be selected if they involve issues or transactions with other taxpayers who were previously selected for audit, such as business partners or investors.
The government generally has three years within which to conduct an audit, and often the exam won’t begin until a year or more after you file your return.
Complex vs. simple returns
The scope of an audit depends on the tax return’s complexity. A return reflecting business or real estate income and expenses will obviously take longer to examine than a return with only salary income.
An audit may be conducted by mail or through an in-person interview and review of records. The interview may be conducted at an IRS office or may be a “field audit” at the taxpayer’s home, business, or accountant’s office.
Important: Even if your chosen for audit, an IRS examination may be nothing to lose sleep over. In many cases, the IRS asks for proof of certain items and routinely “closes” the audit after the documentation is presented.
Don’t go it alone
It’s advisable to have a tax professional represent you at an audit. A tax pro knows the issues that the IRS is likely to scrutinize and can prepare accordingly. In addition, a professional knows that in many instances IRS auditors will take a position (for example, to disallow certain deductions) even though courts and other guidance have expressed contrary opinions on the issues. Because pros can point to the proper authority, the IRS may be forced to concede on certain issues.
If you receive an IRS audit letter or simply want to improve your recordkeeping, we’re here to help. Contact us to discuss this or any other aspect of your taxes. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Cryptocurrency has gone mainstream, and if you’ve been sitting on the fence about accepting donations in virtual currency, it’s time to make a decision. But before your not-for-profit says “yes” to a Bitcoin (or other cryptocurrency) gift, make sure you understand the issues involved — including the risks.
Virtual currency = risk
Cryptocurrency refers to a decentralized form of digital currency that’s tracked in a blockchain ledger. Unlike traditional currencies, the ledger doesn’t reside with a central authority, such as a bank or government, but across public peer-to-peer networks. The value of cryptocurrencies derives in part from its scarcity. In the case of Bitcoins, for example, the supply is limited to 21 million “coins.”
One of the most significant risks related to cryptocurrencies is their price volatility. The price for Bitcoin can shift more than 10% in a single day. Imagine a donation that drops that much in value within hours of receipt. Of course, cryptocurrencies also can quickly appreciate in value dramatically. That’s one reason owners might want to donate them — to avoid capital gains tax on the appreciation.
Third-party facilitators can help
Given such price volatility, you need to decide whether your nonprofit can assume the risks. One way to manage them is to accept cryptocurrency through a third-party facilitator, such as The Giving Block, BitPay or Engiven. These platforms allow nonprofits to almost immediately convert crypto donations into dollars — before their value can fall.
Facilitators typically charge a small fee, similar to credit card transaction fees. Check with your financial institution before signing an agreement with a facilitator, though. Some are wary of transactions involving players in the virtual currency industry.
If, on the other hand, you decide to accept cryptocurrency donations directly, and perhaps benefit from appreciation, you must create a “digital wallet” through a bank or mobile phone app. Wallets store the public and private “keys” required to send and receive coins. And you’ll need to implement internal controls and security measures to secure your keys and wallets.
Your reporting obligations
When it comes to reporting, the IRS says nonprofits should treat these obligations as noncash contributions on Form 990 and, if applicable, Schedule M. You must file Schedule M if you receive more than $25,000 in noncash contributions or contributions of art, historical treasures or similar assets, or qualified conservation contributions.
If you accept cryptocurrency directly and convert it to cash within three years after receipt, you must file Form 8282, Donee Information Return, and give the donor a copy. If the donation is worth more than $5,000, your organization will need to sign the donor’s Form 8283, Noncash Charitable Contributions.
If you haven’t yet been approached by a supporter offering a cryptocurrency contribution, it’s only a matter of time. So prepare now. You’ll need new security and compliance policies and should make a gift acceptance policy addendum. Contact us for more information and help. Sam Brown, CPA, Inc, Troy, Ohio, www.sbcpaohio.com
Are you eligible to take the deduction for qualified business income (QBI)? Here are 10 facts about this valuable tax break, referred to as the pass-through deduction, QBI deduction or Section 199A deduction.
As you can see, this substantial deduction is complex, especially if your taxable income exceeds the thresholds discussed above. Other rules apply. Contact us if you have questions about your situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Many types of businesses — such as homebuilders and manufacturers — turn raw materials into finished products for customers. Production is a continuous process. So, any work that’s been started but isn’t yet completed before the end of the accounting period is reported as work in progress (WIP) under U.S. Generally Accepted Accounting Principles (GAAP).
The value of WIP relies on management’s estimates. Auditors often give special attention to these estimates during fieldwork. Here’s what to expect during a financial statement audit.
Inventory is classified as a current asset on the balance sheet under GAAP. There are three types of inventory:
1. Raw materials. These are tangible inputs that have been received from suppliers but haven’t yet been worked with. For example, a construction firm may have a supply of lumber and drywall in a warehouse that counts as raw materials.
2. Work in progress. This term refers to partially finished products at various stages of completion. Items classified as WIP still require further work, processing, assembly and/or inspection. It includes raw materials, labor and overhead allocations.
3. Finished goods. These items are fully complete. They may be ready for customers to purchase or, in the case of custom products, available for delivery or title transfer to customers.
Standard vs. job costing
When a company produces large volumes of the same product, management allocates costs as each phase of the production process is completed. This is known as standard costing. For example, if a production process involves eight steps, the company might allocate 50% of its costs to the product once the fourth stage is completed.
On the other hand, when a company produces unique products — such as the construction of a factory or made-to-order parts — a job costing system is typically used to allocate materials, labor and overhead costs as incurred.
Most experienced managers use realistic estimates, but inexperienced or dishonest managers may inflate WIP values. This can make a company appear healthier than it really is by overstating the value of inventory at the end of the period and understating cost of goods sold during the current accounting period.
Eye on WIP
Auditors focus significant effort on analyzing how companies quantify and allocate their costs. Under standard costing, companies typically record inventory (including WIP) at cost, and then recognize revenue once they sell finished goods. The WIP balance grows based on the number of steps completed in the production process. Auditors analyze the methods used to quantify a product’s standard costs, as well as how the company allocates the costs corresponding to each phase of production.
Conversely, with job costing, revenue recognition happens based on the percentage-of-completion or completed-contract method. Auditors analyze the process to allocate materials, labor and overhead to each job. In particular, they test to ensure that costs assigned to a particular product or project correspond to that job.
Get it right
Under both methods, accounting for WIP affects the balance sheet and the income statement. We can help determine whether your company’s WIP estimates are reasonable and whether your accounting practices comply with the recent changes to the revenue recognition rules for long-term contracts, if applicable. Contact us for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Married couples may not be able 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 earns compensation. However, there’s an exception involving a “spousal” IRA. It allows contributions to be made for nonworking spouses.
For 2021, the amount that an eligible married couple can contribute to an IRA for a nonworking spouse is $6,000, which is the same limit that applies for the working spouse.
As you may know, IRAs offer two types of advantages for taxpayers who make contributions to them.
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.)
Boost contributions if 50 or older
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, for 2021, 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 2021, 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 nonparticipant spouse only if the couple’s AGI doesn’t exceed $125,000. This limit is phased out for AGI between $198,000 and $208,000.
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
During the pandemic, your not-for-profit may have been forced to operate without your dedicated volunteers. It has probably come as a great relief to welcome them back in person. However, volunteers, like employees, represent some risk to your organization. For example, you could be exposed to lawsuits if volunteers are harmed or harm others while volunteering for you.
What’s the risk?
Allegations of negligence or intentional misconduct often motivate lawsuits against nonprofits. In certain situations, responsibility for harm may be considered automatic whether or not there’s negligence or misconduct. Nonprofits also can be held liable even when volunteers act outside the scope of prescribed duties or accepted procedures.
Still, most organizations have to manage volunteer-related risks as best they can, because operating without unpaid help would be impossible. But you can use volunteers with greater confidence by adopting certain practices. Just be sure to create policies with input from legal counsel.
How do you mitigate risk?
Your volunteer recruitment process should be almost as formal and structured as your paid employee hiring process. Before seeking volunteers, develop job descriptions for open positions that outline the nature of the work to be performed, any required skills or experience, and any possible risks the job presents.
Screen prospective volunteers according to your nonprofit’s mission, programs and likely volunteer activities. Some positions will pose few risks and your screening process can be relatively basic: Ask candidates to fill out an application and submit to an interview, and then check their work and character references. Positions that carry greater risks — such as work involving children, the elderly and other vulnerable populations, or direct access to cash donations — require a more rigorous process.
Once volunteers are on board, provide training, supervision and, if necessary, discipline. At a minimum, training should involve an orientation session to explain your nonprofit’s mission and policies. Once volunteers have begun working for you, actively supervise them.
Do you need insurance?
Adequate insurance is critical. In addition to general liability coverage, your nonprofit may want to consider supplemental policies that address specific types of exposure such as medical malpractice or sexual misconduct.
Contact us. We can help review your nonprofit’s current insurance coverage and risk mitigation policies and identify threats you may not have considered. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The Employee Retention Tax Credit (ERTC) is a valuable tax break that was extended and modified by the American Rescue Plan Act (ARPA), enacted in March of 2021. Here’s a rundown of the rules.
Back in March of 2020, Congress originally enacted the ERTC in the CARES Act to encourage employers to hire and retain employees during the pandemic. At that time, the ERTC applied to wages paid after March 12, 2020, and before January 1, 2021. However, Congress later modified and extended the ERTC to apply to wages paid before July 1, 2021.
The ARPA again extended and modified the ERTC to apply to wages paid after June 30, 2021, and before January 1, 2022. Thus, an eligible employer can claim the refundable ERTC against “applicable employment taxes” equal to 70% of the qualified wages it pays to employees in the third and fourth quarters of 2021. Except as discussed below, qualified wages are generally limited to $10,000 per employee per 2021 calendar quarter. Thus, the maximum ERTC amount available is generally $7,000 per employee per calendar quarter or $28,000 per employee in 2021.
For purposes of the ERTC, a qualified employer is eligible if it experiences a significant decline in gross receipts or a full or partial suspension of business due to a government order. Employers with up to 500 full-time employees can claim the credit without regard to whether the employees for whom the credit is claimed actually perform services. But, except as explained below, employers with more than 500 full-time employees can only claim the ERTC with respect to employees that don’t perform services.
Employers who got a Payroll Protection Program loan in 2020 can still claim the ERTC. But the same wages can’t be used both for seeking loan forgiveness or satisfying conditions of other COVID relief programs (such as the Restaurant Revitalization Fund program) in calculating the ERTC.
Beginning in the third quarter of 2021, the following modifications apply to the ERTC:
Contact us if you have any questions related to your business claiming the ERTC. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Timing counts in financial reporting. Under the accrual method of accounting, the end of the accounting period serves as a strict “cutoff” for recognizing revenue and expenses.
However, during the COVID-19 pandemic, managers may be tempted to show earnings or reduce losses. As a result, they may extend revenue cutoffs beyond the end of the period or delay reporting expenses until the next period. Here’s an overview of the rules that apply to revenue and expense recognition under U.S. Generally Accepted Accounting Principles (GAAP).
Companies that follow GAAP recognize revenue when the earnings process is complete, and the rights of ownership have passed from seller to buyer. Rights of ownership include possession of an unrestricted right to use the property, title, assumption of liabilities, transferability of ownership, insurance coverage and risk of loss.
In addition, under accrual-based accounting methods, revenue and expenses are matched in the reporting periods that they’re earned and incurred. The exchange of cash doesn’t necessarily drive the recognition of revenue and expenses under GAAP. The rules may be less clear for certain services and contract sales, tempting some companies to play timing games to artificially boost financial results.
Rules for long-term contracts
The rules regarding cutoffs recently changed for companies that enter into long-term contracts. Under Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, revenue should be recognized “to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services.”
The guidance requires management to make judgment calls about identifying performance obligations (promises) in contracts, allocating transaction prices to these promises and estimating variable consideration. These judgments could be susceptible to management bias or manipulation.
In turn, the risk of misstatement and the need for expanded disclosures will bring increased attention to revenue recognition practices. So, if your business is affected by the updated guidance, expect your auditors to ask more questions about cutoff policies and to perform additional audit procedures to test compliance with GAAP. For instance, they’ll likely review a larger sample of customer contracts and invoices than in previous periods to ensure you’re accurately applying the cutoff rules.
For more information
Contact us if you need help understanding the rules on when to record revenue and expenses. We can help you comply with the current guidance and minimize audit adjustments. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Are you age 65 and older and have basic Medicare insurance? You may need to pay additional premiums to get the level of coverage you want. The premiums can be expensive, especially if you’re married and both you and your spouse are paying them. But there may be a bright side: You may qualify for a tax break for paying the premiums.
Medicare premiums are medical expenses
You can combine premiums for Medicare health insurance with other qualifying medical 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, coinsurance, deductibles and other costs. Medigap is private supplemental insurance that’s intended to cover some or all gaps.
Itemizing versus the standard deduction
Qualifying for a medical expense deduction is hard for many people for a couple of reasons. For 2021, 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 2021, the standard deduction amounts are $12,550 for single filers, $25,100 for married couples filing jointly and $18,800 for heads of household. (For 2020, these amounts were $12,400, $24,800 and $18,650, 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 deducted 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 16-cents-per-mile rate for 2021 (down from 17 cents for 2020), or you can keep track of your actual out-of-pocket expenses for gas, oil and repairs.
Claim all eligible deductions
Contact us if you have additional questions about claiming medical expense deductions on your tax return. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
“Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards” (Uniform Guidance) applies to all not-for-profits that accept federal funding. It has been updated and amended several times, most recently in 2020. So if you haven’t reviewed your own organization’s procurement policies lately, now’s a good time to ensure you’re in compliance.
Pay attention to amounts
Uniform Guidance imposes some strict purchasing requirements on nonprofits receiving federal funds. For example, you must pay attention to the amount of a purchase because it determines the procurement methods you need to employ. “Micro-purchases” of supplies or services up to $10,000 generally can be awarded without soliciting competitive quotes. But under the 2020 changes the threshold can be increased to $50,000 — and even over that amount in certain circumstances. For procurements up to $250,000 you can use the “simple acquisition” method of comparing price or rate quotes from qualified vendors.
For purchases exceeding $250,000, you must select vendors or suppliers based on publicly solicited sealed bids or competitive proposals. Select the lowest bid or the proposal most advantageous to the relevant program based on price and other factors that impact the program performance. Also perform a cost or price analysis for every purchase over $250,000, to make independent estimates before receiving bids or proposals.
Noncompetitive proposals solicited from a single source are permissible in limited circumstances. For example, they’re allowed in the event of a public emergency where the nonprofit must respond immediately.
Multiple requirements apply
Some nonprofits have found the standards challenging. Barriers to full compliance may include staff resistance or lack of time. The standards also have multiple documentation requirements.
For example, your organization must document all procurement procedures in writing. Conflict of interest policies covering employees involved in procurement as well as all entities owned by or considered “related” to your organization need to be included. And you must keep records detailing each procurement — including bids solicited, selection criteria, quotes from vendors and the final contract price. Designing a checklist that outlines the decisions needed at each purchase level may make the process more manageable.
Compliance is critical
What might happen if you fail to fully comply with the Uniform Guidance? In extreme circumstances, you could lose your funding. Reduce this risk by regularly auditing your new procedures and processes. Contact us for help. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
As we continue to come out of the COVID-19 pandemic, you may be traveling again for business. Under tax law, there are a number of rules for deducting the cost of your out-of-town business travel within the United States. These rules apply if the business conducted out of town reasonably requires an overnight stay.
Note that under the Tax Cuts and Jobs Act, employees can’t deduct their unreimbursed travel expenses through 2025 on their own tax returns. That’s because unreimbursed employee business expenses are “miscellaneous itemized deductions” that aren’t deductible through 2025.
However, self-employed individuals can continue to deduct business expenses, including away-from-home travel expenses.
Here are some of the rules that come into play.
Transportation and meals
The actual costs of travel (for example, plane fare and cabs to the airport) are deductible for out-of-town business trips. You’re also allowed to deduct the cost of meals and lodging. Your meals are deductible even if they’re not connected to a business conversation or other business function. The Consolidated Appropriations Act includes a provision that removes the 50% limit on deducting eligible business meals for 2021 and 2022. The law allows a 100% deduction for food and beverages provided by a restaurant. Takeout and delivery meals provided by a restaurant are also fully deductible.
Keep in mind that no deduction is allowed for meal or lodging expenses that are “lavish or extravagant,” a term that’s been interpreted to mean “unreasonable.”
Personal entertainment costs on the trip aren’t deductible, but business-related costs such as those for dry cleaning, phone calls and computer rentals can be written off.
Combining business and pleasure
Some allocations may be required if the trip is a combined business/pleasure trip, for example, if you fly to a location for five days of business meetings and stay on for an additional period of vacation. Only the cost of meals, lodging, etc., incurred for the business days are deductible — not those incurred for the personal vacation days.
On the other hand, with respect to the cost of the travel itself (plane fare, etc.), if the trip is “primarily” business, the travel cost can be deducted in its entirety and no allocation is required. Conversely, if the trip is primarily personal, none of the travel costs are deductible. An important factor in determining if the trip is primarily business or personal is the amount of time spent on each (although this isn'’t the sole factor).
If the trip doesn’t involve the actual conduct of business but is for the purpose of attending a convention, seminar, etc., the IRS may check the nature of the meetings carefully to make sure they aren’t vacations in disguise. Retain all material helpful in establishing the business or professional nature of this travel.
The rules for deducting the costs of a spouse who accompanies you on a business trip are very restrictive. No deduction is allowed unless the spouse is an employee of you or your company, and the spouse’s travel is also for a business purpose.
Finally, note that personal expenses you incur at home as a result of taking the trip aren’t deductible. For example, the cost of boarding a pet while you’re away isn’t deductible. Contact us if you have questions about your small business deductions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Businesses need financial information that’s accurate, relevant and timely. The Securities and Exchange Commission requires publicly traded companies to follow U.S. Generally Accepted Accounting Principles (GAAP), often considered the “gold standard” in financial reporting in the United States. But privately held companies can use simplified alternative accounting methods. What’s right for your business depends on its size, regulatory and contractual requirements, management’s future plans and the needs of its stakeholders.
Menu of accounting methods
Here’s an overview of the accounting methods available for small and medium-sized entities (SMEs):
GAAP. This framework follows rules set forth by the Financial Accounting Standards Board (FASB). It’s based on the accrual method of accounting, where revenues and expenses are matched to the reporting period in which they’re earned and incurred, respectively. Under this method, companies report receivables for revenue that’s earned but not yet collected and payables for expenses that are incurred but not yet paid. Prepaid (and accrued) expenses are also reported on an accrual-basis balance sheet.
Financial Reporting Framework for SMEs. This framework is rooted in GAAP, but it’s adjusted to accommodate the needs of private businesses. Developed by the American Institute of Certified Public Accountants (AICPA), this simplified framework blends traditional accounting principles with accrual-basis income tax accounting methods.
This non-GAAP framework is based on historic cost, steering away from complex, fair-value-based standards that have been implemented in recent years. For example, it retains the familiar accounting for revenue recognition and leases. It also includes targeted disclosure requirements and provides a degree of optionality, enabling SMEs to customize their financial statements to meet the needs of stakeholders.
Tax-basis method. Under this method, companies use the same accounting principles for book and federal income tax purposes. The U.S. tax code provides the rules that apply under this method.
Cash-basis method. This is the simplest reporting method. Revenues are recognized when received from customers and expenses when the company pays them. But there’s a potential downside: Revenues for the period aren’t necessarily matched to the related expenses for the period. This can lead to fluctuations in profits and financial ratios when comparing performance over time.
Discuss the following questions with your accounting professional to help select the right method for your business:
For example, the cash- or tax-basis method may be appropriate for a single-owner business without any debt that uses its financial statements for internal purposes only. But larger private firms may decide it’s advantageous to comply with GAAP to attract outside investors, obtain loans, satisfy bonding and regulatory requirements, and evaluate strategic business decisions.
What’s right for you?
As your business grows in size, sophistication and complexity, it may be time to upgrade to a more complicated and consistent method of accounting. Contact us to help select a reporting framework that suits your current needs. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you’re a parent with a college-bound child, you may be concerned about being able to fund future tuition and other higher education costs. You want to take maximum advantage of tax benefits to minimize your expenses. Here are some possible options.
Series EE U.S. savings bonds offer two tax-saving opportunities for eligible families when used to finance college:
To qualify for the tax exemption for college use, you must purchase the bonds in your name (not the child’s) or jointly with your spouse. The proceeds must be used for tuition, fees and certain other expenses — not room and board. If only part of the proceeds is used for qualified expenses, only that part of the interest is exempt.
The exemption is phased out if your adjusted gross income (AGI) exceeds certain amounts.
A qualified tuition program (also known as a 529 plan) allows you to buy tuition credits for a child or make contributions to an account set up to meet a child’s future higher education expenses. Qualified tuition programs are established by state governments or private education institutions.
Contributions aren’t deductible. The contributions are treated as taxable gifts to the child, but they’re eligible for the annual gift tax exclusion ($15,000 for 2021). A donor who contributes more than the annual exclusion limit for the year can elect to treat the gift as if it were spread out over a five-year period.
The earnings on the contributions accumulate tax-free until college costs are paid from the funds. Distributions from 529 plans are tax-free to the extent the funds are used to pay “qualified higher education expenses.” Distributions of earnings that aren’t used for qualified expenses will be subject to income tax plus a 10% penalty tax.
Coverdell education savings accounts (ESAs)
You can establish a Coverdell ESA and make contributions of up to $2,000 annually for each child under age 18.
The right to make contributions begins to phase out once your AGI is over a certain amount. If the income limitation is a problem, a child can contribute to his or her own account.
Although the contributions aren’t deductible, income in the account isn’t taxed, and distributions are tax-free if used on qualified education expenses. If the child doesn’t attend college, the money must be withdrawn when he or she turns 30, and any earnings will be subject to tax and penalty. But unused funds can be transferred tax-free to a Coverdell ESA of another member of the child’s family who hasn’t reached age 30. (Some ESA requirements don’t apply to individuals with special needs.)
These are just some of the tax-favored ways to build up a college fund for your children. Once your child is in college, you may qualify for tax breaks such as the American Opportunity Tax Credit or the Lifetime Learning Credit. Contact us if you’d like to discuss any of the options. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Collective impact projects are collaborations between not-for-profits, government, businesses and communities with the goal of achieving challenging and complicated social objectives. They can succeed in ways that simply aren’t available to individual organizations. But they also require a level of commitment your nonprofit may not be prepared for.
A common cause
Collective impact is more than just collaboration. Its originators describe it as the commitment of important players from different sectors to a common agenda for solving a specific social problem. Such cross-sector coordination may help nonprofits achieve greater change than isolated interventions by individual groups.
One example is Active Schools, a national collaborative of health, education and corporate partners, including Nike and Campbell Soup Foundation. Together this coalition aims to confront “a nationwide crisis of inactivity” by providing structural support and resources for physical education and activity programs in K-12 schools.
Prerequisites for success
Collective impact adherents typically cite several prerequisites necessary to produce successful initiatives:
Common agenda. Participants must have a shared vision for change based on a common understanding of the challenge. Everyone doesn’t need to agree on every facet of the problem. But differences of opinion about the problem — and goals for addressing it — must be resolved to prevent division.
Shared measurement systems. A shared agenda will be of little value unless participants agree on how to measure and report outcomes. All participants must take the same approach to data collection and metrics to foster accountability and facilitate information sharing.
Mutually reinforcing activities. Stakeholders need to work together, but that doesn’t mean they all must do the same thing. Each participant should be encouraged to harness its strengths in a way that supports and coordinates with the other participants.
Continuous communication. Trust is critical. But it usually takes time and multiple interactions to develop. So the most effective initiatives keep the lines of communication open and encourage stakeholders to meet in person regularly.
Backbone organizations. Collective impact requires a separate organization with its own infrastructure to provide the project’s “backbone.” This includes a dedicated staff to plan, manage and support the organization.
Know the risks
Collective impact enables nonprofits and their partners to take on big issues. But before joining a project, understand that you may need to provide substantial human and financial resources, commit to a long-term agenda and put your trust in possibly untested partners. Contact us for help determining whether your organization is prepared for the challenge. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Here are some of the key tax-related deadlines affecting businesses and other employers during the third 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.
Monday, August 2
Tuesday, August 10
Wednesday, September 15
In today’s unprecedented market conditions, it can be challenging to predict metrics that underlie your company’s accounting estimates. Examples of key “unknowns” include how much longer certain pandemic issues will continue, how federal stimulus spending will affect the economy over the long run, and the extent to which tax laws and environment regulations may change under the Biden administration.
Your predictions on these matters could, in turn, have a material impact on your company’s financial statements. Inaccurate predictions could lead to restatements or write-offs in future periods.
Relying on estimates
Accounting estimates may be based on subjective or objective information (or both) and involve some level of measurement uncertainty. Some estimates may be easily determinable, but many are inherently subjective or complex. Examples of accounting estimates include allowances for doubtful accounts, work-in-progress inventory and uncertain tax positions.
Fair value measurements are another type of accounting estimate. Under U.S. Generally Accepted Accounting Principles (GAAP), a fair value measurement represents “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Fair value is the basis for recording assets and liabilities in a business combination and measuring impairment of long-lived assets, goodwill and other intangible assets.
Accounting estimates involve a high degree of subjectivity and judgment and may be susceptible to misstatement. Therefore, they require more auditor focus.
Auditing standards generally provide three approaches for substantively testing accounting estimates and fair value measurements. During fieldwork, the auditor selects one or a combination of these approaches:
1. Testing management’s process. Auditors evaluate the reasonableness and consistency of management’s assumptions, as well as test whether the underlying data is complete, accurate and relevant.
2. Developing an independent estimate. Using management’s assumptions (or alternative assumptions), auditors come up with estimates to compare to what’s reported on the internally prepared financial statements.
3. Reviewing subsequent events or transactions. The reasonableness of estimates can be gauged by looking at events or transactions that happen after the balance sheet date but before the date of the auditor’s report.
Eye on estimates
Expect your auditors to give extra attention to your accounting estimates this year. For example, they may ask more in-depth questions or perform additional testing procedures. Some items may require a different measurement technique than you’ve used in the past. Before audit season begins, contact us for help making estimates, based on market research and the use of specialists, that will withstand scrutiny. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you’re getting ready to retire, you’ll soon experience changes in your lifestyle and income sources that may have numerous tax implications.
Here’s a brief rundown of four tax and financial issues you may deal with when you retire:
Taking required minimum distributions. This is the minimum amount you must withdraw from your retirement accounts. You generally must start taking withdrawals from your IRA, SEP, SIMPLE and other retirement plan accounts when you reach age 72 (70½ before January 1, 2020). Roth IRAs don’t require withdrawals until after the death of the owner.
You can withdraw more than the minimum required amount. Your withdrawals will be included in your taxable income except for any part that was taxed before or that can be received tax-free (such as qualified distributions from Roth accounts).
Selling your principal residence. Many retirees want to downsize to smaller homes. If you’re one of them and you have a gain from the sale of your principal residence, you may be able to exclude up to $250,000 of that gain from your income. If you file a joint return, you may be able to exclude up to $500,000.
To claim the exclusion, you must meet certain requirements. During a five-year period ending on the date of the sale, you must have owned the home and lived in it as your main home for at least two years.
If you’re thinking of selling your home, make sure you’ve identified all items that should be included in its basis , which can save you tax.
Engaging in new work activities. After retirement, many people continue to work as consultants or start new businesses. Here are some tax-related questions to ask:
Taking Social Security benefits. If you continue to work, it may have an impact on your Social Security benefits. If you retire before reaching full Social Security retirement age (65 years of age for people born before 1938, rising to 67 years of age for people born after 1959) and the sum of your wages plus self-employment income is over the Social Security annual exempt amount ($18,960 for 2021), you must give back $1 of Social Security benefits for each $2 of excess earnings.
If you reach full retirement age this year, your benefits will be reduced $1 for every $3 you earn over a different annual limit ($50,520 in 2021) until the month you reach full retirement age. Then, your earnings will no longer affect the amount of your monthly benefits, no matter how much you earn.
Speaking of Social Security, you may have to pay federal (and possibly state) tax on your benefits. Depending on how much income you have from other sources, you may have to report up to 85% of your benefits as income on your tax return and pay the resulting federal income tax.
As you can see, tax planning is still important after you retire. We can help maximize the tax breaks you’re entitled to so you can keep more of your hard-earned money. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
It takes more than dedication and enthusiasm for your not-for-profit’s cause and programs to make a good board member. The most critical duty for all board members is being a fiduciary. This means, among other things, that they can be trusted to always act in their nonprofit’s best interests, avoid unnecessary risk, make decisions thoughtfully and execute them efficiently.
Not all board members are aware of their duties — and it’s up to your organization to ensure they understand them. In general, a fiduciary has three primary duties:
If your board members violate these duties, they may be held personally liable for any financial harm your organization suffers as a result.
One of the most challenging — but critical — components of fiduciary duty is the obligation to avoid conflicts of interest. In general, a conflict of interest exists when a nonprofit organization does business with:
To avoid even the appearance of impropriety, your nonprofit should also treat a transaction as a conflict of interest if it involves a board member’s spouse or other family member, or an entity in which a spouse or family member has a financial interest.
The key to dealing with conflicts of interest, whether real or perceived, is disclosure. The board member involved should disclose the relevant facts to the board and abstain from any discussion or vote on the issue — unless the board determines that he or she may participate.
Educating your board
To help your board carry out its duties, provide new members with an orientation that educates them in the basics of nonprofit finance and accounting. Also regularly provide an updated list of responsibilities that covers financial documents, compliance requirements and risk management. Contact us. We can help inform your board and ensure it meets its fiduciary duties. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you’re claiming deductions for business meals or auto expenses, expect the IRS to closely review them. In some cases, taxpayers have incomplete documentation or try to create records months (or years) later. In doing so, they fail to meet the strict substantiation requirements set forth under tax law. Tax auditors are adept at rooting out inconsistencies, omissions and errors in taxpayers’ records, as illustrated by one recent U.S. Tax Court case.
Facts of the case
In the case, the taxpayer ran a notary and paralegal business. She deducted business meals and vehicle expenses that she allegedly incurred in connection with her business.
The deductions were denied by the IRS and the court. Tax law “establishes higher substantiation requirements” for these and certain other expenses, the court noted. No deduction is generally allowed “unless the taxpayer substantiates the amount, time and place, business purpose, and business relationship to the taxpayer of the person receiving the benefit” for each expense with adequate records or sufficient evidence.
The taxpayer in this case didn’t provide adequate records or other sufficient evidence to prove the business purpose of her meal expenses. She gave vague testimony that she deducted expenses for meals where she “talked strategies” with people who “wanted her to do some work.” The court found this was insufficient to show the connection between the meals and her business.
When it came to the taxpayer’s vehicle expense deductions, she failed to offer credible evidence showing where she drove her vehicle, the purpose of each trip and her business relationship to the places visited. She also conceded that she used her car for both business and personal activities. (TC Memo 2021-50)
Best practices for business expenses
This case is an example of why it’s critical to maintain meticulous records to support business expenses for meals and vehicle deductions. Here’s a list of “DOs and DON'Ts” to help meet the strict IRS and tax law substantiation requirements for these items:
DO keep detailed, accurate records. For each expense, record the amount, the time and place, the business purpose, and the business relationship of any person to whom you provided a meal. If you have employees who you reimburse for meals and auto expenses, make sure they’re complying with all the rules.
DON’T reconstruct expense logs at year end or wait until you receive a notice from the IRS. Take a moment to record the details in a log or diary or on a receipt at the time of the event or soon after. Require employees to submit monthly expense reports.
DO respect the fine line between personal and business expenses. Be careful about combining business and pleasure. Your business checking account shouldn’t be used for personal expenses.
DON’T be surprised if the IRS asks you to prove your deductions. Meal and auto expenses are a magnet for attention. Be prepared for a challenge.
With organization and guidance from us, your tax records can stand up to scrutiny from the IRS. There may be ways to substantiate your deductions that you haven’t thought of, and there may be a way to estimate certain deductions (“the Cohan rule”), if your records are lost due to a fire, theft, flood or other disaster. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Working capital equals the difference between current assets and current liabilities. Organizations need a certain amount of working capital to run their operations smoothly. The optimal (or “target”) amount of working capital depends on the nature of operations and the industry. Inefficient working capital management can hinder growth and performance.
The term “liquidity” refers to how quickly an item can be converted to cash. In general, receivables are considered more liquid than inventory. Working capital is often evaluated using the following liquidity metrics:
Current ratio. This is computed by dividing current assets by current liabilities. A current ratio of at least 1.0 means that the company has enough current assets on hand to cover liabilities that are due within 12 months.
Quick (or acid-test) ratio. This is a more conservative liquidity benchmark. It typically excludes prepaid assets and inventory from the calculation.
An alternative perspective on working capital is to compare it to total assets and annual revenues. From this angle, working capital becomes a measure of operating efficiency. Excessive amounts of cash tied up in working capital detract from other spending options, such as expanding to new markets, buying equipment and paying down debt.
High liquidity generally equates with low financial risk. However, you can have too much of a good thing. If working capital is trending upward from year to year — or it’s significantly higher than your competitors — it may be time to take proactive measures to speed up cash inflows and delay cash outflows.
Lean operations require taking a closer look at each component of working capital and implementing these best practices:
1. Put cash to good use. Excessive cash balances encourage management to become complacent about working capital. If your organization has plenty of money in its checkbook, you might be less hungry to collect receivables and less disciplined when ordering inventory.
2. Expedite collections. Organizations that sell on credit effectively finance their customers’ operations. Stale receivables — typically any balance over 45 or 60 days outstanding, depending on the industry — are a red flag of inefficient working capital management.
Getting a handle on receivables starts by evaluating which items should be written off as bad debts. Then viable balances need to be “talked in the door” as soon as possible. Enhanced collections efforts might include early bird discounts, electronic invoices and collections-based sales compensation programs.
3. Carry less inventory. Inventory represents a huge investment for manufacturers, distributors, retailers and contractors. It’s also difficult to track and value. Enhanced forecasting and data sharing with suppliers can reduce the need for safety stock and result in smarter ordering practices. Computerized technology — such as barcodes, radio frequency identification and enterprise resource planning tools — also improve inventory tracking and ordering practices.
4. Postpone payments. Credit terms should be extended as long as possible — without losing out on early bird discounts. If you can stretch your organization’s average days in payables from, say, 45 to 60 days, it trains vendors and suppliers to accept the new terms, particularly if you’re a predictable, reliable payor.
Prioritize working capital
Some organizations are so focused on the income statement, including revenue and profits, that they lose sight of the strategic significance of the balance sheet — especially working capital accounts. We can benchmark your organization’s liquidity and asset efficiency over time and against competitors. If necessary, we also can help implement strategies to improve your performance, without exposing you to unnecessary risk. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
High-income taxpayers face a 3.8% net investment income tax (NIIT) that’s imposed in addition to regular income tax. Fortunately, there are some steps you may be able to take to reduce its impact.
The NIIT applies to you only if modified adjusted gross income (MAGI) exceeds:
The amount subject to the tax is the lesser of your net investment income or the amount by which your MAGI exceeds the threshold ($250,000, $200,000, or $125,000) that applies to you.
Net investment income includes interest, dividend, annuity, royalty, and rental income, unless those items were derived in the ordinary course of an active trade or business. In addition, other gross income from a trade or business that’s a passive activity is subject to the NIIT, as is income from a business trading in financial instruments or commodities.
There are many types of income that are exempt from the NIIT. For example, tax-exempt interest and the excluded gain from the sale of your main home aren’t subject to the tax. Distributions from qualified retirement plans aren’t subject to the NIIT. Wages and self-employment income also aren’t subject to the NIIT, though they may be subject to a different Medicare surtax.
It’s important to remember the NIIT applies only if you have net investment income and your MAGI exceeds the applicable thresholds above. But by following strategies, you may be able to minimize net investment income.
If your income is high enough to trigger the NIIT, shifting some income investments to tax-exempt bonds could result in less exposure to the tax. Tax-exempt bonds lower your MAGI and avoid the NIIT.
Dividend-paying stocks are taxed more heavily as a result of the NIIT. The maximum income tax rate on qualified dividends is 20%, but the rate becomes 23.8% with the NIIT.
As a result, you may want to consider rebalancing your investment portfolio to emphasize growth stocks over dividend-paying stocks. While the capital gain from these investments will be included in net investment income, there are two potential benefits: 1) the tax will be deferred because the capital gain won’t be subject to the NIIT until the stock is sold and 2) capital gains can be offset by capital losses, which isn’t the case with dividends.
Because distributions from qualified retirement plans are exempt from the NIIT, upper-income taxpayers with some control over their situations (such as small business owners) might want to make greater use of qualified plans.
These are only a couple of strategies you may be able to employ. You also may be able to make moves related to charitable donations, passive activities and rental income that may allow you to minimize the NIIT. If you’re subject to the tax, you should include it in your tax planning. Consult with us for tax-planning strategies. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
COVID-19 was a kind of disaster most not-for-profits weren’t prepared for. As your organization recovers from this unusual event, don’t let it become vulnerable to other, more common, threats. Every nonprofit needs a formal disaster plan for such risks as a fire, natural disaster or terrorist attack.
No organization can anticipate or eliminate all possible risks, but you can limit the damage of potential risks specific to your nonprofit. The first step in creating a disaster plan is to identify the threats you face when it comes to your people, processes and technology. For example, if you work with vulnerable populations such as children and the disabled, you may need to take extra precautions to protect your clients.
Also, assess what the damages would be if your operations were interrupted. For example, if you had an office fire — or even a long-lasting power outage — what would be the possible outcomes regarding property damage and financial losses?
Designate a lead person to oversee the creation and implementation of your continuity plan. Then assemble teams to handle different duties. For example, a communications team could be responsible for contacting and updating staff, volunteers and other stakeholders, as well as updating your website and social media accounts. Other teams might focus on:
Don’t neglect planning for recovery, or how your nonprofit will get employees back to work and your office and services up and running. You may need to plan in phases that can be rolled out depending on the extent of the disaster’s damage.
All must plan
All organizations — nonprofit and for-profit alike — need to think about potential disasters. But plans are critical for charities that provide basic human services (such as medical care, food and housing) or that respond directly to disasters. This could mean mobilizing quickly, perhaps without full staffing, working computers or safe facilities.
If you aren’t sure where to start with your disaster plan, contact us for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you’re a business owner and you hire your children this summer, you can obtain tax breaks and other nontax benefits. The kids can gain on-the-job experience, spend time with you, save for college and learn how to manage money. And you may be able to:
A legitimate job
If you hire your child, you get a business tax deduction for employee wage expenses. In turn, the deduction reduces your federal income tax bill, your self-employment tax bill (if applicable), and your state income tax bill (if applicable). However, in order for your business to deduct the wages as a business expense, the work performed by the child must be legitimate and the child’s salary must be reasonable.
For example, let’s say you operate as a sole proprietor and you’re in the 37% tax bracket. You hire your 16-year-old daughter to help with office work on a full-time basis during the summer and part-time into the fall. Your daughter earns $10,000 during 2021 and doesn’t have any other earnings.
You save $3,700 (37% of $10,000) in income taxes at no tax cost to your daughter, who can use her 2021 $12,550 standard deduction to completely shelter her earnings.
Your family’s taxes are cut even if your daughter’s earnings exceed her standard deduction. Why? The unsheltered earnings will be taxed to the daughter beginning at a rate of 10%, instead of being taxed at your higher rate.
How payroll taxes might be saved
If your business isn’t incorporated, your child’s wages are exempt from Social Security, Medicare and FUTA taxes if certain conditions are met. Your child must be under age 18 for this to apply (or under age 21 in the case of the FUTA tax exemption). Contact us for how this works.
Be aware that there’s no FICA or FUTA exemption for employing a child if your business is incorporated or a partnership that includes nonparent partners. And payments for the services of your child are subject to income tax withholding, regardless of age, no matter what type of entity you operate.
Begin saving for retirement
Your business also may be able to provide your child with retirement benefits, depending on the type of plan you have and how it defines qualifying employees. And because your child has earnings from his or her job, he can contribute to a traditional IRA or Roth IRA and begin to build a nest egg. For the 2021 tax year, a working child can contribute the lesser of his or her earned income, or $6,000, to an IRA or a Roth.
Keep accurate records
As you can see, hiring your child can be a tax-smart idea. Be sure to keep the same records as you would for other employees to substantiate the hours worked and duties performed (such as timesheets and job descriptions). Issue your child a Form W-2. Contact us if you have questions about how these rules apply to your situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Internal controls are a system of policies and procedures organizations put in place to protect assets and improve operating efficiency. Effective internal controls are critical to accurate financial reporting. A solid system of controls can help prevent, detect and correct financial misstatements due to errors and fraud.
Internal and external risk factors evolve over time. So, upon completion of the year-end financial statements, managers and internal auditors should reassess whether internal controls are up to snuff and brainstorm ways to solidify controls. Start your annual assessment with the following three basic controls:
1. Physical restrictions
Employees only should have access to those assets necessary to perform their jobs. Locks and alarms are examples of ways to protect valuable tangible assets, including petty cash, inventory and equipment. But intangible assets — such as customer lists, lease agreements, patents and financial data — also require protection with controls including passwords, access logs and appropriate legal paperwork.
2. Account reconciliation
Management should confirm and analyze account balances on a regular basis. To illustrate, strong organizations reconcile bank statements and count inventory on a regular basis. Waiting until year-end to complete these basic procedures is a potential red flag of weak oversight.
Interim financial reports, such as weekly operating scorecards and quarterly financial statements, also keep management informed. But reports are only useful if management finds time to analyze them and investigate anomalies. Supervisory review takes on many forms, including observation, test counts, inquiry and task replication.
3. Job descriptions
Another basic control is maintaining detailed, up-to-date job descriptions. This exercise can help you better understand how financial job duties interact with one another. It can also highlight possible conflicts of interest that could lead to improper recordkeeping.
Your policies should call for job segregation, job duplication and mandatory vacations. For example, the person who receives customer payments should not also approve write-offs (job segregation). And two signatures should be required for checks above a prescribed dollar amount (job duplication).
It’s important to confirm during the annual review whether employees are aware of internal control policies and procedures — and whether they’re being strictly followed. At some organizations, certain internal controls procedures have been suspended while employees are working remotely during the COVID-19 pandemic.
No time like the present
For many businesses and not-for-profits, the pandemic has slowed operations. Unfortunately, times of financial distress may also entice some employees to exaggerate financial results or even commit fraud. Our auditors have seen the best (or worst) in internal control practices. We can help you identify potential weaknesses and — regardless of whether your organization is large or small — find cost-effective ways to reinforce your controls. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Eligible parents will soon begin receiving payments from the federal government. The IRS announced that the 2021 advance child tax credit (CTC) payments, which were created in the American Rescue Plan Act (ARPA), will begin being made on July 15, 2021.
How have child tax credits changed?
The ARPA temporarily expanded and made CTCs refundable for 2021. The law increased the maximum CTC — for 2021 only — to $3,600 for each qualifying child under age 6 and to $3,000 per child for children ages 6 to 17, provided their parents’ income is below a certain threshold.
Advance payments will receive up to $300 monthly for each child under 6, and up to $250 monthly for each child 6 and older. The increased credit amount will be reduced or phased out, for households with modified adjusted gross income above the following thresholds:
Under prior law, the maximum annual CTC for 2018 through 2025 was $2,000 per qualifying child but the income thresholds were higher and some of the qualification rules were different.
Important: If your income is too high to receive the increased advance CTC payments, you may still qualify to claim the $2,000 CTC on your tax return for 2021.
What is a qualifying child?
For 2021, a “qualifying child” with respect to a taxpayer is defined as one who is under age 18 and who the taxpayer can claim as a dependent. That means a child related to the taxpayer who, generally, lived with the taxpayer for at least six months during the year. The child also must be a U.S. citizen or national or a U.S. resident.
How and when will advance payments be sent out?
Under the ARPA, the IRS is required to establish a program to make periodic advance payments which in total equal 50% of IRS’s estimate of the eligible taxpayer’s 2021 CTCs, during the period July 2021 through December 2021. The payments will begin on July 15, 2021. After that, they’ll be made on the 15th of each month unless the 15th falls on a weekend or holiday. Parents will receive the monthly payments through direct deposit, paper check or debit card.
Who will benefit from these payments and do they have to do anything to receive them?
According to the IRS, about 39 million households covering 88% of children in the U.S. “are slated to begin receiving monthly payments without any further action required.” Contact us if you have questions about the child tax credit. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Many Americans remain unemployed due to the COVID-19 pandemic — at least 9.8 million at the end of April, according to the U.S. Bureau of Labor Statistics. But that’s expected to change quickly as employers ramp up hiring activities. If your not-for-profit will soon need new staffers, you might want to start putting out feelers now.
Obviously, the decision to hire is a difficult one considering the economic uncertainty that may remain. But you also don’t want to miss out on the best talent. Here are some issues to consider.
First off, do you need new employees? Even if you plan to expand services and introduce new programs, volunteers may be capable of picking up the slack. Or current staffers may be underused on projects that are stagnating or winding down. Carefully examine your nonprofit’s priorities and consider eliminating programs that aren’t meeting expectations so that you can redeploy human resources where you need them most.
If staffers have been working from home, you may want to call them back to the office (with any necessary safety protocols) before making the decision to hire. It’s possible some won’t want to return to in-person work. On the other hand, you may find you have enough hands once everyone’s back on site.
The pandemic took a financial toll on most nonprofits. Others, however, have actually experienced outpourings of support. Whatever your situation, ensure you can fit any new staffers into your budget.
Even if you can, the fact remains that nonprofits are obligated to be careful financial stewards. Donors, watchdog groups and the media demand it. So consider how you’ll make the most of any new staffing budget before you spend it.
Remember that when you hire full-time employees, the expense isn’t limited to salaries or hourly wages — you’ll also be paying for benefits. In many cases, it’s cheaper to outsource functions, particularly accounting, IT and human resources work.
Outsourcing offers the additional benefit of being temporary if you aren’t happy with the service. Underperforming employees are much harder to let go.
Making the decision
The decision to hire is likely to be one of your organization’s toughest calls this year. Employees are expensive. And probably the last thing you want to do anytime soon is lay off people due to a social or economic crisis. Contact us. We can review your financials and help you decide how to proceed. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The IRS recently released guidance providing the 2022 inflation-adjusted amounts for Health Savings Accounts (HSAs).
Fundamentals of HSAs
An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).
A high deductible health plan (HDHP) is generally a plan with 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) can’t 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 next year
In Revenue Procedure 2021-25, the IRS released the 2022 inflation-adjusted figures for contributions to HSAs, which are as follows:
Annual contribution limitation. For calendar year 2022, the annual contribution limitation for an individual with self-only coverage under a HDHP will be $3,650. For an individual with family coverage, the amount will be $7,300. This is up from $3,600 and $7,200, respectively, for 2021.
High deductible health plan defined. For calendar year 2022, an HDHP will be 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 2021). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) won’t be able to exceed $7,050 for self-only coverage or $14,100 for family coverage (up from $7,000 and $14,000, respectively, for 2021).
There are a variety of benefits to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax free year after year and be can 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 workforce. If you have questions about HSAs at your business, contact your employee benefits and tax advisors. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Strategic investments — such as expanding a plant, purchasing a major piece of equipment or introducing a new product line — can add long-term value. But management shouldn’t base these decisions on gut instinct. A comprehensive, formal analysis can help minimize the guesswork and maximize your return on investment.
Forecasting cash flows
Financial forecasts typically start with the most recent income statement. Then assumptions are made about 1) how much revenue (or cost savings) will the project generate, and 2) what incremental expenses will the project incur. In some cases, a project may create special tax savings (for example, first-year bonus depreciation or Section 179 deductions) that may need to be factored into the decision.
Strategic investments will also affect your company’s balance sheet and statements of cash flows. For example, they may require additional working capital and fixed assets. Preparing comprehensive financial forecasts helps management evaluate how much cash the project will need each period and whether internal resources will be sufficient to finance it. Some projects will require the company to tap into the company’s line of credit — or require additional loans or capital contributions.
Comparing investment alternatives
Company resources are limited. So, once cash flows have been forecasted, it’s time to analyze the results and prioritize competing investment alternatives. For example, you might have $50,000 to invest in either a new machine or IT upgrades. Which alternative is better from a financial perspective?
Three financial tools that are used to evaluate such decisions include:
1. Accounting payback period. This tells you how long it will take for a project to recoup its initial investment and start generating positive net cash flow — without considering the time value of money. For example, suppose a new machine that costs $48,000 is expected to generate $12,000 of incremental cash flow annually. Its accounting payback period would be four years ($48,000 divided by $12,000).
2. Net present value (NPV). This is a tool that discounts each period’s forecasted cash flow into its present value. The sum of the present values for all the periods equals the project’s NPV. If NPV is greater than zero, the project will generate positive cash flow and it’s worth considering. If not, the project may not be worthwhile. Typically, management uses the company’s cost of capital — or possibly a rate based on the risk of the investment — to discount forecasted cash flow.
3. Internal rate of return (IRR). This tool estimates a project’s expected return on investment. This is the point at which a project’s NPV equals zero. Management typically has a preset hurdle rate that a project must exceed to be considered. For example, if management sets its hurdle rate at 13%, any project with an IRR below 13% will be on the chopping block.
These financial tools may sometimes conflict with one another. So, it’s important to consider qualitative factors, too. For example, IT upgrades might also protect against cyberattacks and reputational harm, which may be difficult to quantify in financial forecasts.
Contact us to evaluate the quantitative and qualitative effects of strategic investment alternatives. We can help determine what’s right for your situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Even after your 2020 tax return has been successfully filed with the IRS, you may still have some questions about the return. Here are brief answers to three questions that we’re frequently asked at this time of year.
Are you wondering when you will receive 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.” You’ll need your Social Security number, filing status and the exact refund amount.
Which tax records can you throw away now?
At a minimum, 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 2017 and earlier years. (If you filed an extension for your 2017 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 should 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 legitimate returns. (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.)
If you overlooked claiming a tax break, can you still collect a refund for it?
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.
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.
Year-round tax help
Contact us if you have questions about retaining tax records, receiving your refund or filing an amended return. We’re not just here at tax filing time. We’re available all year long. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
As the COVID-19 pandemic finally seems to be fading in the United States, your not-for-profit organization may be making plans for its post-pandemic future. Is a merger with another nonprofit part of these plans?
A merger can provide your organization with greater stability and resilience so that you can survive any new challenges that comes your way. But a merger isn’t always the best solution if, for example, you’re looking for a financial rescue. Here’s a rundown of good — and bad — reasons to join forces.
Successful mergers are based on a foundation of solid motivations. You might decide to merge to establish the stability that will make it easier to pursue your mission. Such a union could lead to a stronger organization that’s better able to survive difficult times. You also might want to merge to reduce the competition for funding, which could intensify as cash-strapped state governments cut back on their nonprofit grants and contracts in the wake of the pandemic.
A merger can help nonprofits achieve economies of scale that will make the merged organization more efficient, too. This might come, for example, from combining infrastructures — everything from staffing and board leadership to administration, information systems, human resources and accounting. A merger could also give you access to a wider network, as well as more perspectives and experiences to base decisions on. And it might enable you to provide more programming or add physical locations.
For all of the worthwhile reasons to consider a merger, it’s important to remember that mergers do sometimes fail. One common reason is that the merger itself, as well as the new organization, can cost much more than expected. In the short term, for example, you’ll need to finance transactional and integration costs.
Arrangements intended to rescue a failing organization are another red flag. In this scenario, you usually see a larger, more stable nonprofit swoop in to save a smaller counterpart that, despite its weaknesses, has something to offer. But a merger isn’t likely to solve problems such as poor leadership or business practices. The better approach in such a situation is for the larger nonprofit to acquire assets, or viable pieces, of the smaller organization.
If you do decide to proceed with a merger, be careful about choosing a partner. It should share a similar mission, values and work culture. That doesn’t mean you have to offer duplicative services, but they should at least complement each other.
Contact us for more information about the benefits and risks of a merger. We can review your financial situation and help determine whether your plans make sense or whether there are better alternatives. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If your business is organized as a sole proprietorship or as a wholly owned limited liability company (LLC), you’re subject to both income tax and self-employment tax. There may be a way to cut your tax bill by conducting business as an S corporation.
Fundamentals of self-employment tax
The self-employment tax is imposed on 92.35% of self-employment income at a 12.4% rate for Social Security up to a certain maximum ($142,800 for 2021) and at a 2.9% rate for Medicare. No maximum tax limit applies to the Medicare tax. An additional 0.9% Medicare tax is imposed on income exceeding $250,000 for married couples ($125,000 for married persons filing separately) and $200,000 in all other cases.
What if you conduct your business as a partnership in which you’re a general partner? In that case, in addition to income tax, you’re subject to the self-employment tax on your distributive share of the partnership’s income. On the other hand, if you conduct your business as an S corporation, you’ll be subject to income tax, but not self-employment tax, on your share of the S corporation’s income.
An S corporation isn’t subject to tax at the corporate level. Instead, the corporation’s items of income, gain, loss and deduction are passed through to the shareholders. However, the income passed through to the shareholder isn’t treated as self-employment income. Thus, by using an S corporation, you may be able to avoid self-employment income tax.
Keep your salary “reasonable”
Be aware that the IRS requires that the S corporation pay you reasonable compensation for your services to the business. The compensation is treated as wages subject to employment tax (split evenly between the corporation and the employee), which is equivalent to the self-employment tax. If the S corporation doesn’t pay you reasonable compensation for your services, the IRS may treat a portion of the S corporation’s distributions to you as wages and impose Social Security taxes on the amount it considers wages.
There’s no simple formula regarding what’s considered reasonable compensation. Presumably, reasonable compensation is the amount that unrelated employers would pay for comparable services under similar circumstances. There are many factors that should be taken into account in making this determination.
Converting from a C corporation
There may be complications if you convert a C corporation to an S corporation. A “built-in gains tax” may apply when you dispose of appreciated assets held by the C corporation at the time of the conversion. However, there may be ways to minimize its impact.
Many factors to consider
Contact us if you’d like to discuss the factors involved in conducting your business as an S corporation, and how much the business should pay you as compensation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
In recent years, the accounting rules for certain balance sheet items have transitioned from historical cost to “fair value.” Examples of assets that may currently be reported at fair value are asset retirement obligations, derivatives and intangible assets acquired in a business combination. Though fair value may better align your company’s financial statements with today’s market values, estimating fair value may require subjective judgment.
Under U.S. Generally Accepted Accounting Principles (GAAP), fair value is “the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.” Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, explains how companies should estimate the fair value of assets and liabilities by using available, quantifiable market-based data.
Topic 820 provides the following three-tier valuation hierarchy for valuation inputs:
Fair value measurements, especially those based on the third level of inputs, may involve a high degree of subjectivity, making them susceptible to misstatement. Therefore, these estimates usually require more auditor focus.
Auditing standards generally require auditors to select one or a combination of the following approaches to substantively test fair value measurements:
Test management’s process. Auditors evaluate the reasonableness and consistency of management’s assumptions, as well as test whether the underlying data is complete, accurate and relevant.
Develop an independent estimate. Using management’s assumptions (or alternate assumptions), auditors come up with an estimate to compare to what’s reported on the internally prepared financial statements.
Review subsequent events or transactions. The reasonableness of fair value estimates can be gauged by looking at events or transactions that happen after the balance sheet date but before the date of the auditor’s report.
Measuring fair value is outside the comfort zone of most in-house accounting personnel. Fortunately, an outside valuation expert can provide objective, market-based evidence to support the fair value of assets and liabilities. Contact us for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Before the COVID-19 pandemic hit, the number of people engaged in the “gig” or sharing economy had been growing, according to several reports. And reductions in working hours during the pandemic have caused even more people to turn to gig work to make up lost income. There are tax consequences for the people who perform these jobs, which include providing car rides, delivering food, walking dogs and providing other services.
Bottom line: If you receive income from freelancing or from one of the online platforms offering goods and services, it’s generally taxable. That’s true even if the income comes from a side job and even if you don’t receive an income statement reporting the amount of money you made.
Basics for gig workers
The IRS considers gig workers as those who are independent contractors and conduct their jobs through online platforms. Examples include Uber, Lyft, Airbnb and DoorDash.
Unlike traditional employees, independent contractors don’t receive benefits associated with employment or employer-sponsored health insurance. They also aren’t covered by the minimum wage or other protections of federal laws and they aren’t part of states’ unemployment insurance systems. In addition, they’re on their own when it comes to retirement savings and taxes.
Pay taxes throughout the year
If you’re part of the gig or sharing economy, here are some tax considerations.
It’s important to keep good records tracking income and expenses in case you are audited by the IRS or state tax authorities. Contact us if you have questions about your tax obligations as a gig worker or the deductions you can claim. You don’t want to get an unwanted surprise when you file your tax return. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
As states open for business and the need for social distancing recedes, your not-for-profit organization may want to think about scheduling an in-person retreat for your board of directors. Members are likely to welcome the opportunity to see one another again in the flesh and a retreat can provide them with a chance to de-stress and think creatively about how your nonprofit should move forward when the pandemic ends.
Get board buy-in
Board retreats enable participants to get past the mundane topics of regular board meetings — particularly if they’ve been holding meetings online for more than a year. Although Zoom and other videoconference sites have been essential during the pandemic, they generally don’t produce the kind of synergistic magic that’s possible when like-minded people brainstorm face-to-face.
But before you start scheduling a meeting, float the idea past your board. Board members need to agree about the merit of a retreat (including its potential expense) and feel comfortable about safety. Timing can be important. If your state is still partially closed for business, for example, think about scheduling your retreat for the fall — or later.
If your board agrees to a retreat, turn your thoughts to logistics, which will vary depending on your objectives. An afternoon at a local restaurant may be ideal if the board needs to come up with some new fundraising options. Broader agendas or confidential topics will require more time and privacy — perhaps several days at a local resort. The further you can get board members away from their regular work responsibilities, even if only mentally, the better.
Creating a detailed agenda is important. Start by asking what outcome you want to come away with at the close of the retreat. If, for example, you’d like to end the meeting with a five-year strategic plan, your agenda might start off with time to review the history of your organization and competitive research from other nonprofits. From there, build in time to brainstorm where your donors, beneficiaries, members and other important constituencies may be in five years.
Make sure you include adequate breaks and time for informal social interaction, such as exercise (perhaps golf or a yoga session) and a nice dinner. This will not only keep your board members focused, but also reward them for their efforts.
Keep in mind that some of the most important work will happen after the retreat ends. Be sure to recap all decisions and commitments and make a plan to put your work into action before the board scatters. Follow up by sending members a written summary of retreat discussions and add action items to future board meeting agendas based on those plans.
If your board members aren’t yet ready to meet in person, revisit the idea regularly in coming months. The pandemic has taken a mental toll on most organizations and a retreat can be just what your nonprofit needs to renew and refresh. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Many businesses use independent contractors to help keep their costs down. If you’re among them, make sure that these workers are properly classified for federal tax purposes. If the IRS reclassifies them as employees, it can be a costly error.
It can be complex to determine whether a worker is an independent contractor or an employee for federal income and employment tax purposes. If a worker is an employee, your company must withhold federal income and payroll taxes, pay the employer’s share of FICA taxes on the wages, plus FUTA tax. A business may also provide the worker with fringe benefits if it makes them available to other employees. In addition, there may be state tax obligations.
On the other hand, if a worker is an independent contractor, these obligations don’t apply. In that case, the business simply sends the contractor a Form 1099-NEC for the year showing the amount paid (if it’s $600 or more).
What are the factors the IRS considers?
Who is an “employee?” Unfortunately, there’s no uniform definition of the term.
The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors. But other factors are also taken into account including who provides tools and who pays expenses.
Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Section 530. This protection generally applies only if an employer meets certain requirements. For example, the employer must file all federal returns consistent with its treatment of a worker as a contractor and it must treat all similarly situated workers as contractors.
Note: Section 530 doesn’t apply to certain types of workers.
Should you ask the IRS to decide?
Be aware that you can ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.
Businesses should consult with us before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and it may unintentionally trigger an employment tax audit.
It may be better to properly treat a worker as an independent contractor so that the relationship complies with the tax rules.
Workers who want an official determination of their status can also file Form SS-8. Disgruntled independent contractors may do so because they feel entitled to employee benefits and want to eliminate self-employment tax liabilities.
If a worker files Form SS-8, the IRS will notify the business with a letter. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return the form to the IRS, which will render a classification decision.
These are the basic tax rules. In addition, the U.S. Labor Department has recently withdrawn a non-tax rule introduced under the Trump administration that would make it easier for businesses to classify workers as independent contractors. Contact us if you’d like to discuss how to classify workers at your business. We can help make sure that your workers are properly classified. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Many companies are continuing to struggle financially during the COVID-19 pandemic. If cash is tight, what can your business do to shorten its cash cycle? The answer could lie in your outstanding accounts receivable. Here are five strategies to help convert receivables into cash ASAP.
1. Apply for a line of credit. A line of credit can help bridge the “cash gap” between making a sale and getting paid. Often credit lines are collateralized by unpaid invoices, just like equipment and property are pledged for conventional term loans. Banks typically charge fees and interest for securitized receivables.
Each financial institution sets its own rates and conditions. Typically, these arrangements provide immediate loans for up to 90% of the value of an outstanding debt and are repaid as customers pay their bills.
2. Encourage early payment. Your company may be able to expedite collections if customers are given a financial incentive to pay their bills early. For example, you might give a 3% discount to customers who pay with 14 days of receiving their invoices. Online and autopayment options often work in tandem with these discounts.
3. Consider factoring. This option allows companies to monetize their unpaid — but not yet delinquent — receivables. Here, receivables are sold to a third-party factoring company for immediate cash.
Costs associated with receivables factoring can be much higher than those for collateral-based loans. And factoring companies are likely to scrutinize the creditworthiness of your customers. But selling receivables for upfront cash may be advantageous, especially for smaller businesses, because it reduces the burden on accounting staff and saves time.
4. Renegotiate with customers. Before you write off stale receivables that are more than 90 days outstanding, call the customer and ask what’s going on. Sometimes you might be able to negotiate a lower amount or installment payments — which might be better than a write-off if your customer is facing bankruptcy.
5. Focus on collections. Some small companies haven’t historically needed to dedicate specific resources to collections, because customers have generally paid in a timely matter. However, if significant collection issues have built up during the pandemic, it may be time to pick a customer service rep to be in charge of making collections calls. For more serious issues, you might prefer hiring a seasoned, in-house collections professional or reaching out to an external commission-based collection agency.
If slow-to-pay customers are adversely affecting your company’s cash flow, contact us. We’ve helped many businesses implement creative solutions to convert receivables into fast cash. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The May 17 deadline for filing your 2020 individual tax return is coming up soon. It’s important to file and pay your tax return on time to avoid penalties imposed by the IRS. Here are the basic rules.
Failure to pay
Separate penalties apply for failing to pay and failing to file. The failure-to-pay penalty is 1/2% for each month (or partial month) the payment is late. For example, if payment is due May 17 and is made June 22, the penalty is 1% (1/2% times 2 months or partial months). The maximum penalty is 25%.
The failure-to-pay penalty is based on the amount shown as due on the return (less credits for amounts paid through withholding or estimated payments), even if the actual tax bill turns out to be higher. On the other hand, if the actual tax bill turns out to be lower, the penalty is based on the lower amount.
For example, if your payment is two months late and your return shows that you owe $5,000, the penalty is 1%, which equals $50. If you’re audited and your tax bill increases by another $1,000, the failure-to-pay penalty isn’t increased because it’s based on the amount shown on the return as due.
Failure to file
The failure-to-file penalty runs at a more severe rate of 5% per month (or partial month) of lateness to a maximum of 25%. If you obtain an extension to file (until October 15), you’re not filing late unless you miss the extended due date. However, a filing extension doesn’t apply to your responsibility for payment.
If the 1/2% failure-to-pay penalty and the failure-to-file penalty both apply, the failure-to-file penalty drops to 4.5% per month (or part) so the total combined penalty is 5%. The maximum combined penalty for the first five months is 25%. After that, the failure-to-pay penalty can continue at 1/2% per month for 45 more months (an additional 22.5%). Thus, the combined penalties could reach 47.5% over time.
The failure-to-file penalty is also more severe because it’s based on the amount required to be shown on the return, and not just the amount shown as due. (Credit is given for amounts paid via withholding or estimated payments. So if no amount is owed, there’s no penalty for late filing.) For example, if a return is filed three months late showing $5,000 owed (after payment credits), the combined penalties would be 15%, which equals $750. If the actual tax liability is later determined to be an additional $1,000, the failure to file penalty (4.5% × 3 = 13.5%) would also apply for an additional $135 in penalties.
A minimum failure to file penalty will also apply if you file your return more than 60 days late. This minimum penalty is the lesser of $210 or the tax amount required to be shown on the return.
Both penalties may be excused by IRS if lateness is due to “reasonable cause.” Typical qualifying excuses include death or serious illness in the immediate family and postal irregularities.
As you can see, filing and paying late can get expensive. Furthermore, in particularly abusive situations involving a fraudulent failure to file, the late filing penalty can reach 15% per month, with a 75% maximum. Contact us if you have questions or need an appointment to prepare your return. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If your not-for-profit periodically prepares internal financial statements for your board, you may have noticed that your auditors propose adjustments to these interim statements at year end. Why do auditors do this? Generally, it reflects differences due to cash basis vs. accrual basis financial statements. But you can help minimize the need for such adjustments. Here’s how.
Cash basis accounting
Under cash basis accounting, income is recognized when you receive payments and expenses are recognized when you pay them. The cash “ins” and “outs” are totaled (generally by accounting software) to produce the internal financial statements and trial balance you use to prepare periodic statements. Cash basis financial statements are useful because they’re quick and easy to prepare and they can alert you to any immediate cash flow problems.
The simplicity of this accounting method comes at a price, however: Accounts receivable (income you’re owed but haven’t yet received, such as pledges) and accounts payable and accrued expenses (expenses you’ve incurred but haven’t yet paid) don’t exist.
Accrual basis accounting
With accrual accounting, accounts receivable, accounts payable and other accrued expenses are recognized when they occur, allowing your financial statements to be a truer picture of your organization at any point in time. If a donor pledges money to you, you recognize it now when it’s pledged rather than waiting until you receive the money — which could be next month or next year.
Generally Accepted Accounting Principles (GAAP) require the use of accrual accounting and recognition of contributions as income when promised. Often, year-end audited financial statements are prepared on a GAAP basis.
Internal and year end statements also may differ because your auditors proposed adjusting certain entries for reasonable estimates. This could include a reserve for accounts receivable that may be ultimately uncollectible. Another common estimate is for litigation settlement. Your organization may be the party or counterparty to a lawsuit for which there’s a reasonable estimate of the amount to be received or paid.
We can help you reduce disparities between monthly or quarterly statements and those prepared at year end by maximizing your accounting software’s capabilities. Also, we can work with you to improve the accuracy of estimates. Contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Are you wondering whether alternative energy technologies can help you manage energy costs in your business? If so, there’s a valuable federal income tax benefit (the business energy credit) that applies to the acquisition of many types of alternative energy property.
The credit is intended primarily for business users of alternative energy (other energy tax breaks apply if you use alternative energy in your home or produce energy for sale).
The business energy credit equals 30% of the basis of the following:
The credit equals 10% of the basis of the following:
Pluses and minuses
However, there are several restrictions. For example, the credit isn’t available for property acquired with certain non-recourse financing. Additionally, if the credit is allowable for property, the “basis” is reduced by 50% of the allowable credit.
On the other hand, a favorable aspect is that, for the same property, the credit can sometimes be used in combination with other benefits — for example, federal income tax expensing, state tax credits or utility rebates.
There are business considerations unrelated to the tax and non-tax benefits that may influence your decision to use alternative energy. And even if you choose to use it, you might do so without owning the equipment, which would mean forgoing the business energy credit.
As you can see, there are many issues to consider. We can help you address these alternative energy considerations. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
During the pandemic, many employees have postponed using their allotted paid time off until COVID-related restrictions are lifted and safety concerns subside. This situation has caused an increase in accruals for certain employers. Here’s some guidance to help evaluate whether your company is required to report a liability for so-called “compensated absences” and, if so, how to estimate the proper amount.
Balance sheet effects
Compensated absences include:
Accruals for compensated absences are classified as other liabilities on companies’ balance sheets. The liability also creates a deferred tax asset equal to the accrual times the effective tax rate, because companies can’t deduct paid time off until it’s actually paid under U.S. tax law.
When to book an accrual
Before quantifying the compensated absences liability, review your company’s policies and procedures related to paid time off. Does your company allow employees to accumulate unused paid time off, beyond year end, for use in future years? Does the company provide vesting rights to accumulated paid time off balances that require payout after employment is terminated? If you answered “yes” to either question, you may be required to record a compensated absences accrual.
Specifically, under U.S. Generally Accepted Accounting Principles (GAAP), employers should accrue a liability for an employee’s right to receive compensation for a future absence if these four conditions are met:
You also must consider applicable laws in the states and countries where your employees live. In some cases, these laws may supersede your company’s policies and practices.
Calculating the accrual
For an employee who’s paid hourly, the compensated absences liability equals the hourly pay rate times the number of hours per day times accumulated days off. The hourly rate includes benefits and employer taxes your company will incur while the employee isn’t at work.
The calculation for a salaried employee involves dividing annual compensation (including benefits and employer taxes) by the number of days worked per year to arrive at the employee’s daily pay rate. This amount is then multiplied by the accumulated days off.
You must also adjust the accrual for the probability that employees will fail to exercise their rights to accumulated time off. Often employers support this adjustment with historical data on how employees have behaved in the past.
Mounting paid time off accruals have brought accounting issues related to compensated absences to the forefront. While companies don’t want to report higher liabilities, there’s also an intangible cost to consider: When employees forego time off, their well-being often suffers, which can lead to lower productivity and increased turnover. We can help you comply with the financial reporting requirements under GAAP, as well as brainstorm ways to remind employees about the importance of maintaining a healthy work-life balance. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
“Tax day” is just around the corner. This year, the deadline for filing 2020 individual tax returns is Monday, May 17, 2021. The IRS postponed the usual April 15 due date due to the COVID-19 pandemic. If you still aren’t ready to file your return, you should request a tax-filing extension. Anyone can request one and in some special situations, people can receive more time without even asking.
Taxpayers can receive more time to file by submitting a request for an automatic extension on IRS Form 4868. This will extend the filing deadline until October 15, 2021. But be aware that an extension of time to file your return doesn’t grant you an extension of time to pay your taxes. You need to estimate and pay any taxes owed by your regular deadline to help avoid possible penalties. In other words, your 2020 tax payments are still due by May 17.
Victims of certain disasters
If you were a victim of the February winter storms in Texas, Oklahoma and Louisiana, you have until June 15, 2021, to file your 2020 return and pay any tax due without submitting Form 4868. Victims of severe storms, flooding, landslides and mudslides in parts of Alabama and Kentucky have also recently been granted extensions. For eligible Kentucky victims, the new deadline is June 30, 2021, and eligible Alabama victims have until August 2, 2021.
That’s because the IRS automatically provides filing and penalty relief to taxpayers with addresses in federally declared disaster areas. Disaster relief also includes more time for making 2020 contributions to IRAs and certain other retirement plans and making 2021 estimated tax payments. Relief is also generally available if you live outside a federally declared disaster area, but you have a business or tax records located in the disaster area. Similarly, relief may be available if you’re a relief worker assisting in a covered disaster area.
Located in a combat zone
Military service members and eligible support personnel who are serving in a combat zone have at least 180 days after they leave the combat zone to file their tax returns and pay any tax due. This includes taxpayers serving in Iraq, Afghanistan and other combat zones.
These extensions also give affected taxpayers in a combat zone more time for a variety of other tax-related actions, including contributing to an IRA. Various circumstances affect the exact length of time available to taxpayers.
Outside the United States
If you’re a U.S. citizen or resident alien who lives or works outside the U.S. (or Puerto Rico), you have until June 15, 2021, to file your 2020 tax return and pay any tax due.
The special June 15 deadline also applies to members of the military on duty outside the U.S. and Puerto Rico who don’t qualify for the longer combat zone extension described above.
While taxpayers who are abroad get more time to pay, interest applies to any payment received after this year’s May 17 deadline. It’s currently charged at the rate of 3% per year, compounded daily.
We can help
If you need an appointment to get your tax return prepared, contact us. We can also answer any questions you may have about filing an extension. Sam Brown, CPA, Inc. Troy, Ohio, www.sbcpaohio.com
If your not-for-profit organization accepts contributions of nonfinancial assets, such as land, services and supplies, you should know about Financial Accounting Standards Board (FASB) rules approved last year. Accounting Standards Update (ASU), Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets is intended to increase transparency around gifts in kind.
The updated rules were generated in response to concerns about U.S. wholesale market prices being used to determine the value of donated pharmaceuticals that can’t legally be sold in the United States. A donor, for example, could contribute such drugs for use only outside the country.
Stakeholders worried that the values will be inflated, which could increase an organization’s revenue and program expenses. The nonprofit might, therefore, appear larger and more efficient than a smaller organization or one with lower values for its gifts-in-kind donations.
New procedures and disclosures
The most dramatic change from previous gifts-in-kind rules is that donations should be reported by type of asset (for example, building, food or pharmaceuticals), rather than reported in aggregate. The rules also require you to report gifts-in-kind donations as a separate line item in the statement of activities.
Further, you must disclose:
This last disclosure is necessary if donor restrictions prohibit your nonprofit from selling or using the donation in the principal or most advantageous market. The principal market has the highest volume of activity for the donated asset. The most advantageous market generally maximizes the amount that would be received if the donation were sold.
Compliance required soon
If you aren’t already following the rules, prepare to comply with them. They take effect for annual reporting periods starting after June 15, 2021, and interim periods within fiscal years starting after June 15, 2022. Contact us if you have questions or need help. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Many businesses provide education fringe benefits so their employees can improve their skills and gain additional knowledge. An employee can receive, on a tax-free basis, up to $5,250 each year from his or her employer for educational assistance under a “qualified educational assistance program.”
For this purpose, “education” means any form of instruction or training that improves or develops an individual’s capabilities. It doesn’t matter if it’s job-related or part of a degree program. This includes employer-provided education assistance for graduate-level courses, including those normally taken by an individual pursuing a program leading to a business, medical, law or other advanced academic or professional degree.
The educational assistance must be provided under a separate written plan that’s publicized to your employees, and must meet a number of conditions, including nondiscrimination requirements. In other words, it can’t discriminate in favor of highly compensated employees. In addition, not more than 5% of the amounts paid or incurred by the employer for educational assistance during the year may be provided for individuals who (including their spouses or dependents) who own 5% or more of the business.
No deduction or credit can be taken by the employee for any amount excluded from the employee’s income as an education assistance benefit.
If you pay more than $5,250 for educational benefits for an employee during the year, he or she must generally pay tax on the amount over $5,250. Your business should include the amount in income in the employee’s wages. However, in addition to, or instead of applying, the $5,250 exclusion, an employer can satisfy an employee’s educational expenses, on a nontaxable basis, if the educational assistance is job-related. To qualify as job-related, the educational assistance must:
“Job-related” employer educational assistance isn’t subject to a dollar limit. To be job-related, the education can’t qualify the employee to meet the minimum educational requirements for qualification in his or her employment or other trade or business.
Educational assistance meeting the above “job-related” rules is excludable from an employee’s income as a working condition fringe benefit.
In addition to education assistance, some employers offer student loan repayment assistance as a recruitment and retention tool. Recent COVID-19 relief laws may provide your employees with tax-free benefits. Contact us to learn more about setting up an education assistance or student loan repayment plan at your business. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If your company is planning to merge with or buy another business, your attention is probably on conducting due diligence and negotiating deal terms. But you also should address the post-closing financial reporting requirements for the transaction. If not, it may lead to disappointing financial results, restatements and potential lawsuits after the dust settles.
Here’s guidance on how to correctly account for M&A transactions under U.S. Generally Accepted Accounting Principles (GAAP).
Identify assets and liabilities
A seller’s GAAP balance sheet may exclude certain intangible assets and contingencies, such as internally developed brands, patents, customer lists, environmental claims and pending lawsuits. Overlooking identifiable assets and liabilities often results in inaccurate reporting of goodwill from the sale.
Private companies can elect to combine noncompete agreements and customer-related intangibles with goodwill. If this alternative is used, it specifically excludes customer-related intangibles that can be licensed or sold separately from the business.
It’s also important to determine whether the deal terms include arrangements to compensate the seller or existing employees for future services. These payments, along with payments for pre-existing arrangements, aren’t part of a business combination. In addition, acquisition-related costs, such as finder’s fees or professional fees, shouldn’t be capitalized as part of the business combination. Instead, they’re generally accounted for separately and expensed as incurred.
Determine the price
When the buyer pays the seller in cash, the purchase price (also called the “fair value of consideration transferred”) is obvious. But other types of consideration muddy the waters. Consideration exchanged may include stock, stock options, replacement awards and contingent payments.
For example, it can be challenging to assign fair value to contingent consideration, such as earnouts payable only if the acquired entity achieves predetermined financial benchmarks. Contingent consideration may be reported as a liability or equity (if the buyer will be required to pay more if it achieves the benchmark) or as an asset (if the buyer will be reimbursed for consideration already paid). Contingent consideration that’s reported as an asset or liability may need to be remeasured each period if new facts are obtained during the measurement period or for events that occur after the acquisition date.
Allocate fair value
Next, you’ll need to split up the purchase price among the assets acquired and liabilities assumed. This requires you to estimate the fair value of each item. Any leftover amount is assigned to goodwill. Essentially, goodwill is the premium the buyer is willing to pay above the fair value of the net assets acquired for expected synergies and growth opportunities related to the business combination.
In rare instances, a buyer negotiates a “bargain” purchase. Here, the fair value of the net assets exceeds the purchase price. Rather than book negative goodwill, the buyer reports a gain on the purchase.
Make accounting a forethought, not an afterthought
M&A transactions and the accompanying financial reporting requirements are uncharted territory for many buyers. Don’t wait until after a deal closes to figure out how to report it. We can help you understand the accounting rules and the fair value of the acquired assets and liabilities before closing. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
In recent months, there have been a number of tax changes that may affect your individual tax bill. Many of these changes were enacted to help mitigate the financial damage caused by COVID-19.
Here are two changes that may result in tax savings for you on your 2020 or 2021 tax returns. The 2020 return is due on May 17, 2021 (because the IRS extended many due dates from the usual April 15 this year). If you can’t file by that date, you can request an extra five months to file your 2020 tax return by October 15, 2021. Your 2021 return will be due in April of 2022.
1. Some unemployment compensation from last year is tax free.
Many people lost their jobs last year due to pandemic shutdowns. Generally, unemployment compensation is included in gross income for federal tax purposes. But thanks to the American Rescue Plan Act (ARPA), enacted on March 11, 2021, up to $10,200 of unemployment compensation can be excluded from federal gross income on 2020 federal returns for taxpayers with an adjusted gross income (AGI) under $150,000. In the case of a joint return, the first $10,200 per spouse isn’t included in gross income. That means if both spouses lost their jobs and collected unemployment last year, they’re eligible for up to a $20,400 exclusion.
However, keep in mind that some states tax unemployment compensation that is exempt from federal income tax under the ARPA.
The IRS has announced that taxpayers who already filed their 2020 individual tax returns without taking advantage of the 2020 unemployment benefit exclusion, don’t need to file an amended return to take advantage of it. Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed.
The IRS will take steps in the spring and summer to make the appropriate change to the returns, which may result in a refund. The first refunds are expected to be made in May and will continue into the summer.
2. More taxpayers may qualify for a tax credit for buying health insurance.
The premium tax credit (PTC) is a refundable credit that assists individuals and families in paying for health insurance obtained through a Marketplace established under the Affordable Care Act. The ARPA made several significant enhancements to this credit.
For example, under pre-ARPA law, individuals with household income above 400% of the federal poverty line (FPL) weren’t eligible for the PTC. But under the new law, for 2021 and 2022, the premium tax credit is available to taxpayers with household incomes that exceed 400% of the FPL. This change increases the number of people who are eligible for the credit.
Let’s say a 45-year-old unmarried man has income of $58,000 (450% of FPL) in 2021. He wouldn’t have been eligible for the PTC before ARPA was enacted. But under the ARPA, he’s eligible for a premium tax credit of about $1,250.
Other favorable changes were also made to the premium tax credit.
Many more changes
The 2020 unemployment benefit exclusion and the enhanced premium tax credit are just two of the many recent tax changes that may be beneficial to you. Contact us if you have questions about your situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Not-for-profit organizations may operate under the assumption that their missions and their board members’ good intentions protect them from litigation. Sometimes, this assumption is proven wrong with a lawsuit. To protect your leaders from financial exposure, consider directors and officers (D&O) liability insurance. This coverage allows board members to make decisions without fear that they’ll be personally responsible for any related litigation costs.
Protecting key individuals
D&O policies are designed to protect both your organization and its key individuals: directors, officers, employees and even volunteers and committee members. Normally, D&O insurance covers allegations of wrongful acts, errors, misleading statements, neglect or breaches of duty connected with a person’s performance of duties.
Such coverage typically would protect from allegations of mismanagement of funds or investments and employment issues such as harassment and discrimination. D&O insurance also usually covers claims of self-dealing, failure to provide services and failure to fulfill fiduciary duties.
If a legal complaint is filed against them, insured organizations contact their insurer to determine whether the matter is insurable and includes defense costs. Most policies reimburse the insured for reasonable defense costs, in addition to covering judgments against the insured.
Observing policy periods
D&O policyholders need to be aware of a few caveats. This type of insurance is claims-made, meaning that the insurer pays for claims filed during the policy period even if the alleged wrongful act occurred outside of the policy period. So D&O insurance provides no coverage for lawsuits filed after a policyholder cancels, even if the alleged act happened when the policy was in effect.
If you need to make a claim after your policy has been canceled or expired, you might still be covered if you have extended reporting period (ERP) coverage. It generally covers newly filed claims on actions that allegedly occurred during the regular policy period.
Considering cost constraints
Most nonprofits are cost-conscious and you may be wary of adding another insurance policy. To keep costs down, think seriously about the people and actions that should be covered and the amount of protection you need — and don’t need. If you already have general liability and workers’ compensation insurance, you probably don’t need coverage of bodily injury or property damage. And if you opt for higher deductibles, your policy will be less expensive.
Nonprofits in some states may not need D&O insurance because volunteer immunity statutes provide limited protection for negligence. Contact us for more information about the insurance you need and general risk-prevention strategies. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Owners of incorporated businesses know that there’s a tax advantage to taking money out of a C corporation as compensation rather than as dividends. The reason: A corporation can deduct the salaries and bonuses that it pays executives, but not dividend payments. Thus, if funds are paid as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is only taxed once — to the employee who receives it.
However, there are limits to how much money you can take out of the corporation this way. Under tax law, compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion isn’t deductible and, if paid to a shareholder, may be taxed as if it were a dividend. Keep in mind that the IRS is generally more interested in unreasonable compensation payments made to someone “related” to a corporation, such as a shareholder-employee or a member of a shareholder’s family.
Determining reasonable compensation
There’s no easy way to determine what’s reasonable. In an audit, the IRS examines the amount that similar companies would pay for comparable services under similar circumstances. Factors that are taken into account include the employee’s duties and the amount of time spent on those duties, as well as the employee’s skills, expertise and compensation history. Other factors that may be reviewed are the complexities of the business and its gross and net income.
There are some steps you can take to make it more likely that the compensation you earn will be considered “reasonable,” and therefore deductible by your corporation. For example, you can:
You can avoid problems and challenges by planning ahead. If you have questions or concerns about your situation, contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
In December 2020, Richard Jones stepped up as chairman of the Financial Accounting Standards Board (FASB). After meeting with stakeholders in early 2021, Jones identified a list of high-priority projects that he plans to tackle under his leadership.
The FASB is responsible for creating and updating U.S. Generally Accepted Accounting Principles (GAAP), the rules that many domestic businesses use to report their financial results externally. In a recent interview, Jones said he wants the FASB to be “very transparent” when making and reviewing accounting rules.
He also encouraged stakeholders — including investors, CPAs, not-for-profits and businesses — to actively engage with the FASB. “Engagement is a critical part of our mission; we need that external feedback to function and set standards,” said Jones. His goal is to understand the environment in which stakeholders are operating and consider their input when prioritizing projects and setting comment periods.
In the coming year, Jones expects to face many challenges, because his tenure began amid a global pandemic that has had significant economic impacts. Moreover, he indicated that technological changes and a shift to one-party control of Congress and the White House may affect the future direction of the FASB.
Jones’ recent interview also sheds light on the FASB’s current agenda, which includes the following high-priority projects:
When asked about the status of global convergence projects, Jones said the FASB has “great communication” with the International Accounting Standards Board (IASB). He plans to continue working with the IASB on “projects of common interest.”
During the interview, Jones stressed that FASB standards are subject to “continuous improvement.” Accordingly, he plans to conduct a post-implementation review of the updated standards for revenue, leases and credit losses that have been implemented in recent years. These types of large projects typically require fine-tuning after they’re adopted by public companies to make the standards more effective and to make it easier for smaller entities to comply with the changes. The review process usually takes multiple years, and the FASB is just in the initial stages of reviewing these standards.
Finally, Jones shared his thoughts on the impact that technology — such as artificial intelligence and software developments — will have on the way the FASB sets standards. He noted that technology has helped investors access and process large volumes of data, which has led to a demand for additional, more-disaggregated reporting.
The FASB has been fairly quiet in the last few years, as companies worked to adopt the updates to the revenue, leases and credit losses standards. Now, with a new chairman at the helm, the FASB is positioned to resume rulemaking activities in key areas. Contact us to learn about the latest developments under GAAP. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The housing market in many parts of the country is strong this spring. If you’re buying or selling a home, you should know how to determine your “basis.”
How it works
You can claim an itemized deduction on your tax return for real estate taxes and home mortgage interest. Most other home ownership costs can’t be deducted currently. However, these costs may increase your home’s “basis” (your cost for tax purposes). And a higher basis can save taxes when you sell.
The law allows an exclusion from income for all or part of the gain realized on the sale of your home. The general exclusion limit is $250,000 ($500,000 for married taxpayers). You may feel the exclusion amount makes keeping track of the basis relatively unimportant. Many homes today sell for less than $500,000. However, that reasoning doesn’t take into account what may happen in the future. If history is any indication, a home that’s owned for 20 or 30 years appreciates greatly. Thus, you want your basis to be as high as possible in order to avoid or reduce the tax that may result when you eventually sell.
To prove the amount of your basis, keep accurate records of your purchase price, closing costs, and other expenses that increase your basis. Save receipts and other records for improvements and additions you make to the home. When you eventually sell, your basis will establish the amount of your gain. Keep the supporting documentation for at least three years after you file your return for the sale year.
Start with the purchase price
The main element in your home’s basis is the purchase price. This includes your down payment and any debt, such as a mortgage. It also includes certain settlement or closing costs. If you had your house built on land you own, your basis is the cost of the land plus certain costs to complete the house.
You add to the cost of your home expenses that you paid in connection with the purchase, including attorney’s fees, abstract fees, owner’s title insurance, recording fees and transfer taxes. The basis of your home is affected by expenses after a casualty to restore damaged property and depreciation if you used your home for business or rental purposes,
Over time, you may make additions and improvements to your home. Add the cost of these improvements to your basis. Improvements that add to your home’s basis include:
Home expenses that don’t add much to the value or the property’s life are considered repairs, not improvements. Therefore, you can’t add them to the property’s basis. Repairs include painting, fixing gutters, repairing leaks and replacing broken windows. However, an entire job is considered an improvement if items that would otherwise be considered repairs are done as part of extensive remodeling.
The cost of appliances purchased for your home generally don’t add to your basis unless they are considered attached to the house. Thus, the cost of a built-in oven or range would increase basis. But an appliance that can be easily removed wouldn’t.
Plan for best results
Other rules and requirements may apply. We can help you plan for the best tax results involving your home’s basis. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Not-for-profit organizations are different from for-profit businesses in many vital ways. One of the most crucial differences is that under Section 501(c)(3), Sec. 501(c)(7) and other provisions, nonprofits are tax-exempt. But your tax-exempt status is fragile. If you don’t follow the rules laid out in IRS Publication 557, Tax-Exempt Status for Your Organization, the IRS could revoke it. Be particularly alert to the following common stumbling blocks.
Lobbying and campaign activities
There are many categories of tax exemption — each with its own rules. But certain hot-button issues apply to most tax-exempt entities — such as lobbying and campaign activities. Having a Sec. 501(c)(3) status limits the amount of lobbying a charitable organization can undertake. This doesn’t mean lobbying is totally prohibited. But according to the IRS, your organization shouldn’t devote “a substantial part of its activities” trying to influence legislation.
For nonprofits that are exempt under other categories of Sec. 501(c), there are fewer restrictions on lobbying activities. Lobbying activities these groups undertake must relate to the accomplishment of the group’s purpose. For instance, an association of teachers can lobby for education reform without risking its tax exemption.
The IRS considers lobbying to be different from campaign activities, which are completely off limits to Sec. 501(c)(3) organizations. This means they can’t participate or intervene in any political campaign for or against a candidate for public office. If you’re not a 501(c)(3) organization, campaign restrictions vary.
Excess profit and unrelated revenue
The cardinal rule about excess profits is that a nonprofit can’t be operated to benefit private interests. If your fundraising is successful and you have extra income, you must put it back into the organization through additional services or by creating a reserve or an endowment. You can’t use extra income to reward an individual or a person’s related entities.
If you’re generating income through a trade or business you conduct regularly and it’s outside the scope of your mission, you may be subject to unrelated business income tax (UBIT). Examples include a college that rents performance halls to noncollege members of its community or a charity that sells advertising in its newsletter. Almost all nonprofits are subject to this provision of the tax code, and, if you ignore it, you could risk your exempt status. That said, losing an exempt status from unrelated business income is rare.
Notice from the IRS
The best way to preserve your organization’s exempt status is to refrain from risky activities. But if you receive notice from the IRS of a violation, please contact us. We can help you respond and get your nonprofit back on track. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Are you thinking about setting up a retirement plan for yourself and your employees, but you’re worried about the financial commitment and administrative burdens involved in providing a traditional pension plan? Two options to consider are a “simplified employee pension” (SEP) or a “savings incentive match plan for employees” (SIMPLE).
SEPs are intended as an alternative to “qualified” retirement plans, particularly for small businesses. The relative ease of administration and the discretion that you, as the employer, are permitted in deciding whether or not to make annual contributions, are features that are appealing.
If you don’t already have a qualified retirement plan, you can set up a SEP simply by using the IRS model SEP, Form 5305-SEP. By adopting and implementing this model SEP, which doesn’t have to be filed with the IRS, you’ll have satisfied the SEP requirements. This means that as the employer, you’ll get a current income tax deduction for contributions you make on behalf of your employees. Your employees won’t be taxed when the contributions are made but will be taxed later when distributions are made, usually at retirement. Depending on your needs, an individually-designed SEP — instead of the model SEP — may be appropriate for you.
When you set up a SEP for yourself and your employees, you’ll make deductible contributions to each employee’s IRA, called a SEP-IRA, which must be IRS-approved. The maximum amount of deductible contributions that you can make to an employee’s SEP-IRA, and that he or she can exclude from income, is the lesser of: 25% of compensation and $58,000 for 2021. The deduction for your contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s own contribution to a regular IRA. Your employees control their individual IRAs and IRA investments, the earnings on which are tax-free.
There are other requirements you’ll have to meet to be eligible to set up a SEP. Essentially, all regular employees must elect to participate in the program, and contributions can’t discriminate in favor of the highly compensated employees. But these requirements are minor compared to the bookkeeping and other administrative burdens connected with traditional qualified pension and profit-sharing plans.
The detailed records that traditional plans must maintain to comply with the complex nondiscrimination regulations aren’t required for SEPs. And employers aren’t required to file annual reports with IRS, which, for a pension plan, could require the services of an actuary. The required recordkeeping can be done by a trustee of the SEP-IRAs — usually a bank or mutual fund.
Another option for a business with 100 or fewer employees is a “savings incentive match plan for employees” (SIMPLE). Under these plans, a “SIMPLE IRA” is established for each eligible employee, with the employer making matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The SIMPLE plan is also subject to much less stringent requirements than traditional qualified retirement plans. Or, an employer can adopt a “simple” 401(k) plan, with similar features to a SIMPLE plan, and automatic passage of the otherwise complex nondiscrimination test for 401(k) plans.
For 2021, SIMPLE deferrals are up to $13,500 plus an additional $3,000 catch-up contributions for employees age 50 and older.
Contact us for more information or to discuss any other aspect of your retirement planning. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
During the pandemic, cash has been tight for many small businesses, which may make it hard to attract and retain skilled workers. In lieu of providing cash bonuses or annual raises, some companies may decide to give valued employees a share of their future profits. While corporations generally issue stock options, limited liability companies (LLCs) use a relatively new form of equity compensation called “profits interests” to incentivize workers. Here’s a summary of the accounting rules that are used to account for these transactions.
Types of awards
Under U.S. Generally Accepted Accounting Principles (GAAP), profits interest awards may be classified as:
Classification is determined by the specific terms and features of the profits interest. In most cases, the fair value of the award must be recorded as an expense on the income statement. Profits interest can also result in the recognition of a liability on the balance sheet and require footnote disclosures.
Under GAAP, fair value is the price an entity would receive to sell an asset — or pay to transfer a liability — in a transaction that’s orderly, takes place between market participants and occurs at the acquisition date. If quoted market prices and other observable inputs aren’t available, unobservable inputs are used to estimate fair value.
One of the upsides to issuing profits interest awards is their flexibility. There’s no standard definition of a profits interest; the term “profits” can refer to whatever is agreed to by the LLC and the recipient of the award. In addition, profits interest units may be subject to various terms and conditions, such as:
An LLC may offer multiple types of profits interests, allowing it to customize awards for various purposes. The varieties of terms and conditions that can be incorporated into a profits interest requires the use of customized valuation techniques.
Need for improvement
Many private companies struggle with how to report profits interests. In recent years, the Financial Accounting Standards Board (FASB) has discussed ways to simplify the rules, including scaling back the disclosure requirements and providing a practical expedient to measure grant-date fair value of these awards. No changes have been made yet, however.
For more information
Accounting complexity has caused some private companies to shy away from profits interest arrangements. But they can be an effective tool for attracting and retaining workers under the right circumstances. Contact us for help reporting these transactions under existing GAAP or for an update on the latest developments from the FASB. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
When you file your tax return, you must check one of the following filing statuses: Single, married filing jointly, married filing separately, head of household or qualifying widow(er). Who qualifies to file a return as a head of household, which is more favorable than single?
To qualify, you must maintain a household, which for more than half the year, is the principal home of a “qualifying child” or other relative of yours whom you can claim as a dependent (unless you only qualify due to the multiple support rules).
A qualifying child?
A child is considered qualifying if he or she:
If a child’s parents are divorced, the child will qualify if he meets these tests for the custodial parent — even if that parent released his or her right to a dependency exemption for the child to the noncustodial parent.
A person isn’t a “qualifying child” if he or she is married and can’t be claimed by you as a dependent because he or she filed jointly or isn’t a U.S. citizen or resident. Special “tie-breaking” rules apply if the individual can be a qualifying child of (and is claimed as such by) more than one taxpayer.
Maintaining a household
You’re considered to “maintain a household” if you live in the home for the tax year and pay over half the cost of running it. In measuring the cost, include house-related expenses incurred for the mutual benefit of household members, including property taxes, mortgage interest, rent, utilities, insurance on the property, repairs and upkeep, and food consumed in the home. Don’t include items such as medical care, clothing, education, life insurance or transportation.
Special rule for parents
Under a special rule, you can qualify as head of household if you maintain a home for a parent of yours even if you don’t live with the parent. To qualify under this rule, you must be able to claim the parent as your dependent.
You must be unmarried to claim head of household status. If you’re unmarried because you’re widowed, you can use the married filing jointly rates as a “surviving spouse” for two years after the year of your spouse’s death if your dependent child, stepchild, adopted child, or foster child lives with you and you “maintain” the household. The joint rates are more favorable than the head of household rates.
If you’re married, you must file either as married filing jointly or separately, not as head of household. However, if you’ve lived apart from your spouse for the last six months of the year and your dependent child, stepchild, adopted child, or foster child lives with you and you “maintain” the household, you’re treated as unmarried. If this is the case, you can qualify as head of household.
We can answer questions if you’d like to discuss a particular situation or would like additional information about whether someone qualifies as your dependent. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
High-net-worth individuals donated $5.8 billion during the first six months of the COVID-19 pandemic — generous giving by most standards. This is according to a recent report, “Philanthropy and COVID-19 in the first half of 2020,” from the Center for Disaster Philanthropy and information service Candid. However, that $5.8 billion amount is deceptive, because nearly three-quarters of it came from one donor, Mackenzie Scott (the ex-wife of Amazon’s Jeff Bezos).
In fact, a 2020 study from the Milken Institute Center for Strategic Philanthropy found that only a relatively small percentage, 36%, of the ultra-wealthy are involved in charitable giving. This may sound like ominous news for not-for-profit organizations. But there are ways to tap this group’s ample resources.
Bad news, good news
The Milken Institute report, “Stepping off the Sidelines: The Unrealized Potential of Strategic Ultra-High-Net-Worth Philanthropy,” studied individuals with more than $30 million in assets and found that only 9% had made charitable gifts of $1 million or more. The Institute summarizes the current issue this way: “the personal wealth of the world’s richest is accumulating faster than philanthropic capital is being deployed, and faster than global issues are being solved.”
However, the report identifies some cause for optimism. Although women currently make up one of every seven ultra-high-net-worth individuals, they’re growing in number. And wealthy women generally give more generously than their male peers. Their motivations also tend to be different. Men are more likely to give to create a legacy, and women are more likely to give to support a cause.
So if your nonprofit doesn’t already, you may want to focus more development efforts on both women who are already wealthy and younger female executives and business owners on the way up. Even if they aren’t in the position to make gifts right now, they may be in decades to come and will want to support charities they know and trust.
Also explore building relationships with the financial advisors of high-net-worth individuals. These include estate planners as well as advisors to donor-advised funds (DAFs), family offices and private foundations (which must spend at least 5% of their net investment assets annually). DAFs are the fastest growing charitable giving vehicles (over 100% in the past five years). And many are sitting on hefty cash cushions, thanks to a surging stock market and no minimum payout requirements. But public pressure and potential legislation might force DAF owners to step up their charitable donations in the near future.
If your nonprofit is working to rebuild its emergency fund or an endowment it was forced to tap during the COVID-19 pandemic, consider focusing on high-net-worth individuals. We can help you devise a targeted development plan. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
As a business owner, you should be aware that you can save family income and payroll taxes by putting your child on the payroll.
Here are some considerations.
Shifting business earnings
You can turn some of your high-taxed income into tax-free or low-taxed income by shifting some business earnings to a child as wages for services performed. In order for your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s salary must be reasonable.
For example, suppose you’re a sole proprietor in the 37% tax bracket. You hire your 16-year-old son to help with office work full-time in the summer and part-time in the fall. He earns $10,000 during the year (and doesn’t have other earnings). You can save $3,700 (37% of $10,000) in income taxes at no tax cost to your son, who can use his $12,550 standard deduction for 2021 to shelter his earnings.
Family taxes are cut even if your son’s earnings exceed his standard deduction. That’s because the unsheltered earnings will be taxed to him beginning at a 10% rate, instead of being taxed at your higher rate.
Income tax withholding
Your business likely will have to withhold federal income taxes on your child’s wages. Usually, an employee can claim exempt status if he or she had no federal income tax liability for last year and expects to have none this year.
However, exemption from withholding can’t be claimed if: 1) the employee’s income exceeds $1,100 for 2021 (and includes more than $350 of unearned income), and 2) the employee can be claimed as a dependent on someone else’s return.
Keep in mind that your child probably will get a refund for part or all of the withheld tax when filing a return for the year.
Social Security tax savings
If your business isn’t incorporated, you can also save some Social Security tax by shifting some of your earnings to your child. That’s because services performed by a child under age 18 while employed by a parent isn’t considered employment for FICA tax purposes.
A similar but more liberal exemption applies for FUTA (unemployment) tax, which exempts earnings paid to a child under age 21 employed by a parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting only of his or her parents.
Note: There’s no FICA or FUTA exemption for employing a child if your business is incorporated or is a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work you’d pay someone else to do.
Your business also may be able to provide your child with retirement savings, depending on your plan and how it defines qualifying employees. For example, if you have a SEP plan, a contribution can be made for the child up to 25% of his or her earnings (not to exceed $58,000 for 2021).
Contact us if you have any questions about these rules in your situation. Keep in mind that some of the rules about employing children may change from year to year and may require your income-shifting strategies to change too. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.comw
On March 30, the Financial Accounting Standards Board (FASB) published an updated accounting standard on events that trigger an impairment test under U.S. Generally Accepted Accounting Principles (GAAP). This simplified alternative may provide relief to private companies and not-for-profit entities that have been adversely affected by the COVID-19 pandemic. Here’s what you should know.
Simplified options for certain entities
Under GAAP, goodwill appears on a company’s balance sheet only when it’s been acquired in an M&A transaction. It represents what’s left over after the purchase price has been allocated to the fair value of identifiable tangible and intangible assets acquired and liabilities assumed. When goodwill declines in value, it’s considered “impaired.” Impairment charges can lower a company’s earnings.
Private companies and not-for-profits that report goodwill on their balance sheets have been given various simplified financial reporting alternatives over the years. One such alternative allows these entities to amortize goodwill generally over a 10-year period, rather than capitalize it and test annually for impairment. However, entities that elect this alternative still must test goodwill for impairment when a triggering event happens.
Examples of triggering events include the loss of a key customer, unanticipated competition and negative cash flows from operations. Impairment also may occur if, after an acquisition has been completed, there’s a stock market or economic downturn — such as the market and economic downturn caused by COVID-19 — that causes the parent company or the acquired business to lose value.
Accounting Standards Update No. 2021-03, Intangibles — Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events, provides an accounting alternative that allows private companies and not-for-profit organizations to perform a goodwill triggering event assessment as of the end of the reporting period only, whether the reporting period is an interim or annual period. It eliminates the requirement for entities that elect this alternative to perform this assessment during the reporting period.
The changes go into effect on a prospective basis for fiscal years beginning after December 15, 2019. Private companies and not-for-profits can adopt the changes early for interim and annual financial statements that haven’t yet been issued or made available for issuance as of March 30, 2021. But they aren’t allowed to adopt the changes retroactively for interim financial statements already issued in the year of adoption.
The updated guidance on evaluating triggering events will help reduce financial reporting complexity for private companies and not-for-profits in the midst of the pandemic — and for other triggering events that happen in the future. Contact us for more information. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you have a life insurance policy, you may want to ensure that the benefits your family will receive after your death won’t be included in your estate. That way, the benefits won’t be subject to federal estate tax.
Current exemption amounts
For 2021, the federal estate and gift tax exemption is $11.7 million ($23.4 million for married couples). That’s generous by historical standards but in 2026, the exemption is set to fall to about $6 million ($12 million for married couples) after inflation adjustments — unless Congress changes the law.
In or out of your estate
Under the estate tax rules, insurance on your life will be included in your taxable estate if:
It’s easy to avoid the first situation by making sure your estate isn’t designated as the policy beneficiary.
The second rule is more complicated. Just having someone else possess legal title to the policy won’t prevent the proceeds from being included in your estate if you keep “incidents of ownership.” Rights that, if held by you, will cause the proceeds to be taxed in your estate include:
Be aware that merely having any of the above powers will cause the proceeds to be taxed in your estate even if you never exercise them.
Buy-sell agreements and trusts
Life insurance obtained to fund a buy-sell agreement for a business interest under a “cross-purchase” arrangement won’t be taxed in your estate (unless the estate is the beneficiary).
An irrevocable life insurance trust (ILIT) is another effective vehicle that can be set up to keep life insurance proceeds from being taxed in the insured’s estate. Typically, the policy is transferred to the trust along with assets that can be used to pay future premiums. Alternatively, the trust buys the insurance with funds contributed by the insured. As long as the trust agreement doesn’t give the insured the ownership rights described above, the proceeds won’t be included in the insured’s estate.
The three-year rule
If you’re considering setting up a life insurance trust with a policy you own currently or simply assigning away your ownership rights in such a policy, consult with us to ensure you achieve your goals. Unless you live for at least three years after these steps are taken, the proceeds will be taxed in your estate. (For policies in which you never held incidents of ownership, the three-year rule doesn’t apply.)
Contact us if you have questions or would like assistance with estate planning and taxation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Many not-for-profits are just starting to emerge from one of the most challenging environments in recent memory due to the COVID-19 pandemic. Even if your organization is in good shape, don’t get too comfortable. Financial obstacles can appear at any time and you need to be vigilant about acting on certain warning signs. Consider the following.
Once your board has signed off on a budget, you should carefully monitor it for unexplained variances. Although some variances are to be expected, staff should be able to provide reasonable explanations — such as funding changes or macroeconomic factors — for significant discrepancies. Where necessary, work to mitigate negative variances by, for example, cutting expenses.
Also make sure you don’t:
Such moves might mark the beginning of a financially unsustainable cycle.
If your financial statements are untimely and inconsistent or aren’t prepared using U.S. Generally Accepted Accounting Principles (GAAP), you could be heading for trouble. Poor financial statements can lead to poor decision-making and undermine your nonprofit’s reputation. They also can make it difficult to obtain funding or financing.
Insist on professionally prepared statements as well as annual audits. Members of your organization’s audit committee should communicate directly with auditors before and during the process, and all board members should have the opportunity to review and question the audit report.
Let’s say you’ve noticed a decline in donations. Then you start hearing from long-standing supporters that they’re losing confidence in your organization’s finances or leadership. Investigate immediately.
Ask supporters what they’re seeing or hearing that prompts their concerns. Also note when development staff hits up major donors outside of the usual fundraising cycle. These contacts could mean your nonprofit is scrambling for cash.
Even the most experienced and knowledgeable nonprofit executive director shouldn’t have absolute power. Your board needs to step in if an executive tries to ignore expense limits and breaks other rules of good fiscal management. The board also should question an executive who attempts to choose a new auditor or makes strategic decisions without the board’s input.
Don’t ignore the signs
If one of these danger signs appears, it’s important to act swiftly. Financial problems don’t disappear on their own. Contact us for help evaluating the situation and for advice on how to get your organization back on track. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Are you considering buying or replacing a vehicle that you’ll use in your business? If you choose a heavy sport utility vehicle (SUV), you may be able to benefit from lucrative tax rules for those vehicles.
Under current law, 100% first-year bonus depreciation is available for qualified new and used property that’s acquired and placed in service in a calendar year. New and pre-owned heavy SUVs, pickups and vans acquired and put to business use in 2021 are eligible for 100% first-year bonus depreciation. The only requirement is that you must use the vehicle more than 50% for business. If your business usage is between 51% and 99%, you can deduct that percentage of the cost in the first year the vehicle is placed in service. This generous tax break is available for qualifying vehicles that are acquired and placed in service through December 31, 2022.
The 100% first-year bonus depreciation write-off will reduce your federal income tax bill and self-employment tax bill, if applicable. You might get a state tax income deduction, too.
This option is available only if the manufacturer’s gross vehicle weight rating (GVWR) is above 6,000 pounds. You can verify a vehicle’s GVWR by looking at the manufacturer’s label, usually found on the inside edge of the driver’s side door where the door hinges meet the frame.
Note: These tax benefits are subject to adjustment for non-business use. And 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.
Detailed, contemporaneous expense records are essential — in case the IRS questions your heavy vehicle’s claimed business-use percentage.
That means you’ll need to keep track of the miles you’re driving for business purposes, compared to the vehicle’s total mileage for the year. Recordkeeping is much simpler today, now that there are apps and mobile technology you can use. Or simply keep a small calendar or mileage log in your car and record details as business trips occur.
If you’re considering buying an eligible vehicle, doing so and placing it in service before the end of this tax year could deliver a big write-off on your 2021 tax return. Before signing a sales contract, consult with us to help evaluate the right tax moves for your business. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Audit committees face many challenges in 2021. As the economy rebounds from the COVID-19 pandemic, there are new dimensions to the oversight roles and responsibilities of the audit committees. Consider taking these following four steps to fortify your committee’s effectiveness.
1. Focus on fundamentals
Once you’ve wrapped up the financial reporting process for fiscal year 2020, take the time to revisit goals and expectations to develop an agenda for 2021 that directs the audit committee’s attention back to the basics. The committee is responsible for oversight of the following key areas:
Each agenda item before the audit committee should ideally relate to one of these areas.
2. Assess the composition of the audit committee
Periodically, it’s appropriate to assess the level of financial expertise that each member of the committee possesses, especially if the composition of the group has recently changed. If the company anticipates significant changes in the regulatory environment under the Biden administration, now may be the time to add suitably qualified members to the audit committee. At least one member of the audit committee should possess in-depth financial expertise. (Publicly traded companies have specific “financial literacy” requirements.)
Today, companies are increasingly recognizing the value of adding gender and racial diversity to decision-making bodies, including audit committees. These companies believe diversity is a strength that leads to better-informed decisions and fresh perspectives.
3. Get a handle on operational risk
Your company’s risk profile may have changed during the pandemic. For example, you may have temporarily cut staff or deferred capital investments to preserve cash flow during uncertain times.
However, these crisis-driven decisions may adversely affect the company’s long-term financial performance. The audit committee should consider asking management to review significant operational decisions made in the last year to determine if excess risk was created and whether it’s time to change course.
In addition, operational changes and increased financial pressures on accounting staff may expose the company to increased risk of internal and external fraud. And remote working arrangements could lead to cyberattacks and theft of intellectual property. It’s a good time to request that internal auditors commission a fraud and cyber-risk assessment. Proactively assessing these issues can dramatically reduce the probability of losses occurring.
4. Consider exposure to financial difficulties across the supply chain
The pandemic also may have affected certain suppliers and customers, especially those located overseas or in states with COVID-19-restrictions on business operations. The audit committee should evaluate whether management has identified the company’s material relationships and the potential financial and operational impact if any of those businesses close or file for bankruptcy.
Full speed ahead
By taking proactive measures, your audit committee can help improve your company’s performance as the economy returns to full capacity. Contact us to help position your company to minimize risks and maximize value-added opportunities in 2021 and beyond. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The new American Rescue Plan Act (ARPA) provides eligible families with an enhanced child and dependent care credit for 2021. This is the credit available for expenses a taxpayer pays for the care of qualifying children under the age of 13 so that the taxpayer can be gainfully employed.
Note that a credit reduces your tax bill dollar for dollar.
For care to qualify for the credit, the expenses must be “employment-related.” In other words, they must enable you and your spouse to work. In addition, they must be for the care of your child, stepchild, foster child, brother, sister or step-sibling (or a descendant of any of these), who’s under 13, lives in your home for over half the year, and doesn’t provide over half of his or her own support for the year. The expenses can also be for the care of your spouse or dependent who’s handicapped and lives with you for over half the year.
The typical expenses that qualify for the credit are payments to a day care center, nanny or nursery school. Sleep-away camp doesn’t qualify. The cost of kindergarten or higher grades doesn’t qualify because it’s an education expense. However, the cost of before and after school programs may qualify.
To claim the credit, married couples must file a joint return. You must also provide the caregiver’s name, address and Social Security number (or tax ID number for a day care center or nursery school). You also must include on the return the Social Security number(s) of the children receiving the care.
The 2021 credit is refundable as long as either you or your spouse has a principal residence in the U.S. for more than half of the tax year.
What are the limits?
When calculating the credit, several limits apply. First, qualifying expenses are limited to the income you or your spouse earn from work, self-employment, or certain disability and retirement benefits — using the figure for whichever of you earns less. Under this limitation, if one of you has no earned income, you aren’t entitled to any credit. However, in some cases, if one spouse has no actual earned income and that spouse is a full-time student or disabled, the spouse is considered to have monthly income of $250 (for one qualifying individual) or $500 (for two or more qualifying individuals).
For 2021, the first $8,000 of care expenses generally qualifies for the credit if you have one qualifying individual, or $16,000 if you have two or more. (These amounts have increased significantly from $3,000 and $6,000, respectively.) However, if your employer has a dependent care assistance program under which you receive benefits excluded from gross income, the qualifying expense limits ($8,000 or $16,000) are reduced by the excludable amounts you receive.
How much is the credit worth?
If your AGI is $125,000 or less, the maximum credit amount is $4,000 for taxpayers with one qualifying individual and $8,000 for taxpayers with two or more qualifying individuals. The credit phases out under a complicated formula. For taxpayers with an AGI greater than $440,000, it’s phased out completely.
These are the essential elements of the enhanced child and dependent care credit in 2021 under the new law. Contact us if you have questions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
According to the Nonprofit Times, only 41% of not-for-profits have whistleblower policies. Perhaps nonprofit leaders believe their organizations are too small or collegial to worry about illicit activities — let alone people reporting them. Or perhaps a whistleblower policy seems like one more thing that requires time and money they don’t have. This is a mistake. Here’s why.
Why you should bother
No federal law specifically requires nonprofits to protect people who risk their jobs to report illegal or unethical practices. Instead, various federal, state and local laws contain whistleblower protection provisions, including the Sarbanes-Oxley Act and The Dodd-Frank Wall Street Reform and Consumer Protection Act. Also, nonprofits are asked on IRS Form 990 to report whether they’ve adopted a whistleblower policy.
Adopting a whistleblower policy increases the odds that you’ll learn about activities before the media, law enforcement or regulators do. Encouraging stakeholders to speak up also sends a message about your commitment to good governance and ethical behavior.
What it should say
Your policy should be tailored to your organization’s unique circumstances, but most policies need to spell out who’s covered. In addition to employees, volunteers and board members, you might want to include clients and third parties who conduct business with your organization, such as vendors and independent contractors.
Also specify covered misdeeds. Financial malfeasance often gets the most attention. But you might also include violations of organizational client protection policies, conflicts of interest, discrimination and unsafe work conditions.
And how should whistleblowers report their concerns? Must they notify a compliance officer or can they report anonymously? Is a confidential hotline available? Whom can whistleblowers turn to if the designated individual is suspected of wrongdoing?
What to do with a report
Covered individuals need to know how you’ll handle reports once they’re submitted. Your policy should state that every concern will be promptly and thoroughly investigated and that designated investigators will have adequate independence to conduct an objective query.
Also describe what will happen after an investigation is complete. For example, will the reporting individual receive feedback? Will the individual responsible for the illegal or unethical behavior be punished? If your organization opts not to take corrective action, document your reasoning. Finally, explain in your policy that although you’ll do everything possible to maintain the whistleblower’s anonymity, you can’t guarantee it if the whistleblower needs to act as a witness in criminal or civil proceedings.
How to act now
Make sure you have your attorney review your whistleblower policy before releasing it. For more information about encouraging staffers to speak up when necessary, contact us. We can help you strengthen internal controls and implement a confidential reporting hotline. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Are you thinking about launching a business with some partners and wondering what type of entity to form? An S corporation may be the most suitable form of business for your new venture. Here’s an explanation of the reasons why.
The biggest advantage of an S corporation over a partnership is that as S corporation shareholders, you won’t be personally liable for corporate debts. In order to receive this protection, it’s important that the corporation be adequately financed, that the existence of the corporation as a separate entity be maintained and that various formalities required by your state be observed (for example, filing articles of incorporation, adopting by-laws, electing a board of directors and holding organizational meetings).
If you expect that the business will incur losses in its early years, an S corporation is preferable to a C corporation from a tax standpoint. Shareholders in a C corporation generally get no tax benefit from such losses. In contrast, as S corporation shareholders, each of you can deduct your percentage share of these losses on your personal tax returns to the extent of your basis in the stock and in any loans you 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.
Once the S corporation begins to earn profits, the income will be taxed directly to you whether or not it’s distributed. It will be reported on your individual tax return and be aggregated with income from other sources. To the extent the income is passed through to you as qualified business income, you’ll be eligible to take the 20% pass-through deduction, subject to various limitations. Your share of the S corporation’s income won’t be subject to self-employment tax, but your wages will be subject to Social Security taxes.
Are you planning to provide fringe benefits such as health and life insurance? If so, you should be aware that the costs of providing such benefits to a more than 2% shareholder are deductible by the entity but are taxable to the recipient.
Be careful with S status
Also be aware that the S corporation could inadvertently lose its S status if you or your partners transfers stock to an ineligible shareholder such as another corporation, a partnership or a nonresident alien. If the S election were terminated, the corporation would become a taxable entity. You would not be able to deduct any losses and earnings could be subject to double taxation — once at the corporate level and again when distributed to you. In order to protect you against this risk, it’s a good idea for each of you to sign an agreement promising not to make any transfers that would jeopardize the S election.
Consult with us before finalizing your choice of entity. We can answer any questions you have and assist in launching your new venture. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Data security is a critical part of the audit risk assessment. If your financial statements are audited, your audit team will tailor their procedures to answer critical questions about cyber risks and the effectiveness of your internal controls. While conducting fieldwork, they’ll assess how your practices measure up and whether your company has weaknesses that may require additional inquiry, testing and disclosure.
Is cybersecurity a priority?
Most companies today view cybersecurity as a business problem, not just as an information technology (IT) issue. During the audit process, it’s important to identify the “crown jewels” of your company’s data assets, and then consider how your management team evaluates, manages and responds to cyber risks and cybersecurity incidents.
People are often the weakest link in cybersecurity. So, auditors will evaluate your company’s training, awareness and accountability policies to ensure that sensitive data is kept safe. Those policies may need to be regularly updated as 1) hackers get more sophisticated and find new ways of breaking into systems, and 2) your business environment changes.
For example, remote working arrangements during the COVID-19 pandemic have resulted in new risks as employees access data from less-secure home networks. So companies may need to modify their practices to maintain effective data security.
Auditors also consider the tone at the top of your organization. Cybersecurity should be integrated into an organization’s values and goals. Responsibility shouldn’t fall solely in the hands of your company’s IT department. After all, if your company can’t keep its intellectual property and customers safe, its ability to operate will ultimately be diminished over the long run.
What’s important to investors and lenders?
To date, the Public Company Accounting Oversight Board (PCAOB) hasn’t found any material misstatements on a public company’s financial statements as a result of a cybersecurity breach. So, stakeholders generally have confidence in the ability of auditors to evaluate and identify cyber risks.
However, audit committees and other external stakeholders recognize that there’s a risk that future cyberattacks may affect financial reporting. And they expect auditors to actively communicate about cybersecurity measures and the costs associated with breaches. The full cost of a data breach — including response and reputational damage — may not always be apparent. Financial statement disclosures should be as accurate, timely and comprehensive as possible.
An agile approach
Many traditional audit risks — such as supply chain and related party risks — tend to be fairly constant and predictable over time. But cyber risks are constantly evolving. We have experience evaluating and disclosing data security practices. Each accounting period, our audit team will take a fresh look your company’s cyber risks in today’s marketplace and modify our audit procedures as necessary. We can also help get your policies and procedures back on track, if they haven’t kept up with the times. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The American Rescue Plan Act, signed into law on March 11, provides a variety of tax and financial relief to help mitigate the effects of the COVID-19 pandemic. Among the many initiatives are direct payments that will be made to eligible individuals. And parents under certain income thresholds will also receive additional payments in the coming months through a greatly revised Child Tax Credit.
Here are some answers to questions about these payments.
What are the two types of payments?
Under the new law, eligible individuals will receive advance direct payments of a tax credit. The law calls these payments “recovery rebates.” The law also includes advance Child Tax Credit payments to eligible parents later this year.
How much are the recovery rebates?
An eligible individual is allowed a 2021 income tax credit, which will generally be paid in advance through direct bank deposit or a paper check. The full amount is $1,400 ($2,800 for eligible married joint filers) plus $1,400 for each dependent.
Who is eligible?
There are several requirements but the most important is income on your most recently filed tax return. Full payments are available to those with adjusted gross incomes (AGIs) of less than $75,000 ($150,000 for married joint filers and $112,500 for heads of households). Your AGI can be found on page 1 of Form 1040.
The credit phases out and is no longer available to taxpayers with AGIs of more than $80,000 ($160,000 for married joint filers and $120,000 for heads of households).
Who isn’t eligible?
Among those who aren’t eligible are nonresident aliens, individuals who are the dependents of other taxpayers, estates and trusts.
How has the Child Tax Credit changed?
Before the new law, the Child Tax Credit was $2,000 per “qualifying child.” Under the new law, the credit is increased to $3,000 per child ($3,600 for children under age 6 as of the end of the year). But the increased 2021 credit amounts are phased out at modified AGIs of over $75,000 for singles ($150,000 for joint filers and $112,500 for heads of households).
A qualifying child before the new law was defined as an under-age-17 child, whom the taxpayer could claim as a dependent. The $2,000 Child Tax Credit was phased out for taxpayers with modified AGIs of over $400,000 for joint filers, and $200,000 for other filers.
Under the new law, for 2021, the definition of a qualifying child for purposes of the Child Tax Credit includes one who hasn’t turned 18 by the end of this year. So 17-year-olds qualify for the credit for 2021 only.
How are parents going to receive direct payments of the Child Tax Credit this year?
Unlike in the past, you don’t have to wait to file your tax return to fully benefit from the credit. The new law directs the IRS to establish a program to make monthly advance payments equal to 50% of eligible taxpayers’ 2021 Child Tax Credits. These payments will be made from July through December 2021.
What if my income is above the amounts listed above?
Taxpayers who aren’t eligible to claim an increased Child Tax Credit, because their incomes are too high, may be able to claim a regular credit of up to $2,000 on their 2021 tax returns, subject to the existing phaseout rules.
There are other rules and requirements involving these payments. This article only describes the basics. Stay tuned for additional details about other tax breaks in the new law. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
No one needs to tell nonprofit organizations how tough the past year has been. According to the John Hopkins Center for Civil Society Studies, 7.7% of not-for-profit workers — nearly one million people — lost their jobs between February 2020 and January 2021. An even higher percentage of arts and education organizations lost jobs last year. Although the nonprofit sector received higher-than-usual donations in 2020, many nonprofits that sought COVID-19-related loans were shut out.
So the new American Rescue Plan Act’s (ARPA’s) provisions for nonprofits are welcome. Let’s take a look at some key elements.
Employer tax credits
As with 2020’s CARES Act, the ARPA helps nonprofit employers keep employees on their payrolls. The Employee Retention Tax Credit has been extended through December 31, 2021, for eligible employers that continue to pay worker wages during COVID-19-related closures or experience reduced revenue.
Tax credits for nonprofits granting paid sick and family leave to staffers are also extended — to September 30, 2021. The ARPA increases the amount of wages employers can claim from $10,000 to $12,000 per employee. Employers may now include time employees use to obtain vaccinations (and any time needed to recover from vaccination side effects) as paid leave.
To help self-insuring nonprofits, the ARPA extends federal coverage of the unemployment costs of reimbursing nonprofits. The current reimbursement rate of 50% continues to March 31, 2001. On April 1, it increases to 75% and remains at that rate until September 6. The ARPA also continues coverage for self-employed nonprofit workers and staff of religious and smaller nonprofits.
Expanded loan and grant access
The ARPA allocates a new $7.5 billion to the Paycheck Protection Program (PPP) and expands eligibility to some nonprofits with more than 500 employees that operate in more than one location. Currently, eligible nonprofits have until March 31, 2021, to apply for PPP loans. Because this gives employers little time to assess their needs and apply for a loan, many nonprofit advocates are calling for an extension beyond March 31. Congress is discussing a standalone bill that would extend the deadline.
Performing arts organizations can apply for PPP loans, but they may also want to consider requesting a grant from the new Shuttered Venue Operators Grants (SVOG) program. The Small Business Administration is expected to start accepting applications for this program in April. Note that PPP funds can reduce the size of SVOG grants.
In addition, ARPA state and local funding is expected to benefit charities. For example, if your organization lost a government grant due to COVID-19-related declines in revenue, you may be able to obtain new funding.
It’s possible that Congress will extend the PPP deadline (and other ARPA dates). However, if your organization intends to apply, start the process immediately. Contact us for help and for additional information about ARPA provisions. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
President Biden signed the $1.9 trillion American Rescue Plan Act (ARPA) on March 11. While the new law is best known for the provisions providing relief to individuals, there are also several tax breaks and financial benefits for businesses.
Here are some of the tax highlights of the ARPA.
The Employee Retention Credit (ERC). This valuable tax credit is extended from June 30 until December 31, 2021. The ARPA continues the ERC rate of credit at 70% for this extended period of time. It also continues to allow for up to $10,000 in qualified wages for any calendar quarter. Taking into account the Consolidated Appropriations Act extension and the ARPA extension, this means an employer can potentially have up to $40,000 in qualified wages per employee through 2021.
Employer-Provided Dependent Care Assistance. In general, an eligible employee’s gross income doesn’t include amounts paid or incurred by an employer for dependent care assistance provided to the employee under a qualified dependent care assistance program (DCAP).
Previously, the amount that could be excluded from an employee’s gross income under a DCAP during a tax year wasn’t more than $5,000 ($2,500 for married individuals filing separately), subject to certain limitations. However, any contribution made by an employer to a DCAP can’t exceed the employee’s earned income or, if married, the lesser of employee’s or spouse’s earned income.
Under the ARPA, for 2021 only, the exclusion for employer-provided dependent care assistance is increased from $5,000 to $10,500 (from $2,500 to $5,250 for married individuals filing separately).
This provision is effective for tax years beginning after December 31, 2020.
Paid Sick and Family Leave Credits. Changes under the ARPA apply to amounts paid with respect to calendar quarters beginning after March 31, 2021. Among other changes, the law extends the paid sick time and paid family leave credits under the Families First Coronavirus Response Act from March 31, 2021, through September 30, 2021. It also provides that paid sick and paid family leave credits may each be increased by the employer’s share of Social Security tax (6.2%) and employer’s share of Medicare tax (1.45%) on qualified leave wages.
Grants to restaurants. Under the ARPA, eligible restaurants, food trucks, and similar businesses that provide food and drinks may receive restaurant revitalization grants from the Small Business Administration. For tax purposes, amounts received as restaurant revitalization grants aren’t included in the gross income of the person who receives the money.
These are only some of the provisions in the ARPA. There are many others that may be beneficial to your business. Contact us for more information about your situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The statement of cash flows essentially tells you about cash entering and leaving a business. It’s arguably the most misunderstood and underappreciated part of a company’s annual report. After all, a business that reports positive net income on its income statements sometimes doesn’t have enough cash in the bank to pay its bills. Reviewing the statement of cash flows can provide significant insight into a company’s financial health and long-term viability.
Under Generally Accepted Accounting Principles (GAAP), the statement of cash flows is typically organized into three sections:
1. Cash flows from operations. This section focuses on cash flows from selling products and services. It customarily starts with accrual-basis net income. Then it’s adjusted for items related to normal business operations, such as:
The end result is cash-basis net income. Companies that report several successive years of negative operating cash flows may be better off closing than continuing to incur losses.
2. Cash flows from investing activities. If a company buys or sells property, equipment or marketable securities, the transaction generally shows up here. This section reveals whether a company is reinvesting in its future operations — or divesting assets for emergency funds.
3. Cash flows from financing activities. This section shows cash flows from raising, borrowing and repaying capital. It highlights the company’s ability to obtain cash from lenders and investors, including:
Capital leases and noncash transactions are reported in a separate schedule at the bottom of the statement of cash flows or in a narrative footnote disclosure. For example, if a borrower purchases equipment directly using loan proceeds, the transaction would typically appear at the bottom of the statement, rather than as a cash outflow from investing activities and an inflow from financing activities.
In addition, U.S. companies that enter into foreign currency transactions customarily report the effect of exchange rate changes as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents.
For more information
The statement of cash flows provides valuable insight about your company’s financial health. But it may not always be clear how to classify transactions. We can help you get it right. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
April 15 is not only the deadline for filing your 2020 tax return, it’s also the deadline for the first quarterly estimated tax payment for 2021, if you’re required to make one.
You may have to make estimated tax payments if you receive interest, dividends, alimony, self-employment income, capital gains, prize money or other income. If you don’t pay enough tax during the year through withholding and estimated payments, you may be liable for a tax penalty on top of the tax that’s ultimately due.
Four due dates
Individuals must pay 25% of their “required annual payment” by April 15, June 15, September 15, and January 15 of the following year, to avoid an underpayment penalty. If one of those dates falls on a weekend or holiday, the payment is due on the next business day.
The required annual payment for most individuals is the lower of 90% of the tax shown on the current year’s return or 100% of the tax shown on the return for the previous year. However, if the adjusted gross income on your previous year’s return was more than $150,000 (more than $75,000 if you’re married filing separately), you must pay the lower of 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year.
Most people who receive the bulk of their income in the form of wages satisfy these payment requirements through the tax withheld by their employers from their paychecks. Those who make estimated tax payments generally do so in four installments. After determining the required annual payment, they divide that number by four and make four equal payments by the due dates.
The annualized method
But you may be able to use the annualized income method to make smaller payments. This method is useful to people whose income flow isn’t uniform over the year, perhaps because they’re involved in a seasonal business.
If you fail to make the required payments, you may be subject to a penalty. However, the underpayment penalty doesn’t apply to you:
In addition, the IRS may waive the penalty if the failure was due to casualty, disaster, or other unusual circumstances and it would be inequitable to impose it. The penalty may also be waived for reasonable cause during the first two years after you retire (after reaching age 62) or become disabled.
Stay on track
Contact us if you have questions about how to calculate estimated tax payments. We can help you stay on track so you aren’t liable for underpayment penalties. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
How committed is your not-for-profit organization to benchmarking? Perhaps you think it makes sense in the for-profit sphere, but not as much for charities and other nonprofits. If so, you’re probably missing out on benefits — including long-term sustainability. Here’s how to overcome reluctance and learn to love benchmarking.
Even if your staff and board believe benchmarking fails to capture the true impact of your programs, consider what other stakeholders think. Funders, in particular, increasingly rely on benchmarks to assess effectiveness when making funding decisions.
Benchmarking also provides critical information when developing and executing strategic plans. It can help you identify strengths, weaknesses and opportunities. And benchmarking allows not-for-profits to keep a steady eye on financial health.
Choose the right metrics
When you’re ready to move ahead with benchmarking, it’s critical that you select the right metrics. They could relate to a variety of areas, from fundraising (for example, dollars raised or average gift amount) to online presence (number of followers or retweets).
Many nonprofits, though, begin by focusing on:
Program efficiency (program expenses / total expenses). This is a popular metric with funders. It measures the amount you spend on your mission vs. administrative expenses. The ideal ratio is 1:1, but because this is unlikely, benchmarking your score against your peers’ is necessary to evaluate your efficiency.
Organizational liquidity (expendable net assets / total expenses). This measure considers the percentage of annual expenses that can be covered by expendable equity (as opposed to reserves or restricted assets). Higher scores mean greater liquidity.
Operating reliance (unrestricted program revenue / total expenses). This calculation shows whether you could pay all your expenses solely from program revenues. A figure close to 1:1 is very strong. But, again, comparing it with your peers’ ratios will tell you if you’re on solid ground.
You must be able to gather the requisite data, whichever metrics you end up using. That’s where nonprofit rating sites such as Charity Navigator and GuideStar are useful. The sites calculate scores for some of the most common metrics and provide data on other, comparable organizations. You also might tap trade association and government databases (for example, the IRS’s Tax-Exempt Organization Search) for information, including audited financial statements.
Start benchmarking by conducting a root-cause analysis of the areas with the lowest scores to get to the bottom of the problems. Then develop short- and long-term solutions. Contact us with your questions and for help choosing the right benchmarks, collecting data and developing improvement plans. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
While many businesses have been forced to close due to the COVID-19 pandemic, some entrepreneurs have started new small businesses. Many of these people start out operating as sole proprietors. Here are some tax rules and considerations involved in operating with that entity.
The pass-through deduction
To the extent your business generates qualified business income (QBI), you’re eligible to claim the pass-through or QBI deduction, subject to limitations. For tax years through 2025, the deduction can be up to 20% of a pass-through entity owner’s QBI. You can take the deduction even if you don’t itemize deductions on your tax return and instead claim the standard deduction.
As a sole proprietor, you’ll file Schedule C with your Form 1040. Your business expenses are deductible against gross income. If you have losses, they’ll generally be deductible against your other income, subject to special rules related to hobby losses, passive activity losses and losses in activities in which you weren’t “at risk.”
If you hire employees, you need to get a taxpayer identification number and withhold and pay employment taxes.
For 2021, you pay Social Security on your net self-employment earnings up to $142,800, and Medicare tax on all earnings. An additional 0.9% Medicare tax is imposed on self-employment income in excess of $250,000 on joint returns; $125,000 for married taxpayers filing separate returns; and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.
Quarterly estimated payments
As a sole proprietor, you generally have to make estimated tax payments. For 2021, these are due on April 15, June 15, September 15 and January 17, 2022.
Home office deductions
If you work from a home office, perform management or administrative tasks there, or store product samples or inventory at home, you may be entitled to deduct an allocable portion of some costs of maintaining your home.
Health insurance expenses
You can deduct 100% of your health insurance costs as a business expense. This means your deduction for medical care insurance won’t be subject to the rule that limits medical expense deductions.
Retain complete records of your income and expenses so you can claim all the tax breaks to which you’re entitled. Certain expenses, such as automobile, travel, meals, and office-at-home expenses, require special attention because they’re subject to special recordkeeping rules or deductibility limits.
Saving for retirement
Consider establishing a qualified retirement plan. The advantage is that amounts contributed to the plan are deductible at the time of the contribution and aren’t taken into income until they’re withdrawn. A SEP plan requires less paperwork than many qualified plans. A SIMPLE plan is also available to sole proprietors and offers tax advantages with fewer restrictions and administrative requirements. If you don’t establish a retirement plan, you may still be able to contribute to an IRA.
We can help
Contact us if you want additional information about the tax aspects of your new business, or if you have questions about reporting or recordkeeping requirements. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Breakeven analysis can be useful when investing in new equipment, launching a new product or analyzing the effects of a cost reduction plan. During the COVID-19 pandemic, however, many struggling companies are using it to evaluate how much longer they can afford to keep their doors open.
Fixed vs. variable costs
Breakeven can be explained in a few different ways using information from your company’s income statement. It’s the point at which total sales are equal to total expenses. More specifically, it’s where net income is equal to zero and sales are equal to variable costs plus fixed costs.
To calculate your breakeven point, you need to understand a few terms:
Fixed expenses. These are the expenses that remain relatively unchanged with changes in your business volume. Examples include rent, property taxes, salaries and insurance.
Variable/semi-fixed expenses. Your sales volume determines the ebb and flow of these expenses. If you had no sales revenue, you’d have no variable expenses and your semifixed expenses would be lower. Examples are shipping costs, materials, supplies and independent contractor fees.
The basic formula for calculating the breakeven point is:
Breakeven = fixed expenses / [1 – (variable expenses / sales)]
Breakeven can be computed on various levels. For example, you can estimate it for your company overall or by product line or division, as long as you have requisite sales and cost data broken down.
To illustrate how this formula works, let’s suppose ABC Company generates $24 million in revenue, has fixed costs of $2 million and variable costs of $21.6 million. Here’s how those numbers fit into the breakeven formula:
Annual breakeven = $2 million / [1 – ($21.6 million / $24 million)] = $20 million
Monthly breakeven = $20 million / 12 = $1,666,667
As long as expenses stay within budget, the breakeven point will be reliable. In the example, variable expenses must remain at 90% of revenue and fixed expenses must stay at $2 million. If either of these variables changes, the breakeven point will change.
Lowering your breakeven
During the COVID-19 pandemic, distressed companies may have taken measures to reduce their breakeven points. One solution is to convert as many fixed costs into variable costs as possible. Another solution involves cost cutting measures, such as carrying less inventory and furloughing workers. You also might consider refinancing debt to take advantage of today’s low interest rates and renegotiating key contracts with lessors, insurance providers and suppliers. Contact us to help you work through the calculations and find a balance between variable and fixed costs that suits your company’s current needs. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you’re approaching retirement, you probably want to ensure the money you’ve saved in retirement plans lasts as long as possible. If so, be aware that a law was recently enacted that makes significant changes to retirement accounts. The SECURE Act, which was signed into law in late 2019, made a number of changes of interest to those nearing retirement.
You can keep making traditional IRA contributions if you’re still working
Before 2020, traditional IRA contributions weren’t allowed once you reached age 70½. But now, an individual of any age can make contributions to a traditional IRA, as long as he or she has compensation, which generally means earned income from wages or self-employment. So if you work part time after retiring, or do some work as an independent contractor, you may be able to continue saving in your IRA if you’re otherwise eligible.
The required minimum distribution (RMD) age was raised from 70½ to 72.
Before 2020, retirement plan participants and IRA owners were generally required to begin taking RMDs from their plans by April 1 of the year following the year they reached age 70½. The age 70½ requirement was first applied in the early 1960s and, until recently, hadn’t been adjusted to account for increased life expectancies.
For distributions required to be made after December 31, 2019, for individuals who attain age 70½ after that date, the age at which individuals must begin taking distributions from their retirement plans or IRAs is increased from 70½ to 72.
“Stretch IRAs” have been partially eliminated
If a plan participant or IRA owner died before 2020, their beneficiaries (spouses and non-spouses) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the life or life expectancy of the beneficiaries. This was sometimes called a “stretch IRA.”
However, for deaths of plan participants or IRA owners beginning in 2020 (later for some participants in collectively bargained plans and governmental plans), distributions to most non-spouse beneficiaries are generally required to be distributed within 10 years following a plan participant’s or IRA owner’s death. Therefore, the “stretch” strategy is no longer allowed for those beneficiaries.
There are some exceptions to the 10-year rule. For example, it’s still allowed for: the surviving spouse of a plan participant or IRA owner; a child of a plan participant or IRA owner who hasn’t reached the age of majority; a chronically ill individual; and any other individual who isn’t more than 10 years younger than a plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally still take their distributions over their life expectancies.
More changes may be ahead
These are only some of the changes included in the SECURE Act. In addition, there’s bipartisan support in Congress to make even more changes to promote retirement saving. Last year, a law dubbed the SECURE Act 2.0 was introduced in the U.S. House of Representatives. At this time, it’s unclear if or when it could be enacted. We’ll let you know about any new opportunities. In the meantime, if you have questions about your situation, don’t hesitate to contact us. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Events of the past year put a dent in many not-for-profit’s reserves. Perhaps you tapped this stash to buy personal protective equipment or to pay staffers’ salaries when your budget no longer proved adequate. As the pandemic wanes and economic conditions improve, you’ll need to start thinking about rebuilding your operating reserves.
Back on steady ground
Assembling an adequate operating reserve takes time and should be regarded as a continuous project. Obviously, it’s nearly impossible to contribute to reserves when you’re under financial stress. But once you feel your nonprofit is on steadier ground, your board of directors needs to determine what amount to target and how your organization will reach that target. It’s also a good time to review circumstances under which reserves can be drawn down.
Reserve funds can come from unrestricted contributions, investment income and planned surpluses. Many boards designate a portion of their organizations’ unrestricted net assets as an operating reserve. On the other hand, funds that shouldn’t be considered part of an operating reserve include endowments and temporarily restricted funds. Net assets tied up in illiquid fixed assets used in operations, such as your buildings and equipment, generally don’t qualify either.
Protection and flexibility
Determining how much should be in your operating reserve depends on your organization and its operations. Generally, if you depend heavily on only a few funders or government grants, your nonprofit probably will benefit from a larger reserve. Likewise, if personnel costs are high, your organization could use a healthy reserve cushion.
Three months of reserves is typically considered a minimum accumulation. Six months of reserves provides greater security. A three-to-six-month reserve should enable your organization to continue its operations for a relatively brief transition in operations or funding. Or, in the worst-case scenario, it would allow for an orderly winding up of affairs.
An operating reserve of more than six months provides greater protection if, for example, something similar to the COVID-19 lockdown occurs again. And a bigger reserve can give you financial flexibility. For example, you might have the funds to pursue a new program initiative that’s not fully funded, or to leverage debt funding for needed facilities or equipment.
Note that it’s generally not a good idea to put aside more than 12 months of expenses. Increasingly, donors want to see the nonprofits they support put funds to work, not hoard them. Contact us for more information about operating reserves and setting policies that are appropriate for your organization. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Are you a business owner thinking about hiring? Be aware that a recent law extended a credit for hiring individuals from one or more targeted groups. Employers can qualify for a tax credit known as the Work Opportunity Tax Credit (WOTC) that’s worth as much as $2,400 for each eligible employee ($4,800, $5,600 and $9,600 for certain veterans and $9,000 for “long-term family assistance recipients”). The credit is generally limited to eligible employees who began work for the employer before January 1, 2026.
Generally, an employer is eligible for the credit only for qualified wages paid to members of a targeted group. These groups are:
You must meet certain requirements
There are a number of requirements to qualify for the credit. For example, for each employee, there’s also a minimum requirement that the employee must have completed at least 120 hours of service for the employer. Also, the credit isn’t available for certain employees who are related to or who previously worked for the employer.
There are different rules and credit amounts for certain employees. The maximum credit available for the first-year wages is $2,400 for each employee, $4,000 for long-term family assistance recipients, and $4,800, $5,600 or $9,600 for certain veterans. Additionally, for long-term family assistance recipients, there’s a 50% credit for up to $10,000 of second-year wages, resulting in a total maximum credit, over two years, of $9,000.
For summer youth employees, the wages must be paid for services performed during any 90-day period between May 1 and September 15. The maximum WOTC credit available for summer youth employees is $1,200 per employee.
A valuable credit
There are additional rules and requirements. In some cases, employers may elect not to claim the WOTC. And in limited circumstances, the rules may prohibit the credit or require an allocation of it. However, for most employers hiring from targeted groups, the credit can be valuable. Contact us with questions or for more information about your situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
The use of audit analytics can help during the planning and review stages of the audit. But analytics can have an even bigger impact when these procedures are used to supplement substantive testing during fieldwork.
Definition of “analytics”
Auditors use analytical procedures to evaluate financial information by assessing relationships among financial and nonfinancial data. Examples of analytical tests include:
Significant fluctuations or relationships that are materially inconsistent with other relevant information or that differ from expected values require additional investigation.
Auditors generally follow this four-step process when performing analytical procedures:
1. Form an independent expectation. The auditor develops an expectation of an account balance or financial relationship. Expectations are based on the auditor’s understanding of the company and its industry. Examples of data used to develop expectations include prior-period information (adjusted for expected changes), management’s budgets or forecasts, and ratios published in trade journals.
2. Identify differences between expected and reported amounts. The auditor must compare his or her expectation with the amount recorded in the company’s accounting system. Then, any difference is compared to the auditor’s threshold for analytical testing. If the difference is less than the threshold, the auditor generally accepts the recorded amount without further investigation and the analytical procedure is complete. If not, the auditor moves to the next step.
3. Investigate the reason. The auditor brainstorms all possible causes and then determines the most probable cause(s) for the discrepancy. Sometimes, the analytical test or the data itself is problematic, and the auditor needs to apply additional analytical procedures with more precise data. Other times, the discrepancy has a “plausible” explanation, usually related to unusual transactions or events, or accounting or business changes.
4. Evaluate differences. The auditor evaluates the likelihood of material misstatement and then determines the nature and extent of any additional auditing procedures. Plausible explanations require corroborating audit evidence.
For differences that are due to misstatement (rather than a plausible explanation), the auditor must decide whether the misstatement is material (individually or in the aggregate). Material misstatements typically require adjustments to the amounts reported and may also necessitate additional audit procedures to determine the scope of a misstatement.
A win-win for everyone
Done right, analytical procedures can help make your audit less time-consuming, less expensive and more effective at detecting errors and omissions. Analytics also may be easier to perform remotely than traditional, manual audit testing procedures — a major upside during the COVID-19 pandemic. To avoid surprises in the coming audit season, notify us about any major changes to your operations, accounting methods or market conditions that occurred during the reporting period. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you’re getting ready to file your 2020 tax return, and your tax bill is higher than you’d like, there might still be an opportunity to lower it. If you qualify, you can make a deductible contribution to a traditional IRA right up until the April 15, 2021 filing date and benefit from the tax savings on your 2020 return.
Who is eligible?
You can make a deductible contribution to a traditional IRA if:
For 2020, if you’re a joint tax return filer and you are covered by an employer plan, your deductible IRA contribution phases out over $104,000 to $124,000 of modified AGI. If you’re single or a head of household, the phaseout range is $65,000 to $75,000 for 2020. For married filing separately, the phaseout range is $0 to $10,000. For 2020, if you’re not an active participant in an employer-sponsored retirement plan, but your spouse is, your deductible IRA contribution phases out with modified AGI of between $196,000 and $206,000.
Deductible IRA contributions reduce your current tax bill, and earnings within the IRA are tax deferred. However, every dollar you take out is taxed in full (and subject to a 10% penalty before age 59 1/2, unless one of several exceptions apply).
IRAs often are referred to as “traditional IRAs” to differentiate them from Roth IRAs. You also have until April 15 to make a Roth IRA contribution. But while contributions to a traditional IRA are deductible, contributions to a Roth IRA aren’t. However, withdrawals from a Roth IRA are tax-free as long as the account has been open at least five years and you’re age 59 1/2 or older. (There are also income limits to contribute to a Roth IRA.)
Here are two other IRA strategies that may help you save tax.
1. Turn a nondeductible Roth IRA contribution into a deductible IRA contribution. Did you make a Roth IRA contribution in 2020? That may help you in the future when you take tax-free payouts from the account. However, the contribution isn’t deductible. If you realize you need the deduction that a traditional IRA contribution provides, you can change your mind and turn a Roth IRA contribution into a traditional IRA contribution via the “recharacterization” mechanism. The traditional IRA deduction is then yours if you meet the requirements described above.
2. Make a deductible IRA contribution, even if you don’t work. In general, you can’t make a deductible traditional IRA contribution unless you have wages or other earned income. However, an exception applies if your spouse is the breadwinner and you are a homemaker. In this case, you may be able to take advantage of a spousal IRA.
What’s the contribution limit?
For 2020 if you’re eligible, you can make a deductible traditional IRA contribution of up to $6,000 ($7,000 if you’re 50 or over).
In addition, small business owners can set up and contribute to a Simplified Employee Pension (SEP) plan up until the due date for their returns, including extensions. For 2020, the maximum contribution you can make to a SEP is $57,000.
If you want more information about IRAs or SEPs, contact us or ask about it when we’re preparing your return. We can help you save the maximum tax-advantaged amount for retirement. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Thousands of not-for-profit organizations fall victim to embezzlement schemes every year — some even losing millions of dollars. But losses go beyond actual dollar amounts. The hit to a group’s reputation may scare off donors, grantmakers and other supporters. However, with the right response, nonprofits can bounce back from fraud. Here’s how.
One best practice
A study published in the Journal of Accounting, Ethics & Public Policy makes the case that the specific steps an organization takes following a fraud incident can mitigate significant reputational damage. In its hypothetical example, the study lists several ways a nonprofit might act after discovering money has been embezzled:
The study found that improving board oversight was the only response to elicit a statistically significant positive effect on supporters’ intentions to donate. Stronger oversight also helped restore an organization’s perceived trustworthiness.
To signal improved board oversight to would-be donors, the authors suggested that an embezzled organization start requiring board members to be completely independent from management and bar employees from serving on the board. Researchers also informed study participants that a nonprofit should increase the number of voting board members and mandate that at least one member has a financial or accounting background. Participants were further told that all board members must review the financial statements at least monthly.
Comply with regulations
The study’s authors call improving board oversight “an ideal image repair strategy” because it comes at a relatively low cost. But while reputational repair is of utmost importance, it’s not the only consideration for victimized nonprofits. If your nonprofit loses funds to fraud, it must comply with federal and state reporting obligations, too.
The IRS generally requires organizations to report any “significant diversion” of assets on Form 990. A significant diversion happens when the gross amount of all diversions discovered during the tax year exceeds the lesser of 1) 5% of gross receipts for the year, 2) 5% of total assets at year end or 3) $250,000. Check with your state for other required reporting.
You may be able to save yourself a lot of heartache by preventing rogue employees from committing fraud in the first place. Tighten internal controls and board oversight now. And just in case a criminal slips through the cracks, be ready with a fraud contingency plan that can guide you in the aftermath of an incident. Contact us for help with controls or to investigate fraud. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
During the COVID-19 pandemic, many people are working from home. If you’re self-employed and run your business from your home or perform certain functions there, you might be able to claim deductions for home office expenses against your business income. There are two methods for claiming this tax break: the actual expenses method and the simplified method.
In general, you qualify for home office deductions if part of your home is used “regularly and exclusively” as your principal place of business.
If your home isn’t your principal place of business, you may still be able to deduct home office expenses if 1) you physically meet with patients, clients or customers on your premises, or 2) you use a storage area in your home (or a separate free-standing structure, such as a garage) exclusively and regularly for business.
What can you deduct?
Many eligible taxpayers deduct actual expenses when they claim home office deductions. Deductible home office expenses may include:
But keeping track of actual expenses can take time and require organization.
How does the simpler method work?
Fortunately, there’s a simplified method: You can deduct $5 for each square foot of home office space, up to a maximum total of $1,500.
The cap can make the simplified method less valuable for larger home office spaces. But even for small spaces, taxpayers may qualify for bigger deductions using the actual expense method. So, tracking your actual expenses can be worth it.
Can I switch?
When claiming home office deductions, you’re not stuck with a particular method. For instance, you might choose the actual expense method on your 2020 return, use the simplified method when you file your 2021 return next year and then switch back to the actual expense method for 2022. The choice is yours.
What if I sell the home?
If you sell — at a profit — a home that contains (or contained) a home office, there may be tax implications. We can explain them to you.
Also be aware that the amount of your home office deductions is subject to limitations based on the income attributable to your use of the office. Other rules and limitations may apply. But any home office expenses that can’t be deducted because of these limitations can be carried over and deducted in later years.
Do employees qualify?
Unfortunately, the Tax Cuts and Jobs Act suspended the business use of home office deductions from 2018 through 2025 for employees. Those who receive a paycheck or a W-2 exclusively from their employers aren’t eligible for deductions, even if they’re currently working from home.
We can help you determine if you’re eligible for home office deductions and how to proceed in your situation. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
Your company’s financial statements should be transparent about any restrictions on cash. Are your reporting practices in compliance with the current accounting guidance?
Restricted cash is a separate category of “cash and cash equivalents” that isn’t available for general business operations or investments. There are many types of restricted cash.
For example, companies sometimes set aside money for a specific business purpose, such as a loan repayment, a legal retainer or a plant expansion. Similarly, if a major purchase is financed with a loan, the lender may require the borrower to maintain a minimum cash balance or a balance in a separate account as collateral against the loan. Or a business may be restricted from accessing a customer’s deposit until the terms of the contract are complete.
The balance sheet must differentiate restricted cash and cash equivalents from unrestricted amounts. The footnotes also must disclose the nature of any restrictions on cash.
Restricted cash may be classified as either a current or noncurrent asset. If it’s expected to be used within one year of the balance sheet date, the cash should be classified as a current asset. However, if it will be unavailable for use for more than a year, it should be classified as a noncurrent asset.
Statement of cash flows
Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230) — Restricted Cash, provides guidance for reporting restricted cash on the statement of cash flows. Under the guidance, transfers between cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents aren’t part of the entity’s operating, investing, and financing activities. So, details of those transfers shouldn’t be reported as cash flow activities in the statement of cash flows.
Instead, if the cash flow statement includes a reconciliation of the total cash balances for the beginning and end of the period, the amounts for restricted cash and restricted cash equivalents should be included with cash and cash equivalents. The updated guidance requires cash flow statements to report separate amounts for the changes during a reporting period of the totals for:
These amounts are typically found just before the reconciliation of net income to net cash provided by operating activities in the statement of cash flows.
Get it right
Restrictions on cash are common, but the accounting rules can sometimes be confusing. We can help you report these amounts in an accurate and transparent manner. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
If you’re like many Americans, letters from your favorite charities may be appearing in your mailbox acknowledging your 2020 donations. But what happens if you haven’t received such a letter — can you still claim a deduction for the gift on your 2020 income tax return? It depends.
What is required
To support a charitable deduction, you need to comply with IRS substantiation requirements. This generally includes obtaining a contemporaneous written acknowledgment from the charity stating the amount of the donation, whether you received any goods or services in consideration for the donation and the value of any such goods or services.
“Contemporaneous” means the earlier of:
So if you made a donation in 2020 but haven’t yet received substantiation from the charity, it’s not too late — as long as you haven’t filed your 2020 return. Contact the charity and request a written acknowledgment.
Keep in mind that, if you made a cash gift of under $250 with a check or credit card, generally a canceled check, bank statement or credit card statement is sufficient. However, if you received something in return for the donation, you generally must reduce your deduction by its value — and the charity is required to provide you a written acknowledgment as described earlier.
New deduction for non-itemizers
In general, taxpayers who don’t itemize their deductions (and instead claim the standard deduction) can’t claim a charitable deduction. Under the CARES Act, individuals who don’t itemize deductions can claim a federal income tax write-off for up to $300 of cash contributions to IRS-approved charities for the 2020 tax year. The same $300 limit applies to both unmarried taxpayers and married joint-filing couples.
Even better, this tax break was extended to cover $300 of cash contributions made in 2021 under the Consolidated Appropriations Act. The new law doubles the deduction limit to $600 for married joint-filing couples for cash contributions made in 2021.
2020 and 2021 deductions
Additional substantiation requirements apply to some types of donations. We can help you determine whether you have sufficient substantiation for the donations you hope to deduct on your 2020 income tax return — and guide you on the substantiation you’ll need for gifts you’re planning this year to ensure you can enjoy the desired deductions on your 2021 return. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com
With the competition for donation dollars fierce right now, many not-for-profits are turning to influencers — from Hollywood celebrities to politicians to blog stars — to raise awareness of their organizations and causes. But before your nonprofit solicits influencer support, there are a few things you should know.
On the plus side
If influencer marketing didn’t work, for-profit companies wouldn’t pay celebrities to tout their products on their social media accounts. These sponsors realize that influencers have ready access to the thousands, if not millions, of people who follow them online. Their followers may consider influencers credible on a wide range of topics. When an influencer promotes a nonprofit, that organization immediately assumes an air of legitimacy with his or her followers. Followers may explore the cause more thoroughly or just immediately click a link to donate.
For budget-strained nonprofits, it’s hard to beat the cost-efficiency of influencer marketing. By connecting with a charitably minded influencer, you can get the word out about your mission or programs to a mass audience at little or no expense.
Planning is critical
Like your other marketing initiatives, effective influencer marketing takes planning, preparation and continuing work. Consider these three steps:
First, find the right person. A good influencer can increase awareness and generate support and donations. The wrong one can irreparably hurt your reputation. You need to consider more than just an influencer’s number of followers. Also make sure that the person’s values and interests align with your organization’s. Keep in mind that not every influencer is an actor, athlete or performer. Journalists and authors, subject matter experts, academics and other thought leaders may have smaller audiences, but their followers might be more engaged with their areas of interest.
Second, take the time to build true relationships with your influencers. Your interactions shouldn’t simply be transactional. Establish rapport and common cause and do what you can to shine a light on the influencers’ charitable acts on your social media and elsewhere. Give them branded swag, share their successes and invite them to your events.
Finally, give your influencers the tools they need to help you. Begin by establishing expectations in writing. Lay out your respective roles and responsibilities, with timelines and suggested tactics. Also provide them with all of the information they’ll need to clearly carry your message — for example, facts about your cause, success stories, details about upcoming campaigns, graphics, photos, and links to make donations or to volunteer.
Depending on the influencers, they also might appreciate assistance drafting their posts. Remember, though, that their posts must reflect their own voices.
Don’t give up
If, despite all your planning, an influencer relationship doesn’t work out, don’t give up. You may need to find a different kind of influencer or work on a different social media platform. The potential low cost and ability to raise awareness makes influencer marketing worth the occasional obstacles. Sam Brown, CPA, Inc., Troy, Ohio, www.sbcpaohio.com