Normally when appreciated business assets such as real estate are sold, tax is owed on the appreciation. But there’s a way to defer this tax: a Section 1031 “like kind” exchange. However, the Tax Cuts and Jobs Act (TCJA) reduces the types of property eligible for this favorable tax treatment.

What is a like-kind exchange?

Section 1031 of the Internal Revenue Code allows you to defer gains on real or personal property used in a business or held for investment if, instead of selling it, you exchange it solely for property of a “like kind.” Thus, the tax benefit of an exchange is that you defer tax and, thereby, have use of the tax savings until you sell the replacement property.

This technique is especially flexible for real estate, because virtually any type of real estate will be considered to be of a like kind, as long as it’s business or investment property. For example, you can exchange a warehouse for an office building, or an apartment complex for a strip mall.

Deferred and reverse exchanges

Although a like-kind exchange may sound quick and easy, it’s relatively rare for two owners to simply swap properties. You’ll likely have to execute a “deferred” exchange, in which you engage a qualified intermediary (QI) for assistance.

When you sell your property (the relinquished property), the net proceeds go directly to the QI, who then uses them to buy replacement property. To qualify for tax-deferred exchange treatment, you generally must identify replacement property within 45 days after you transfer the relinquished property and complete the purchase within 180 days after the initial transfer.

An alternate approach is a “reverse” exchange. Here, an exchange accommodation titleholder (EAT) acquires title to the replacement property before you sell the relinquished property. You can defer capital gains by identifying one or more properties to exchange within 45 days after the EAT receives the replacement property and, typically, completing the transaction within 180 days.

Changes under the TCJA

There had been some concern that tax reform would include the elimination of like-kind exchanges. The good news is that the TCJA still generally allows tax-deferred like-kind exchanges of business and investment real estate.

But there’s also some bad news: For 2018 and beyond, the TCJA eliminates tax-deferred like-kind exchange treatment for exchanges of personal property. However, prior-law rules that allow like-kind exchanges of personal property still apply if one leg of an exchange was completed by December 31, 2017, but one leg remained open on that date. Keep in mind that exchanged personal property must be of the same asset or product class.

Complex rules

The rules for like-kind exchanges are complex, so these arrangements present some risks. If, say, you exchange the wrong kind of property or acquire cash or other non-like-kind property in a deal, you may still end up incurring a sizable tax hit. If you’re exploring a like-kind exchange, contact us. We can help you ensure you’re in compliance with the rules.

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Nonprofits don’t face the same government regulations or public scrutiny as for-profit public companies do. But that doesn’t mean your board can afford to get slack about financial governance. Donors and watchdog groups pay close attention to organizations’ Forms 990 and the media is quick to pounce on rumors of fraud in the nonprofit sector. That’s why you should regularly evaluate your board’s financial oversight (if you aren’t already doing so) and recruit new members or outside advisors with financial expertise if necessary.

Assigning responsibility

Your board needs to ensure that your nonprofit has reliable operating cash flow, avoids unnecessary risk and adheres to commonly accepted accounting policies. Start by focusing on activities that your finance and audit committees have the most direct influence on. For example, does your nonprofit have an operating reserves policy and are your reserves adequate? Does your outside auditor always issue clean reports? If not, how have auditor concerns been addressed?

If you spot negative patterns, dig deeper. In most cases, board members aren’t intentionally negligent. They may not have the time or energy that your organization’s financial governance requires or the background to successfully tackle the complex tasks they’ve been assigned.

Staffing committees

If you’re having trouble finding qualified board members to sit on financial committees, you’re not alone. But it’s important to have at least a few qualified people on your board. Good candidates can interpret financial statements and have a working knowledge of accounting principles. They should also be able to recognize nonfinancial indicators that measure the success of your mission, such as paid hours vs. volunteer hours.

Professionals such as CPAs, bankers and company controllers or CFOs usually fit the bill. But you might also look to attorneys who specialize in financial transactions or insurance professionals who have extensive risk-management experience.

Once you’ve found new board members who meet your criteria, train them on your organization’s issues. You may need to explain such concepts as the differences between restricted and unrestricted funds and accounting rules for pledges, endowments and charitable gift annuities.

Hiring an advisor

If you’re having trouble finding qualified individuals to staff your finance or audit committee, consider contracting with a CPA to act as your board’s independent advisor. A CPA can provide financial expertise and act as a liaison between your finance or audit committee and the full board or staff. Contact us for help.

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Has your not-for-profit’s program lineup remained unchanged for at least a couple of years? If so, consider using the tradition of spring cleaning to review your offerings. Some of your programs might be due for replacement.

Clear out the closets

Many nonprofits keep programs long after they’ve stopped working. Instead of relying on old assumptions about their effectiveness, perform new research. Start by surveying participants, members, donors, employees, volunteers and community leaders about which of your nonprofit’s programs are the most — and least — effective and why.

You may get mixed responses regarding the same program, so consider their source. Employees and volunteers who work directly with program participants are more likely to know if your current efforts are off target than is a donor who attends a fundraising event once a year.

Right tool for the job

If you don’t already have goals for each program, you need to set them. Also put in place an evaluation system with metrics that are strategic, realistic and timely. For example, a charity that provides tutoring to high school students in low-income neighborhoods might measure the program’s success by considering exam and class grades and graduation rates as well as the students’ and teachers’ feedback.

Apply several measures, including subjective ones, before deciding to cut or fund a program. Numerical data might suggest that a program isn’t worth the money spent on it, but those who benefit from the program may be so vocal about its success that eliminating it could harm your reputation.

Shiny and newer

It’s usually easier to identify obsolete programs than to decide on new ones. If one of your programs is clearly ineffective and another is wildly exceeding expectations, the decision to redeploy funds is simple.

Keep in mind that new programs can be variations of old ones, but they must better serve your basic mission, values and goals. Also, no matter how much good programs do, they can’t be successful if they overspend. For every new program, make a tight budget and stick to it. You might want to start small and, if your soft launch gets positive results, simply revise your budget.

It takes a team

Even if it’s clear to you and your staff which programs must go, some stakeholders may object to your proposals. Handle these individuals — particularly donors — with care. Let us know how we can help.

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When it comes to income tax returns, April 15 (actually April 17 this year, because of a weekend and a Washington, D.C., holiday) isn’t the only deadline taxpayers need to think about. The federal income tax filing deadline for calendar-year partnerships, S corporations and limited liability companies (LLCs) treated as partnerships or S corporations for tax purposes is March 15. While this has been the S corporation deadline for a long time, it’s only the second year the partnership deadline has been in March rather than in April.

Why the deadline change?

One of the primary reasons for moving up the partnership filing deadline was to make it easier for owners to file their personal returns by the April filing deadline. After all, partnership (and S corporation) income passes through to the owners. The earlier date allows owners to use the information contained in the pass-through entity forms to file their personal returns.

What about fiscal-year entities?

For partnerships with fiscal year ends, tax returns are now due the 15th day of the third month after the close of the tax year. The same deadline applies to fiscal-year S corporations. Under prior law, returns for fiscal-year partnerships were due the 15th day of the fourth month after the close of the fiscal tax year.

What about extensions?

If you haven’t filed your calendar-year partnership or S corporation return yet, you may be thinking about an extension. Under the current law, the maximum extension for calendar-year partnerships is six months (until September 17, 2018, for 2017 returns). This is up from five months under prior law. So the extension deadline is the same — only the length of the extension has changed. The extension deadline for calendar-year S corporations also is September 17, 2018, for 2017 returns.

Whether you’ll be filing a partnership or an S corporation return, you must file for the extension by March 15 if it’s a calendar-year entity.

When does an extension make sense?

Filing for an extension can be tax-smart if you’re missing critical documents or you face unexpected life events that prevent you from devoting sufficient time to your return right now.

But keep in mind that, to avoid potential interest and penalties, you still must (with a few exceptions) pay any tax due by the unextended deadline. There may not be any tax liability from the partnership or S corporation return. If, however, filing for an extension for the entity return causes you to also have to file an extension for your personal return, you need to keep this in mind related to the individual tax return April 17 deadline.

Have more questions about the filing deadlines that apply to you or avoiding interest and penalties? Contact us.

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Cloud computing promises lower technology costs and greater efficiency and productivity. Yet many nonprofits have yet to move to the cloud, possibly because their staffs are smaller and their IT expertise is limited. Fortunately, cloud computing is a simple concept that’s easy to adopt.

Remote control

Cloud computing, also known as “software as a service,” uses a network of remote third-party servers made available online. Rather than relying on your organization’s own computers or server, you remotely share software and storage to process, manage and share information.

For many nonprofits, the greatest advantage of using cloud services is lower costs. The technology generally eliminates pricey contracts and per-user licensing fees. Instead, cloud customers pay a monthly subscription fee or are billed based on actual usage. What’s more, service providers update their offerings and provide security patches on an ongoing basis.

Another benefit is the scalability of cloud services. You can scale up when you need more storage or data capacity and scale back when you need less. Also, because cloud services aren’t limited to a physical location and can be accessed from anywhere, they make it easy for colleagues, board members and volunteers to collaborate on projects. Finally, cloud services can make it easier to track and report funds over multiple time periods and to analyze budgets, expenses and cash flows. They can also produce specialized data reports.

Rest assured

Most reputable services boast stronger security, including firewalls, authorization restrictions and data encryption, than your own nonprofit could afford to put in place on its own. And cloud services typically offer continuous data backup and disaster recovery capabilities.

That said, your nonprofit can’t possibly have as much control over a cloud system as it would of its own infrastructure. So if control is a priority, you need to weigh it against the benefits of cloud computing.

Vendor options

You’ll want to look for a service that:

Cost is another major consideration when selecting a vendor. But your nonprofit may qualify for discounts or even gratis services.

Get satisfaction

Before leaping into the cloud, be sure to research your options and get recommendations from other nonprofits and from IT experts. Contact us for help finding a cost-effective cloud provider.

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