Outside financial audits may seem like an extravagance to not-for-profits working to contain costs and focus on their mission. But undergoing regular audits allows your organization to identify risks early and act quickly to prevent problems. Independent audits also provide valuable reassurance to donors. Fortunately, you can reduce the cost of external audits with good preparation.

Draft an RFP

Start by drafting a request for proposal (RFP) from prospective auditors. The RFP should describe your organization, its programs, major funding sources and the type of service you need. Once you select an auditor, the firm will provide an engagement letter outlining the scope of services to be performed and assign responsibility for various tasks to your staff or the auditors.

The preaudit meeting with your auditors comes next. Finance staff and management should attend, as well as representatives from your board of directors or audit committee. Those involved will draw up a timeline for the work, and the auditors can answer any questions about the information they’ll need.

During this meeting, inform the auditors of any changes in your nonprofit’s activities since you first met. Also communicate new or eliminated programs, new grant reporting requirements, and changes to internal controls and staff.

Assemble documents

Collecting and organizing the documentation auditors need before they arrive saves them time and saves you money. Usually auditors will provide a list of documents — such as financial statements, accounting records, physical inventories and investment-related documents — and the date when each item is needed. Keeping accurate, complete and up-to-date records throughout the year will make this step much easier. And you’ll benefit from staying abreast of changes to the Financial Accounting Standards Board’s rules for nonprofits.

Auditors also need relevant organizational records such as articles of incorporation; financial policies; exemption letters; board meeting minutes; grant agreements, pledges and other funding documents; contracts; leases; and insurance policies. They usually appreciate having a current organizational chart, too. You should gather support for the footnote disclosures, as well. This includes documentation of significant estimates, pending litigation, restricted contributions and related-party transactions.

Anticipate issues

Don’t wait for auditors to find problems and ask questions. You can expedite the process and reduce costs when you identify and address issues before they’re raised by auditors.

After making year-end closing entries, reconcile all your schedules and workpapers to the trial balance and review for obvious anomalies. Double-check manual journal entries, accrual calculations, entries that require estimates, and in-kind donation valuations. Compare actual figures with budgeted ones and be ready to explain any significant variances.

Process can be affirming

Annual independent audits don’t have to be stressful. If you devote proper time and attention to accounting throughout the year, you may even find audits affirming. Contact us with your audit questions.

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A financial power of attorney can be a valuable planning tool. The most common type is the durable power of attorney, which allows someone (the agent) to act on the behalf of another person (the principal) even if the person becomes mentally incompetent or otherwise incapacitated. It authorizes the agent to manage the principal’s investments, pay bills, file tax returns and handle other financial matters if the principal is unable to do so as a result of illness, injury, advancing age or other circumstances.

However, a disadvantage of a power of attorney is that it may be susceptible to abuse by scam artists, dishonest caretakers or greedy relatives.

Watch out for your loved ones

A broadly written power of attorney gives an agent unfettered access to the principal’s bank and brokerage accounts, real estate, and other assets. In the right hands, this can be a huge help in managing a person’s financial affairs when the person isn’t able to do so him- or herself. But in the wrong hands, it provides an ample opportunity for financial harm.

Many people believe that, once an agent has been given a power of attorney, there’s little that can be done to stop the agent from misappropriating money or property. Fortunately, that’s not the case.

If you suspect that an elderly family member is a victim of financial abuse by the holder of a power of attorney, contact an attorney as soon as possible. An agent has a fiduciary duty to the principal, requiring him or her to act with the utmost good faith and loyalty when acting on the principal’s behalf. So your relative may be able to sue the agent for breach of fiduciary duty and obtain injunctive relief, damages (including punitive damages) and attorneys’ fees.

Take steps to prevent abuse

If you or a family member plans to execute a power of attorney, there are steps you can take to minimize the risk of abuse:

• Make sure the agent is someone you know and trust.
• Consider using a “springing” power of attorney, which doesn’t take effect until certain conditions are met, such as a physician’s certification that the principal has become incapacitated.
• Use a “special” or “limited” power of attorney that details the agent’s specific powers. (The drawback of this approach is that it limits the agent’s ability to deal with unanticipated circumstances.)
• Appoint a “monitor” or other third party to review transactions executed by the agent and require the monitor’s approval of transactions over a certain dollar amount.
• Provide that the appointment of a guardian automatically revokes the power of attorney.

Some state laws contain special requirements, such as a separate rider, to authorize an agent to make large gifts or conduct other major transactions.

Act now

If you’re pursuing legal remedies against an agent, the sooner you proceed, the greater your chances of recovery. And if you wish to execute or revoke a power of attorney for yourself, you need to do so while you’re mentally competent. Contact us with questions.

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Many taxpayers make charitable gifts — because they’re generous and they want to save money on their federal tax bills. But with the tax law changes that went into effect a couple years ago and the many rules that apply to charitable deductions, you may no longer get a tax break for your generosity.

Are you going to itemize?

The Tax Cuts and Jobs Act (TCJA), signed into law in 2017, didn’t put new limits on or suspend the charitable deduction, like it did with many other itemized deductions. Nevertheless, it reduces or eliminates the tax benefits of charitable giving for many taxpayers.

Itemizing saves tax only if itemized deductions exceed the standard deduction. Through 2025, the TCJA significantly increases the standard deduction. For 2020, it is $24,800 for married couples filing jointly (up from $24,400 for 2019), $18,650 for heads of households (up from $18,350 for 2019), and $12,400 for singles and married couples filing separately (up from $12,200 for 2019).

Back in 2017, these amounts were $12,700, $9,350, $6,350 respectively. The much higher standard deduction combined with limits or suspensions on some common itemized deductions means you may no longer have enough itemized deductions to exceed the standard deduction. And if that’s the case, your charitable donations won’t save you tax.

To find out if you get a tax break for your generosity, add up potential itemized deductions for the year. If the total is less than your standard deduction, your charitable donations won’t provide a tax benefit.

You might, however, be able to preserve your charitable deduction by “bunching” donations into alternating years. This can allow you to exceed the standard deduction and claim a charitable deduction (and other itemized deductions) every other year.

What is the donation deadline?

To be deductible on your 2019 return, a charitable gift must have been made by December 31, 2019. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” The delivery date depends in part on what you donate and how you donate it. For example, for a check, the delivery date is the date you mailed it. For a credit card donation, it’s the date you make the charge.

Are there other requirements?

If you do meet the rules for itemizing, there are still other requirements. To be deductible, a donation must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions.

And there are substantiation rules to prove you made a charitable gift. For a contribution of cash, check, or other monetary gift, regardless of amount, you must maintain a bank record or a written communication from the organization you donated to that shows its name, plus the date and amount of the contribution. If you make a charitable contribution by text message, a bill from your cell provider containing the required information is an acceptable substantiation. Any other type of written record, such as a log of contributions, isn’t sufficient.

Do you have questions?

We can answer any questions you may have about the deductibility of charitable gifts or changes to the standard deduction and itemized deductions.

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The deductibility of most charitable gifts hasn’t changed since passage of the Tax Cuts and Jobs Act, but some recordkeeping requirements have. Helping your donors who itemize deductions understand the rules and benefits of their gifts can strengthen your not-for-profit’s ties with them — and may help increase contributions.

Allowable deductions

Generally, donors can deduct total contributions of money or property up to 60% of their adjusted gross income. The amount of the allowable deduction varies, but cash donations are 100% deductible if the donor maintains proof (such as bank records or thank-you letters from your nonprofit).

Donations of ordinary-income property usually are limited to the donor’s tax basis in the property (usually the purchase price). Specifically, donors can deduct the property’s fair market value (FMV) less the amount that would be ordinary income or short-term capital gains if they sold the property at FMV. Property is ordinary-income property when donors would recognize ordinary income or short-term capital gains if they sold it at FMV on the date of donation.

When FMV applies

Donors of capital gains property usually can deduct the property’s FMV. Property is considered capital gains property if the donor would have recognized long-term capital gains had he or she sold it at FMV on the donation date. This includes capital assets held more than one year. But in some circumstances, such as when the donation is intellectual property, only the donor’s tax basis of the property may be deducted.

If your nonprofit uses tangible donated property for its tax-exempt purpose — for example, a museum displays a donated painting — the donor can deduct its fair market value. But if the property is put to an unrelated use (a hospital sells the donated painting) the deduction is limited to the donor’s basis in the property.

For donations of property, the substantiation requirements depend on the deductible value. If someone donates an item worth:

• Less than $250, a receipt is sufficient.
• Between $250 and $500, the donor must have contemporaneous written acknowledgment.
• Between $501 and $5,000, the donor must also file Form 8283.
• More than $5,000, the donor must obtain a qualified appraisal.

Other donations

In general, only donations of the full ownership interest in property are deductible. The right to use property is considered a contribution of less than the donor’s entire interest in the property. But there are some situations in which a donor can receive a deduction for a partial-interest donation, such as with a qualified conservation contribution.

Donors can’t claim a deduction for the donation of their professional services. However, related out-of-pocket costs, such as supplies and miles driven, are deductible as charitable contributions.

Look out for their interests

Take time to make sure your donors understand the tax implications of their gifts. It can help them avoid unpleasant surprises down the road — and keep them loyal to your nonprofit. Contact us with questions.

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Married couples often wonder whether they should file joint or separate tax returns. The answer depends on your individual tax situation.

It generally depends on which filing status results in the lowest tax. But keep in mind that, if you and your spouse file a joint return, each of you is “jointly and severally” liable for the tax on your combined income. And you’re both equally liable for any additional tax the IRS assesses, plus interest and most penalties. This means that the IRS can come after either of you to collect the full amount.

Although there are provisions in the law that offer relief, they have limitations. Therefore, even if a joint return results in less tax, you may want to file separately if you want to only be responsible for your own tax.

In most cases, filing jointly offers the most tax savings, especially when the spouses have different income levels. Combining two incomes can bring some of it out of a higher tax bracket. For example, if one spouse has $75,000 of taxable income and the other has just $15,000, filing jointly instead of separately can save $2,512.50 for 2020.

Filing separately doesn’t mean you go back to using the “single” rates that applied before you were married. Instead, each spouse must use “married filing separately” rates. They’re less favorable than the single rates.

However, there are cases when people save tax by filing separately. For example:

One spouse has significant medical expenses. For 2019 and 2020, medical expenses are deductible only to the extent they exceed 7.5% of adjusted gross income (AGI). If a medical expense deduction is claimed on a spouse’s separate return, that spouse’s lower separate AGI, as compared to the higher joint AGI, can result in larger total deductions.

Some tax breaks are only available on a joint return. The child and dependent care credit, adoption expense credit, American Opportunity tax credit and Lifetime Learning credit are only available to married couples on joint returns. And you can’t take the credit for the elderly or the disabled if you file separately unless you and your spouse lived apart for the entire year. You also may not be able to deduct IRA contributions if you or your spouse were covered by an employer retirement plan and you file separate returns. You also can’t exclude adoption assistance payments or interest income from series EE or Series I savings bonds used for higher education expenses.

Social Security benefits may be taxed more. Benefits are tax-free if your “provisional income” (AGI with certain modifications plus half of your Social Security benefits) doesn’t exceed a “base amount.” The base amount is $32,000 on a joint return, but zero on separate return (or $25,000 if the spouses didn’t live together for the whole year).

No hard and fast rules

The decision you make on your federal tax return may affect your state or local income tax bill, so the total tax impact should be compared. There’s often no simple answer to whether a couple should file separate returns. A number of factors must be examined. We can look at your tax bill jointly and separately. Contact us to prepare your return or if you have any questions.

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