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Nonprofits: Here’s how to embrace accountability

Accounting & Assurance|October 3, 2018

To protect the organization, demonstrate openness and support the greater good, your not-for-profit needs to embrace accountability. Doing so will also help you fulfill your fiduciary responsibilities to donors, constituents and the public.

Fairness and clarity

Accountability starts by complying with all applicable laws and rules. As you carry out your organization’s initiatives, do so fairly and in the best interests of your constituents and community. Your status as a nonprofit means you’re obligated to use your resources to support your mission and benefit the community you serve. Evaluate programs accordingly, both in respect to the activities and their outcomes.

There can be no accountability without good governance, and that’s ultimately your board’s responsibility. Your board needs to understand the importance of its role and focus on the big picture — not the process-oriented details best handled at the staff or committee level.

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

Communicating with your public

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

Your nonprofit’s Form 990 also provides the public with an overview of your organization’s programs, finances, governance, compliance and compensation methods. Notably, charity watchdog groups use 990 information to rate nonprofits.

Big impact

Whether your organization is accountable — and able to communicate its accountability — can affect everything from donations to grants, hiring to volunteering and good word-of-mouth. Contact us for more information.

Could a cost segregation study help you accelerate depreciation deductions?

Tax Prep, Planning & Strategy|October 1, 2018

Businesses that acquire, construct or substantially improve a building — or did so in previous years — should consider a cost segregation study. It may allow you to accelerate depreciation deductions, thus reducing taxes and boosting cash flow. And the potential benefits are now even greater due to enhancements to certain depreciation-related breaks under the Tax Cuts and Jobs Act (TCJA).

Real property vs. tangible personal property

IRS rules generally allow you to depreciate commercial buildings over 39 years (27½ years for residential properties). Most times, you’ll depreciate a building’s structural components — such as 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 — fences, outdoor lighting and parking lots, for example — are depreciable over 15 years.

Too often, businesses allocate all or most of a building’s 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 instance — the distinction between real and personal property is obvious. But often the line between the two is 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.

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.

Depreciation break enhancements

Last year’s 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. Sec. 179 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%).

Assess the potential savings

Cost segregation studies may yield substantial benefits, but they’re not right for every business. To find out whether a study would be worthwhile for yours, contact us for help assessing the potential tax savings.

Using insurance to manage your nonprofit’s risk

Accounting & Assurance|September 26, 2018

Insurance is the cornerstone of any not-for-profit’s comprehensive risk management plan. It can’t protect your organization from every contingency, but it’s critical to protecting the people, property, funds and support you depend on.

Must-have policies

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

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

Optional coverage

Depending on your nonprofit’s operations and assets, consider such optional policies as:

• Automobile,
• Product liability,
• Fraud/employee dishonesty,
• Business interruption,
• Umbrella coverage, and
• Directors and officers liability.

Insurance also is available to cover risks associated with special events. Before purchasing a separate policy, however, check whether your nonprofit’s general liability insurance extends to special events.

Setting priorities

Because you’re likely to be working with a limited budget, prioritize the risks that pose the greatest threats and discuss with your financial and insurance advisors the kinds — and amounts — of coverage that will mitigate them. But don’t assume insurance alone will address your nonprofit’s exposure. Your objective should be to never actually need insurance benefits. To that end, put in place internal controls and other risk-avoidance policies.

We can help you establish policies that stipulate proper oversight of accounting functions by executives and board members and provide for the security of physical assets and safety of employees and nonemployees. And your insurance agent can help determine the amount of coverage that’s appropriate given the size and scope of your organization.

Businesses aren’t immune to tax identity theft

Tax Prep, Planning & Strategy|September 24, 2018

Tax identity theft may seem like a problem only for individual taxpayers. But, according to the IRS, increasingly businesses are also becoming victims. And identity thieves have become more sophisticated, knowing filing practices, the tax code and the best ways to get valuable data.

How it works

In tax identity theft, a taxpayer’s identifying information (such as Social Security number) is used to fraudulently obtain a refund or commit other crimes. Business tax identity theft occurs when a criminal uses the identifying information of a business to obtain tax benefits or to enable individual tax identity theft schemes.

For example, a thief could use an Employer Identification Number (EIN) to file a fraudulent business tax return and claim a refund. Or a fraudster may report income and withholding for fake employees on false W-2 forms. Then, he or she can file fraudulent individual tax returns for these “employees” to claim refunds.

The consequences can include significant dollar amounts, lost time sorting out the mess and damage to your reputation.

Red flags

There are some red flags that indicate possible tax identity theft. For example, your business’s identity may have been compromised if:

Your business doesn’t receive expected or routine mailings from the IRS,
You receive an IRS notice that doesn’t relate to anything your business submitted, that’s about fictitious employees or that’s related to a defunct, closed or dormant business after all account balances have been paid,
The IRS rejects an e-filed return or an extension-to-file request, saying it already has a return with that identification number — or the IRS accepts it as an amended return,
You receive an IRS letter stating that more than one tax return has been filed in your business’s name, or
You receive a notice from the IRS that you have a balance due when you haven’t yet filed a return.

Keep in mind, though, that some of these could be the result of a simple error, such as an inadvertent transposition of numbers. Nevertheless, you should contact the IRS immediately if you receive any notices or letters from the agency that you believe might indicate that someone has fraudulently used your Employer Identification Number.

Prevention tips

Businesses should take steps such as the following to protect their own information as well as that of their employees:

Provide training to accounting, human resources and other employees to educate them on the latest tax fraud schemes and how to spot phishing emails.
Use secure methods to send W-2 forms to employees.
Implement risk management strategies designed to flag suspicious communications.

Of course identity theft can go beyond tax identity theft, so be sure to have a comprehensive plan in place to protect the data of your business, your employees and your customers. If you’re concerned your business has become a victim, or you have questions about prevention, please contact us.

Leadership’s role during a nonprofit’s merger

Accounting & Assurance|September 19, 2018

If your not-for-profit is contemplating a merger or acquisition with another organization, you have a lot of work ahead of you. One of the most daunting challenges is keeping leaders focused and invested in the process. Most nonprofits are run by both board members and internal management, and this structure can bog down decision making and make transitions difficult.

5 phases

Discussions between merging nonprofits often begin a year or more before the actual integration takes place. And whether it’s a merger forming a new organization or an acquisition enlarging an existing nonprofit, leaders must make critical decisions during five phases:

1. Idea. Internal managers, and then board leadership, typically meet as a group to discuss the benefits of joining forces.

2. Formalizing. Here, the two nonprofits formalize their decision to combine. This can be achieved in a letter of intent that outlines expectations, agreed-upon roles for each organization and a timeframe. It’s in this phase that the two organizations and their leaders learn about each other and decide whether they want to go forward with the plan.

3. Development. Key leaders must be evaluated for their complementary skills and the role each might play in the new organization. Also, the board and management must develop a shared vision for the new organization. Mutual respect and trust, flexibility, and a willingness to compromise are important at this stage.

The team that works through the development phase must include representatives of all stake-holder groups. This includes board members, key management and staff, and constituents served. Involvement of all groups will result in greater buy-in and smoother integration.

4. Due diligence. Due diligence involves formal research into each of the combining organizations. Leaders ensure that financial and legal advisors have the materials they need to review and evaluate issues and potential impediments to the proposed merger.

5. Transition. Planned changes are implemented during this final phase, making it the most difficult and time-consuming for leadership. You may need to make an official name change, apply for a new tax-exempt status, communicate changes with the community and physically move locations.

All hands on deck

Your organization’s leaders should participate in evaluating the strategic potential of a merger and preparing the transition. Some of your executives and board members may have experience combining organizations. But even with such in-house expertise, your nonprofit needs to involve professionals such as accountants and attorneys in the process. Contact us for information.

Keeping a king in the castle with a well-maintained cash reserve

Tax Prep, Planning & Strategy|September 19, 2018

You’ve no doubt heard the old business cliché “cash is king.” And it’s true: A company in a strong cash position stands a much better chance of obtaining the financing it needs, attracting outside investors or simply executing its own strategic plans.

One way to ensure that there’s always a king in the castle, so to speak, is to maintain a cash reserve. Granted, setting aside a substantial amount of dollars isn’t the easiest thing to do — particularly for start-ups and smaller companies. But once your reserve is in place, life can get a lot easier.

Common metrics

Now you may wonder: What’s the optimal amount of cash to keep in reserve? The right answer is different for every business and may change over time, given fluctuations in the economy or degree of competitiveness in your industry.

If you’ve already obtained financing, your bank’s liquidity covenants can give you a good idea of how much of a cash reserve is reasonable and expected of your company. To take it a step further, you can calculate various liquidity metrics and compare them to industry benchmarks. These might include:

• Working capital = current assets – current liabilities,• Current ratio = current assets / current liabilities, and• Accounts payable turnover = cost of goods sold / accounts payable.
There may be other, more complex metrics that better apply to the nature and size of your business.

Financial forecasts

Believe it or not, many companies don’t suffer from a lack of cash reserves but rather a surplus. This often occurs because a business owner decides to start hoarding cash following a dip in the local or national economy.

What’s the problem? Substantial increases in liquidity — or metrics well above industry norms — can signal an inefficient deployment of capital.

To keep your cash reserve from getting too high, create financial forecasts for the next 12 to 18 months. For example, a monthly projected balance sheet might estimate seasonal ebbs and flows in the cash cycle. Or a projection of the worst-case scenario might be used to establish your optimal cash balance. Projections should consider future cash flows, capital expenditures, debt maturities and working capital requirements.

Formal financial forecasts provide a coherent method to building up cash reserves, which is infinitely better than relying on rough estimates or gut instinct. Be sure to compare actual performance to your projections regularly and adjust as necessary.

More isn’t always better

Just as individuals should set aside some money for a rainy day, so should businesses. But, when it comes to your company’s cash reserves, the notion that “more is better” isn’t necessarily correct. You’ve got to find the right balance. Contact us to discuss your reserve and identify your ideal liquidity metrics.

Be sure your employee travel expense reimbursements will pass muster with the IRS

Tax Prep, Planning & Strategy|September 17, 2018

Does your business reimburse employees’ work-related travel expenses? If you do, you know that it can help you attract and retain employees. If you don’t, you might want to start, because changes under the Tax Cuts and Jobs Act (TCJA) make such reimbursements even more attractive to employees. Travel reimbursements also come with tax benefits, but only if you follow a method that passes muster with the IRS.

The TCJA’s impact

Before the TCJA, unreimbursed work-related travel expenses generally were deductible on an employee’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction. However, many employees weren’t able to benefit from the deduction because either they didn’t itemize deductions or they didn’t have enough miscellaneous itemized expenses to exceed the 2% of adjusted gross income (AGI) floor that applied.

For 2018 through 2025, the TCJA suspends miscellaneous itemized deductions subject to the 2% of AGI floor. That means even employees who itemize deductions and have enough expenses that they would exceed the floor won’t be able to enjoy a tax deduction for business travel. Therefore, business travel expense reimbursements are now more important to employees.

The potential tax benefits

Your business can deduct qualifying reimbursements, and they’re excluded from the employee’s taxable income. The deduction is subject to a 50% limit for meals. But, under the TCJA, entertainment expenses are no longer deductible.

To be deductible and excludable, travel expenses must be legitimate business expenses and the reimbursements must comply with IRS rules. You can use either an accountable plan or the per diem method to ensure compliance.

Reimbursing actual expenses

An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. To qualify as “accountable,” your plan must meet the following criteria:

Payments must be for “ordinary and necessary” business expenses.
Employees must substantiate these expenses — including amounts, times and places — ideally at least monthly.
Employees must return any advances or allowances they can’t substantiate within a reasonable time, typically 120 days.

The IRS will treat plans that fail to meet these conditions as nonaccountable, transforming all reimbursements into wages taxable to the employee, subject to income taxes (employee) and employment taxes (employer and employee).

Keeping it simple

With the per diem method, instead of tracking actual expenses, you use IRS tables to determine reimbursements for lodging, meals and incidental expenses, or just for meals and incidental expenses, based on location. (If you don’t go with the per diem method for lodging, you’ll need receipts to substantiate those expenses.)

Be sure you don’t pay employees more than the appropriate per diem amount. The IRS imposes heavy penalties on businesses that routinely overpay per diems.

What’s right for your business?

To learn more about business travel expense deductions and reimbursements post-TCJA, contact us. We can help you determine whether you should reimburse such expenses and which reimbursement option is better for you.

2018 Q4 tax calendar: Key deadlines for businesses and other employers

Tax Prep, Planning & Strategy|September 13, 2018

Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2018. 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.

October 15

If a calendar-year C corporation that filed an automatic six-month extension:
- File a 2017 income tax return (Form 1120) and pay any tax, interest and penalties due.
- Make contributions for 2017 to certain employer-sponsored retirement plans.

October 31

Report income tax withholding and FICA taxes for third quarter 2018 (Form 941) and pay any tax due. (See exception below under “November 13.”)

November 13

Report income tax withholding and FICA taxes for third quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.

December 17

If a calendar-year C corporation, pay the fourth installment of 2018 estimated income taxes.

Volunteers are assets nonprofits must protect

Tax Prep, Planning & Strategy|September 13, 2018

How much are your volunteers worth? The not-for-profit advocacy group Independent Sector estimates the value of the average American volunteer at $24.69 an hour. Volunteers who perform specialized services may be even more valuable.

Whether your entire workforce is unpaid or you rely on a few volunteers to support a paid staff, you need to safeguard these assets. Here’s how.

1. Create a professional program

“Professionalizing” your volunteer program can give participants a sense of ownership and “job” satisfaction. New recruits should receive a formal orientation and participate in training sessions. Even if they’ll be contributing only a couple of hours a week or month, ask them to commit to at least a loose schedule. And as with paid staffers, volunteers should set annual performance goals. For example, a volunteer might decide to work a total of 100 hours annually or learn enough about your mission to be able to speak publicly on the subject.

If volunteers accomplish their goals, publicize the fact. And consider “promoting” those who’ve proved they’re capable of assuming greater responsibility. For example, award the job of volunteer coordinator to someone who has exhibited strong communication and organization skills.

2. Keep them engaged

A formal program won’t keep volunteers engaged if it doesn’t take advantage of their talents. What’s more, most volunteers want to know that the work they do matters. So even if they must occasionally perform menial tasks such as cleaning out animal shelter cages, you can help them understand how every activity contributes to your charity’s success.

During the training process, inventory each volunteer’s experience, education, skills and interests and ask if there’s a particular project that attracts them. Don’t just assume that they want to use the skills they already have. Many people volunteer to learn something new.

3. Make it fun

Most volunteers understand that you’ll put them to work. At the same time, they expect to enjoy coming in. So be careful not to make the same demands on volunteers that you would on employees. Also, try to be flexible when it comes to such issues as scheduling.

Because many volunteers are motivated by the opportunity to meet like-minded people, facilitate friendships. Newbies should be introduced to other volunteers and assigned to work alongside someone who knows the ropes. Also schedule on- and off-site social activities for volunteers.

4. Remember to say “thank you”

No volunteer program can be successful without frequent and effusive “thank-yous.” Verbal appreciation will do, but consider holding a volunteer thank-you event.

Is a significant portion of your wealth concentrated in a single stock?

Tax Prep, Planning & Strategy|September 6, 2018

Estate planning and investment risk management go hand in hand. After all, an estate plan is effective only if you have some wealth to transfer to the next generation. One of the best ways to reduce your investment risk is to diversify your holdings. But it’s not unusual for affluent people to end up with a significant portion of their wealth concentrated in one or two stocks.

There are many ways this can happen, including the exercise of stock options, participation in equity-based compensation programs, or receipt of stock in a merger or acquisition.

Sell the stock

To reduce your investment risk, the simplest option is to sell some or most of the stock and reinvest in a more diversified portfolio. This may not be an option, however, if you’re not willing to pay the resulting capital gains taxes, if there are legal restrictions on the amount you can sell and the timing of a sale, or if you simply wish to hold on to the stock.

To soften the tax hit, consider selling the stock gradually over time to spread out the capital gains. Or, if you’re charitably inclined, contribute the stock to a charitable remainder trust (CRT). The trust can sell the stock tax-free, reinvest the proceeds in more diversified investments, and provide you with a current tax deduction and a regular income stream. (Be aware that CRT payouts are taxable — usually a combination of ordinary income, capital gains and tax-free amounts.)

Keep the stock

To reduce your risk without selling the stock:

Use a hedging technique. For example, purchase put options to sell your shares at a set price.
Buy other securities to rebalance your portfolio. Consider borrowing the funds you need, using the concentrated stock as collateral.
Invest in a stock protection fund. These funds allow investors who own concentrated stock positions in different industries to pool their risks, essentially insuring their holdings against catastrophic loss.

If you have questions about specific assets in your estate, contact us. We can help you preserve as much of your estate as possible so that you have more to pass on to your loved ones.

Nonprofits: Here’s how to embrace accountability

Could a cost segregation study help you accelerate depreciation deductions?

Using insurance to manage your nonprofit’s risk

Businesses aren’t immune to tax identity theft

Leadership’s role during a nonprofit’s merger

Keeping a king in the castle with a well-maintained cash reserve

Be sure your employee travel expense reimbursements will pass muster with the IRS

2018 Q4 tax calendar: Key deadlines for businesses and other employers

Volunteers are assets nonprofits must protect

Is a significant portion of your wealth concentrated in a single stock?

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