As in the for-profit world, sometimes not-for-profits need to spend money to make money. This is particularly true when it comes to fundraisers. At the same time, you need to resist the temptation to overspend or your special event may not raise the amount you were hoping for. Here’s how to stay on budget.
Focus on your goal
Start with your total fundraising goal, which should include funds received from event attendees, sponsors and any pre-event appeals. Your financial objective should be realistic, based on your nonprofit’s experience with previous fundraising events. But consider a stretch goal, say from 5% to 20% higher than last year, to energize staff and motivate supporters.
Then, estimate expenses for such items as facility rental, food and beverages, prizes, invitations and decorations, and speaker and entertainment fees. You may also need to pay for permits — for example, to charge sales tax or host a raffle — and might want to buy special event insurance coverage.
Look closely at your list for expenses that can either be eliminated or cut. Say that you held last year’s event at a luxury hotel. This year you might consider a new venue that’s willing to discount the space for the opportunity to host your community’s movers and shakers. Even if you receive sponsorships and discounts, be sure to include the original expenses in your budget should you need to pay the full amount for a future event.
And don’t be afraid to try something different. If you usually host a black-tie affair with a multicourse meal, consider holding a more casual event this year, such as a cocktail party with a silent auction. As long as the event is well planned and publicized, attendees will probably be just as generous.
Importance of sponsors
Good sponsors are critical. Not only can they help defray expenses with donations of goods and services, but they can also raise your nonprofit’s profile by introducing your name and mission to a new audience. But be careful not to promise too much in sponsor benefits, such as free advertising or endorsements of the sponsor’s products — it could lead to unrelated business income tax problems.
Target well-known names with a connection to your nonprofit. For example, a pet food company makes an ideal sponsor for an animal welfare charity. A successful self-empowerment author might be a great fit for an association meeting of salespeople.
As you plan your special event, the most important thing is to keep a laser focus on costs. Although you want your fundraiser to be fun and memorable, the real purpose of the event is to raise money. And you probably won’t do that if you lose track of expenses.
The IRS uses Audit Techniques Guides (ATGs) to help IRS examiners get ready for audits. 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, child care providers and veterinary medicine. Others address issues that frequently arise in audits, such as executive compensation, passive activity losses and capitalization of tangible property.
How they’re used
IRS auditors need to examine all 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 may 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.
For example, one ATG focuses specifically on businesses that deal in cash, such as auto repair shops, car washes, check-cashing operations, gas stations, laundromats, liquor stores, restaurants., bars, and salons. The “Cash Intensive Businesses” ATG tells auditors “a financial status analysis including both business and personal financial activities should be done.” It explains techniques such as:
Auditors are obviously looking for cash-intensive businesses that underreport their cash receipts but how this is uncovered varies. For example, when examining a restaurants or bar, auditors are told to ask about net profits compared to the industry average, spillage, pouring averages and tipping.
Learn the red flags
Although ATGs were created to help IRS examiners ferret out 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. Contact us if you have questions about your business. For a complete list of ATGs, visit the IRS website here: https://bit.ly/2rh7umD
Your not-for-profit has likely grown and evolved since it was founded. Have your bylaws kept pace? Bylaws are the rules and principles that define your organization — and, if you haven’t revisited them recently, they may not be as effective as they could be.
Rules and procedures
Typically, bylaws cover such topics as the broad charitable purpose of an organization. They also include rules about the size and function of the board; election terms and duties of directors and officers; and basic guidelines for voting, holding meetings, electing directors and appointing officers.
Without being too specific, your bylaws should provide procedures for resolving internal disputes, such as the removal and replacement of a board member. If you’re not familiar with the bylaws, you should get up to speed fast.
What if you need to change your organization’s bylaws? First, make sure you have the authority to do so. Most bylaws contain an amendment paragraph that defines the procedures for changing them. Consider creating a bylaw committee made up of a cross-section of your membership or constituency. This committee will be responsible for reviewing existing bylaws and recommending revisions to your board or members for a full vote.
The bylaw committee needs to focus on your nonprofit’s mission, not its organizational politics. A bylaw change is appropriate only if you want to change your nonprofit’s governing structure, not its operating procedures.
If your nonprofit is incorporated, ensure that any proposed bylaw changes conform to your articles of incorporation. For example, the “purposes” clause in your bylaws must match that in your articles of incorporation. Any new provision or language changes in your bylaws contrary to the objectives and ideals included in your incorporation documents may invalidate the revisions.
Bylaw provisions that suggest you’ve strayed from your original mission also can jeopardize your federal tax-exempt status. So make sure your bylaw amendments are consistent with that tax-exempt purpose. If changes are “structural or operational,” report the amendments on your Form 990.
Know what they contain
Your board and staff need to be familiar with exactly what your nonprofit’s bylaws contain — and what they don’t. If they’re incomplete or don’t reflect your organization’s current mission, it’s time to revise them. Questions? Contact us.
There’s good news about the Section 179 depreciation deduction for business property. The election has long provided a tax windfall to businesses, enabling them to claim immediate deductions for qualified assets, instead of taking depreciation deductions over time. And it was increased and expanded by the Tax Cuts and Jobs Act (TCJA). Even better, the Sec. 179 deduction isn’t the only avenue for immediate tax write-offs for qualified assets. Under the 100% bonus depreciation tax break provided by the TCJA, the entire cost of eligible assets placed in service in 2019 can be written off this year.
Sec. 179 basics
The Sec. 179 deduction applies to tangible personal property such as machinery and equipment purchased for use in a trade or business, and, if the taxpayer elects, qualified real property. It’s generally available on a tax year basis and is subject to a dollar limit.
The annual deduction limit is $1.02 million for tax years beginning in 2019, subject to a phaseout rule. Under the rule, the deduction is phased out (reduced) if more than a specified amount of qualifying property is placed in service during the tax year. The amount is $2.55 million for tax years beginning in 2019. (Note: Different rules apply to heavy SUVs.)
There’s also a taxable income limit. If your taxable business income is less than the dollar limit for that year, the amount for which you can make the election is limited to that taxable income. However, any amount you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable dollar limit, the phaseout rule, and the taxable income limit).
In addition to significantly increasing the Sec. 179 deduction, the TCJA also expanded the definition of qualifying assets to include depreciable tangible personal property used mainly in the furnishing of lodging, such as furniture and appliances.
The TCJA also expanded the definition of qualified real property to include qualified improvement property and some improvements to nonresidential real property, such as roofs; heating, ventilation and air-conditioning equipment; fire protection and alarm systems; and security systems.
Bonus depreciation basics
With bonus depreciation, businesses are allowed to deduct 100% of the cost of certain assets in the first year, rather than capitalize them on their balance sheets and gradually depreciate them. (Before the TCJA, you could deduct only 50% of the cost of qualified new property.)
This break applies to qualifying assets placed in service between September 28, 2017, and December 31, 2022 (by December 31, 2023, for certain assets with longer production periods and for aircraft). After that, the bonus depreciation percentage is reduced by 20% per year, until it’s fully phased out after 2026 (or after 2027 for certain assets described above).
Bonus depreciation is now allowed for both new and used qualifying assets, which include most categories of tangible depreciable assets other than real estate.
Important: When both 100% first-year bonus depreciation and the Sec. 179 deduction are available for the same asset, it’s generally more advantageous to claim 100% bonus depreciation, because there are no limitations on it.
Maximize eligible purchases
These favorable depreciation deductions will deliver tax-saving benefits to many businesses on their 2019 returns. You need to place qualifying assets in service by December 31. Contact us if you have questions, or you want more information about how your business can get the most out of the deductions.
If you’re considering buying or selling a business — or you’re in the process of a merger or acquisition — it’s important that both parties report the transaction to the IRS 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.
When buying 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:
The IRS may inspect the forms that are filed to see if the buyer and the seller use different allocations. If the IRS finds that different allocations are used, auditors may dig deeper and the investigation could expand beyond just the transaction. So, it’s in your best interest 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 complicated. 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 postacquisition results, consult with us before finalizing any transaction.
Not-for-profit organizations don’t lose as much to occupational fraud as for-profit businesses do. According to the Association of Certified Fraud Examiners’ (ACFE’s) 2018 Report to the Nations, nonprofits lost a median amount of $75,000 during the 21-month study period, compared with $164,000 for private for-profit companies. Yet few nonprofit budgets can afford a $75,000 shortfall or the bad publicity associated with fraud. Here’s how nonprofits open the door to fraud — and how your organization can shut it.
How thieves slip through
The core of any organization’s fraud-prevention program is strong internal controls — policies that govern everything from accepting cash to signing checks to training staff to performing regular audits. Most nonprofits have at least a rudimentary set of internal controls, but employees bent on fraud can usually find gaps.
Nonprofits typically devote the largest chunk of their budgets to programming, and can be stingy about allocating dollars to enforcing internal controls. This can be especially problematic if 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, these members may lack financial oversight experience and the knowledge to spot irregularities.
Trust is another Achilles’ heel for many nonprofits. Organizations often regard their staff and dedicated volunteers as family. They may allow managers to override internal controls and let volunteers accept cash donations without oversight — both very risky activities.
Fortify your defenses
Check tampering, expense reimbursement fraud and billing schemes are the three most common types of employee theft found in nonprofit organizations. But proper segregation of duties — for example, assigning account reconciliation and fund depositing to two different staff members — is a relatively easy and effective method of preventing such fraud. Strong management oversight and confidential fraud hotlines are also associated with lower losses due to employee theft.
Indeed, when it comes to employees, you should trust but verify. Conduct background checks on all prospective staff members, as well as volunteers who will 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 suspect fraud in your organization, contact us for help investigating it.
The IRS’s staffing shortages have been well publicized and audits of individuals have decreased in the past several years. But it’s a mistake to assume that the agency has stopped scrutinizing not-for-profits and conducting audits when it deems necessary. If your organization receives an audit letter, you need to know what the process involves and how you can help resolve it as quickly as possible.
Igniting a spark
An audit begins with the initial contact via letter from the IRS and continues until a closing letter is issued. Before closing an audit, an officer of your nonprofit, your CPA and the IRS agent will discuss the agent’s conclusions at a closing conference. Both the conference and letter will explain your appeal rights.
Audits can cover many areas. For example, the IRS may want to learn whether your organization has filed all returns and forms as required by law. Or it might delve into whether your activities have been consistent with your tax-exempt purpose, or whether unrelated business income tax or employment taxes were properly paid.
The igniting spark for an audit might be an IRS examination initiative or project, or complaints to the agency about potential noncompliance. In general, Form 990 plays a strong role in the selection process. For instance, the IRS may apply risk models to your organization’s Form 990 data related to governance or the incidence of fraud.
Types of audits
If your initial contact letter schedules an agent to visit, the IRS is conducting a field audit, which falls into one of two categories: 1) general program exam, which typically is conducted by a single IRS agent; or 2) Team Examination Program audit, which focuses on large, complex organizations and may involve a team of examiners.
If, on the other hand, your initial IRS letter asks you to deliver documents to an IRS office by mail, the agency is conducting a correspondence audit. An agent generally will perform the audit via letters and phone calls to your officers or representative. If a correspondence audit grows more complex or your nonprofit doesn’t respond to requests, it can turn into a field audit.
The IRS might also contact you to announce a compliance check. This isn’t an audit; it’s a determination of whether your organization is adhering to record-keeping and information reporting requirements. However, a compliance check can lead to an audit.
Handle it right
Whether you’re facing a field or correspondence audit, don’t try to handle the matter yourself. Contact us for help. © 2019
The Tax Cuts and Jobs Act (TCJA) has changed the landscape for business taxpayers. That’s because the law introduced a flat 21% federal income tax rate for C corporations. Under prior law, profitable C corporations paid up to 35%.
The TCJA also cut individual income tax rates, which apply to sole proprietorships and pass-through entities, including partnerships, S corporations, and LLCs (treated as partnerships for tax purposes). However, the top rate dropped from 39.6% to only 37%.
These changes have caused many business owners to ask: What’s the optimal entity choice for me?
Entity tax basics
Before the TCJA, conventional wisdom was that most small businesses should be set up as sole proprietorships or pass-through entities to avoid the double taxation of C corporations. A C corporation pays entity-level income tax and then shareholders pay tax on dividends — and on capital gains when they sell the stock. For pass-through entities, there’s no federal income tax at the entity level.
Although C corporations are still potentially subject to double taxation, their current 21% tax rate helps make up for it. This issue is further complicated, however, by another tax provision that allows noncorporate owners of pass-through entities to take a deduction equal to as much as 20% of qualified business income (QBI), subject to various limits. But, unless Congress extends it, that deduction is available only through 2025.
Many factors to consider
The best entity choice for your business depends on many factors. Keep in mind that one form of doing business might be more appropriate at one time (say, when you’re launching), while another form might be better after you’ve been operating for a few years. Here are a few examples:
For example, one often-cited advantage of certain entities is that they allow a business to be treated as an entity separate from the owner. A properly structured corporation can protect you from business debts. But to ensure that the corporation is treated as a separate entity, it’s important to observe various formalities required by the state. These include filing articles of incorporation, adopting by-laws, electing a board of directors, holding organizational meetings and keeping minutes.
The best long-term choice
The TCJA has far-reaching effects on businesses. Contact us to discuss how your business should be set up to lower its tax bill over the long run. But remember that entity choice is easier when starting up a business. Converting from one type of entity to another adds complexity. We can help you examine the ins and outs of making a change.