Is your not-for-profit overpaying unemployment tax? Many employers are and don’t know it. Here’s how to find out and possibly reduce unemployment costs.
The burden is on employers to ensure unemployment charges are accurate and to seek repayment if they believe they’ve been overcharged due to errors.
First, make sure you’ve kept the state up-to-date on new hires and other employment events. Then perform periodic audits of benefit statements to uncover possible instances of overcharging, such as:
• Duplicate charges for the same period,
• Charges assessed during a waiting period, or
• Sums in excess of the approved benefit amount.
Although your state agency may be responsible for inaccuracies, it’s also possible that former workers are falsifying claims. For example, claimants may not report that they have other sources of income or that they’ve found a new job. If you suspect this type of fraud, notify your state agency so it can investigate. By monitoring unemployment costs as closely and regularly as you would other expenses, you may be able to rein in — or at least better estimate — payouts.
It’s also critical to participate in your state agency’s decisions about awarding or denying benefits to claimants. If you disagree with decisions, appeal them.
Become a reimbursing employer
Many 501(c)(3) organizations have the option of becoming a “reimbursing employer.” This means that, instead of paying periodic unemployment taxes to the state, you reimburse the state only for actual claims paid out to former employees. The advantage is that the actual benefits you pay often will be lower than state unemployment tax rates.
However, there are risks. States generally mandate dollar-for-dollar payment from reimbursing employers as soon as unemployment benefit claims are made. Your organization could face a temporary cash crunch or even more serious financial hardship if it needs to pay out more in claims than it budgeted for.
If your nonprofit chooses to become a reimbursing employer, you can handle the reimbursement process yourself or use a third-party reimburser, such as a membership association. Third-party reimbursers can save your nonprofit significant time and effort by handling administrative work and monitoring claims for accuracy. Also, they usually offer trust accounts to help with cash management.
By monitoring statements for accuracy and ensuring all claims are legitimate, you may be able to reduce unemployment tax costs. Also be sure to weigh the pros and cons of becoming a reimbursing employer. Contact us for more information. © 2019
A variety of tax-related limits affecting businesses are annually indexed for inflation, and many have gone up for 2019. Here’s a look at some that may affect you and your business:
Section 179 expensing:
Limit: $1.02 million (up from $1 million)
Phaseout: $2.55 million (up from $2.5 million)
Income-based phase-ins for certain limits on the Sec. 199A qualified business income deduction:
Married filing jointly: $321,400-$421,400 (up from $315,000-$415,000)
Married filing separately: $160,725-$210,725 (up from $157,500-$207,500)
Other filers: $160,700-$210,700 (up from $157,500-$207,500)
Employee contributions to 401(k) plans: $19,000 (up from $18,500)
Catch-up contributions to 401(k) plans: $6,000 (no change)
Employee contributions to SIMPLEs: $13,000 (up from $12,500)
Catch-up contributions to SIMPLEs: $3,000 (no change)
Combined employer/employee contributions to defined contribution plans (not including catch-ups): $56,000 (up from $55,000)
Maximum compensation used to determine contributions: $280,000 (up from $275,000)
Annual benefit for defined benefit plans: $225,000 (up from $220,000)
Compensation defining “highly compensated employee”: $125,000 (up from $120,000) Compensation defining “key employee”: $180,000 (up from $175,000)
Other employee benefits
Qualified transportation fringe-benefits employee income exclusion: $265 per month (up from $260)
Health Savings Account contributions:
Individual coverage: $3,500 (up from $3,450)
Family coverage: $7,000 (up from $6,900)
Catch-up contribution: $1,000 (no change)
Flexible Spending Account contributions:
Health care: $2,700 (up from $2,650)
Dependent care: $5,000 (no change)
Additional rules apply to these limits, and they are only some of the limits that may affect your business. Please contact us for more information. © 2019
An operating reserve is an unrestricted and relatively liquid portion of a not-for-profit’s net assets. Securing this reserve for use in emergencies or simply when your budget falls short is critical to your organization’s security and long-term survival.
Building an adequate operating reserve takes time and should be regarded as a continuous project. Your board of directors needs to determine your nonprofit’s policy on building an operating reserve, the desired fund amount and the circumstances under which it 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.
The right amount
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 would benefit from a larger reserve. Likewise, if personnel costs make up a significant part of your expense budget, your organization could use the cushion a healthy operating reserve provides.
On the other hand, there are nonprofits that need less in reserve — for example, those with diverse funding. Three months of reserves is typically considered a minimum accumulation. Six months of reserves provides greater security. A three-to-six month reserve would 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 flexibility. For example, it might give your nonprofit funds to pursue a new program initiative that’s not fully funded, or to leverage debt funding for needed facilities or equipment.
Note, however, that it may be a mistake to accumulate more than a year’s worth of expenses in reserve, unless it’s designated by your board for specific purposes. Donors and community members want to see nonprofits put funds to work, not hoard them.
Consider all factors
As your nonprofit establishes its operating reserve, it’s important to consider all factors that affect your organization’s finances. What’s right for one organization might not be right for another. Contact us for help calculating the appropriate reserve amount for your nonprofit. © 2019
This year, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business increased by 3.5 cents, to the highest level since 2008. As a result, you might be able to claim a larger deduction for vehicle-related expense for 2019 than you can for 2018.
Actual costs vs. mileage rate
Businesses can generally deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases depreciation write-offs on vehicles are subject to certain limits that don’t apply to other types of business assets.
The mileage rate comes into play when taxpayers don’t want to keep track of actual vehicle-related expenses. With this approach, you don’t have to account for all your actual expenses, although you still must record certain information, such as the mileage for each business trip, the date, and the destination.
The mileage rate approach also is popular with businesses that reimburse employees for business use of their personal automobiles. Such reimbursements can help attract and retain employees who’re expected to drive their personal vehicle extensively for business purposes. Why? Under the Tax Cuts and Jobs Act, employees can no longer deduct unreimbursed employee business expenses, such as business mileage, on their individual income tax returns.
But be aware that you must comply with various rules. If you don’t, you risk having the reimbursements considered taxable wages to the employees.
The 2019 rate
Beginning on January 1, 2019, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 58 cents per mile. For 2018, the rate was 54.5 cents per mile. The business cents-per-mile rate is adjusted annually. It is based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. Occasionally, if there is a substantial change in average gas prices, the IRS will change the mileage rate midyear.
There are certain situations where you can’t use the cents-per-mile rate. It depends in part on how you’ve claimed deductions for the same vehicle in the past or, if the vehicle is new to your business this year, whether you want to take advantage of certain first-year depreciation breaks on it.
As you can see, there are many variables to consider in determining whether to use the mileage rate to deduct vehicle expenses. Contact us if you have questions about tracking and claiming such expenses in 2019 — or claiming them on your 2018 income tax return. © 2019
Not-for-profits that direct and benefit from the actions of their volunteers can be held accountable if those individuals are harmed or harm others on the job. Lawsuits involving volunteers often arise from allegations of negligence or intentional misconduct, even when volunteers act outside the scope of their prescribed duties. Your organization needs to take steps to limit risk associated with unpaid workers.
Volunteers as employees
Your volunteer recruitment process should be almost as formal and structured as your paid employee hiring process. Develop job descriptions for open positions that outline the nature of the work, any required skills or experience, and possible risks the job presents to the volunteer or your nonprofit. Once you have volunteer candidates, screen them according to the risks that might be involved based on your nonprofit’s mission, programs and likely volunteer activities.
Some positions will pose few risks. For those, 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 — should involve more rigorous screening. This might include criminal history and credit report checks and verification of driver’s licenses, certifications or degrees.
Training and performance plans
Once volunteers are on board, provide training, supervision and, if necessary, discipline. Hold an orientation session to explain your nonprofit’s mission and policies. After volunteers have begun working for you, continue active supervision to verify that they understand expectations.
To encourage professionalism and responsibility in your volunteers, consider devising performance plans that include goals — and rewards for achieving them. Such plans can also provide you with a framework to evaluate and dismiss volunteers who may be putting your nonprofit at risk by, for example, failing to follow safety procedures.
Role of insurance
No risk reduction plan is complete without insurance coverage. In addition to general liability, consider supplemental policies that address specific types of exposure such as medical malpractice or sexual misconduct.
It’s also a good idea to have legal advisors periodically review policies and procedures pertaining to volunteers. Attorneys and financial advisors can help you determine whether your organization is doing all it can to reduce risks. © 2018
The dawning of 2019 means the 2018 income tax filing season will soon be upon us. After year end, it’s generally too late to take action to reduce 2018 taxes. Business owners may, therefore, want to shift their focus to assessing whether they’ll likely owe taxes or get a refund when they file their returns this spring, so they can plan accordingly. With the biggest tax law changes in decades — under the Tax Cuts and Jobs Act (TCJA) — generally going into effect beginning in 2018, most businesses and their owners will be significantly impacted. So, refreshing yourself on the major changes is a good idea.
Taxation of pass-through entities
These changes generally affect owners of S corporations, partnerships and limited liability companies (LLCs) treated as partnerships, as well as sole proprietors:
- Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%
- A new 20% qualified business income deduction for eligible owners (the Section 199A deduction)
- Changes to many other tax breaks for individuals that will impact owners’ overall tax liability
Taxation of corporations
These changes generally affect C corporations, personal service corporations (PSCs) and LLCs treated as C corporations:
- Replacement of graduated corporate rates ranging from 15% to 35% with a flat corporate rate of 21%
- Replacement of the flat PSC rate of 35% with a flat rate of 21%
- Repeal of the 20% corporate alternative minimum tax (AMT)
Tax break positives
These changes generally apply to both pass-through entities and corporations:
- Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets
- Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
- A new tax credit for employer-paid family and medical leave
Tax break negatives
These changes generally also apply to both pass-through entities and corporations:
- A new disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
- New limits on net operating loss (NOL) deductions
- Elimination of the Section 199 deduction (not to be confused with the new Sec.199A deduction), which was for qualified domestic production activities and commonly referred to as the “manufacturers’ deduction”
- A new rule limiting like-kind exchanges to real property that is not held primarily for sale (generally no more like-kind exchanges for personal property)
- New limitations on deductions for certain employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation
Preparing for 2018 filing
Keep in mind that additional rules and limits apply to the rates and breaks covered here. Also, these are only some of the most significant and widely applicable TCJA changes; you and your business could be affected by other changes as well. Contact us to learn precisely how you might be affected and for help preparing for your 2018 tax return filing — and beginning to plan for 2019, too. © 2018