If your top executive were to step down tomorrow, would your not-for-profit know how to make a smooth leadership transition or would your boat suddenly be rudderless? Research by the nonprofit BoardSource has found that only 27% of charitable organizations have written succession plans. Most nonprofits, therefore, face an uncertain future — one that could include lost funding, program disruption and even an early demise.
Fortunately, creating a succession plan isn’t as difficult as you might think. An experienced advisor can guide you through the process. But there are several points for you and your board to keep in mind as you establish policies for replacing leaders.
Don’t make assumptions
Ideally, any succession will be planned and allow for time to identify and recruit a successor and move that person into the job. If you don’t already, start developing employees who can move up the ladder when an executive director or other senior manager leaves.
However, promoting from within can be difficult for some organizations, particularly smaller ones with limited “bench strength.” What’s more, your nonprofit may require an executive director who’s already experienced in running a nonprofit or comes with specific skills. So you can’t rule out hiring an outsider.
Indeed, don’t assume that your next executive needs to be as similar as possible to the outgoing one. Your nonprofit and its constituencies may change over time. Succession planning provides a great opportunity to reevaluate your strategies and identify new qualities that will be important going forward.
Another thing to keep in mind: Not all successions are planned. A sudden departure due to illness or death can be particularly challenging for the staff and other stakeholders left behind. Outline policies for communicating with donors, clients and the press if a leadership emergency arises, as well as steps your board should take to put in place a temporary leader and find a permanent replacement.
Start with a strong organization
Your succession plan will only be as effective as the organization that makes it. Among other things, you need a functional board, dependable funding sources, well-run programs and a dedicated staff that can handle change. Solid systems and well-documented procedures can help you leverage organizational knowledge and keep your nonprofit running smoothly during leadership transitions. Contact us for help planning for succession and to strengthen your current operations.
Don’t let the holiday rush keep you from taking some important steps to reduce your 2019 tax liability. You still have time to execute a few strategies, including:
1. Buying assets. Thinking about purchasing new or used heavy vehicles, heavy equipment, machinery or office equipment in the new year? Buy it and place it in service by December 31, and you can deduct 100% of the cost as bonus depreciation.
Although “qualified improvement property” (QIP) — generally, interior improvements to nonresidential real property — doesn’t qualify for bonus depreciation, it’s eligible for Sec. 179 immediate expensing. And QIP now includes roofs, HVAC, fire protection systems, alarm systems and security systems placed in service after the building was placed in service.
You can deduct as much as $1.02 million for QIP and other qualified assets placed in service before January 1, not to exceed your amount of taxable income from business activity. Once you place in service more than $2.55 million in qualifying property, the Sec. 179 deduction begins phasing out on a dollar-for-dollar basis. Additional limitations may apply.
2. Making the most of retirement plans. If you don’t already have a retirement plan, you still have time to establish a new plan, such as a SEP IRA, 401(k) or profit-sharing plans (the deadline for setting up a SIMPLE IRA to make contributions for 2019 tax purposes was October 1, unless your business started after that date). If your circumstances, such as your number of employees, have changed significantly, you also should consider starting a new plan before January 1.
Although retirement plans generally must be started before year-end, you usually can deduct any contributions you make for yourself and your employees until the due date of your tax return. You also might qualify for a tax credit to offset the costs of starting a plan.
3. Timing deductions and income. If your business operates on a cash basis, you can significantly affect your amount of taxable income by accelerating your deductions into 2019 and deferring income into 2020 (assuming you expect to be taxed at the same or a lower rate next year).
For example, you could put recurring expenses normally paid early in the year on your credit card before January 1 — that way, you can claim the deduction for 2019 even though you don’t pay the credit card bill until 2020. In certain circumstances, you also can prepay some expenses, such as rent or insurance and claim them in 2019.
As for income, wait until close to year-end to send out invoices to customers with reliable payment histories. Accrual-basis businesses can take a similar approach, holding off on the delivery of goods and services until next year.
Proceed with caution
Bear in mind that some of these tactics could adversely impact other factors affecting your tax liability, such as the qualified business income deduction. Contact us to make the most of your tax planning opportunities.
State law typically specifies the minimum number of directors a not-for-profit must have on its board. But so long as organizations fulfill that requirement, it’s up to them to determine how many total board members they need. Several guidelines can help you arrive at the right number.
Small vs. large
Both small and large boards come with perks and drawbacks. For example, smaller boards allow for easier communication and greater cohesiveness among the members. Scheduling is less complicated, and meetings tend to be shorter and more focused.
Several studies have indicated that group decision making is most effective when the group size is five to eight people. But boards on the small side of this range may lack the experience or diversity necessary to facilitate healthy deliberation and debate. What’s more, members may feel overworked and burn out easily.
Burnout is less likely with a large board where each member shoulders a smaller burden, including when it comes to fundraising. Large boards may include more perspectives and a broader base of professional expertise — for example, financial advisors, community leaders and former clients.
On the other hand, larger boards can lead to disengagement because the members may not feel they have sufficient responsibilities or a voice in discussions and decisions. Larger boards also require more staff support.
What you should weigh
If you’re assembling a board or thinking about resizing, consider:
Downsizing harder than upsizing
If you decide a larger board is in order, recruit new members. Trimming your board is a trickier proposition. For starters, you might need to change your bylaws. Generally, it’s best to set a range for board size in the bylaws, rather than a precise number.
Your bylaws already might call for staggered terms, which makes paring down simpler. As terms end, don’t replace members. Or establish an automatic removal process in which members are removed for missing a specified number of meetings.
An engaging experience
To successfully recruit and retain committed board members, you need to offer an engaging experience. Maintaining an appropriately sized board that makes the most of their talents is the first step.
Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2020. 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.
According to the Society for Human Resource Management, 47% of companies offer a community volunteer program for employees. Chief Executives for Corporate Purpose has found that large companies are even more likely to sponsor volunteer activities: 61% offer paid-release time volunteer programs or a structured corporate volunteer program.
If your not-for-profit suffers from a chronic volunteer shortage or has had to put off large projects for lack of helping hands, such corporate volunteer partnerships can be a boon. Teaming up with a well-known company can also raise your nonprofit’s profile with potential donors and the media. And employees who participate may decide to become permanent volunteers or financial supporters.
Finding a match
The best volunteer partnerships generally are those where the nonprofit’s mission and the company’s core business correlate. For example, an athletic clothing manufacturer is a perfect match for an afterschool soccer league.
Many businesses seek one-day volunteer opportunities that can accommodate all of their employees. If your organization is painting the walls of schools, serving free meals to the needy or setting up for a fundraising event, short-term assistance from an army of volunteers can be a lifesaver.
However, you shouldn’t create work where it doesn’t exist, particularly if coming up with activities or managing volunteers will put a strain on staff resources. Also be wary when companies offer volunteers on short notice. To be successful, corporate volunteer days take planning. For example, you may need to arrange such logistical details as meals or prepare training instructions and educational materials.
If you must turn down an eager corporate volunteer, do so carefully. Explain how the offer may, in fact, cost your nonprofit time and money. Then propose other volunteer opportunities.
Group volunteer days aren’t the only way to take advantage of employees who want to help. Many companies provide paid time for staff to volunteer for the charity of their choice. Other companies make financial contributions to organizations where employees volunteer.
To find companies with volunteer programs, check with the Points of Light Foundation (pointsoflight.org), VolunteerMatch (volunteermatch.org) or regional groups. Once you have a corporate partner, make sure you dedicate time to building the relationship. Think beyond a one-day volunteer event and try to gain an ongoing commitment, such as quarterly — and possibly some financial support, too.
With Thanksgiving behind us, the holiday season is in full swing. At this time of year, your business may want to show its gratitude to employees and customers by giving them gifts or hosting holiday parties. It’s a good idea to understand the tax rules associated with these expenses. Are they tax deductible by your business and is the value taxable to the recipients?
Customer and client gifts
If you make gifts to customers and clients, the gifts are deductible up to $25 per recipient per year. For purposes of the $25 limit, you don’t need to include “incidental” costs that don’t substantially add to the gift’s value, such as engraving, gift wrapping, packaging or shipping. Also excluded from the $25 limit is branded marketing collateral — such as small items imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4.
The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (for example, a gift basket for all team members of a customer to share) as long as they’re “reasonable.”
In general, anything of value that you transfer to an employee is included in his or her taxable income (and, therefore, subject to income and payroll taxes) and deductible by your business. But there’s an exception for noncash gifts that constitute a “de minimis” fringe benefit.
These are items small in value and given infrequently that are administratively impracticable to account for. Common examples include holiday turkeys or hams, gift baskets, occasional sports or theater tickets (but not season tickets), and other low-cost merchandise.
De minimis fringe benefits aren’t included in your employee’s taxable income yet they’re still deductible by your business. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts. However, many businesses use an informal cutoff of $75.
Important: Cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income and subject to payroll tax withholding regardless of how small and infrequent.
Throwing a holiday party
Under the Tax Cuts and Jobs Act, certain deductions for business-related meals were reduced and the deduction for business entertainment was eliminated. However, there’s an exception for certain recreational activities, including holiday parties.
Holiday parties are fully deductible (and excludible from recipients’ income) so long as they’re primarily for the benefit of non-highly-compensated employees and their families. If customers, and others also attend, holiday parties may be partially deductible.
Spread good cheer
Contact us if you have questions about giving holiday gifts to employees or customers or throwing a holiday party. We can explain the tax rules.
A hypothetical not-for-profit staffer named Britney had maxed out her personal credit cards. So when her car needed repairs, she reached for her employer’s card. She reasoned that she would come up with the money to pay the bill before her boss ever saw a statement. Britney didn’t come up with the money. But lucky for her, her boss didn’t review the card statement that month. When Britney needed to buy holiday gifts, she reached for her work card again — and again. By the time her boss finally noticed the illicit charges, Britney had spent more than $5,000.
This kind of credit card misuse or fraud is more common in nonprofits than you may think. But if you write and enforce a strong card use policy at your organization, you can help prevent Britney’s and her boss’s mistakes.
Who needs one?
Your policy should start with who has the right to a card. Nonprofits commonly issue cards to their executive directors, program directors and office managers (or other employees responsible for buying supplies). Before issuing a card to other staffers, consider whether they really need it. Most can pay out of pocket and submit reimbursement requests. However, if employees travel or entertain donors regularly on your nonprofit’s behalf, it may make sense to give them cards.
Just ensure that cardholders understand the rules. Explicitly say (even if it seems obvious) that they can’t use the card for personal expenses, and list prohibited uses such as cash advances and electronic cash transfers, as well as charges over a specified amount. State that reimbursement for returns of goods or services must be credited directly to the card account. Employees should never accept cash or refunds directly.
What’s management’s role?
Manager involvement is essential to helping prevent credit card abuse. Require employees to seek preapproval prior to incurring any credit card charge. Stress that unauthorized purchases (and related late fees and interest) will become the employee’s responsibility. Employees should be required to provide documentation (such as itemized receipts) to their authorizing supervisor for review.
Supervisors need to indicate their approval of the charges by a signature and date on the receipts or on a standardized expense form. Your accounting department should reconcile monthly credit card statements, and the statements should be reviewed by an executive or board member.
How do you enforce it?
Make sure staffers understand the possible consequences of violating your credit card policy, including employment termination and criminal prosecution. To ensure there’s no misunderstanding, require employees to acknowledge that they’ve read the policy and agree to follow it in writing before they receive a card. Contact us if you have any questions.
If your company faces the need to “remediate” or clean up environmental contamination, the money you spend can be deductible on your tax return as ordinary and necessary business expenses. Of course, you want to claim the maximum immediate income tax benefits possible for the expenses you incur.
These expenses may include the actual cleanup costs, as well as expenses for environmental studies, surveys and investigations, fees for consulting and environmental engineering, legal and professional fees, environmental “audit” and monitoring costs, and other expenses.
Current deductions vs. capitalized costs
Unfortunately, every type of environmental cleanup expense cannot be currently deducted. Some cleanup costs must be capitalized. But, generally, cleanup costs are currently deductible to the extent they cover:
Maximize the tax breaks
In addition to federal tax deductions, there may be state or local tax incentives involved in cleaning up contaminated property. The tax treatment for the expenses can be complex. If you have environmental cleanup expenses, contact us so we can help plan your efforts to maximize the deductions available.
Accounting for contributions and grants has often proven complicated for not-for-profits, especially when they come with donor-imposed conditions. But 2018 guidance from the Financial Accounting Standards Board (FASB) provided some much-needed clarification of earlier instructions.
Traditionally, nonprofits have taken varying approaches to characterizing grants and similar contracts as exchange transactions (also known as reciprocal transactions) or contributions (nonreciprocal transactions). The new guidance makes the process relatively simple. To determine how to treat a grant or similar contract, assess whether the “provider” receives commensurate value for the assets it’s transferring. If so, treat the grant or contract as an exchange transaction.
If the provider doesn’t receive commensurate value, determine whether the asset transfer is a payment from a third-party payer for an existing transaction between you and an identified customer (for example, payments made under Medicare). If it is, the transaction isn’t a contribution, and other accounting guidance would apply. If it isn’t, the transaction is accounted for as a contribution.
Distinguishing between conditional and unconditional contributions has been the other main challenge for nonprofits. But the new rules stipulate that a conditional contribution includes:
Already in effect
The FASB’s Accounting Standards Update No. 2018-08 already affects most nonprofits. It takes effect for most organizations that are recipients of funds for annual reporting periods starting after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The rules generally take effect one year later for organizations that are resource providers.
Note that, as a result of this guidance, you may find yourself accounting for more grants and similar contracts as contributions than you have in the past. If you aren’t sure what this means for your financial statements, loan covenants and other matters, contact us.
A month after the new year begins, your business may be required to comply with rules to report amounts paid to independent contractors, vendors and others. You may have to send 1099-MISC forms to those whom you pay nonemployee compensation, as well as file copies with the IRS. This task can be time consuming and there are penalties for not complying, so it’s a good idea to begin gathering information early to help ensure smooth filing.
There are many types of 1099 forms. For example, 1099-INT is sent out to report interest income and 1099-B is used to report broker transactions and barter exchanges. Employers must provide a Form 1099-MISC for nonemployee compensation by January 31, 2020, to each noncorporate service provider who was paid at least $600 for services during 2019. (1099-MISC forms generally don’t have to be provided to corporate service providers, although there are exceptions.)
A copy of each Form 1099-MISC with payments listed in box 7 must also be filed with the IRS by January 31. “Copy A” is filed with the IRS and “Copy B” is sent to each recipient.
There are no longer any extensions for filing Form 1099-MISC late and there are penalties for late filers. The returns will be considered timely filed if postmarked on or before the due date.
A few years ago, the deadlines for some of these forms were later. But the earlier January 31 deadline for 1099-MISC was put in place to give the IRS more time to spot errors on tax returns. In addition, it makes it easier for the IRS to verify the legitimacy of returns and properly issue refunds to taxpayers who are eligible to receive them.
Hopefully, you’ve collected W-9 forms from independent contractors to whom you paid $600 or more this year. The information on W-9s can be used to help compile the information you need to send 1099-MISC forms to recipients and file them with the IRS. Here’s a link to the Form W-9 if you need to request contractors and vendors to fill it out: https://bit.ly/2NQvJ5O.
Form changes coming next year
In addition to payments to independent contractors and vendors, 1099-MISC forms are used to report other types of payments. As described above, Form 1099-MISC is filed to report nonemployment compensation (NEC) in box 7. There may be separate deadlines that report compensation in other boxes on the form. In other words, you may have to file some 1099-MISC forms earlier than others. But in 2020, the IRS will be requiring “Form 1099-NEC” to end confusion and complications for taxpayers. This new form will be used to report 2020 nonemployee compensation by February 1, 2021.
Help with compliance
But for nonemployee compensation for 2019, your business will still use Form 1099-MISC. If you have questions about your reporting requirements, contact us.