To properly fulfill their fiduciary duties, your not-for-profit’s board needs certain information. And it’s up to the executive director and managers to ensure they have it. This doesn’t mean you have to share every internal email, memo or phone message. Board members are busy and you don’t want to bog them down with superfluous reading material. However, there are several types of information you must share so that they can make informed decisions.
Financial data and filings
The first is financial information. To fully understand your nonprofit’s position, the board must receive copies of your Form 990. The board president or treasurer should review this document and approve it before it’s filed.
The board also must get the results of any audit you’ve conducted, salary information for key staff and monthly and quarterly financial reports showing income and expenses. If your organization provides directors and officers insurance, provide proof to board members.
Strategic information includes reports on your nonprofit’s work, such as how programs are being carried out and how they’re used, progress on event timelines, and membership statistics. If your organization collects information from the audience it serves through formal or informal means, provide at least an executive summary of your findings to your board.
Occasionally sharing with the board articles that relate to your nonprofit’s mission, locations or audiences also may be useful.
Board member info
To help foster teamwork and commitment to the cause, ask that members share brief bios and other relevant background information. Also publicly share thank-yous when board members make special efforts — whether those efforts are individual (such as securing an event sponsor) or group (performing due diligence on a new executive director).
How do you know whether a piece of information should be shared with your board? Ultimately, if it’s something that will help them serve your nonprofit, it’s something you should share. Contact us with any questions you may have.
The right entity choice can make a difference in the tax bill you owe for your business. Although S corporations can provide substantial tax advantages over C corporations in some circumstances, there are plenty of potentially expensive tax problems that you should assess before making the decision to convert from a C corporation to an S corporation.
Here’s a quick rundown of four issues to consider:
LIFO inventories. C corporations that use last-in, first-out (LIFO) inventories must pay tax on the benefits they derived by using LIFO if they convert to S corporations. The tax can be spread over four years. This cost must be weighed against the potential tax gains from converting to S status.
Built-in gains tax. Although S corporations generally aren’t subject to tax, those that were formerly C corporations are taxed on built-in gains (such as appreciated property) that the C corporation has when the S election becomes effective, if those gains are recognized within five years after the conversion. This is generally unfavorable, although there are situations where the S election still can produce a better tax result despite the built-in gains tax.
Passive income. S corporations that were formerly C corporations are subject to a special tax. That tax kicks in if their passive investment income (including dividends, interest, rents, royalties, and stock sale gains) exceeds 25% of their gross receipts, and the S corporation has accumulated earnings and profits carried over from its C corporation years. If that tax is owed for three consecutive years, the corporation’s election to be an S corporation terminates. You can avoid the tax by distributing the accumulated earnings and profits, which would be taxable to shareholders. Or you might want to avoid the tax by limiting the amount of passive income.
Unused losses. If your C corporation has unused net operating losses, they can’t be used to offset its income as an S corporation and can’t be passed through to shareholders. If the losses can’t be carried back to an earlier C corporation year, it will be necessary to weigh the cost of giving up the losses against the tax savings expected to be generated by the switch to S status.
These are only some of the factors to consider when a business switches from C to S status. For example, shareholder-employees of S corporations can’t get all of the tax-free fringe benefits that are available with a C corporation. And there may be issues for shareholders who have outstanding loans from their qualified plans. These factors have to be taken into account in order to understand the implications of converting from C to S status.
Contact us. We can explain how these factors will affect your company’s situation and come up with strategies to minimize taxes.
Some of your not-for-profit’s communications are of interest only to a select group of your supporters. But your organization’s annual report is for all stakeholders — donors, grantmakers, clients, volunteers, watchdog groups and the government.
Some report elements are nonnegotiable, such as financial statements. But you also have plenty of creative license to make your report engaging and memorable for its wide-ranging audience.
First things first
Most nonprofit annual reports consist of several standard sections, starting with the Chairman of the Board’s letter. This executive summary should provide an overview of your nonprofit’s activities, accomplishments and anything else worth highlighting. Next is the directors and officers list. The biggest task here is to make sure all names, professional affiliations and designations are accurate and spelled correctly.
Then there’s the financial information section, which generally is subdivided into three sections:
Meat of the matter
A “Description” is the other major section in a typical annual report, and it’s where you can — and should — get creative. First, explain your organization’s mission, goals and strategies for reaching those goals. Then, describe who benefits from your organization’s services and how they contribute to the community.
So that your report does justice to this work, include client testimonials where those you’ve helped tell their own story in a personal way. Or create a timeline that enables readers to see the progress you’ve made toward a long-term goal.
Your annual report should be as visually exciting as it is interesting to read, with engaging photos, arresting graphics and innovative layouts. Make sure your graphic designer has experience with annual reports — preferably those of nonprofits — and understands the brand, values and image your organization wants to convey.
Even if you’re proud of the finished product, make sure you survey stakeholders. Or convene a small focus group to find out what your report’s readers liked — and what they didn’t find as effective. Then apply these insights to next year’s effort. Contact us for more information.
Is your business depreciating over a 30-year period the entire cost of constructing the building that houses your operation? If so, you should consider a cost segregation study. It may allow you to accelerate depreciation deductions on certain items, thereby reducing taxes and boosting cash flow. And under current law, the potential benefits of a cost segregation study are now even greater than they were a few years ago due to enhancements to certain depreciation-related tax breaks.
Business buildings generally have a 39-year depreciation period (27.5 years for residential rental properties). Most times, you depreciate a building’s structural components, including 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, such as fences, outdoor lighting and parking lots, are depreciable over 15 years.
Often, businesses allocate all or most of their buildings’ 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 example — the distinction between real and personal property is obvious. But the line between the two is frequently 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.
Identifying and substantiating costs
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.
Speedier depreciation tax breaks
The Tax Cuts and Jobs Act (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, which 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%).
Making favorable depreciation changes
Fortunately, it isn’t too late to get the benefit of speedier depreciation for items that were incorrectly assumed to be part of your building for depreciation purposes. You don’t have to amend your past returns (or meet a deadline for claiming tax refunds) to claim the depreciation that you could have already claimed. Instead, you can claim that depreciation by following procedures, in connection with the next tax return that you file, that will result in “automatic” IRS consent to a change in your accounting for depreciation.
Cost segregation studies can yield substantial benefits, but they’re not right for every business. We must judge whether a study will result in overall tax savings greater than the costs of the study itself. To find out whether this would be worthwhile for you, contact us.
If your not-for-profit owns its own facility, it likely will have more control of work space than if you lease. However, ownership carries risks — and leasing can provide several advantages. If you’re trying to make a buy-or-lease decision, be sure to weigh the following factors.
Equity in owning
Buying a facility allows your nonprofit to build equity, and it can stabilize your cash flow and presence in the community. Owning can also be important if you want to accommodate special needs and configure and equip your space to certain specifications. For example, a physical therapy center might need to buy a facility because it plans to construct a swimming pool and locker rooms.
But when buying, it’s easy to bite off more than you can chew. Some organizations fail to project negative scenarios such as a funding drop or local government assessments. And there’s the risk of plummeting resale values. If you bought, what would happen if the neighborhood surrounding your building changed or if it were no longer near your client base?
Flexibility in leasing
Leasing office space or a facility can offer more flexibility than ownership. Say you’re uncertain about your client base and your organization could experience substantial growth or decline. It’s far easier to move when your lease expires than to sell real estate.
Perhaps you can secure an attractive long-term lease, one that guarantees only modest rent increases, and allows (and sometimes finances) reconfiguring the space to meet your needs. Another lease plus: Most repair headaches — and expenses — will be your landlord’s.
On the other hand, monthly rent can take a big bite from your budget with little return, and the cost can increase dramatically when it’s time to renew your lease. Fire insurance and real estate taxes also can be the renter’s responsibility if you have what’s called “a triple net lease.”
Sometimes it’s difficult to decide whether to lease or buy the space you need for operations. In such cases, cost analysis can help you make an informed decision.
On the buying side, consider the property’s:
Given the escalating cost of employee health care benefits, your business may be interested in providing some of these benefits through an employer-sponsored Health Savings Account (HSA). For eligible individuals, HSAs offer a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs. Here are the key tax benefits:
Who is eligible?
To be eligible for an HSA, an individual must be covered by a “high deductible health plan.” For 2019, a “high deductible health plan” is one with an annual deductible of at least $1,350 for self-only coverage, or at least $2,700 for family coverage. For self-only coverage, the 2019 limit on deductible contributions is $3,500. For family coverage, the 2019 limit on deductible contributions is $7,000. Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits cannot exceed $6,750 for self-only coverage or $13,500 for family coverage.
An individual (and the individual’s covered spouse, as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2019 of up to $1,000.
If an employer contributes to the HSA of an eligible individual, the employer’s contribution is treated as employer-provided coverage for medical expenses under an accident or health plan and is excludable from an employee’s gross income up to the deduction limitation. There’s no “use-it-or-lose-it” provision, so funds can be built up for years. An employer that decides to make contributions on its employees’ behalf must generally make comparable contributions to the HSAs of all comparable participating employees for that calendar year. If the employer doesn’t make comparable contributions, the employer is subject to a 35% tax on the aggregate amount contributed by the employer to HSAs for that period.
HSA distributions can be made to pay for qualified medical expenses, which generally mean those expenses that would qualify for the medical expense itemized deduction. They include expenses such as doctors’ visits, prescriptions, chiropractic care and premiums for long-term care insurance.
If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it’s made after reaching age 65, or in the event of death or disability.
As you can see, HSAs offer a flexible option for providing health care coverage, but the rules are somewhat complex. Contact us if you’d like to discuss offering this benefit to your employees.
Who would defraud a kids’ organization? The answer, unfortunately, is that trusted adults sometimes steal from not-for-profits benefiting children. Youth sports leagues and teams, for example, are ripe for fraud. Cash transactions are common, and coaches and board members usually are volunteers with little accountability.
If you or your children are involved in a youth sports league, here’s what you can do to ensure that its funds support the kids, not thieves.
By far the most important step leagues can take is to segregate duties. This means that no single individual receives, records and deposits funds coming in, pays bills and reconciles bank statements.
So one person might handle deposits and payments, another would receive and reconcile bank statements and a third would monitor the budget. Also, every payment (or at least payments over a certain threshold) should be signed by two individuals. If your league has credit or debit cards, someone who isn’t an authorized card user should be assigned to review the statements.
Some simple steps
Other procedures can help prevent fraud. For example, if your league still uses paper registrations and accepts payment by cash or check, look into electronic payment options. Cash can be pocketed in the blink of an eye, and checks can be diverted to thieves’ own accounts. But with online registration, payments are deposited directly into the league’s account.
Also, monitor your league’s treasurer. People in this position are the most likely youth sports league officials to commit fraud because they have the easiest access to funds and the ability to cover their tracks. No one person should stay in the treasurer position for more than a couple of years. If funds are available, your league might consider hiring a part-time bookkeeper who will report directly to the board.
The treasurer should submit a report to the board of directors for every board meeting, with bank statements attached. And your board should receive and review financial reports at least quarterly — including when the league isn’t in season.
What fraud perpetrators hope
You may have a hard time believing that anyone in your community would steal from a youth organization. But that’s just what fraud perpetrators hope you’ll think. So put some basic fraud controls in place; then sit back and enjoy the game! Contact us if you have any questions.
These days, most businesses need a website to remain competitive. It’s an easy decision to set one up and maintain it. But determining the proper tax treatment for the costs involved in developing a website isn’t so easy.
That’s because the IRS hasn’t released any official guidance on these costs yet. Consequently, you must apply existing guidance on other costs to the issue of website development costs.
Hardware and software
First, let’s look at the hardware you may need to operate a website. The costs involved fall under the standard rules for depreciable equipment. Specifically, once these assets are up and running, you can deduct 100% of the cost in the first year they’re placed in service (before 2023). This favorable treatment is allowed under the 100% first-year bonus depreciation break.
In later years, you can probably deduct 100% of these costs in the year the assets are placed in service under the Section 179 first-year depreciation deduction privilege. However, Sec. 179 deductions are subject to several limitations.
For tax years beginning in 2019, the maximum Sec. 179 deduction is $1.02 million, subject to a phaseout rule. Under the rule, the deduction is phased out if more than a specified amount of qualified property is placed in service during the year. The threshold amount for 2019 is $2.55 million.
There’s also a taxable income limit. Under it, your Sec. 179 deduction can’t exceed your business taxable income. In other words, Sec. 179 deductions can’t create or increase an overall tax loss. However, any Sec. 179 deduction amount that you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable limits).
Similar rules apply to purchased off-the-shelf software. However, software license fees are treated differently from purchased software costs for tax purposes. Payments for leased or licensed software used for your website are currently deductible as ordinary and necessary business expenses.
Software developed internally
If your website is primarily for advertising, you can also currently deduct internal website software development costs as ordinary and necessary business expenses.
An alternative position is that your software development costs represent currently deductible research and development costs under the tax code. To qualify for this treatment, the costs must be paid or incurred by December 31, 2022.
A more conservative approach would be to capitalize the costs of internally developed software. Then you would depreciate them over 36 months.
Third party payments
Some companies hire third parties to set up and run their websites. In general, payments to third parties are currently deductible as ordinary and necessary business expenses.
Before business begins
Start-up expenses can include website development costs. Up to $5,000 of otherwise deductible expenses that are incurred before your business commences can generally be deducted in the year business commences. However, if your start-up expenses exceed $50,000, the $5,000 current deduction limit starts to be chipped away. Above this amount, you must capitalize some, or all, of your start-up expenses and amortize them over 60 months, starting with the month that business commences.
We can help
We can determine the appropriate treatment for these costs for federal income tax purposes. Contact us if you have questions or want more information.
Many not-for-profit organizations use fundraising methods that cross state boundaries. If your nonprofit is one of them, it may need to register in multiple jurisdictions. But keep in mind that registration requirements vary — sometimes dramatically — from state to state. So be sure to determine your obligations before you invest time and money in registering.
The critical activity
How do you know if your nonprofit needs to register in other states? The critical activity is soliciting donations, not receiving them.So if your charity receives occasional contributions from out-of-state donors, you may not need to register in those states if you never asked for the contributions.However, email and text blasts and social media appeals are likely to be considered multistate solicitations.
Even so, a handful of state don’t require certain nonprofits to register. For example, they may exempt houses of worship as well as nonprofits with total annual income under certain thresholds. Other states may require charities to register but exempt them annual filing. All of the states have varying rules, income thresholds, exceptions, registration fees and fines for violations. Even the agencies that regulate charities differ by state.
No easy way
Unfortunately, there isn’t a simple way to register with every state. Most states require you to complete a general information form and submit it with:
First-time registrants can use a Unified Registration Statement in most states. However, even those states mandate that annual renewals and reports be submitted using individual state forms.
If your nonprofit fails to register in states where it raises funds, the consequences can be severe.Your organization, officers and board members could face civil and criminal penalties. Your charity might lose its ability to solicit funds in certain states or even lose its tax-exempt status with the IRS. Nonprofits must alsolist the states where they’re registered on their Form 990s.
For some nonprofits — particularly smaller organizations — cross-state registration requirements and potential penalties may lead them to limit fundraising to their own states. Contact us for help determining your registration obligations.
Do you want to withdraw cash from your closely held corporation at a low tax cost? The easiest way is to distribute cash as a dividend. However, a dividend distribution isn’t tax-efficient, since it’s taxable to you to the extent of your corporation’s “earnings and profits.” But it’s not deductible by the corporation.
Fortunately, there are several alternative methods that may allow you to withdraw cash from a corporation while avoiding dividend treatment. Here are five ideas:
1. Capital repayments. To the extent that you’ve capitalized the corporation with debt, including amounts that you’ve advanced to the business, the corporation can repay the debt without the repayment being treated as a dividend. Additionally, interest paid on the debt can be deducted by the corporation. This assumes that the debt has been properly documented with terms that characterize debt and that the corporation doesn’t have an excessively high debt-to-equity ratio. If not, the “debt” repayment may be taxed as a dividend. If you make cash contributions to the corporation in the future, consider structuring them as debt to facilitate later withdrawals on a tax-advantaged basis.
2. Salary. Reasonable compensation that you, or family members, receive for services rendered to the corporation is deductible by the business. However, it’s also taxable to the recipient. The same rule applies to any compensation (in the form of rent) that you receive from the corporation for the use of property. In either case, the amount of compensation must be reasonable in relation to the services rendered or the value of the property provided. If it’s excessive, the excess will be nondeductible and treated as a corporate distribution.
3. Loans. You may withdraw cash from the corporation tax-free by borrowing money from it. However, to avoid having the loan characterized as a corporate distribution, it should be properly documented in a loan agreement or a note and be made on terms that are comparable to those on which an unrelated third party would lend money to you. This should include a provision for interest and principal. All interest and principal payments should be made when required under the loan terms. Also, consider the effect of the corporation’s receipt of interest income.
4. Fringe benefits. Consider obtaining the equivalent of a cash withdrawal in fringe benefits that are deductible by the corporation and not taxable to you. Examples are life insurance, certain medical benefits, disability insurance and dependent care. Most of these benefits are tax-free only if provided on a nondiscriminatory basis to other employees of the corporation. You can also establish a salary reduction plan that allows you (and other employees) to take a portion of your compensation as nontaxable benefits, rather than as taxable compensation.
5. Property sales. You can withdraw cash from the corporation by selling property to it. However, certain sales should be avoided. For example, you shouldn’t sell property to a more than 50% owned corporation at a loss, since the loss will be disallowed. And you shouldn’t sell depreciable property to a more than 50% owned corporation at a gain, since the gain will be treated as ordinary income, rather than capital gain. A sale should be on terms that are comparable to those on which an unrelated third party would purchase the property. You may need to obtain an independent appraisal to establish the property’s value.
If you’re interested in discussing any of these ideas, contact us. We can help you get the maximum out of your corporation at the minimum tax cost.