Winter 2021 Nonprofit Standard Newsletter

To stay abreast of the continuing impacts the coronavirus is having on the nonprofit industry and ways to adapt to all the changes, as well as to catch up on key trends in the nonprofit industry!
 
HIGHLIGHTS FROM THIS ISSUE:
  • Triaging Data Breaches: Part Two
  • Tax Exempt & Government Entities Division Releases 2022 Program Letter
  • Top Considerations for the Nonprofit Sector: Part Two
  • Nonprofit & Education Webinar Series 
  • Thinking Ahead: Colleges & Universities Can Plan for Long-Term Services
  • BDO’s 2021 Nonprofit Benchmarking Survey

Click below to view the file.  

Latest Non-Profit / Government Blog Posts
November 6, 2023Stay abreast of the continuing new regulations impacting the nonprofit industry, and catch up on new key trends in our Nonprofit Fall 2023 Newsletter!   HIGHLIGHTS FROM THIS ISSUE Cash Benefits for Supporting ESG – New Markets Tax Credit The IRS Weighs in on Nonprofit NIL Collectives  GASB Implementation Guide No. 2023-1, Implementation Guidance Update-2023 The Evolving Role of CFOs in Driving ESG Initiatives Are Your Processes Innovative or Merely Electronic? Leverage Technology the Right Way BDO Professionals in the News Form 990 Review: What Nonprofit Boards Should Look For … Click below to view the file.   Nonprofit and Government Page   [...] Read more...
October 16, 2023Corporate sponsorships represents a significant funding source for tax exempt organizations and an important business strategy for taxable organizations. Sponsorships creates identification with charitable activity. This type of identification is valuable to those organizations. Sponsorship payments received by tax-exempt organizations has been an issue that the IRS has struggled with, first focusing the nature of the services provided by the exempt organization rather than the benefit received by the sponsor, and distinguishing advertising (which is an unrelated trade or business activity) from acknowledgements (which are not UBTI). Then section 513(i) was added to the law, which defines qualified sponsorship payments and provides that they are not subject to unrelated business income tax. What are Qualified Sponsorship Payments? Treas. Reg 1.513-4(c)(i) defines a qualified sponsorship payments as any payment of money, transfer of property or the performance of services, by any person engaged in a trade or business, where there is no arrangement or expectation that the person will receive any substantial return benefit in exchange for the payment. What are NOT Qualified Sponsorship Payments? Treas. Reg 1.513-4(b) states that a qualified sponsorship payment does not include: Any payment if the amount of such payment is contingent upon the level of attendance at one or more events, broadcast ratings, or other factors indicating the degree of public exposure to one or more events. Any payment which entitles the payor to the use or acknowledgement of the name or logo (or product lines) of the payor’s trade or business in regularly scheduled and printed material (periodicals) published by or on behalf of the exempt organization that is not related to and primarily distributed in connection with a specific event conducted by the payee organization; or Any payment made in connection with any qualified convention or trade show activity. (The term “convention and trade show activity” means any activity of a kind traditionally conducted at conventions, annual meetings, or trade shows.) Any payment which entitles the payor to acknowledgement containing qualitative or comparative language, price information or other indications of savings or value associated with a productor service, an endorsement or an inducement to purchase, sell or use the sponsor’s company, service, facility or product. These are considered advertising. A single message that contains both advertising and acknowledgement is considered advertising. What is Substantial Return Benefit? Treas. Reg 1.513-4(c)(2) provides that if there is an arrangement or expectation that the payor will receive a substantial return benefit with respect to any payment, then only the portion of the payment thatexceeds the fair market value of the substantial return benefit is a qualified sponsorship payment. However, if the exempt organization does not establish that the payment exceeds the fair market value of any substantial return benefits, the no portion of the payment constitutes a qualified sponsorship payment. More information on Qualified Sponsorship Payments can be found at https://www.irs.gov/charities-non-profits/advertising-orqualified-sponsorship-payments. Nonprofit and Government Page [...] Read more...
September 7, 2023What are In-Kind Contributions In-kind contributions are a wonderful way for your nonprofit organization to receive support that goes beyond monetary donations. These unique contributions involve the transfer of assets, such as goods or services, and can come from individuals, organizations, or companies. Goods: In-kind donations can include physical materials that can be of great value to your organization. For example, someone might generously donate office furniture or computer equipment, which you can use to further your mission. Services: Talented professionals can also contribute their skills and expertise as in-kind donations. This could be anything from accounting and legal assistance to free use of meeting spaces. Recording In-Kind Donations Properly documenting in-kind donations serves several important purposes. It ensures that both you and your donors have the necessary records for tax purposes, and it allows you to accurately report these contributions in your annual tax forms. Additionally, properly recording in-kind documents is arequirement for following Generally Accepted Accounting Principles (GAAP). When you receive in-kind donations, it’s essential to promptly estimate their value and record them in your organization’s chart of accounts. You can create separate accounts like “In-Kind Contributions – Goods” and “In-Kind Contributions – Services” in your chart of accounts to differentiate between tangible goods and professional services received. Let’s say a lawyer generously donates $2,000 worth of services. To record this in your books, you would make the following entry: Debit in-kind Contributions – Services $2,000 Credit in-kind Contributions – Services $2,000 Remember, the aim is to maintain a net zero balance in the account since the contribution doesn’t directly affect your bank account balance. While your cash remains the same, the in-kind donation enhances your flexibility by eliminating the need to spend money on the donated item or service. Tax Considerations There are two aspects to consider: the forms your nonprofit organization needs to submit annually, and the taxes your supporters pay. Are In-Kind Donations Tax-Deductible for Donors? Absolutely! In-kind donations are tax-deductible for your donors, which is a fantastic incentive for them to contribute. To help your supporters claim a tax deduction for their in-kind donations, it’s important to provide a written acknowledgment. This acknowledgment should include your nonprofit’s name, Employer Identification Number (EIN), date of receipt or service, a description of the donation or service contributed, and a statement confirming that the donor didn’t receive anything in return for their gift. Unlike monetary donations where your organization provides the value, in-kind donations require the donor to determine the fair value of their contribution. However, you can offer a good-faith estimate to assist them. When drafting your acknowledgment letters, make sure to review the IRS guidelines to ensure compliance and convey your appreciation effectively. Do In-Kind Donations Need to be Reported on the Form 990? Yes, they do! Tangible in-kind donations should be recorded and reported on Form 990. Keep in mind that if your in-kind donations are valued at more than $25,000 or include art or historical artifacts, there may be additional paperwork involved. Although intangible donations like services are not mandatory to report on this form, it’s still a good idea to record them to maintain compliance with GAAP standards. Remember to thoroughly research IRS guidelines to understand specific rules, regulations, and reporting requirements for different types of in-kind donations. For example, if you receive vehicle donations valued over $500, there are specific IRS rules you need to follow. Ensuring compliance with IRS guidelines is essential to properly accept and report in-kind contributions. Nonprofit and Government Page [...] Read more...
May 31, 2023Stay abreast of the continuing new regulations impacting the nonprofit industry, and catch up on new key trends!   HIGHLIGHTS FROM THIS ISSUE Is that a Lease? A Focus on Nonprofit Lease Considerations under ASC Topic 842 The Great Resignation, Talent Shortages, Inflation, Recession … Maybe Bonuses Can Help! Pay Transparency –  Is Your Organization Ready? The Inflation Reduction Act of 2022: New Incentives for your College or University Implementation of GASB Statement No. 94, Public and Public-Public Partnerships and Availability Payment Arrangements Updates Guidance: Federal Perkins Loan Closeout Endowment Woes! Navigating the Nuances With Endowments ESG: An Opportunity for Nonprofits Click below to view the file.   Newsletter Nonprofit and Government Page [...] Read more...
January 9, 2023The Winter Nonprofit Standard Newsletter 2022 is here! Stay abreast of the continuing new regulations impacting the nonprofit industry, and catch up on new key trends in the nonprofit industry!   HIGHLIGHTS FROM THIS ISSUE How Will CECL Affect Your Non-For-Profit? Presentation and Disclosure Examples for FASBA ASU on Contributed Nonfinancial Assets GASB Statement No. 101 Compensated Absences New Data on Nonprofit Challenges and Opportunities; Benchmark Yourself Against Industries Peers Navigating FEMA’s COVID-19 Appeals Process Click below to view the file.   Winter Nonprofit Standard Newsletter 2022 Nonprofit and Government Page [...] Read more...
November 11, 2022As we approach the new year, it is time for individuals to review their 2022 and 2023 tax situations and identify opportunities to reducing, deferring or accelerating their tax obligations. Click the the picture below to read the full issue on 2022 Year-End Tax Planning for Individuals: Highlights from this guide: Individual Tax Planning Highlights with tax brackets Timing of Income and Deductions Long-Term Capital Gains with rate brackets Retirement Plan Contributions Foreign Earned Income Exclusion Kiddie Tax Alternative Minimum Tax Limitations on Deduction of State and Local Taxes ( Salt Limitations) Charitable Contributions Net Operating Losses and Excess Busoness Loss Limitation Estate and Gift Taxes [...] Read more...
November 11, 2022As we approach the new year, it is time for businesses to review their 2022 and 2023 tax situations and identify opportunities to reducing, deferring or accelerating their tax obligations. Click the the picture below to read the full issue on 2022 Year-End Tax Planning for Individuals: Highlights from this guide: Recent Legislative Changes – The Inflations Reductions Act and Chips Act Claim Available Tax Credits Partnerships and S Corporations Considerations For Employers State and Local Taxes [...] Read more...
October 26, 2022Stay abreast of the continuing new regulations impacting the nonprofit industry, and catch up on new key trends in the nonprofit industry!   HIGHLIGHTS FROM THIS ISSUE Implementing FASB ASU on Contributed Nonfinancial Assets GASB Statement No. 100, Accounting Changes and Error Corrections “Is there Something I Can Read That Describes Our Compensation Program?” Implications and Impacts NSPM-33 on Research Institutions Cybersecurity Best Practices For Your Organization How Technology & Culture Support Sustainability Click below to view the file.   Nonprofit and Government Page [...] Read more...
August 12, 2022Stay abreast of the continuing new regulations impacting the nonprofit industry, and catch up on new key trends in the nonprofit industry!   HIGHLIGHTS FROM THIS ISSUE Engaging Donors at Every Level: A Checklist OMB Issues the 2022 Compliance Supplement GASB Statement No. 99  Executive Compensation Excise Tax: Challenging and Strategies Salary Increase Budgets Jump for Nonprofits Click below to view the file.   Nonprofit and Government Page [...] Read more...
June 15, 2022The Internal Revenue Service on June, 9th announced an increase in the optional standard mileage rate for the final 6 months of 2022. Taxpayers may use the optional standard mileage rates to calculate the deductible costs of operating an automobile for business and certain other purposes. For the final 6 months of 2022, the standard mileage rate for business travel will be 62.5 cents per mile, up 4 cents from the rate effective at the start of the year. The new rate for deductible medical or moving expenses (available for active-duty members of the military) will be 22 cents for the remainder of 2022, up 4 cents from the rate effective at the start of 2022. These new rates become effective July 1, 2022. In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2022. The IRS normally updates the mileage rates once a year in the fall for the next calendar year. For travel from Jan. 1 through June 30, 2022. While fuel costs are a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs. The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage. Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. The 14 cents per mile rate for charitable organizations remains unchanged as it is set by statute. Midyear increases in the optional mileage rates are rare, the last time the IRS made such an increase was in 2011. Mileage Rate Changes PurposeRates 1/1 through 6/30/22Rates 7/1 through 12/31/22Business58.562.5Medical/Moving1822Charitable1414 Link to the full article on the IRS website: https://www.irs.gov/newsroom/irs-increases-mileage-rate-for-remainder-of-2022 Link to Optional Standard Mileage Rates IRS Announcement: https://www.irs.gov/pub/irs-drop/a-22-13.pdf Tax Planning & Compliance [...] Read more...
June 8, 2022David Hegstrom from Harris CPAs goes over the audit and process and how to be prepared. Focusing on understanding an audit, the value of an audit, and tips for an effective audit. Below is the full webinar video. Nonprofit and Government Page [...] Read more...
February 7, 2022This year we sift through the noise of headlines to understand what is actually happening in the economy. Steve Scranton, CFA from Washington Trust Bank dives into the economic outlook for the Treasure Valley and also insight into Supply Chain issues around the world. We concluded with a tax update by our very own Robert Shappee, CPA, CCIFP reviewing recent legislation, and what strategies you might be able to take advantage of in 2022. Below is a video of our full presentation. [...] Read more...
February 7, 2022To stay abreast of the continuing impacts the coronavirus is having on the nonprofit industry and ways to adapt to all the changes, as well as to catch up on key trends in the nonprofit industry!   HIGHLIGHTS FROM THIS ISSUE: Triaging Data Breaches: Part Two Tax Exempt & Government Entities Division Releases 2022 Program Letter Top Considerations for the Nonprofit Sector: Part Two Nonprofit & Education Webinar Series  Thinking Ahead: Colleges & Universities Can Plan for Long-Term Services BDO’s 2021 Nonprofit Benchmarking Survey Click below to view the file.   Nonprofit and Government Page [...] Read more...
December 3, 2021As the U.S. entered 2021, many assumed that newly elected President Joe Biden along with Democratic majorities in the House and Senate would swiftly enact tax increases on both corporations and individuals to pay for the cost of proposed new infrastructure and social spending plans, potentially using the budget reconciliation process to do so. Since then, various versions of tax and spending measures have been negotiated and debated by members of Congress and the White House. As 2021 heads to a close, tax increases are still expected, but the timing and content of final changes are still not certain. On November 5, 2021, the U.S. House of Representatives delayed voting on its version of the Build Back Better Act (H.R. 5376), a package of social spending measures funded by tax increases. The delay allows members more time to review the budget impact of the provisions in the bill. Some of the legislation’s major tax proposals, which mainly target large profitable corporations and high-income individuals, include: A 15% corporate alternative minimum tax on companies that report financial statement profits of over $1 billion. A 1% surtax on corporate stock buybacks. A 15% country-by-country minimum tax on foreign profits of U.S. corporations. A 5% surtax on individual incomes over $10 million, an additional 3% surtax on incomes over $25 million and expansion of the 3.8% Net Investment Income Tax. At the time of writing, the House had not yet voted on the Build Back Better Act. Once the House votes, the legislation will be taken up by the Senate. If enacted in its current form, the legislation would generally be effective for taxable years beginning after December 31, 2021; however, many of the corporate and international proposals affecting businesses would apply for taxable years beginning after December 31, 2022 – i.e., they would be deferred for one year. The information contained in this article is based on tax proposals as of November 4, 2021 and is subject to change based on final legislation. Businesses should continue to track the latest tax proposals to understand the impacts of possible new legislation, particularly when engaging in tax planning. Despite the delays and uncertainty around exactly what tax changes final legislation will contain, there are actions that businesses can consider taking to minimize their tax liabilities. Consider tax accounting method changes and strategic tax elections The 2017 Tax Cuts and Jobs Act (TCJA) lowered the regular corporate tax rate to 21% and eliminated the corporate alternative minimum tax beginning in 2018. The current version of the proposed Build Back Better Act would leave the 21% regular corporate tax rate unchanged but, beginning in 2023, would create a new 15% corporate alternative minimum tax on the adjusted financial statement income of corporations with such income over $1 billion. Companies with adjusted financial statement income over $1 billion, therefore, should take into account the proposed 15% corporate alternative minimum tax when considering 2021 tax planning actions that could affect future years. Companies that want to reduce their 2021 tax liability should consider traditional tax accounting method changes, tax elections and other actions for 2021 to defer recognizing income to a later taxable year and accelerate tax deductions to an earlier taxable year, including the following: Changing from recognizing certain advance payments (e.g., upfront payments for goods, services, gift cards, use of intellectual property, sale or license of software) in the year of receipt to recognizing a portion in the following taxable year. Changing from the overall accrual to the overall cash method of accounting. Changing from capitalizing certain prepaid expenses (e.g., insurance premiums, warranty service contracts, taxes, government permits and licenses, software maintenance) to deducting when paid using the “12-month rule.” Deducting eligible accrued compensation liabilities (such as bonuses and severance payments) that are paid within 2.5 months of year end. Accelerating deductions of liabilities such as warranty costs, rebates, allowances and product returns under the “recurring item exception.” Purchasing qualifying property and equipment before the end of 2021 to take advantage of the 100% bonus depreciation provisions and the Section 179 expensing rules. Deducting “catch-up” depreciation (including bonus depreciation, if applicable) by changing to shorter recovery periods or changing from non-depreciable to depreciable. Optimizing the amount of uniform capitalization costs capitalized to ending inventory, including changing to simplified methods available under Section 263A. Electing to fully deduct (rather than capitalize and amortize) qualifying research and experimental (R&E) expenses attributable to new R&E programs or projects that began in 2021. Similar planning may apply to the deductibility of software development costs attributable to new software projects that began in 2021. (Note that capitalization and amortization of R&E expenditures is required beginning in 2022, although the proposed Build Back Better Act would delay the effective date until after 2025). Electing to write-off 70% of success-based fees paid or incurred in 2021 in connection with certain acquisitive transactions under Rev. Proc. 2011-29. Electing the de minimis safe harbor to deduct small-dollar expenses for the acquisition or production of property that would otherwise be capitalizable under general rules. Is “reverse” planning better for your situation? Depending on their facts and circumstances, some businesses may instead want to accelerate taxable income into 2021 if, for example, they believe tax rates will increase in the near future or they want to optimize usage of NOLs. These businesses may want to consider “reverse” planning strategies, such as: Implementing a variety of “reverse” tax accounting method changes. Selling and leasing back appreciated property before the end of 2021, creating gain that is taxed currently offset by future deductions of lease expense, being careful that the transaction is not recharacterized as a financing transaction. Accelerating taxable capital gain into 2021. Electing out of the installment sale method for installment sales closing in 2021. Delaying payments of liabilities whose deduction is based on when the amount is paid, so that the payment is deductible in 2022 (e.g., paying year-end bonuses after the 2.5-month rule). Write-off bad debts and worthless stock Given the economic challenges brought on by the COVID-19 pandemic, businesses should evaluate whether losses may be claimed on their 2021 returns related to worthless assets such as receivables, property, 80% owned subsidiaries or other investments. Bad debts can be wholly or partially written off for tax purposes. A partial write-off requires a conforming reduction of the debt on the books of the taxpayer; a complete write-off requires demonstration that the debt is wholly uncollectible as of the end of the year. Losses related to worthless, damaged or abandoned property can generate ordinary losses for specific assets. Businesses should consider claiming losses for investments in insolvent subsidiaries that are at least 80% owned and for certain investments in insolvent entities taxed as partnerships (also see Partnerships and S corporations, below). Certain losses attributable to COVID-19 may be eligible for an election under Section 165(i) to be claimed on the preceding taxable year’s return, possibly reducing income and tax in the earlier year or creating an NOL that may be carried back to a year with a higher tax rate. Maximize interest expense deductions The TCJA significantly expanded Section 163(j) to impose a limitation on business interest expense of many taxpayers, with exceptions for small businesses (those with three-year average annual gross receipts not exceeding $26 million ($27 million for 2022), electing real property trades or businesses, electing farming businesses and certain utilities. The deduction limit is based on 30% of adjusted taxable income. The amount of interest expense that exceeds the limitation is carried over indefinitely. Beginning with 2022 taxable years, taxpayers will no longer be permitted to add back deductions for depreciation, amortization and depletion in arriving at adjusted taxable income (the principal component of the limitation). The Build Back Better Act proposes to modify the rules with respect to business interest expense paid or incurred by partnerships and S corporations (see Partnerships and S corporations, below). Maximize tax benefits of NOLs Net operating losses (NOLs) are valuable assets that can reduce taxes owed during profitable years, thus generating a positive cash flow impact for taxpayers. Businesses should make sure they maximize the tax benefits of their NOLs. Make sure the business has filed carryback claims for all permitted NOL carrybacks. The CARES Act allows taxpayers with losses to carry those losses back up to five years when the tax rates were higher. Taxpayers can still file for “tentative” refunds of NOLs originating in 2020 within 12 months from the end of the taxable year (by December 31, 2021 for calendar year filers) and can file refund claims for 2018 or 2019 NOL carrybacks on timely filed amended returns. Corporations should monitor their equity movements to avoid a Section 382 ownership change that could limit annual NOL deductions. Losses of pass-throughs entities must meet certain requirements to be deductible at the partner or S corporation owner level (see Partnerships and S corporations, below). Defer tax on capital gains Tax planning for capital gains should consider not only current and future tax rates, but also the potential deferral period, short and long-term cash needs, possible alternative uses of funds and other factors. Noncorporate shareholders are eligible for exclusion of gain on dispositions of Qualified Small Business Stock (QSBS). The Build Back Better Act would limit the gain exclusion to 50% for sales or exchanges of QSBS occurring after September 13, 2021 for high-income individuals, subject to a binding contract exception. For other sales, businesses should consider potential long-term deferral strategies, including: Reinvesting capital gains in Qualified Opportunity Zones. Reinvesting proceeds from sales of real property in other “like-kind” real property. Selling shares of a privately held company to an Employee Stock Ownership Plan. Businesses engaging in reverse planning strategies (see Is “reverse” planning better for your situation? above) may instead want to move capital gain income into 2021 by accelerating transactions (if feasible) or, for installment sales, electing out of the installment method. Claim available tax credits The U.S. offers a variety of tax credits and other incentives to encourage employment and investment, often in targeted industries or areas such as innovation and technology, renewable energy and low-income or distressed communities. Many states and localities also offer tax incentives. Businesses should make sure they are claiming all available tax credits for 2021 and begin exploring new tax credit opportunities for 2022. The Employee Retention Credit (ERC) is a refundable payroll tax credit for qualifying employers that have been significantly impacted by COVID-19. Employers that received a Paycheck Protection Program (PPP) loan can claim the ERC but the same wages cannot be used for both programs. The Infrastructure Investment and Jobs Act signed by President Biden on November 15, 2021, retroactively ends the ERC on September 30, 2021, for most employers. Businesses that incur expenses related to qualified research and development (R&D) activities are eligible for the federal R&D credit. Taxpayers that reinvest capital gains in Qualified Opportunity Zones may be able to defer the federal tax due on the capital gains. An additional 10% gain exclusion also may apply if the investment is made by December 31, 2021. The investment must be made within a certain period after the disposition giving rise to the gain. The New Markets Tax Credit Program provides federally funded tax credits for approved investments in low-income communities that are made through certified “Community Development Entities.” Other incentives for employers include the Work Opportunity Tax Credit, the Federal Empowerment Zone Credit, the Indian Employment Credit and credits for paid family and medical leave (FMLA). There are several federal tax benefits available for investments to promote energy efficiency and sustainability initiatives. In addition, the Build Back Better Act proposes to extend and enhance certain green energy credits as well as introduce a variety of new incentives. The proposals also would introduce the ability for taxpayers to elect cash payments in lieu of certain credits and impose prevailing wage and apprenticeship requirements in the determination of certain credit amounts. Partnerships and S corporations The Build Back Better Act contains various tax proposals that would affect partnerships, S corporations and their owners. Planning opportunities and other considerations for these taxpayers include the following:  Taxpayers with unused passive activity losses attributable to partnership or S corporation interests may want to consider disposing of the interest to utilize the loss in 2021. Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (within certain limitations based on the taxpayer’s taxable income, whether the taxpayer is engaged in a service-type trade or business, the amount of W-2 wages paid by the business and the unadjusted basis of certain property held by the business). Planning opportunities may be available to maximize this deduction. Certain requirements must be met for losses of pass-through entities to be deductible by a partner or S corporation shareholder. In addition, an individual’s excess business losses are subject to overall limitations. There may be steps that pass-through owners can take before the end of 2021 to maximize their loss deductions. The Build Back Better Act would make the excess business loss limitation permanent (the limitation is currently scheduled to expire for taxable years beginning on or after January 1, 2026) and change the manner in which the carryover of excess business losses may be used in subsequent years. Under current rules, the abandonment or worthlessness of a partnership interest may generate an ordinary deduction (instead of a capital loss) in cases where no partnership liabilities are allocated to the interest. Under the Build Back Better Act, the abandonment or worthlessness of a partnership interest would generate a capital loss regardless of partnership liability allocations, effective for taxable years beginning after December 31, 2021. Taxpayers should consider an abandonment of a partnership interest in 2021 to be able to claim an ordinary deduction. Following enactment of the TCJA, deductibility of expenses incurred by investment funds are treated as “investment expenses”—and therefore are limited at the individual investor level— if the fund does not operate an active trade or business (i.e., if the fund’s only activities are investment activities). To avoid the investment expense limitation, consideration should be given as to whether a particular fund’s activities are so closely connected to the operations of its portfolio companies that the fund itself should be viewed as operating an active trade or business. Under current rules, gains allocated to carried interests in investment funds are treated as long-term capital gains only if the investment property has been held for more than three years. Investment funds should consider holding the property for more than three years prior to sale to qualify for reduced long-term capital gains rates. Although the Build Back Better Act currently does not propose changes to the carried interest rules, an earlier draft of the bill would have extended the current three-year property holding period to five years. Additionally, there are multiple bills in the Senate that, if enacted, would seek to tax all carry allocations at ordinary income rates. Under the Build Back Better Act, essentially all pass-through income of high-income owners that is not subject to self-employment tax would be subject to the 3.8% Net Investment Income Tax (NIIT). This means that pass-through income and gains on sales of assets allocable to partnership and S corporation owners would incur NIIT, even if the owner actively participates in the business. Additionally, taxpayers that currently utilize a state law limited partnership to avoid self-employment taxes on the distributive shares of active “limited partners” would instead be subject to the 3.8% NIIT. If enacted, this proposal would be effective for taxable years beginning after December 31, 2021. Taxpayers should consider accelerating income and planned dispositions of business assets into 2021 to avoid the possible additional tax. The Build Back Better Act proposes to modify the rules with respect to business interest expense incurred by partnerships and S corporations effective for taxable years beginning after December 31, 2022. Under the proposed bill, the Section 163(j) limitation with respect to business interest expense would be applied at the partner and S corporation shareholder level. Currently, the business interest expense limitation is applied at the entity level (also see Maximize interest expense deductions, above). Various states have enacted PTE tax elections that seek a workaround to the federal personal income tax limitation on the deduction of state taxes for individual owners of pass-through entities. See State pass-through entity tax elections, below. Planning for international operations The Build Back Better Act proposes substantial changes to the existing U.S. international taxation of non-U.S. income beginning as early as 2022. These changes include, but are not limited to, the following: Imposing additional interest expense limitations on international financial reporting groups. Modifying the rules for global intangible low-taxed income (GILTI), including calculating GILTI and the corresponding foreign tax credits (FTCs) on a country-by-country basis, allowing country specific NOL carryforwards for one taxable year and reducing the QBAI reduction to 5%. Modifying the existing FTC rules for all remaining categories to be calculated on a country-by-country basis. Modifying the rules for Subpart F, foreign derived intangible income (FDII) and the base erosion anti-abuse tax (BEAT). Imposing new limits on the applicability of the Section 245A dividends received deduction (DRD) by removing the application of the DRD rules to non-controlled foreign corporations (CFCs). Modifying the rules under Section 250 to remove the taxable income limitation as well as reduce the GILTI and FDII deductions to 28.5% and 24.8%, respectively. Businesses with international operations should gain an understanding of the impacts of these proposals on their tax profile by modeling the potential changes and considering opportunities to utilize the favorable aspects of the existing cross-border rules to mitigate the detrimental impacts, including: Considering mechanisms/methods to accelerate foreign source income (e.g., prepaying royalties) and associated foreign income taxes to maximize use of the existing FTC regime and increase current FDII benefits. Optimizing offshore repatriation and associated offshore treasury aspects while minimizing repatriation costs (e.g., previously taxed earnings and profits and basis amounts, withholding taxes, local reserve restrictions, Sections 965 and 245A, etc.). Accelerating dividends from non-CFC 10% owned foreign corporations to maximize use of the 100% DRD currently available. Utilizing asset step-up planning in low-taxed CFCs to utilize existing current year excess FTCs in the GILTI category for other CFCs in different jurisdictions. Considering legal entity restructuring to maximize the use of foreign taxes paid in jurisdictions with less than a 16% current tax rate to maximize the GILTI FTC profile of the company. If currently in NOLs, considering methods to defer income or accelerate deductions to minimize detrimental impacts of existing Section 250 deduction taxable income limitations in favor of the proposed changes that will allow a full Section 250 deduction without a taxable income limitation. In combination with the OECD Pillar One/Two advancements coupled with U.S. tax legislation, reviewing the transfer pricing and value chain structure of the organization to consider ways to adapt to such changes and minimize the future effective tax rate of the organization. Review transfer pricing compliance Businesses with international operations should review their cross-border transactions among affiliates for compliance with relevant country transfer pricing rules and documentation requirements. They should also ensure that actual intercompany transactions and prices are consistent with internal transfer pricing policies and intercompany agreements, as well as make sure the transactions are properly reflected in each party’s books and records and year-end tax calculations. Businesses should be able to demonstrate to tax authorities that transactions are priced on an arm’s-length basis and that the pricing is properly supported and documented. Penalties may be imposed for non-compliance. Areas to consider include: Have changes in business models, supply chains or profitability (including changes due to the effects of COVID-19) affected arm’s length transfer pricing outcomes and support? These changes and their effects should be supported before year end and documented contemporaneously. Have all cross-border transactions been identified, priced and properly documented, including transactions resulting from merger and acquisition activities (as well as internal reorganizations)? Do you know which entity owns intellectual property (IP), where it is located and who is benefitting from it? Businesses must evaluate their IP assets — both self-developed and acquired through transactions — to ensure compliance with local country transfer pricing rules and to optimize IP management strategies. If transfer pricing adjustments need to be made, they should be done before year end, and for any intercompany transactions involving the sale of tangible goods, coordinated with customs valuations. Multinational businesses should begin to monitor and model the potential effects of the recent agreement among OECD countries on a two pillar framework that addresses distribution of profits among countries and imposes a 15% global minimum tax. Considerations for employers Employers should consider the following issues as they close out 2021 and head into 2022: Employers have until the extended due date of their 2021 federal income tax return to retroactively establish a qualified retirement plan and fund the plan for 2021. Contributions made to a qualified retirement plan by the extended due date of the 2021 federal income tax return may be deductible for 2021; contributions made after this date are deductible for 2022. The amount of any PPP loan forgiveness is excluded from the federal gross income of the business, and qualifying expenses for which the loan proceeds were received are deductible. The CARES Act permitted employers to defer payment of the employer portion of Social Security (6.2%) payroll tax liabilities that would have been due from March 27 through December 31, 2020. Employers are reminded that half of the deferred amount must be paid by December 31, 2021 (the other half must be paid by December 31, 2022). Notice CP256-V is not required to make the required payment. Employers should ensure that common fringe benefits are properly included in employees’ and, if applicable, 2% S corporation shareholders’ taxable wages. Partners should not be issued W-2s. Publicly traded corporations may not deduct compensation of “covered employees” — CEO, CFO and generally the three next highest compensated executive officers — that exceeds $1 million per year. Effective for taxable years beginning after December 31, 2026, the American Rescue Plan Act of 2021 expands covered employees to include five highest paid employees. Unlike the current rules, these five additional employees are not required to be officers. Generally, for calendar year accrual basis taxpayers, accrued bonuses must be fixed and determinable by year end and paid within 2.5 months of year end (by March 15, 2022) for the bonus to be deductible in 2021. However, the bonus compensation must be paid before the end of 2021 if it is paid by a Personal Service Corporation to an employee-owner, by an S corporation to any employee-shareholder, or by a C corporation to a direct or indirect majority owner. Businesses should assess the tax impacts of their mobile workforce. Potential impacts include the establishment of a corporate tax presence in the state or foreign country where the employee works; dual tax residency for the employee; and payroll tax, benefits, and transfer pricing issues. State and local taxes Businesses should monitor the tax rules in the states in which they operate or make sales. Taxpayers that cross state borders—even virtually—should review state nexus and other policies to understand their compliance obligations, identify ways to minimize their state tax liabilities and eliminate any state tax exposure. The following are some of the state-specific areas taxpayers should consider when planning for their tax liabilities in 2021 and 2022: Does the state conform to federal tax rules (including recent federal legislation) or decouple from them? Not all states follow federal tax rules. (Note that states do not necessarily follow the federal treatment of PPP loans. See Considerations for employers, above.) Has the business claimed all state NOL and state tax credit carrybacks and carryforwards? Most states apply their own NOL/credit computation and carryback/forward provisions. Has the business considered how these differ from federal and the effect on its state taxable income and deductions? Has the business amended any federal returns? Businesses should make sure state amended returns are filed on a timely basis to report the federal changes. If a federal amended return is filed, amended state returns may still be required even there is no change to state taxable income or deductions. Has a state adopted economic nexus for income tax purposes, enacted NOL deduction suspensions or limitations, increased rates or suspended or eliminated some tax credit and incentive programs to deal with lack of revenues due to COVID-19 economic issues? The majority of states now impose single-sales factor apportionment formulas and require market-based sourcing for sales of services and licenses/sales of intangibles using disparate sourcing methodologies. Has the business recently examined whether its multistate apportionment of income is consistent with or the effect of this trend? Consider the state and local tax treatment of merger, acquisition and disposition transactions, and do not forget that internal reorganizations of existing structures also have state tax impacts. There are many state-specific considerations when analyzing the tax effects of transactions. Is the business claiming all available state and local tax credits, e.g., for research activities, employment or investment? For businesses selling remotely and that have been protected by P.L. 86-272 from state income taxes in the past, how is the business responding to changing state interpretations of those protections with respect to businesses engaged in internet-based activities? Has the business considered the state tax impacts of its mobile workforce? Most states that provided temporary nexus and/or withholding relief relating to teleworking employees lifted those orders during 2021 (also see Considerations for employers, above). Has the state introduced (or is it considering introducing) a tax on digital services? The definition of digital services can potentially be very broad and fact specific. Taxpayers should understand the various state proposals and plan for potential impacts. Remote retailers, marketplace sellers and marketplace facilitators (i.e., marketplace providers) should be sure they are in compliance with state sales and use tax laws and marketplace facilitator rules. Assessed property tax values typically lag behind market values. Consider challenging your property tax assessment. State pass-through entity elections The TCJA introduced a $10,000 limit for individuals with respect to federal itemized deductions for state and local taxes paid during the year ($5,000 for married individuals filing separately). At least 20 states have enacted potential workarounds to this deduction limitation for owners of pass-through entities, by allowing a pass-through entity to make an election (PTE tax election) to be taxed at the entity level. PTE tax elections present state and federal tax issues for partners and shareholders. Before making an election, care needs to be exercised to avoid state tax traps, especially for nonresident owners, that could exceed any federal tax savings. (Note that the Build Back Better Act proposes to increase the state and local tax deduction limitation for individuals to $80,000 ($40,000 for married individuals filing separately) retroactive to taxable years beginning after December 31, 2020. In addition, the Senate has begun working on a proposal that would completely lift the deduction cap subject to income limitations.) Accounting for income taxes – ASC 740 considerations The financial year-end close can present unique and challenging issues for tax departments. Further complicating matters is pending U.S. tax legislation that, if enacted by the end of the calendar year, will need to be accounted for in 2021. To avoid surprises, tax professionals can begin now to prepare for the year-end close: Evaluate the effectiveness of year-end tax accounting close processes and consider modifications to processes that are not ideal. Update work programs and train personnel, making sure all team members understand roles, responsibilities, deliverables and expected timing. Communication is especially critical in a virtual close. Know where there is pending tax legislation and be prepared to account for the tax effects of legislation that is “enacted” before year end. Whether legislation is considered enacted for purposes of ASC 740 depends on the legislative process in the particular jurisdiction. Document whether and to what extent a valuation allowance should be recorded against deferred tax assets in accordance with ASC 740. Depending on the company’s situation, this process can be complex and time consuming and may require scheduling deferred tax assets and liabilities, preparing estimates of future taxable income and evaluating available tax planning strategies. Determine and document the tax accounting effects of business combinations, dispositions and other unique transactions. Review the intra-period tax allocation rules to ensure that income tax expense/(benefit) is correctly recorded in the financial statements. Depending on a company’s activities, income tax expense/(benefit) could be recorded in continuing operations as well as other areas of the financial statements. Evaluate existing and new uncertain tax positions and update supporting documentation. Make sure tax account reconciliations are current and provide sufficient detail to prove the year-over-year change in tax account balances. Understand required tax footnote disclosures and build the preparation of relevant documentation and schedules into the year-end close process. Begin Planning for the Future Future tax planning will depend on final passage of the proposed Build Back Better Act and precisely what tax changes the final legislation contains. Regardless of legislation, businesses should consider actions that will put them on the best path forward for 2022 and beyond. Business can begin now to: Reevaluate choice of entity decisions while considering alternative legal entity structures to minimize total tax liability and enterprise risk. Evaluate global value chain and cross-border transactions to optimize transfer pricing and minimize global tax liabilities. Review available tax credits and incentives for relevancy to leverage within applicable business lines. Consider the benefits of an ESOP as an exit or liquidity strategy, which can provide tax benefits for both owners and the company. Perform a cost segregation study with respect to investments in buildings or renovation of real property to accelerate taxable deductions, and identify other discretionary incentives to reduce or defer various taxes. Perform a state-by-state analysis to ensure the business is properly charging sales taxes on taxable items, but not exempt or non-taxable items, and to determine whether the business needs to self-remit use taxes on any taxable purchases (including digital products or services). Evaluate possible co-sourcing or outsourcing arrangements to assist with priority projects as part of an overall tax function transformation. [...] Read more...
December 3, 2021As we approach year end, now is the time for individuals, business owners, and family offices to review their 2021 and 2022 tax situations and identify opportunities for reducing, deferring, or accelerating tax obligations. Areas potentially impacted by proposed tax legislation still in play should be reviewed, as well as applicable opportunities and relief granted under legislation enacted during the past year.   The information contained within this article is based on tax proposals as presented in the November 3, 2021, version of the Build Back Better Act. Our guidance is subject to change when final legislation is passed. Taxpayers should consult with a trusted advisor when making tax and financial decisions regarding any of the items below.   Individual Tax Planning Highlights   2021 Federal Income Tax Rate Brackets 2022 Federal Income Tax Rate Brackets Proposed Surcharge on High-Income Individuals, Estates and Trusts The draft Build Back Better Act released on November 3, 2021 would impose a 5% surcharge on modified adjusted gross income that exceeds $5 million for married individuals filing separately, $200,000 for estates and trusts and $10 million for all other individuals. An additional 3% surcharge would be imposed on modified adjusted gross income in excess of $12.5 million for married individuals filing separately, $500,000 for estates and trusts and $25 million for all other individuals. The proposal would be effective for taxable years beginning after December 31, 2021 (i.e., beginning in 2022). While keeping the proposed surcharges in mind, taxpayers should consider whether they can minimize their tax bills by shifting income or deductions between 2021 and 2022. Ideally, income should be received in the year with the lower marginal tax rate, and deductible expenses should be paid in the year with the higher marginal tax rate. If the marginal tax rate is the same in both years, deferring income from 2021 to 2022 will produce a one-year tax deferral and accelerating deductions from 2022 to 2021 will lower the 2021 income tax liability. Actions to consider that may result in a reduction or deferral of taxes include:  Delaying closing capital gain transactions until after year end or structuring 2021 transactions as installment sales so that gain is deferred past 2021 (also see Long Term Capital Gains, below).  Considering whether to trigger capital losses before the end of 2021 to offset 2021 capital gains.  Delaying interest or dividend payments from closely held corporations to individual business-owner taxpayers.  Deferring commission income by closing sales in early 2022 instead of late 2021.  Accelerating deductions for expenses such as mortgage interest and charitable donations (including donations of appreciated property) into 2021 (subject to AGI limitations).  Evaluating whether non-business bad debts are worthless by the end of 2021 and should be recognized as a short-term capital loss.  Shifting investments to municipal bonds or investments that do not pay dividends to reduce taxable income in future years. On the other hand, taxpayers that will be in a higher tax bracket in 2022 or that would be subject to the proposed 2022 surcharges may want to consider potential ways to move taxable income from 2022 into 2021, such that the taxable income is taxed at a lower tax rate. Current year actions to consider that could reduce 2022 taxes include: Accelerating capital gains into 2021 or deferring capital losses until 2022.  Electing out of the installment sale method for 2021 installment sales.  Deferring deductions such as large charitable contributions to 2022. Long-Term Capital Gains The long-term capital gains rates for 2021 and 2022 are shown below. The tax brackets refer to the taxpayer’s taxable income. Capital gains also may be subject to the 3.8% Net Investment Income Tax. 2021 Long-Term Capital Gains Rate Brackets 2022 Long-Term Capital Gains Rate Brackets Long-term capital gains (and qualified dividends) are subject to a lower tax rate than other types of income. Investors should consider the following when planning for capital gains: Holding capital assets for more than a year (more than three years for assets attributable to carried interests) so that the gain upon disposition qualifies for the lower long-term capital gains rate. Considering long-term deferral strategies for capital gains such as reinvesting capital gains into designated qualified opportunity zones. Investing in, and holding, “qualified small business stock” for at least five years. (Note that the November 3 draft of the Build Back Better Act would limit the 100% and 75% exclusion available for the sale of qualified small business stock for dispositions after September 13, 2021.) Donating appreciated property to a qualified charity to avoid long term capital gains tax (also see Charitable Contributions, below). Net Investment Income Tax An additional 3.8% net investment income tax (NIIT) applies on net investment income above certain thresholds. For 2021, net investment income does not apply to income derived in the ordinary course of a trade or business in which the taxpayer materially participates. Similarly, gain on the disposition of trade or business assets attributable to an activity in which the taxpayer materially participates is not subject to the NIIT. The November 3 version of the Build Back Better Act would broaden the application of the NIIT. Under the proposed legislation, the NIIT would apply to all income earned by high income taxpayers unless such income is otherwise subject to self-employment or payroll tax. For example, high income pass-through entity owners would be subject to the NIIT on their distributive share income and gain that is not subject to self-employment tax. In conjunction with other tax planning strategies that are being implemented to reduce income tax or capital gains tax, impacted taxpayers may want to consider the following tax planning to minimize their NIIT liabilities: Deferring net investment income for the year. Accelerating into 2021 income from pass-through entities that would be subject to the expanded definition of net investment income under the proposed tax legislation. Social Security Tax The Old-Age, Survivors, and Disability Insurance (OASDI) program is funded by contributions from employees and employers through FICA tax. The FICA tax rate for both employees and employers is 6.2% of the employee’s gross pay, but only on wages up to $142,800 for 2021 and $147,000 for 2022. Self-employed persons pay a similar tax, called SECA (or self-employment tax), based on 12.4% of the net income of their businesses. Employers, employees, and self-employed persons also pay a tax for Medicare/Medicaid hospitalization insurance (HI), which is part of the FICA tax, but is not capped by the OASDI wage base. The HI payroll tax is 2.9%, which applies to earned income only. Self-employed persons pay the full amount, while employers and employees each pay 1.45%. An extra 0.9% Medicare (HI) payroll tax must be paid by individual taxpayers on earned income that is above certain adjusted gross income (AGI) thresholds, i.e., $200,000 for individuals, $250,000 for married couples filing jointly and $125,000 for married couples filing separately. However, employers do not pay this extra tax. Long-Term Care Insurance and Services Premiums an individual pays on a qualified long-term care insurance policy are deductible as a medical expense. The maximum deduction amount is determined by an individual’s age. The following table sets forth the deductible limits for 2021 and 2022 (the limitations are per person, not per return): Retirement Plan Contributions Individuals may want to maximize their annual contributions to qualified retirement plans and Individual Retirement Accounts (IRAs) while keeping in mind the current proposed tax legislation that would limit contributions and conversions and require minimum distributions beginning in 2029 for large retirement funds without regard to the taxpayer’s age. The maximum amount of elective contributions that an employee can make in 2021 to a 401(k) or 403(b) plan is $19,500 ($26,000 if age 50 or over and the plan allows “catch up” contributions). For 2022, these limits are $20,500 and $27,000, respectively. The SECURE Act permits a penalty-free withdrawal of up to $5,000 from traditional IRAs and qualified retirement plans for qualifying expenses related to the birth or adoption of a child after December 31, 2019. The $5,000 distribution limit is per individual, so a married couple could each receive $5,000. Under the SECURE Act, individuals are now able to contribute to their traditional IRAs in or after the year in which they turn 70½. The SECURE Act changes the age for required minimum distributions (RMDs) from tax-qualified retirement plans and IRAs from age 70½ to age 72 for individuals born on or after July 1, 1949. Generally, the first RMD for such individuals is due by April 1 of the year after the year in which they turn 72. Individuals age 70½ or older can donate up to $100,000 to a qualified charity directly from a taxable IRA. The SECURE Act generally requires that designated beneficiaries of persons who die after December 31, 2019, take inherited plan benefits over a 10-year period. Eligible designated beneficiaries (i.e., surviving spouses, minor children of the plan participant, disabled and chronically ill beneficiaries and beneficiaries who are less than 10 years younger than the plan participant) are not limited to the 10-year payout rule. Special rules apply to certain trusts. Small businesses can contribute the lesser of (i) 25% of employees’ salaries or (ii) an annual maximum set by the IRS each year to a Simplified Employee Pension (SEP) plan by the extended due date of the employer’s federal income tax return for the year that the contribution is made. The maximum SEP contribution for 2021 is $58,000. The maximum SEP contribution for 2022 is $61,000. The calculation of the 25% limit for self-employed individuals is based on net self-employment income, which is calculated after the reduction in income from the SEP contribution (as well as for other things, such as self-employment taxes). 2021 could be the final opportunity to convert non-Roth after-tax savings in qualified plans and IRAs to Roth accounts if legislation passes in its current form. Proposed legislation would prohibit all taxpayers from funding Roth IRAs or designated Roth accounts with after-tax contributions starting in 2022, and high-income taxpayers from converting retirement accounts attributable to pre-tax or deductible contributions to Roths starting in 2032. Proposed legislation would require wealthy savers of all ages to substantially draw down retirement balances that exceed $10 million after December 31, 2028, with potential income tax payments on the distributions. As account balances approach the mandatory distribution level, extra consideration should be given before making an annual contribution. Foreign Earned Income Exclusion The foreign earned income exclusion is $108,700 in 2021, to be increased to $112,000 in 2022. Alternative Minimum Tax A taxpayer must pay either the regular income tax or the alternative minimum tax (AMT), whichever is higher. The established AMT exemption amounts for 2021 are $73,600 for unmarried individuals and individuals claiming head of household status, $114,600 for married individuals filing jointly and surviving spouses, $57,300 for married individuals filing separately and $25,700 for estates and trusts. For 2022, those amounts are $75,900 for unmarried individuals and individuals claiming the head of household status, $118,100 for married individuals filing jointly and surviving spouses, $59,050 for married individuals filing separately and $26,500 for estates and trusts. Kiddie Tax The unearned income of a child is taxed at the parents’ tax rates if those rates are higher than the child’s tax rate. Limitation on Deductions of State and Local Taxes (SALT Limitation) For individual taxpayers who itemize their deductions, the Tax Cuts and Jobs Act (TCJA) introduced a $10,000 limit on deductions of state and local taxes paid during the year ($5,000 for married individuals filing separately). The limitation applies to taxable years beginning on or after December 31, 2017 and before January 1, 2026. Various states have enacted new rules that allow owners of pass-through entities to avoid the SALT deduction limitation in certain cases. The November 3 draft of the Build Back Better Act would extend the TCJA SALT deduction limitation through 2031 and increase the deduction limitation amount to $72,500 ($32,250 for estates, trusts and married individuals filing separately). An amendment currently on the table proposes increasing the deduction limitation amount to $80,000 ($40,000 for estates, trusts and married individuals filing separately). The proposal would be effective for taxable years beginning after December 31, 2020, therefore applying to the 2021 calendar year. Charitable Contributions The Taxpayer Certainty and Disaster Relief Act of 2020 extended the temporary suspension of the AGI limitation on certain qualifying cash contributions to publicly supported charities under the CARES Act. As a result, individual taxpayers are permitted to take a charitable contribution deduction for qualifying cash contributions made in 2021 to the extent such contributions do not exceed the taxpayer’s AGI. Any excess carries forward as a charitable contribution that is usable in the succeeding five years. Contributions to non-operating private foundations or donor-advised funds are not eligible for the 100% AGI limitation. The limitations for cash contributions continue to be 30% of AGI for non-operating private foundations and 60% of AGI for donor advised funds. The temporary suspension of the AGI limitation on qualifying cash contributions will no longer apply to contributions made in 2022. Contributions made in 2022 will be subject to a 60% AGI limitation. Tax planning around charitable contributions may include: Maximizing 2021 cash charitable contributions to qualified charities to take advantage of the 100% AGI limitation. Deferring large charitable contributions to 2022 if the taxpayer would be subject to the proposed individual surcharge tax. Creating and funding a private foundation, donor advised fund or charitable remainder trust. Donating appreciated property to a qualified charity to avoid long term capital gains tax. Estate and Gift Taxes The November 3 draft of the Build Back Better Act does not include any changes to the estate and gift tax rules. For gifts made in 2021, the gift tax annual exclusion is $15,000 and for 2022 is $16,000. For 2021, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $11,700,000 per person. For 2022, the exemption is $12,060,000. All outright gifts to a spouse who is a U.S. citizen are free of federal gift tax. However, for 2021 and 2022, only the first $159,000 and $164,000, respectively, of gifts to a non-U.S. citizen spouse are excluded from the total amount of taxable gifts for the year. Tax planning strategies may include: Making annual exclusion gifts. Making larger gifts to the next generation, either outright or in trust. Creating a Spousal Lifetime Access Trust (SLAT) or a Grantor Retained Annuity Trust (GRAT) or selling assets to an Intentionally Defective Grantor Trust (IDGT). Net Operating Losses The CARES Act permitted individuals with net operating losses generated in taxable years beginning after December 31, 2017, and before January 1, 2021, to carry those losses back five taxable years. The unused portion of such losses was eligible to be carried forward indefinitely and without limitation. Net operating losses generated beginning in 2021 are subject to the TCJA rules that limit carryforwards to 80% of taxable income and do not permit losses to be carried back. Excess Business Loss Limitation A non-corporate taxpayer may deduct net business losses of up to $262,000 ($524,000 for joint filers) in 2021. The limitation is $270,000 ($540,000 for joint filers) for 2022. The November 3 draft of the Build Back Better Act would make permanent the excess business loss provisions originally set to expire December 31, 2025. The proposed legislation would limit excess business losses to $500,000 for joint fliers ($250,000 for all other taxpayers) and treat any excess as a deduction attributable to a taxpayer’s trades or businesses when computing excess business loss in the subsequent year. [...] Read more...
November 12, 2021Harris CPAs has announced a merger with Deagle Ames, LLC and Ataraxis Accounting and Advisory, Chtd of Twin Falls, Idaho effective October 16, 2021. The mergers add a total of 22 professionals to the Harris CPAs team, and a new office location in Twin Falls. Deagle Ames, LLC offers tax planning and preparation, advisory and accounting services and has worked side by side with their business owners to help them stay competitive and profitable for nearly 65 years from two office in Twin Falls and Buhl. “This merger provided a unique opportunity for us to expand our service offerings to our clients. Their core values strongly mirror our own and we are excited to be a part of their continuous growth,” said Pam McClain, managing partner of Deagle Ames. Pam and her team of 12 other professionals remain in their current office locations in Twin Falls on 5th Ave S and in Buhl on Main St. Ataraxis Accounting and Advisory Services, Chtd is located in Twin Falls and provides tax planning and preparation, advisory and accounting services. They have an established reputation for quality service and deep client relationships in the area. “We are enthusiastic to continue the high level of service we have provided our clients for nearly 50 years,” said Lisa Donnelley, Managing Partner at Ataraxis. “Joining the team at Harris CPAs will allow us to take advantage of their advanced technology in service delivery and provide our clients additional technical resources.” Lisa and her team of 7 other professionals have relocated to the new Harris location at 161 5th Ave S, Suite 200 in the historic downtown Twin Falls. Harris CPAs has been a leading provider of assurance, tax, accounting, and advisory services in Idaho since 1996 with additional offices in Meridian, Boise and Coeur d’Alene. They serve clients throughout the United States and in all stages of the business cycle. The merger also provides Harris CPAs with a new competitive advantage in the agriculture industry. A ribbon cutting with the Twin Falls Chamber of Commerce will take place on December 2, 2021 at 161 5th Ave S, Suite 200, Twin Falls, ID 83301, followed by a welcoming reception. For more information, please contact Tara Davis, Marketing Manager for Harris CPAs at (208) 333-8965 or taradavis@harriscpas.com. [...] Read more...
September 22, 2021Some businesses may not be aware of the tax credits offered by the Internal Revenue Service. For construction clients, there are a broad range of construction activities which qualify for the credits, from research and development to building green and energy efficiency. For all industries, there are credits for employers as well, including the work opportunity tax credit and the employee retention credit. This article identifies several of those tax credits and gives a brief overview of each. To learn more about these credits and others including proposed credits for the future, please contact us. – Ann Stratton, Harris CPAs   Tax credit programs provide opportunities to reduce tax expense, increase after-tax income and improve cash flow. The federal government offers a variety of tax credits and other incentives to encourage employment and investment, often in targeted industries or areas such as innovation and technology, renewable energy, low-income communities and others. Many states and localities offer their own tax incentive programs. Taxpayers that are looking for ways to reduce their tax bill and boost their bottom line may still be able to take advantage of federal tax credits or incentive programs in 2021. In some cases, taxpayers also may still be able to claim benefits for prior years. Federal tax credits and incentives to consider include: Employee Retention Credit R&D credit Incentives for investment in low-income communities Energy efficiency and sustainability incentives Other credits for employers American Jobs Plan Employee retention creditThe employee retention credit (ERC) is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to a COVID-19-related governmental order or that experienced a “significant” reduction in gross receipts as compared to 2019. Businesses may use ERCs to reduce federal payroll tax deposits, including deposits of employee FICA and income tax withholding. Eligible employers may claim a credit of up to $7,000 per employee in each quarter of 2021 (eligible start-upbusinesses can claim up to $35,000 per employee per quarter). For 2020, the annual per-employee credit is limited to $10,000. Businesses that have obtained a loan under the Payroll Protection Program (PPP) may also claim the ERC, provided that ERC wages are not also used for determining the amount of their PPP loan forgiveness. Employers should take steps now to make sure they are claiming all of the ERCs to which they are entitled. Businesses that were eligible for but did not claim the ERC in 2020 may be able to file amended payroll tax returns to claim 2020 benefits. Importantly, planning may be needed prior to filing PPP loan forgiveness applications to ensure maximum benefits of both the ERC and PPP programs. BDO’s ERC resource hub contains more information on how to qualify for, calculate and claim ERC benefits. Also, be sure to review the update of guidance issued in April 2021 by the IRS—see BDO’s article IRS Issues Guidance for Claiming Employee Retention Credit in 2021. R&D creditBusinesses in any industry are eligible for the federal R&D credit provided they incur expenses related to qualified R&D activities. Both in-house and contract research expenditures can qualify. Special rules apply for start-ups and qualified small businesses, which may be able to claim a credit of up to $250,000 against the employer portion of federal payroll taxes. Many states also offer their own R&D credits. R&D credits can reduce taxes by as much as 9% of qualified spending for federal taxes and as much as 40% in some states. Incentives for investment in low-income communities qualified opportunity zonesQualified opportunity zones (QOZs) present an opportunity for investors to defer (and potentially reduce) the federal tax due on certain capital gains. To qualify, a taxpayer must invest the capital gain in property or businesses located inside a QOZ, or in a “qualified opportunity fund” (QOF), shortly following the completed transaction that gave rise to the gain. (QOFs are investment vehicles that invest at least 90% of their capital in QOZ properties and businesses.) There are substantial tax benefits for investors: Tax deferral on capital gains until the earlier of the disposition of the investment in the QOZ/QOF (or other inclusion event), or December 31, 2026; Ten percent reduction of the deferred tax on the original gain when the investment in the QOZ/QOF is made by December 31, 2021 and is held for at least five years; and Exemption from tax on post-acquisition appreciation of the QOZ/QOF investment provided the investment is held for at least 10 years and is sold by December 31, 2047. New markets tax creditThe new markets tax credit program provides federally funded tax credits for approved investments in low-income communities that are made through certified “Community Development Entities.” The credit generally equals 39% of the investment and is paid out over seven years. Energy efficiency and sustainability incentivesThere are a number of federal tax benefits available for investments to promote energy efficiency and sustainability initiatives, including: A deduction of up to $1.80 per square foot for investments in qualifying energy efficient systems (lighting, HVAC, etc.) installed in commercial, certain multi-family and government-owned buildings; A credit of $2,000 per home for the construction of energy efficient new homes; A credit of up to 26% of qualifying investments in solar, wind or other renewable energy equipment (the credit reduces further in 2023). Larger credit amounts may be available based on when the projects commenced construction and the application of the IRS regulations around this area; Cash grants for the development of products and technology that assist with energy efficiency and certain othersustainability goals; and Alternate fuel tax incentives. Other credits for employersEmployers may be able to take advantage of the following credits: The work opportunity tax credit (WOTC) program grants tax credits (of up to $9,600 per new hire) to employers that hire and retain individuals from any of 10 targeted employment groups—including veterans, ex-felons, long term family assistance or unemployment recipients, summer youth workers and others. Businesses operating within a federal empowerment zone may claim a 20% credit on up to the first $15,000 of wages paid to certain employees. The Indian employment credit may entitle an employer to a 20% tax credit on a portion of the qualified wages and employee health insurance costs paid to an enrolled member of an Indian tribe. (BDO’s article Three Tax Credit Opportunities Extended: WOTC, Federal Empowerment Zone and Indian Employment Credits contains more information on these three credits.) The family and medical leave (FMLA) tax credit provides employers a credit of up to 25% of paid family and medical leave taken as a result of the birth of a child, adoption or foster care, or to care for a spouse or child that has a serious health condition. The “FICA tip credit” gives tax relief to employers via a federal income tax credit that is based on the amount of FICA and Medicare taxes they have paid on reported tips. Credits may be available for providing access for disabled individuals or for providing employer provided childcare facilities and services. American Jobs PlanThe American Jobs Plan, introduced by President Biden on March 31, 2021, includes proposals that would create a number of new tax credits for businesses, such as credits for green energy initiatives, affordable housing, construction of childcare facilities and others. For more information on the American Jobs Plan, see BDO’s article Biden Administration Unveils Tax Blueprint as Part of American Jobs Plan. By Dan Fuller, Managing Partner, National Business Incentives & Tax Credits Practice Leader (This article was originally published https://www.bdo.com/insights/tax/. Harris CPAs is an independent member of the BDO Alliance USA.) [...] Read more...
September 13, 2021To stay abreast of the continuing impacts the coronavirus is having on the nonprofit industry and ways to adapt to all the changes, as well as to catch up on key trends in the nonprofit industry!   HIGHLIGHTS FROM THIS ISSUE: The Uniform Guidance – Some Ongoing Pitfalls Coronavirus State and Local Fiscal Recovery Funds (CSLFRF) Triaging Data Breaches What Higher Education Institutions Need to Know About Tuition Discounting Pulse Check: Is It Time to Update Your Spending Policy? 5 Steps to Maintain Donor Engagement in a Tumultuous Time Privacy by Design for Nonprofits Click below to view the file.   Nonprofit and Government Page [...] Read more...
September 13, 2021One of the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was to introduce the Paycheck Protection Program. This allowed small business to obtain crucial funding and keep their staff employed through the pandemic. Now that the dust has settled on the three rounds of PPP loan funding, it important to consider the tax implications of these loans and the forgiveness thereof. First off, if the loan was not forgiven (the business for whatever reason did not qualify for forgiveness), the loan is treated the same as any other debt. The principle will be required to be paid back and the interest will be deductible as a business expense. If the business does qualify for forgiveness, the amount forgiven will be treated as tax-exempt income. This created some initial confusion as expenses incurred to generate tax-exempt income are generally not deductible (thus making the forgiveness essentially taxable in a roundabout way). As this was not the intent of congress, the CARES Act was amended by the Tax Relief Act of 2020 to allow for these expenses to be fully deductible. This was a win-win for taxpayers as it allowed for the exclusion from income of the forgiveness while still being able to deduct the payroll, rent, utilities, and other qualifying expenses used to obtain the forgiveness. If you or your business has taken advantage of the tax-favorable provision and have questions or need assistance applying for forgiveness, please reach out to one of our advisors. We are always happy to help! By: Matt Goodfellow, CPA- Harris CPAs [...] Read more...
May 18, 2021To stay abreast of the continuing impacts the coronavirus is having on the nonprofit industry and ways to adapt to all the changes, as well as to catch up on key trends in the nonprofit industry!   HIGHLIGHTS FROM THIS ISSUE: IRS Issues Final Regulations on UBTI “Silos” Provider Relief Funds – Reporting and Audit Requirements Higher Education Emergency Relief Fund II Presentation of COVID-19 Related Federal Programs on the Schedule of Expenditures of Federal Awards CARES Act Employee Retention Credits for Nonprofit Employers Nonprofit Data Breach Vulnerabilities and How to Avoid Them Assessing Risk to Maximize Cyber Insurance Coverage Revisions to the Uniform Guidance Affecting Recipients Click below to view the file.   [...] Read more...
March 18, 2021The American Rescue Plan Act of 2021 (ARPA), signed into law by President Biden on March 11, 2021, provides additional major relief to individuals and businesses that continue to be impacted by the COVID-19 pandemic. The ARPA includes the following provisions related to individual taxpayers:​ Additional recovery rebate credit Unemployment compensation received in 2020 partially excluded from gross income Child tax credit expanded for 2021 Child and dependent care credit enhanced and refundable Student loan discharges excluded from gross income Additional Recovery/Rebate Credit Two rounds of economic impact payments have already been sent to individual taxpayers. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) enacted on March 27, 2020 granted eligible individuals a recovery rebate credit of $1,200 for single filers and $2,400 for joint filers (plus $500 per qualifying child). The rebate amount was advanced based on 2018 or 2019 income, but the credit is determined based on 2020 income. The Covid-Related Tax Relief Act of 2020 (CRTRA), enacted as part of the Consolidated Appropriations Act on December 27, 2020, granted eligible individuals a second refundable tax credit against their 2020 taxable income equal to $600 for single filers and $1,200 for joint filers (plus $600 per qualifying child). The CRTRA rebate amount is determined based on 2020 income, but the credit was advanced to taxpayers based on their 2019 income tax return. The ARPA grants eligible individuals a third refundable tax credit equal to $1,400 for single filers and $2,800 for joint filers, plus $1,400 for each dependent of the taxpayer. The credit is for the 2021 tax year; however, the rebate amount is advanced based on 2019 income, or 2020 income if the 2020 tax return has been filed. Similar to the CARES Act and CRTRA, the ARPA credit begins to phase out when the single filer’s adjusted gross income (AGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers). The credit completely phases out when a single filer’s AGI exceeds $80,000 ($160,000 for joint filers and $120,000 for head of household filers). Individuals eligible for the third economic impact payment do not include nonresident aliens, individuals who may be claimed as a dependent on another person’s return, estates or trusts. Children who are or can be claimed as dependents by their parents are not eligible individuals, even if the parent chooses not to claim the child as a dependent. A dependent of the taxpayer includes a qualifying child and a qualifying relative. A qualifying child includes a child, stepchild, eligible foster child, brother, sister, stepbrother or stepsister, or a descendent of any of them (i) who is under age 19 or a student under age 24 at the end of the year, (ii) who has not provided more than half of their own support, (iii) who has lived with the taxpayer for more than half of the year and (iv) who has not filed a joint return (other than only for a refund claim) with the individual’s spouse. For a qualifying child who is permanently and totally disabled at any time during the tax year, all of the foregoing requirements apply except for age—age is irrelevant. A qualifying relative includes a child, stepchild, eligible foster child, brother, sister, stepbrother or stepsister, father or mother, grandparent, stepfather or stepmother, or an individual with the same place of abode as taxpayer (i) whose gross income is less than $4,300 (excluding social security benefits), (ii) who has not provided more than half of their own support, and (iii) who is not a qualifying child. For a qualifying relative who is permanently and totally disabled at any time during the tax year, gross income does not include income for services performed at a school that provides special instruction or training designed to alleviate the disability of the individual and that is operated as a non-profit organization. The availability of medical care at the school must be the principal reason for the individual’s presence there, and the income must arise solely from activities at the school that are incidental to the medical care. The ARPA provides that no advance refund amount will be made if the taxpayer was deceased before January 1, 2021, nor will any amount be determined for a qualifying dependent of a taxpayer if the taxpayer (both taxpayers on a joint return) was deceased before January 1, 2021. Further, in the case of a joint return where only one spouse has a valid Social Security number (SSN), that spouse is eligible to receive the $1,400 rebate if he or she meets all other requirements of joint filers (i.e., AGI limitations). However, for military service members, both spouses are eligible for the economic income payment if at least one spouse was a member of the U.S. armed forces at any time during the tax year and at least one spouse’s SSN in included on the joint return. If a dependent is considered when calculating the credit, the dependent must have a valid SSN. Individuals who did not file a tax return in 2019 or 2020 may still receive an automatic advance based on the individual’s status as a beneficiary of social security, railroad retirement benefits or VA (Veteran’s Administration) benefits. Individuals who otherwise are not required to file and are not receiving social security benefits are still eligible for the rebate but will be required to file a tax return to claim the benefit. Unemployment Income For tax year 2020, if a taxpayer’s adjusted gross income is less than $150,000, the taxpayer may exclude up to $10,200 of unemployment compensation from gross income. There is no phaseout, and the $150,000 limit applies to single filers, joint filers and head of household filers. In the case of joint filers, the $10,200 exclusion amount applies separately to each filer. If the taxpayer has filed his or her 2020 tax return, the he or she will need to file an amended return to receive the tax benefit. The act also extends the federal unemployment compensation benefits in the amount of $300 per week through September 6, 2021. Child Tax Credit The ARPA expands the child tax credit amounts and eligibility requirements for tax year 2021. The credit is increased from $2,000 to $3,000 per qualifying child ($3,600 for children under age 6). The definition of a qualifying child is expanded to include a child who has not turned 18 by the end of 2021. The credit is fully refundable for a taxpayer with a principal place of abode in the U.S. for more than one-half the tax year, or for a taxpayer who is a bona fide resident of Puerto Rico for the tax year. The additional $1,000 credit amount per qualifying child ($1,600 per qualifying child under age 6) begins to phase out at a rate of $50 for each $1,000 when a single filer’s modified adjusted gross income (MAGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers). A single filer with one qualifying child over age 6 will phase out of the increased credit amount if the taxpayer’s MAGI exceeds $95,000. Similarly situated joint filers will phase out of the increased credit amount if their MAGI exceeds $170,000. After application of the phase-out rules for the temporarily increased credit amount, the remaining $2,000 of credit is subject to the phaseout rules under existing law ($400,000 for joint filers and $200,000 for all other filers). A single filer with one qualifying child will phase out of the remaining credit if his or her MAGI exceeds $240,000, while joint filers with one qualifying child will phase out of the remaining credit if their MAGI exceeds $440,000. The ARPA directs the IRS to establish a program in which monthly advance payments equal to 1/12th of the estimated 2021 Child Tax Credit amount will be paid to the taxpayer during the period July 2021 through December 2021. The remaining 50% of the annual estimated amount will be claimed on the 2021 tax return. Initially, the advanced amount will be determined based on a taxpayer’s 2019 or 2020 tax filing. However, upon receipt of a more recent tax filing or other taxpayer-provided eligibility information, the IRS may modify the advance amount. The IRS announced on March 12, 2021 that it is reviewing implementation plans for the ARPA and that it will be issuing guidance on relevant provisions. Child and Dependent Care Credit The child and dependent care credit also is expanded for tax year 2021. The limitation for employment-related expenses considered in determining the credit is increased from $3,000 to $8,000 for one qualifying individual and from $6,000 to $16,000 for two or more qualifying individuals. Further, the applicable percentage of employment-related expenses that are allowed as a credit against tax is increased from 35% to 50%. As a result, for taxpayers with one qualifying individual, the maximum credit is increased from $1,050 to $4,000. For taxpayers with two or more qualifying individuals, the maximum credit is increased from $2,100 to $8,000. The credit begins to phase out when the taxpayer’s AGI exceeds $125,000. The applicable percentage is reduced by 1 percentage point for each $2,000 (or fraction thereof) by which the taxpayer’s AGI exceeds $125,000. However, the applicable percentage is not reduced below 20% except for taxpayers with AGI in excess of $400,000. Consequently, the applicable percentage is 50% for taxpayers with AGI of $125,000 or less, 20% for taxpayers with AGI greater than $185,000 but not greater than $400,000, and phases out completely for taxpayers with AGI greater than $440,000. The credit is refundable for taxpayers that have a principal place of abode in the U.S. for more than one-half of the tax year. Student Loan Discharges For tax years 2021 through 2025, partial or full discharge of an eligible student loan may be excluded from gross income. The types of eligible student loans include (1) loans for post-secondary educational if made, insured or guaranteed by a federal, state or local government; (2) certain private education loans; and (3) original or refinanced loans made by an educational institution, charitable contributions to which would be limited to 50% of an individual taxpayer’s AGI if the loan is made with federal, state or local government or with certain private education lenders pursuant to a program designed to encourage students to serve in occupations, or areas, with unmet needs under the supervision of a tax-exempt governmental unit or organization described in Internal Revenue Code section 501(c)(3). If the discharge of a loan made by an educational organization or a private education lender is in exchange for services performed for that organization or private lender, these rules do not exclude the discharge of the loan from gross income. [...] Read more...
March 5, 2021Are you taking advantage of all of the COVID relief available to you? A little known provision of the CARES act passed in the spring of 2020 is the Employee Retention Credit (ERC). When the CARES act first passed the ERC was an alternative to the Payroll Protection Loan Program (PPP). The Consolidated Appropriations Act signed into law on December 27, 2020 changed the ERC program and it is now available to employers who also received the PPP Loans and meet certain requirements. In the article below, you can determine if you qualify for the ERC and what steps you can take to claim this generous tax credit. -Margaret Flowers, Harris CPAs   Many nonprofit organizations were forced to shutter or temporarily close their operations under a governmental order as a result of the coronavirus pandemic, while others were forced to severely limit their offerings. One way to continue to pursue your organization’s objectives is to ensure that you are still able to function, even if only in a limited capacity. The government has supported nonprofits and the continuation of their services with the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, which includes the Paycheck Protection Program (PPP) and the Employee Retention Credit (ERC). Under the CARES Act, organizations could take advantage of either the PPP or the ERC, but not both. In welcome news for nonprofit organizations, the Consolidated Appropriations Act, 2021 (Relief Act, signed by former President Trump on December 27, 2020) retroactively eliminates this limitation and extends and enhances the ERC through the first two quarters of 2021.    The ERC is one of the most beneficial provisions of the Relief Act relevant to nonprofit organizations. If you did not consider the ERC in 2020, or were not eligible to consider the ERC because you took a PPP loan, the retroactive ability to benefit from both PPP loans and the ERC is a powerful reason to consider the ERC for 2020. Looking ahead to 2021, the enhanced amount of the credit for wages paid during the first two quarters of 2021 provides another compelling reason to consider the ERC.   Can nonprofit organizations take advantage of the ERC?   Yes! Tax-exempt organizations are eligible for the ERC because they are deemed to be engaged in a trade or business regarding the entirety of their operations. Examples of nonprofit organizations that have already taken advantage of the credit are hospitals, schools, museums, performing arts centers and churches.   What is the ERC?   The ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to a COVID-19-related governmental order or that experienced a significant reduction in gross receipts. The ERC can be claimed quarterly to help offset the cost of retaining employees. Employers may use ERCs to offset federal payroll tax deposits, including the employee FICA and income tax withholding components of the employer’s federal payroll tax deposits. Unlike the PPP, which was on a first-come first-serve basis, the ERC can be claimed up to three years from the date in which your quarterly payroll return was filed.   Who is eligible for the ERC?   To claim the ERC in any given calendar quarter, nonprofit organizations must meet one of the following criteria during that quarter: Operations were fully or partially suspended as a result of orders from a governmental authority limiting commerce, travel or group meetings due to COVID-19; or The organization experienced a significant decline in gross receipts during the calendar quarter compared to 2019. Specifically, for 2020, gross receipts for the 2020 quarter decline more than 50% when compared to the same 2019 quarter. Eligibility for the credit continues through the 2020 quarter in which gross receipts are greater than 80% of gross receipts in the same 2019 quarter. For 2021, the gross receipts eligibility threshold for employers is reduced from a 50% decline to a 20% decline in gross receipts for the same calendar quarter in 2019, and a safe harbor is provided allowing employers to use prior quarter gross receipts compared to the same quarter in 2019 to determine eligibility. Employers not in existence in 2019 may compare 2021 quarterly gross receipts to 2020 quarters to determine eligibility. Can you claim the ERC if you receive a PPP loan?  Yes! As described above, one of the most favorable provisions in the new law allows taxpayers to receive PPP loans and claim the ERC. This overlap was not permitted when the CARES Act was originally enacted, and organizations in need of cash infusions during 2020 more frequently turned to PPP loans as a source of funds rather than the ERC. Importantly, the Relief Act makes the ability to claim the ERC and receive PPP loans retroactive to March 12, 2020. As a result, organizations that received PPP loans in 2020 (and/or will receive new loans in 2021) can now explore potential ERC credits for 2020 and 2021.  Which wages qualify for the ERC? The answer depends on an organization’s employee count. Eligible organizations that are considered “Large Employers” can only claim the ERC for wages paid to employees for the time the employees are not providing services. This aligns with the purpose of the ERC, which is to encourage employers to retain and compensate employees during periods in which businesses are not fully operational. Smaller eligible organizations may claim a credit for all wages paid to employees. The Relief Act increases the threshold used to determine Large Employer status for 2021 claims to an employee count of more than 500 (for 2020, it is more than 100). This favorable change broadens the number of eligible nonprofit organizations that can claim the ERC for all wages paid to employees, including wages paid to employees who are providing services. Importantly, qualified healthcare expenses count as wages. BDO Insight: If you furloughed your employees but continue to pay their health insurance, you can claim the ERC. Furloughed employees do not have to receive wages—health care expenses alone qualify as wages for purposes of the ERC. How is the determination of Large Employer status made? Large Employer status is determined by counting the average number of full-time employees employed during 2019. For this purpose, “full-time employee” means an employee who, with respect to any calendar month in 2019, worked an average of at least 30 hours per week or 130 hours in the month. This is the same definition used for purposes of the Affordable Care Act. Importantly, aggregation rules apply when determining the number of full-time employees. In general, all entities are considered a single employer if they are a controlled group of corporations, are under common control or are aggregated for benefit plan purposes. Organizations that operated for the entire 2019 year compute the average number of full-time employees employed during 2019 by following the steps below: Step 1: Count the number of full-time employees in each calendar month in 2019. Include only those employees that worked an average of at least 30 hours per week or 130 hours in the month. Step 2: Add up each month’s employee count from Step 1 and divide by 12. BDO Insight: Part-time employees that work, on average, less than 30 hours per week are not counted in the determination of Large Employer status. Omitting part-time employees from the computation should result in more nonprofit organizations having 500 or fewer full-time employees and, therefore, being able to claim the ERC for all wages paid to employees in the first two quarters of 2021 (assuming eligibility criteria are met).  Can the same wages be used for the computation of both the ERC and the amount of PPP loan forgiveness?  No. Simply put, there is no double dipping. Wages used to claim the ERC cannot also be counted as “payroll costs” for purposes of determining the amount of PPP loan forgiveness, and organizations that want to benefit from the ERC and have their PPP loans fully forgiven will need to have sufficient wages to cover both. To the extent an organization does not have sufficient wages, strategic planning will be needed to generate maximum benefits.   Summary of ERC Changes Prior Law: 3/13/20 – 12/31/20 New Law: 3/13/20 – 12/31/20 New Law:  1/1/21-6/30/21 Interplay with PPP Loan No ERC if a forgiven PPP loan was received Taxpayers that receive a PPP loan can claim the ERC, but double dipping is not allowed Maximum Creditable Wages per Employee $10,000 per year $10,000 per year $10,000 per quarter Maximum Credit 50% of eligible wages, up to $5,000 per employee 50% of eligible wages, up to $5,000 per employee 70% of eligible wages, up to $14,000 per employee Threshold to be Considered a “Large Employer” (based on average full-time employees in 2019 and considering aggregation rules) More than 100 More than 100 More than 500 Insight: Employers that previously reached the credit limit on some of their employees in 2020 can continue to claim the ERC for those employees in 2021 to the extent the employer remains eligible for the ERC. Qualification for employers in 2021 based on the reduction in gross receipts test may provide new opportunities for businesses in impacted industries. Eligible employers with 500 or fewer employees may now claim up to $7,000 in credits per quarter, paid to all employees, regardless of the extent of services performed. This rule previously was applicable to employers with 100 or fewer employees and a maximum of $5,000 in credit per employee per year. Aggregation rules apply to determine whether entities under common control are treated as a single employer. By Carolyn Smith Driscoll, Gabe Rubio, Brad Poris | February 01, 2021    This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” Blog (February 1, 2021). Copyright © 2021 BDO USA, LLP. All rights reserved. www.bdo.com. Harris CPAs is an independent member of the BDO Alliance USA. [...] Read more...
March 4, 2021The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act or Act), signed into law on December 27, 2020 as a part of the Consolidated Appropriations Act, 2021, makes additional funds available under the Paycheck Protection Program (PPP) and expands eligibility for PPP loans. On January 6, 2021, the federal Small Business Administration (SBA) released interpretations of the new provisions: Interim Final Rule (IFR), “Business Loan Program Temporary Changes; Paycheck Protection Program as Amended,” which consolidates the rules for original PPP loans, including the modifications made by the Act; IFR “Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans,” which contains guidance for businesses that previously received a PPP loan and are seeking a second loan; and Guidance on Accessing Capital for Minority, Underserved, Veteran and Women-Owned Business Concerns, which sets out the commitment to reserve at least the first two days of the PPP application window exclusively for applications from community financial institutions that serve minority- and women-owned businesses. On January 8, 2021, the SBA released applications for the new loans, as well as overviews of the loans and two procedural notices: SBA Form 2483 – First Draw Borrower Application SBA Form 2484 – First Draw Lender Guaranty Application SBA Form 2483-SD – Second Draw Borrower Application SBA Form 2484-SD – Second Draw Lender Guaranty Application Overview of First Draw PPP Loans Overview of Second Draw PPP Loans 5000-20074, Modifications to SBA Forms 3506, 3507 and 750 CA (for purposes of PPP only) (effective January 6, 2021) 5000-20075, Repeal of EIDL Advance Deduction Requirement for SBA Loan Forgiveness Remittances to PPP Lenders (effective January 8, 2021). In a joint statement with the U.S. Department of Treasury, the SBA also announced on January 8 that the PPP reopens on January 11, 2021. However, to promote loan access for smaller lenders and their customers, the SBA will initially only accept loan applications from community financial institutions, with the main program opening to all participating lenders shortly thereafter. This alert summarizes some key points of the Act and updated SBA guidance (i.e., guidance issued through January 10, 2021), and is accompanied by an easy-to-read table that outlines the salient features of the guidance. Overview The PPP—which was originally created as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) enacted on March 27, 2020—is designed to help small businesses that have suffered from the disruptions and shutdowns related to the coronavirus pandemic and keep them operational by granting federally guaranteed loans to be used to retain staff at pre-COVID levels. A particularly beneficial aspect of the PPP is that the loan may be forgiven in whole or in part provided certain requirements are met. The Economic Aid Act earmarks an additional $284 billion for PPP loans, with specific set asides for eligible borrowers with no more than 10 employees or for loans of $250,000 or less to eligible borrowers in low- or moderate-income neighborhoods. The program ends the earlier of March 31, 2021 or the exhaustion of the funds. First draw loans are available to entities that were in operation on February 15, 2020, including certain nonprofits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships and independent contractors that make the required certification regarding economic necessity and: Did not receive a prior PPP loan and meet the definition of a small business by: Employing, together with their affiliates (unless special rules apply that allow employees to be counted by location, which applies to NAICS codes 72- restaurants and hospitality and 511110 or 5151-news organizations), fewer than 500 employees (the 500 employee count is reduced to 300 in the case of housing cooperatives, eligible Internal Revenue Code Section 501(c)(6) organizations or eligible destination marking organizations) Meeting the SBA’s size standards for industries that it allows to exceed 500 employees Qualifying under the SBA’s alternative size standard, if as of March 27, 2020, it (1) had a maximum tangible net worth of not more than $15 million, and (2) an average net income after US federal income taxes of not more than $5 million for the last two fiscal years before the date of the application Received a 2020 loan that was not forgiven by December 27, 2020 and qualifies for a larger draw on account of: Having returned all or part of the PPP loan, Having not drawn the entire loan amount that was approved by the lender, Failing to include any compensation for its partners in the original application, or Being a seasonal employer that now qualifies for an increased loan amount under the new provisions. Second draw loans are available to a more select group and only if the full amount of the first draw loan will be or has been used for authorized purposes. To qualify for a second draw loan, the employer must: Average no more than 300 employees, together with its affiliates (unless special rules apply that allow employees to be counted by location, which apply to NAICS codes 72-restaurants and hospitality,  511110 or 5151 news organizations and borrowers assigned a franchise identifier code by the SBA); Demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020; and Make the required certification regarding economic necessity. The Act clears up the controversy about the taxation of PPP loans that are forgiven and the expenses that support such forgiveness. Borrowers should deduct, capitalize or adjust basis for expenses attributable to forgiven PPP loans just as they do any other expenses in accordance with their accounting methods. The Act also confirms that the forgiven amount does not generate taxable income and that it is excluded from gross receipts in calculating the gross receipts test for the second draw. Additionally, the Act changes grants under the Economic Injury Disaster Loan (EIDL) program from taxable to nontaxable income. Loan Eligibility As explained above, the Act allows certain previously excluded entities to apply for first draw PPP loans. Additionally, the Act specifically provides—and the SBA guidance confirms—that certain businesses are not eligible for a PPP loan under the new round of funding, including the following: Publicly traded businesses and entities; Debtors in a bankruptcy proceeding; Entities that have permanently closed (note, however, that businesses that have closed temporarily or that temporarily suspend operations remain eligible for a loan, provided other relevant requirements are met); Business concerns or entities primarily engaged in political or lobbying activities; Businesses and entities created or organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong that hold directly or indirectly at least 20% of the economic interest of the business or entity, or that retain a China-resident person as a member of the entity’s board of directors; Persons required to submit a registration statement under Section 2 of the Foreign Agents Registration Act; Persons that receive a grant for shuttered venue operators under Section 324 of the Economic Aid Act; Businesses that are controlled, directly or indirectly, by the president, vice president, head of executive departments and members of Congress (or their spouses as defined by applicable common law); and Entities that previously received a second draw PPP loan. Maximum PPP Loan Amounts First draw loans continue to use the original formulas under the CARES Act to determine the loan size, i.e., 2.5 times the average monthly payroll costs up to $10 million per borrower with an overall limit of $20 million when including loans to members of the same corporate group. Second draw loans use the same 2.5 times average monthly payroll costs for most borrowers but restaurants, hotels and other establishments that provide lodging and/or food for immediate consumption (NAICS code 72 entities) are allowed a factor of 3.5 times the average monthly payroll costs. All second draw PPP loans are capped at a maximum of $2 million per borrower (per location for NAICS code 72, 511110 or 5151) up to an overall limit of $4 million when including loans to members of the same corporate group. The borrower can elect to use the average monthly payroll costs for calendar year 2019, calendar year 2020 or the one-year period before the loan application. Special rules apply to seasonal employers and those who were not in business during 2019. Note that the definition of payroll costs has been changed to include life and disability coverage paid by the employer. Revenue Reduction Needed for Second Draws To qualify for the second draw PPP loan, a borrower must demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020. For administrative ease, the SBA’s IFR allows an applicant that was in operation in all four quarters of 2019 and 2020 to substantiate its 25% gross receipt reduction based on the comparison of its 2019 and 2020 annual tax returns. A borrower that did not experience a 25% annual decline in revenues or that was not in operation in all four quarters of 2019 may still meet the revenue reduction requirement under one of the quarterly measurements. The IFR defines gross receipts consistent with the SBA’s size regulations that generally include all revenue (including investment income) received or accrued, in accordance with the entity’s accounting method, i.e., “total income” (“gross income” in the case of a sole proprietorship, independent contractor or self-employed individual), plus the cost of goods sold, but excluding net capital gains or losses. Gross receipts do not include items collected by the borrower required to be remitted to another, such as sales taxes and amounts collected by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker. Receipts from affiliates (also known as intercompany transfers) are also excluded. Receipts that are collected as reimbursements for subcontractor costs and purchases made at a customer’s request may not be excluded from gross receipts. For loans that exceed $150,000, the applicant must submit documentation that substantiates the 25% revenue reduction. For loans that do not exceed $150,000, documentation is not required with the loan application, but must be submitted to receive forgiveness of the loan. If a borrower does not apply for forgiveness, the documentation must be provided if requested by the SBA. Reduced Payroll Documentation PPP loan applicants for first draw and/or second draw loans must submit documentation that demonstrates their eligibility for the loan and to evidence the qualifying payroll amount. This documentation may include payroll records, payroll tax filings, Form 1099-MISC, Schedule C or F, income and expenses from a sole proprietorship or bank records. However, an applicant for a second draw loan will not have to document payroll costs when the same lender that processed the original loan is handling the second draw and the 2019 calendar payroll figures are used for both the original or first draw and the second draw. However, the borrower can elect to substantiate a different payroll cost for the second draw as allowed by the Act and additional documentation may be requested by the lender if helpful in conducting a good-faith review of the borrower’s application. Use of Loan Proceeds The original list of expenses that could legally be paid with PPP loan funds (cash payroll, health care, retirement plans and interest on mortgages, rent to unrelated parties, and utilities for obligations in existence on February 15, 2020) has been expanded to include: Covered operations expenditure, i.e., payments for business software or cloud computing services needed to keep business operations running (for example, HR, accounting, payables, inventory, etc.); Covered property damage costs not covered by insurance attributable to looting and vandalism during public disturbances that took place during 2020; Covered supplier costs, i.e., expenditures for goods that are essential to operations pursuant to an obligation made prior to the covered period. Expenditures for perishable goods qualify even if the obligation arises during the covered period; Covered worker protection expenditure necessary to ensure that the business complies with guidance regarding COVID-19 sanitation, safety or social distancing standards; and   Life and disability benefits (also increases payroll as for calculating the maximum loan amount). Loan Forgiveness and Simplified Procedure for Loans that Do Not Exceed $150,000 A PPP loan may be forgiven if employee headcount and wage levels are maintained, the borrower uses the proceeds for eligible expenses (e.g., payroll and other specified costs) within 24 weeks following the receipt of the funds and at least 60% of the loan funds are spent on payroll costs. The parameters for loan forgiveness were not changed by the Act, although the expenses eligible for forgiveness have been expanded as outlined above. Applicants for forgiveness can elect any period between eight and 24 weeks after the loan is disbursed. The end of the covered period will determine the date on which safe harbors must be satisfied. Under the Act, EIDL grants do not reduce the PPP loan forgiveness amount. For loans already forgiven, the SBA will return the EIDL advance that was deducted to the lender, with interest. The PPP lender is responsible for notifying the borrower of the reconciliation payment due to it. The Act requires any PPP loan that is not more than $150,000 be forgiven based solely on an application that sets out the number of employees the borrower was able to retain because of the PPP loan, the estimated total amount of the loan spent on payroll costs and the total loan amount, along with an attestation that the eligible recipient accurately provided the required certification, complied with the requirements of the law pertaining to the loan and retains employment records for four years following submission and other records for three years following submission that prove compliance. These records remain subject to audit by the SBA. The SBA will be releasing the simplified loan forgiveness application following which, lenders will need to modify their systems to make an electronic version available to eligible borrowers. Insight Entities that expect to apply for a PPP loan should begin to proactively prepare and gather all of the necessary financial information and related documentation so they can apply as soon as their lender reopens its application process. The application can be filed before the borrower receives or applies for forgiveness, as long as there is a plan to spend the original loan before the borrower receives the second draw PPP loan disbursement. If the loan request does not exceed $150,000, the revenue reduction documentation is not required until the earlier or the application for forgiveness or upon SBA’s request. A borrower can apply before filing the 2020 tax return that substantiates the 25% revenue reduction. If relevant tax forms are not available, quarterly financial statements or bank statements can be submitted.   The demand for these loans is expected to exceed the funding, so it is recommended that applications be filed as early as possible.     Issue First Draw PPP Loan(Did Not Receive PPP Loan in 2020 or Qualifies for an Adjustment) Second Draw PPP Loan(Received a PPP Loan in 2020 or First Draw PPP Loan in 2021) Last Day to Apply Earlier of March 31, 2021 or exhaustion of funds Earlier of March 31, 2021 or exhaustion of funds Eligibility Requirements for 2021 PPP Loan In operation on February 15, 2020 Did not receive a 2020 PPP loan   or Received a 2020 loan that was not forgiven by December 27, 2020 and qualifies for a larger draw on account of: Having returned all or part of  the PPP loan, Having not drawn the entire  loan amount that was approved by the lender, Failing to include any compensation for its partners in the original application, or Being a seasonal employer  that now qualifies for an increased loan amount under the new provisions Business concern, independent contractor, eligible self- employed individual, sole proprietor,  nonprofit organization eligible for   a 2020 PPP loan, veterans’ organization, tribal business concern, housing cooperative, small agricultural cooperative, eligible 501(c)(6) organization not conducting substantial lobbying activities or destination marketing organization, or an eligible nonprofit news organization Meets the “small business” definition Generally, 500  employees including affiliates or SBA Industry Standard based on size/revenue 500 employees reduced to 300 for eligible Section      501(c)(6) organization, destination marketing organizations, housing cooperatives A business can qualify under the alternative size standard, if as of March  27, 2020, it (1) had a maximum tangible net worth of not more than $15 million, and (2) had an average net income after US federal income taxes of not more than $5 million for the last two fiscal years before the date of the application Previously received a first draw PPP loan in 2020 or 2021 Used, or will use, the full amount of its first draw PPP loan received in 2020 or 2021 on authorized uses on or before the disbursement   date of the second draw PPP loan Employs, along with its affiliates, not more than 300 employees, unless it satisfies the alternative criteria for businesses with a North American Industry Classification System (NAICS) code beginning with 72 (restaurants and hospitality) and 511110 or 5151 (eligible news organizations) Experienced at least a 25% reduction in 2020 gross receipts when compared to 2019 gross receipts, measured as follows: If in operation all quarters in 2019, compare gross receipts reported on the 2019 tax return to the gross receipts for the 2020 tax return, or Compare any quarter in  2020 to the same quarter in 2019 Affiliation Rules Borrowers are considered  together with their affiliated businesses for purposes of determining eligibility for a PPP loan. In ascertaining the number of employees, employee counts include those of the borrower and its affiliates, although the affiliation rules are waived for: A business concern with not more than 500 employees that, as of the date on which the covered loan is disbursed, is assigned a NAICS code beginning with 72; (i) any business concern (including any station that broadcasts pursuant to a license that employs not more than 300 employees, per physical location of such business concern and is majority owned or controlled by a business concern that is assigned a NAICS code beginning with 511110 or 5151; or (ii) any nonprofit organization that is assigned a NAICS code beginning with 5151; and A business concern  operating as a franchise that is assigned a franchise identifier code by the Administration. Same as first draw except “300” is substituted each time “500” employees appear Necessity for Certification The borrower must certify that the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” Continues to be a requirement (notwithstanding the implication that the 25% revenue reduction illustrates necessity) Excluded Entities The following are not eligible for a PPP loan: Publicly traded company Debtor in bankruptcy proceedings Entity that has permanently closed  Business concern or entity primarily engaged in political or lobbying activities Business concern or entity for which an entity created in or organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong holds directly or indirectly at least 20% of the economic interest of the business or entity or that retain a China-resident person as a member of the entity’s board of directors Person required to submit a registration statement under Section 2 of the Foreign Agents Registration Act of 1938  Person or entity that receives a grant for shuttered venue operators under Section 324 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act Entity in which the President, the Vice President, the head of an Executive department, or a Member of Congress, or the spouse of such person as determined under applicable common law, directly or indirectly holds a controlling interest in the entity, where any issuer, the securities of which are listed on an exchange registered as a national securities exchange Entity that has previously received a second draw PPP loan Same as first draw even if a first draw PPP loan was received in 2020 Maximum Loan Amount Original formulas continue to apply to determine the loan size, i.e., 2.5 times the average monthly payroll costs limited to $10 million per borrower with an overall limit  of $20 million when including loans to members of the same corporate group. The borrower can elect to use the average monthly payroll costs for calendar year 2019, calendar year 2020 or the one-year period before the loan application.  Special rules apply to seasonal employers and those who were  not in business during 2019. Note that the definition of payroll costs has been changed to include life and disability coverage paid by the employer. Generally, the same 2.5 times average monthly payroll costs for most borrowers; but restaurants, hotels and other establishments that provide lodging and/or food for immediate consumption (NAICS code 72 entities) are allowed a factor of 3.5 times average  monthly payroll costs. All second draw PPP loans are capped at a maximum of $2 million per borrower (per location for NAICS code 72, 511110 or 5151) and with an overall limit of $4 million when including loans to members of the same corporate group. Like first draw PPP loans, the borrower can elect to use the average monthly payroll costs for calendar year 2019, calendar year 2020 or the one-year period before the loan application.  Special rules apply to seasonal employers and those who were  not in business during 2019. Note that the definition of payroll costs has been changed to include life and disability coverage paid by   the employer. Revenue Reduction Documentation  N/A For loans that exceed $150,000, the applicant must submit documentation that substantiates the 25% or greater revenue reduction. For loans that do not exceed $150,000, documentation is not required with the loan application, but it must be submitted to receive forgiveness. If a borrower does not apply for forgiveness, the documentation must be provided   if requested by the SBA. Payroll Documentation Documents must be submitted  with the loan application that demonstrates eligibility for the loan and to evidence the qualifying payroll amount. This documentation may include payroll records, payroll tax filings, Form 1099-MISC, Schedule C or F, income and expenses from a sole proprietorship, or bank records. Documentation of payroll costs is not required when the same lender that processed the original loan is handling the second draw and the 2019 calendar payroll figures are used for both the original or first draw and the second draw.  If the borrower elects different payroll costs for the second draw, substantiation will be required. Additional documentation may be requested by the lender if helpful  in conducting the good-faith  review of the borrower’s application.   Use of Loan Proceeds Payroll costs Cash payroll Employer cost of health care Employer retirement plan contribution Employer state payroll tax Life and disability benefits (new)  Non-payroll costs for obligations in existence on February 15, 2020 Interest on mortgages Rent to unrelated parties Utilities New non-payroll costs Covered operations expenditure Covered property damage costs Covered supplier costs Covered worker protection expenditure Same as first draw PPP loans Covered Period For all loan forgiveness applications filed after December 27, 2020, the covered period: Starts on the disbursement date Ends on any day that is at least eight but not more than 24 weeks later (or any time frame  in between) than the start date The end of the covered period will determine the date on which safe harbors must be satisfied. Same as first draw PPP loan rules Loan Forgiveness Loan forgiveness must be applied for within 10 months following the end of the selected covered period to avoid loan payments. Loan may be forgiven to the extent the loan proceeds are spent on the expanded payroll costs and other eligible expenses, as described above, within the covered period. In addition to the use on qualified expenses, full forgiveness requires Full-time equivalent employee and compensation levels be maintained (full forgiveness may be achieved even with some reduction of full-time equivalent employees or wages/salaries)  At least 60% of the proceeds are spent on payroll costs Same as first draw PPP loan rules Maturity Date and Interest Rate 100 basis points (1%) Five years Same as first draw if received in 2021 For more information, please visit our PPP Loan Forgiveness Center (CLICK HERE) at or contact Margaret Flowers, CPA, Partner at Harris CPAs, directly at margaretflowers@harriscpas.com. [...] Read more...
February 11, 2021To stay abreast of the continuing impacts the coronavirus is having on the nonprofit industry and ways to adapt to all the changes, as well as to catch up on key trends in the nonprofit industry!   HIGHLIGHTS FROM THIS ISSUE: What is the Private Nonprofit Sector Going to Look Like in the New Post-COVID Environment? Questions Audit Committees Should Consider In The Current Environment Federal Funding Terms Demystified Directors & Officers Liability Insurance for Nonprofits: What You Need to Know About But Were Afraid to Ask How Nonprofits can Protect their Data and Reputation in the New Era of Data Privacy Click below to view the file.   [...] Read more...
February 9, 2021The Internal Revenue Service reminds taxpayers of a special new provision that will allow more people to easily deduct up to $300 in donations to qualifying charities in 2020. Following special tax law changes made earlier in 2020, cash donations of up to $300 made before December 31, 2020, are now deductible when people file their taxes in 2021. “Our nation’s charities are struggling to help those suffering from COVID-19, and many deserving organizations can use all the help they can get,” said IRS Commissioner Chuck Rettig. “The IRS reminds people there’s a new provision that allows for up to $300 in cash donations to qualifying organizations to be deducted from income. We encourage people to explore this option to help deserving tax-exempt organizations – and the people and causes they serve.” The Coronavirus Aid, Relief and Economic Security (CARES) Act, enacted last spring, includes several temporary tax changes helping charities, including the special $300 deduction designed especially for people who choose to take the standard deduction, rather than itemizing their deductions. Nearly nine in 10 taxpayers now take the standard deduction and could potentially qualify for this new tax deduction. In tax-year 2018, the most recent year for which complete figures are available, more than 134 million taxpayers claimed the standard deduction, just over 87% of all filers. Under this new change, individual taxpayers can claim an “above-the-line” deduction of up to $300 for cash donations made to charity during 2020. This means the deduction lowers both adjusted gross income and taxable income – translating into tax savings for those making donations to qualifying tax-exempt organizations. Before making a donation, the IRS reminds people they can check the special Tax Exempt Organization Search(TEOS) tool on IRS.gov to make sure the organization is eligible for tax-deductible donations. Cash donations include those made by check, credit card or debit card. They don’t include securities, house hold items or other property. Though cash contributions to most charitable organizations qualify, some do not. Check Publication 526, Charitable Contributions, and the TEOS for more information. Though cash contributions to most charitable organizations qualify, those made to supporting organizations and donor-advised funds do not. The IRS reminds everyone giving to charity to be sure to keep good records. By law, special recordkeeping rules apply to any taxpayer claiming a charitable contribution deduction. Usually, this includes obtaining a receipt or acknowledgement letter from the charity, before filing a return, and retaining a cancelled check or credit card receipt. For details on these recordkeeping rules, see Publication 526, available on IRS.gov. In addition, the CARES Act includes other temporary provisions designed to help charities. These include higher charitable contribution limits for corporations, individuals who itemize their deductions and businesses that give food inventory to food banks and other eligible charities. For more information about these and other Coronavirus-related tax relief provisions, visit IRS.gov/coronavirus. Source: https://www.irs.gov/newsroom/special-300-tax-deduction-helps-most-people-give-to-charity-this-year-even-if-they-dont-itemize ) [...] Read more...
January 14, 2021Are internal controls still designed and operating effectively in the remote environment? As the evolving COVID-19 pandemic brings uncertainties, organizations face immediate risks impacting their control environment. The pandemic has caused many to transition to a work-from-home framework, but your most important internal controls may not have kept pace with these rapid process changes. The design and operating effectiveness of internal controls needs to be reviewed to ensure these arrangements remain fit for purpose. –Kevin Congo, Harris CPAs   Due to its mission-driven purpose, a nonprofit organization’s financial and operational sustainability is significantly impacted by its environment. Natural disasters, economic slowdowns and unforeseen events are just a few factors that can adversely affect nonprofit organizations. That is why a strong internal control system has always been a priority for audit committees and management of nonprofit organizations. They’ve established policies to address the primary question—“what could go wrong?” Now nonprofits are facing the challenges of dealing with the results of the global novel coronavirus (COVID-19) pandemic, which include a scattered and remote workforce. As a result, management of nonprofit organizations are asking themselves—are the internal controls that were once effective still operating in a manner to achieve our objectives in this unprecedented time? What can nonprofit organizations implement in order to adapt to this remote environment, when their employees, resources, technology and documentation may only be accessible through virtual means?   Below are five tips that nonprofit organization management should consider to strengthen their internal control environment in response to a remote environment: 1. Re-evaluate risks Due to the ever-changing environment the pandemic has created, prior to re-assessing internal control systems, risks must first be reevaluated. Every nonprofit organization’s circumstances related to COVID-19 will be unique. Additional risks that impact the organization’s financial position may arise. Audit committees and management should ask themselves questions such as “How has COVID-19 impacted the organization’s liquidity and capital resources? Is there now uncertainty about our ability to meet the covenants of our debt agreements? Have new cybersecurity and data integrity risks resulted from our digital working environment? Does our business continuity plan need to be re-assessed?” Developing plans and strategies to address questions such as these is crucial to help navigate this new reality. 2. Reassess the existing control environment in response to reevaluated risks Although a nonprofit organization may periodically reassess and test its internal control system to ensure it is working properly, we have now entered an unprecedented time, where reassessing controls takes on a whole new meaning. What proved successful in the past may now result in control gaps when taking into consideration new risks such as a remote work environment, digital reviews/approvals and virtual documentation. Internal controls should be reassessed to determine if current existing controls are in fact targeting the specific risks now at hand. Nonprofit organizations may have to make changes in order to use the information and resources available to them at this time. This could result in a change in both operational and financial policies and implementing new policies. Roles and responsibilities may have to be adjusted. Contingency plans may have to be formulated in response to the new risks that have arisen. For many nonprofit organizations, controls around donor-restricted and government grant funds may need to be enhanced. Current system capabilities may have to be explored to determine if there is the potential to automate controls. The overall implementation of amended controls is essential to thriving in this changing work environment. 3. Strengthen segregation of duties Segregation of duties is often a challenge for nonprofit organizations, depending on their size and complexity—the smaller the size, the bigger the challenge. This challenge intensifies even more in a COVID-19 environment, where the separation of duties, which may have been enforced before, now appears less pragmatic when all parties are working remotely, and circumstances are constantly changing. Questions such as “Who is establishing the controls and who is monitoring them?” need to be revisited. For instance, in a virtual environment, is management able to clearly distinguish between who holds physical custody of an asset versus who does record keeping for that asset? Furthermore, who has the authorization to approve transactions? Leveraging technology to enhance controls is one way to assist in clearly distinguishing between roles and responsibilities. Technology can provide collaboration tools and additional layers of approval that can help ensure that controls are enforced and appropriate segregation of duties is maintained. 4. Document key areas Key areas represent those higher-risk financial statement areas that require comprehensive and robust supporting documentation. Management of nonprofit organizations should exercise extreme caution in ensuring significant areas such as management estimates and expenditure/cost tracking are thoroughly supported by documentation. The expectation of well-documented management estimates has always existed—however, in this rapidly changing environment, reasons and explanations of how an estimate is being recorded are more imperative than ever. The estimation should include written assessments of the thought process as well as reasons for any changes from prior years. This especially comes into play when considering the impact of COVID-19 on goodwill impairment, going concern evaluation and any potential additional debt requirements. These represent areas that may likely need renewed consideration and reinforcement when documenting underlying rationales behind the estimates. Additionally, proper expenditure/cost tracking has become increasingly important. Whether nonprofit organizations are incurring expenditures specific to COVID-19-related costs or receiving government relief funds, the methodology behind identifying and tracking these revenues and expenses is vital to a nonprofit organization’s financial position. A nonprofit may consider recording COVID-19-related funds received and expense incurred in separate cost centers. Detailed supporting documentation needs to be maintained to support these amounts. 5. Don’t be afraid to seek assistance from outside experts In order to perform their oversight function, audit committees, boards of directors and management of nonprofit organizations might need assurance that the new information and data they are processing is of the utmost quality. As new matters arise, outside experts can help the organization better understand best practices as well as help to monitor and assess the effectiveness of internal controls. They can also address complex accounting and auditing questions or assist with reviewing controls related to cybersecurity and privacy risks. External experts can also identify opportunities for nonprofit organizations by helping them understand the eligibility provisions for additional relief funding with respect to the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Templates and tools can be provided to the organization to help them better understand the calculations behind the relief packages available to them. By Carla DeMartini, CPA (This article was originally published in BDO’s Nonprofit Standard Newsletter, Summer 2020 on bdo.com. Harris CPAs is an independent member of the BDO Alliance USA.) [...] Read more...
January 4, 2021A video introduction of our new office at 1120 S Rackham Way, Meridian While 2020 has dealt its fair share of curve balls, one thing that has not wavered is our commitment to helping our clients and their businesses succeed and make it through these unforeseen circumstances. We are grateful to each and every one of our clients for the relationships we have created over the years. Our success would not be possible without you. We have been excited to see our team grow significantly over the last few years, and the time has come where we have finally outgrown our current space. We are excited to announce that we have moved and are now open at our new location! It was important to us to remain in Meridian, which has become a central location for the entire Treasure Valley, and to continue to provide easy access to our office for our clients. Our new office location is just down the road from our former location, and is in the new Eagle View Landing Business Complex in Meridian. We look forward to celebrating this move with you and inviting you to our new space when it is safe to do so. We truly value our relationship with each and every one of our clients and look forward to working with you in the new year! NEW ADDRESS:1120 S Rackham Way, Suite 100 | Meridian, ID 83642(Map Source: https://bvadev.com/properties) Take a Look Inside: (Swipe to advance slideshow) [...] Read more...
December 29, 2020On December 27, 2020, the president signed into law the Consolidated Appropriations Act, 2021 (bill), a massive tax, funding, and spending bill that contains a nearly $900 billion coronavirus aid package. The over 5,500-page emergency coronavirus relief package aims to bolster the economy, provide relief to small businesses and the unemployed, deliver checks to individuals and provide funding for COVID-19 testing and the administration of vaccines. The coronavirus relief package contains another round of financial relief for individuals in the form of cash payments and enhanced federal unemployment benefits. Individuals who earn $75,000 or less annually generally will receive a direct payment of $600. Qualifying families will receive an additional $600 for each child. According to Treasury Secretary Mnuchin, these checks could be distributed before the end of 2020. To provide emergency financial assistance to the unemployed, federal unemployment insurance benefits that expire at the end of 2020 will be extended for 11 weeks through mid-March 2021, and unemployed individuals will receive a $300 weekly enhancement in unemployment benefits from the end of December 2020 through mid-March. The CARES Act measure that provided $600 in enhanced weekly unemployment benefits expired on July 31, 2020. The bill earmarks an additional $284 billion for a new round of forgivable small-business loans under the Paycheck Protection Program (PPP) and contains a number of important changes to the PPP. It expands eligibility for loans, allows certain particularly hard-hit businesses to request a second loan, and provides that PPP borrowers may deduct PPP expenses attributable to forgiven PPP loans in computing their federal income tax liability and that such borrowers need not include loan forgiveness in income. The bill allocates $15 billion in dedicated funding to shuttered live venues, independent movie theaters and cultural institutions, with $12 billion allocated to help business in low-income and minority communities. The bill also extends and expands the employee retention credit (ERC) and extends a number of tax deductions, credits and incentives that are set to expire on December 31, 2020. This alert highlights the main tax provisions included in the bill. Paycheck Protection Program The PPP, one of the stimulus measures created by the CARES Act, provides for the granting of federally guaranteed loans to small businesses, nonprofit organizations, veterans organizations and tribal businesses in an effort to keep businesses operating and retain staff during the COVID-19 pandemic. (PPP loans are administered by the Small Business Administration (SBA)). A recipient of a PPP loan under the CARES Act (the first round) could use the funds to meet payroll costs, certain employee healthcare costs, interest on mortgage obligations, rent and utilities. At least 60% of the loan funds were required to be spent on payroll costs for the loan to be forgiven. Eligible businesses Business are eligible for the second round of PPP loans regardless of whether a loan was received in the first round. The bill changes the definition of a “small business.” Small businesses are defined as businesses with no more than 300 employees and whose revenues dropped by 25% during one of the first three quarters of 2020 (or the fourth quarter if the business is applying after January 1, 2021). The decrease is determined by comparing gross receipts in a quarter to the same in the prior year. Businesses with more than 300 employees must meet the SBA’s usual criteria to qualify as a small business. Borrowers may receive a loan amount of up to 2.5 (3.5 for accommodation and food services sector businesses) times their average monthly payroll costs in 2019 or the 12 months before the loan application, capped at $2 million per borrower, reduced from a limit of $10 million in the first round of PPP loans.  The bill also expands the types of organizations that may request a PPP loan. Eligibility for a PPP loan is extended to: Tax-exempt organizations described in Internal Revenue Code (IRC) Section 501(c)(6) that have no more than 300 employees and whose lobbying activities do not comprise more than 15% of the organization’s total activities (but the loan proceeds may not be used for lobbying activities) “Destination marketing organizations” that do not have more than 300 employees Housing cooperatives that do not have more than 300 employees Stations, newspapers and public broadcasting organizations that do not have more than 500 employees The following businesses, inter alia, are not eligible for a PPP loan: Publicly-traded businesses and entities created or organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong that hold directly or indirectly at least 20% of the economic interest of the business or entity, including as equity shares or a capital or profit interest in a limited liability company or partnership, or that retain as a member of the entity’s board of directors a China-resident person Persons required to submit a registration statement under the Foreign Agents Registration Act Persons that receive a grant under the Economic Aid to Hard Hit Small Businesses, Nonprofits and Venues Act Uses of loan proceeds The bill adds four types of non-payroll expenses that can be paid from and submitted for forgiveness, for both round 1 and round 2 PPP loans, but it is unclear whether borrowers that have already been approved for partial forgiveness can resubmit an application to add these new expenses: Covered operational expenditures, i.e., payments for software or cloud computing services that facilitate business operations, product or service delivery, the processing, payment or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses Covered property damage, i.e., costs related to property damage and vandalism or looting due to public disturbances that took place in 2020, which were not covered by insurance or other compensation Covered supplier costs, i.e., expenses incurred by a borrower under a contract or order in effect before the date the PPP loan proceeds were disbursed for the supply of goods that are essential to the borrower’s business operations Covered worker protection equipment, i.e., costs of personal protective equipment incurred by a borrower to comply with rules or guidance issued by the Department of Health & Human Services, the Occupational Safety and Health Administration or the Centers for Disease Control, or a state or local government To qualify for full forgiveness of a PPP loan, the borrower must use at least 60% of the funds for payroll-related expenses over the relevant covered period (eight or 24 weeks). Increase in loan amount The bill contains a provision that allows an eligible recipient of a PPP loan to request an increased amount, even if the initial loan proceeds were returned in part or in full, and even if the lender of the original loan has submitted a Form 1502 to the SBA (the form sets out the identity of the borrower and the loan amount). Expense deductions The bill confirms that business expenses (that normally would be deductible for federal income tax purposes) paid out of PPP loans may be deducted for federal income tax purposes and that the borrower’s tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. This has been an area of uncertainty because, while the CARES Act provides that any amount of PPP loan forgiveness that normally would be includible in gross income will be excluded from gross income, it is silent on whether eligible business expenses attributable to PPP loan forgiveness are deductible for tax purposes. The IRS took the position in guidance that, because the proceeds of a forgiven PPP loan are not considered taxable income, expenses paid with forgiven PPP loan proceeds may not be deducted. The bill clarifies that such expenses are fully deductible—welcome news for struggling businesses. Importantly, the effective date of this provision applies to taxable years ending after the date of the enactment of the CARES Act. Thus, taxpayers that filed tax returns without deducting PPP-eligible deductions should consider amending such returns to claim the expenses. Loan forgiveness covered period The bill clarifies the rules relating to the selection of a PPP loan forgiveness covered period. Under the current rules, only borrowers that received PPP proceeds before June 5, 2020 could elect an eight-week covered period. The bill provides that the covered period begins on the loan origination date but allows all loan recipients to choose the ending date that is eight or 24 weeks later. Loan forgiveness PPP loan recipients generally are eligible for loan forgiveness if they apply at least 60% of the loan proceeds to payroll costs (subject to the newly added eligible expenditures, as described above), with partial forgiveness available where this threshold is not met. Loans that are not forgiven must be repaid. Currently, PPP loan recipients apply for loan forgiveness on either SBA Form 3508, Form 3508 EZ or Form 3508S, all of which required documentation that demonstrates that the claimed amounts were paid during the applicable covered period, subject to reduction for not maintaining the workforce or wages at pre-COVID levels. The bill provides a new simplified forgiveness procedure for loans of $150,000 or less. Instead of the documentation summarized above, these borrowers cannot be required to submit to the lender any documents other than a one-page signed certification that sets out the number of employees the borrower was able to retain because of the PPP loan, an estimate of the amounts spent on payroll-related costs, the total loan value and that the borrower has accurately provided all information required and retains all relevant documents. The SBA will be required to develop the simplified loan forgiveness application form within 24 days of the enactment of the bill and generally may not require additional documentation. Lenders will need to modify their systems used for applications to make an electronic version of the new forgiveness application available to eligible borrowers. Employment Retention Credit and Families First Coronavirus Response Credit The bill extends and expands the ERC and the paid leave credit under the Families First Coronavirus Response Act (FFCRA). ERC The ERC, introduced under the CARES Act, is a refundable tax credit equal to 50% of up to $10,000 in qualified wages (i.e., a total of $5,000 per employee) paid by an eligible employer whose operations were suspended due to a COVID-19-related governmental order or whose gross receipts for any 2020 calendar quarter were less than 50% of its gross receipts for the same quarter in 2019. The bill makes the following changes to the ERC, which will apply from January 1 to June 30, 2021: The credit rate is increased from 50% to 70% of qualified wages and the limit on per-employee wages is increased from $10,000 for the year to $10,000 per quarter. The gross receipts eligibility threshold for employers is reduced from a 50% decline to a 20% decline in gross receipts for the same calendar quarter in 2019, a safe harbor is provided allowing employers to use prior quarter gross receipts to determine eligibility and the ERC is available to employers that were not in existence during any quarter in 2019. The 100-employee threshold for determining “qualified wages” based on all wages is increased to 500 or fewer employees. The credit is available to certain government instrumentalities. The bill clarifies the determination of gross receipts for certain tax-exempt organizations and that group health plan expenses can be considered qualified wages even when no wages are paid to the employee. New, expansive provisions regarding advance payments of the ERC to small employers are included, such as special rules for seasonal employers and employers that were not in existence in 2019. The bill also provides reconciliation rules and provides that excess advance payments of the credit during a calendar quarter will be subject to tax that is the amount of the excess. Treasury and the SBA will issue guidance providing that payroll costs paid during the PPP covered period can be treated as qualified wages to the extent that such wages were not paid from the proceeds of a forgiven PPP loan. Further, the bill strikes the limitation that qualified wages paid or incurred by an eligible employer with respect to an employee may not exceed the amount that employee would have been paid for working during the 30 days immediately preceding that period (which, for example, allows employers to take the ERC for bonuses paid to essential workers). The bill makes three retroactive changes that are effective as if they were included the CARES Act. Employers that received PPP loans may still qualify for the ERC with respect to wages that are not paid for with proceeds from a forgiven PPP loan. The bill also clarifies how tax-exempt organizations determine “gross receipts” and that group health care expenses can be considered “qualified wages” even when no other wages are paid to the employee. FFCRA The FFCRA paid emergency sick and child-care leave and related tax credits are extended through March 31, 2021 on a voluntary basis. In other words, FFCRA leave is no longer mandatory, but employers that provide FFCRA leave from January 1 to March 31, 2021 may take a federal tax credit for providing such leave. Some clarifications have been made for self-employed individuals as if they were included in the FFCRA. Other Tax Provisions in the CAA The bill includes changes to some provisions in the IRC: Charitable donation deduction: For taxable years beginning in 2021, taxpayers who do not itemize deductions may take a deduction for cash donations of up to $300 made to qualifying organizations. The CARES Act revised the charitable donation deduction rules to encourage donations following a decline after the enactment of the Tax Cuts and Jobs Act in 2017. Medical expense deduction: The income threshold for unreimbursed medical expense deductions is permanently reduced from 10% to 7.5% so that more expenses may be deducted. Business meal deduction: Businesses may deduct 100% of business-related restaurant meals during 2021 and 2022 (the deduction currently is available only for 50% of those expenses). Extenders: The bill provides for a five-year extension of the following tax provisions that are scheduled to sunset on December 31, 2020: The look-through rule for certain payments from related controlled foreign corporations in IRC Section 954(c)(6), which was extended to apply to taxable years of foreign corporations beginning before January 1, 2026 and to taxable years of U.S. shareholders with or within which such taxable years of foreign corporations end New Markets Tax Credit Work Opportunity Tax Credit Health Coverage Tax Credit Carbon Oxide Sequestration Credit Employer credit for paid family and medical leave Empowerment zone tax incentives Exclusion from gross income of discharge of qualified principal residence indebtedness Seven-year recovery period for motorsports entertainment complexes Expensing rules for certain productions Oil spill liability trust fund rate Incentive for certain employer payments of student loans (notably, the bill does not include other student loan relief so that borrowers will need to resume payments on such loans and interest will begin to accrue). Permanent changes: The bill makes several tax provisions permanent that were scheduled to expire in the future, in addition to the medical expense deduction threshold mentioned above: The deduction of the costs of energy-efficient commercial building property (now subject to inflation adjustments) The gross income deduction provided to volunteer firefighters and emergency medical responders for state and local tax benefits and certain qualified payments The transition from a deduction for qualified tuition and related expenses to an increased income limitation on the lifetime learning credit The railroad track maintenance credit Certain provisions, refunds and reduced rates related to beer, wine and distilled spirits, as well as minimum processing requirements for certain craft beverages produced outside the U.S. [...] Read more...
November 24, 2020In the face of Covid-19, many nonprofits have had to reevaluate their financial positions. Has your organization taken another look at its budget recently? In this article you will learn about flexible budgeting techniques and when to use them – they are not just for pandemics. –Jacki Cox, Harris CPAs Most organizations have an established budgeting process. Whether the entity uses a robust performance management tool or a spreadsheet, there is likely a thoughtful process to predict the next year’s revenues and expenses. The budget is usually approved by the board of directors and/or other committee and memorialized in the meeting minutes. Once the budget is final, how an organization utilizes this tool varies. Most organizations utilize the budget as a tool for comparing actuals on a periodic basis while some revisit the budget and make changes based on certain events, and a rare few actually revisit the budget on a rolling schedule and update forecasts routinely.   Based on a survey conducted in 2016 with the Economic Intelligence Unit (consisting of 544 global companies) only two thirds of organizations surveyed incorporated rolling budgets. Although experts often say reforecasting or rolling budgets are important, many organizations continue to operate with a static budget, citing time or computer system limitations. A static or fixed budget occurs when the organization prepares an annual budget, which remains untouched for the fiscal year. The organization compares actual performance to the budget at periodic reporting intervals. This common type of budgeting is a good tool for keeping spending within a predetermined threshold. A static budget remains useful when spending is generally predictable and consistent. However, it can become cumbersome and unhelpful when the organization sees major changes, and the variances, while explainable, render the static budget meaningless.   Consider the current reality of our unprecedented economic and social times. On Jan. 30, 2020, the World Health Organization (WHO) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (COVID-19) and the risks to the international community as the virus spread globally. In March 2020, the WHO classified COVID-19 as a pandemic, based on the rapid increase in global exposure. The world is still determining the ultimate impact of the global pandemic. In the United States, shelter-in-place orders seem to change daily and differ not only by state, but by county or even potentially by neighborhood. Economic stimulus packages were enacted on March 27, 2020, under the Coronavirus Aid, Relief and Economic Security Act, with new grant opportunities, tax changes, and ever evolving lending programs. In addition, we have seen historic stock market changes based on seemingly every announcement from the Centers for Disease Control and Prevention (CDC), the president and/or major corporations. Now, more than ever, organizations need to understand how to reforecast static budgets so that the executive teams can make real-time informed decisions.   Per an article from Kshitjil Dayal, Workday, “…from March 23 to 27, our cloud planning platform processed up to 30 times more forecasts and build-out scenarios than in a typical week. Since the emergence of the COVID-19 pandemic, we’ve seen an overall average increase of 15 times the amount of modeling and recalibrating as organizations everywhere attempt to make sense of the ripple effects.” Based on that evidence, organizations seem to be aware of the need to reforecast budgets for fiscal year 2020 and beyond. Was your organization ready?   Historically, the most common reason noted for using reforecasting or a rolling budget was the constantly changing nature of the business environment, whether it be technology innovations, stock market fluctuations or management changes, and the belief that a static budget would not provide organizations with a useful tool when making key decisions. In the past, your organization may have concluded your environment was not constantly changing, or that the headache of the reforecasting process was larger than the benefits. Now every organization is in a state of constant change, and reforecasting is critical.   Budgeting is a bit like road trip directions. In the past, you pulled out the road atlas, plotted your course and headed out. It was a surprise when you hit a major traffic jam or detour, and you were forced to wait patiently. Now, you put the destination into your favorite mapping app and start your route. As you drive, the app periodically notifies you of a shorter available route, or a major road blockage ahead that requires rerouting. Your mapping app provides all of the information you need to quickly make the decision to take a new course or stay on the original one. A budget that can be reforecast quickly gives your organization the same ability. If you want this capability for your organization, the next step is to decide whether you will use a reforecast or a rolling budget. What is reforecasting? Reforecasting means updating the entire budget based on new facts and circumstances, taking a holistic look at your original budget and updating any elements as necessary. In the end there is a separate, fully revised budget, not an adjustment to just a line or two. The reforecast allows the operational group to understand the new route to follow and what will be ahead on the new path. It provides a more relevant decision tool than the static budget. When should an organization reforecast? As noted above, a reforecast should happen whenever there is a large or unexpected trigger event, such as the COVID-19 pandemic. However, it doesn’t have to be that big of a trigger. It could be a large or unexpected change in one of the organization’s major revenue streams or cost drivers, such as winning (or losing) a major contract. When the main driver of your budget is expected to change as a result of the event, a reforecast should be completed. Organizations should also consider reforecasting when trends show that the original budget was not accurate, and you start to see recurring, significant variances in line items between actual and budgeted amounts. The key message is that a reforecast is needed when the main driver of your budget suffers a significant enough impact that it is necessary to consider a holistic change in your original static budget. How should an organization reforecast? Before you determine the next steps in reforecasting, consider the budget process in your organization. Do you have a zero-based budget? In a zero-based budget, the organization builds the budget from scratch, considering each expense driving the budget from the expense side and attempting to grow profit by reducing expenses, rather than increasing price per unit or units sold. Or, does the organization look at historical trends and adjust revenues and expenses according to expected growth or shrinkage? Either way, break down the assumptions to the original drivers, whether it is variable costs or variable revenue sources that drive the bottom-line budget. This may require more thought if your organization has not done a zero-based budget recently. If you are struggling to identify your organization’s drivers, consider what key performance indicators you report to the board of directors or what benchmarks you are tracking. These are likely the drivers to consider when you are reforecasting. Once you have determined which costs or revenues are variable, then reforecast what impact the event will have on your variable drivers. If you budget based on costs, think about what costs are variable, such as operational payroll or supplies. Will these costs increase or decrease? If your costs increase, what will the organization need to do to increase revenues? Another approach is to start with the variable revenue drivers (such as patients served, units sold or students enrolled). Will the visit/unit sales rate increase or decrease? If the unit sales increase or decrease, what is the impact on costs? Will prices need to change? If prices change, what must the organization do in response? Remember as you change the cost driver, consider the impact on revenue, or vice versa. Next, consider fixed costs and if there are any changes to these based on the trigger event. Typically, fixed costs would not be subject to change; however, in response to an event such as the COVID-19 pandemic, organizations may be renegotiating administrative payroll or rent expenses and, therefore, those fixed costs should be reforecast as well. Perhaps the original fixed-cost assumptions were not accurate in the first place. It is worth looking at all significant line items to ensure the accuracy of the forecast. Take this time to be critical of all original assumptions. Review future debt payments, rental agreements or other recurring charges to ensure that the terms of those contracts have not substantially changed since the budget was originally prepared. The main drivers of the budget are always program/operational related. Therefore, it is critical that you speak with the managers of each division to understand what their projections entail. Accounting and finance personnel must understand if a change to the budget is realistic and if operations can function with the parameters that have been assigned. For example, if you cut expenses to balance the budget from anticipated revenue losses, make sure operational/program managers agree that there are enough expenses to produce whatever is needed to meet anticipated demands. Finance teams have noted that siloed operations or lack of integrations are main reasons for preparing only a static budget and finding a lack of value in other models. While working on reforecasting, time is of the essence. The sooner the data is reforecast, the sooner the organization can use it as a tool for their decision making. It may be difficult the first time the organization works through a reforecast. Take notes on lessons learned and consider how you can set up the next period’s budget in a format that may be easier to reforecast in the future. How do I predict the unpredictable? Reforecasting for a trigger event, such as a new contract, is relatively straightforward. Program managers will understand how drivers will be impacted and what considerations should be made. However, what should organizations do with something like the COVID-19 pandemic? How can the future be predicted? Financial analysts have made a living out of creating models that consider scenarios such as these. Those scenarios are then stress tested to see what happens if certain assumptions change. Using the same thought process can help you “predict” the future. One way to create a model is to understand your organization’s cash burn. Most CFOs are acutely aware of cash trends. Look back at historical cash flows and calculate what your average spend rate is compared to your average collection rate. With this knowledge you could model a few scenarios. Consider the worst case scenario first. If the organization is unable to collect cash from any revenue for an entire quarter what reforecast is needed on the budget? What happens if cash from revenue is only reduced a certain percentage over that same quarter? Essentially using this theory, you can start to build steps to respond to a prediction and implement those steps as necessary. As an example, Organization Y has noted that the current cash position is $1 million, and that fixed costs requiring cash for the next quarter are $200,000. This leaves $800,000 of potential spending. If the organization’s variable expenses are $900,000 a quarter, what steps would need to be taken to cover the shortfall of $100,000 ($1.1 million of variable and fixed costs for the quarter less cash on hand of $1 million)? With a predicted shortfall number, the organization can decide if that means taking on new debt, curbing capital expenses or potentially cutting salaries. The worst case scenario may not be the most likely. But rather if Organization Y forecasts that instead of the typical cash from revenue of $1 million a quarter, they anticipate $500,000 in cash from revenue this quarter. Now the organization has $1.5 million ($1 million of cash on hand plus the $500,000) to spend over the quarter. If the cash needs are $1.1 million, they know going into the next quarter that they have $400,000 of cash available. It is easy to establish the worst case scenario. It is harder to picture a realistic scenario, especially during situations like the COVID-19 pandemic. To assist your organization in determining the most realistic scenarios when reforecasting, look at what is happening in your industry in particular. If you are a member of a trade organization, it is likely that they are polling members and publicizing what member organizations are experiencing. You can also look to other sources of benchmarking, such as public companies, to see what the quarterly earnings or filings look like. Economic sources like IBISworld, Moody’s Analytics, Morgan Stanley Economic Outlook, Morningstar Economic Outlook, or Placer.ai on Retail Foot Traffic provide data and information on economic trends experts are seeing. Organizations often forget to look at external sources to help predict the course of the budget drivers, which can be detrimental when creating an accurate forecast. When preparing any kind of budget, looking at external data sources is critical. Even if your organization struggles with defining the most realistic scenario, the reforecast is still a helpful tool as it starts to put parameters (Organization Y has somewhere between a shortfall of $100,000 or a surplus of $400,000 to consider) that management can work with to make informed decisions about the best next direction rather than driving blind. What is a rolling budget? A rolling budget is similar to a reforecast, except a rolling budget was never intended to remain static and has a set time of when it should be adjusted (rather than waiting for trigger events). A common example of a rolling budget is where an organization would budget four quarters ahead. Each quarter the organization updates the next three quarters and adds a new fourth. Meanwhile monthly comparisons would be made to the monthly budget planned in the rolling budget. The organization would set a time period at which point the budget will be reviewed and updated using the same techniques as noted above for reforecasting. The rolling period could always be adjusted if a trigger event occurred outside of the normal update period. The rolling budget is always anticipating change, so an organization is set up to continuously monitor the trends and update either revenue or cost predictions, or both, to stay nimble. Which one is better? The best budget method depends entirely on the attributes of your organization and the industry it operates in. A static budget is likely the best option for a small organization with relatively small fluctuations year over year. It may also be helpful in organizations that are grant driven where the grant budgets will not change once adopted. While the budgeting process can be long, it only occurs once a year in this environment, which makes it easier for a small staff and limited software capabilities. If your organization utilizes a static budget, to ensure that the budget stays relevant, the organization should routinely compare actual results to budget. Reforecasting is not always necessary, especially if there is no trigger event and no major variances from the static budget. However, because events like the COVID-19 pandemic are rarely foreseen, the ability to reforecast a static budget is beneficial for any organization. Right now, every organization should prepare a reforecast budget using the steps outlined above based on the impacts of the COVID-19 pandemic. While working on the reforecast, use this time to set up a process and policy of how and when to reforecast your budget in the future. For example, as a policy, an organization could define a trigger event. Try to use thresholds such as an event that would likely change the main budget driver by 20% . When a “roadblock” like the COVID -19 pandemic comes up, the organization needs the tools to create a new fiscal road map. It will likely also lead the organization to identify areas to improve in the static budget process. If your organization is in a more volatile industry where the drivers are constantly changing and strategy is ever evolving, then the rolling budget is most likely the best method for your organization. Another benefit of a rolling budget is that it inherently pushes the organization to a forward-looking approach, as governance discussions center around how the budget was adjusted and why, versus the historical approach of comparing the static budget to actual and repeating oftentimes the same variances each time. To be successful, a rolling budget requires an ongoing assessment with quick changes to ensure that the periodic budget to actual reporting can be maintained. Reforecasting with a rolling budget also needs to be fairly quick since it is continuous. If the organization adopts a rolling budget or a reforecasting model moving forward, it is important to make sure careful thought goes into preparing the original budget. Drivers should be clearly identified, and formulas used to show how the variable revenues and costs build from the drivers. Does my Organization Need Budgeting Software? A budget could be a simple spreadsheet or prepared using budgeting software. The team should consider how complex the organization’s drivers are when considering whether to utilize a spreadsheet or software. Organizations with multiple streams of revenue with different corresponding variable costs, may find it necessary to utilize software. Software often allows for more complex planning and reforecasting, allowing the organization to create various scenarios to see what an impact such as changing the price of a unit by 5% versus 7% would be. Software can aid collaboration amongst different teams or units, while using a spreadsheet could make maintaining version integrity when sharing with multiple users problematic. Consider what the likely trend in budgeting will be for your organization to select a tool. In a study done by the Chartered Institute of Management Accountants in 2016, The Reforecasting Report, the authors note that “buying an increasingly complex software platform without full cooperation and negotiation may fail to reduce ‘noise’ in the planning and budgeting process.” In addition, bad data in, bad data out, no matter what the tool, so an organization should first make sure the budget basics are in place and reliable data can be easily obtained to ensure a software or spreadsheet’s ability to create a proper forecast is enhanced. By Barbara Finke, CPA (This article was originally published in BDO’s Nonprofit Standard Newsletter, Summer 2020 on bdo.com. Harris CPAs is an independent member of the BDO Alliance USA.) [...] Read more...
November 5, 2020To stay abreast of the continuing impacts the coronavirus is having on the nonprofit industry and ways to adapt to all the changes, as well as to catch up on key trends in the nonprofit industry!   HIGHLIGHTS FROM THIS ISSUE: President Signs “Protecting Nonprofits from Catastrophic Cash Flow Strain Act” to Assist Nonprofit Organizations into Law “Are we paying our executives appropriately?” FASB Issues ASU on Contributed Nonfinancial Assets IRS Proposes Excise Tax Relief for Exempt Organizations Under Code Section 4960 Is Your Organization Audit Ready? Privacy Shield Invalidated – Nonprofits May Not Be Affected But Should be Aware Using Data to Create an Infrastructure of Success Nonprofits Have Additional Time to Comply with New Lease Accounting Standards Main Street Lending Program Open to Nonprofits Click below to view the file.   [...] Read more...
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