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Simple ways to improve your nonprofit’s cash flow

Declining donations, dues, grants or sponsorship funds may lead to not-for-profit budget deficits. But you can reduce the risk of cash flow crunches by making relatively minor changes to your cash management practices.

Expedite receipts

The sooner your organization accumulates cash, the better your cash flow. For example, consider moving your fundraising calendar ahead. By sending an appeal in July rather than November, your nonprofit may receive significant cash in late summer. Then mail reminders in November to those who haven’t yet given, and ask summer givers to make a year-end gift, too. By doing this, you’re more likely to see contributions in December as well.

Try to collect installment donations earlier, too. Instead of waiting for each payment of a four-quarter gift, contact those donors who are clearly predisposed to giving. Asking for the remaining donation in advance may speed up the process.

Get billing right

Billing errors, whether in the amounts invoiced or the recipient’s mailing address, can delay payments and hamper cash flow. Take steps to get the details right on every invoice. Request updated address or credit card information in every encounter with a payer and review reports of declined credit cards so that recurring payments can be made without delay.

Also make your invoices clear, clean and easy to understand. Use text descriptions rather than internal billing codes. The recipient should have no questions about what the charges are for or how they’re computed. Confused payers may just set their bills aside.

And consider issuing bills earlier. If a charge is incurred at the beginning of the month, but you wait until the end of the month to bill — and then allow a 30-day grace period for payment — you’re likely waiting at least two months to collect.

Manage disbursements

Managing cash outflow goes hand in hand with accelerating cash inflow. If you’re facing severe deficits, you may need to decelerate your bill payment or negotiate extended payment plans with vendors.

When your nonprofit is in a pinch, you must prioritize disbursements. But be careful: Although employee compensation can account for as much as 70% of some nonprofits’ budgets, such disbursements generally can’t be delayed.

Taking charge

Even in relatively flush economic times, nonprofits need to take a proactive approach to managing cash flow. Contact us for more cash management tips.

© 2017

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How auditors evaluate fraud risks

Assessing fraud risks is an integral part of the auditing process. Statement on Auditing Standards (SAS) No. 99, Consideration of Fraud in a Financial Statement Audit, requires auditors to consider potential fraud risks before and during the information-gathering process. Business owners and managers may find it helpful to understand how this process works — even if their financial statements aren’t audited.

Risk factors

SAS 99 advises auditors to presume that, if given the opportunity, companies will improperly recognize revenue and management will attempt to override internal controls. Certain factors create opportunities for dishonest employees to commit fraud and, therefore, should be avoided, if possible. Examples of fraud risk factors that auditors consider include:

* Large amounts of cash or other valuable inventory items on hand, without adequate security measures in place,
* Heavy dependence on a few key employees, who have too much power and too few checks and balances,
* Employees with conflicts of interest, such as relationships with other employees and financial interests in vendors or customers,
* Unrealistic goals and performance-based compensation that tempt workers to artificially boost revenue and profits,
* Failure to conduct background checks and other pre-employment screening, and
* Weak internal controls.

Auditors also watch for questionable journal entries that dishonest employees could use to hide their impropriety. These entries might, for example, be made to seldom-used or intracompany accounts; on holidays, weekends, or the last day of the accounting period; or with limited descriptions. Fraudsters also tend to use round numbers — just below the dollar threshold that would require additional signatures — for their fictitious journal entries.

Next steps

Auditors are responsible for using professional skepticism throughout the audit process, as well as planning and performing the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, either caused by fraud or error. Auditors generally aren’t required to investigate fraud. But they are required to communicate fraud risk findings to the appropriate level of management, who can then take actions to prevent fraud in their organizations.

If conditions exist that make it impractical to plan an audit in a way that will adequately address fraud risks, an auditor may even decide to withdraw from the engagement. When conditions are ripe for fraud, we can help you pursue a formal forensic accounting investigation to find out more.

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Does your nonprofit need to register in multiple states?

If your not-for-profit solicits funds online — or uses other fundraising methods that cross state boundaries — it may need to register in multiple jurisdictions. We’ve answered some commonly asked questions.

My charity receives occasional contributions from out-of-state donors. Do I need to register with those states? Yes, but only if you’re actually asking for donations in those states. The critical activity is soliciting, not accepting, funds. Remember, email and text blasts and social media appeals are likely to be considered multistate solicitations.

That said, some nonprofits are generally exempt from registering or may need to register but aren’t required to file annually. For example, many states exempt houses of worship as well as nonprofits with total annual income under certain thresholds.

So registration rules vary by state? That’s right. A handful of states don’t require charities to register at all. The remaining ones have varying rules, income thresholds, exceptions, registration fees and fines for violations. Even the agencies that regulate charities differ by state.

How much does it cost to register? Again, this varies by state — generally ranging from $0 to $2,000.

Is there a simple way to register with every state? Unfortunately not. Most states require you to complete a general information form and submit it with your last financial statement, a list of officers and directors, a copy of your originating document and your IRS-issued tax-exempt determination letter.

First-time registrants can use a Unified Registration Statement in most states. However, even those states mandate that annual renewals and reports be submitted using individual state forms.

What are the consequences of not registering in states where my nonprofit raises funds? Your organization, officers and board members could face civil and criminal penalties. Your charity might lose its ability to solicit funds in certain states or lose its tax-exempt status with the IRS.

Do I need to tell the IRS where my nonprofit is registered? Yes; Form 990 asks you to list the states where you’re required to file a copy of your return.

Given the resources involved, you may wonder if out-of-state donations are worth the trouble. For some nonprofits, it may make sense to focus exclusively on local fundraising. Contact us and we’ll help you weigh the pros and cons.

© 2017

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SEPs: A powerful retroactive tax planning tool

Simplified Employee Pensions (SEPs) are sometimes regarded as the “no-brainer” first choice for high-income small-business owners who don’t currently have tax-advantaged retirement plans set up for themselves. Why? Unlike other types of retirement plans, a SEP is easy to establish and a powerful retroactive tax planning tool: The deadline for setting up a SEP is favorable and contribution limits are generous.

SEPs do have a couple of downsides if the business has employees other than the owner: 1) Contributions must be made for all eligible employees using the same percentage of compensation as for the owner, and 2) employee accounts are immediately 100% vested.

Deadline for set-up and contributions

A SEP can be established as late as the due date (including extensions) of the business’s income tax return for the tax year for which the SEP is to first apply. For example:

  • A calendar-year partnership or S corporation has until March 15, 2017, to establish a SEP for 2016 (September 15, 2017, if the return is extended).
  • A calendar-year sole proprietor or C corporation has until April 18, 2017 (October 16, 2017, if the return is extended), because of their later filing deadlines.

The deadlines for limited liability companies (LLCs) depend on the tax treatment the LLC has elected. Furthermore, the business has until these same deadlines to make 2016 contributions and still claim a potentially hefty deduction on its 2016 return.

Generally, other types of retirement plans would have to have been established by December 31, 2016, in order for 2016 contributions to be made (though many of these plans do allow 2016 contributions to be made in 2017).

Contribution amounts

Contributions to SEPs are discretionary. The business can decide what amount of contribution it will make each year. The contributions go into SEP-IRAs established for each eligible employee.
For 2016, the maximum contribution that can be made to a SEP-IRA is 25% of compensation (or 20% of self-employed income net of the self-employment tax deduction) of up to $265,000, subject to a contribution cap of $53,000. The 2017 limits are $270,000 and $54,000, respectively.

Setting up a SEP is easy

A SEP is established by completing and signing the very simple Form 5305-SEP (“Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement”). Form 5305-SEP is not filed with the IRS, but it should be maintained as part of the business’s permanent tax records. A copy of Form 5305-SEP must be given to each employee covered by the SEP, along with a disclosure statement.

Of course, additional rules and limits do apply to SEPs, but they’re generally much less onerous than those for other retirement plans. If you think a SEP might be good for your business, please contact us.

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When an elderly parent might qualify as your dependent

It’s not uncommon for adult children to help support their aging parents. If you’re in this position, you might qualify for the adult-dependent exemption. It allows eligible taxpayers to deduct up to $4,050 for each adult dependent claimed on their 2016 tax return.

Basic qualifications

For you to qualify for the adult-dependent exemption, in most cases your parent must have less gross income for the tax year than the exemption amount. (Exceptions may apply if your parent is permanently and totally disabled.) Generally Social Security is excluded, but payments from dividends, interest and retirement plans are included.

In addition, you must have contributed more than 50% of your parent’s financial support. If you shared caregiving duties with a sibling and your combined support exceeded 50%, the exemption can be claimed even though no one individually provided more than 50%. However, only one of you can claim the exemption.

Factors to consider

Even though Social Security payments can usually be excluded from the adult dependent’s income, they can still affect your ability to qualify. Why? If your parent is using Social Security money to pay for medicine or other expenses, you may find that you aren’t meeting the 50% test.

Don’t forget about your home. If your parent lives with you, the amount of support you claim under the 50% test can include the fair market rental value of part of your residence. If the parent lives elsewhere — in his or her own residence or in an assisted-living facility or nursing home — any amount of financial support you contribute to that housing expense counts toward the 50% test.

Easing the financial burden

Sometimes caregivers fall just short of qualifying for the exemption. Should this happen, you may still be able to claim an itemized deduction for the medical expenses that you pay for the parent. To receive a tax benefit, the combined medical expenses paid for you, your dependents and your parent must exceed 10% of your adjusted gross income.

The adult-dependent exemption is just one tax break that you may be able to employ to ease the financial burden of caring for an elderly parent. Contact us for more information on qualifying for this break or others.

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Keep family matters out of the public eye by avoiding probate

Although probate can be time consuming and expensive, perhaps its biggest downside is that it’s public — anyone who’s interested can find out what assets you owned and how they’re being distributed after your death. The public nature of probate can also draw unwanted attention from disgruntled family members who may challenge the disposition of your assets, as well as from other unscrupulous parties.

However, by implementing the right estate planning strategies, you can keep much or even all of your estate out of probate.

Probate, defined

Probate is a legal procedure in which a court establishes the validity of your will, determines the value of your estate, resolves creditors’ claims, provides for the payment of taxes and other debts and transfers assets to your heirs.

Is probate ever desirable? Sometimes. Under certain circumstances, you might feel more comfortable having a court resolve issues involving your heirs and creditors. Another possible advantage is that probate places strict time limits on creditor claims and settles claims quickly.

Choose the right strategies

There are several ways you can avoid (or minimize) probate. (You’ll still need a will — and probate — to deal with guardianship of minor children, disposition of personal property and certain other matters.)

The right strategies depend on the size and complexity of your estate. The simplest ways to avoid probate involve designating beneficiaries or titling assets in a manner that allows them to be transferred directly to your beneficiaries outside your will. So, for example, be sure that you have appropriate, valid beneficiary designations for assets such as life insurance policies, annuities and retirement plans.

For assets such as bank and brokerage accounts, look into the availability of “pay on death” (POD) or “transfer on death” (TOD) designations, which allow these assets to avoid probate and pass directly to your designated beneficiaries. However, keep in mind that, while the POD or TOD designation is permitted in most states, not all financial institutions and firms make this option available.

For homes or other real estate — as well as bank and brokerage accounts and other assets — some people avoid probate by holding title with a spouse or child as “joint tenants with rights of survivorship” or as “tenants by the entirety.” Be aware that drawbacks exist for this technique.

Contact us with all of your probate questions.

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Don’t make hunches — crunch the numbers

Some business owners make major decisions by relying on gut instinct. But investments made on a “hunch” often fall short of management’s expectations.

In the broadest sense, you’re really trying to answer a simple question: If my company buys a given asset, will the asset’s benefits be greater than its cost? The good news is that there are ways — using financial metrics — to obtain an answer.

Accounting payback

Perhaps the most common and basic way to evaluate investment decisions is with a calculation called “accounting payback.” For example, a piece of equipment that costs $100,000 and generates an additional gross margin of $25,000 per year has an accounting payback period of four years ($100,000 divided by $25,000).

But this oversimplified metric ignores a key ingredient in the decision-making process: the time value of money. And accounting payback can be harder to calculate when cash flows vary over time.

Better metrics

Discounted cash flow metrics solve these shortcomings. These are often applied by business appraisers. But they can help you evaluate investment decisions as well. Examples include:

Net present value (NPV). This measures how much value a capital investment adds to the business. To estimate NPV, a financial expert forecasts how much cash inflow and outflow an asset will generate over time. Then he or she discounts each period’s expected net cash flows to its current market value, using the company’s cost of capital or a rate commensurate with the asset’s risk. In general, assets that generate an NPV greater than zero are worth pursuing.

Internal rate of return (IRR). Here an expert estimates a single rate of return that summarizes the investment opportunity. Most companies have a predetermined “hurdle rate” that an investment must exceed to justify pursuing it. Often the hurdle rate equals the company’s overall cost of capital — but not always.

A mathematical approach

Like most companies, yours probably has limited funds and can’t pursue every investment opportunity that comes along. Using metrics improves the chances that you’ll not only make the right decisions, but that other stakeholders will buy into the move. Please contact our firm for help crunching the numbers and managing the decision-making process.

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What is a business?

Differentiating the purchase of a business from the purchase of a group of assets is something that the Financial Accounting Standards Board (FASB) has been debating for years. In January 2017, the board finally published guidance to help financial executives and accountants define what a business is in the context of a business combination.

Existing rules

Business owners and managers generally know the difference between a business and a group of assets. But in some instances — such as a merger or an acquisition — the distinction is unclear. Under existing U.S. Generally Accepted Accounting Principles (GAAP), a business has three elements:

1. Inputs,
2. Processes, and
3. Outputs.

The existing guidance requires no minimum inputs or outputs to meet the definition of a business, leading to broad interpretations. In many cases, routine asset purchases are currently treated like complex business combinations.

Proposed clarity

Under Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, a business must. at minimum, include an input and a “substantive process” that contributes to the ability to create outputs. The presence of more than an insignificant amount of goodwill is an indicator that a substantive process is present.

Inputs can include people, money, raw materials, finished goods and other economic resources that create (or have the ability to create) goods or services. Outputs typically are considered goods or services for customers that provide (or have the ability to provide) a return to the business’s investors in the form of dividends, lower costs or other economic benefits.

Shortcut approach

The update includes an initial test to help businesses make a quick decision regarding whether the business combination accounting rules apply to a particular transaction: If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset (or group of similar identifiable assets), the deal won’t be considered a business combination. To illustrate, when a company leases a building, the lease and building are considered a single identifiable asset.

Bottom line

The update is expected to reduce the number of transactions that qualify as business combinations vs. routine asset acquisitions. Unsure how to account for an upcoming acquisition (or disposal) under the new rules? We can help.

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Clarification for 1099 Questions : Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011

Clarification for 1099 Questions

On April 14, 2011, President Obama signed into law H.R. 4, the “Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011.”  This law is very short and basically includes four items.

1) The requirement for rental property owners to issue Form 1099 starting with 2011 payments is repealed as if it never existed. This means landlords do NOT need to issue Form 1099.

2) The requirement for businesses to issue Form 1099 for products starting with 2012 payments is repealed as if it never existed.

3) The requirement for businesses to issue Form 1099 to corporations starting with 2012 payments is repealed as if it never existed. However, the requirement to issue Form 1099 to corporations for attorney’s fees or medical or healthcare services is still in effect.

4) The fourth provision is not a Form 1099 issue and involves a provision dealing with the repayment of overpayments of health care credits for lower income taxpayers and doesn’t start until 2014.

If you have questions or need more information, please call us. We would be happy to talk with you at any time.

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Mileage Rate Announced : The IRS Announced the 2012 Mileage Rates

IRS Announces 2012 Mileage Rates

On December 9, the IRS announced the standard mileage rates for 2012 (Announcement 2012-1).  Taxpayers can use the optional standard mileage rates to calculate the deductible costs of operating an automobile.

The 2012 rates are:

  • For business use of an automobile remains at 55 1/2 cents per mile.
  • For medical or moving expenses, it is 23 cents per mile.
  • For services to charitable organizations, the rate is 14 cents per mile.

Instead of using the standard mileage rates, taxpayers can use their actual costs but must maintain adequate records and be able to substantiate their expenses.

For automobiles used for business purposes, the portion of the business standard mileage rate treated as depreciation is 23 cents per mile for 2012, which is a one (1) cent increase from 2011 rates.

Please let us know if you have any questions.