Jul 21, 2020
Your nonprofit organization may be required to hire an independent outside CPA to audit its books, depending on its annual gross receipts and other factors. Even when external audits aren’t mandated, however, they’re often recommended. These audits can provide assurance to donors and other stakeholders that your organization is operating with integrity and within acceptable accounting guidelines.
Internal audits
Most nonprofits conduct internal audits on a regular basis, perhaps quarterly or annually. These audits are typically performed by a board member or a member of the organization’s staff. The objective is to review the organization’s financial statements, accounting policies and spending habits.
Internal audits promote fiscal responsibility and are essential to good governance. But they’re often conducted by people who don’t have extensive audit training and who have a vested interest in issuing a clean bill of health.
External audits
Outside auditors may be in a better position to determine whether your statements offer a fair picture of your finances. In an external audit, a CPA examines your organization’s financial statements and issues an opinion on whether those statements adhere to Generally Accepted Accounting Principles (GAAP) or another reporting framework.
To support this opinion, the auditor tests underlying records such as your nonprofit’s bank reconciliations, accounts payable records and contribution classifications. The auditor also evaluates your organization’s internal controls, including procedures for fraud prevention and detection.
This type of audit is completely separate from an internal audit. Though external audits are optional for nonprofits in some states, they’re required in others. Be sure you learn the rules that apply to your organization.
Preparing for the audit
You can facilitate external audit fieldwork by anticipating information requests and inquiries from your auditor. He or she will ask for various financial documents, including:
- Financial statements,
- Bank correspondence,
- Budgets,
- Board meeting minutes, and
- Payroll, accounts receivable and accounts payable records.
Your auditor also may ask to review records related to loans, leases, grants, donations and fundraising activities. In addition, be ready to answer questions about such issues as how money and other resources are received and spent, what the organization does to comply with applicable laws, and how financial transactions are recorded.
We can help
Internal audits are essential. But they’re no substitute for an external audit by a qualified CPA, especially in light of the major changes to GAAP in recent years and increasing government scrutiny of nonprofits. Contact us to discuss whether you’re required to obtain an external audit under state or federal guidelines. Even if your organization isn’t required to submit CPA-audited statements, you’re sure to benefit from the expertise of an independent financial professional.
© 2020
Jul 15, 2020
There’s a new IRS form for business taxpayers that pay or receive nonemployee compensation.
Beginning with tax year 2020, payers must complete Form 1099-NEC, Nonemployee Compensation, to report any payment of $600 or more to a payee.
Why the new form?
Prior to 2020, Form 1099-MISC was filed to report payments totaling at least $600 in a calendar year for services performed in a trade or business by someone who isn’t treated as an employee. These payments are referred to as nonemployee compensation (NEC) and the payment amount was reported in box 7.
Form 1099-NEC was reintroduced to alleviate the confusion caused by separate deadlines for Form 1099-MISC that report NEC in box 7 and all other Form 1099-MISC for paper filers and electronic filers. The IRS announced in July 2019 that, for 2020 and thereafter, it will reintroduce the previously retired Form 1099-NEC, which was last used in the 1980s.
What businesses will file?
Payers of nonemployee compensation will now use Form 1099-NEC to report those payments.
Generally, payers must file Form 1099-NEC by January 31. For 2020 tax returns, the due date will be February 1, 2021, because January 31, 2021, is on a Sunday. There’s no automatic 30-day extension to file Form 1099-NEC. However, an extension to file may be available under certain hardship conditions.
Can a business get an extension?
Form 8809 is used to file for an extension for all types of Forms 1099, as well as for other forms. The IRS recently released a draft of Form 8809. The instructions note that there are no automatic extension requests for Form 1099-NEC. Instead, the IRS will grant only one 30-day extension, and only for certain reasons.
Requests must be submitted on paper. Line 7 lists reasons for requesting an extension. The reasons that an extension to file a Form 1099-NEC (and also a Form W-2, Wage and Tax Statement) will be granted are:
- The filer suffered a catastrophic event in a federally declared disaster area that made the filer unable to resume operations or made necessary records unavailable.
- A filer’s operation was affected by the death, serious illness or unavoidable absence of the individual responsible for filing information returns.
- The operation of the filer was affected by fire, casualty or natural disaster.
- The filer was “in the first year of establishment.”
- The filer didn’t receive data on a payee statement such as Schedule K-1, Form 1042-S, or the statement of sick pay required under IRS regulations in time to prepare an accurate information return.
Need help?
If you have questions about filing Form 1099-NEC or any tax forms, contact us. We can assist you in staying in compliance with all rules.
© 2020
Jul 13, 2020
In 2016, the Financial Accounting Standards Board (FASB) published guidance that requires major changes to how leases are reported on financial statements. One area of the guidance that’s especially complicated relates to “embedded” leases.
Updated guidance
Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), requires organizations to report on the balance sheet the assets and liabilities associated with leasing office space, vehicles and other assets. Public companies implemented the updated guidance in 2019.
In June, the FASB extended the effective date for ASU 2016-02 for private companies and not-for-profit organizations. The one-year deferral is welcome news for smaller organizations that have been trying to get a handle on the complex new rules during the COVID-19 crisis.
Hidden in the fine print
In some cases, a contract that qualifies as a lease doesn’t have the word “lease” written across the top. Instead, a lease may be embedded in a contract’s terms.
Unless private companies and nonprofits adopted the changes early, they’re currently expensing operating lease payments as they’re incurred, as per prior guidance. Carving out embedded leases from supply or service contracts wasn’t a big deal under those rules; the costs would be classified as operating expenses either way. But the updated guidance requires service contract payments to continue being expensed while embedded leases are reported on the balance sheet.
The updated guidance is clear about the identification and criteria for an embedded lease: A contract contains a lease if it conveys the right to control the use of an identified asset in exchange for cash or other consideration. This includes the right to obtain substantially all the economic benefits from the asset for a specific period.
Equipment leases may be buried in supply and service contracts with equipment manufacturers. Likewise, lease agreements may contain nonlease components, such as maintenance and property taxes.
Implementation solutions
During the implementation phase for the updated guidance, you’ll need to train other departments, such as procurement, sales, operations and information technology, to recognize when contract terms convey the right to control the use of a specific asset. After implementation, you’ll need to execute controls or processes to identify embedded leases when contracts are signed.
To simplify matters, consider adopting the practical expedient in the updated accounting guidance that allows lessors to combine lease and nonlease components. While this treatment will increase the lease liability reported on your balance sheet, simplified reporting may be worthwhile, depending on the size and duration of the embedded leases.
Contact us
For private companies and private not-for-profits, the updated lease guidance now goes into effect for fiscal years beginning after December 15, 2021 (or interim periods beginning after December 15, 2022). For public not-for-profits, the updated guidance now goes into effect for fiscal years beginning after December 15, 2019, including interim reporting periods.
A one-year deferral isn’t an excuse to procrastinate. The issue of embedded leases shows how implementing the updated guidance can be challenging and may require significant changes to systems and procedures. We can help.
© 2020
Jul 10, 2020
If you own or manage a business with employees, you may be at risk for a severe tax penalty. It’s called the “Trust Fund Recovery Penalty” because it applies to the Social Security and income taxes required to be withheld by a business from its employees’ wages.
Because the taxes are considered property of the government, the employer holds them in “trust” on the government’s behalf until they’re paid over. The penalty is also sometimes called the “100% penalty” because the person liable and responsible for the taxes will be penalized 100% of the taxes due. Accordingly, the amounts IRS seeks when the penalty is applied are usually substantial, and IRS is very aggressive in enforcing the penalty.
Far-reaching penalty
The Trust Fund Recovery Penalty is among the more dangerous tax penalties because it applies to a broad range of actions and to a wide range of people involved in a business.
Here are some answers to questions about the penalty so you can safely stay clear of it.
Which actions are penalized? The Trust Fund Recovery Penalty applies to any willful failure to collect, or truthfully account for, and pay over Social Security and income taxes required to be withheld from employees’ wages.
Who is at risk? The penalty can be imposed on anyone “responsible” for collection and payment of the tax. This has been broadly defined to include a corporation’s officers, directors and shareholders under a duty to collect and pay the tax as well as a partnership’s partners, or any employee of the business with such a duty. Even voluntary board members of tax-exempt organizations, who are generally excepted from responsibility, can be subject to this penalty under certain circumstances. In addition, in some cases, responsibility has been extended to family members close to the business, and to attorneys and accountants.
IRS says responsibility is a matter of status, duty and authority. Anyone with the power to see that the taxes are (or aren’t) paid may be responsible. There’s often more than one responsible person in a business, but each is at risk for the entire penalty. Although a taxpayer held liable can sue other responsible people for contribution, this is an action he or she must take entirely on his or her own after he or she pays the penalty. It isn’t part of the IRS collection process.
Here’s how broadly the net can be cast: You may not be directly involved with the payroll tax withholding process in your business. But if you learn of a failure to pay over withheld taxes and have the power to pay them but instead make payments to creditors and others, you become a responsible person.
What’s considered “willful?” For actions to be willful, they don’t have to include an overt intent to evade taxes. Simply bending to business pressures and paying bills or obtaining supplies instead of paying over withheld taxes that are due the government is willful behavior. And just because you delegate responsibilities to someone else doesn’t necessarily mean you’re off the hook. Your failure to take care of the job yourself can be treated as the willful element.
Avoiding the penalty
You should never allow any failure to withhold and any “borrowing” from withheld amounts — regardless of the circumstances. All funds withheld must also be paid over to the government. Contact us for information about the penalty and making tax payments.
© 2020
Jul 8, 2020
The sudden shutdown of the economy in March because of the COVID-19 pandemic forced many businesses to rely more heavily on technology. Some companies fared better than others.
Many businesses that had been taking an informal approach to IT strategy discovered their systems weren’t as robust and scalable as they’d hoped. Some may have lost ground competitively as fires were put out and employees got back up to speed in an altered working environment.
To keep your approach to technology relevant, you’ve got to regularly reassess processes and assets. Doing so is even more important in the new normal. Here are six key questions to ask:
1. What are our users saying? Every successful IT strategy is built on a foundation of plentiful user feedback. Talk with (or survey) your employees about what’s happened over the last few months from a technology perspective. Find out what’s working, what isn’t and why.
2. Do we have information silos? Most companies today use multiple applications. If these solutions can’t “talk” to each other, you may suffer from information silos — when different people and teams keep data to themselves. Shifting to a more remote workforce may have worsened this problem or made it more obvious. If it’s happening, determine how to integrate critical systems.
3. Do we have a digital file-sharing policy? Businesses used to generate tremendous amounts of paperwork. Sharing documents electronically is much more common now but, without a formal approach to file sharing, things can still get lost or various versions of files can cause confusion. Implement (or improve) a digital file-sharing policy to better manage system access, network procedures and version control.
4. Has our technology become outdated? Along with being an incredible tragedy and ongoing problem, the pandemic is accelerating change. Technology that may have been at least passable before the crisis may now be falling far short of optimal functionality. Look closely at whether your business may need to upgrade hardware, software or platforms sooner than you previously anticipated.
5. Do employees need more training? You may have implemented IT changes over the past few months that employees haven’t fully understood or have adjusted to in problematic ways. Consider mandatory training and ongoing refresher sessions to ensure users are taking full advantage of available technology and following proper procedures.
6. Are your security protocols being followed? Changes made to facilitate working during the pandemic may have exposed your systems and data to threats from disgruntled employees, outside hackers and ever-present viruses. Make sure you have a closely followed policy for critical actions such as regularly changing passwords, removing inactive users and installing security updates.
Technology has played a critical role in enabling businesses to stay connected internally, communicate with customers and remain operational during the COVID-19 crisis.
© 2020
Jul 1, 2020
The extended federal income tax deadline is coming up fast. As you know, the IRS postponed until July 15 the payment and filing deadlines that otherwise would have fallen on or after April 1, 2020, and before July 15.
Retroactive COVID-19 business relief
The Coronavirus Aid, Relief and Economic Security (CARES) Act, which passed earlier in 2020, includes some retroactive tax relief for business taxpayers. The following four provisions may affect a still-unfiled tax return — or you may be able to take advantage of them on an amended return if you already filed.
Liberalized net operating losses (NOLs). The CARES Act allows a five-year carryback for a business NOL that arises in a tax year beginning in 2018 through 2020. Claiming 100% first-year bonus depreciation on an affected year’s return can potentially create or increase an NOL for that year. If so, the NOL can be carried back, and you can recover some or all of the income tax paid for the carryback year. This factor could cause you to favor claiming 100% first-year bonus depreciation on an unfiled return.
Since NOLs that arise in tax years beginning in 2018 through 2020 can be carried back five years, an NOL that’s reported on a still-unfiled return can be carried back to an earlier tax year and allow you to recover income tax paid in the carry-back year. Because federal income tax rates were generally higher in years before the Tax Cuts and Jobs Act (TCJA) took effect, NOLs carried back to those years can be especially beneficial.
Qualified improvement property (QIP) technical corrections. QIP is generally defined as an improvement to an interior portion of a nonresidential building that’s placed in service after the date the building was first placed in service. The CARES Act includes a retroactive correction to the TCJA. The correction allows much faster depreciation for real estate QIP that’s placed in service after the TCJA became law.
Specifically, the correction allows 100% first-year bonus depreciation for QIP that’s placed in service in 2018 through 2022. Alternatively, you can depreciate QIP placed in service in 2018 and beyond over 15 years using the straight-line method.
Suspension of excess business loss disallowance. An “excess business loss” is a loss that exceeds $250,000 or $500,000 for a married couple filing a joint tax return. An unfavorable TCJA provision disallowed current deductions for excess business losses incurred by individuals in tax years beginning in 2018 through 2025. The CARES Act suspends the excess business loss disallowance rule for losses that arise in tax years beginning in 2018 through 2020.
Liberalized business interest deductions. Another unfavorable TCJA provision generally limited a taxpayer’s deduction for business interest expense to 30% of adjusted taxable income (ATI) for tax years beginning in 2018 and later. Business interest expense that’s disallowed under this limitation is carried over to the following tax year.
In general, the CARES Act temporarily and retroactively increases the limitation from 30% to 50% of ATI for tax years beginning in 2019 and 2020. (Special rules apply to partnerships and LLCs that are treated as partnerships for tax purposes.)
Assessing the opportunities
These are just some of the possible tax opportunities that may be available if you haven’t yet filed your 2019 tax return. Other rules and limitations may apply. Contact us for help determining how to proceed in your situation.
© 2020
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