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Joseph

CPA, CGMA | Senior Manager

Joe loves to travel, whether that means flying overseas for on-site audit work or across the state for the next big Washington State game. When he’s not out seeing the world, he’s helping his not-for-profit clients to improve it.

Through recent proposed regulations on November 20, 2018, the IRS has noted that, for individuals who took advantage of the increased gift and estate tax exclusions from 2018 to 2025, there will be no claw back when current exemption levels are set to decrease after 2025.

In general, estate tax planners across the board felt that this proposed scenario would be the case but were relieved nonetheless to receive official IRS confirmation.  The proposed regulations are currently open for public comment.

The dollars at stake are enormous since the 2017 Tax Cuts and Jobs Act (TCIA) temporarily increased the basic exclusion amounts from $5 million to $10 million per person .  With inflation adjustments, the 2018 basic exclusion is $11.18 million and was, after 2025, set to revert to the 2017 level of $5 million as adjusted for inflation.

In summary, the planning mantra may very well be to take advantage of the current exemption while you can—and before it expires.

For more information on estate planning, please contact your Clark Nuber Tax professional or Jeff Pannell.

© Clark Nuber PS and Developing News, 2018. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.

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Articles and Publications

What Employers Need to Know About Transportation Benefits Heading Into 2019

Changes impact taxable and tax-exempt employers. Many of the questions were related to the costs of providing qualified transportation benefits. Of particular note:
  • For-profit taxpayers lost the deduction for providing these benefits.
  • The corresponding law for tax-exempt organizations created unrelated taxable income equal to the cost of providing excluded benefits.
The TCJA was passed mid-December 2017 and went into effect January 1, 2018, which gave little warning to businesses or tax-exempt organizations to allow for planning.  The amount of qualified transportation benefits excluded from employee benefits is indexed annually. The excluded amount is based upon the fair value of benefits provided.  The employer excluded deduction and unrelated business income addition are both based on the cost of providing the excluded employee benefits. Some of the questions answered by Notice 2018-99 and the earlier Publication 15B, include:
  • If the employer provides qualified transportation benefits to employees through a qualified salary reduction plan, is the salary deductible to the employer? Do benefits create UBI to the tax-exempt employer?
  • What is the indexed amount employees may exclude from taxable income in 2019?
  • What is the consequence of an employer providing qualified transportation benefits to employees where the cost exceeds the annual indexed amount allowed to be excluded from employee compensation?
  • How should employers determine the cost of providing parking in lots owned by the employer when parking is free to customers, the public and employees?
  • How should the employer determine the cost of providing parking in lots included in the lease of a building and which includes parking for customers, and employees?
  • Given the uncertainty in implementing the new law, will the IRS provide relief of penalties for making estimated tax deposits?
Publication 15B, issued earlier in 2018, clarified it makes no difference if an employer provides qualified transportation benefits directly or by allowing employees to use a qualified salary reduction plan to pay for benefits. The benefit would be non-deductible to a taxpaying employer.  Because these costs would be non-deductible to a taxable employer, the same costs create unrelated business income to a tax-exempt employer. The question of determining the costs paid or incurred in providing qualifying transportation benefits is complicated and nuanced.  IRS Notice 2018-99, although helpful, also specifically states Treasury will provide additional clarifying Regulations superseding the Notice. Until Treasury issues such guidance, taxpayers may rely on this Notice.
  • The 2018 indexed value of transportation benefits which may be excluded from employee income is $260. The amount increases to $265 in 2019.  Notice 2018-99 confirms the qualified transportation benefits exceeding the indexed monthly amounts must be included in taxable income of the employee. The taxable amounts are deductible expenses for taxable employers and do not create unrelated business income for tax-exempt employers.
  • The Notice provides examples of costs of providing parking benefits that create unrelated business income for tax-exempt employers owning or leasing all or a portion of a parking facility utilized by employees. Depreciation is specifically an excluded expense for this purpose.
  • Notice 2018-99 also allows employers to use any reasonable method to allocate the costs associated with owning or leasing a parking lot used all or in part by employees. The Notice specifically states using the value of parking provided is not a reasonable method for determining cost. The cost is the amount paid or incurred by the employer and a separate calculation of the for determining tax on the employer, regardless of the value of benefits provided to employees.
  • Some relief is provided to employers with public lots in which certain spaces are reserved for employees. They may remove the employee designation by March 31, 2019 and have the removal effective retroactively to December 31, 2017, the day before implementing the new law.
  • A four-step process is laid out in the Notice for determining the shared lot spaces used by employers and the associated costs which should be allocated to qualified employee transportation benefits.
Two final notes to remember are:
  1. To the extent a tax-exempt employer has unrelated business income, the exempt employer must allocate a certain amount of its parking benefits which will be non-deductible in computing unrelated business taxable income. The expenses will be non-deductible, but they will not generate additional unrelated business income.
  2. Tax-exempt employers are allowed the $1,000 specific deduction against unrelated business income generated by qualified transportation benefits. Therefore, if the total taxable amount is less than $1,000, no Form 990-T must be filed.
The IRS also issued an additional penalty relief notice for exempt employers.  Notice 2018-100 applies to exempt organizations required to file Form 990-T for the first time because of the new tax on transportation benefits.  If this is an initial Form 990-T, the Form is timely filed, and tax due is paid with the return, there will be no penalties assessed for failure to make estimated tax payments during 2018. If you have questions regarding the taxability of qualified transportation benefits or need assistance with calculating unrelated business income from qualified transportation benefits, please contact your tax team at Clark Nuber. © Clark Nuber PS, 2018. All Rights Reserved

More Clarity on Taxable and Tax-Free Employee Benefits Under Tax Reform

Among many other things, the Tax Cuts and Jobs Act affected how the government will tax certain employee benefits. Changes were made simultaneously to whether employers could take a deduction for certain benefits and whether employees could exclude certain benefits from income. The intersections of these multiple changes (and the compounding factor of a whole new category of unrelated business income to tax-exempt employers) led to unprecedented confusion. Treasury has spent the better part of 2018 issuing guidance in the form of Publications, Notices, and answering questions in public forums on the updates. When the law changed at the end of 2017, disallowing the deduction by employers paying for qualified transportation benefits employees could exclude from income, it was thought employers had a choice in how they could treat the benefits; taxable or non-taxable transportation benefits. It was originally thought employee benefits, which are tax-free benefits under IRC 132(f) (transportation, parking, and on-site exercise facilities), would only continue to be tax free if:
  1. The employer is a for-profit business and chose to forgo the federal income tax deduction, or
  2. The employer is a tax-exempt organization and chose to pay unrelated business income tax on the value of those benefits.
As we now know, this is not how the law is being implemented. Instead, the law starts with the question of whether the employee receives benefits defined in IRC section 132(f) or (j)(4) – qualified transportation benefits valued at up to $260/month or on-site athletic facilities which are restricted to highly compensated employees. It is a binary question. If the employee receives qualifying benefits, the employer must follow the tax treatment provided in the law. The decision point is whether the employer provides qualified benefits.

What are the tax outcomes of the three most common scenarios?

There are three ways these benefits are most commonly offered. The first is straightforward. The second required Treasury guidance, which they provided in Publication 15B. The last is likely a prospective change for most organizations.

Option #1: 100% Employer-Provided Benefits

If the employer pays for qualified transportation benefits within the non-taxable limits, the employee will not recognize taxable income on these benefits - up to $260/month. This is a non-deductible expense to the taxable employer. In the case of the tax-exempt employer, the cost of the benefits paid or incurred is converted to unrelated business income.

Option #2: 100% Employee-Paid Benefits

If the employer is not paying for the benefit, they can make the qualified transportation benefits available to employees by allowing them to pay for benefits with pre-tax dollars. Under IRC section 3401(a)(19), employees may use pre-tax dollars to pay for benefits if they have a reasonable belief the benefit would be a non-taxable fringe benefit. Publication 15B states the employer may not deduct the salary expense if the employee uses salary to purchase qualified transportation benefits through a qualified salary reduction plan. This means the tax treatment to the employer is the same — whether they pay the benefits directly or through a salary reduction plan, there is a loss of deduction. The difference is the out-of-pocket expense is greater when the employer pays for the benefit in addition to paying the employees’ compensation.

Funding Option #3: Get out of the “parking business”  

Because the critical factor is whether the employer provides qualified transportation benefits, the only way to avoid the loss of deduction is for the employer to not provide these benefits. This leaves employers with the only option of grossing up employees’ salary for an approximately equivalent amount and NOT requiring the compensation be used for qualified transportation benefits. For the compensation to be taxable to the employees and deductible to the employer, the employees must be free to use the additional compensation for any purpose

What guidance is still required from Treasury? 

The way the law was revised, employees exclude the fair market value of the qualified transportation benefits, which includes transit benefits and parking benefits each up to $260/month. The lost deduction is based on the cost paid or incurred by the employer. When the employer is paying an outside vendor for these benefits, there is usually a direct correlation between fair market value to the employee and cost to the employer. However, when the benefit provided is parking and the employer is not purchasing parking individual parking stalls, the cost is not always easily determined. Treasury must still provide guidance for determining the cost of parking benefits when there are complicating factors such as the employer owns the parking lot, and everyone (the public, clients, employees) can park there for free. In the meantime, employers must arrive at a reasonable tax filing position, document the filing position based upon existing authority, pay taxes, and file returns based upon those reasonable best efforts at compliance with existing statutory authority.

Questions?

If you would like assistance discerning how the change in the tax law may affect your organization, your employers, or your employees, please contact Clark Nuber. © Clark Nuber PS, 2018. All Rights Reserved

When Should I Have an Audit?

The NFP doesn’t have any outside requirements to have an audit. It does not need to provide one to a lender to fulfill debt covenants, nor does it need to file one with the state because its revenue is over the threshold. None of your big donors have asked for your financial statements in years because they look at your IRS Form 990. But isn’t it a best practice to have an annual audit performed by an independent auditor? Before you send out a request for proposal, let’s look at what a financial statement audit really means, and what other service offerings may be a better fit. First, establish what result your organization is looking for. Is it a set of financial statements with an accountant’s report? Is it a deeper dive into your operations and internal controls, resulting in actionable recommendations for improvement? Perhaps it’s an analysis of the general ledger, looking for signs of fraudulent activity? If you are focusing on financial statement reporting, it’s helpful to know the main three services: audits, reviews, and compilations. Each of these result in a set of financial statements, typically including some form of balance sheet, income statement, statement of cash flows, and statement of functional expenses. These also include footnote disclosures. For all three of these services, the financial statements and footnotes are identical. The difference is in the report from the CPA firm that is attached to the front of the financials. The first two services below are attestation engagements. This means that the independent accountant provides a level of assurance that the financial statements are reported in accordance with generally accepted accounting principles (GAAP).

What is a Financial Statement Audit:

Financial statement audits are the highest level of assurance that can be obtained for an organization’s financial statements. The auditor issues an opinion that provides reasonable assurance that the financial statements, including footnotes, are presented fairly, in all material respects, in accordance with a relevant reporting framework like GAAP. As an independent auditor, CPAs are bound by generally accepted auditing standards (GAAS) that structure how an audit must be performed. In return, the audit report “enhances the degree of confidence that intended users can place in the financial statements.” (AICPA AU-C 200.04) Required elements of an audit include the following:
  • Risk assessments to determine where the financial statements and footnotes are at higher risk of material misstatement. In the auditing standards, revenue recognition is presumed to be a higher risk area for all organizations.
  • An assessment of internal controls, including obtaining an understanding of the internal control structure as it impacts financial reporting, and performing limited procedures to gain comfort that the controls have been implemented as described.
  • Reporting of qualitative and quantitative audit results to those charged with governance. For NFPs, this is often the board of directors, or an audit/finance committee if such a group has been authorized by the board to act on their behalf.
From a practical standpoint, a financial statement audit includes detailed testing of activity from the fiscal year and of year-end balances. For your first audit, this also includes testing beginning balances. Third-party documents, such as invoices and contract agreements, are requested by the auditor and confirmations are sent to outside parties to verify certain transactions and balances. Analytical procedures are also performed on populations of data, such as assessing the change in compensation expense from the prior year by comparing to the change in staffing levels and approved pay increases. As a part of the audit, most CPA firms will also assist with pulling together the financial statements and footnotes from the organization’s trial balance and audit workpapers. Keep in mind though, the audited financial statements and footnotes are the responsibility of the organization. The NFP can’t rely on its external auditors to be the GAAP experts if the auditors are to remain independent. If your organization doesn’t have the knowledge, skills, and expertise to oversee the preparation of GAAP-basis financials, that’s an indicator of an internal control deficiency the auditors will likely write up as a finding. An internal control letter, or a letter of comments, is a byproduct of a financial statement audit. It should be noted that the purpose of an audit is not to seek out internal control deficiencies. However, if the auditors identify any weaknesses as part of their audit procedures, they are required to put them in writing to those charged with governance. If you receive an internal control letter, donors and lenders will often ask to see it in conjunction with your audited financials. What a financial statement audit does not include is an auditor’s opinion over internal controls or a full assessment of operations and workflows. Depending on what the auditor observed during audit testing, the auditee may receive some suggestions about these items. These are not the purpose of a financial statement audit, but the auditors have a good idea of what the best practices are in your industry and can provide some feedback.

What is a Financial Statement Review:

A financial statement review is less in scope than an audit. The independent accountant does not issue an opinion; rather, a review report indicates that the accountant did not note any material modifications that would need to be made to the financials in order for them to be in accordance with GAAP. Reviews consist primarily of inquiries of the NFP’s management, plus some analytical procedures on the balances and activity. Reviews do not include an assessment of internal controls or vouching to third-party documents. If your organization’s goal is to obtain a set of financials that have more assurance than management-prepared statements, and there isn’t a desire for the internal controls assessment or higher level of assurance that an audit provides, a review is a good option. A review is also lower in cost than an audit.

What is a Financial Statement Compilation:

A financial statement compilation provides no assurance from the independent accountant. The accountant simply takes the financial data and puts it into the form of financial statements. If you have a CPA on staff, you probably don’t want to spend the money to have a compilation performed. If you don’t have a robust accounting staff, a compilation is the lowest-cost option for a set of financial statements and footnotes from an independent accountant.

Other Engagements:

What about services that aren’t focused on providing a complete GAAP-basis set of financials? One benefit of the following two types of engagements is that they can be right-sized to fit any budget by simply expanding or limiting the scope of work.

Agreed-Upon Procedures (AUPs):

This attest service is very flexible as to what it can provide. Management and the external accountant work together to come up with a list of procedures for the accountant to perform, and the accountant reports back on the results. The benefit is the procedures can be structured to get at the specific areas of interest of the organization. Examples of agreed-upon procedures include tests of a sample of cash disbursements to see evidence of the internal control procedures occurring, or tests of a sample of payroll transactions to see if signed timesheets were kept on file. Analytical procedures can also be performed, such as running data analytics over a population of disbursements to identify all checks cut on the weekend, for example, with the results provided to management. There is no audit opinion with an AUP. Unless it’s written into the engagement letter, there is no application of materiality by the accountant, and no judgment as to which errors or exceptions are included in the report. The independent accountant simply reports the results. Management and the board can determine what follow-up they want to implement internally.

Consulting:

Finally, consulting is the most flexible type of service that you can obtain from a CPA firm. The NFP and CPA firm can discuss what the NFP’s needs are and can structure the best solution to the problem. Many CPA firms have ready-to-go consulting projects that they offer to organizations. For example, Clark Nuber has consulted with NFPs that receive federal funding to assist them with their implementation of the Uniform Guidance requirements. We also offer a Business Health Checkup service, which looks at compliance and reporting matters.  We can lead Enterprise Risk Management discussions to help identify and prioritize areas of risk for your organization. Our IT audit team can do a deep dive into your IT internal controls, including performing penetration testing to see where the weaknesses in your system are. We have accounting software experts to do a functional needs assessment for your software packages. These may be more useful than an engagement that is focused on financial statement reporting. In conclusion, a financial statement audit may be just what your organization wants and needs. But before diving in to your first audit, take a step back and figure out what would be the best service for your needs (and your budget!) © Clark Nuber PS, 2018. All Rights Reserved

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