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When she needs a momentary escape from her Masters program, Jamie has plenty of avenues.

As an auditor, I’ve seen my fair share of fraud attempts. But personally, I had not experienced such an attempt against an organization I was volunteering with– until now. I have the dubious distinction of being amongst the hundreds of thousands who have received a social engineering phishing email (i.e., solicitation of information by posing as a trustworthy person).

Here’s the scenario: I’m the board treasurer for the local chapter of an association. The fraudsters likely found the board listing online and set up an AOL account ( under the board president’s name. They then used that email address to send me the following email:

Subject: General Expenditures

Am currently out of town. What is our current balance? We have some disbursement to complete immediately.

The fraudsters then signed the message with the president’s full name.

There were several immediate red flags here. They wouldn’t know from the board listing, but our board president doesn’t sign emails with a full name. There was also uncharacteristic poor grammar (“some disbursement”). Additionally, we have a management company that handles our finances, so most inquiries would go there and not directly to me.

Here’s the simple internal control I used (and which is a great first line of defense): I contacted the real board president to confirm the authenticity of the email. (I sent an email to a known, verified email address; I did not respond to the AOL one). I immediately received confirmation that the disbursement message was fake. I could have also verified with a personal phone call. The key is to get independent, verified confirmation from the purported source.

It’s a good guess the fraudsters use this “board.pres” email address for many other boards and just change the name on the account when sending out their phishing emails.

Fraudsters cast a wide net – it takes only one fish to make it worth their time. The United States Computer Emergency Readiness Team has a webpage dedicated to social engineering/phishing. It has many helpful tips and is worth bookmarking for the future.

© Clark Nuber PS and Focus on Fraud, 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

ASC 606: A Case Study for Operating Real Estate Companies

Given the name of the standard, it is important to understand what is considered a contract, who is considered a customer, and what is considered revenue. The first consideration is whether or not you have a contract. A contract must have five elements: (1) the contract is approved and the parties are committed to perform; (2) each party’s rights regarding the goods/services to be transferred can be identified; (3) payment terms regarding the goods/services to be transferred can be identified; (4) the contract has commercial substance; and (5) it is probable that the consideration will be collected. If you do not have a contract by the standards above, then ASC 606 does not apply. Who a customer is and what revenue means is generally considered straightforward, but in terms of ASC 606, we must remember that only revenue from an entity’s ordinary activities falls under this standard. If you sell a division of your business, or dispose of some assets, those types of transactions will likely be excluded from ASC 606.

The 5-Step Model – A Case Study

The crux of the new standard is a 5-step model. As an example of how it works, let’s apply the 5-step model to a common revenue stream in the real estate industry; management fee revenue. Step 1 - Identify the contract(s) with a customer. If your organization does not always use an executed management fee agreement, we recommend you obtain one for all future projects. In this case study, the management fee contract has the following terms: Manager enters into a one-year contract with Owner to provide property management services for an apartment building. The contract stipulates that Manager will manage day-to-day operations of Owner’s apartment building for a fee of 5% of the property’s operating revenue. There is also an incentive fee of 3% of annual Net Operating Income, with a threshold of $5 million. Step 2 - Identify the performance obligations in the contract. How do you identify performance obligations? Think about the following questions:
  • What are the promised services? In this case, the promised service is to provide daily management services.
  • What is/are the performance obligation(s)? The performance obligation is daily property management. This series of services forms a single property management performance obligation. The various aspects of property management services (janitorial and maintenance, rent collection, purchase of operating supplies and equipment, etc.) are inputs to produce a combined output (the property management services).
  • Should any distinct services be combined and accounted for as a single performance obligation? Although the underlying activities will vary within a single day and day-to-day, the manager is providing a daily management service that is distinct and substantially the same. Therefore, the property management service is a single performance obligation composed of a series of distinct services.
Step 3 - Determine the transaction price. In our case study, this is fairly straightforward. The base management fee is equal to 5% of operating revenues and the incentive management fee is equal to 3% of annual net operating income. The incentive management fee falls under a category of revenue known as variable consideration, which is discussed in further detail below. Step 4 - Allocate the transaction price to the performance obligations in the contract. When a contract has a single performance obligation, the transaction price is attributed to that performance obligation. When a contract has more than one performance obligation, you must allocate consideration to each performance obligation based on the relative standalone selling prices of the goods or services at the inception of the contract. If such prices are not known, they must be estimated. In this case we have one performance obligation, so this step is rather simple. Step 5 - Recognize revenue when (or as) the entity satisfies a performance obligation. Revenue should be recognized when (or as) performance obligations are satisfied by transferring a promised good or service (i.e., an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset. Performance obligations may be satisfied at a single point in time or over a period of time.

Steps 4 and 5 – Application to the Base Management Fee

In this case study, we determined that management services represent a single performance obligation recognized over time because the manager is providing a series of distinct services. Since each day is a distinct service, the operator would recognize revenue daily; however, for practical purposes, revenue recognition on a monthly basis is more likely. As such, at the end of Month 1, if operating revenues were $500,000, the manager would recognize management fee revenue of $25,000 ($500,000 x 5%).

Steps 4 and 5 – Application to the Incentive Management Fee

The concept of variable consideration is important under ASC 606. The incentive fee is an example of variable consideration, as the actual amount of revenue to be received is unknown at contract inception. In this case study, the incentive fee is equal to 3% of annual net operating income (NOI). However, the fee is only earned if NOI is at least $5 million. To determine how much revenue to recognize after one month, two methods can be used: the "Expected Value" approach or the "Most Likely Amount" approach. Under the Expected Value approach, the amount of revenue recognized is equal to the sum of probability-weighted amounts in a range of possible amounts. Under the Most Likely Amount approach, the single most likely amount in a range of possible amounts is recognized as revenue. The Expected Value approach would fit this situation. Based on the below assumptions, after 1 month, $13,000 of incentive fee revenue would be recognized by the manager. It is important to remember that you cannot recognize future variable fees, and you must consider if it is probable that a significant reversal of revenue will occur. If you anticipate a significant reversal, no variable revenue would be recognized. Analysis and review of variable consideration recognized to date must be done at each reporting period, with recognized revenue adjusted as needed.

How to Prepare for ASC 606

First, examine your revenue streams (management fee, developer fee, incentive fee, etc.). Remember that leases within the scope of ASC 840: Leases, do not fall under ASC 606. Next, perform and document the 5-step process for each of these revenue streams. Remember that this should be an ongoing process. Each time there is a significant new customer contract or revenue steam, an analysis should be performed. If revenue sources include variable consideration (i.e., an incentive management fee), ensure your company has the processes and procedures in place to regularly review the revenue estimates as the fee (and revenue recognized) may need to be adjusted to account for revised estimates. Clark Nuber can assist with the implementation process. We hold live trainings (register here for our November 14, 2018, event), have developed a template to guide you through the 5-step process, can help draft footnotes, and are available for consulting and implementation projects. Please contact your Clark Nuber professional or Katy DeFilippo for more information. © Clark Nuber PS, 2018. All Rights Reserved

The IRS Draft Form 990-T Gives UBI Clues (Updated)

The IRS published a draft 2018 Form 990-T* and Instructions** for exempt organizations. These will help organizations gain an understanding of its 2018 unrelated business income (UBI) tax liability. Treasury (the IRS) is using the Form 990-T to provide guidance on two of the most impactful changes to UBI from the Tax Cuts and Jobs Act:
  • The creation of UBI from the provision of non-taxable qualified transportation benefits to employees; and
  • The segregation of separate trade or business activities with losses when there is more than one trade or business activity.
Treasury may provide guidance through this mechanism because the Internal Revenue Code gives the Form 990 and its instructions authority similar to Treasury regulations, without the requirement of going through the change process necessary to issue new regulations. The following are some high-level observations:
  • The 990-T header has changed so an organization now indicates how many separate trades or businesses it has on line H. The organization will also provide a NAICS code for its “primary” unrelated activity with a description of the primary activity. How the primary is measured is not yet known. Is it the largest by gross or net revenue? Perhaps most significant by some other measure? Can the organization choose?
  • It is clear there will be a new Schedule M required for organizations that have more than one unrelated trade or business. However, no Schedule M or instructions have been released yet. It is likely this Schedule will report each separate trade or business and all direct expenses and allow for the carryforward of any losses not allowed to offset income from other segregated trade or business activities.
  • Finally, we know taxable fringe benefits are added at the bottom on line 34, after other ordinary and necessary business expenses have been deducted, such as tax preparation fees, legal fees, and the charitable contribution deduction. It is after current and subsequent net operating losses generated in current and subsequent tax. This is different from the 990-T 2017 where the UBTI is reported above expenses. Regardless of the amount of additional UBTI, if this is the only reason for filing the Form 990-T, organizations need only complete the Header above Part I, except C, E, H, and I; Part III and IV - only the relevant lines; and the signature lines. For both years 2017 and prior, net operating loss carryforwards are allowed to offset the UBTI generated by qualified transportation fringe benefits
The IRS issued Notice 2018-67 with guidance on segregating and suspending losses. The new IRS section 512(a)(6) requires reporting separate trades or businesses on the yet-to-be-published Schedule M. For the other new code section 512(a)(7), many organizations are still awaiting guidance on how to calculate the “cost” of providing parking benefits when parking is provided in an employer owned parking facility. For both of the new Code sections, organizations will need to prepare a reasoned tax position based upon available guidance. If you have questions or need assistance calculating unrelated business income tax, please contact your tax advisor or the tax professionals at Clark Nuber. *Draft 2018 Form 990-T **Draft 2018 990-T Instructions © Clark Nuber PS, 2018. All Rights Reserved

Washington State and Local Tax Compliance for Short-Term Vacation Rental Businesses

But first, let’s define a short-term rental business. For both tax and regulatory purposes in Washington, short-term rental business is typically defined as lodging provided by an owner or operator for less than 30 consecutive days in a dwelling or residential unit for a fee. The term therefore does not include hotel or motel lodging, residential rentals for 30 or more consecutive days, or residences operated by a charitable organization for specifically excluded purposes. “Short-term rentals” generally include short-term house, condo unit or apartment rentals, or renting a room in a house, condo unit or apartment.  If a property owner does any of the following, it is presumed to be conducting a “business” that may be subject to state and local taxes:
  1. Advertising a property for overnight accommodations on an online platform (for example, Airbnb and VRBO);
  2. Hiring a property manager to manage a property rental; or
  3. Selling three or more short-term rentals in one year.

Washington Business License

The State of Washington requires most businesses to obtain a state business license and to register with the Washington Department of Revenue, including businesses that will gross over $12,000 per year and those that will make any retail sales subject to sales tax.  Since short-term rentals are treated as retail sales (discussed below), any owner or operator of a short-term rental should obtain a state business license. State business license applications may be completed by filling out a paper form and submitting it by mail, or by completing an electronic application.  The paper form and electronic application are available through the Washington Business Licensing Service’s website. There is a one-time $19 application fee.  After registering, businesses are issued a unified business identifier (UBI) number that is used to identify taxpayer accounts with the Washington Department of Revenue.

Washington State Taxes and Tax Returns

Washington excise tax returns are filed monthly, quarterly or annually, depending on the frequency assigned by the Washington Department of Revenue.  One excise tax return form is used to report state business and occupation (B&O) taxes and most taxes collected from customers, including state and local sales taxes, local lodging taxes, and convention center taxes.  Monthly and quarterly filers are required to file electronically using the Department of Revenue’s online filing system. Washington imposes B&O tax on gross business income, including income from short-term rentals located within the state.  The state B&O tax has numerous classifications, each of which may have a different rate.  Gross revenue from short-term rentals is reported under the retailing B&O tax classification, which is imposed at a rate of .471%.  Importantly, a short-term rental business with less than $90,000 in annual gross income will likely owe no state B&O tax because a small business credit applies to reduce the B&O tax liability to $0. Short-term rentals are subject to state and local sales tax that is generally collected from customers.  The state sales tax rate is 6.5% and local sales tax rates differ by city, ranging from 1% to 3.9%.  Both the state and local portions of the tax are reported on the Washington excise tax return and remitted to the Department of Revenue. In addition to sales taxes, many localities in Washington impose hotel/motel taxes and convention center taxes that are also reported on the state excise tax return.  The tax rates and fees differ by locality.  The Department of Revenue publishes the local rates in a quarterly publication. Beginning January 1, 2019, short-term rental businesses located in Seattle must begin collecting a 7% convention center tax. Short-term rental businesses that advertise rentals on online platforms (for example, Airbnb, VRBO and HomeAway) should confirm whether the platform(s) they use collect and remit taxes on behalf of hosts.  It appears that most major online platforms currently collect Washington sales and lodging taxes on rentals booked through their respective platforms. B&O taxes are imposed directly on the property owner/operator and are not reported by the online platforms; therefore, short-term rental businesses should still file state excise tax returns.  The returns will report gross amounts for B&O tax as well as sales tax, hotel/motel and convention center tax, but if all rentals are made through a platform that reports the latter taxes directly, the owner/operator would deduct the full amount of such receipts so that they are not taxed more than once.

Local Tax Registrations

Many Washington cities and towns require short-term rental businesses to obtain a general business license, which is different from the regulatory permit or operator’s license that may be required. For example, the City of Seattle requires businesses operating in city limits to obtain a business license tax certificate from the city. Business license tax certificates must be renewed annually. Seattle’s renewal fees are determined according to the gross income of the business during the last complete calendar year.  Fees for 2019 business license tax certificates range between $55 and $2,400, with the minimum $55 fee charged if a business had less than $20,000 in annual gross income, increasing to $110 if the business had between $20,000 and $500,000 of gross income. Other Washington cities, like Bellevue, charge only a one-time registration fee ($90 in 2018), and the registration is valid for the life of the business (i.e., no renewal fees).

City B&O Taxes

More than 40 Washington cities and towns impose a local B&O tax, including most of the more populated cities like Seattle, Bellevue, Tacoma, Renton, Everett and Issaquah. The list of all Washington cities that impose a B&O tax is available here. Many cities have a minimum annual gross income threshold that must be reached before city B&O tax is due, and the thresholds vary by city.  For example, the threshold in Seattle is $100,000, Bellevue’s minimum threshold is $160,000, Everett’s is $20,000 and Tacoma’s is $250,000. Unless a city has expressly granted a taxpayer permission to not file a B&O tax return, short-term rental businesses should file returns with the city where the rental property is located, even when no city B&O tax is due. City B&O tax returns are typically due on a quarterly or annual basis, and they are filed directly with the applicable city. Some cities that impose a B&O tax allow taxpayers to file returns electronically.

Other City Fees

Many city governments have passed non-tax ordinances to restrict or regulate short-term rental activities within city boundaries. Furthermore, conversations amongst city officials, property owners and other stakeholders regarding short-term rental properties continue to occur, as increasing short-term rental activities create new dynamics in local housing markets. Notably, Seattle enacted regulations governing short-term rental businesses. Beginning January 1, 2019, short-term rental businesses located in Seattle must obtain an operator’s license from the city.  The annual fee for an operator’s license is $75. Seattle also passed an ordinance that would have imposed a per-night fee on short-term rentals within the City beginning on January 1, 2019; however, the short-term rental tax ordinance was repealed in June 2018.  As of the publication date of this article, we are not aware of any other Washington localities enacting a short-term rental tax.

What if your business has been offering short-term rentals in Washington without a state or local tax registration?

If your short-term rental business has not been complying with Washington and/or local tax requirements, we recommend that you discuss the issue with a state and local tax professional.  The Washington Department of Revenue and many of the B&O tax cities offer voluntary disclosure programs that may allow the business to avoid otherwise applicable penalties if it agreed to pay any taxes that would have been due for the prior four years and to remain in compliance going forward.


Contact your Clark Nuber tax professional or our SALT team members if you have any questions on how state and local taxes may impact your short-term rental properties.   Jennifer Hill Clark Nuber Co-author Jennifar Hill is a manager in Clark Nuber's state and local tax practice team. © Clark Nuber PS, 2018. All Rights Reserved

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