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Jennifer

CPA | Shareholder

Foundations and not-for-profits might be exempt from taxation, but they’re not exempt from complexity: anything but.

Trust is foundational to any relationship, both personally and professionally.  Trust is also something that needs to be nurtured over time, with the main ingredients being integrity, honesty and demonstration of respect.   Lack of trust in the workplace can lead to a culture of backstabbing and paranoid suspicion, and perhaps even to the demise of a business.

But at the same time, trust has a dark side as well.  Too much trust can leave the door wide open for occupational fraud.

Picture the following:  An Accounting Manager (AM) for Firm X has been with the business for decades and is beloved by staff and management alike.  She is like family and has gained absolute trust from the CEO all the way down to her staff.  In theory, there are some internal controls, but since the AM has been with the company for so long, no one ever checks to see if the controls are holding up or even being followed.  This inherent trust is a badge of honor for the AM – it also leaves the door wide open for her to take advantage of the situation.  In fact, over the last 20 years, the AM embezzled a tidy sum of $1.2 million.

How could this fraud go on for so long without being uncovered?  The answer: blind trust.  Nobody at Firm X could ever conceive that the AM would do anything like this, yet it happens.  This scenario happens all too frequently in occupational fraud cases.

So what can be done?  We need to go back to the old adage “trust but verify.”  It is perfectly reasonable to have allowed the AM the freedom to do her job with minimal oversight.  But there needed to be vigilance on the part of management to periodically verify that processes are occurring the way they should be.

Personally, when I feel trusted in the workplace I get the amazing sense that my work is valued and I am empowered to do the best job I possibly can.  It’s a great and exhilarating feeling.  However, I expect management to review my work, verify that I am following procedures correctly, and question me from time to time.  Ironically, this verification also empowers me because I know that our leadership cares about the quality and integrity of our work.

To find out more on how you can implement fraud controls for your workplace, please contact Mike Nurse or Pete Miller.

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Mike Nurse is a manager in the Accounting and Consulting Group at Clark Nuber PS.

© Clark Nuber PS and Focus on Fraud, 2017. 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 Focus on Fraud with appropriate and specific direction to the original content.

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Articles and Publications

Colorado and Massachusetts Put the Summer Heat on Remote Sellers

New Vendor Reporting Requirements

First, Colorado’s long awaited (and litigated) vendor reporting requirements finally go into effect on July 1, 2017. Although the Colorado law was enacted way back in 2010, it was immediately challenged, eventually making its way up to the US Supreme Court. However, the dust has now settled from the litigation and Colorado has announced it will begin enforcing the law. Under the Colorado law, any out-of-state vendor that makes at least $100,000 of annual sales to Colorado customers – and does not collect Colorado sales tax – must inform those customers that their purchases may be subject to the state’s use tax. This notification may be provided on the customer invoice, or in another communication made in conjunction with the sale (an online order summary, for example). Additionally, if individual customers purchase more than $500 worth of taxable goods in a year, these sellers must send them an “annual purchase summary” listing purchase dates and amounts. The annual purchase summary must also reiterate that Colorado consumers must pay use tax on all untaxed, nonexempt purchases. Finally, the vendor must send the Colorado Department of Revenue an annual customer information report, listing the name, address, and total untaxed purchases of each Colorado customer. The first of these annual summaries and customer reports are not due until early 2018. To be in full compliance with the new law, however, remote sellers with Colorado customers should start providing notifications to customers and compiling information on nontaxed sales as of July 1st. Unfortunately, for sellers that make more than $100,000 of annual Colorado sales, the only way to avoid being subject to these requirements is to voluntarily start collecting tax from Colorado customers. It is a Hobson’s choice, to be sure, but one that the Colorado Legislature fully intended when it passed the law back in 2010.

Remote Sellers and State Sales Tax

The second reason July 1st is significant for remote sellers is that Massachusetts will start requiring sellers with more than $500,000 in Massachusetts sales, and at least 100 transactions with Massachusetts customers in the prior 12 months, to begin collecting the state’s sales tax on that date. The state is following South Dakota, Alabama, and a smattering of other states that have begun imposing a duty to collect sales tax on remote sellers that have never set foot in the state. Massachusetts is notable in that it is the most populous state yet to try to impose such a duty. Further, it is doing so by administrative pronouncement, without any change in the relevant laws or regulations. This action would seem to be a clear violation of the US Supreme Court’s holdings in the 1967 National Bellas Hess and 1992 Quill decisions, which both confirmed that some physical presence on the part of the seller is required for a state to impose a duty to collect sales tax for the state. However, in his dissenting opinion in a 2015 decision related to the Colorado remote seller law, Justice Kennedy stated that he felt that it was time to revisit those earlier decisions. The tax collection requirements now being imposed by Massachusetts, and other states, are a clear attempt to create just such a case.

What Can We Expect?

In response, two trade groups (NetChoice and the American Catalog Mailers Association) filed suit in Massachusetts state court on June 9th, seeking a preliminary injunction to block enforcement of the remote seller directive, as well as a declaratory judgment that the directive is unconstitutional. A decision (at least on the injunction) is expected before the July 1st enforcement date. Thus, it may come down to the wire as to whether remote sellers must actually start collecting Massachusetts tax on that date, or will get some sort of a reprieve. So, it looks like, while the rest of us are working hard to beat the summer heat, remote sellers may be feeling the heat of the Colorado and Massachusetts state taxing authorities. Save them a cool beverage, won’t you? Questions? Seeking more information on the new legislation, or wondering how it might affect you? Contact Joe Haberzetle at info@clarknuber.com for more information.   © Clark Nuber PS, 2017. All Rights Reserved

Cash and Noncash Donations: The Ins and Outs of Charitable Contributions

Figuring out charitable contributions can be a tricky thing – especially when it comes to your tax deductions. How do you determine if your cash donation is deductible? What about your noncash donation? For starters, to be a valid tax deduction, your donation must contribute to an eligible organization. An eligible organization can include a non-profit organization; a church or other religious organization; a federal, state, or local government; a war veteran’s organization; or other organizations that the IRS recognizes.

Choosing an Eligible Organization

Many organizations have their own websites, which will state whether a donation will qualify for a tax deduction. If you want to donate to an organization, but aren’t sure whether your contributions are legitimately tax-deductible, check with the IRS database of eligible charitable organizations – or sign up for GuideStar. GuideStar is an organization that specializes in providing information on millions of nonprofit organizations, including whether they are a qualified organization. It also allows you to view any organization’s recently-filed tax return, including those for your favorite charities. However, there are some organizations for which a donation could not qualify for a tax deduction. For example, donations to sports clubs, labor unions, politicians, your kids’ school bake-off, or needy individuals directly.

Cash and Noncash Deduction Limitations

As much as charities appreciate donations of any amount, the IRS does have maximums on how much you can annually deduct from your taxes. Further, not all non-profits are created equal when it comes to the limitations for deductibility. Deduction rules become a bit more complicated when you donate noncash items. This means it’s best to discuss your intent with your qualified tax professional; they can help you understand the benefits and limitations for donations of cash and noncash items. Tax deductibility for cash donations is not as complex as noncash donations. That said, cash deductions can be limited to either 50% or 30% of your annual adjusted gross income, depending on what type of organization you donate to. But don’t worry, if you are limited on how much you can deduct in a given year, you can carry over the excess contributions to the next tax year for a maximum of up to five years.

Proof of Donation

If you donate $250 or more at a time, you should request a receipt, or charitable acknowledgement letter, from the organization. The charitable acknowledgement letter needs to be from the organization and needs to provide key information, such as the date of the donation, the amount donated, and whether you received any benefits from your donation. Having this information is imperative, because if the IRS questions your donations, they will request both the charitable acknowledgement letter and either your credit card statement, bank statement, or a canceled check as proof you made the donation. There are some instances, however, wherein obtaining a receipt is not necessary. One such instance is if you donate less than $250 at a time. Additionally, if, for example, you give your church a regular weekly donation of $25, you don’t need a receipt - even though your contributions will eventually add up to over $250. While it’s important to have some kind of a record of every donation you make, receipts are not required for donations of under $250. Further, many organizations will send you a total at the end of the year.

Deductions for Noncash Donations

Donating Publicly Traded Stock
Everyone knows cash is king. But in the world of charitable donations, cash may not be the king of kings. Cash and noncash donations can have the same effect on your tax liability, and in some instances, certain noncash donations can give you a bigger bang for your buck. Such is the case with a donation of appreciated publicly traded stock, which you have held for longer than 12 months. For example, if you donate these types of stocks to a qualified charitable organization, you will not have to include the gain in your income – which you would have to do if you had sold the stock. The best part of this scenario is that you get the fair market value of the stock (typically the average of the high and low of the trading stock price) the day it transfers out of your account. Wait, what? Yes, it’s true! If you transfer the stock, rather than selling it, you don’t recognize the gain and you receive the charitable deduction on the fair market value on the date of the transfer. That’s a major win! For example, let’s say you purchased stock in XYZ Company 20 years ago for $100 and now it’s worth $1,000,000. You donate the stock to your favorite local qualified charity. In this instance, you wouldn’t recognize income on the $999,900 gain and you’d get the charitable tax deduction of $1,000,000. The actual tax effect will depend on each taxpayer’s specific tax situation, so it’s extremely important to consult with your tax professional before making a contribution. This will allow you completely understand the benefits you’ll receive. As a warning, stock held less than 12 months may have some adverse tax consequences, so be very careful when deciding which stock to donate.
Other Noncash Contributions
Some other noncash contribution examples include clothing, furniture, household items, wine collections, art, jewelry, antiques, collectibles, automobiles, boats and recreational vehicles, and even your home. While these types of noncash donations can qualify for deduction, it’s very important to note there are very specific rules and timelines you must follow in order to claim deductions in excess of $5,000. In instances where you donate a noncash item that exceeds $5,000, you need to have a professional appraisal (recognized by the IRS). You also need to have the IRS Form 8283 signed by both the charitable organization and the qualified appraiser. The signed Form 8283 will also need to be attached to your filed tax return. These rules do not apply for publicly traded stock or mutual funds.

Reducing Donations for Value Received

Everyone loves free stuff, but when NPR offers you a tote bag in return for donating, or you attend an annual gala dinner, you must subtract the value of the tote bag, meal, or any other items received, from your charitable donation. The charity will usually tell you the value of the items you received, and will typically include the amount on your receipt. For example, if you attend a fundraising dinner and pay $100 per ticket, your receipt should show your $100 donation and include an amount for the value of your dinner (ex. $25). Only the part of your donation that excludes the value you pay for your dinner (or tote bag) is tax deductible. In this example, your tax deduction is limited to $75 ($100 - $25).

Deductions and IRA Distributions

Are you receiving IRA distributions? Here is another way of reducing your annual taxable income through charitable donations. In the Consolidated Appropriations Act of 2016, legislation made qualified charitable distributions (QCD) from individual retirement accounts permanent. A QCD permits an annual transfer of up to $100,000 of tax deferred IRA savings to an eligible charity. To qualify, funds must be transferred from the IRA account through a direct transfer to the charity. It’s important to note that the owner of the IRA cannot receive the funds and then transfer them to a charity. To make a QCD, however, you must meet the following criteria:
  • You must have attained age 70 ½;
  • You must donate an organization that qualifies;
  • The transfer must be made from an IRA (a simplified employee pension, a simple retirement account or inherited IRA does not count).
The benefit of the QCD includes a reduction of your adjusted gross income, which can affect the taxability of your Social Security benefits, can help reduce the impact of alternative minimum tax, and can reduce the limitations trimming itemized deductions.

Questions?

To learn more about receiving tax deductions from your cash and noncash donations, please contact Brian Wainscoat at info@clarknuber.com. Brian-Wainscoat-Color-Web-Resolution Brian Wainscoat is a manager in Clark Nuber's Tax Practice. He works primarily with closely held businesses and high net worth individuals.   © Clark Nuber PS, 2017. All Rights Reserved

A Deeper Dive into Not-for-Profit Functional Expense Reporting

As many NFP organizations choose to present two years of financial statements, now is the time to start thinking about how the new standard will impact your organization. For most organizations, this will not be an entirely new exercise, as they have a statement or schedule of functional expenses as part of their financial statements. Many other organizations, however, have only reported expenses on the Form 990. This may be the first time they will be including a functional expense statement or schedule within their financial statements. In addition to disclosing its expenses, your organization will also be required to disclose the method used for allocating expenses among the functional classifications. This information should be included in the footnotes to the financial statements. It should also include a brief disclosure of the major types of expenses that are allocated among programs and the methodology for the allocation, such as square footage or time reporting. Since this new reporting standard will impact all NFP organizations in some way, now is a great time for a refresher on the current accounting rules, such as the definitions of the functional classifications and common methods of allocating expenses. We will also point out some common pitfalls, and a few tips, that will prepare you for the new standard’s implementation. Definitions per ASC 958-720-45: Program - the activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill the purposes or mission for which the NFP exists. Those services are the major purpose for and the major output of the NFP and often relate to several major programs. Supporting Services are broken down into three underlying classifications:
  • Management and General - the activities that are not identifiable with a single program, fundraising activity, or membership-development activity, but that are indispensable to the conduct of those activities and to an entity's existence. These often include budgeting, oversight, accounting and record keeping, and overall management of the organization.
  • Fundraising - the activities undertaken to induce potential donors to contribute money, securities, services, materials, facilities, other assets, or time. These often include any activity that is performed to induce donor contributions to the organization, including by way of special events, maintaining donor lists, meeting with or contacting donors, writing grants or contribution solicitations
  • Membership Development - soliciting for prospective members and membership dues, membership relations, and similar activities. However, if there are no significant benefits or duties connected with membership, the substance of membership development activities may, in fact, be fundraising. These often include soliciting members or prospective members to become members and pay membership dues.
Allocation Methods:
  • Square Feet - Costs such as utilities, rent, and building depreciation can be allocated based on the spaces the organization’s different departments occupy. For example, an organization could compare the square feet included in a lease to the square feet the development department occupies. They could then use the difference to determine the percentage of the monthly rent that should be allocated to fundraising. Next, the common area space could be allocated to all functions, based on head count. The accounting department offices could be allocated to management and general, while the space occupied by the executive director, or others who work in multiple functions, could be allocated based on how those employees typically spend their time.
  • Head Count – Smaller organizations, or those that operate virtually, are typically the easiest to allocate costs based on a headcount. This is because the number of people working in each program, or supporting services, can be calculated as a percentage of total employees to allocate the underlying cost. This could also be used to allocate insurance costs.
  • Time studies - Some organizations will ask their employees to document how their time is being spent during a given pay period to determine, on average, where an employee is spending their time - whether it be program, management and general, or fundraising. The organization will then use that data on an annual basis to allocate costs, such as supplies, telephone, or internet costs.
  • Direct costs - Some costs only relate to one classification, such as grant payments or consulting services, for a specific program. These costs can be directly charged as incurred.
Common Pitfalls:
  • Depreciation – Sometimes, organizations will include all depreciation in one function, such as management and general or program, when multiple functions are benefiting. Depreciation for building and building improvements, rent, repairs, and maintenance can all be allocated based on the square feet of the functional classification. Or, in the case of depreciation or repairs and maintenance, if the asset or repair was for a program or supporting service, the costs could be directly charged to that program or supporting service.
  • Insurance - We sometimes see this directly charged to management and general. However, depending on the type of insurance, a portion of the insurance cost should be allocated to all programs and supporting services. For example, the property insurance on the headquarters of an organization which includes space for programmatic activities and management of the organization should be allocated to those functional classifications. Insurance for a site where only programmatic activities occur would be directly charged to program.
  • Interest costs - Interest expense on debt is another expense we see organizations classifying as entirely management and general. Instead, the organization should allocate the cost to the benefiting program or supporting services. Since debt is usually issued for the construction or purchase of a building a reasonable allocation method could be based on square feet occupied. If costs cannot be allocated, the interest should be reported as management and general.
  • Not reporting fundraising expense - If an organization shows more than an insignificant amount of contributions on the statement of activities, we would expect to see fundraising expense included in the functional expense statement. Even if your organization does not have a specific grant writer or development director, there is likely someone, such as the executive director, spending time cultivating these donations. Because that time is focused on fundraising activities, a portion of that person’s salary should be allocated to fundraising. However, there are some types of organizations that generally do not have fundraising expenses. These include religious organizations, private foundations, or an entity that has no paid staff where most, or all, contributions arise from uncompensated board members soliciting contributions.
  • Forgetting netted expenses on the Functional Expense Statement - Don’t forget to allocate expenses that have been netted against revenue sources on the statement of activities, such as the direct costs of special events or costs of goods sold. These expenses can appear as a reconciling item, below a subtotal that agrees to the statement of activities functional classifications. This ties the numbers between the two statements together.
  • Other/Miscellaneous Expense - As a rule, this natural expense line should not be more than 10% of total expenses.
Other Rules and Tips to Consider
  • Don’t recreate the wheel - Take into consideration the functional reporting you are already performing for the Form 990. There is likely an efficient way to group some of the natural classifications to reduce the number of lines, as well as prevent additional work when preparing for your U.S. GAAP basis financial statements.
  • Utilize functionality within your general ledger system - For reoccurring expenses, determine the most appropriate allocation method, calculate the allocation percentages at the beginning of the year, and set-up your accounting software to automatically allocate the expenses on a per-invoice basis. An example could be medical insurance invoices. If your organization has low turnover, the allocation by headcount can be easily calculated at the beginning of the year. An automated allocation can then be performed each month.
  • Review methods on an annual basis - Like other policies, it is a best practice to review the organization’s allocation methods, at least annually, to ensure the method used accurately reflects how the costs are benefiting each functional classification.
If your organization has questions, or would like additional information about expense reporting, please contact Sarah Wine or another Clark Nuber professional. © Clark Nuber PS, 2017. All Rights Reserved

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