If your tax-exempt nonprofit organization utilizes annual fundraising events to raise money, you’re not alone. Many nonprofits host dinner galas, golf tournaments, runs/walks, carnivals, concerts, etc. to raise awareness and funds for their cause. And for many small to mid-size nonprofits, these special events are major sources of revenue that support internal operations which deploy the organization’s mission. However, with these events comes additional recordkeeping and IRS reporting responsibilities that many organizations overlook. Here are a few ways to ensure your fundraising event is in compliance with the IRS:

Event Contributions vs. Ordinary Contributions

Contributions received from fundraising events are different from ordinary charitable contributions received throughout the year. Ordinary contributions are made without any expected benefit in return and they are fully deductible on a donor’s income tax return.

On the other hand, event contributions are only partially deductible because attendees typically receive something in return for their donation (i.e. meal, golf greens fee, show attendance, etc.). Because of this “quid pro quo” contribution, only the portion over and above the benefit received is considered a charitable donation.

Here’s an example: Your nonprofit is hosting a gala. Tickets cost $150 per person and each attendee will receive dinner and live music. The fair market value of the dinner and music is deemed to be $50. Therefore, the attendee is purchasing a $50 meal (purchased good) and contributing $100 to your organization (charitable contribution). 

Segregating Special Events

Due to the infrequent nature and fundraising aspects of special events, the IRS requires them to be reported separately on the Form 990 tax return. The isolation of special events preserves the integrity of the financial information related to the organization’s program activities. This allows readers of the Form 990 to get a clear financial understanding of how the organization utilizes funds for their mission activities. 

In order to facilitate this requirement, the organization needs to segregate and track all revenue and direct expenses associated with each fundraising event. In addition to segregating activities, the charitable portion of each attendee’s purchase must be determined. These contributions are then stripped from the fundraising event and shown elsewhere on the Form 990 return. Many times, this leads to the fundraising event reporting a loss on the face of their tax return.

Although uncomfortable to the organization, showing a loss from a fundraising event is a very common occurrence. When the contributions are combined with the net income from the fundraising event, it becomes clear that the events are normally very successful and raise thousands of dollars. But with that success comes added IRS compliance!

Additional IRS Compliance

If an organization raises over $15,000 from fundraising events, there is an added responsibility of preparing Schedule G with Form 990. This schedule details the revenues and costs associated with each fundraising event.

However, tax return reporting isn’t the only compliance requirement for fundraising events. If the purchase price of a ticket for any fundraising event is greater than $75, the organization must include a statement with or on the face of the ticket stating the fair market value of the benefit received. In the case of our example, the ticket would read:

“Thank you for your cash contribution! You received goods and/or services valued at $50 with your contribution.”

This ensures the donor is aware that his or her deductible contribution is only $100 and ensures that your organization is complying with IRS rules. 

If done correctly, fundraising events can be a powerful and exciting way to celebrate your nonprofit’s accomplishments or introduce your mission to new contributors. Fundraising events can also be seen as great networking opportunities or chances to give the casual donor an additional reason to support your cause.    

If you would like to learn more about fundraising events or have any questions, please contact the nonprofit team at Cray, Kaiser. We can ensure your organization has the right resources in place to make your next fundraising event a success!

 

Click here for more nonprofit resources.

As businesses are formed and as they grow, one question often asked by owners and chief financial officers is whether their companies would benefit from an audit. As you might have guessed, the answer depends on a number of factors specific to each company. Below is helpful information about audits to keep in mind as you decide whether or not an audit is right for your business.

 

Audit vs. Compilation vs. Review

Although audits, reviews, and compilations all involve a report on financial statements, an audit provides a higher level of assurance compared to a review or a compilation. Here’s what each consists of:

Compilation

The most basic of the three, a compilation is when the accountant assists management in presenting financial information in the form of financial statements without providing any assurance that there are no material modifications needed to the financial statements.

Review

In a review engagement, the accountant performs analytical, inquiry, and other procedures to obtain limited assurance that no material modifications should be made to the financial statements.

Audit

An auditor obtains reasonable assurance about whether the financial statements are free of material misstatements. In order to obtain this assurance, auditors are required to gain an understanding of an entity’s internal controls and fraud risk. During the audit, tests of balances and transactions through third-party confirmations, physical inspections, observations, and other procedures are performed. Due to its greater scope, an audit is higher in cost, but the benefit is that it is more thorough and provides a higher assurance of accuracy.

Should I Consider an Audit?

There are many reasons why a business may benefit from an audit. Here are a few examples:

• Greater access to credit and more favorable borrowing terms. Because of the comparatively high assurance that comes with an audit, banks and other lenders are generally more likely to extend higher levels of credit to businesses with audited financial statements. Additionally, loans to audited companies may come with better terms, such as lower interest rates or the elimination of personal guarantees.
• Required by lenders, regulators, bonding companies, or other parties. In some cases, an audit may be required for a company to obtain credit from a lender or vendor, or to receive bonding. Customers may also request audited financial statements to evaluate the business’s ability to fulfill large orders or complete contracts. Businesses operating in certain industries may also be required to provide audited financial statements to federal or state regulators, and audits will likely be required for companies performing contracts for federal or state entities.
• Required by partnership or shareholder agreement. In some cases, a partnership or shareholder agreement may require a business to obtain an annual audit. Other agreements, such as a buy-sell arrangement, may also require one.
• You are considering selling the company (or may be in the future). Having a history of audited financial statements can make a company more attractive to investors or other businesses that may be interested in purchasing the business. This can lead to a smoother transaction and possibly a higher selling price.
• To promote accountability within the business. In addition to the value an audit can provide in dealing with outside parties, an audit can also encourage accountability and best practices internally.

Internal Benefits of Audits

As auditors gain an understanding of internal controls, they are required to communicate any weaknesses they identify to the company board and management. These auditor communications can be a valuable resource in helping management and ownership take action to establish or strengthen procedures that safeguard assets, reduce the risk of fraud, and improve the financial reporting process. As a result, the company will have more effective and efficient financial reporting and accounting processes, which may lead to even more operational efficiencies.

At Cray Kaiser, we recognize that every business has unique needs and considerations when it comes to audits. If you have questions about whether an audit may be right for your business, contact us today.

 

Click here to learn more about audits.

We recently shared what you should do if you receive notification of a tax audit (and why you should never take on the IRS alone!). But have you ever wondered what the odds are of your return being audited? This is somewhat of a mystery to taxpayers and unfortunately there is no concrete answer. Audits are generally selected at random, but there are a few things that may flag your return for an audit. Here are some considerations to keep in mind:

Not All Notices Are Audits

Before you panic when you check the mail and find a letter from the IRS, know that not all notices are audit notices. Taxpayers often receive notices about information on tax returns that does not agree with government tax records. These are known as computer-generated CP2000 notices. They generally cover the data mismatches of income and deductions on your tax returns when compared to the data the IRS receives via W-2s, 1099s, and 1098s. Most importantly, CP2000 notices are NOT audits.

There are other types of notices requesting additional information to allow for a deduction or simply to verify reported data. These are also NOT audits. If you ever receive a notice from the IRS and you’re not sure what it means, contact your tax advisor right away.

Decreased Audit Rates

Overall, there has actually been a decrease in audit rates over the last few years. In 2018 there was a 7% drop in audit exam rates compared to 2017 for all tax returns.

The 2018 individual audit rate was just 0.59%, which means one out of every 170 returns filed was audited. 81% of those audits were correspondence exams and 19% were conducted in person at IRS offices or at the taxpayer’s business. In other words, only about one out of every 900 returns required in-person audit meetings.

 There were also less business return audits in 2018. The C corporation exam rate was 0.9% and exam rates for both partnerships and S corporations was only 0.2%. 

As the IRS audit staff is reduced, fewer audits are being performed. However, with the increased application of computer-assisted audits and reviews, we believe audits will continue for taxpayers that are at high risk.

Red Flags That Increase Your Audit Risk

There are many red flags that can increase your chance for an audit. Some are identified by IRS computer formulas while others are issue-focused compliance campaigns by IRS’s Large Business and International Divisions. Here are the most common audit triggers:

• Earned Income Credit (EIC)
• Sole proprietors (Schedule C filers)
• Returns with net losses
• Alimony deduction
• Large charitable deductions
• Foreign Earned Income Exclusion (FEIE)
• S Corporation with losses in excess of stock basis

If you are concerned about your tax audit risk, we can review your situation and advise if we identify any potential red flags. Call Cray Kaiser if you would like a risk assessment or if you receive any tax notices that you are uncertain about.

According to the Association of Certified Fraud Examiners, nearly 30% of businesses are victims of payroll misconduct, with small businesses twice as likely to be affected than large businesses. Here are four payroll fraud schemes that every business should be aware of:

Ghost Employees

A ghost employee does not exist anywhere except in your payroll system. Typically, someone with access to your payroll creates a fake employee and assigns direct deposit information to a dummy account so they can secretly transfer the money into their own bank account.

Time Thieves

Time stealing happens when employees add more time to their timecard than they actually worked. Sometimes multiple employees will work together to clock each other in earlier than when they arrive or later than when they depart for the day.

Shape-Shifting Commissions

In an attempt to bump up a commission payment or attain a quota, sales employees may alter a sales contract to their benefit. A typical tactic used by a dishonest salesperson is to make a booked sale appear larger than it is and then slide a credit memo through the system in a later period. Companies with complicated commission calculations or weak controls in this area are the most vulnerable.

External Swindlers

A popular scam, known as phishing, starts with a fraudster impersonating a company executive through email or over the phone asking an employee with access to payroll data to wire money or provide sensitive information. These imposters can make the correspondence look very real by using company logos, signatures and email addresses.

How to Combat Payroll Fraud

Being aware of these types of threats is a start, but you also need to know how to prevent and stop them. Here are some tips to reduce your company’s payroll fraud risk:

1. Create better internal controls – While most employees are trustworthy, giving too much control over your payroll to one person is not a good idea. Separating payroll duties and formalizing an approval process protects both your business and your employees.

2. Review payroll records – Designate someone outside of the payroll-processing department to periodically review the payroll records. Have them review names, pay rates and verify that the total payroll matches what was withdrawn from the business bank account.

3. Perform random internal audits – An internal audit is when you can really get into the details to look for potential payroll fraud. You can do an in-depth review of the whole payroll system or select a random sample of dates and employees. Keep the timing of the audit under wraps to prevent giving someone the chance to cover up their misdeeds.

Managing your business payroll is a daunting task by itself, and actively protecting against fraud adds additional complexity. If you need assistance creating internal controls to prevent payroll fraud schemes, please contact us today. You can also click here to learn about our Accounting Services.

We have great news for manufacturers in Illinois! There has been a longstanding sales tax exemption for machinery and equipment that is used primarily in the manufacturing of tangible personal property. However, until recently, the exemption did not apply to consumables, hand tools, safety apparel, or other supplies. Recent tax legislation has now expanded the manufacturing sales tax exemption in Illinois. For purchases made on or after July 1, 2019, any production-related, tangible personal property used or consumed in the manufacturing process qualifies for the sales tax exemption.

Here are a few examples of supplies that are included in this new tax law:

• Tangible personal property incorporated into a manufacturing facility for use in a production related process;
• Tangible personal property primarily used or consumed in activities such as research and development, preproduction material handling, receiving and quality control, storage, packing, and shipping;
• Supplies and consumables primarily used in a manufacturing process, including fuels, coolants, solvents, oils, lubricants, and adhesives, hand tools, protective apparel, and fire and safety equipment.

To receive the exemption, you must prepare Form ST-587, Exemption Certificate (for Manufacturing, Production Agriculture, and Coal and Aggregate Mining), and provide the certificate to the retailer selling the related tangible personal property.

For more information on the exemption, click here. If you have any questions about whether your company’s purchases qualify for this sales tax exemption, please don’t hesitate to contact Cray Kaiser today.

You certainly know that profit and cash flow are both important elements of a healthy business. But what’s the difference? And what can you do to achieve positive cash flow? Read our insights below, and be sure to contact Cray Kaiser if you have any questions.

Profit vs. Cash Flow

Profit is defined as revenue minus expenses. It may also be referred to as net income. Cash flow, on the other hand, refers to the inflows and outflows of cash for a particular business. In other words, profit is how much money your business is making when all is accounted for, but cash flow is how much money you currently have access to. 

For small businesses, positive cash flow is the goal. You want to generate more money than you’re spending. And while this sounds simple, plenty of profitable businesses run into problems. It can be challenging to balance regular expenses like salaries, rent and technology with irregular revenue. Your sales might be strong, but if cash is stuck in inventory or accounts receivable, you have a cash flow problem. 

So, what can you do to manage it? Statements, along with balance sheets and income statements, help provide insights into a company’s finances. Unfortunately, many business owners do not access a cash flow statement and they only rely on the balance sheet and income statement to help manage their finances. 

Income Statement vs. Cash Flow Statement

An income statement, also known as a Profit & Loss (P&L) report, shows the bigger picture of how much money your business makes and spends within a given time period. In other words, it summarizes how your business earned revenue, paid expenses, and arrived at its bottom line. 

Income statements account for financial factors beyond cash flow, non-cash expenses such as depreciation, and allow you to observe your business’s longer-term trends in spending and earning. Your income statement can help you answer questions such as: How did my business perform last year? Where can I cut back on costs? Will lenders trust me to repay their financing? 

A cash flow statement shows the incomings and outgoings of your business’s cash within a given time period. It provides the shorter-term information you need on a daily basis. Your statement can help you answer questions such as: Can I afford to pay my bills? Do I have enough cash for unexpected equipment repairs? Will I be able to fund payroll on time? 

Cash flow statements typically divide cash by use:

• Financing: Cash used for borrowing or lending
• Operations: Cash used during daily operations
• Investing: Cash used to purchase equipment or other assets

Both types of statements present different, yet related, information. The full financial picture of your company is incomplete without understanding both.

How to Plan

Higher profits are a great objective, but meeting the cash needs of your business requires careful planning. Staying in the green can be difficult, especially for startups and small businesses. Here are a few suggestions for staying on top of your cash flow:

• Review statements to help understand the inflow and outflow of cash.
• Create budgets to help forecast where you are at and where you would like to be.
• Establish a line of credit to provide cash when needed. Addressing a problem is sometimes as simple as unlocking cash tied up in accounts receivable.

You can learn more about cash management methods here.

At Cray Kaiser, we know that understanding the importance of cash management is key to your business’s survival and success. If you need help, please don’t hesitate to call us today at 630-953-4900. You can also click here to learn about our Accounting Services.

As we officially enter the second half of the year, we’d like to remind you to perform a check-up on your payroll tax withholdings. You probably know that many taxpayers were surprised with either reduced refunds or higher taxes due when they filed their 2018 taxes. Why did this happen? Because their 2018 income tax withholding was not sufficient throughout the year. 

While the tax reform that came out of the Tax Cuts and Jobs Act (TCJA) went into effect in 2018, the IRS has not yet revised Form W-4 to reflect major revisions that affect withholdings. The IRS plans to issue a revised Form W-4 for the 2020 tax year. As such, employers continue to use the pre-TCJA form which results in lower amounts withheld than the withholdings based on the new law. 

The good news is that the IRS website has a tax withholding calculator where you can input your salary and withholdings to date, along with other criteria, to compute your estimated 2019 withholding. Using this tool and updating the W-4 you have on file with your employer can help you avoid any large tax surprises on your 2019 tax return. Alternatively, we can perform a detailed computation based on your 2018 return along with 2019 activity to help you come up with an accurate withholding amount for your specific tax situation. As always, Cray Kaiser is here should you have any questions or concerns about your payroll withholdings. Please don’t hesitate to contact us at 630-953-4900.

If you have questions about your company’s buy-sell agreement or would like assistance putting one together, please don’t hesitate to contact Cray Kaiser today.

It’s hard to believe that summer is in full swing and in just another few weeks we’ll be at the halfway point of 2019! The first quarter of the year focused on getting the financial reporting and tax returns filed for the previous year and the second quarter was spent getting the current year up-to-date. Before we knew it, we were transacting business as usual. Somehow those goals of cleaning up accounting records became long forgotten. But we’re here to remind you not to forget the importance of accounting clean up projects!

It’s vital to get your accounting cleaned up before the year-end activities kick in and this is the perfect time of year to do it. Below are a few accounting projects you may want to consider taking on over the next few months. In the end it will set you up for success come December.

#1 Revisit Your Record Retention Policies

When was the last time you reviewed your record retention policies? If you are like many organizations, you retain hard copies until space runs out, then you look to discard old items. However, this may subject you to added scrutiny when you are unable to produce key documents for your business. The IRS and AICPA have guidelines to help you in formulating your record retention policy. We recommend that you formalize your current policy utilizing both physical and electronic storage. Remember, the goal of record retention is to be able to retrieve key documents in a reasonable period of time and this should be considered as you formalize your policy.

#2 Formally Close Out Your 2018 Financial Results

Your accounting records should be locked down for the previous year so no additional changes can be made to the year-end balances. If not done already, you should request a copy of year-end adjusting journal entries and a trial balance report from your accountant. These adjustments need to be recorded in your accounting system and a process needs to be performed in which you are able to lock the period so that additional changes cannot be made.   Depending on the accounting system you are using this may be as simple as setting a password for the file. Doing this will provide assurance that you are starting 2019 with accurate balances.  

#3 Set Up Standard Journal Entries for 2019

Each year certain adjusting journal entries are recorded such as depreciation/amortization, prepaid expenses, and certain accrual items. Many of these adjustments can be maintained throughout the year to normalize your operating results and to help you to forecast year-end results. Reviewing the year-end adjustments prepared by your staff or an outside accountant is one way of identifying potential standard journal entries to record throughout the year. 

#4 Review Your Chart of Accounts

It’s always a good idea to take some time to review the chart of accounts you are using to summarize your financial reporting. Are there significant accounts that you have to dig into the details to understand the fluctuations from one period to another? If so, it may be time to create accounts or sub-accounts to appropriately track certain transactions so that you can easily monitor fluctuations. 

Do you have accounts set up to handle the record keeping for the various stages of your operating processes? For instance, are you tracking raw materials, work in progress and finished goods? If not, you may want to consider adding accounts and journalizing the flow of the inventory process.

#5 Review Significant Agreements and Contracts

Now is a good time to take an inventory of your outstanding agreements and contracts to identify any key performance requirements that you must meet to stay in compliance with the established terms. Often times, bank financing has compliance requirements such as ratios and bank balance levels that must be met on a monthly, quarterly or annual basis. Do you have processes in place to monitor the compliance of these key performance requirements?  Routinely performing a review of these requirements will allow you time to make any necessary corrective actions in the event the requirements will not be met.

By being proactive and keeping your accounting organized now, you’ll be in the best position possible when it comes to closing out the year and preparing for taxes next spring. If you have questions or would like assistance with any of these accounting clean up projects, please don’t hesitate to contact Cray Kaiser today!

Click here to learn about Cray Kaiser’s Accounting Services.