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Member of Russell Bedford International, a global network of independent professional service firms.
In our recent Understanding Nonprofit Audits blog series, we discussed the ins and outs of a nonprofit financial statement audit. Now that the end of the year is approaching, we wanted to inform you of several important changes regarding your financial statements as a nonprofit organization. Here’s what you’ll need to know to have a successful planning and reporting process in 2018 and beyond.
The forthcoming changes aim to reduce the complexity and increase transparency in nonprofit financial statements, especially for potential donors. The update, Accounting Standards Update (ASU) 2016-14, requires new disclosures for your financial statements and may require your organization to adopt additional accounting policies. There are several components to the new format, but the most important changes are:
The number of net asset classes will be reduced from three to two. Previously, net assets have been categorized as unrestricted, temporarily restricted, or permanently restricted. With ASU 2016-14, assets will be categorized as either “donor-restricted” or “without donor restrictions.” In other words, donations are either allocated for a specific purpose per the donor’s instructions or can be used as your nonprofit board chooses. Enhanced disclosures will be required on donor restrictions, requiring you to describe the composition of net assets with donor restrictions.
A nonprofit board may set aside funds for their purposes, such as developing a specific program. Since the board is not a donor, those funds will be categorized as “without donor restrictions.” In that case, you’ll need to make sure that you provide financial statement disclosures which describe how those funds are appropriated based upon the board’s policies.
Your expense reporting will now need to include both the nature and function of your expenditures in one location. For example, you’ll need to determine whether rent expense should be allocated as program, general/administrative, fundraising, or a combination of these functions. You can present that information in either a separate statement, in the statement of activities, or in the financial statement disclosures. Since most nonprofits are reporting this information either on the Form 990 or in the financial statements, chances are you already have a policy in place. However, it may need to be revised for the new reporting standards, so check with your accounting firm for details.
For your investments, ASU 2016-14 requires that you net any investment fees or expenses against your investment returns. For example, direct expenses such as brokerage fees or investment salaries may need to get allocated against the net investment returns. However, you’ll no longer be required to disclose the components of your investment expenses. This is a perfect opportunity for your organization to review your current investment policies for recording investment returns and expenses.
You’ll now need to provide information on the organization’s liquidity by including both qualitative and quantitative information (such as how funds are managed to provide for general expenditures and the availability of such funds). A presentation will need to be provided that identifies those accounts that are easily converted to cash (such as cash equivalents, receivables and other accounts). This new stipulation is intended to give potential donors more transparency into your nonprofit’s liquidity.
The updates to your statement of cash flows is really just an adjustment to how they’re reported. Your statement of cash flows can be reported using either the direct or indirect method. Currently, if you choose the direct reporting method, you have to attach the indirect method reconciliation. After ASU 2016-14 is implemented, you’ll no longer have to attach your indirect method reconciliation with your direct method reporting.
If your nonprofit follows a fiscal year, these changes will be implemented in 2019. If it follows a calendar year, you’ll implement these changes in 2018. Either way, since nonprofit financial statements are in comparative form (the current year’s report is provided alongside the previous year), we recommend planning for these changes as 2017 comes to a close. That way, you’ll have the support and policies in place once the requirements take effect.
Remember, your financial statements are an opportunity to tell your organization’s story to potential donors. The new policies enacted by ASU 2016-14 enable a way for your nonprofit to reveal vital information to donors in a clear, understandable way. We recommend having a conversation with your accounting firm so you have a thorough understanding of the impact of these changes. If you have any questions, please contact us. We’d be happy to help you get your policies and support in place for the new financial statement reporting rules.
If you have the means, making extra payments on your mortgage before the end of its term seems like a no-brainer. After all, who wouldn’t want to reduce that substantial debt and be done with those monthly principal and interest payments? But paying off your mortgage early may not be the best choice for every household.
Before you start paying off your mortgage early, here are five questions to ask yourself.
Let’s say your credit card company is charging 15% on your outstanding balance. You can earn a guaranteed 15% by paying off that debt. It makes the most sense to pay off high-interest accounts before putting extra funds toward your low interest rate mortgage. This is especially important if you’re in a higher tax bracket, because home mortgage interest is tax deductible, whereas interest on consumer debt is not.
Life happens. If you haven’t set aside funds in an easy to access “rainy day” account, you could be forced to acquire additional debt if an emergency comes along. Your emergency account should cover at least a few months of living expenses. Before supplementing your mortgage payments, make sure that you’re financially protected in case of an emergency.
Many companies will match a percentage of funds that you contribute to a 401(k) retirement account. For example, your employer might match 50% of the money you contribute, up to a maximum of 6% of your salary. Don’t pass up the opportunity to save for retirement. It’s easy and it earns a better return than dollars paid toward your mortgage principal.
Investing in stocks for a speedy windfall is tempting. But the stock market is notoriously unpredictable. Paying off your mortgage is very low risk, but if you can handle the uncertainty of stock based mutual funds or similar accounts, you could benefit with a much higher rate of return.
Starting your retirement without mortgage debt may be one of your financial goals. But it’s important to base your decisions on facts, not wishful thinking. Before you retire from full-time employment and paychecks are replaced by social security payments, pensions, and/or retirement account withdrawals, do the math. Your life on a fixed income could look very different from now, so make sure you have enough saved to maintain a comfortable lifestyle.
There are many implications to paying off your mortgage early, and they all depend on your unique circumstances. Contact us today to discuss which path is right for you.
If you own a business that operates out of your home, you may be able to deduct a wide variety of expenses. These deductions could include part of your rent or mortgage costs, insurance, utilities, repairs, maintenance and even cleaning costs. This can be a tricky area of the tax code, so make sure you have professional guidance.
Here are some of the top mistakes people make when taking home office deductions:
The most common mistake for home office users is simply not taking the deduction! Taking the deduction seems too complicated for some, while others believe taking it increases your chances of being audited. The rules can be complex, but a home office structured correctly would allow for the home office deduction. There is even a simplified method that can be used to compute the deduction. Contact Cray Kaiser for any questions you may have.
The IRS mandates that the space you use must be exclusive and regular for your business. In a nutshell, here’s what that means:
Exclusively: If you use a spare bedroom as a business office, it can’t double as a guest room, a playroom for the kids or a place to store your hockey gear. Any kind of non-business use can invalidate the deduction.
Regularly: Your home office needs to be the primary place you conduct your regular business activities. That doesn’t mean that you must use it every day or that you can’t ever work outside the office. However, it should be the primary place for activities such as recordkeeping, billing, making appointments, ordering equipment or storing supplies.
If you work for someone else in addition to running your own business, you need to be extra careful. IRS rules state that you can use a home office deduction as an employee only if you work remotely for your employer.
Unfortunately, this means if you run a side business out of your home, you can’t bring work home from your employer’s office and do it in your home office. Doing so would invalidate your use of the home office deduction.
If you own your home and have been using your home office deduction, you could be in for a future tax surprise. If you sell your house, you will need to account for the depreciation of your home office. This rule, called the Depreciation Recapture Rule, often creates a tax liability for many unsuspecting home office users.
There are special rules that apply to your use of the home office deduction. If any of the below statements are true for you, contact us for support with navigating the deduction.
While there are benefits of utilizing the home office deduction, there are many details that are important not to overlook. If you have questions about your home office and the deductions available to you, please contact us today.
Your tax return is filed and you’ve even received your refund check. Naturally, you had hoped to be done with taxes for another year. But what do you do if you discover a mistake on your return? Should you file an amended return? Depending on a few circumstances, filing a 1040X may not end up working in your favor. Before you decide to amend your tax return, here are some things to consider.
If a correction will result in a substantial additional refund, usually your best option is to file the amended return. However, there some caveats:
If you discover errors on your tax return that will result in an additional tax obligation, you are required to correct the errors and file an amended tax return, along with the amount due.
If the IRS discovers your tax error before you do, they could add interest and penalty fees. The sooner you file the amended return and pay the tax that is the due, the better.
Finding an error on your tax return can be unsettling, but rest assured there are ways to fix the problem. Contact Cray Kaiser today to determine the best solution for you.
Performing a valuation of a publicly-traded company is fairly straightforward. When a company’s stock is actively traded on an exchange, the market sets the price and the transaction can be completed in a matter of seconds. A privately-held company, on the other hand, is a different story. Valuing private businesses requires financial models, investment and return expectations, and ownership constraints to establish an opinion as to what the market may pay.
Though complex, valuing private businesses provides insight into a company’s strategic needs and positioning. It also provides a better understanding to the company’s owners of the assets in their portfolio and the expected pricing of the business.
Whether you’re selling, planning for succession, gifting an interest, setting up a buy/sell agreement, or considering a merger and acquisition, it’s important to use the right approach dependent on the purpose of the valuation.
An initial step in determining which business valuation approach to take is to examine the business’s structure and operating characteristics. The nature of the business activity, the value of its assets, the amount and reliability of the income generated, and whether there are adequate market comparables will determine the specific approach. Consult with your valuation expert to learn more about the impact of these factors.
Generally speaking, the three predominant approaches are:
Within each approach, there are more specific methods, depending on the particulars of the business. For this blog, we will focus on the three main valuation methods.
At the very beginning, it’s also important to determine which standard of value, either fair market value or fair value, is appropriate for the engagement. The appropriate standard of value is determined by the reason for the valuation.
For example, anything that involves the IRS, such as a sale or a transfer of ownership requires use of fair market value. Read more about standards of value here.
In most cases, the market approach is the preferred approach to determine the value of a business. Since privately-held businesses aren’t publicly traded, it’s challenging to determine their value on the market alone. To compensate, we use one of the available valuation databases to identify comparable businesses that have already been valued.
For example, if your business is a restaurant franchise, we can look to see if another franchise exists in the database. Since their standards and business models should be nearly identical, the database valuation can be used as a benchmark. However, there are some shortcomings with the market approach. For most small businesses, finding a comparable business can be very difficult. The database may also be missing vital information or factors that influenced their specific valuation.
The asset approach is a clear-cut assessment in which a business’ net assets determine its value. This method is used when a business has a high value of fixed assets and low income or is in liquidation. Raw material and commodity businesses are generally good candidates for an asset approach. For example, if the business in question is a stone quarry, we’d gauge its value based on the worth of its inventory of stone and other materials such as equipment and supplies. Since this method doesn’t consider future earning potential, it’s typically used for businesses that are defunct or in combination with another approach.
The income approach is used when the net assets of a business are less significant than its earning potential. The key factor from this approach is how much economic benefit the business is expected to generate for its owners. The income approach involves formulas that balance the earning power of a business against its potential risk that the expected earnings may not be achieved. In applying an income approach, we are attempting to identify the expectation for the future income stream and determine a present-day price for those future earnings.
When available, forecasts of earnings are used to create the financial models. Often when accurate forecasts are not available, historical financial data is reviewed to determine whether the business has grown at a steady pace or fluctuated from year to year. The Capitalization of Earnings method is used if the growth is expected to be steady. If growth fluctuates, a Discounted Earnings method is used. Your accountant can help you determine the best method under the income approach.
To complicate matters even more, there are additional valuation methodologies, including some that combine approaches. The valuation process is an art that applies the science of long standing principles and an understanding of business and capital. Not only can it be challenging to determine a value for your business without a market to compare against, but there are also emotional factors at play. Often the perception of a business’ value by its owners is very different from what the valuation reveals.
Valuing private businesses requires a thorough understanding of the business, its structure, revenue drivers as well as other characteristics. Which business valuation method is right for you? Cray Kaiser can help you chart the best course for your valuation. Contact us today to find out how our team can help you through the valuation process.
There are plenty of advantages to self-employment, but there are also a lot of additional responsibilities that aren’t part of the picture when you’re an employee. One of the biggest advantages and drawbacks is the lack of structure for benefit plans. As a self-employed person (with no other employees), you have the freedom to set your own policies, schedule and so forth. But, many of the structures that we take for granted, such as health insurance, taxes, and retirement plans, are solely up to you to set up and maintain. So, you may be wondering where to start when it comes to selecting a retirement plan. We’re here to help.
The two most popular retirement savings plan options for self-employed individuals with no employees are the SEP (Simplified Employee Pension) IRA and the Individual (or Solo) 401(k). As with most things in the financial realm, there’s no such thing as a one-size-fits-all solution, so it’s important to understand which option is best for you. Below we outline both options for self-employed persons (with no employees) at a high level, with a focus on the different benefits to each.
Contributions: The main advantages to a SEP IRA are ease of use, minimal responsibilities for the account owner and flexible timing of contributions. With this plan, you only make contributions from your business as an employer, not as an employee, which is deductible against your adjusted gross income (AGI) on your individual 1040. This plan allows you to open and fund an account right up until you file your tax return. So it’s great for procrastinators or if you need to have flexibility around contributions based on cash flow.
Contribution Limit: The contribution limit for the SEP IRA is 20% of your net income (minus the self-employment tax), up to a maximum of $54k per year. Your contributions are pre-tax, so they will be taxed upon withdrawal.
Roth Options: The SEP IRA does not have a Roth option. Since your income tax bracket could be much higher at retirement than it is currently, you’ll need to weigh the risk of paying more taxes on withdrawal against the simplicity of the SEP.
Loans: Loans against IRAs including the SEP IRA are not permitted under current IRS code.
Contributions: The Individual 401(k) allows you to contribute from two sources: as an employee and an employer. The contribution rules are stricter than the SEP IRA, and the administrative demands are higher. The deadline for establishing the plan is by the fiscal year end of the business year (typically December 31). Your employee contributions can be made throughout the year, but no later than the fiscal year end of the business year. The employer portion of your contributions can be made up to the filing deadline (or the extension deadline), and there’s a 5500 Form filing requirement.
Contribution Limits: An Individual 401(k) with a profit sharing component allows you to contribute up to $18k as an employee, and then an additional 20% of your net income as an employer annually. If you’re over 50, you can contribute up to an additional $6k of income via a ‘catch-up’ provision, making this an excellent option for someone who’s a little behind the curve on saving for retirement. Regardless of the source, the total contribution limit is $54k ($60K with the ‘catch-up’ provision). The total contribution is deductible against your AGI on your individual 1040.
Roth Options: The employee portion of the contribution can be counted as a Roth contribution, which means it’s after tax. This is ideal if you’re anticipating being in a higher tax bracket upon withdrawal.
Loans: Another advantage to the Individual 401(k) is that you can take loans against your plan. You can take up to 50% of the vested value or $50K, whichever is smaller. This gives you more options for obtaining funds for some of life’s other needs or unexpected surprises without the tax or penalties of withdrawing from your retirement account.
Margaret is 60 years old and self-employed (with no employees) and her business earned $100k in net income (after self-employment taxes). If Margaret has a SEP IRA, she would be able to defer $20k (20%) of her business income. If she has an Individual 401(k) with a profit sharing component, she can defer $44k of her business income from her employee deferral ($18K), employer contribution ($20K), and by using the ‘catch-up’ provision ($6K). Ultimately, it’s up to Margaret to weigh the pros and cons of using a SEP IRA or an Individual 401(k). The Individual 401(k) allows her to defer a higher amount, but she may prefer the flexibility of the SEP IRA.
Selecting, setting up and maintaining your retirement plan is a complex process, and it’s easy to overlook the details when you’re doing it alone. Saving for retirement is a critical step in securing your future, and Cray Kaiser can assist you with understanding which plan is right for your specific needs. Contact us today to get started or to make sure you’re on the right track!
Please Note: Policies and percentages are all reflective as of 2017. We will make updates as needed to reflect any changes. Should you have questions in the meantime, please contact us.
It’s already midyear, and that means it’s the perfect time to review the audit requirements for your company-sponsored employee benefit plans. One of the most important and complex audits is the annual audit of your 401(k) plan. Here are some general tips and guidelines to help you understand benefit plan audits, when you’ll need one, and what to expect during the process.
Form 5500
If you’re involved in maintaining your company’s 401(k) plan, you’re already familiar with the Form 5500. The annual process of filling out the required Form 5500 has a helpful side benefit of determining your plan’s exact number of participants. Lines 5 and 6 on the Form 5500 are used to tally the total number of plan participants at the beginning and end of the plan year. Participants include people in the following four categories:
If your plan has never had an audit, or if your participant count fluctuates from year-to-year, you’ll need to follow what’s called the 80-120 rule. In short, the 80-120 rule spells out your plan’s annual filing requirements if it is hovering somewhere between 80 to 120 participants.
For plans with participant counts in this range, the Department of Labor (DOL) allows the plan to use the same filing status as it used in the filing of its prior year Form 5500. There are two filing statuses, known simply as “large” plan (100+ participants) and “small” plan (under 100 participants). Plans filing as “large” plans generally have an annual audit requirement, while plans filing as “small” plans do not.
The 80-120 rule prevents plans with fluctuating participant counts from having to continually change from a “large” plan to a “small” plan each year. For example, the 80-120 rule allows a plan with 90 participants at the beginning of the previous year and 110 participants at the beginning of the current year to continue to file as a “small” plan in the current year. If the 80-120 rule were not in place, there would be unnecessary disruptions caused by the 100 participant cutoff.
While you won’t need your first audit until you exceed 120 participants at the beginning of a plan year, you’ll want to start preparing for a plan audit as you approach that figure. If your business is expanding, acquiring another business, or simply experiencing organic growth, you’ll want to contact us to ensure you’ll be in good shape for next year’s audit deadlines.
To prepare for your annual 401(k) plan audit, you’ll want to have all of your materials in order ahead of time so that the process is as efficient as possible. Here’s a list of documents to prepare in advance:
In addition to issuing an audit report on the 401(k) plan’s financial statements, plan auditors will also communicate to management any internal control or operational deficiencies that they noted during the audit. Since 401(k) plans can be complicated to administer, it’s crucial that plan sponsors and administrators understand the plan documents and amendments. Most deficiencies result from inadvertently not following the provisions of the plan document. The resulting consequences can range from having to voluntarily correct the issues, being fined by the Department of Labor, or in the worst-case scenario, having the plan disqualified.
At Cray Kaiser, we recognize that having a sound 401(k) plan is one of the pillars of security that your employees count upon. Since every business has unique needs and methods, you’ll want to make sure you’re working with a team that has extensive small business experience and can be flexible to your specific plan. Contact us today so that we can make sure you’re well prepared for benefit plan audits.
With over 2.2 million registered online users, QuickBooks Online is far and away the most popular accounting software solution for small businesses. With ample room for customization via third party applications, QuickBooks is striving to be the leading choice for cloud-based accounting software. But are you getting the most out of it? Below is an overview of QuickBooks Online new features and some helpful tips to help you determine if you’re using the software to its fullest potential.
Over the past few years, QuickBooks has moved to a cloud-based system, making it easier for multiple team members to access the platform across multiple devices. Here are a few reasons why QuickBooks’ cloud-based system is best for small businesses:
One of the biggest pain points with QuickBooks used to be the lack of customization. In the past, there was a significant amount of manual work required to customize QuickBooks to meet your needs. They’ve solved this by allowing third party vendors to sell add-on plugins for specific requirements. With over 5,000 apps available on the Intuit app store, practically any need can be addressed. There’s truly a solution for everyone – from very complex to very simple installations. And, since the app companies are all competing for your business, they’re all striving to be more robust and less expensive, which is great news for you as the consumer.
Here are some benefits of third party plugins:
The biggest problems for QuickBooks users usually result from improper software installation. Even though QuickBooks has better user guides and online video tutorials than ever before, it’s still easy to make small mistakes that have big impacts in the future. If your software isn’t properly set up, you’ll expend a lot of time and effort backfilling incorrect reporting. To avoid this, the best practice is to contact someone from the Find a Pro Advisor directory to ensure that your setup and workflows are correct from the beginning.
Your accounting software should be as unique as your organization. At Cray Kaiser, we’re able to adapt your accounting solution to best fit the way you do business. If you have questions about the QuickBooks Online new features, please contact us today to speak with our in-house Certified QuickBooks Pro Advisors.
Now that you have determined the need for a nonprofit financial statement audit, it is time to select an accounting firm and begin the process. This can be an overwhelming experience, but it doesn’t have to be. With the right team on your side and all the documentation you need prepared ahead of time, you’ll be ready to execute a successful audit.
As soon as the need is determined, you can start the process of selecting an accounting firm for your financial statement audit. In addition to selecting a firm that’s certified to perform audits in the state of Illinois, you’ll want to make sure that you choose a team that truly understands your operations and transactions. It’s critical that the firm has extensive nonprofit experience since the regulations differ significantly from those of for-profit businesses. It is highly recommended to ask all potential accounting firms to provide a copy of their most recent peer review certificate and report.
After your firm has been selected, you’ll start the organizational and preparation processes. Your audit team should clearly communicate what documentation you’ll need to have ready initially. You’ll also meet with your auditors to understand what metrics, such as key balances from your balance sheet, will be important to the process. The auditors will go over your risk assessment and internal controls to ensure that they’re working properly. In a perfect world, those meetings should take place throughout the year so that nothing is missed. Finally, the team will review your accounting and personnel policies to ensure everything is up to date. Based upon these discussions, your audit team will determine the procedures that will take place during the audit.
Once you’re ready to move forward, the most critical element of a successful audit is good communication between the auditors and your internal team. The audit team will relay which key documents will be necessary. Having all of your documentation and reporting ready in advance of any on-site visits will save you time and money. Since most firms bill by the hour, the less time that’s spent on the audit means more resources to devote towards fulfilling your mission.
As a final note, there are going to be updates to the financial statements themselves. There are new reporting standards that will take effect for 2018’s audits. These changes are going to require major revisions to the current accounting policies and reporting for nonprofits. It’s important to start implementing these changes prior to the end of this year so that you’re prepared for next year. Click here for more information.
An unqualified audit report from the audit firm will provide reasonable assurances to your governing bodies, lenders, and donors that you’re running your organization responsibly. It can help open doors for more funding so that you’ll be able to pursue your mission to the fullest. Contact us today if you have questions about whether you need an audit or to see how we can make the process as seamless as possible.
For various reasons, many people continue to work while collecting Social Security retirement benefits. Some people need the additional income while others simply enjoy keeping busy. Per the Social Security Administration, SS benefits represent about 30% of the income of people over age 65. Whatever the reason, there are important tax implications to consider should you choose to work while receiving Social Security benefits.
You can start collecting Social Security retirement benefits at age 62, but full retirement age is between 65 and 67, depending on your birth year. People age 65 and younger who work while collecting Social Security will have their benefits reduced by $1 for every $2 they earn over $21,240 in 2023.
If you reach full retirement age in 2023, your benefits will be reduced by $1 for every $3 you earn over $56,520 in the months before you reach full retirement age (depending again on your birth year). For these purposes, earnings include gross wages from a job, or net earnings if you are self-employed. It does not include pensions, annuities, investment income or other retirement benefits. Starting with the month you reach full retirement age, your benefits will not be reduced no matter how much you earn.
Keep in mind that the amount of the benefit that is reduced while you are working is not gone forever. Once you reach full retirement age, it will be returned to you over time in the form of a slight increase in your monthly benefits.
Your earnings in retirement also affect the amount of benefits subject to income tax. If your “combined income” (including adjusted gross income, tax-exempt interest and half of your Social Security benefits) exceeds $25,000 as an individual or $32,000 for a married couple filing jointly, you may have to pay federal income taxes on as much as 85% of your benefits.
Imagine what your ideal retirement looks like. Do you see yourself spending a lot of time at the golf course? Volunteering? Babysitting your grandchildren? Or, maybe you’d prefer to continue working because it energizes you and gives you purpose. Ultimately, the decision is up to you. If you need any assistance, we’re here to help. Please contact us if you have any questions about Social Security benefits or retirement.
