The CPA Desk

A Thought Leader Production by PKFTexas

Not-for-Profits: You Can Save Tax with an Accountable Plan

Your not-for-profit can’t generally reimburse employees for business expenses tax-free just because staffers submit expense records. However, you can if you have a properly executed accountable plan. Under such a plan, reimbursement payments will be free from federal income and employment taxes for recipient employees and not subject to withholding from their paychecks. Additionally, your organization benefits because the reimbursements aren’t subject to the employer’s portion of federal employment taxes.

Follow the rules

Of course, rules and conditions apply. The IRS stipulates that all expenses covered in an accountable plan have a business connection and be “reasonable.” Additionally, an employer can’t reimburse an employee more than what he or she paid for any business expense. And the employee must account to you for his or her expenses and, if an expense allowance was provided, return any excess allowance within a reasonable time period.

An expense generally can qualify as a tax-free reimbursement if it could otherwise qualify as a business deduction for the employee. For meals and entertainment, the plan may reimburse expenses at 100% that would be deductible by the employee at only 50%.

It’s your organization’s responsibility to identify the reimbursement or expense payment and keep these amounts separate from other amounts, such as wages. The accountable plan must reimburse expenses in addition to an employee’s regular compensation. No matter how informal your nonprofit, you can’t substitute tax-free reimbursements for compensation employees otherwise would have received.

Keep good records

The IRS requires employers with accountable plans to keep good records for expenses that are reimbursed. This includes documentation of the:

  • Amount of the expense and the date,
  • Place of the travel, meal or transportation,
  • Business purpose of the expense, and
  • The business relationship of the people entertained or fed.

You also should require employees to submit receipts for any expenses of $75 or more and for all lodging, unless your nonprofit uses a per diem plan.

Put it in writing

While an accountable plan isn’t required to be in writing, formally establishing one makes it easier for your nonprofit to prove its validity to the IRS if ever challenged. Contact us for more information and help setting up an accountable plan.

David Robinson and Daniel Bassichis of Admiral Capital Group

Russ Capper interviews David Robinson, former player for the San Antonio Spurs and co-founder, Admiral Capital Group; and Dan Bassichis, co-founder, Admiral Capital Group. They discuss Admiral Capital Group’s core strengths, and how they use the company’s philanthropic footprint to do good in the community.

How to Create a Continuity Plan That Works for Your Not-for-Profit

Most not-for-profits are intensely focused on present needs — not the possibility that disaster will strike sometime in the distant future. Yet it’s critical that all organizations have a formal continuity plan to guide them should a natural or manmade disaster disrupt operations.

Formal plan

You likely already have many of the necessary processes in place — such as safely evacuating your office or backing up data. A continuity plan can help you organize and document existing processes and address any other issues you might have overlooked.

If your nonprofit provides basic human services (such as medical care and food) or disaster-related services, you generally need a more detailed and extensive plan so that you’ll be able to serve constituents — even without a full staff and other resources.

Assess risks

No organization can anticipate or eliminate all possible risks, but you can limit the damage of potential risks specific to your nonprofit. These vary by organization type, location, and technology. So, the first step in creating a continuity plan is to identify the threats you face when it comes to your people, processes, and technology.

Also, assess what the damages would be if your operations were interrupted. For example, if you had an office fire, what are the possible outcomes regarding personal injury, property damage, and financial losses?

Designate a lead person to oversee the creation and implementation of your continuity plan. Then assemble teams to handle different duties, such as a communications team responsible for contacting and updating staff, volunteers and other stakeholders. Other teams might focus on IT issues, decide how to preserve and retrieve critical inventory or devise evacuation procedures.

It only takes one

Keep in mind that the disaster doesn’t have to be a cataclysmic event such as a major fire or hurricane. Something as seemingly mundane as an extended power outage or virulent flu season could prevent your organization from carrying out its mission. Contact us for help assessing and addressing threats to your nonprofit’s operations.

Contribute to Your IRA for 2016 Until April 18

Yes, there’s still time to make 2016 contributions to your IRA. The deadline for such contributions is April 18, 2017. If the contribution is deductible, it will lower your 2016 tax bill. But even if it isn’t, making a 2016 contribution is likely a good idea.

Benefits beyond a deduction

Tax-advantaged retirement plans like IRAs allow your money to grow tax-deferred — or, in the case of Roth accounts, tax-free. But annual contributions are limited by tax law, and any unused limit can’t be carried forward to make larger contributions in future years.

This means that, once the contribution deadline has passed, the tax-advantaged savings opportunity is lost forever. So it’s a good idea to use up as much of your annual limit as possible.

Contribution options

The 2016 limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on December 31, 2016). If you haven’t already maxed out your 2016 limit, consider making one of these types of contributions by April 18:

1. Deductible traditional. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k) — or you do but your income doesn’t exceed certain limits — the contribution is fully deductible on your 2016 tax return. Account growth is tax-deferred; distributions are subject to income tax.

2. Roth. The contribution isn’t deductible, but qualified distributions — including growth — are tax-free. Income-based limits, however, may reduce or eliminate your ability to contribute.

3. Nondeductible traditional. If your income is too high for you to fully benefit from a deductible traditional or a Roth contribution, you may benefit from a nondeductible contribution to a traditional IRA. The account can still grow tax-deferred, and when you take qualified distributions you’ll be taxed only on the growth. Alternatively, shortly after contributing, you may be able to convert the account to a Roth IRA with minimal tax liability.

Want to know which option best fits your situation? Contact us.

An Overview of the 2017 Gulf Coast Regional Family Forum

Russ:  This is PKF Texas Entrepreneur’s Playbook.  I’m Russ Capper, this week’s guest host, and I’m coming to you from the Gulf Coast Regional Family Forum and I’m with Del Walker, Tax Practice Leader at PKF Texas and Founding organizer of the forum.  Welcome to the Playbook Del.

Del:  Welcome Russ, thank you for having us.

Russ:  You bet.  So this is my third Family Practice Forum with you guys and it is impressive but share what it’s all about with our audience.

Del:  From our standpoint what we’re trying to do is really help families provide – I told a little story this morning involving my mother.  She asked what is this about, what are you trying to do.  And I replied back to her the goal is we really want to help people be successful in achieving their family goals, we want to help people be successful as they pursue their vision.  We want to promote commerce, we want to enable people to learn from one another, kind of create a community and we want to have a little bit of fun from that standpoint.

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Common Questions About Registering a Not-for-Profit in Multiple States

If your not-for-profit solicits funds online — or uses other fundraising methods that cross state boundaries — it may need to register in multiple jurisdictions. We’ve answered some commonly asked questions.

My charity receives occasional contributions from out-of-state donors. Do I need to register with those states? Yes, but only if you’re actually asking for donations in those states. The critical activity is soliciting, not accepting, funds. Remember, email and text blasts and social media appeals are likely to be considered multistate solicitations.

That said, some nonprofits are generally exempt from registering or may need to register but aren’t required to file annually. For example, many states exempt houses of worship as well as nonprofits with total annual income under certain thresholds.

So registration rules vary by state? That’s right. A handful of states don’t require charities to register at all. The remaining ones have varying rules, income thresholds, exceptions, registration fees and fines for violations. Even the agencies that regulate charities differ by state.

How much does it cost to register? Again, this varies by state — generally ranging from $0 to $2,000.

Is there a simple way to register with every state? Unfortunately not. Most states require you to complete a general information form and submit it with your last financial statement, a list of officers and directors, a copy of your originating document and your IRS-issued tax-exempt determination letter.

First-time registrants can use a Unified Registration Statement in most states. However, even those states mandate that annual renewals and reports be submitted using individual state forms.

What are the consequences of not registering in states where my nonprofit raises funds? Your organization, officers, and board members could face civil and criminal penalties. Your charity might lose its ability to solicit funds in certain states or lose its tax-exempt status with the IRS.

Do I need to tell the IRS where my nonprofit is registered? Yes; Form 990 asks you to list the states where you’re required to file a copy of your return.

Given the resources involved, you may wonder if out-of-state donations are worth the trouble. For some nonprofits, it may make sense to focus exclusively on local fundraising. Contact us and we’ll help you weigh the pros and cons.

Helpful Tips for Not-for-Profits Filling Out Form 990

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, this week’s guest host, and I’m here with Annjeanette Yglesias, one of our Tax Managers on our not-for-profit team. Annjeanette, welcome to the Playbook.

Annjeanette: Thanks, Jenn; it’s nice to be here.

Jen: So, as a tax advisor, you often work with non-profits on filling out their 990 Form. What is the 990 Form?

Annjeanette: Form 990 is the income tax form that a tax-exempt organization complete and file with the IRS annually.

Jen: You know, on the 990 Form, there are a lot of things that you probably give advice on the non-profits that they make sure that they pay attention to. What are some of those things that you ask them to look at?

Annjeanette: Well, there’s a lot of information contained on the 990, both financial information, but also general information about corporate governance, and things like that. But there are three things that typically I tell organizations to watch out for, and that would be their statement of functional expenses; their reporting of the officers, directors, and trustees; and also, their fundraising events.

Jen: Ok, and are there any things that they need to know, kind of, about those specific three things?

Annjeanette: Well, the functional expenses is really important. The IRS requires that all expenses be categorized by either management in general, program service, or fundraising expenses.

Jen: That sounds great. Now, I know you’ve written an article called the “Common Pitfalls,” is that something that we can find on our website, correct?

Annjeanette: That’s correct.

Jen: Perfect. Well, thank you so much for being here, and I appreciate it. We’ll have you back to talk about some more things for non-profits.

Annjeanette: Thanks, Jen.

Jen: To learn more about how we can help not-for-profits, visit pkftexas.com/notforprofit. This has been another Thought Leader Production, brought to you by PKF Texas, The Entrepreneur’s Playbook.

Tangible Property Repairs Eligible for a Deduction

If last year your business made repairs to tangible property, such as buildings, machinery, equipment or vehicles, you may be eligible for a valuable deduction on your 2016 income tax return. But you must make sure they were true “repairs,” not actually “improvements.”

Why? Costs incurred to improve tangible property must be depreciated over a period of years. But costs incurred on incidental repairs and maintenance can be expensed and immediately deducted.

What’s an “improvement”?

In general, a cost that results in an improvement to a building structure or any of its building systems (for example, the plumbing or electrical system) or to other tangible property must be capitalized. An improvement occurs if there was a betterment, restoration or adaptation of the unit of property.

Under the “betterment test,” you generally must capitalize amounts paid for work that is reasonably expected to materially increase the productivity, efficiency, strength, quality or output of a unit of property or that is a material addition to a unit of property.

Under the “restoration test,” you generally must capitalize amounts paid to replace a part (or combination of parts) that is a major component or a significant portion of the physical structure of a unit of property.

Under the “adaptation test,” you generally must capitalize amounts paid to adapt a unit of property to a new or different use — one that isn’t consistent with your ordinary use of the unit of property at the time you originally placed it in service.

2 safe harbors

Distinguishing between repairs and improvements can be difficult, but a couple of IRS safe harbors can help:

1. Routine maintenance safe harbor. Recurring activities dedicated to keeping a property in efficient operating condition can be expensed. These are activities that your business reasonably expects to perform more than once during the property’s “class life,” as defined by the IRS.

Amounts incurred for activities outside the safe harbor don’t necessarily have to be capitalized, though. These amounts are subject to analysis under the general rules for improvements.

2. Small business safe harbor. For buildings that initially cost $1 million or less, qualified small businesses may elect to deduct the lesser of $10,000 or 2% of the unadjusted basis of the property for repairs, maintenance, improvements and similar activities each year. A qualified small business is generally one with gross receipts of $10 million or less.

There is also a de minimis safe harbor as well as an exemption for materials and supplies up to a certain threshold. Contact us for details on these safe harbors and exemptions and other ways to maximize your tangible property deductions.

Get Your Head Out of Your Bottom Line with Bethany Andell

Karen: This is the PKF Texas Entrepreneur’s Playbook; I’m Karen Love, Host and Co-founder. I’m here with Bethany Andell, President of Savage Brands. Welcome to the Playbook again.

Bethany: Thank you Karen.

Karen: Well we had you here the first time to talk about the book Get Your Head Out of Your Bottom Line; I’m going to pick up the book now and put it so that our audience can see it. And we had talked about the Savage Thinking and the purpose, but what I was wondering if we could talk about is why now? Why the timing of this book?

Bethany: Sure. It’s actually – this type of methodology, this type of thinking – it’s perfect timing. Companies really have an obsession right now over the short term and you can blame it on Wall Street or whatever is going on, but we’re thinking more about long term success. And why this is happening is if you’re so short term focused and short term decision making, you’re not thinking about the inter-dependence of all of your stakeholders and what it takes to get them engaged and loyal with your company. And so some of the big problems we’re seeing is internally with culture where you’ve got very low employee engagement, they say about 30% of employees are engaged which means 70% are coming to work every day not that happy.

Karen: Which means turnover.

Bethany: Absolutely. There’s a distrust in leadership, I think it’s 18% of the American workforce trusts their leadership.

Karen: That’s scary.

Bethany: And then a huge opportunity is what we call the perfect storm where you have Baby Boomers that are looking behind and saying what’s the legacy I’m leaving; what’s the positive wake that’s going to be there behind me? Along with the Millennial workforce that’s coming in where money is not the priority, right? They want to make sure that their values are aligned with the company, that they’re making a contribution to the world. And if you can be a company that brings people along towards one common purpose, something they’re really contributing to the world, then you’re going to find yourself in a better place. We like to say that purpose drives performance and performance drives profit.

Karen: Well I love that and that’s Savage Thinking.

Bethany: That’s Savage Thinking.

Karen: And you can help companies do that?

Bethany: Yes ma’am.

Karen: Fantastic, well thank you for sharing that with us.

Bethany: Thank you Karen.

Karen: This has been another Thought Leader production brought to you by the PKF Texas Entrepreneur’s Playbook.

Mileage Deduction Rates: When Do You Use Them?

Rather than keeping track of the actual cost of operating a vehicle, employees and self-employed taxpayers can use a standard mileage rate to compute their deduction related to using a vehicle for business. But you might also be able to deduct miles driven for other purposes, including medical, moving and charitable purposes.

What are the deduction rates?

The rates vary depending on the purpose and the year:

Business: 54 cents (2016), 53.5 cents (2017)

Medical: 19 cents (2016), 17 cents (2017)

Moving: 19 cents (2016), 17 cents (2017)

Charitable: 14 cents (2016 and 2017)

The business standard mileage rate is considerably higher than the medical, moving and charitable rates because the business rate contains a depreciation component. No depreciation is allowed for the medical, moving or charitable use of a vehicle.

In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls.

What other limits apply?

The rules surrounding the various mileage deductions are complex. Some are subject to floors and some require you to meet specific tests in order to qualify.

For example, miles driven for health-care-related purposes are deductible as part of the medical expense deduction. But medical expenses generally are deductible only to the extent they exceed 10% of your adjusted gross income. (For 2016, the deduction threshold is 7.5% for qualifying seniors.)

And while miles driven related to moving can be deductible, the move must be work-related. In addition, among other requirements, the distance from your old residence to the new job must be at least 50 miles more than the distance from your old residence to your old job.

Other considerations

There are also substantiation requirements, which include tracking miles driven. And, in some cases, you might be better off deducting actual expenses rather than using the mileage rates.

So contact us to help ensure you deduct all the mileage you’re entitled to on your 2016 tax return — but not more. You don’t want to risk back taxes and penalties later.

And if you drove potentially eligible miles in 2016 but can’t deduct them because you didn’t track them, start tracking your miles now so you can potentially take advantage of the deduction when you file your 2017 return next year.