The CPA Desk

A Thought Leader Production by PKFTexas

Prevent Fraud in Your Not-for-Profit Sports League

Many not-for-profit youth sports leagues are at risk for fraud and don’t even know it. Cash transactions are common and leagues are typically managed by volunteers with little oversight, it’s easy for crooked individuals to take advantage of the situation. Unfortunately, sports league fraud is usually committed by well known and respected board members or officers. How then can your league prevent this crime?

Simple steps

By far the most important step you can take is to segregate duties. This means that no single individual receives, records and deposits funds coming in, pays bills and reconciles bank statements. Assign someone uninvolved in handling deposits and payments to receive and reconcile the bank statement. A different person should monitor the budget, and every payment (or at least payments over a certain threshold) should require two signatures. If your league has credit or debit cards, ask someone an unauthorized user to review the statements.

Also, your league should:

Mandate board review. Your board of directors should receive and review financial reports on a quarterly or monthly basis — including when the league isn’t in season. The treasurer should submit a report for every board meeting, with bank statements attached.

Require online registration and payment. A lot of leagues still use paper registrations and accept payment by cash or check. Cash can be pocketed and checks can be diverted to thieves’ own accounts. But with online registration, payments are deposited directly into the league’s account.

Rotate treasurers. Treasurers are the most likely youth sports league officials to commit fraud because they have the easiest access to funds and the ability to cover their tracks. Make sure no one person stays in the treasurer position for more than a couple of years. If funds are available, consider hiring a part-time bookkeeper who will report directly to your board.

Not all fun and games

Many youth sports leagues are ripe for fraud, in large part because of their lack of formality and their environment of trust. Structure may seem counter to the spirit of amateur leagues, but if your group doesn’t adopt some smart business practices, it could end up out of business. Contact us for more information.

What to Do if Your Business is Audited by the IRS

If you recently filed your 2016 income tax return (rather than filing for an extension) you may now be wondering whether it’s likely that your business could be audited by the IRS based on your filing. Here’s what every business owner should know about the process.

Catching the IRS’s eye

Many business audits occur randomly, but a variety of tax-return-related items are likely to raise red flags with the IRS and may lead to an audit. Here are a few examples:

  • Significant inconsistencies between previous years’ filings and your most current filing,
  • Gross profit margin or expenses markedly different from those of other businesses in your industry, and
  • Miscalculated or unusually high deductions.

An owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can also catch the IRS’s eye, especially if the business is structured as a corporation.

Response measures

If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS won’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.

The good news is that many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the most severe version, the field audit, requires meeting with one or more IRS auditors.

More good news: In no instance will the agency demand an immediate response. You’ll be informed of the discrepancies in question and given time to prepare. To do so, you’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.

If the IRS selects you for an audit, our firm can help you:

  • Understand what the IRS is disputing (it’s not always crystal clear),
  • Gather the specific documents and information needed, and
  • Respond to the auditor’s inquiries in the most expedient and effective manner.

Don’t let an IRS audit ruin your year — be it this year, next year or whenever that letter shows up in the mail. By taking a meticulous, proactive approach to how you track, document and file your company’s tax-related information, you’ll make an audit much less painful and even decrease the chances that one happens in the first place.

Five Governance Practices All Not-for-Profit Boards Should Follow

Jen:  This is the PKF Texas Entrepreneur’s Playbook.  I’m Jen Lemanski, this week’s guest host, and I’m back again with Nicole Riley, one of our Audit Senior Managers on our not-for-profit team; welcome back to the Playbook Nicole.

Nicole:  Thanks, glad to be here.

Jen:  Now I’ve heard you talk about Governance procedures; what does that all entail?  What do people need to know if they’re nonprofit for Governance procedures?

Nicole:  Really when we talk about Governance we’re talking about the processes and procedures in place with the Board of Directors.  Just like an organization needs to have good processes and procedures to make sure their operations flow and work well, the board needs to have processes and procedures in place to make sure that it governs properly and has great oversight over the organization so the organization can accomplish its mission.

Jen:  So when you go in and you advise a not for profit and you’re talking to them about these things what do you advise that the board pay attention to?

Nicole:  The 5 main things I would recommend first for the board to look at, the first thing is for the board to have an orientation and training program.  When you bring a new board member on you want to make sure that you get them up to speed as fast as possible so they can be a contributing member and you also don’t want to lose what the board members that are leaving know.

Jen:  Because they’re intellectual capital and that kind of thing.

Nicole:  Right, and as well you want the board members to get some annual training where they learn new regulations, new laws and just kind of touch base to make sure that they’re staying up to date on what’s going on with nonprofits.  The second thing I would say is boards have to keep minutes.  Transparency is so important these days with nonprofits, it really plays into their perception in the public, so keeping minutes of the board meetings and the committee meetings helps to make sure that everything’s documented and that they’re able to have total transparency if anybody wants to know what’s going on.

Jen:  So they should post those on the website probably or somewhere in a public place?

Nicole:  That would be up to the organization whether they think that is necessary but somebody may ask for them and they want to have them available.  The third item I would recommend is having a conflict of interest policy and that the board review that annually; which means that if somebody has a brother that has a construction company and the organization is going to go after a bid because they’re going to build a building you want to make sure that the board members are aware of that as they’re evaluating those bids to make sure it’s fair and everybody keeps the organization’s best interest at heart.

Jen:  So have a good RFP kind of process?

Nicole:  Right.  And then fourth I would say your Executive Director needs to have an annual performance evaluation.  They are head of the organization and just like everybody else below them they need to know how they’re doing.  And as well their compensation needs to be evaluated and then documented how the board got there and whether or not it needs to be competitive but not excessive.

Jen:  And I think you said five think, what’s the last one?

Nicole:  The last one would be I recommend the board review the 990 form before it’s filed every year.  It’s filed with the IRS but it’s also available to the public so it’s important the board members know what’s in there and that it’s complete and accurate.

Jen:  Sounds good.  Well, we’ll get you back to talk about some more of this stuff in the future.

Nicole:  Thank you.

Jen:  To learn more about how we can help your not for profit visit PKFTexas.com/notforprofit.  This has been another Thought Leader production brought to you by PKF Texas Entrepreneur’s Playbook.

What Factors Motivate Your Not-for-Profit’s Donors?

What do charitable donors want? The classic answer is: Go ask each one individually. However, research provides some insight into donor motivation that can help your not-for-profit grow its financial support.

Taxing matters

The biennial U.S. Trust® Study of High Net Worth Philanthropy, conducted in partnership with the Indiana University Lilly Family School of Philanthropy, regularly finds that wealthy donors are primarily motivated by philanthropy. Only 18% of respondents in the 2016 survey cited the tax benefits.

On its own, your organization has little control over tax rates or deductions. But by teaming up with other nonprofits, you can exercise influence over tax policy. For example, groups such as the Charitable Giving Coalition are credited with helping to defeat congressional challenges to the charitable deduction. Some nonprofits also partner up to influence state legislation on charitable giving incentive caps. Just keep in mind that, to preserve your nonprofit’s tax-exempt status, political lobbying should be kept to a minimum.

Matching opportunity

Other research found that donors are just as motivated by matching gifts as they are by tax benefits. A joint Australian and American study gave supporters a choice between a tax rebate and a matching donation to charity. Donors were evenly split between the two — but those opting for the match gave more generously than those who took the rebate.

If your nonprofit hasn’t already tried offering matching gifts, it’s worth testing. You’ll need to identify donors willing to use their large gift to incentivize others — reliable supporters such as board members or trustees. Consider using their gifts during short-lived fundraisers, where a “ticking clock” lends the offer greater urgency

Other strategies can enable donors to stretch their giving dollars. For example, encourage your supporters to give appreciated stock or real estate. As long as the donors meet applicable rules, they can avoid the capital gains tax liability they’d incur if they sold the assets.

Don’t make assumptions

Donors are motivated by many social, emotional and financial factors. Do not assume you know how your target audience will respond to certain types of fundraising appeals. Perform some basic research, asking major donors and their advisors about their philanthropic priorities. Contact us for more revenue-boosting ideas.

Real Estate Professional Vs. Investor and Why it Matters

Income and losses from investment real estate or rental property are passive by definition — unless you’re a real estate professional. Why does this matter? Passive income may be subject to the 3.8% net investment income tax (NIIT), and passive losses generally are deductible only against passive income, with the excess being carried forward.

Of course, the NIIT is part of the Affordable Care Act (ACA) and might be eliminated under ACA repeal and replace legislation or tax reform legislation. But if/when such legislation will be passed and signed into law is uncertain. Even if the NIIT is eliminated, the passive loss issue will still be an important one for many taxpayers investing in real estate.

“Professional” requirements

To qualify as a real estate professional, you must annually perform:

  • More than 50% of your personal services in real property trades or businesses in which you materially participate, and
  • More than 750 hours of service in these businesses.

Each year stands on its own, and there are other nuances. (Special rules for spouses may help you meet the 750-hour test.)

Tax strategies

If you’re concerned you’ll fail either test and be subject to the 3.8% NIIT or stuck with passive losses, consider doing one of the following:

Increasing your involvement in the real estate activity. If you can pass the real estate professional tests, the activity no longer will be subject to passive activity rules.

Looking at other activities. If you have passive losses from your real estate investment, consider investing in another income-producing trade or business that will be passive to you. That way, you’ll have passive income that can absorb some or all of your passive losses.

Disposing of the activity. This generally allows you to deduct all passive losses — including any loss on disposition (subject to basis and capital loss limitations). But, again, the rules are complex.

Also be aware that the IRS frequently challenges claims of real estate professional status — and is often successful. One situation where the IRS commonly prevails is when the taxpayer didn’t keep adequate records of time spent on real estate activities.

If you’re not sure whether you qualify as a real estate professional, please contact us. We can help you make this determination and guide you on how to properly document your hours.

Benefits and Procedures of Conducting an Audit

Russ: This is the PFK Entrepreneur’s Playbook. I’m Russ Capper, this week’s guest host, and I am here with Brian Baumler, once again, a Senior Vice President with Joint Venture Strategic Advisors and an Audit Director with PKF Texas.  Welcome back to the Playbook Brian.

Brian: Thank you very much, Russ, I really appreciate it.

Russ: So we are talking about these joint ventures, and you are coming in to help them out.  Do people invite you in most often because they suspect something is wrong with the joint venture?

Brian: Well I think some of it is that, but a lot of it is because each of these arrangements they enter into having a standard requirement to allow for an audit.  So many of them execute their right to have an audit.  And when they do, we’re typically engaged by the party that is typically not the operator.  And the reason being is because the operator in most cases has unilateral authority to execute on behalf of the none operating party.  So, because of that arrangement alone, typically there is some suspicion.

Russ: And there really is a time limit by which if they don’t find something that’s wrong, then it sort of goes off the books?

Brian: That’s a great question.  About 90 percent of work we do happens to represent joint venture arrangement in oil and gas development programs, and they actually have a two-year window.  And once you, you lose your right to perform an audit if you don’t put the operator on notice, you’ll want to have that audit done.  So at the two-year point, yup, those years start dropping off and once the two-year window has lapsed the operator is really not at that interest to allow you to come back.

Russ: Wow, sounds like you need to pay attention to the calendar.

Brian: Absolutely.

Russ: Well I really appreciate it and want you to come back and maybe do this again.

Brian: Thank you so much, Russ.

Russ: You bet. For more about Joint Venture Services, visit www.jvsa.com.  This has been another Thought Leader Production brought to you by the PKF Texas Entrepreneur’s Playbook.

Helpful Tax Tips for Not-for-Profit Fundraisers

Whether you’re planning to raise funds for your not-for-profit with a simple bingo game or raffle, or with a more elaborate casino night, you need to understand and follow the federal rules that govern these kinds of activities. Gaming activities can open the door to unexpected taxes and trigger requirements for specific IRS filings.

Filings and special taxes

If you regularly conduct a gaming activity, you may be required to report it to the IRS. For example, nonprofits that gross more than $1,000 in unrelated business income from regular gaming fundraisers may need to file Form 990-T, “Exempt Organization Business Income Tax Return.”

Your group also may be subject to a wagering excise or occupational tax, depending on:

  • The type of wagering you engage in,
  • How it’s structured, and
  • How your organization benefits from the proceeds.

Generally, this tax applies to lotteries or wagering pools that involve a sporting event or a contest that’s conducted for profit.

Winnings and withholding

Depending on the type of game and the amount won by an individual, you might be required to report winnings to the IRS. This applies if your fundraiser includes a single instant/pull-tab prize of $600 or more (if more than 300 times the amount of the wager), a single bingo or slot machine prize of $1,200 or more, or a single Keno prize of $1,500. You’ll need to obtain the winner’s name and Social Security number.

Regular income tax or backup withholding is necessary for some games with winnings over a certain threshold. No withholding is required for bingo prizes up to $1,200. But withholding is necessary when raffle and some other types of winnings are $600 or more. Your organization is required to pay these amounts, regardless of whether you get the withholding from the winner.

Tip of the iceberg

These are just some of the federal rules surrounding gaming. In addition, many states and municipalities impose their own regulations on gaming activities, including requiring licenses or permits. To ensure your fundraiser complies with complex IRS rules, contact us.

The Tax Risks and Rewards of Operating Across State Lines

It’s a smaller business world after all. With the ease and popularity of e-commerce, as well as the incredible efficiency of many supply chains, companies of all sorts are finding it easier than ever to widen their markets. Doing so has become so much more feasible that many businesses quickly find themselves crossing state lines.

But therein lies a risk: Operating in another state means possibly being subject to taxation in that state. The resulting liability can, in some cases, inhibit profitability. But sometimes it can produce tax savings.

Do you have “nexus”?

Essentially, “nexus” means a business presence in a given state that’s substantial enough to trigger that state’s tax rules and obligations.

Precisely what activates nexus in a given state depends on that state’s chosen criteria. Triggers can vary but common criteria include:

  • Employing workers in the state,
  • Owning (or, in some cases even leasing) property there,
  • Marketing your products or services in the state,
  • Maintaining a substantial amount of inventory there, and
  • Using a local telephone number.

Then again, one generally can’t say that nexus has a “hair trigger.” A minimal amount of business activity in a given state probably won’t create tax liability there. For example, an HVAC company that makes a few tech calls a year across state lines probably wouldn’t be taxed in that state. Or let’s say you ask a salesperson to travel to another state to establish relationships or gauge interest. As long as he or she doesn’t close any sales, and you have no other activity in the state, you likely won’t have nexus.

Strategic moves

If your company already operates in another state and you’re unsure of your tax liabilities there — or if you’re thinking about starting up operations in another state — consider conducting a nexus study. This is a systematic approach to identifying the out-of-state taxes to which your business activities may expose you.

Keep in mind that the results of a nexus study may not be negative. You might find that your company’s overall tax liability is lower in a neighboring state. In such cases, it may be advantageous to create nexus in that state (if you don’t already have it) by, say, setting up a small office there. If all goes well, you may be able to allocate some income to that state and lower your tax bill.

The complexity of state tax laws offers both risk and opportunity. Contact us for help ensuring your business comes out on the winning end of a move across state lines.

Everything Not-for-Profits Need to Know About Unrelated Business Income Tax

Jen:  This is the PKF Texas Entrepreneur’s Playbook.  I’m Jen Lemanski, this week’s guest host, and I’m back again with Annjeanette Yglesias, one of our tax managers on our not for profit team.  Welcome back to the Playbook Annjeanette.

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

Jen:  Well now I’ve heard you talk about unrelated business income tax; what is it?  What do nonprofits need to know about it?

Annjeanette:  Well, first of all, that’s a mouthful so we call it UBI.  UBI is an income tax that is imposed on certain tax-exempt organizations that participate in certain activities that are unrelated to their exempt purpose.

Jen:  So what would qualify for that UBI?

Annjeanette:  UBI is income from a trader business that is regularly carried on and that is not substantially related to the organization’s exempt purpose.

Jen:  So what would a leadership team look for?  How would they know that they need to do something about it?

Annjeanette:  I think the most important thing about UBI to remember is that it hinges heavily on the organization’s exempt purpose.  So I think in most cases the organization should talk to their CPA, just kind of make sure that an activity that they’re thinking about engaging in would qualify under UBI or not because tax could be imposed.

Jen:  What’s an example of something that would qualify under the UBI?

Annjeanette:  Actually it’s case by case.  I think the most important part of UBI to remember is that since it hinges heavily on the organization’s exempt purpose that you have to consider the facts and circumstances of each case.  So for example, one activity that is not considered UBI to one organization might be considered UBI to another organization.

Jen:  So that’s why they need to get you involved so that you can help go through that case by case and you can assist them with that.

Annjeanette:  Exactly.

Jen:  Perfect.  Well thank you so much for being here, I really appreciate it and we’ll get you back to talk about some more stuff impacting on profits.  How does that sound?

Annjeanette:  That sounds great.

Jen:  Perfect.  To learn more about how we can help not for profits visit PKFTexas.com/notforProfit/.  This had been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook.

Understand Your Not-for-Profit Board’s Fiduciary Duty

Interest in not-for-profits’ governance practices from lawmakers, watchdog groups, and the general public has been growing in recent years. If your board hasn’t recently reviewed its fiduciary duties, roles, and responsibilities, now is a good time.

3 primary responsibilities

Nonprofit board members — whether compensated or not — have a fiduciary duty to the organization. Some states have laws governing the responsibilities of nonprofit boards and other fiduciaries. But, in general, a fiduciary has three primary duties:

  1. Duty of care. Board members must exercise reasonable care in overseeing the organization’s financial and operational activities. Although disengaged from day-to-day affairs, they should understand its mission, programs, and structure, make informed decisions, and consult others — including outside experts — when appropriate.
  2. Duty of loyalty. Board members must act solely in the best interests of the organization and its constituents, and not for personal gain.
  3. Duty of obedience. Board members must act in accordance with the organization’s mission, charter and bylaws, and any applicable state or federal laws.

Board members who violate these duties may be held personally liable for any financial harm the organization suffers as a result.

Conflicts of interest

One of the most challenging components of fiduciary duty is the obligation to avoid conflicts of interest. In general, a conflict of interest exists when an organization does business with:

  • A board member,
  • An entity in which a board member has a financial interest, or
  • Another company or organization for which a board member serves as a director or trustee.

To avoid even the appearance of impropriety, your nonprofit should also treat a transaction as a conflict of interest if it involves a board member’s spouse or another family member, or an entity in which a spouse or family member has a financial interest.

The key to dealing with conflicts of interest, whether real or perceived, is disclosure. The board member involved should disclose the relevant facts to the board and abstain from any discussion or vote on the issue — unless the board determines that he or she may participate.

Meet obligations

The rules concerning the liability of fiduciaries are complex. But your board members can meet their obligations by acting in good faith, putting the organization’s best interests first, making informed decisions and disclosing any potential conflicts of interest. Contact us for more information.