The CPA Desk

A Thought Leader Production by PKFTexas

A Closer Look at the New QBI Deduction Wage Limit

The Tax Cuts and Jobs Act (TCJA) provides a valuable new tax break to noncorporate owners of pass-through entities: a deduction for a portion of qualified business income (QBI). The deduction generally applies to income from sole proprietorships, partnerships, S corporations and, typically, limited liability companies (LLCs). It can equal as much as 20% of QBI. But once taxable income exceeds $315,000 for married couples filing jointly or $157,500 for other filers, a wage limit begins to phase in.

Full vs. Partial Phase-In
When the wage limit is fully phased in, at $415,000 for joint filers and $207,500 for other filers, the QBI deduction generally can’t exceed the greater of the owner’s share of:

  • 50% of the amount of W-2 wages paid to employees during the tax year, or
  • The sum of 25% of W-2 wages plus 2.5% of the cost of qualified business property (QBP).

When the wage limit applies but isn’t yet fully phased in, the amount of the limit is reduced and the final deduction is calculated as follows:

  1. The difference between taxable income and the applicable threshold is divided by $100,000 for joint filers or $50,000 for other filers.
  2. The resulting percentage is multiplied by the difference between the gross deduction and the fully wage-limited deduction.
  3. The result is subtracted from the gross deduction to determine the final deduction.

Some Examples
Let’s say Chris and Leslie have taxable income of $600,000. This includes $300,000 of QBI from Chris’s pass-through business, which pays $100,000 in wages and has $200,000 of QBP. The gross deduction would be $60,000 (20% of $300,000), but the wage limit applies in full because the married couple’s taxable income exceeds the $415,000 top of the phase-in range for joint filers. Computing the deduction is fairly straightforward in this situation.

The first option for the wage limit calculation is $50,000 (50% of $100,000). The second option is $30,000 (25% of $100,000 + 2.5% of $200,000). So the wage limit — and the deduction — is $50,000.

What if Chris and Leslie’s taxable income falls within the phase-in range? The calculation is a bit more complicated. Let’s say their taxable income is $400,000. The full wage limit is still $50,000, but only 85% of the full limit applies:

($400,000 taxable income – $315,000 threshold)/$100,000 = 85%

To calculate the amount of their deduction, the couple must first calculate 85% of the difference between the gross deduction of $60,000 and the fully wage-limited deduction of $50,000:

($60,000 – $50,000) × 85% = $8,500

That amount is subtracted from the $60,000 gross deduction for a final deduction of $51,500.

That’s Not All
Be aware that another restriction may apply: For income from “specified service businesses,” the QBI deduction is reduced if an owner’s taxable income falls within the applicable income range and eliminated if income exceeds it.

Please contact us to learn whether your business is a specified service business or if you have other questions about the QBI deduction.

What Not-For-Profits Need to Know About Fraud

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Danielle Supkis Cheek, a PKF Texas Director and one of our Certified Fraud Examiners. Danielle, welcome back to the Playbook.

Danielle: Thanks for having me.

Jen: In your fraud and forensics practice, I know you work with a lot of not-for-profits. There’s fraud in not-for-profit?

Danielle: Unfortunately, yes. One of the risks that non-profits have is that—we’ve done a session before on small businesses and how small businesses are more susceptible for fraud because of their ability to, in effect, invest in their infrastructure and the size of their resources. It takes it one step further for non-profits.

The problem is that most non-profits are not profit maximizing entities, by the name, but really some kind of social good maximization. Most of their money goes toward spending on their mission. Accounting is not usually the mission of most non-profits, as much as I’d like it to be, and so what ends up happening is that a lot of metrics for non-profits on their success are based on the percent spent towards their mission vs. what they spend on their admin, or actually fundraising as well, but I care most about the admin for this little conversation and topic, because where you prevent fraud is on IT resources and accounting resources.

Since they’re actually theoretically penalized for investing heavily in IT and accounting infrastructure because of that percent spend, through lesser donations is the penalty, they tend to push the limit as far as they can go on cutting costs on overhead and not investing in the technology—

Jen: Not a lot of oversight, either. A lot of not-for-profits are working with volunteers, too.

Danielle: Yes, which creates additional risk for them.

Jen: Is it more complicated then for a not-for-profit?

Danielle: Accounting for a non-profit is more complicated than a rank and file business, and the reason for that is that because they are getting donations from either the public, just soliciting general donations, or a private foundation, or even actual the public US government, or a state and local government. There’s a certain duty to spend the money that you’re receiving for your mission in accordance with the donor stipulations. That tracking is actually pretty darn complicated to do, especially on a bootstrapped infrastructure from a spend perspective.

Jen: How would a not-for-profit not necessarily prevent fraud but eliminate some risk?

Danielle: There’s a lot of things that can be done to eliminate some risk. The key control is around cash, really tightening down cash, using the tracking feature of different accounting softwares and kind of hacking together at various accounting softwares to be able to track those restriction. And actually understanding what’s going on in your books and not overcomplicating it for the sake of overcomplicating but making sure that you’re figuring out where that money is actually going. Doing your best practices book keeping, bank reconciliations, that kind of stuff. The most important is tightening down cash more so than anything else.

Jen: Good to know. We’ll get you back to talk a little bit more about that.

Danielle: Sure thing.

Jen: For more about this topic, visit pkftexas.com. This has been another Thought Leader Production brought to you by PKF Texas the Entrepreneur’s Playbook. Tune in next week for another chapter.

Thinking Like an Auditor for Your Not-For-Profit Revenue

Auditors examining a not-for-profit’s financial statements spend considerable time on the revenue figures. They look at the accounting methods used to record revenues and perform a detailed income analysis. You can use the same techniques to increase your understanding of your organization’s revenue profile.

In particular, consider:

Individual Contributions
Compare the donation dollars raised to past years to pinpoint trends. For example, have individual contributions been increasing over the past five years? What campaigns have you implemented during that period? You might go beyond the totals and determine if the number of major donors has grown.

Also estimate what portion of contributions is restricted. If a large percentage of donations are tied up in restricted funds, you might want to re-evaluate your gift acceptance policy or fundraising materials.

Grants
Grants can vary dramatically in size and purpose — from covering operational costs, to launching a program, to funding client services. Pay attention to trends here, too. Did one funder supply 50% of total revenue in 2015, 75% in 2016, and 80% last year? A growing reliance on a single funding source is a red flag to auditors and it should be to you, too. In this case, if funding stopped, your organization might be forced to close its doors.

Fees for Services
Fees from clients, joint venture partners or other third parties can be similar to fees for-profit organizations earn. They’re generally considered exchange transactions because the client receives a product or service of value in exchange for its payment. Sometimes fees are charged on a sliding scale based on income or ability to pay. In other cases, fees are subject to legal limitations set by government agencies. You’ll need to assess whether these services are paying for themselves.

Membership Dues
If your not-for-profit is a membership organization and charges dues, determine whether membership has grown or declined in recent years. How does this compare with your peers? Do you suspect that dues income will decline? You might consider dropping dues altogether and restructuring. If so, examine other income sources for growth potential.

Once you’ve gained a deeper understanding of your revenue picture, you can apply that knowledge to various aspects of managing your organization. This includes setting annual goals and preparing your budget.

Contact us for help interpreting and applying revenue data.

What Can Be Deductible When Volunteering

Because donations to charity of cash or property generally are tax deductible (if you itemize), it only seems logical that the donation of something even more valuable to you — your time — would also be deductible. Unfortunately, that’s not the case.

Donations of time or services aren’t deductible. It doesn’t matter if it’s simple administrative work, such as checking in attendees at a fundraising event, or if it’s work requiring significant experience and expertise that would be much more costly to the charity if it had to pay for it, such as skilled carpentry or legal counsel.

However, you potentially can deduct out-of-pocket costs associated with your volunteer work.

The Basic Rules
As with any charitable donation, for you to be able to deduct your volunteer expenses, the first requirement is that the organization be a qualified charity. You can use the IRS’s “Tax Exempt Organization Search” tool (formerly “Select Check”) at irs.gov to find out.

Assuming the charity is qualified, you may be able to deduct out-of-pocket costs that are:

  • Unreimbursed,
  • Directly connected with the services you’re providing,
  • Incurred only because of your charitable work, and
  • Not “personal, living or family” expenses.

Supplies, Uniforms and Transportation
A wide variety of expenses can qualify for the deduction. For example, supplies you use in the activity may be deductible. And the cost of a uniform you must wear during the activity may also be deductible (if it’s required and not something you’d wear when not volunteering).

Transportation costs to and from the volunteer activity generally are deductible, either the actual cost or 14 cents per charitable mile driven. But you have to be the volunteer. If, say, you drive your elderly mother to the nature center where she’s volunteering, you can’t deduct the cost.

You also can’t deduct transportation costs you’d be incurring even if you weren’t volunteering. For example, if you take a commuter train downtown to work, then walk to a nearby volunteer event after work and take the train back home afterwards, you won’t be able to deduct your train fares. But if you take a cab from work to the volunteer event, then you potentially can deduct the cab fare for that leg of your transportation.

Volunteer Travel
Transportation costs may also be deductible for out-of-town travel associated with volunteering. This can include air, rail and bus transportation; driving expenses; and taxi or other transportation costs between an airport or train station and wherever you’re staying. Lodging and meal costs also might be deductible.

The key to deductibility is that there is no significant element of personal pleasure, recreation or vacation in the travel. That said, according to the IRS, the deduction for travel expenses won’t be denied simply because you enjoy providing services to the charitable organization. But you must be volunteering in a genuine and substantial sense throughout the trip. If only a small portion of your trip involves volunteer work, your travel expenses generally won’t be deductible.

Keep Careful Records
The IRS may challenge charitable deductions for out-of-pocket costs, so it’s important to keep careful records.

If you have questions about what volunteer expenses are and aren’t deductible, please contact us.

ASU No. 2018-08 Clarifies Guidance for Not-For-Profit Entities: Contributions Received and Contributions Made

The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. ASU No. 2018-08 provides clarifying and amended guidance concerning:

  • the determination of whether a transaction should be accounted for as an exchange or as a contribution, and
  • whether a contribution received is conditional or unconditional.

Continue Reading

Understanding Fraud in International Business

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Danielle Supkis Cheek, a Director at PKF Texas and one of our Certified Fraud Examiners. Danielle, welcome back to the Playbook.

Danielle: Thanks for having me.

Jen: So, Houston’s an international city—we’ve had Frank Landreneau, one of our international tax directors on the program. There’s a lot of opportunity for fraud. What are you seeing in the international space?

Danielle: One of the concerns with the international space and fraud is actually the existence of the Foreign Corrupt Practices Act. It says you can’t bribe officials, which is a pretty obvious matter for international foreign officials.

Jen: One would think you don’t want to bribe people. So, what does the FCPA actually cover?

Continue Reading

How Data Analytics Can Help Solve Your Not-For-Profit’s Challenges

If your not-for-profit wants to improve its budgeting, forecasting, fundraising or other functions but is having a hard time identifying both problems and solutions, data analytics can help. This form of business intelligence is already considered invaluable in the for-profit world. But it can be just as useful to not-for-profits.

Informed Decision Making
Data analytics is the science of collecting and analyzing sets of data to develop useful insights, connections and patterns that can lead to more informed decision making. It produces such metrics as program efficacy, outcomes vs. efforts, and membership renewal that can reflect past and current performance and, in turn, predict and guide future performance.

The data usually comes from two sources:

  1. Internal – Examples include your organization’s databases of detailed information on donors, beneficiaries or members.
  2. External – This type of information can be obtained from government databases, social media and other organizations, both non- and for-profit.

Applied Advantages
Data analytics can help your organization validate trends, uncover root causes and improve transparency. For example, analysis of certain fundraising data makes it easier to target those individuals most likely to contribute to your nonprofit.

It typically facilitates fact-based discussions and planning, which is helpful when considering new initiatives or cost-cutting measures that stir political or emotional waters. The ability to predict outcomes can support sensitive programming decisions by considering data on a wide range of factors —  such as at-risk populations, funding restrictions, offerings available from other organizations and grantmaker priorities.

Needs Dictate Your Purchase
Your organization’s informational needs should dictate the data analytics package you buy. Thousands of potential performance metrics can be produced, but not all of them will be useful. So keeping in mind your most important programs, identify those metrics that matter most to stakeholders and that truly drive decisions. Also ensure that the technology solution you choose complies with any applicable privacy and security regulations, as well as your organization’s ethical standards.

You can adopt the most cutting-edge software, but if your staff aren’t on board, data analytics will be of little benefit. Note that you may need to hire or develop qualified staff to conduct data analytics and convert the results into actionable intelligence.

Make the Most of It
Before you choose a technology, make sure your organization, including your staff, is ready to make the most of it. We can help steer you in the right direction.

The SEC Expands the Scope of Smaller Reporting Companies that Qualify for Scaled Disclosures

The U.S. Securities and Exchange Commission (“SEC”) voted last week to adopt amendments to the “smaller reporting companies” (“SRCs”) definition to expand the number of companies that qualify for the scaled-down disclosure requirements. The Commission established the smaller reporting company category of companies in 2008 in an effort to provide general regulatory relief for smaller companies. SRCs may provide scaled disclosures under Regulation S-K and Regulation S-X.

The new smaller reporting company definition adopted last week enables a company with less than $250 million of public float to provide scaled disclosures, as compared to the $75 million threshold under the prior definition. The final rules also expand the definition to include companies with less than $100 million in annual revenues if they also have either no public float or a public float that is less than $700 million, which reflects a change from the revenue test in the prior definition that allowed companies to provide scaled disclosure only if they had no public float and less than $50 million in annual revenues. Continue Reading

How “Going Green” Can Save You Taxes

“Going green” at home — whether it’s your principal residence or a second home — can reduce your tax bill in addition to your energy bill, all while helping the environment, too. The catch is that, to reap all three benefits, you need to buy and install certain types of renewable energy equipment in the home.

Invest in Green and Save Green
For 2018 and 2019, you may be eligible for a tax credit of 30% of expenditures (including costs for site preparation, assembly, installation, piping, and wiring) for installing the following types of renewable energy equipment:

  • Qualified solar electricity generating equipment and solar water heating equipment,
  • Qualified wind energy equipment,
  • Qualified geothermal heat pump equipment, and
  • Qualified fuel cell electricity generating equipment (limited to $500 for each half kilowatt of fuel cell capacity).

Because these items can be expensive, the credits can be substantial. To qualify, the equipment must be installed at your U.S. residence, including a vacation home — except for fuel cell equipment, which must be installed at your principal residence. You can’t claim credits for equipment installed at a property that’s used exclusively as a rental.

To qualify for the credit for solar water heating equipment, at least 50% of the energy used to heat water for the property must be generated by the solar equipment. And no credit is allowed for solar water heating equipment unless it’s certified for performance by the nonprofit Solar Rating & Certification Corporation or a comparable entity endorsed by the state in which your residence is located. (Keep this certification with your tax records.)

The credit rate for these expenditures is scheduled to drop to 26% in 2020 and then to 22% in 2021. After that, the credits are scheduled to expire.

Document and Explore
As with all tax breaks, documentation is key when claiming credits for green investments in your home. Keep proof of how much you spend on qualifying equipment, including any extra amounts for site preparation, assembly and installation. Also keep a record of when the installation is completed, because you can claim the credit only for the year when that occurs.

Be sure to look beyond the federal tax credits and explore other ways to save by going green. Your green home investments might also be eligible for state and local tax benefits, subsidized state and local financing deals, and utility company rebates.

To learn more about federal, state and local tax breaks available for green home investments, contact us.

GILTI Tax – Who it Impacts and Restructure Planning

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski and I’m back again with Frank Landreneau, one of our International Tax Directors. Frank, welcome back to the Playbook.

Frank: Thanks, Jen. It’s great to be back.

Jen: Last time we talked about the GILTI tax. Remind our viewers, if they didn’t watch last time, what does it stand for?

Frank: What GILTI stands for – it’s an acronym for Global Intangible Low Tax Income, and the whole idea is that some level of foreign earnings should be taxed on a current basis in the U.S.

Jen: How does GILTI actually work?

Frank: First of all, you take a look at the foreign corporations’ earnings in its totality. And then, there are a bunch of carve outs, which you take a look at, and then that is the income that would be subject to the GILTI tax.

In theory, it’s supposed to work where a routine return, a normal operating return from normal operations, would be not taxed under GILTI. Any return so called “excess returns,” this would be returns earned through the fact that you’ve got special processes, intellectual property – that type of thing would be subject to the GILTI tax. That’s where the name comes from. There’s a lot of gyrations and calculations needed to get to that amount.

Jen: Are there particular industries that are impacted by this more so than others?

Frank: That’s a great question. Because of the way the Congress decided to spell out this legislation, it’s a mechanical test in how the computation works. Industries with very little or few fixed assets, such as service industries or distributing companies, would be hit more hard than manufacturing companies.

Jen: Would this be something that a company would consider maybe restructuring to a different structure?

Frank: There are some planning ideas. One thought would be for companies that are owned by individuals outright, or what’s common in the U.S. is ownership through pass through entities. Those entities are thinking perhaps putting a domestic corporate blocker entity between the individual owner and the form corporation. There’s some special considerations that are beneficial if you do that structure.

Jen: And does this take in effect already, because of the new tax reform?

Frank: Absolutely. It took effect technically from January 1, because the legislature was signed into law back in December.

Jen: Perfect. Well, we’ll get you back to talking a little bit more about some international tax reform.

Frank: Thank you. There’s plenty to talk about it.

Jen: All right, great. To learn more about other international topics, visit pkftexas.com/internationaldesk. This has been another Thought Leader Production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.