We are excited to share two of PKF Texas’ Directors have been recognized within the Houston community and the accounting profession.
Chief Culture Officer and Audit Director, Sonia Freeman, CPA, was named as one of the Houston Business Journal’s “Women Who Mean Business.” She will be honored with the award on October 18, 2018 at the Hilton Americas-Houston, followed by a special edition of the HBJ weekly edition on October 19.
Recently, the Houston Business Journal published an article on their website authored by PKF Texas Tax Director, Martin Euson, JD, about Houston’s designated “opportunity zones.”
What are opportunity zones?
According to Euson’s article, opportunity zones are part of the U.S. Treasury Department’s new program, which was created by the federal Tax Cuts and Jobs Act (TCJA). These zones were created to “encourage private investment and development in certain distressed, low-income areas across the United States in exchange for significant federal tax benefits.”
Euson then goes into detail to identify and share insight about three ways investors can gain federal tax benefits investing in a “qualified opportunity fund.”
If your not-for-profit is contemplating a merger or acquisition with another organization, you have a lot of work ahead of you. One of the most daunting challenges is keeping leaders focused and invested in the process. Most not-for-profits are run by both board members and internal management, and this structure can bog down decision making and make transitions difficult.
Five Phases Discussions between merging not-for-profits often begin a year or more before the actual integration takes place. And whether it’s a merger forming a new organization or an acquisition enlarging an existing not-for-profit, leaders must make critical decisions during five phases.
1. Idea. Internal managers, and then board leadership, typically meet as a group to discuss the benefits of joining forces.
2. Formalizing. Here, the two not-for-profits formalize their decision to combine. This can be achieved in a letter of intent that outlines expectations, agreed-upon roles for each organization and a timeframe. It’s in this phase that the two organizations and their leaders learn about each other and decide whether they want to go forward with the plan.
3. Development. Key leaders must be evaluated for their complementary skills and the role each might play in the new organization. Also, the board and management must develop a shared vision for the new organization. Mutual respect and trust, flexibility, and a willingness to compromise are important at this stage.
The team that works through the development phase must include representatives of all stake-holder groups. This includes board members, key management and staff, and constituents served. Involvement of all groups will result in greater buy-in and smoother integration.
4. Due diligence. Due diligence involves formal research into each of the combining organizations. Leaders ensure that financial and legal advisors have the materials they need to review and evaluate issues and potential impediments to the proposed merger.
5. Transition. Planned changes are implemented during this final phase, making it the most difficult and time-consuming for leadership. You may need to make an official name change, apply for a new tax-exempt status, communicate changes with the community and physically move locations.
All Hands on Deck Your organization’s leaders should participate in evaluating the strategic potential of a merger and preparing the transition. Some of your executives and board members may have experience combining organizations. But even with such in-house expertise, your not-for-profit needs to involve professionals such as accountants and attorneys in the process.
If you’re charitably inclined and you collect art, appreciated artwork can make one of the best charitable gifts from a tax perspective. In general, donating appreciated property is doubly beneficial because you can both enjoy a valuable tax deduction and avoid the capital gains taxes you’d owe if you sold the property. The extra benefit from donating artwork comes from the fact that the top long-term capital gains rate for art and other “collectibles” is 28%, as opposed to 20% for most other appreciated property.
The first thing to keep in mind if you’re considering a donation of artwork is that you must itemize deductions to deduct charitable contributions. Now that the Tax Cuts and Jobs Act has nearly doubled the standard deduction and put tighter limits on many itemized deductions (but not the charitable deduction), many taxpayers who have itemized in the past will no longer benefit from itemizing.
For 2018, the standard deduction is $12,000 for singles, $18,000 for heads of households and $24,000 for married couples filing jointly. Your total itemized deductions must exceed the applicable standard deduction for you to enjoy a tax benefit from donating artwork.
Something else to be aware of is that most artwork donations require a “qualified appraisal” by a “qualified appraiser.” IRS rules contain detailed requirements about the qualifications an appraiser must possess and the contents of an appraisal.
IRS auditors are required to refer all gifts of art valued at $20,000 or more to the IRS Art Advisory Panel. The panel’s findings are the IRS’s official position on the art’s value, so it’s critical to provide a solid appraisal to support your valuation.
Finally, note that, if you own both the work of art and the copyright to the work, you must assign the copyright to the charity to qualify for a charitable deduction.
Maximizing Your Deduction
The charity you choose and how the charity will use the artwork can have a significant impact on your tax deduction. Donations of artwork to a public charity, such as a museum or university with public charity status, can entitle you to deduct the artwork’s full fair market value. If you donate art to a private foundation, however, your deduction will be limited to your cost.
For your donation to a public charity to qualify for a full fair-market-value deduction, the charity’s use of the donated artwork must be related to its tax-exempt purpose. If, for example, you donate a painting to a museum for display or to a university’s art history department for use in its research, you’ll satisfy the related-use rule. But if you donate it to, say, a children’s hospital to auction off at its annual fundraising gala, you won’t satisfy the rule.
Donating artwork is a great way to share enjoyment of the work with others. But to reap the maximum tax benefit, too, you must plan your gift carefully and follow all of the applicable rules.
Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Danielle Supkis Cheek, a director and one of our Certified Fraud Examiners. Danielle, welcome back to the Playbook.
Danielle: Thank you, Jen.
Jen: We’ve done a whole series on fraud, and I’ve heard people say, “Cash is king.” What can companies do to protect their cash?
Danielle: It’s actually… I won’t say “easy” but pretty cost-effective measures that can be put in place. Usually you have to work with your bank and see what treasury management your bank has, but honestly, requesting meeting with your treasury management department at your bank for your commercial banker and they will be able to go through a lot of the options. The biggest one I push is something about ACH protections.
What you need to initiate in ACH… Let’s use a personal example: you go to your online electric bill provider, and they say, “Do you want to pay by e-check?” because that’s cheaper than charging you for the 1-3% they try to charge you. And so, you put in your routing number and your account number – and what’s on every single check you’ve ever issued is your routing number and your account number – and so those checks are out there.
That means your account number is out there, and your routing number is out there. So, you need to protect an ACH, because those monies come out of your account; once they’re gone, they’re gone. Business bank accounts are different than individual bank accounts; individual bank accounts, usually, there’s some consumer protection. You call up, you say, “Hey, I’ve had fraud, and Bank, please give me my money back.”
Jen: And they say, “Oh, okay. Sure!”
Danielle: Okay, sure. Commercial accounts don’t work like that; the money is gone, the money is gone. You can call the police, and they can try to investigate; it crosses international, it crosses state borders – it’s gone.
How much are your volunteers worth? The not-for-profit advocacy group Independent Sector estimates the value of the average American volunteer at $24.69 an hour. Volunteers who perform specialized services may be even more valuable.
Whether your entire workforce is unpaid or you rely on a few volunteers to support a paid staff, you need to safeguard these assets. Here’s how:
1. Create a Professional Program
“Professionalizing” your volunteer program can give participants a sense of ownership and “job” satisfaction. New recruits should receive a formal orientation and participate in training sessions. Even if they’ll be contributing only a couple of hours a week or month, ask them to commit to at least a loose schedule. And as with paid staffers, volunteers should set annual performance goals. For example, a volunteer might decide to work a total of 100 hours annually or learn enough about your mission to be able to speak publicly on the subject.
If volunteers accomplish their goals, publicize the fact. And consider “promoting” those who’ve proved they’re capable of assuming greater responsibility. For example, award the job of volunteer coordinator to someone who has exhibited strong communication and organization skills.
2. Keep Them Engaged
A formal program won’t keep volunteers engaged if it doesn’t take advantage of their talents. What’s more, most them want to know that the work they do matters. So even if they must occasionally perform menial tasks such as cleaning out animal shelter cages, you can help them understand how every activity contributes to your charity’s success.
During the training process, inventory each volunteer’s experience, education, skills and interests and ask if there’s a particular project that attracts them. Don’t just assume that they want to use the skills they already have. Many people volunteer to learn something new.
3. Make it Fun
Most volunteers understand that you’ll put them to work. At the same time, they expect to enjoy coming in. So be careful not to make the same demands on volunteers that you would on employees. Also, try to be flexible when it comes to such issues as scheduling.
Because many volunteers are motivated by the opportunity to meet like-minded people, facilitate friendships. Newbies should be introduced to other volunteers and assigned to work alongside someone who knows the ropes. Also schedule on- and off-site social activities for them.
4. Remember to Say “Thank You”
No volunteer program can be successful without frequent and effusive “thank-yous.” Verbal appreciation will do, but consider holding a volunteer thank-you event.
Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you.
If a calendar-year C corporation that filed an automatic six-month extension:
File a 2017 income tax return (Form 1120) and pay any tax, interest and penalties due.
Make contributions for 2017 to certain employer-sponsored retirement plans.
Report income tax withholding and FICA taxes for third quarter 2018 (Form 941) and pay any tax due. (See exception below under “November 13.”)
Report income tax withholding and FICA taxes for third quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.
If a calendar-year C corporation, pay the fourth installment of 2018 estimated income taxes.
Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Danielle Supkis Cheek, a director and one of our Certified Fraud Examiners. Danielle, welcome back to the Playbook.
Danielle: Thanks for having me, Jen.
Jen: Certified Fraud Examiner – clearly handle fraud for our firm – what happens if a company has fraud?
Danielle: The first step if somebody in a company finds fraud is you really should follow your internal procedures on what to do about fraud if you have some. So, if you’re a rank and file employee or even at the higher levels, if you have a hotline, you should follow your procedures to report that to the hotline first. And actually having a hotline reduces the median loss for profit by about half so have a hotline.
After that it gets a little bit harder and more confusing of what do you do once you’re the person receiving the tips from the hotline or if there is no hotline. Assuming you’re in the position to be the head of the company or up there really the first call needs to be your attorney. It really needs to be your attorney. I realize I’m the CPA, but the first call really should be the attorney. Getting the attorney involved on the front end really can help prevent some missteps through the investigation process. The investigation process – you can accidentally do some illegal things as you investigate the fraud.
Jen: Yikes, okay.
Danielle: You could also put your company at more risk than you already were just being subject to the fraud by mishandling your investigation. You could also put in jeopardy the ability to prosecute or go after from a civil side your potential fraud situation if you don’t have an attorney helping guide you on the proper steps.
Jen: So at what point do the CPAs or the forensic accountants come in?
Danielle: After the lawyer. Usually it’s the lawyer that comes in first, assesses the situation, gives us a call or the client brings us in. We actually get a fair amount of calls directly from clients wanting to investigate the fraud right away without their attorney, and we usually try to push back and say get your attorney first. We’re gonna probably spend the most time because financial fraud… they think we need a CPA – and you do – but you also need a whole team together, because the CPA is just one piece of the team. There’s also computer forensics, private I’s; honestly corporate security sometimes gets involved. There are some really sensitive HR matters that you sometimes need even just an HR specialist that’s a consultant, and then of course that kind of pinpoint person of the attorney.
Jen: Now do you recommend – and it’s probably based on the attorney advice – that some of these people be in-house to the company and some of them be external, or do you recommend them all be external?
Danielle: I think it can depend on the situation. A lot of times if a company has really strong HR resources there’s no need to bring in another HR consultant. Sometimes a lot of companies have some very strong accounting resources and the fraud doesn’t necessarily occur within the – or the risk of fraud or the concern of fraud – doesn’t happen within a particular team, so that team may be able to help on the investigation. But if that’s the team that you’re concerned about, you may not want to use them. So, I think it really depends on the facts and circumstances of a particular situation.
Computer forensics, though, is one that’s usually always external to the company. Your IT team at your company may be the best of the best of the best, the problem with it is the evidence collection technique; you are usually not set up for that at a company, and you probably don’t have the right software and the right imaging devices to get that forensic quality image of the computer and be able to have that chain of evidence go through. So, computer forensics is probably the one that you almost always want to use an outside firm for.
Jen: Sounds good. Well, we’ll get you back to talk some more about fraud, because it’s a really interesting topic.
Danielle: Of course. I would love to.
Jen: Thank you. For more on 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.
As part of its Disclosure Effectiveness Initiative of the Division of Corporation Finance, the SEC, in Final Rulemaking Release No. 33-10532, Disclosure Update and Simplification, has adopted amendments to certain of its disclosure requirements that are redundant or outdated or that overlap with, or have been superseded by, other SEC disclosure requirements — disclosures required by United States generally accepted accounting principles (“U.S. GAAP”) or those required by International Financial Reporting Standards (“IFRS”). The objective of the amendments is to facilitate disclosure of information to investors and to simplify compliance without significantly altering the total mix of information provided.
The amendments are also in response to a provision of the Fixing America’s Surface Transportation Act (FAST Act), which mandates the SEC to eliminate provisions of Regulation S-K that are no longer deemed necessary.
“It is important to review our regulations to ensure that they evolve along with our capital markets and remain effective and efficient,” said SEC Chairman Jay Clayton. “Today’s amendments are an example of how thoughtful reviews can prompt changes for the benefit of investors, public companies, and our capital markets.”
Additionally, the SEC is referring to the Financial Accounting Standards Board (“FASB”) for potential incorporation into U.S. GAAP certain disclosure requirements that overlap with U.S. GAAP but that call for incremental information. For the time being, pending subsequent action by the FASB, such incremental disclosures are being retained. The SEC has requested, however, that, within the ensuing 18 months, the FASB determine whether (and which of) the referred disclosure items will be added to its standard-setting agenda. The SEC notes that the incorporation of any of its incremental disclosure requirements into U.S. GAAP could potentially affect all entities that prepare financial statements in accordance with U.S. GAAP, including Regulation A issuers, smaller reporting companies, and non-public entities.
Contrary to popular belief, it’s usually perfectly legal to compensate not-for-profit board members — and sometimes it might even be necessary. But is it right for your organization?
Pros and Cons Board member compensation comes with several pros and cons to consider. Your organization might, for example, find it worthwhile to offer compensation to attract individuals who:
Are prominent or bring highly specialized expertise.
Could receive generous compensation from for-profit organizations for serving on their boards.
Are expected to invest significant time and effort.
Represent diverse cultures, classes and ages.
Also, if your not-for-profit has a business model that competes with for-profit organizations, such as a not-for-profit hospital, board compensation may be appropriate. In general, providing compensation can improve board member performance and promote professionalism. It may incentivize meeting attendance and accountability.
But there are several drawbacks. First, it can look bad. Donors expect their funds to go to program services, and board compensation represents resources diverted from your organization’s mission. Further, there are legal and IRS implications. For example, in some states volunteer board members are protected from legal liability, while compensated members may not be.
Implementation Matters If you decide to compensate board members, make sure your arrangement complies with the Internal Revenue Code’s private inurement and excess benefit regulations, as well as the IRS rules about “reasonable compensation.” Failure to do so can result in excise taxes, penalties and even the loss of your tax-exempt status.
Independent directors, an independent governance or compensation committee, or an independent consultant should set the amount of, or formula for, board compensation. Whoever sets the amount should be guided by a formal compensation policy and make the amount comparable to that paid by similar not-for-profit.
Your policy should outline:
How compensating board members benefits your organization (for example, by allowing it to attract a member with financial expertise),
Which members are eligible for compensation (the chair, the officers or all members),
How compensation is structured (for instance, flat or per-meeting fee), and
Expectations for board members in exchange for compensation, such as meeting attendance, qualifications and experience.
Also document all compensation discussions, including your board’s formal vote approving the policy and the compensation amounts.
The Bottom Line Ultimately, the decision whether to pay your board members will come down to your not-for-profit’s culture, the expectations of donors and members, and similar factors. If you decide to move forward, discuss the matter with your attorney.