The CPA Desk

A Thought Leader Production by PKFTexas

How to Handle Mutual Funds with Care at Year End

Graham Brooks
By Graham Brooks on Posted in Tax and Accounting Desk

As we approach the end of 2018, it’s a good idea to review the mutual funds holdings in your taxable accounts and take steps to avoid potential tax traps. Here are some tips.

Avoid Surprise Capital Gains
Unlike with stocks, you can’t avoid capital gains on mutual funds simply by holding on to the shares. Near the end of the year, funds typically distribute all or most of their net realized capital gains to investors. If you hold mutual funds in taxable accounts, these gains will be taxable to you regardless of whether you receive them in cash or reinvest them in the fund.

For each fund, find out how large these distributions will be and get a breakdown of long-term vs. short-term gains. If the tax impact will be significant, consider strategies to offset the gain. For example, you could sell other investments at a loss.

Buyer Beware
Avoid buying into a mutual fund shortly before it distributes capital gains and dividends for the year. There’s a common misconception that investing in a mutual fund just before the ex-dividend date (the date by which you must own shares to qualify for a distribution) is like getting free money.

In reality, the value of your shares is immediately reduced by the amount of the distribution. So you’ll owe taxes on the gain without actually making a profit.

Seller Beware
If you plan to sell mutual fund shares that have appreciated in value, consider waiting until just after year end so you can defer the gain until 2019 — unless you expect to be subject to a higher rate next year. In that scenario, you’d likely be better off recognizing the gain and paying the tax this year.

When you do sell shares, keep in mind that, if you bought them over time, each block will have a different holding period and cost basis. To reduce your tax liability, it’s possible to select shares for sale that have higher cost bases and longer holding periods, thereby minimizing your gain (or maximizing your loss) and avoiding higher-taxed short-term gains.

Think Beyond Just Taxes
Investment decisions shouldn’t be driven by tax considerations alone. For example, you need to keep in mind your overall financial goals and your risk tolerance.

But taxes are still an important factor to consider.

Small Reporting Companies Get Expanded Definition

PKF Texas
By PKF Texas on Posted in PKF Texas - The Entrepreneur's Playbook®, Tax and Accounting Desk

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back with Ryan Istre, an Audit Director and a member of the PKF Texas SEC team. Ryan, welcome back to the Playbook.

Ryan: Thanks for having me, Jen.

Jen: So, I’ve heard that the SEC has made some amendments about the definition of a smaller reporting company. What do these companies need to know?

Ryan: The SEC is in process of expanding the definition of what a small reporting company is. The way a public company determines whether it’s a smaller reporting company is at June 30th of each year, it has to calculate its public float. Public float means how many common shares does the company have outstanding multiplied by the trading price of the shares on that date. Historically $75 million was the cutoff, so if a company’s public float was less than $75 million, it was considered a smaller reporting company. So, the changes that the SEC has made has increased the amount of public float to $250 million, so a lot more companies are going to fall under the definition of a smaller reporting company.

Jen: So, if they’re not actively traded, what if there’s no public float? How do they determine that?

Ryan: That’s a good question. The SEC has also included in the definition of a smaller company a smaller reporting company with no public float annual revenues less than $100 million.

Jen: Okay. Are there any benefits to this to smaller reporting companies?

Ryan: Definitely. In normal public company filings for accelerated filers, you have to include three years of historical financial statement – two years of balance sheets, three years of income statements. And in smaller reporting company rules, you only have to include two years of historical income statements. That doesn’t sound like a lot that they’re dropping off from the requirements, however, in each of the financial statement footnotes and all of the sections of the NDNA, for example, anything under 10 K, because of the amount of disclosures necessary for public companies, dropping off an entire year is actually…

Jen: That’s huge.

Ryan: Definitely, definitely. It’s a big help. The SEC staff actually assumed that about 960 filers will be able to benefit from these expanded rules of smaller reporting companies.

Jen: That’s great. We’ll get you back to talk about it a little bit more.

Ryan: Sure.

Jen: Thank you. For more about this topic, visit PKFTexas.com/SECdesk. This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

Fiscal Sponsorships – How They Work for Charities

Nicole Riley
By Nicole Riley on Posted in Tax and Accounting Desk

Fiscal sponsorships occur when an established charity provides a kind of legal and financial umbrella to a charitable project that lacks 501(c)(3) status. This type of arrangement can benefit both groups. But before agreeing to be a sponsor, be sure you understand how these arrangements work and the risks involved.

Mutually Beneficial
In a fiscal sponsorship, the 501(c)(3) sponsor is legally responsible for the charitable project. It acts as employer to the project’s paid workers and manages all of its funds. Donations and grants are made directly to the fiscal sponsor, thus qualifying their donors for a charitable deduction (if the donors itemize deductions and other applicable requirements are met).

It’s easy to see why small charitable projects seek fiscal sponsorships. Such relationships can provide much-needed infrastructure and fiscal management to a project. By making it possible to receive charitable donations, sponsorships can make more funds available. Plus, associating with an established charity can enhance the project’s credibility.

These arrangements benefit sponsors, too. A sponsorship can provide greater exposure for the 501(c)(3) organization, possibly resulting in new donors for established programs. When you choose a project that shares your mission and basic objectives, it can enhance your own program offerings with minimal monetary outlay. Although a sponsorship isn’t intended to be a source of income for the sponsor, nonprofits often charge a nominal fee to offset their overhead costs.

Prime Candidates
Projects that can best benefit from a fiscal sponsorship generally include those that are:

  • Too small to have staff or much infrastructure,
  • Temporary or periodic,
  • Waiting to secure 501(c)(3) status, but that want to operate sooner, or
  • Based outside the United States.

When you find a good candidate, make sure you thoroughly discuss each partner’s expectations and roles. Mutually agree on start and termination dates and decide which group will make decisions about what. Because nothing causes conflict like money issues, be sure to decide on the sponsorship charge (up to 10% is typical), how disbursements will be handled and who will handle audit and reporting requirements.

Both parties must understand the key responsibilities in the relationship. First and foremost, the fiscal sponsor is responsible because the project and its sponsoring nonprofit are legally one entity.

Consult Advisors
Keep in mind that any fiscal sponsorship involves some risk to your organization’s finances and reputation. So it’s important to discuss your plans with legal and financial advisors before entering into one of these arrangements.

Buying Business Assets Before Year End Can Reduce 2018 Tax Liability

Gary Voth
By Gary Voth on Posted in Tax and Accounting Desk

The Tax Cuts and Jobs Act (TCJA) has enhanced two depreciation-related breaks that are popular year-end tax planning tools for businesses. To take advantage of these breaks, you must purchase qualifying assets and place them in service by the end of the tax year. That means there’s still time to reduce your 2018 tax liability with these breaks, but you need to act soon.

Section 179 Expensing
Sec. 179 expensing is valuable because it allows businesses to deduct up to 100% of the cost of qualifying assets in Year 1 instead of depreciating the cost over a number of years. Sec. 179 expensing can be used for assets such as equipment, furniture and software. Beginning in 2018, the TCJA expanded the list of qualifying assets to include qualified improvement property, certain property used primarily to furnish lodging and the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems.

The maximum Sec. 179 deduction for 2018 is $1 million, up from $510,000 for 2017. The deduction begins to phase out dollar-for-dollar for 2018 when total asset acquisitions for the tax year exceed $2.5 million, up from $2.03 million for 2017.

100% Bonus Depreciation
For qualified assets that your business places in service in 2018, the TCJA allows you to claim 100% first-year bonus depreciation, compared to 50% in 2017. This break is available when buying computer systems, software, machinery, equipment and office furniture. The TCJA has expanded eligible assets to include used assets; previously, only new assets were eligible.

However, due to a TCJA drafting error, qualified improvement property will be eligible only if a technical correction is issued. Also be aware that, under the TCJA, certain businesses aren’t eligible for bonus depreciation in 2018, such as real estate businesses that elect to deduct 100% of their business interest and auto dealerships with floor plan financing (if the dealership has average annual gross receipts of more than $25 million for the three previous tax years).

Traditional, Powerful Strategy
Keep in mind that Sec. 179 expensing and bonus depreciation can also be used for business vehicles. So purchasing vehicles before year end could reduce your 2018 tax liability. But, depending on the type of vehicle, additional limits may apply.

Investing in business assets is a traditional and powerful year-end tax planning strategy, and it might make even more sense in 2018 because of the TCJA enhancements to Sec. 179 expensing and bonus depreciation.

The FASB Changes Public Companies Need to Know

PKF Texas
By PKF Texas on Posted in PKF Texas - The Entrepreneur's Playbook®, Tax and Accounting Desk

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m here today with Ryan Istre, an audit director and a member of the PKF Texas SEC team. Ryan, welcome back to the Playbook.

Ryan: Thanks, Jen. Appreciate it.

Jen: So, I’ve heard FASB is making some changes to share-based payment accounting. What do public companies need to know about this?

Ryan: Changes to the share-based payment accounting is happening pretty soon. A lot of companies will issue share-based payments to some of their employees, sometimes they’ll issue it to some of their consultants, and in the past, the accounting for those two may differ significantly.

Jen: It seems like that would be a little bit confusing to companies.

Ryan: It could be. The FASB issued this new standard to try to simplify the problem of divergent accounting. Now, one of the items, for example, that’s going to change with the new rules is that the point in time when you have to measure and the amount that you have to measure the compensation at, was different if it was a non-employee versus an employee. And historically it was at the commitment date, and now it’s going to be at the grant date of the actual share-based payment, so that’s going to bring the two in line and make it a little bit simpler for companies to apply.

Jen: Sounds good. Now when is this actually going to be effective?

Ryan: For most public companies, it’s going to be effective starting January 1, 2019, but an earlier option is permitted.

Jen: And what do they need to do to get ready for that?

Ryan: They just need to assess how much share-based payments they issue to non-employees and determine whether it benefits them to early adopt or to wait until the normal adoption date.

Jen: Perfect, sounds good. Well, we’ll get you back to talk about some public company information.

Ryan: Sure.

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

Tips: Make Your Not-for-Profit’s Accounting More Efficient

Byron Hebert
By Byron Hebert on Posted in Tax and Accounting Desk

How efficient is your not-for-profit? Even tightly run organizations can use some improvement — particularly in the accounting area. Adopting the following six tips can help improve timeliness and accuracy.

  1. Set cutoff policies. Create policies for the monthly cutoff of invoicing and recording expenses — and adhere to them. For example, require all invoices to be submitted to the accounting department by the end of each month. Too many adjustments — or waiting for different employees or departments to turn in invoices and expense reports — waste time and can delay the production of financial statements.
  2. Reconcile accounts monthly. You may be able to save considerable time at the end of the year by reconciling your bank accounts shortly after the end of each month. It’s easier to correct errors when you catch them early. Also reconcile accounts payable and accounts receivable data to your statements of financial position.
  3. Batch items to process. Don’t enter only one invoice or cut only one check at a time. Set aside a block of time to do the job when you have multiple items to process. Some organizations process payments only once or twice a month. If you make your schedule available to everyone, fewer “emergency” checks and deposits will surface.
  4. Insist on oversight. Make sure that the individual or group that’s responsible for financial oversight (for example, your CFO, treasurer or finance committee) reviews monthly bank statements, financial statements and accounting entries for obvious errors or unexpected amounts. The value of such reviews increases when they’re performed right after each monthly reporting period ends.
  5. Exploit your software’s potential. Many organizations underuse the accounting software package they’ve purchased because they haven’t learned its full functionality. If needed, hire a trainer to review the software’s basic functions with staff and teach time-saving shortcuts.
  6. Review your processes. Accounting systems can become inefficient over time if they aren’t monitored. Look for labor-intensive steps that could be automated or steps that don’t add value and could be eliminated. Often, for example, steps are duplicated by two different employees or the process is slowed down by “handing off” part of a project.

The (Double) Tax Benefits of Donating Appreciated Stock

Jim Streets
By Jim Streets on Posted in Tax and Accounting Desk

A tried-and-true year end tax strategy is to make charitable donations. As long as you itemize and your gift qualifies, you can claim a charitable deduction. But did you know that you can enjoy an additional tax benefit if you donate long-term appreciated stock instead of cash?

2 Benefits From 1 Gift
Appreciated publicly traded stock you’ve held more than one year is long-term capital gains property. If you donate it to a qualified charity, you may be able to enjoy two tax benefits:

  1. If you itemize deductions, you can claim a charitable deduction equal to the stock’s fair market value, and
  2. You can avoid the capital gains tax you’d pay if you sold the stock.

Donating appreciated stock can be especially beneficial to taxpayers facing the 3.8% net investment income tax (NIIT) or the top 20% long-term capital gains rate this year.

Stock vs. Cash
Let’s say you donate $10,000 of stock that you paid $3,000 for, your ordinary-income tax rate is 37% and your long-term capital gains rate is 20%. Let’s also say you itemize deductions.

If you sold the stock, you’d pay $1,400 in tax on the $7,000 gain. If you were also subject to the 3.8% NIIT, you’d pay another $266 in NIIT.

By instead donating the stock to charity, you save $5,366 in federal tax ($1,666 in capital gains tax and NIIT plus $3,700 from the $10,000 income tax deduction). If you donated $10,000 in cash, your federal tax savings would be only $3,700.

Watch Your Step
First, remember that the Tax Cuts and Jobs Act nearly doubled the standard deduction, to $12,000 for singles and married couples filing separately, $18,000 for heads of households, and $24,000 for married couples filing jointly. The charitable deduction will provide a tax benefit only if your total itemized deductions exceed your standard deduction. Because the standard deduction is so much higher, even if you’ve itemized deductions in the past, you might not benefit from doing so for 2018.

Second, beware that donations of long-term capital gains property are subject to tighter deduction limits — 30% of your adjusted gross income for gifts to public charities, 20% for gifts to nonoperating private foundations (compared to 60% and 30%, respectively, for cash donations).

Finally, don’t donate stock that’s worth less than your basis. Instead, sell the stock so you can deduct the loss and then donate the cash proceeds to charity.

Minimizing Tax and Maximizing Deductions
For charitably inclined taxpayers who own appreciated stock and who’ll have enough itemized deductions to benefit from itemizing on their 2018 tax returns, donating the stock to charity can be an excellent year-end tax planning strategy. This is especially true if the stock is highly appreciated and you’d like to sell it but are worried about the tax liability.

How Charity Watchdogs Impact Not-For-Profit Organizations

PKF Texas
By PKF Texas on Posted in PKF Texas - The Entrepreneur's Playbook®

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back once again with Annjeanette Yglesias, one of our tax managers and a member of our not-for-profit team. Annjeanette, welcome back to the Playbook.

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

Jen: So, we’ve talked before about the Donor Bill of Rights and how it really wasn’t a legal thing for nonprofits to follow, but I know there’s organizations out there that are considered “watchdogs.” Can you tell us a little bit about some charity watchdogs?

Annjeanette: Charity watchdog organizations are out there, and they’re basically on the Internet and such. And they’re out there to provide donors information. A lot of nonprofit organizations have tax filings and financial information that’s already made available to the public, and these watchdog organizations basically make that information available in one spot for donors to look at.

Jen: So, kind of like a search engine for charities?

Annjeanette: Basically yes.

Jen: What are the main charity watchdogs that people typically go to?

Annjeanette: There’s three that come to mind. So, first of all, there is Charity Navigator, and Charity Navigator is pretty popular. They basically collect tax returns, copy of tax returns and financial information, as well as annual reports that nonprofit organizations might have on their websites. And what they do is they take that information, analyze it and provide a star rating. So, they have a star rating system, and they have a formula that goes behind their star rating system.

And then there’s Charity Watch; Charity Watch is very similar. They get financial information, tax return information that’s already out there to the public collected, and they have their own method of rating organizations and they provide a letter rating A through F.

And then there’s GuideStar; GuideStar doesn’t necessarily analyze a nonprofit organization’s performance. What they do is they’re just a repository for information: the tax returns, financial reports, annual reports, things like that. But what they do have is a seal of transparency rating that they provide each organization based on how much information the organization itself voluntarily provides to customers.

Jen: So, you’ll want to kind of maybe look at all three but then also do your own due diligence as just part of when you’re making a decision whether or not to contribute to a not-for-profit.

Annjeanette: That’s correct. The important thing for nonprofit organizations to know is that these watchdog organizations are out there, and so, it’s important for the nonprofits to understand what they’re looking at, what the grading methodology is and what the donors are seeing from that aspect of it. That way when they field questions from potential donors, potential supporters they’re aware of what’s out there, and they can respond appropriately.

Jen: Well, that’s good to know. Perfect, we’ll get you back to talk a little bit more.

Annjeanette: Sounds good.

Jen: To learn more about how PKF Texas can help your not-for-profit organization, visit PKFTexas.com/notforprofit. This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

Has Your Not-for-Profit Successfully Transitioned from Overhead to Impact?

Annjeanette Yglesias
By Annjeanette Yglesias on Posted in Tax and Accounting Desk

In the not-so-distant past, charity watchdog groups such as GuideStar, Charity Navigator and the Better Business Bureau’s Wise Giving Alliance were notorious for giving overhead ratios significant weightings in their rankings of not-for-profits. While such a practice can help potential donors weed out spendthrift organizations, it also tends to unfairly penalize not-for-profits making reasonable expenditures for current needs and strategic investments for the future.

In recent years, not-for-profits have been urged to put more focus on transparency, governance, leadership and results. For many not-for-profits, funders and watchdog groups, “impact” is now the primary measure of an organization’s effectiveness. If it hasn’t already, your not-for-profit needs to ensure that it has made the necessary cultural changes and communicated the importance of impact to its supporters.

Possible Challenges
“Impact” generally is defined as the long-term or indirect effects of measurable outcomes (such as the number or percentage of individuals served). It typically refers to broader societal change and can be much less predictable than outcomes.

Hopefully, most of your donors may now use such impact-based yardsticks as “What difference does this organization make in our community?” But. while such a shift of perspective is good news, it may mean that your not-for-profit needs to make some cultural changes — including at the board level. For example, you might have to convince your board that spending more on such items as executive salaries and marketing programs will produce better outcomes and broader reach over time.

Communicating with Stakeholders
Although there’s no proven relationship between overhead and a not-for-profit’s effectiveness, some donors, funders and members of the public continue to use not-for-profit expense ratios to compare organizations. Communicating the value of impact can be challenging.

One practical solution is to revise such publications as your annual report. Compliance with Generally Accepted Accounting Principles requires not-for-profits to report costs in one of three functional categories — program services, general and administrative, and fundraising. But there’s no reason why you can’t provide supplemental financial statements or break out administrative items to tell how they were used to enhance programs and ultimately affect lives.

Advice for Change
If you’re unsure about how much your not-for-profit should spend on overhead and how it can best deploy resources for meaningful impact, contact your accountants. Times are changing — for the better — and your organization needs to change with them.

Can You Save Taxes from “Bunching” Medical Expenses into 2018?

Renee Kroesch
By Renee Kroesch on Posted in Tax and Accounting Desk

Some of your medical expenses may be tax deductible, but only if you itemize deductions and have enough expenses to exceed the applicable floor for deductibility. With proper planning, you may be able to time controllable medical expenses to your tax advantage. The Tax Cuts and Jobs Act (TCJA) could make bunching such expenses into 2018 beneficial for some taxpayers. At the same time, certain taxpayers who’ve benefited from the deduction in previous years might no longer benefit, because of the TCJA’s increase to the standard deduction.

The Changes
Various limits apply to most tax deductions, and one type of limit is a “floor,” which means expenses are deductible only to the extent that they exceed that floor (typically a specific percentage of your income). One example is the medical expense deduction.

Because it can be difficult to exceed the floor, a common strategy is to “bunch” deductible medical expenses into a particular year where possible. The TCJA reduced the floor for the medical expense deduction for 2017 and 2018 from 10% to 7.5%. So, it might be beneficial to bunch deductible medical expenses into 2018.

Medical expenses that aren’t reimbursable by insurance or paid through a tax-advantaged account (such as a Health Savings Account or Flexible Spending Account) may be deductible.

However, if your total itemized deductions won’t exceed your standard deduction, bunching medical expenses into 2018 won’t save tax. The TCJA nearly doubled the standard deduction. For 2018, it’s $12,000 for singles and married couples filing separately, $18,000 for heads of households, and $24,000 for married couples filing jointly.

If your total itemized deductions for 2018 will exceed your standard deduction, bunching nonurgent medical procedures and other controllable expenses into 2018 may allow you to exceed the applicable floor and benefit from the medical expense deduction. Controllable expenses might include prescription drugs, eyeglasses and contact lenses, hearing aids, dental work, and elective surgery.

Planning for Uncertainty
Keep in mind that legislation could be signed into law that extends the 7.5% threshold for 2019 and even beyond.