The CPA Desk

A Thought Leader Production by PKFTexas

Section 83(b) Election May Save You Taxes on Restricted Stock Awards

Today many employees receive stock-based compensation from their employer as part of their compensation and benefits package. The tax consequences of such compensation can be complex — subject to ordinary-income, capital gains, employment and other taxes. But if you receive restricted stock awards, you might have a tax-saving opportunity in the form of the Section 83(b) election.

Convert Ordinary Income to Long-term Capital Gains
Restricted stock is stock your employer grants you subject to a substantial risk of forfeiture. Income recognition is normally deferred until the stock is no longer subject to that risk (that is, it’s vested) or you sell it.

At that time, you pay taxes on the stock’s fair market value (FMV) at your ordinary-income rate. The FMV will be considered FICA income, so it also could trigger or increase your exposure to the additional 0.9% Medicare tax.

But you can instead make a Section 83(b) election to recognize ordinary income when you receive the stock. This election, which you must make within 30 days after receiving the stock, allows you to convert future appreciation from ordinary income to long-term capital gains income and defer it until the stock is sold.

The Section 83(b) election can be beneficial if the income at the grant date is negligible or the stock is likely to appreciate significantly. With ordinary-income rates now especially low under the Tax Cuts and Jobs Act (TCJA), it might be a good time to recognize such income.

Weigh the Potential Disadvantages
There are some potential disadvantages, however:

  • You must prepay tax in the current year — which also could push you into a higher income tax bracket or trigger or increase the additional 0.9% Medicare tax. But if your company is in the earlier stages of development, the income recognized may be relatively small.
  • Any taxes you pay because of the election can’t be refunded if you eventually forfeit the stock or sell it at a decreased value. However, you’d have a capital loss in those situations.
  • When you sell the shares, any gain will be included in net investment income and could trigger or increase your liability for the 3.8% net investment income tax.

It’s Complicated
As you can see, tax planning for restricted stock is complicated. Let us know if you’ve recently been awarded restricted stock or expect to be awarded such stock this year. We can help you determine whether the Section 83(b) election makes sense in your specific situation.

Working Audits with Joint Venture Strategic Advisors

Russ:  This is the PKF Texas Entrepreneur’s Playbook.  I’m Russ Capper, this week’s guest host, and I’m here once again with Kirsten Strieck, a shareholder and Director of Operations and Client Services at Joint Venture Strategic Advisors.  Welcome back to the Playbook, Kirsten.

Kirsten:  Thanks, Russ.

Russ:  You bet.  I assume in this joint venture advisory work that you guys do that there has to be an audit involved somewhere.

Kirsten:  We do many types of audits.  We do operating and capital expense audits, which are related to the joint operating agreement.  We do production revenue royalty audits.  We provide measurement audits, vendor audits, payout statement audits, final statement of adjustment audits and many more.

Russ:  So in every one of the assessments that you do, do you do all of those audits or is it kind of customized by the arrangement?

Kirsten:  It’s very customized to whatever the client’s looking at auditing, or we can go in and we can suggest an audit plan for them.

Russ:  Okay, very interesting, thanks a lot.

Kirsten:  Thank you.

Russ:  You bet.  For more about JVSA, visit JVSA.com.  This has been another Thought Leader production brought to you by PKF Texas Entrepreneur’s Playbook.

Financial sustainability and your nonprofit

If your not-for-profit relies heavily on a few funding sources — for example, an annual government or foundation grant — what happens if you suddenly lose that support? The risk may be compounded if you generally spend every penny that comes in the door and fail to build adequate reserves. Bottom line: If your nonprofit hopes to serve its community many years into the future, you need to think about financial sustainability now.

Information, please

No organization can accurately evaluate its sustainability without timely, comprehensive and accurate financial reporting. In addition to providing a current picture of your standing, financial reports should compare actual figures with historical and projected numbers. Some nonprofits use “dashboards” that give real-time financial data, ratios and trends in easily understood graphic form.

It’s not enough for the board to review financial statements. Board members must provide true fiscal oversight and not leave major financial decisions to staff, no matter how trusted and loyal. The finance committee should report regularly to the full board and engage in dialogue about their reports and the organization’s financial health. Most importantly, your board shouldn’t merely take a backward-looking view but should also consider the future — for example, how current trends and developments might affect future plans for funding your nonprofit’s mission.

Lower costs, more revenue

Holding expenses down and continually searching for new revenue sources are critical to long-term financial sustainability. Many nonprofits forge formal partnerships with other organizations to share costs. Look into partnering with organizations that share your missions and serve similar populations. Such collaboration may enable you to make better use of limited resources while reducing competition for funding. By joining forces, you can more quickly scale up high-demand programs or services.

If you’re seeking new revenue ideas, consider expanding fee-based service offerings to new locations or populations. For example, an organization that provides services to children with disabilities in schools also could offer the services to children with disabilities in foster homes.

Funds in reserve

Finally, maintaining adequate reserves is a key component of financial sustainability. If you don’t have a reserve fund — or have one but no formal policy for determining the appropriate amount, maintaining it and allocating funds when necessary — make developing such a policy a priority. Contact us for help.

TCJA Rule Change Affects Deducting Pass-Through Business Losses

It’s not uncommon for businesses to sometimes generate tax losses. But the losses that can be deducted are limited by tax law in some situations. The Tax Cuts and Jobs Act (TCJA) further restricts the amount of losses that sole proprietors, partners, S corporation shareholders and, typically, limited liability company (LLC) members can currently deduct — beginning in 2018. This could negatively impact owners of start-ups and businesses facing adverse conditions.

Before the TCJA
Under pre-TCJA law, an individual taxpayer’s business losses could usually be fully deducted in the tax year when they arose unless:

  • The passive activity loss (PAL) rules or some other provision of tax law limited that favorable outcome, or
  • The business loss was so large that it exceeded taxable income from other sources, creating a net operating loss (NOL).

After the TCJA
The TCJA temporarily changes the rules for deducting an individual taxpayer’s business losses. If your pass-through business generates a tax loss for a tax year beginning in 2018 through 2025, you can’t deduct an “excess business loss” in the current year. An excess business loss is the excess of your aggregate business deductions for the tax year over the sum of:

  • Your aggregate business income and gains for the tax year, and
  • $250,000 ($500,000 if you’re a married taxpayer filing jointly).

The excess business loss is carried over to the following tax year and can be deducted under the rules for NOLs.

For business losses passed through to individuals from S corporations, partnerships and LLCs treated as partnerships for tax purposes, the new excess business loss limitation rules apply at the owner level. In other words, each owner’s allocable share of business income, gain, deduction or loss is passed through to the owner and reported on the owner’s personal federal income tax return for the owner’s tax year that includes the end of the entity’s tax year.

Keep in mind that the new loss limitation rules apply after applying the PAL rules. So, if the PAL rules disallow your business or rental activity loss, you don’t get to the new loss limitation rules.

Expecting a business loss?
The rationale underlying the new loss limitation rules is to restrict the ability of individual taxpayers to use current-year business losses to offset income from other sources, such as salary, self-employment income, interest, dividends and capital gains.

The practical impact is that your allowable current-year business losses can’t offset more than $250,000 of income from such other sources (or more than $500,000 for joint filers). The requirement that excess business losses be carried forward as an NOL forces you to wait at least one year to get any tax benefit from those excess losses.

If you’re expecting your business to generate a tax loss in 2018, contact us to determine whether you’ll be affected by the new loss limitation rules. We can also provide more information about the PAL and NOL rules.

How the Greater Houston Community Foundation Makes Charity Dollars Productive

Russ:  This is PKF Texas Entrepreneur’s Playbook.  I’m Russ Capper, this week’s guest host, and I’m coming to you from the Gulf Coast Regional Family Forum, and my guest is Renée Wizig-Barrios, Senior Vice President and Chief Philanthropy Officer of the Greater Houston Community Foundation.  Renée, welcome to the show.

Renée:  Thank you, Russ. Good to be here.

Russ:  You bet.  So tell us about the Greater Houston Community Foundation.

Renée:  Well the Greater Houston Community Foundation is a public charity, and we work with high net-worth individuals, families, businesses and foundations to help them make the most of their philanthropy.  We have been around Houston for more than 21 years as a non-profit, and we have the joy of working with people to make Houston a more vibrant place through really generous acts of philanthropy.

Continue Reading

Get Ahead in the Cloud

“Darn. I need that document, but I’m not at the office.”

That’s a phrase that is slowly phasing out.

cloud-based accounting

Over the years, the cloud has been on the rise with many people, as well as companies, making the transition to store physical content digitally. In addition to efforts of going paperless, the main appeal of cloud-based software is accessibility any- and everywhere.

Continue Reading

Does Your Not-For-Profit Comply with Procurement Procedures?

The relatively new federal procurement standards significantly alter the way not-for-profit organizations receiving federal funding handle purchasing. And while your organization may have changed its written policies to comply with the revised standards, it may be easier to follow the rules on paper than in practice.

not-for-profit procurement procedures

Summing Up the Standards
The standards, “Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards,” impose strict requirements on not-for-profits receiving federal funds. For example, you must pay attention to the amount of a purchase because it determines the procurement methods you need employ.

“Micro-purchases” of supplies or services up to $3,500 generally can be awarded without soliciting competitive quotes. “Small purchases” of services, supplies or other property that don’t cost more than $150,000 require price or rate quotes from several qualified sources.

For purchases exceeding $150,000, you must select vendors or suppliers based on publicly solicited sealed bids or competitive proposals. Select the lowest bid or the proposal most advantageous to the relevant program based on price and other factors that impact the program performance. Also perform a cost or price analysis for every purchase over $150,000, to make independent estimates before receiving bids or proposals.

Noncompetitive proposals solicited from a single source are permissible in only limited circumstances. For example, they’re allowed in the event of a public emergency where the not-for-profit must respond immediately.

Clearing Documentation Hurdles
You should already be following the revised standards, which went into effect in fiscal year 2017. However, some not-for-profits have found it challenging. Significant barriers to full compliance include culture shock and staff resistance. Also, these standards have multiple documentation requirements that few organizations previously met:

  • All procurement procedures must be documented in writing.
  • Conflict of interest policies covering employees involved in procurement as well as all entities owned by or considered “related” to your organization need to be included.
  • You must keep records detailing each procurement — including bids solicited, selection criteria, quotes from vendors and the final contract price.

Designing a checklist that outlines the decisions needed at each price level will make the process more manageable, as will keeping the required documentation.

Reduce the Risk
Failure to comply with procurement standards could result in your not-for-profit’s loss of federal funding. You can reduce that risk, though, by auditing your new procedures and processes to confirm that they’re getting the job done. Contact us for assistance.

Consider These Tax Consequences Before Selling Your Home

In many parts of the country, summer is peak season for selling a home. If you’re planning to put your home on the market soon, you’re probably thinking about things like how quickly it will sell and how much you’ll get for it. But don’t neglect to consider the tax consequences.

Home Sale Gain Exclusion
The U.S. House of Representatives’ original version of the Tax Cuts and Jobs Act included a provision tightening the rules for the home sale gain exclusion. Fortunately, that provision didn’t make it into the final version that was signed into law.

As a result, if you’re selling your principal residence, there’s still a good chance you’ll be able to exclude up to $250,000 ($500,000 for joint filers) of gain. Gain that qualifies for exclusion also is excluded from the 3.8% net investment income tax.

To qualify for the exclusion, you must meet certain tests. For example, you generally must own and use the home as your principal residence for at least two years during the five-year period preceding the sale. (Gain allocable to a period of “nonqualified” use generally isn’t excludable.) In addition, you can’t use the exclusion more than once every two years.

More Tax Considerations
Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, as long as you owned the home for at least a year. If you didn’t, the gain will be considered short-term and subject to your ordinary-income rate, which could be more than double your long-term rate.

Here are some additional tax considerations when selling a home:

Tax basis. To support an accurate tax basis, be sure to maintain thorough records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use.

Losses. A loss on the sale of your principal residence generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.

Second homes. If you’re selling a second home, be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.

A Big Investment
Your home is likely one of your biggest investments, so it’s important to consider the tax consequences before selling it. If you’re planning to put your home on the market, we can help you assess the potential tax impact. Contact us to learn more.

Tax and Accounting Tips for Startups

Jen:  This is the PKF Texas Entrepreneur’s Playbook.  I’m Jen Lemanski, this week’s host, and I’m here today with Danielle Supkis Cheek, a director on our Entrepreneurial Advisory Services Team.  Welcome back to the Playbook, Danielle.

Danielle:  Thank you.

Jen:  So our Entrepreneurial Advisory Services Team tends to work with startups quite a bit, and I know you’ve got a lot of – your background is in the startup space – what’s your advice for them to get their accounting started off [on] the right foot for bankers, financials, all that kind of stuff?

Danielle:  That’s a big area.

Jen:  It is.

Danielle:  For either pre-revenues or startup companies and those with not a lot of operation experience, it can be a really overwhelming task in the first place.  Usually you need to start with some kind of model, because you don’t actually have any revenues or any transactions to actually account for, and then it all the way moves to once they start having transactions and the accounting.  So in the more pre-idea stage on that modeling aspect my biggest piece of advice is really to think through every single step of your day, and make sure every single step of that day – once you’re in your future operations – is accounted for somehow in your model.  So if you’re showing up to an office, there should be rent on your books somewhere or in your model.

Continue Reading

Determine if Your Not-For-Profit Income is Sponsorship or Advertising

Many not-for-profit organizations supplement their usual income-producing activities with sponsorships or advertising programs. Although you’re allowed to receive such payments, they’re subject to unrelated business income tax (UBIT) unless the activities are substantially related to your organization’s tax-exempt purpose or qualify for another exemption. So it’s important to understand the possible tax implications of income from sponsorships and advertising.

What is sponsorship?
Qualified sponsorship payments are made by a person (a sponsor) engaged in a trade or business with no arrangement to receive, or expectation of receiving, any substantial benefit from the not-for-profit in return for the payment. Sponsorship dollars aren’t taxed. The IRS allows exempt organizations to use information that’s an established part of a sponsor’s identity, such as logos, slogans, locations, telephone numbers and URLs.

There are some exceptions.

For example, if the payment amount is contingent upon the level of attendance at an event, broadcast ratings or other factors indicating the quantity of public exposure received, the IRS doesn’t consider it a sponsorship.

Providing facilities, services or other privileges to a sponsor — such as complimentary tickets or admission to golf tournaments — doesn’t automatically disallow a payment from being a qualified sponsorship payment. Generally, if the privileges provided aren’t what the IRS considers a “substantial benefit” or if providing them is a related business activity, the payments won’t be subject to UBIT. But when services or privileges provided by an exempt organization to a sponsor are deemed to be substantial, part or all of the sponsorship payment may be taxable.

What is advertising?
Payment for advertising a sponsor’s products or services is considered unrelated business income, so it’s subject to tax. According to the IRS, advertising includes:

  • Messages containing qualitative or comparative language, price information or other indications of value,
  • Endorsements, and
  • Inducements to buy, sell or use products or services.

Activities often are mis-classified as advertising. Using logos or slogans that are an established part of a sponsor’s identity is not, by itself, advertising. And if your not-for-profit distributes or displays a sponsor’s product at an event, whether for free or remuneration, it’s considered use or acknowledgment, not advertising.

Complex Rules
The rules pertaining to qualified sponsorships, advertising and unrelated business income are complex and contain numerous exceptions and situation-specific determinations. Contact us with questions.