The CPA Desk

A Thought Leader Production by PKFTexas

How Tax Reform Affects Pass-Through Entities

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: We spent some time talking about tax reform and how it impacts international corporations and individuals, but what about entrepreneurs and middle market groups using pass-through entities? Is there anything they should be focusing on?

Frank: That’s a good question, because before, while we were focusing on the tax law themselves, what’s interesting is that the tax law treats different tax payers differently. So, for example, as we talked in previous segments, the new tax law severely favors corporate tax payers. Not so much for those who are doing business through entities such as partnerships, S corporations, which really kind of represents most of the entrepreneurs out there.

One of the things that’s top of mind because of the new proposed regs that came out earlier is the new toll tax; for example, how is it computed and so forth. So, things to keep in mind are that the toll tax inclusion amount is determined at the entity level, and so an entrepreneur would get several different K1s from different entities with the inclusion amount and so forth. But it’s up to the individual owner to make certain tax selections, to report the amount; all those kinds of things which are very timely because all of this has to be done by October 15th.

Jen: So, does the individual need to know anything about the toll tax, or is it really for those entrepreneurs?

Frank: Really the entrepreneurs, but the entrepreneurs as tax payers are the individual and the pass-through entities are the entities they do business from, but all of these different things have to be done at the owner level, at the individual level.

Jen: It sounds like they’ll need to give you a call to help them with some of their structuring then.

Frank: Definitely.

Jen: Perfect. We’ll get you back to talk about that.

Frank: All right. Thank you.

Jen: Thanks. 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.

Using Insurance for Not-For-Profit Risk Management

Insurance is the cornerstone of any not-for-profit’s comprehensive risk management plan. It can’t protect your organization from every contingency, but it’s critical to protecting the people, property, funds and support you depend on.

Must-Have Policies
Many kinds of coverage are available, but it’s unlikely your organization needs all of them. One type you do need is a general liability policy for accidents and injuries suffered on your property by clients, volunteers, suppliers, visitors and anyone other than employees. Your state also likely mandates unemployment insurance as well as workers’ compensation coverage.

Property insurance that covers theft and damage to your buildings, furniture, fixtures, supplies and other physical assets is essential, too. When buying a property insurance policy, make sure it covers the replacement cost of assets, rather than their current market value (which is likely to be much lower).

Optional Coverage
Depending on your not-for-profit’s operations and assets, consider such optional policies as:

  • Automobile,
  • Product liability,
  • Fraud/employee dishonesty,
  • Business interruption,
  • Umbrella coverage, and
  • Directors and officers liability.

Insurance also is available to cover risks associated with special events. Before purchasing a separate policy, however, check whether your not-for-profit’s general liability insurance extends to special events.

Setting Priorities
Because you’re likely to be working with a limited budget, prioritize the risks that pose the greatest threats and discuss with your advisors the kinds — and amounts — of coverage that will mitigate them. But don’t assume this will address your not-for-profit’s exposure. Your objective should be to never actually need the benefits. To that end, put in place internal controls and other risk-avoidance policies.

Establish policies that stipulate proper oversight of accounting functions by executives and board members and provide for the security of physical assets and safety of employees and nonemployees. In addition, your insurance agent can help determine the amount of coverage that’s appropriate given the size and scope of your organization.

Investment Tax Planning Just Got More Complex…

For investors, fall is a good time to review year-to-date gains and losses. Not only can it help you assess your financial health, but it also can help you determine whether to buy or sell an investment before year end to save taxes. This year, you also need to keep in mind the impact of the Tax Cuts and Jobs Act (TCJA). While the TCJA didn’t change long-term capital gains rates, it did change the tax brackets for long-term capital gains and qualified dividends.

For 2018 through 2025, these brackets are no longer linked to the ordinary-income tax brackets for individuals. So, for example, you could be subject to the top long-term capital gains rate even if you aren’t subject to the top ordinary-income tax rate.

Old Rules
For the last several years, individual taxpayers faced three federal income tax rates on long-term capital gains and qualified dividends: 0%, 15% and 20%. The rate brackets were tied to the ordinary-income rate brackets.

Specifically, if the long-term capital gains and/or dividends fell within the 10% or 15% ordinary-income brackets, no federal income tax was owed. If they fell within the 25%, 28%, 33% or 35% ordinary-income brackets, they were taxed at 15%. And, if they fell within the maximum 39.6% ordinary-income bracket, they were taxed at the maximum 20% rate.

In addition, higher-income individuals with long-term capital gains and dividends were also hit with the 3.8% net investment income tax (NIIT). It kicked in when modified adjusted gross income exceeded $200,000 for singles and heads of households and $250,000 for married couples filing jointly. So, many people actually paid 18.8% (15% + 3.8%) or 23.8% (20% + 3.8%) on their long-term capital gains and qualified dividends.

New Rules
The TCJA retains the 0%, 15% and 20% rates on long-term capital gains and qualified dividends for individual taxpayers. However, for 2018 through 2025, these rates have their own brackets. Here are the 2018 brackets:

  • Singles:
    • 0%: $0 – $38,600
    • 15%: $38,601 – $425,800
    • 20%: $425,801 and up
  • Heads of households:
    • 0%: $0 – $51,700
    • 15%: $51,701 – $452,400
    • 20%: $452,401 and up
  • Married couples filing jointly:
    • 0%: $0 – $77,200
    • 15%: $77,201 – $479,000
    • 20%: $479,001 and up

For 2018, the top ordinary-income rate of 37%, which also applies to short-term capital gains and non-qualified dividends, doesn’t go into effect until income exceeds $500,000 for singles and heads of households or $600,000 for joint filers. (Both the long-term capital gains brackets and the ordinary-income brackets will be indexed for inflation for 2019 through 2025.) The new tax law also retains the 3.8% NIIT and its $200,000 and $250,000 thresholds.

More Thresholds, More Complexity
With more tax rate thresholds to keep in mind, year-end tax planning for your investment is especially complicated in 2018.

Working with Attorneys and CPAs for Fraud Cases – What to Know

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

Danielle: Good to see you again, Jen.

Jen: So as a CFE I know you work with attorneys on the fraud investigations. Now, attorneys have attorney/client privilege; does that extend to your work with their clients?

Danielle: In certain circumstances it can. CPAs traditionally – as rank in file CPAs – we have confidentiality with our clients, which means I can’t go blabbing your business out and about anywhere I want to. But I can be compelled to testify with a judge-signed court order.

In short, we’ll keep this simple. The difference is… privilege is a higher level. Attorney/client privilege that’s not an Attorney CPA client privilege, but there are certain circumstances where that attorney/client privilege can pass down to the CPA if the attorney manages the engagement correctly and puts proper procedures in place.

And what the benefit of that really is is if you’re doing a corporate investigation and you don’t necessarily know what you don’t know yet, and you have potential brand risk on the line, a lot of times you’ll want those investigations under privilege until you determine what to do or what is the result of those investigations. So many times we’ll be asked to work under privilege running through the attorney. Clients can wave the privilege if they want to; we’ve had ones where entities want to self-report a particular situation. Disclosing to the auditor actually does create disclosure to the third-party, which then can create privilege problems.

And so, working with the attorney to make sure we understand what is the scope, how the privilege is working. There’s also some tax controversy if you have some tax concerns; it’s called “Kovel,” where the privilege does move down as well. It’s a best practice to try to put the engagements in the type of engagement that they should be in for protecting the client. This is really a client protection matter, because you want to trust your CPA and be able to actually disclose information to your CPA that they can help you with.

Jen: Speak freely, give you all the information you need to help them out.

Danielle: Exactly. And I once had a client ask me, when this was just a regular confidentiality matter, they said, “Well, does that mean you’re going to sing like a canary?” And I go, “Well, that means I’m going to have to tell the truth if I’m asked the truth.” We can’t claim the 5th amendment, because it’s not self-incrimination, so making sure you bring in the attorney to manage that is really important.

Jen: Perfect, sounds good. We’ll get you back to talk some more fraud – interesting stuff always. 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.

PKF Texas Directors Receive Recognition

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.

In addition, Entrepreneurial Advisory Services (EAS) Director, Danielle Supkis Cheek, CPA, CFE, CVA, was recognized by CPA Practice Advisor, as well as Accounting Today. CPA Practice Advisor named Supkis Cheek as a “40 Under 40” honoree, and Accounting Today named her as a “Top 100 People: Ones to Watch,” which landed her a featured spot at the top of the website’s home page.

As Sonia and Danielle continue to see success in their careers, they’re paving a prosperous career path for fellow team members at PKF Texas.

Opportunity Zones – What Are They and How They Provide Tax Savings

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.”

For the full article, visit www.bizjournals.com/houston/news/2018/09/05/investing-in-houston-s-opportunity-zones-provides.html

To learn more information, contact Martin Euson at meuson@pkftexas.com.

Leadership Tips for Not-For-Profit Mergers

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.

Tax Deduction Considerations When Donating Artwork to Charity

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.

Requirements
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.

Plan Carefully
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.

Putting Controls in Place to Protect Businesses from Fraud

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.

Jen: It’s gone.

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How Not-For-Profits Can Protect Volunteers as Assets

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.