Many not-for-profits look international, beyond the United States, to boost revenue. They recruit members, sell products, promote conferences or solicit donations abroad. But it’s important to look before you leap borders; consider not only potential windfalls, but also pitfalls.

Research Your Target
Before your nonprofit invests funds internationally, make sure that the need in your target country for your services or products is robust enough to justify the costs of doing business there. For instance, what will your competition be like? Ample research is essential before making a decision.

This includes gathering information about the country’s relevant laws and regulations. If you plan to sell products or services there, investigate sales and tax issues thoroughly. If, for example, the country engages in free trade, it may be easy to do business there. But if the country isn’t a party to a free trade agreement with the United States, high tariffs might prove an insurmountable obstacle.

Consult with legal and financial advisors as you chart your business plan. Foreign activities also may require analysis to ensure that your American contributors retain their tax deductions and that you don’t jeopardize your organization’s own tax-exempt status.

Put People First
Your understanding of the target country’s people will be key to your success. Setting up a cultural advisory committee in the United States that includes expatriates is one way to develop insights into your new market. If English isn’t the primary spoken language in the target country, bring a translator along on exploratory visits.

Offering membership to individuals in other countries can be your initial step toward becoming a global organization. Some organizations hold seminars and conferences for these potential new members and even open local offices to establish roots.

If you appoint a member from the target country to your board, be willing to accept different approaches to issues. Board meetings probably will continue to be held at your U.S. headquarters. But videoconferencing applications and collaborative software can help board members participate fully in meetings regardless of physical location.

Consider Currency
Finally, don’t discount the potential impact of currency exchange rates. If the U.S. dollar is weak, it could work to your advantage in selling products and services abroad. On the other hand, a strong dollar will likely go further when leasing foreign property or compensating international staff.

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 for having me, Jen.

Jen: So, with the revenue recognition rules for ASC 606 that have come out and were applicable as of January 1, 2018, what do we need to know about that?

Ryan: That’s a good question, Jen. So, the SEC hasn’t had a whole lot of new comment letters come out about ASC 606. We do probably expect a lot of those to come out right around February and March of next year, because that’s when the companies will have a full cycle of revenue recognition under their belt for the full year.

Jen: So, do you expect them to come out with anything else?

Ryan: Again, they haven’t ever said officially. We’ve just sat through forums and a lot of CPE updates, and what we’ve heard to this point is that the SEC is suggesting that while most of the companies that they’ve been reviewing have been meeting the minimum requirements, they are suggesting that there are still a few more quarters that are available for the rest of the year for them to actually beef up their disclosures. So, we’re thinking they might believe a little deficiency is there but probably not enough to issue a formal comment letter so far.

Jen: Now, are there things in the disclosures that you’re recommending be enhanced based on that?

Ryan: Yes. So, what we’ve heard is that they’re recommending enhanced disclosures around what constitutes a specific performance obligation and what management is determining is the actual point in time in which the companies are meeting those performance obligations.

Jen: Okay, so it sounds like there’s definitely more information to come and that they should if they’re looking at it at all they need to contact someone like you so that we can give them guidance on what to do.

Ryan: Exactly. That would be a good idea; definitely contact the auditors, contact us. What we’ve heard in recent forums is that the Office of the Chief Accountant will continue to respect companies’ disclosure practices and procedures if those disclosures are well-grounded and based upon the principles of the new revenue recognition guide. So, I guess we’ll have to wait and see.

Jen: Yeah, so, let’s get some real-world application and see if it makes common sense maybe?

Ryan: Common sense, principles-based – it’s a toss-up, but only time will tell.

Jen: Perfect. Well, we’ll get you back once we know more information.

Ryan: Definitely.

Jen: Thank you. For more about this topic, visit our Revenue Recognition Central page on 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.

To err is human, but some errors are more consequential — and harder to fix — than others. Most not-for-profits can’t afford to lose precious financial resources, so you need to do whatever possible to minimize accounting and tax mistakes.

Get started by considering the following five questions:

Have we formally documented our accounting processes? All aspects of managing your not-for-profit’s money should be reflected in a detailed, written accounting manual. This should include how to accept and deposit donations and pay bills.

How much do we rely on our accounting software? These days, accounting software is essential to most not-for-profits’ daily functioning. But even with the assistance of technology, mistakes happen. Your staff should always double-check entries and reconcile bank accounts to ensure that transactions entered into accounting software are complete and accurate.

Do we consistently report unrelated business income (UBI)? IRS officials have cited “failing to consider obvious and subtle” UBI tax issues as the biggest tax mistake not-for-profits make. Many organizations commonly fail to report UBI — or they underreport this income. Be sure to follow guidance in IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations. And if you need more help, consult a tax expert with not-for-profit expertise.

Have we correctly classified our workers? This is another area where not-for-profits commonly make errors in judgment and practice. You’re required to withhold and pay various payroll taxes on employee earnings, but don’t have the same obligation for independent contractors. If the IRS can successfully argue that one or more of your independent contractors meet the criteria for being classified as employees, both you and the contractor possibly face financial consequences.

Do we back up data? If you don’t regularly back up accounting and tax information, it may not be safe in the event of a fire, natural disaster, terrorist attack or other emergency. This data should be backed up automatically and frequently using cloud-based or other offsite storage solutions.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back 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: Hi, Jen, it’s nice to be here.

Jen: So, we’ve talked a lot about different not-for-profit topics, and what are some options for families that are looking to invest?

Annjeanette: Family philanthropy is a really hot topic, especially here in Houston with all the opportunities and wealth in the city. Typically, when we talk about family philanthropy, two things come up: private foundations and donor advised funds.

Jen: Is there a difference between the two, I’m assuming? And what is that difference?

Annjeanette: A private foundation is a separate legal entity. It’s a 501(c)(3) organization that has its own tax filings and its own set up process, etc. But a donor advised fund is just an account that is set up at a 501(c)(3) organization that a donor can contribute to and then suggest grants be made out of.

Jen: How would a family decide which option is best for them?

Annjeanette: There’s a lot of things to consider when deciding which vehicle is the best. Is a private foundation the best for a certain family to use or is a donor advised fund the best?

There are several considerations, but one of the most important considerations is the administrative tasks that go into maintaining each of these types of vehicles. A private foundation is going to be more responsibility on the donor family, because they’ll have to maintain the accounting records, make sure that tax filings are made and, most importantly, administer the grant programs. With a donor advised fund, on the other hand, all the donor family does is contribute money to the donor advised fund, and the sponsoring organization takes care of the rest. It takes care of maintaining the funds, filing the appropriate forms, things like that. So that’s definitely one consideration.

Another consideration is setup time. A private foundation has to be established as a legal entity first, and then get its 501(c)(3) status from the IRS, and then it can go forth and start doing grant programs. That process can take up to six months—maybe a year—depending on how fast the paperwork gets through the system, but a donor advised fund can be set up within a week. It’s basically minimal paperwork, because the entity itself—the 501(c)(3)—is already created. You’re just setting up a donor advised fund, which is an account within that organization.

Jen: Perfect. It sounds like they need to talk with you if they need some advice on which would be best to meet their goals, right?

Annjeanette: Exactly. It’s important to have a conversation with a tax advisor, because families have different goals, charitable goals and family goals. There’s different succession planning that has to be discussed, and also, most importantly, is what assets are going to be used to fund these vehicles. Those are the types of things that we can help clients with.

Jen: Perfect. We will get you back to talk about a little bit more.

Annjeanette: That 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.

With the dawn of 2019 on the near horizon, here’s a quick list of tax and financial to-dos you should address before 2018 ends.

Check your FSA balance. If you have a Flexible Spending Account (FSA) for health care expenses, you need to incur qualifying expenses by December 31 to use up these funds or you’ll potentially lose them. (Some plans allow you to carry over up to $500 to the following year or give you a 2½-month grace period to incur qualifying expenses.) Use expiring FSA funds to pay for eyeglasses, dental work or eligible drugs or health products.

Max out tax-advantaged savings. Reduce your 2018 income by contributing to traditional IRAs, employer-sponsored retirement plans or Health Savings Accounts to the extent you’re eligible. (Certain vehicles, including traditional and SEP IRAs, allow you to deduct contributions on your 2018 return if they’re made by April 15, 2019.)

Take RMDs. If you’ve reached age 70½, you generally must take required minimum distributions (RMDs) from IRAs or qualified employer-sponsored retirement plans before the end of the year to avoid a 50% penalty. If you turned 70½ this year, you have until April 1, 2019, to take your first RMD. But keep in mind that, if you defer your first distribution, you’ll have to take two next year.

Consider a QCD. If you’re 70½ or older and charitably inclined, a qualified charitable distribution (QCD) allows you to transfer up to $100,000 tax-free directly from your IRA to a qualified charity and to apply the amount toward your RMD. This is a big advantage if you wouldn’t otherwise qualify for a charitable deduction (because you don’t itemize, for example).

Use it or lose it. Make the most of annual limits that don’t carry over from year to year, even if doing so won’t provide an income tax deduction. For example, if gift and estate taxes are a concern, make annual exclusion gifts up to $15,000 per recipient. If you have a Coverdell Education Savings Account, contribute the maximum amount you’re allowed.

Contribute to a Sec. 529 plan. Sec. 529 prepaid tuition or college savings plans aren’t subject to federal annual contribution limits and don’t provide a federal income tax deduction. But contributions may entitle you to a state income tax deduction (depending on your state and plan).

Review withholding. The IRS cautions that people with more complex tax situations face the possibility of having their income taxes underwithheld due to changes under the Tax Cuts and Jobs Act. Use its withholding calculator (available at irs.gov) to review your situation. If it looks like you could face underpayment penalties, increase withholdings from your or your spouse’s wages for the remainder of the year. (Withholdings, unlike estimated tax payments, are treated as if they were paid evenly over the year.)

Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2019. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact your advisors to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

January 31

  • File 2018 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
  • Provide copies of 2018 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.
  • File 2018 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS.
  • File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2018. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 11 to file the return.
  • File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2018. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 11 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944,“Employer’s Annual Federal Tax Return.”)
  • File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2018 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 11 to file the return.

February 28

  • File 2018 Forms 1099-MISC with the IRS if 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is April 1.)

March 15

  • If a calendar-year partnership or S corporation, file or extend your 2018 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2018 contributions to pension and profit-sharing plans.

The commerciality doctrine was created along with the operational test to address concerns over not-for-profits competing at an unfair tax advantage with for-profit businesses. But even business activities related to your exempt purpose could fall prey to the commerciality doctrine, resulting in the potential loss of your organization’s exempt status.

Several Factors Considered
The operational test generally requires that a not-for-profit be both organized and operating exclusively to accomplish its exempt purpose. It also requires that no more than an “insubstantial part” of its activities further a nonexempt purpose. Your organization can operate a business as a substantial part of its activities as long as the business furthers your exempt purpose.

But under the commerciality doctrine, courts have ruled that some organizations’ otherwise exempt activities are substantially the same as those of commercial entities. They consider several factors when evaluating commerciality, including:

  • Whether an organization has set prices to maximize profits,
  • The degree to which it provides below-cost services,
  • Whether it accumulates unreasonable reserves,
  • The use of commercial promotional methods such as advertising,
  • Whether the business is staffed by volunteers or paid employees,
  • Whether it sells to the general public, and
  • The extent to which the not-for-profit relies on charitable donations. (They should be a significant percentage of total support.)

No single factor is decisive for courts or the IRS.

Possible UBIT Issues
There’s another risk for not-for-profits operating a business. You could pass muster under the commerciality doctrine but end up liable for unrelated business income tax (UBIT).

Revenue that a not-for-profit generates from a regularly conducted trade or business that isn’t substantially related to furthering the organization’s tax-exempt purpose may be subject to UBIT. Much depends on how significant the business activities are to your organization as a whole. There are also several exceptions.

Seek Advice First
If you’re thinking about launching a new business to drum up additional revenues, consult your advisors first. They can help reduce the risk that your organization will run into potential exemption or UBIT issues.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m here with Martin Euson, a director on our tax team. Martin, welcome back to the Playbook.

Martin: Thanks, Jen. I’m glad to be here.

Jen: So, I’ve heard a little bit about the Opportunity Zone Program. What is it?

Martin: The Opportunity Zone Program is a new program that was created as a result of the Tax Cuts and Jobs Act that, as we know, was signed into law last December, and the program is really aimed at encouraging private investment and development into areas that are historically distressed communities or low-income communities across the United States. And in exchange for that, investors are given some pretty significant tax benefits.

Jen: We’re in Houston – are there areas where we can feel the impact locally?

Martin: Oh, absolutely. In Houston, alone, there are more than 100 Opportunity Zone designations. If you look at a map of inside the Beltway, most of Downtown Houston has the Opportunity Zone designation and much of the area to the east of Downtown. So, more than 100 areas inside of Houston, across the state of Texas more than 600 areas were designated Opportunity Zones, and so, it should have a very significant impact at the local level.

Jen: So, Martin, what kind of incentives exist for investment in these Opportunity Zones?

Martin: So, the incentive, Jen, really is a tax incentive. Investors who invest in Opportunity Zones can benefit from three different types of tax incentives:

  • The first one being deferral of gain from a recent sale or exchange transaction when that gain is reinvested into an Opportunity Zone area. And that gain can be deferred as long as December 31 of 2026, and so, that’s a pretty significant deferral just that length of time.
  • The second tax benefit comes from investors being able to eliminate up to 15% of the gain on the investment or the gain that they’re reinvesting into a qualified Opportunity Zone.
  • And the third tax benefit that investors can receive is avoiding tax on the gain associate with the investment in the Opportunity Zone and avoid paying tax all together if the investment’s held for at least 10 years.

Jen: So where can our viewers find out more information about where these Opportunity Zones are?

Martin: The IRS website has put together a very comprehensive FAQ section that addresses a lot of questions associated with the program. There’s also a map of the United States, and it can be scaled down to Texas and down to Houston.

Jen: Okay, perfect.

Martin: That provides a lot of good information, and as always viewers can go to the PKF Texas website for more information or connect with me directly on LinkedIn.

Jen: Sounds good. Now is there any specific industry that this impacts, or it’s pretty much anybody can invest in these Opportunity Zones?

Martin: There are some prohibited investments when you get into recreation and entertainment, things like that, and there are a lot of nuances that go along with it from a tax perspective and from the type of investment perspective. So, the best thing to do would be either to check out the FAQ sections or to consult with your PKF tax advisor.

Jen: Come talk to you. All right, perfect. We’ll get you back to talk a little bit more about it, sound good?

Martin: All right, thanks, Jen.

Jen: This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

Under the amendments in Accounting Standards Update 2018-17, a private company will be able to elect not to apply Variable Interest Entities (VIE) guidance to legal entities under common control (including common control leasing arrangements) if both the parent and the legal entity being evaluated for consolidation are not public business entities, simply by adopting a new accounting policy election – all current and future legal entities under common control will have to follow the same practices.

There will still be a need to provide detailed disclosures about a company’s involvement with and exposure to the legal entity under common control.

By adopting this guidance, private companies will have the same result as the previous alternative not to apply VIE guidance under common control leasing arrangements with all other legal entities under common control.

This accounting alternative is expected to provide more useful and meaningful information to the users of private company financial statements – as many of the stakeholders aren’t necessarily concerned with common control entities.

For entities other than private companies, the amendments in this Update are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The amendments in this Update are effective for a private company for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. All entities are required to apply the amendments in this Update retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. Early adoption is permitted.

Click here for additional details on Accounting Standards Update 2018-17.

For more information, visit www.fasb.org.

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.