All posts by Erin Mirante

Financial best practices for religious congregations

Churches, synagogues, mosques and other religious congregations aren’t required to file tax returns, so they might not regularly hire independent accountants. But regardless of size, religious organizations often are subject to other requirements, such as paying unrelated business income tax (UBIT) and properly classifying employees.

Without the oversight of tax authorities or outside accountants, religious leaders may not be aware of all requirements to which they’re subject. This can leave their organizations vulnerable to fraud and its trustees and employees subject to liabilities.

Common vulnerabilities

To effectively prevent financial and other critical mistakes, make sure your religious congregation complies with IRS rules and federal and state laws. In particular, pay attention to:

Employee classification. Determine which workers in your organization are full-time employees and which are independent contractors. Depending on many factors, such as the amount of control your organization has over them, their responsibilities, and their form of compensation, individuals you consider independent contractors may need to be reclassified as employees.

Clergy wages. Most clergy should be treated as employees and receive W-2 forms. Typically, they’re exempt from Social Security taxes, Medicare taxes and federal withholding but are subject to self-employment tax on wages. A parsonage (or rental) allowance can reduce income tax, but not self-employment tax.

UBIT. If your organization regularly engages in any type of business activity that’s unrelated to its religious mission, be aware of certain tax and reporting rules. Income from such activities could be subject to UBIT.

Lobbying. Your organization shouldn’t devote a substantial part of its activities in attempting to influence legislation. Otherwise you might risk your tax-exempt status and face potential penalties.

Trust and protect

Faith groups can be particularly vulnerable to fraud because they generally foster an environment of trust. Also, their leaders may be reluctant to punish offenders. Just keep in mind that even the most devout and long-standing members of your congregation are capable of embezzlement when faced with extreme circumstances.

To ensure employees and volunteers can’t help themselves to collections, require that at least two people handle all contributions. They should count cash in a secure area and verify the contents of offering envelopes. Next, they should document their collection activity in a signed report. For greater security, encourage your members to make electronic payments on your website or sign up for automatic bank account deductions.

Seek expertise

Although your congregation is subject to less IRS scrutiny than even your fellow nonprofit organizations, that doesn’t mean you can afford to ignore financial best practices. Contact us for help.

Fringe benefits: Long-term care insurance can pay off

The U.S. population is aging and, as it does, the need for long-term support and services will only grow. According to a 2017 fact sheet from the AARP Public Policy Institute, on average, 52% of people who turn 65 today will develop a severe disability that will require long-term care (LTC) at some point. For this reason, among others, employers should consider offering LTC insurance as a fringe benefit.

High cost of care

LTC insurance helps covered individuals pay for the care they need because of a severe cognitive impairment or if they need assistance with activities of daily living (ADLs), including bathing, dressing, toileting and eating. They might require assistance because of an accident, disability, chronic illness or aging.

The costs associated with such care have skyrocketed. AARP reports that the average annual cost of a private room in a nursing home in 2016 was about $92,000, with a shared room costing around $82,000 annually.

The average cost for a home health aide in 2016 was $20 per hour. With the average aide working about 30 hours per week, that came out to $31,000 per year. And, to the surprise of many, Medicare doesn’t pay anything for LTC, whether in-home or at a facility.

Purchase considerations

LTC insurance isn’t cheap. But by buying the insurance on a group basis, you may be able to obtain a discount from the individual policy rates.

You also might qualify for a guaranteed issue plan that provides coverage regardless of health status and need — meaning employees who might not be able to get coverage on their own would now have one less thing to worry about.

From a tax perspective, you can claim a deduction for the premiums you pay, and neither the premiums nor the benefits are taxable for the employee.

Employer benefits

The positive impact of offering LTC insurance can play out over the long term. First, a fringe benefit like this can draw better job candidates who are looking for more than just basic health care coverage. It might help you retain employees as well — especially those who are already looking toward retirement and beyond.

Think about extending LTC insurance to employees’ family members, too. As AARP notes, unpaid family and friends provide most LTC support, often incurring direct costs as well as lost wages and benefits. Employees providing caregiving could be forced to cut their work hours, take easier positions or quit work altogether.

By providing coverage for their family members, you could reduce the caregiving burden on your employees, relieving stress on them — and probably reaping productivity gains to boot.

A worthy consideration

Not every employer will have room in its benefits budget to buy LTC coverage. But if you’re looking to upgrade your fringe benefits, this is one perk that’s well worth considering. To discuss further, please contact us.

© 2018

3 under-the-radar aspects of payroll recordkeeping

The phrase “payroll recordkeeping” may conjure images of paystubs and W-4s. But there are other aspects that often fly under the radar and lead to administrative slip-ups. Here are three examples.

1. Fringe benefit records

The tax code provides an explicit recordkeeping requirement for employers with enumerated fringe benefit plans, such as:

  • Health insurance,
  • Cafeteria plans,
  • Educational assistance,
  • Adoption assistance, and
  • Dependent care assistance.

You’re required to keep whatever records are needed to determine whether the plan meets the requirements for excluding the benefit amounts from employees’ taxable income.

Tax code provisions regarding fringe benefit records don’t specify how long records pertaining to fringe benefits should be kept. Presumably, they’re subject to the four-year rule that’s widely applicable to payroll recordkeeping. Thus, you should retain them for at least four years after the due date of any federal income, Social Security and Medicare taxes for the return period to which the records relate or the date such tax is paid, whichever is later.

Caution: To the extent that any fringe benefit records must also comply with ERISA Title I, a longer retention period of six years applies.

2. Unemployment tax records

The Federal Unemployment Tax Act (FUTA) requires employers to retain records relating to compensation earned and unemployment contributions made. Such records must be retained for four years after the due date of the Form 940, “Employer’s Annual Federal Unemployment Tax Return,” or the date the required FUTA tax was paid, whichever is later.

In addition, be sure to retain records substantiating:

  • The total amount of employee compensation paid during the calendar year,
  • The amount of compensation subject to FUTA tax,
  • State unemployment contributions made, with separate totals for amounts paid by the employer and amounts withheld from employees’ wages,
  • All information shown on Form 940 (with Schedule A and/or R as applicable), and
  • If applicable, the reason why total compensation and the taxable amounts are different.

Remember, record retention requirements are also set by the federal Department of Labor and state wage-hour and unemployment insurance agencies.

3. IRS informational returns

The Affordable Care Act (ACA) requires certain employers to file informational returns with the IRS — namely, Forms 1094-B, 1095-B, 1094-C, and 1095-C.

The B Forms are filed by minimum essential coverage providers (some self-insuring employers) to report coverage information. Meanwhile, the C Forms are filed by applicable large employers to provide information that the IRS needs to administer employer shared responsibility under the ACA, as well as receipt of premium tax credits. (Forms 1095-B and 1095-C are also furnished to individuals.) Retain these forms for at least three years from the reporting due date.

Also retain information returns and employer statements to employees on tip allocations for at least three years after the due date of the return or statement to which they relate.

Complex task

Paying employees is a complex task on its own; naturally, the recordkeeping involved can be challenging as well. Our firm can offer further assistance.

© 2018

Estimates vs. actuals: Was your 2018 budget reasonable?

As the year winds down, business owners can be thankful for the gift of perspective (among other things, we hope). Assuming you created a budget for the calendar year, you should now be able to accurately assess that budget by comparing its estimates to actual results. Your objective is to determine whether your budget was reasonable, and, if not, how to adjust it to be more accurate for 2019.

Identify notable changes

Your estimates, like those of many companies, probably start with historical financial statements. From there, you may simply apply an expected growth rate to annual revenues and let it flow through the remaining income statement and balance sheet items. For some businesses, this simplified approach works well. But future performance can’t always be expected to mirror historical results.

For example, suppose you renegotiated a contract with a major supplier during the year. The new contract may have affected direct costs and profit margins. So, what was reasonable at the beginning of the year may be less so now and require adjustments when you draft your 2019 budget.

Often, a business can’t maintain its current growth rate indefinitely without investing in additional assets or incurring further fixed costs. As you compare your 2018 estimates to actuals, and look at 2019, consider whether your company is planning to:

• Build a new plant,

• Buy a major piece of equipment,

• Hire more workers, or

• Rent additional space.

External and internal factors — such as regulatory changes, product obsolescence, and in-process research and development — also may require specialized adjustments to your 2019 budget to keep it reasonable.

Find the best way to track

The most analytical way to gauge reasonableness is to generate year-end financials and then compare the results to what was previously budgeted. Are you on track to meet those estimates? If not, identify the causes and factor them into a revised budget for next year.

If you discover that your actuals are significantly different from your estimates — and if this takes you by surprise — you should consider producing interim financials next year. Some businesses feel overwhelmed trying to prepare a complete set of financials every month. So, you might opt for short-term cash reports, which highlight the sources and uses of cash during the period. These cash forecasts can serve as an early warning system for “budget killers,” such as unexpected increases in direct costs or delinquent accounts.

Alternatively, many companies create 12-month rolling budgets — which typically mirror historical financial statements — and update them monthly to reflect the latest market conditions.

Do it all

The budgeting process is rarely easy, but it’s incredibly important. And that process doesn’t end when you create the budget; checking it regularly and performing a year-end assessment are key. We can help you not only generate a workable budget, but also identify the best ways to monitor

Taking the hybrid approach to cloud computing

For several years now, cloud computing has been touted as the perfect way for companies large and small to meet their software and data storage needs. But, when it comes to choosing and deploying a solution, one size doesn’t fit all.

Many businesses have found it difficult to fully commit to the cloud for a variety of reasons — including complexity of choices and security concerns. If your company has struggled to make a decision in this area, a hybrid cloud might provide the answer.

Public vs. private

The “cloud” in cloud computing is generally categorized as public or private. A public cloud — such as Amazon Web Services, Google Cloud or Microsoft Azure — is shared by many users. Private clouds, meanwhile, are created for and restricted to one business or individual.

Not surprisingly, public clouds generally are considered less secure than private ones. Public clouds also require Internet access to use whatever is stored on them. A private cloud may be accessible via a company’s local network.

Potential advantages

Hybrid computing, as the name suggests, combines public and private clouds. The clouds remain separate and distinct, but data and applications can be shared between them. This approach offers several potential advantages, including:

Scalability. For less sensitive data, public clouds give businesses access to enormous storage capabilities. As your needs expand or shrink — whether temporarily or for the long term — you can easily adjust the size of a public cloud without incurring significant costs for additional on-site or remote private servers.

Security. When it comes to more sensitive data, you can use a private cloud to avoid the vulnerabilities associated with publicly available options. For even greater security, procure multiple private clouds — this way, if one is breached, your company won’t lose access or suffer damage to all of its data.

Accessibility. Public clouds generally are easier for remote workers to access than private clouds. So, your business could use these for productivity-related apps while confidential data is stored on a private cloud.

Risks and costs

Using a blended computer infrastructure like this isn’t without risks and costs. For example, it requires more sophisticated technological expertise to manage and support compared to a straight public cloud approach. You’ll likely have to invest more dollars in procuring multiple public and private cloud solutions, as well as in the IT talent to maintain and support the infrastructure.

Overall, though, many businesses that have been reluctant to solely rely on either a public or private cloud may find that hybrid cloud computing brings the best of both worlds. Our firm can help you assess the financial considerations involved.

© 2018

Make your nonprofit’s accounting function more efficient

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 under use 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.

 

Contact us. We can help review your accounting function for ways to improve efficiency.

© 2018

The fine art of valuing donated property


Not-for-profits often struggle with valuing noncash and in-kind donations. Whether for record-keeping purposes or when helping donors understand proper valuation for their charitable tax deductions, the task isn’t easy. Although the amount that a donor can deduct generally is based on the donation’s fair market value (FMV), there’s no single formula for calculating it.

FMV basics

FMV is often defined as the price that property would sell for on the open market. For example, if a donor contributes used clothes, the FMV would be the price that typical buyers pay for clothes of the same age, condition, style and use. If the property is subject to any type of restriction on use, the FMV must reflect it. So, if a donor stipulates that a painting must be displayed, not sold, that restriction affects its value.

According to the IRS, there are three particularly relevant FMV factors:

  1. Cost or selling price. This is the cost of the item to the donor or the actual selling price received by your organization. However, note that, because market conditions can change, the cost or price becomes less important the further in time the purchase or sale was from the contribution date.
  2. Comparable sales. The sales price of a property similar to the donated property can determine FMV. The weight that the IRS gives to a comparable sale depends on the:
    • Degree of similarity between the property sold and the donated property,
    • Time of the sale,
    • Circumstances of the sale (was it at arm’s length?), and
    • Market conditions.
  3. Replacement cost. FMV should consider the cost of buying or creating property similar to the donated item, but the replacement cost must have a reasonable relationship with the FMV.

 

Businesses that contribute inventory can generally deduct the smaller of its FMV on the day of the contribution or the inventory’s basis. The basis is any cost incurred for the inventory in an earlier year that the business would otherwise include in its opening inventory for the year of the contribution. If the cost of donated inventory isn’t included in the opening inventory, its basis is zero and the business can’t claim a deduction.

Important reminder

Even if a donor can’t deduct a noncash or in-kind donation (for example, a piece of tangible property or property rights), you may need to record the donation on your financial statements. Recognize such donations at their fair value, or what it would cost if your organization were to buy the donation outright. Contact us for more information.

© 2018

Volunteers are assets nonprofits must protect

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 volunteers 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 volunteers.

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.

© 2018

Analyze your health plan’s electronic security to comply with HIPAA

If you’re an employer that sponsors a health care plan, you may worry about inadvertently violating the Health Insurance Portability and Accountability Act — commonly known as HIPAA. But you should also bear in mind that there is a formal requirement for ensuring electronic data security. Specifically, sponsors of most plans must do a risk analysis to comply with what’s called the HIPAA security rule.

Pertaining to PHI

The HIPAA security rule describes the required risk analysis as “an accurate and thorough assessment of the potential risks and vulnerabilities to the confidentiality, integrity, and availability of electronic protected health information.”

In this context, a “vulnerability” is a flaw or weakness in a security system that could be exploited (intentionally or accidentally) to breach security. “Risk” is determined by assessing both the likelihood that a vulnerability will be exploited and the extent of the resulting impact on the health plan.

In performing the risk analysis, it’s important to remember that the HIPAA security rule applies only to electronic protected health information (PHI). Employers with insured plans may limit their compliance obligations by minimizing the amount of electronic PHI they create, receive, maintain or transmit. For example, you might structure your plan so individually identifiable information, such as claims data, is maintained exclusively by your insurer.

Also, enrollment information created by the plan sponsor — for instance, when you administer open enrollment — doesn’t constitute PHI because that information isn’t collected on behalf of the plan. Thus, the risk analysis for a small insured plan can be much simpler than that for a large, self-insured plan where the sponsor performs administrative functions.

Surveying your systems

As a first step, identify all hardware, software, facilities, workstations and information systems used in storing, receiving, maintaining or transmitting electronic PHI. You may be surprised at the amount of electronic PHI you have. Next, identify and assess security measures currently in place to protect the electronic PHI, noting specific vulnerabilities and risks. Finally, determine what, if any, additional security measures are needed to respond to the identified vulnerabilities and risks.

It’s particularly important to document completely each step of the risk analysis, including how the health plan reached its conclusions regarding vulnerabilities, risk assessment and security measures. The security rule doesn’t require perfect security but, in the event of a security breach, a health plan must be able to explain why its security measures were appropriate.

Undertaking the process

Note that the HIPAA security rule doesn’t apply to a health plan that has fewer than 50 participants and is self-administered by the employer that established and maintains the plan.

If the rule does apply to you, keep in mind that it doesn’t specify how often employers should conduct a risk analysis. Undertaking the process annually or whenever there’s a major change to your health plan or IT systems is generally recommended. For further information, please contact us.