All posts by Erin Mirante

Buy vs. lease: Business equipment edition

Life presents us with many choices: paper or plastic, chocolate or vanilla, regular or decaf. For businesses, a common conundrum is buy or lease. You’ve probably faced this decision when considering office space or a location for your company’s production facilities. But the buy vs. lease quandary also comes into play with equipment.

Pride of ownership

Some business owners approach buying equipment like purchasing a car: “It’s mine; I’m committed to it and I’m going to do everything I can to familiarize myself with this asset and keep it in tip-top shape.” Yes, pride of ownership is still a thing.

If this is your philosophy, work to pass along that pride to employees. When you get staff members to buy in to the idea that this is your equipment and the success of the company depends on using and maintaining each asset properly, the business can obtain a great deal of long-term value from assets that are bought and paid for.

Of course, no “buy vs. lease” discussion is complete without mentioning taxes. The Tax Cuts and Jobs Act dramatically enhanced Section 179 expensing and first-year bonus depreciation for asset purchases. In fact, many businesses may be able to write off the full cost of most equipment in the year it’s purchased. On the downside, you’ll take a cash flow hit when buying an asset, and the tax benefits may be mitigated somewhat if you finance.

Fine things about flexibility

Many businesses lease their equipment for one simple reason: flexibility. From a cash flow perspective, you’re not laying down a major purchase amount or even a substantial down payment in most cases. And you’re not committed to an asset for an indefinite period — if you don’t like it, at least there’s an end date in sight.

Leasing also may be the better option if your company uses technologically advanced equipment that will get outdated relatively quickly. Think about the future of your business, too. If you’re planning to explore an expansion, merger or business transformation, you may be better off leasing equipment so you’ll have the flexibility to adapt it to your changing circumstances.

Last, leasing does have some tax breaks. Lease payments generally are tax deductible as “ordinary and necessary” business expenses, though annual deduction limits may apply.

Pros and cons

On a parting note, if you do lease assets this year and your company follows Generally Accepted Accounting Principles (GAAP), new accounting rules for leases take effect in 2020 for calendar-year private companies. Contact us for further information, as well as for any assistance you might need in weighing the pros and cons of buying vs. leasing business equipment.

© 2019

Writing a winning grant proposal

Competition is as fierce as it has ever been for private and public grants to not-for-profits. If your funding model depends on receiving adequate grant money, you can’t afford to submit sloppy, unprofessional grant proposals. Here are some tips on writing a winner.

Do your research

Just as you’d research potential employers before applying for a job, you should get to know grant-making organizations before asking for their support. Familiarize yourself with the grant-maker’s primary goals and objectives, the types of projects it has funded in the past, and its grant-making processes and procedures.

Performing research enables you to determine whether your programs are a good fit with the grant-maker’s mission. If they aren’t, you’ll save yourself time and effort in preparing a proposal. If they are, you’ll be better able to tailor your proposal to your audience.

Support your request

Every grant proposal has several essential elements, starting with a single-page executive summary. Your summary should be succinct, using only the number of words necessary to define your organization and its needs. You also should include a short statement of need that provides an overview of the program you’re seeking to fund and explains why you need the money for your program. Other pieces include a detailed project description and budget, an explanation of your organization’s unique ability to run this program, and a conclusion that briefly restates your case.

Support your proposal with facts and figures but don’t forget to include a human touch by telling the story behind the numbers. Augment statistics with a glimpse of the population you serve, including descriptions of typical clients or community testimonials.

Follow the rules

Review the grant-maker’s guidelines as soon as you receive them so that if you have any questions you can contact the organization in advance of the submission deadline. Then, be sure to follow application instructions to the letter. This includes submitting all required documentation on time and error-free. Double-check your proposal for common mistakes such as:

  • Excessive length,
  • Math errors,
  • Overuse of industry jargon, and
  • Missing signatures.

Take the time

To produce a winning proposal, you need to give yourself a generous time budget. Researching the grant-maker, collecting current facts and statistics about your organization, composing a compelling story about your work and proofreading your proposal all take more time than you probably think they do. Above all, don’t leave grant proposal writing to the last minute. Contact Langdon & Company LLP if you have any questions!

© 2019

How to convince donors to remove “restricted” from their gifts

Restricted gifts — or donations with conditions attached — can be difficult for not-for-profits to manage. Unlike unrestricted gifts, these donations can’t be poured into your general operating fund and be used where they’re most needed. Instead, restricted gifts generally are designated to fund a specific program or initiative, such as a building or scholarship fund.

It’s not only unethical, but dangerous, not to comply with a donor’s restrictions. If donors learn you’ve ignored their wishes, they can demand the money back and sue your organization. And your reputation will almost certainly take a hit. Rather than take that risk, try to encourage your donors to give with no strings attached.

Personal touch

Some donors simply don’t realize how restricted gifts can prevent their favorite charity from achieving its objectives. So when speaking with potential donors about their giving plans, praise the benefits of unrestricted gifts. Explain how donations are used at your organization, offering hard numbers and examples where needed. Be as upfront as possible and give them as much information as you can about your organization.

To make unrestricted giving as easy as possible, give donors (and their advisors) sample bequest clauses that refer to the general mission and purpose of your organization. Also encourage them to include wording that shows “suggestions” or “preferences” for their donations, as opposed to binding restrictions. Prepare documents that give wording samples for these cases.

Words of intent

Unless you’re holding a fundraiser to benefit a specific program, include general giving statements in your fundraising materials. For example, you might say: “All gifts will be used to further the organization’s general charitable purposes,” or “Your donations to this year’s fundraiser will be used toward the continued goal of fulfilling our organization’s mission.”

Reinforce this message in your donor thank-you letters. They should state your nonprofit’s understanding of how the gift is intended to be used. For example, if a donor stipulated no restrictions, explain that the money will be used for general operating purposes.

Gentle persuasion

Obviously, you’ll need to be respectful if a donor is determined to attach strings to a gift. (Before accepting it, just make certain you’ll be able to carry out the donor’s wishes.) But if you can persuade contributors that their gifts will be used in a responsible and mission-enhancing way, many are likely to remove restrictions.

Contact us for more information on using restricted and unrestricted funds.

© 2019

5 questions can help nonprofits avoid accounting and tax mistakes

To err is human, but some errors are more consequential — and harder to fix — than others. Most not-for-profit organizations 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:

  1. Have we formally documented our accounting processes? All aspects of managing your nonprofit’s money should be reflected in a detailed, written accounting manual. This should include how to accept and deposit donations and pay bills.
  2. How much do we rely on our accounting software? These days, accounting software is essential to most nonprofits’ 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.
  3. 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 nonprofits 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 nonprofit expertise.
  4. Have we correctly classified our workers? This is another area where nonprofits 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.
  5. 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.

 

If your accounting and tax policies and processes aren’t quite up to snuff and potentially put your organization at risk of making serious errors, don’t despair. We can help you address these shortcomings. Contact Langdon & Company today!

© 2019

Charitable donations: Unraveling the mystery of motivation

Traditionally, Americans have supported charities not only for tax breaks and a vague sense of “giving back,” but also for a variety of other financial, emotional and social reasons. Understanding what motivates donors and how their motivations vary across demographic groups can help your not-for-profit more effectively reach and engage potential supporters.

Money matters

Asset protection and capital preservation traditionally have motivated many wealthy individuals to make charitable donations. And certain strategies — such as gifting appreciated stock or real estate to get “more bang for the buck” — may be particularly appealing to donors who make charitable giving a piece of their larger financial plans.

But high-income donors sometimes have less-obvious financial motivations, such as a wish to limit the amount their children inherit to prevent a “burden of wealth.” Warren Buffett, for example, plans to leave the vast majority of his wealth to charity rather than to his children. As he told Fortune, wealthy parents should leave their children “enough money so that they would feel they could do anything, but not so much that they could do nothing.” To appeal to these kinds of donors, you may want to offer to work with the entire family so that they can begin a multigenerational tradition of giving.

Social considerations

Research by the Center on Philanthropy at Indiana University has found that younger donors — those between 20 and 45 — as well as wealthier and better-educated individuals are more likely to want to “make a difference” with their gifts. Those with lower incomes and a high school degree or less often donate to meet basic needs in their communities or to “help the poor help themselves.”

Donors of all stripes are motivated by the perceived social effects of giving. Research published in American Economic Review reported that donors typically gave more when their gifts were announced publicly.

Similarly, numerous studies have found that people are more likely to give — and to give in greater amounts — if asked personally, particularly if they know the person making the appeal. These donors may want to make an altruistic impression, and some may seek the prestige of being connected with a well-established and admired nonprofit “brand.” Such individuals are more likely to buy pricey tickets to annual galas or join a nonprofit’s board to meet and socialize with others in their socioeconomic group or business community.

Get — and keep — their attention

There are probably as many motivations as there are donors, and most people have more than one reason to support a particular charity. To get — and keep — donors’ attention, perform some basic market research to learn who they are.

© 2019

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