Category Archives: Accounting

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.

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

Keeping a king in the castle with a well-maintained cash reserve

You’ve no doubt heard the old business cliché “cash is king.” And it’s true: A company in a strong cash position stands a much better chance of obtaining the financing it needs, attracting outside investors or simply executing its own strategic plans.

One way to ensure that there’s always a king in the castle, so to speak, is to maintain a cash reserve. Granted, setting aside a substantial amount of dollars isn’t the easiest thing to do — particularly for start-ups and smaller companies. But once your reserve is in place, life can get a lot easier.

Common metrics

Now you may wonder: What’s the optimal amount of cash to keep in reserve? The right answer is different for every business and may change over time, given fluctuations in the economy or degree of competitiveness in your industry.

If you’ve already obtained financing, your bank’s liquidity covenants can give you a good idea of how much of a cash reserve is reasonable and expected of your company. To take it a step further, you can calculate various liquidity metrics and compare them to industry benchmarks. These might include:

• Working capital = current assets – current liabilities,

• Current ratio = current assets / current liabilities, and

• Accounts payable turnover = cost of goods sold / accounts payable.

There may be other, more complex metrics that better apply to the nature and size of your business.

Financial forecasts

Believe it or not, many companies don’t suffer from a lack of cash reserves but rather a surplus. This often occurs because a business owner decides to start hoarding cash following a dip in the local or national economy.

What’s the problem? Substantial increases in liquidity — or metrics well above industry norms — can signal an inefficient deployment of capital.

To keep your cash reserve from getting too high, create financial forecasts for the next 12 to 18 months. For example, a monthly projected balance sheet might estimate seasonal ebbs and flows in the cash cycle. Or a projection of the worst-case scenario might be used to establish your optimal cash balance. Projections should consider future cash flows, capital expenditures, debt maturities and working capital requirements.

Formal financial forecasts provide a coherent method to building up cash reserves, which is infinitely better than relying on rough estimates or gut instinct. Be sure to compare actual performance to your projections regularly and adjust as necessary.

More isn’t always better

Just as individuals should set aside some money for a rainy day, so should businesses. But, when it comes to your company’s cash reserves, the notion that “more is better” isn’t necessarily correct. You’ve got to find the right balance. Contact us to discuss your reserve and identify your ideal liquidity metrics.

Stop your trade secrets from walking out the door

Trade secrets are among the most critical yet often overlooked assets of any organization. And they aren’t always as sophisticated as proprietary software or as famously secret as Coca-Cola’s formula. A trade secret can be as seemingly innocuous as a customer list, business strategy, policy manual or pricing sheet.

When looking to protect yours, the first line of defense should be following the advice of your attorney. But your HR staff and policies can also play critical supporting roles in stopping trade secrets from walking out the door.

Eyes only

For starters, create an internal employee policy dealing with the care and keeping of confidential information. Only those needing access to trade secrets should be able to get to them.

Control access to physical facilities where documents related to trade secrets are kept. Just as important, if not more so, establish strong technological safeguards to prevent unauthorized access to servers and hard drives where confidential data is stored.

Whenever you must share trade secrets with a third party, first get approval from your legal counsel. Then, require the third party to sign a nondisclosure agreement stating that the information is confidential and proprietary to your organization.

Also incorporate nondisclosure language into employment applications and job descriptions for sensitive positions. And ask key employees to sign a noncompete agreement that contains language specific to trade secrets.

Employee departures

When employees leave your organization, you should conduct exit interviews to, in part, remind them of their obligation to maintain confidentiality. During the interview, use a checklist to ensure all intellectual property has been returned. And change passwords and take other security measures after the employee departs.

If necessary, send a letter to the former employee’s new employer, advising them that this person had access to trade secrets as well as confidential information and has a continuing duty not to disclose it. But don’t overstate your company’s rights to confidentiality or cast the former worker in a negative light.

Everything in your power

A well-protected trade secret can mean the difference between keeping a competitive edge and losing it. Make sure you regularly take inventory of your trade secrets. Then do everything in your power to protect them. Our firm can provide more information and further guidance.

© 2018

Why employers are taking another look at life insurance as a fringe benefit

In their continuing effort to assemble the most enticing employee benefits package possible, some employers are showing renewed interest in an old favorite: group term life insurance. Although such life insurance coverage had fallen off the radar screens of some employers, it remains an affordable benefit that can pay off for employer and employees alike.

Employer upside

For you, the employer, the upside is considerable. Premiums you pay for group term life insurance are generally tax-deductible and, because claims occur so infrequently, the coverage is typically simple and inexpensive to administer compared with other fringe benefits. When covered employees do pass away, the paperwork is fairly straightforward.

But perhaps the most important reason to consider offering life insurance as a fringe benefit is that employees want it. In fact, almost half of those who responded to MetLife’s 15th Annual U.S. Employee Benefit Trends Study, published in 2017, called life insurance a “must-have” benefit.

With the mounting concern among workers about financial wellness, life insurance is especially appealing to those with children or other dependents. Having it can reduce stress, strengthen organizational loyalty and increase productivity.

Employee costs

For employees, group term life insurance usually isn’t a taxable benefit. More specifically, the cost of the first $50,000 of coverage you provide generally is tax-exempt for the covered employee if you meet certain conditions. But you must include in the employee’s income the cost of coverage exceeding $50,000, less any amounts the employee paid toward the coverage. The amount included in income is also subject to payroll taxes (Medicare and Social Security, or FICA).

What if you provide coverage for an employee’s spouse or dependent? The cost of such group term life insurance coverage is tax-exempt to the employee if the coverage doesn’t exceed $2,000. If it does, the entire cost of coverage generally is taxable.

Note: The cost of coverage for tax purposes is calculated according to an IRS table, not the actual premiums paid.

Eligible participants

Once you decide to offer life insurance, you’ll have to determine which employees will be eligible. The more insured employees, the lower the rates you’ll pay.

Bear in mind that, if you offer the benefit only to key employees or in a way that favors key employees, it probably will be taxable to them because you’ll have trouble satisfying the IRS nondiscrimination requirements. The cost also would be subject to payroll taxes, and you’ll risk alienating the rank and file.

A valuable tool

All in all, group term life insurance is a worthwhile benefit to consider adding to the mix. Structured properly and combined with other desirable benefits, it can prove a valuable tool to boost recruitment and retention. We can provide you with more information on the tax impact and advantages of life insurance, as well as other fringe benefits to consider.

© 2018

6 ways to get more value from an IT consultant

IT consultants are many things — experts in their field, champions of the workaround and, generally, the “people persons” of the tech field. But they’re not magicians who, with the wave of a smartphone, can solve any dilemma you throw at them. Here are six ways to get more value from your company’s next IT consulting relationship:

1. Spell out your needs. Define your desired outcome in as much detail as possible up front, so that both you and the consultant know what’s expected of each party. To do so, create a project scope document that clearly delineates the job’s purpose, timeframe, resources, personnel, reporting requirements, critical success factors and conflict resolution methods.

2. Appoint an internal contact. Assign someone within your organization as the internal project manager as early in the process as possible. He or she will be the go-to person for the consultant and, therefore, needs to have a thorough knowledge of the job’s requirements and be able to fairly assess the consultant’s performance.

3. Put in some prep time. Before the consultant arrives, prepare his or her workstation, ensuring that any equipment you’re providing works and allows appropriate access to the required systems — including email. Don’t forget to set up the phone, too, and add the consultant to your company phone list. Also, alert your staff that you have engaged a consultant and, to alleviate potential concerns, explain why.

4. Roll out the welcome wagon. Try to arrange an orientation on the Friday before the start date (assuming it’s a Monday). That way, you can give the consultant the project scope document as well as a written company overview (perhaps your employee procedures manual) that includes policies, safety protocols, office hours and tips on company culture to review over the weekend.

5. Keep in touch. Conduct regular project status meetings with the consultant to assess progress and provide feedback. Notify the consultant or the internal project manager immediately if you suspect the job is off track.

6. Conclude courteously. If you need to end the consulting engagement earlier than expected (for reasons other than poor performance) or extend it beyond the agreed-on timeframe, give as much notice as possible.

Act toward a good consultant as you would any valued vendor with whom you’d like to work again. After all, establishing a positive relationship with someone who knows your business could provide even greater return on investment in the future. Our firm would be happy to explain further or explore other ideas.