Financial Statements of Nonprofits are Different!

Many seasoned accountants get confused when they start working with nonprofits, also known as not-for-profit or tax-exempt organizations. On the surface, both nonprofits and for-profits look the same, but there are significant differences between these two to require different reports.

Nonprofit Basics

A common misconception is that nonprofits are simple and not that important overall in our economy. But let’s look at the facts – as of June 2016 we have 1,571,056 tax-exempt organizations in the US. As of 2010, nonprofits were responsible for 9.2% of all wages and salaries. “Nonprofit share of GDP was 5.3% in 2014” (National Center of Charitable Statistics). So, this sector cannot be ignored and sooner or later you may find yourself involved with a nonprofit and its idiosyncrasies.

“A nonprofit is a corporation or an association that conducts business for the benefit of the general public without shareholders and without a profit motive” (Legal Dictionary online). Based on the principle that profits are not relevant, nonprofit organizations operate to provide goods and services to a community. Examples are the Red Cross, food banks and welfare organizations. They can be big and small with many nonprofits having operations in foreign countries. Regardless of its size, most nonprofits are organized in three general areas, reflected on financial statements:

  • Program
  • Administration
  • Fundraising

Program is the most important area of a nonprofit. Without program, there’s no reason for the nonprofit to exist. The program area is closely connected to the nonprofit mission statement. It’s where most of the revenue received should be spent. The other areas exist to provide support for programs.

Administration area, also known as “Management” or “G&A,” is the backbone of the organization, including accounting and human resources departments. It’s often also considered overhead. This is the area where most money is usually spent after programs.

Fundraising is the marketing department of the nonprofit. Fundraisers are in charge of getting money in and could be involved in grant writing, special events and other activities designed to attract donors. This area typically spends the least amount of money.

Learn more!


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Timely Tax Tip: So Many Notices, so Little Time

Practically everyone is getting calls, emails and texts from clients who have IRS and/or state notices that need to be addressed – yesterday. Yup. That’s right. Often, you only about 1-3 days to respond. Why? Because our clients haven’t bothered to open up their mail and let us know about an impending deadline. Or worse. They did know and didn’t have the courtesy to forward the correspondence while we still have breathing space to respond (10-90 days). Now, they expect us to drop everything and help them – right now.

Which means, even tax practices that aren’t flush with clients are working year-round. Often, the busy-work comes from responding to the IRS and state notices. Sometimes, they are slam-dunk correspondence. Other times, there’s some real work involved. Why? Generally for one of two reasons:

1) We made a mistake and left something off the return – or didn’t understand where to report it, and now we have to straighten it out. These corrections should be done at no charge. After all, they are our own errors.

2) The client neglected to give us a document, or tell us about some income…and now we have sort out the issues. And we will probably have to help them deal with additional taxes, penalties and interest – and a way to pay all this. In particular, we are getting notices about Obamacare information missing from the tax returns. Our clients told us they didn’t get anything, right? Uh huh.

Too often, tax professionals tell me that they feel bad, or guilty in the second situation. Somehow, the fault must have been theirs. So they don’t charge a fee to help their clients resolve these issues.

Really? Truly? Why do you value yourself, your costly education, your continued training and years of skills so lightly? You really should be charging for these services. Learn more!


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Posted in Tax

Recovering Unsaved Excel Workbooks

You’ve likely experienced that flash of panic that occurs when suddenly the Excel spreadsheet you’ve been laboring over unexpectedly vanishes off of your screen. I’ve certainly gotten lost in my work innumerable times over the years and forgotten to save periodically. This often sets the stage for any of a number of bad things to happen: your computer crashes; the power goes out; you close the wrong workbook without saving—the list goes on and on. Fortunately in Excel 2010 and later you have pretty good odds of being able to recover your work.

Microsoft Excel has long had a Document Recovery feature that in many cases will present a list of workbooks that were open at the time that Excel crashes unexpectedly. Ostensibly Excel creates a back-up copy of your document every 10 minutes, and it’s these back-up files that are presented to you after a crash. However, if you close the Document Recovery window without making a selection, those back-up files are lost forever. Fortunately in Excel 2010 and later you have a couple of additional recovery options.

Learn more about Excel documentation management.

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Self-Employment Tax Developments

With the growth in sole proprietorship and partnership returns, self-employment tax continues to be a significant tax for individuals and their return preparers. The sharing economy has not only created more freelancers (contractors), but also more owners of short-term rentals who might be subject to self-employment tax. This article addresses developments of the past 18 months involving self-employment tax and reviews the rules as relevant in today’s sharing economy.


Recent cases have generally centered around whether an individual’s activity constituted a trade or business subject to self-employment tax. Some cases focused on the nature of the receipts and application of the definition at IRC Section 1402 on “net earnings from self-employment tax.” In addition, the IRS issued regulations in May 2016 involving certain partnership arrangements. Summaries of this guidance follows.

Is it Self-Employment Income?

Case Study: Blogger’s Ad Revenue Subject to Self-Employment Tax: In 2012, Mr. Clark was a full-time video blogger. He had an agreement with Google to allow ads on his blog website. For 2012, ad revenue was just over $20,000 and Google issued Clark a 1099-MISC for this amount. Clark reported this as other income on his Form 1040. After an examination, the IRS imposed self-employment tax on Clark.

The Tax Court found that Clark was engaged in a trade or business as his intent was to make a profit. In addition, he worked six to eight hours per day seven days a week, making this a regular and continuous activity.

Clark’s argument that the revenue constituted royalty payments not subject to self-employment tax failed. The court noted that per Section 1402, “royalty payments received from a trade or business are subject to self-employment tax.”

Tax Shelter Activity Can Be Subject to Self-Employment Tax: Mr. Chai, an architect, became involved in tax shelter activity through a Harvard College classmate who married his cousin. Millions of dollars flowed through some of the more than 100 entities set up by the classmate. At issue was a $2 million payment to Chai in 2003. At one point, Chai was told the payment was a non-taxable return of capital (although he had not invested in the entity) but it was eventually reported on Form 1099 for consulting services. Chai did not report the income, arguing it was a return of capital from his investments.

Chai argued that he did not provide “any meaningful services” to the partnership. But the IRS argued that even if he delegated duties to others, the “risky nature and large receipts of the tax shelters provide ample justification for the high compensation relative to the low amount of personal effort involved.” Chai also indicated he signed a lot of documents. The IRS noted that whether Chai understood the transactions “does not eliminate the significance of the services he provided to Delta and the other tax shelters by signing the formation and organizational documents.” Also, Chai received large payments in the past (over $1 million) and had properly reported then as nonemployee income. The court also noted that the payment was not a gift because the payor expected work from Mr. Chai.

The court agreed with the IRS that the $2 million payment was income and subject to self-employment tax, finding that Chai’s “activities were continuous and regular.”

The court also upheld penalties against Chai. Chai’s argument that he relied on advice from his tax return preparer failed because he had not given all of the details of the transactions to his preparer.

Learn more about recent developments in Self-Employement Tax Law at:


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Posted in Tax

Business Analytics

How do business analytics apply to the CFO’s finance and accounting function? It is increasingly apparent that corporate accounting is evolving from its traditional role of collecting and validating data and subsequently reporting information to a more value-adding role of providing and supporting analysis for decision making. To be clear, the message here is not about accountants simply getting better with traditional financial analysis methods like cost-volume-profit (CPV) breakeven graphs and expense-to-sales ratios. The message here is about how accountants can use “deep analytics” to discover relationships to discern knowledge not previously made visible – to provide information to line managers for better decisions.

Accountants’ progress with analytics has been notable. With the recent explosion of available digital data, accountants are certainly getting better at measuring and reporting more. But are the measures and reports the most relevant ones? Do they answer critical questions to drive growth and profits? The upside potential to applying analytics with the accountants’ financial planning and analysis (FP&A) role is substantial.

As the CFO’s scope of responsibility broadens with more oversight and as CFOs become that “strategic advisor” so often written about, they now have the opportunity to become catalysts for introducing innovation and change. This can include leading transformational projects that increase efficiencies, lower costs, increase revenues, and better execute strategies. Accountants traditionally have been reactive to historical information. Business analytics enables them to help their organization be more proactive.

The trend clearly is toward increased use of business analytics and enterprise performance improvement (EPM) methods within the finance function. An example described in this IIA Research Brief is a shift beyond just reporting profitability by product and service line toward providing a more encompassing view of channel and customer profitability reporting using activity-based costing (ABC) principles. With this type of reporting business analytics can take decisions to a higher level by providing insights as to what factors differentiate higher from lower profit levels from a supplier’s customers other than just the customer’s sales volume with the supplier. Learn More

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Measuring and Managing Customer Profitability

The only value a company will ever create for its shareholders and owners is the value that comes from its customers – current ones and new ones acquired in the future. To remain competitive, companies must determine how to keep customers longer, grow them into bigger customers, make them more profitable, serve them more efficiently, and target acquiring more profitable customers.

But there is a problem with pursing these ideals. Customers increasingly view suppliers’ products and standard service lines as commodities. This means that suppliers must shift their actions toward differentiating their services, offers, discounts, and deals to different types of existing customers to retain and grow them. Further, they should concentrate their marketing and sales efforts on acquiring new customers who have traits comparable to those of their relatively more profitable customers.

Some customers purchase a mix of mainly high-margin products. However, after adding the non-product related costs to serve for those customers apart from the products and service lines they purchase, these customers may be unprofitable to a company. This is because they demanded extra services that caused greater expenses than low demanding customers. How does one properly measure customer and supplier profitability? How does one deselect or “fire” a customer?

As companies shift from a product-centric focus to a customer-centric focus, a myth that almost all current customers are profitable needs to be replaced with the truth. As just noted, some high-demanding customers may indeed be unprofitable! Unfortunately, many companies’ managerial accounting systems aren’t able to report customer profitability information to support analysis for how to rationalize which types of customers to retain, grow, or win back and which types of new customers to acquire.

With this shift in attention from products to customers, managers are increasingly seeking granular nonproduct-associated costs to serve customer-related information as well as information about intangibles, such as customer loyalty and social media messaging about their company and its competitors. Today in many companies there’s a wide gap between the CFO’s function and the marketing and sales function. That gap needs to be closed!

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Tax Rules for Your Shared Economy Clients

The “new economy” really means new ways of doing business that involve digital and borderless transactions. That is, a business likely connects with clients via an Internet connection organized by software or an “app.” The location of the customer may not be important, particularly if the “product” is digital or services that can be provided electronically (online). Often, the costs to start generating revenues in the new economy are minimal. It might just involve signing up at a website as someone who can provide services (face-to-face or online) or offer to share (rent) property, such as a room in their home or their car. This part of the new economy is often referred to as the sharing economy or peer-to-peer networked economy where parties seeking to offer or use services or property are easily connected. Many aspects of the connection, such as payment and assessment, are completed on websites or apps that are simple to navigate.

Some of the companies creating shared economy opportunities have grown rapidly, such as Airbnb and Uber. There are in fact though, numerous “sharing economy” operations beyond these two. The low barriers to entry, and desire by many to generate income (or at least cash flow), makes it highly probable that at least one of your clients is generating income from sharing or freelancing. It is also likely that your client needs assistance with the recordkeeping and income tax consequences of this cash-generating activity. Planning on how to optimize the treatment of deductions and any losses may also be needed. In addition, freelancing also leads to self-employment tax and perhaps local business license taxes. Home-sharing often also involves local transient occupancy tax (TOT), business license tax and perhaps other local taxes. Some short-term rentals may be subject to self-employment tax.

The continued growth in the sharing economy makes this a practice area that can’t be ignored.

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Depreciation of Assets Acquired as a Gift

Special rules apply to property acquired as a gift. The determination of the basis for depreciation purposes and the amount of deductible loss on the eventual sale of the asset are treated differently for property received as a gift.

The first step in determining the depreciation deduction allowable for property received as a gift is to determine the donor’s adjusted basis, the FMV of the property at the time of the gift, and any gift tax paid by the donor on the gift.

The donor’s adjusted basis plus a portion of the gift tax paid by the donor is used by the taxpayer to establish their depreciable basis in the gift. However, unlike a related party transaction, the taxpayer does not “step into the shoes” of the donor. Instead, the taxpayer starts the depreciation recovery period as of the date of the gift, using the applicable convention and method.

Example: Grandpa decided it was time to abandon his summer home and move permanently to Florida. On April 30, 2015, he gave his house to his niece, Peggy. The FMV of the property at that time was $250,000. Grandpa’s basis in the home was $200,000. He filed Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return, but did not owe any gift tax.

Peggy decides to use the house as rental property. On her 2015 return, she reports the acquisition date as April 30, 2015, and a beginning basis of $200,000. Residential real estate is depreciated over 27.5 years using the mid-month convention and the straight-line method.

For gifts received after 1976, a portion of the gift tax that was paid on the gift is added to the basis. This is calculated by multiplying the gift tax by a fraction. The numerator of the fraction is the net increase in value of the gift, and the denominator is the amount of the gift. The net increase in value of the gift is the FMV of the gift less the donor’s adjusted basis. The amount of the gift is its value for gift tax purposes after reduction for any annual exclusion and marital or charitable deduction that applies.

For an update on depreciation and other tax law changes affecting tax year 2015, get your tax updates today!

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Tax Issues of High-Income Clients

High-income clients face a number of complex tax-planning issues. Recent changes in tax law implemented by the Affordable Care Act (ACA) and ATRA have greatly increased the potential tax liability of this group of taxpayers.

Provisions important to high-income taxpayers include the following.

INCOME TAX MARGINAL RATE – ATRA permanently lowered the marginal tax rates for many middle-income taxpayers. However, it permanently increased the highest marginal tax rate for high-income earners from 35% to 39.6%. This increase affects single taxpayers with 2015 taxable incomes greater than $413,200 and married filing jointly (MFJ) taxpayers with taxable incomes greater than $464,850.

ADDITIONAL MEDICARE TAX – Beginning January 1, 2013, the ACA implemented an additional Medicare tax of 0.9% for taxpayers whose wages, compensation, and self-employment (SE) income exceeds threshold amounts. Thresholds for 2015 are $200,000 for single taxpayers and $250,000 for married filing jointly (MFJ) taxpayers. The additional Medicare tax applies to the following income categories.

  • Wages and other compensation subject to Medicare
  • Compensation subject to the Railroad Retirement Tax Act (RRTA)
  • SE net income (an SE net loss is not considered for purposes of this tax)
  • Taxable wages not paid in cash, such as noncash fringe benefits
  • Tips

CAPITAL GAINS TAX – ATRA permanently set the tax rate for long-term capital gains (assets held for more than one year) at 15% for many middle-income taxpayers. In addition, it eliminated a long-term capital gains tax for taxpayers in the two lowest income brackets. However, ATRA raised the long-term capital gains rate from 15% to 20% for taxpayers with ordinary income taxed at the highest marginal rate. 2015 rate is $413,200 for Single taxpayers and $464,850 for MFJ taxpayers.

PERSONAL EXEMPTION PHASEOUT – In 2015, taxpayers are granted a personal exemption of $4,000 for themselves and for each of their dependents. However, this exemption is reduced by 2% for each $2,500 (or part of $2,500) that AGI exceeds a certain threshold and is eliminated entirely at higher income levels. The phaseout begins at $258,250 for single filers and at $309,900 for MFJ filers.

ITEMIZED DEDUCTION LIMITATION – As with the personal exemption, certain itemized deductions are limited once a taxpayer reaches a certain income threshold. This limitation, sometimes called the Pease limitation, was permanently reinstated for tax years after 2012. The Pease limitation is triggered when AGI exceeds the threshold amounts for 2015 of $258,250 for single filers and $309,900 for MFJ filers.

These provisions that affect high-income taxpayers present numerous planning opportunities for tax practitioners. Don’t miss out.  Get your 2015-2016 Tax Updates today!

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Tracking CPE Made Easier for Firm Administrators

If you are a firm administrator responsible for tracking CPE for your staff, you’ll be happy to hear that CPE Link has released a couple of new features on its Compliance Manager dashboard that will make your job easier!

Here is a quick summary of what’s new:

  • Posting Credit for Multiple Staff – Firm administrators can now post CPE credit for multiple staff who attended a course from another CPE provider in one simple entry.
  • Multiple Firm Admins – Firms now have the ability to assign as many administrators to their Firm CPE account as desired. All administrators have full rights to manage staff CPE information.

Not using Compliance Manager yet?  Have questions? Interested in scheduling a demo? Please contact Janaye Fletcher at or (800) 616-3822 ext 220.




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