If your not-for-profit is struggling financially, you’ve probably already taken steps to cut costs, such as wage freezes and layoffs. But to keep your organization afloat, you may need to come up with more creative ways to generate operating cash flow. Here are five:
1. Revisit your mission and programs. Perhaps there’s a particular program that isn’t critical to your organization’s mission, yet provides a drain on cash balances and staff resources. Saying good-bye to that program can be difficult — but the reward is freeing up funds for more pertinent programs or administrative necessities. If you can redirect individuals to similar programs offered by other organizations, such changes can be made without a break in service.
2. Examine your investment portfolio. Your nonprofit may have portfolio investments or idle assets that aren’t generating operating income — for example, donated real estate, collections and other nonmarketable holdings. Consider divesting some of these possessions and obtaining the operating funds you need.
3. Review your permanently restricted endowments. Another potential source of operating funds is your organization’s permanently restricted endowment funds. Under the Uniform Prudent Management of Institutional Funds Act (UPMIFA), you may be able to spend what was once considered the untouchable original principal (or historical balance) of funds. Access generally is available when the donor of the original gift is silent about restrictions or hasn’t specified that UPMIFA provisions don’t apply. In some cases, an original condition or restriction may no longer be practicable or possible to achieve. Consult your attorney to learn whether this is an option.
4. Contact the original endowment donor. If UPMIFA provisions don’t open up a potential source of funds, you could take another route by approaching the original donor. Ask the donor to lift all or some of the spending restrictions so you may use a portion of the funds for operating costs.
5. Rely more heavily on board members. Board members usually have a passion for their organization and will do whatever they can to assist. In many cases, board members already have employer backing for your organization, and that company may be willing to step up its financial support. Board members have other community contacts as well. Sometimes all you need to do is ask.
The ideas above, while not all-inclusive, point to cash sources you may need to sustain your organization. For additional help, please contact us. © 2017
Even if your income is high your family may be able to benefit from the 0% long-term capital gains rate
We’re entering the giving season, and if making financial gifts to your loved ones is part of your plans — or if you’d simply like to reduce your capital gains tax — consider giving appreciated stock instead of cash this year. Doing so might allow you to eliminate all federal tax liability on the appreciation, or at least significantly reduce it. Leveraging lower rates Investors generally are subject to a 15% tax rate on their long-term capital gains (20% if they’re in the top ordinary income tax bracket of 39.6%). But the long-term capital gains rate is 0% for gain that would be taxed at 10% or 15% based on the taxpayer’s ordinary-income rate. In addition, taxpayers with modified adjusted gross income (MAGI) over $200,000 per year ($250,000 for joint filers and $125,000 for married filing separately) may owe the net investment income tax (NIIT). The NIIT equals 3.8% of the lesser of your net investment income or the amount by which your MAGI exceeds the applicable threshold. If you have loved ones in the 0% bracket, you may be able to take advantage of it by transferring appreciated assets to them. The recipients can then sell the assets at no or a low federal tax cost. The strategy in action Faced with a long-term capital gains tax rate of 23.8% (20% for the top tax bracket, plus the 3.8% NIIT), Rick and Sara decide to transfer some appreciated stock to their adult daughter, Maia. Just out of college and making only enough from her entry-level job to leave her with $25,000 in taxable income, Maia falls into the 15% income tax bracket. Therefore, she qualifies for the 0% long-term capital gains rate. However, the 0% rate applies only to the extent that capital gains “fill up” the gap between Maia’s taxable income and the top end of the 15% bracket. In 2017, the 15% bracket for singles tops out at $37,950. When Maia sells the stock her parents transferred to her, her capital gains are $20,000. Of that amount $12,950 qualifies for the 0% rate and the remaining $7,050 is taxed at 15%. Maia pays only $1,057.50 of federal tax on the sale vs. the $4,760 her parents would have owed had they sold the stock themselves. Additional considerations Before acting, make sure the recipients won’t be subject to the “kiddie tax.” Also consider any gift and generation-skipping transfer (GST) tax consequences. For more information on transfer taxes, the kiddie tax or capital gains planning, please contact us. We can help you find the strategies that will best achieve your goals. © 2017
Accelerating deductible expenses, such as property tax on your home, into the current year typically is a good idea. Why? It will defer tax, which usually is beneficial. Prepaying property tax may be especially beneficial this year, because proposed tax legislation might reduce or eliminate the benefit of the property tax deduction beginning in 2018.
The initial version of the House tax bill would cap the property tax deduction for individuals at $10,000. The initial version of the Senate tax bill would eliminate the property tax deduction for individuals altogether.
In addition, tax rates under both bills would go down for many taxpayers, making deductions less valuable. And because the standard deduction would increase significantly under both bills, some taxpayers might no longer benefit from itemizing deductions.
2017 year-end planning
You can prepay (by December 31) property taxes that relate to 2017 but that are due in 2018 and deduct the payment on your 2017 return. But you generally can’t prepay property tax that relates to 2018 and deduct the payment on your 2017 return.
Prepaying property tax will in most cases be beneficial if the property tax deduction is eliminated beginning in 2018. But even if the property tax deduction is retained, prepaying could still be beneficial. Here’s why:
• If your property tax bill is very large, prepaying is likely a good idea in case the property tax deduction is capped beginning in 2018.
• If you could be subject to a lower tax rate in 2018 or won’t have enough itemized deductions overall in 2018 to exceed a higher standard deduction, prepaying is also likely tax-smart because a property tax deduction next year would have less or no benefit.
However, there are a few caveats:
If you’re subject to the AMT in 2017, you won’t get any benefit from prepaying your property tax. And if the property tax deduction is retained for 2018, the prepayment could cost you a tax-saving opportunity next year.
• If your income is high enough that the income-based itemized deduction reduction applies to you, the tax benefit of a prepayment may be reduced.
• While the initial versions of both the House and Senate bills generally lower tax rates, some taxpayers might still end up being subject to higher tax rates in 2018, either because of tax law changes or simply because their income goes up next year. If you’re among them and the property tax deduction is retained, you may save more tax by holding off on paying property tax until it’s due next year.
It’s still uncertain what the final legislation will contain and whether it will be passed and signed into law this year. We can help you make the best decision based on tax law change developments and your specific situation. © 2017
People are naturally inclined to make charitable gifts around the holidays. With the end of the year fast approaching, your not-for-profit should prepare now to take advantage of donors’ generosity. Here are four tips for making the most of the season:
1. Strike early. Plan events or solicitations for early December or sooner. By being one of the first to appeal to givers’ seasonal generosity, you increase the odds of securing an early commitment and avoiding the donor fatigue that may set in later as solicitations and holiday financial demands mount.
2. Target qualified prospects. Rather than blitz every prospect in your database, identify the best prospects among current donors. Past donors are more likely to give again and in larger amounts than those who have never donated before. Consider factors such as how often individuals have given in the past, how recently they’ve given, their likely ability to give and their degree of attachment to your organization. You can then write meaningful, personal appeals that encourage a greater commitment.
3. Make it personal. The more personal a solicitation, the more effective it’s likely to be, with face-to-face appeals being especially powerful. The holiday season is the ideal time for executives and board members to solicit past supporters and promising new ones.
4. “Missionize” late-year events. Attendees are already inclined to give; it’s just that most need to be inspired to give more. So don’t allow an event to take place without making a brief but carefully crafted pitch for your nonprofit. Make your mission come alive through your remarks or a short video presentation. When telling the audience about the great work you’re doing, mention how much more you could do with their help and talk about specific needs for cash, in-kind goods and services. People are more likely to give when they clearly understand the difference their gifts can make.
The holiday season is an opportune time to raise funds for your nonprofit. All you have to do is ask — but in the right way. Contact us for more fundraising ideas. © 2017
Not-for-profit board members need to keep an eye on how well their organizations are meeting major goals and furthering their missions. One of the easiest, quickest ways for boards to do this is with a “dashboard” of key performance indicators. Just as an automobile dashboard gives drivers a quick glimpse of their car’s status, a performance dashboard provides an at-a-glance look at an organization’s financial health.
Concise and Focused
Although most boards regularly receive financial reports to review, a dashboard can be more effective because it’s designed to be concise and focus on the most critical numbers. Plus, the information is displayed in a format that all board members can easily understand — even if they aren’t accustomed to analyzing financial statements. For example, an organization whose primary goal is to diversify revenue sources might use a pie chart on its dashboard to display the percentage of income from each source. All board members need to do is monitor whether slices of the pie are becoming more equal in size over time. Or a nonprofit might use various simple graphics and data displays to track the number of new clients served, volunteer hours, and the number of individual and corporate donors.
To develop your own dashboard, consider these questions:
• What are your nonprofit’s top priorities or objectives?
• What key aspects of your operations do you want to monitor?
• What is the best way to display progress toward goals in key areas?
• How often do you want board members to receive the dashboard for review — such as quarterly or at every meeting?
Include only the most important key indicators on your dashboard so that board members don’t get distracted and can detect trends quickly and take corrective action as necessary.
One of the most important roles of nonprofit boards is to set strategic direction and establish priorities for their organizations. To carry out this duty, your board needs relevant information that’s easy to monitor and understand. We can help you provide it. © 2017
Preparing your not-for-profit’s annual budget is probably one of the least appealing parts of your job. Here’s how to make the process a little less painful.
1. Count your chickens. Before you start allocating resources, figure out what they are. This includes not only the amount of your income, but its nature. Remember that restricted or planned gifts aren’t necessarily available for spending.
2. Get with the program — costs. With the input of staff and board members, determine the costs of current programs and what your nonprofit expects to offer in the next year. Be careful not to underestimate needs. Make necessary adjustments to the previous year’s expenses for inflation and other higher costs that may disproportionately affect your nonprofit.
3. Pay attention to other expenses. List your direct expenses, breaking them down into specific line items. Payroll is probably the largest item — likely at least 50% of total expenses. Add to current salaries any expected salary increases and payroll taxes and benefits. Other direct costs may include rent, utilities, supplies, equipment maintenance, insurance, contracted services and transportation. Account for indirect expenses as well. These benefit multiple programs, such as costs related to payroll for business management, recordkeeping and financial reporting. You may have to allocate salaries for certain positions to several categories.
4. Play with the numbers. What you have at this point is a rough draft. You’ll need to make at least some adjustments to your numbers, assumptions and plans before getting to where your staff and board want to be — whether that means you break even, spend from reserves earned in prior years or plan for a surplus. Be sure to compare your budget to last year’s and to the actual results, paying attention to large variances. An unanticipated one-time event might explain going over budget. But if you routinely overspend, you probably need to be more realistic about your income and expenses.
5. Ask for direction. Don’t hesitate to get assistance if you need it. Your board members may be able to help you prepare an effective budget. But if you’re uncertain, contact us. After all, your annual budget is one of the keys to current and long-term financial stability. © 2017
If you’re an executive or other key employee, you might be rewarded for your contributions to your company’s success with compensation such as restricted stock, stock options or nonqualified deferred compensation (NQDC). Tax planning for these forms of “exec comp,” however, is generally more complicated than for salaries, bonuses and traditional employee benefits. And planning gets even more complicated if you could potentially be subject to two taxes under the Affordable Care Act (ACA): 1) the additional 0.9% Medicare tax, and 2) the net investment income tax (NIIT). These taxes apply when certain income exceeds the applicable threshold: $250,000 for married filing jointly, $125,000 for married filing separately, and $200,000 for other taxpayers. Additional Medicare tax The following types of exec comp could be subject to the additional 0.9% Medicare tax if your earned income exceeds the applicable threshold: Fair market value (FMV) of restricted stock once the stock is no longer subject to risk of forfeiture or it’s sold, FMV of restricted stock when it’s awarded if you make a Section 83(b) election, Bargain element of nonqualified stock options when exercised, and Nonqualified deferred compensation once the services have been performed and there’s no longer a substantial risk of forfeiture. NIIT The following types of gains from stock acquired through exec comp will be included in net investment income and could be subject to the 3.8% NIIT if your modified adjusted gross income (MAGI) exceeds the applicable threshold: Gain on the sale of restricted stock if you’ve made the Sec. 83(b) election, and Gain on the sale of stock from an incentive stock option exercise if you meet the holding requirements. Keep in mind that the additional Medicare tax and the NIIT could possibly be eliminated under tax reform or ACA-related legislation. If you’re concerned about how your exec comp will be taxed, please contact us. We can help you assess the potential tax impact and implement strategies to reduce it. © 2017
There are more than 87,000 foundations in the United States — including family, corporate and community foundations — according to the Foundation Center. If your not-for-profit isn’t actively seeking grants from these groups, you’re neglecting a potentially significant income source. Know your target Probably the most important thing to remember when approaching foundations is that they tend to specialize, making grants to certain types of charities or in specific geographic regions. It’s not enough to be a 501(c)(3) organization — though your exempt status is critical. Your nonprofit’s mission and programs will need to match the interests of the foundation to which you’re applying. So it’s essential to research foundations before you apply for grants. Review annual reports, tax filings, press releases and any other information you can get your hands on. One place to start is the Foundation Center’s online directory at foundationcenter.org. Once you have a list of matches, don’t just start sending out long, detailed proposals. Call your target foundations and talk to staff members about the kind of information they need and their communication preferences. Most will be happy to provide insights into their decision-making process and shed light on your chances of securing a grant. Successful qualities The most successful foundation grant proposals have several qualities in common. For example, foundations like projects that are well defined and data driven with specific goals. They also want to know that their gifts are effective, so achievement of such goals needs to be measurable. It’s important to outline a project’s life cycle and how you plan to fund it to completion. Many foundations provide the money to initiate projects but expect nonprofits to use their own funds and other grants to continue them. In fact, if you hope to establish a long-term relationship with a foundation that has given you a grant, you must successfully finish what you started. If at first ... Keep in mind that a rejected proposal doesn’t have to shut the door on future opportunities. If your request is turned down, ask the foundation to explain its decision and to provide tips on making your proposals stronger. Many organizations are competing for the same foundation funds, so tenacity is crucial. Contact us for more tips on getting the funding your organization needs. © 2017
The Social Security Administration (SSA) announced on Friday that the maximum amount of wages in 2018 subject to the 6.2% Social Security tax (old age, survivor, and disability insurance) will rise from $127,200 to $128,700, an increase of a little more than 1%. By comparison, the 2017 wage base increased more than 7% over the 2016 wage base.
The maximum amount of Social Security tax a taxpayer could pay will therefore increase from $7,886.40 in 2017 to $7,979.40 in 2018, an increase of $93.
The SSA also announced that Social Security beneficiaries will get a 2% increase in benefits in 2018, after receiving a 0.3% increase in benefits in 2017 and no increase in 2016. The average retiree will receive an increase of $27 a month.
Among the other increases is the amount a worker under full retirement age can earn before he or she has Social Security benefits reduced. The limit increases from $16,920 for 2017 to $17,040 for 2018, after which $1 in benefits is withheld for every $2 earned above the limit.
There is no limit on the amount of wages subject to the other portion of the FICA tax, the 1.45% Medicare tax.
—JOURNAL Of ACCOUNTANCY - Sally Schreiber (Sally.Schreiber@aicpa-cima.com) is a JofA senior editor.
The extended deadline for filing 2016 individual federal income tax returns is October 16. If you extended your return and know you owe tax but can’t pay the bill, you may be wondering what to do next. File by October 16 First and foremost, file your return by October 16. Filing by the extended deadline will allow you to avoid the 5%-per-month failure-to-file penalty. The only cost for failing to pay what you owe is an interest charge. Because an extension of time to file isn’t an extension of time to pay, generally the interest will begin to accrue after the April 18 filing deadline even if you filed for an extension. If you still can’t pay when you file by the extended October 16 due date, interest will continue to accrue until you pay the tax. Consider your payment options So when must you pay the balance due? As soon as possible, if you want to halt the IRS interest charges. Here are a few options: Pay with a credit card. You can pay your federal tax bill with American Express, Discover, MasterCard or Visa. But before pursuing this option, ask about the one-time fee your credit card company will charge (which might be deductible) and the interest rate. Take out a loan. If you can borrow at a reasonable rate, this may be a good option. Arrange an IRS installment agreement. You can request permission from the IRS to pay off your bill in installments. Approval of your installment payment request is automatic if you: Owe $10,000 or less (not counting interest or penalties), Propose a repayment period of 36 months or less, Haven’t entered into an earlier installment agreement within the preceding five years, and Have filed returns and paid taxes for the preceding five tax years. As long as you have an unpaid balance, you’ll be charged interest. But this may be at a much lower rate than what you’d pay on a credit card or could arrange with a commercial lender. Be aware that, when you enter into an installment agreement, you must pledge to stay current on your future taxes. Act soon Filing a 2016 federal income tax return is important even if you can’t pay the tax due right now. If you need assistance or would like more information, please contact us. © 2017
Term limits for not-for-profit board members can be a double-edged sword. They can allow you to easily let go of unsuccessful board members, but they also can cause you to lose the best sooner than you’d like. Consider some of the issues involved before making a decision. Review the pros Term limits allow you to remove inactive or difficult members politely and, hopefully, without hurting their feelings. They also can create an opportunity for new board members with fresh ideas and perspectives to come on board and provide flexibility as your organization grows. Suppose, for example, that a board member’s term is expiring and a key initiative is to replace outdated technology. This is an ideal time to add a new board member with IT expertise. Term limits can help board members, too. By knowing in advance that their terms will be expiring, they can move on to other nonprofit boards without feeling guilty. And they can exit gracefully if age or life-changing situations affect their participation. Recognize the cons But in some circumstances, term limits do more harm than good. First, your organization may have to look for qualified and dedicated volunteers every couple of years — which can be difficult and time consuming. Also, term limits require your board and organization to commit to an endless cycle of new member training. This can diminish your board’s return on its training investment — by the time a member becomes a valuable asset and is effective, his or her term may be up. What’s more, you may sacrifice your most dedicated members. Although ideally all board members contribute significantly and equally, nonprofits often have a few members that perform the bulk of the board’s work. Losing one of these key people can be devastating. Last, you may lose institutional knowledge and organizational history when founding and experienced members leave. Other options If term limits aren’t appropriate for your organization but you want to ensure board members are active and engaged, think about developing an advisory committee to evaluate members and assess their ongoing interest. To discuss your options, contact us. © 2017
Not-for-profit special events can be lucrative from a fundraising standpoint, but they also carry significant risks. Proper insurance coverage can help protect your organization. Special event, special planning Risks associated with special events run the gamut from accidents and personal injury, to fraud and theft, to cancellation due to inclement weather or nonappearance by a featured performer. However, it’s possible to buy designated “special events insurance.” These policies provide coverage for lawsuits and claims brought by a third party who suffered a loss connected to the event. Coverage may include liquor liability coverage that protects your nonprofit against postevent calamities, such as an auto accident caused by an event guest driving under the influence. Cost-effective options There is a drawback: Special events insurance for a single event generally comes with a high price tag. Depending on the type of event and your current coverage, it might be more cost-effective to obtain coverage by extending one of the following types of insurance policies: Comprehensive/commercial general liability. CGL insurance provides coverage for claims that allege bodily injury or property damage. When necessary, the coverage usually can be extended to members, volunteers, temporary or leased workers, co-sponsoring organizations, outside sponsors and board members. Directors and officers liability. D&O insurance covers claims arising from the management or governance of an organization and can include coverage for board members and executives. Nonowned/hired automobile liability. You may need this coverage if volunteers or staff will use their own vehicles during the event, or if rented or hired cars, such as limousines, will be used. Fidelity. Fidelity bonds guard against the loss of money or property due to dishonest acts of staff or volunteers. Weather. Weather insurance provides coverage for losses resulting from weather-related event cancellations and is particularly important for outdoor events. Nonappearance/cancellation. This insurance protects against losses that result when a featured guest fails to appear. Check with your insurer You may already have some of this coverage under your current policies. But check with your insurer to learn whether your special event will be covered — and, if not, whether you could pay a one-time additional premium for protection. Contact us for more information on managing risk. © 2017
Your not-for-profit has probably spent a lot of time and effort attracting board members who have the knowledge, enthusiasm and commitment to make a difference to your organization. Unfortunately, what begins as a good relationship can sour over time, and you may find yourself in the tough position of having to “fire” a board member. 8 deadly sins Several behaviors can interfere with your board’s efficacy. Pay particular attention to members who: 1. Regularly miss meetings. Everyone has time conflicts now and then, but a chronically absent member drags down your board’s productivity and can lower morale among other members. 2. Don’t accept or complete tasks. Board members who aren’t willing to assume their share of the work force other members to pick up the slack. 3. Are motivated by personal agendas. Board members who pursue their own interests can waste time trying to convince others of their way of thinking — or can steer your nonprofit off course.4. Monopolize — or conversely, never participate in — discussions. There’s a happy medium when it comes to participation. Overbearing members stifle debate and those who sit silently through meetings may not be fully engaged.5. Treat peers disrespectfully. Boards are a team, and their members need to work together amicably.6. Betray confidentiality. Trust is an essential component of the board-organization relationship and your nonprofit can’t afford to have untrustworthy members. 7. Don’t disclose conflicts of interest. Board members risk eroding the trust of others, including external stakeholders if they make (or even appear to be making) decisions that benefit themselves over the best interests of your organization.8. Don’t realize when it’s time to retire. If a longtime board member is preventing your organization from moving forward and staying relevant, it may be time for him or her to move on. Take action Any of these behaviors can be toxic to your organization. When they start to interfere with your board’s work, it’s time to take action. Contact us for more information. © 2017
Own a vacation home? Adjusting rental vs. personal use might save taxes. If you rent out the home for less than 15 days, you don’t have to report the income, but rental expenses aren’t deductible. If you rent it out for 15 days or more, you must report the income, and deductibility of expenses depends on how the home is classified for tax purposes, based on personal vs. rental use. Adjusting the number of days you rent it out and/or use it personally between now and year end might allow the home to be classified in a more beneficial way. Contact us to learn more.
Out-of-pocket medical expenses may be deductible if they exceed 10% of your adjusted gross income. By “bunching” nonurgent medical expenses into alternating years, you may be able to exceed the floor. The “Unified Framework for Fixing Our Broken Tax Code” President Trump and congressional Republicans released on Sept. 27 proposes, among other things, increasing the standard deduction and eliminating most itemized deductions, which likely would include the medical expense deduction. So bunching such expenses into 2017 may be tax-smart. Contact us to learn more.