CHANGES IN ACCOUNTING FOR LEASES

Whether you are a small startup organization just getting off the ground or are well-established with years under your belt, chances are you have leased a piece of equipment, office space or property. These leases have been treated as either operating or capital leases on your books. All that is about to change.

On February 25, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). The ASU on leases will take effect for public companies for fiscal years beginning after December 15, 2018 (calendar year 2019) and for all other organizations, including not-for-profit organizations, for fiscal years beginning after December 15, 2019 (calendar year 2020).

A few of the improvements that the FASB is seeking through the new lease standards are:

• More faithful representation of a lessee’s rights and obligations arising from leases
• Fewer opportunities for organizations to structure leasing transactions to achieve a particular outcome on the balance sheet
• Improvements in the understanding and comparability of a lessee’s financial statements
• Additional information about lessors’ leasing activities and exposure to credit and asset risk as a result of leasing

There are many key requirements to the standard that will need to be addressed, but the biggest changes for your organization are as follows:

• If you are the lessee, you will recognize most leases on your balances sheet (statement of financial position for not-for-profit organizations). If your lease term is greater than 12 months you will be recording both a right of use (ROU) asset and a lease liability. This differs from current treatment of operating leases as currently you are expensing your lease cost on a monthly basis, thus only effecting your “bottom line” and not assets or liabilities.
• There will be expanded quantitative and qualitative disclosures by both lessees and lessors.
• Organizations will need to review each lease and other arrangements to determine if still meet the criteria under the new definition.

Beyond financial reporting, the standard impacts other aspects of operations:

• Moving operating leases onto the organization’s balance sheet could make a significant difference in the numbers the organization is reporting (to creditors, board members, etc.), affecting loan covenants for example.
• Larger organizations with multiple leases may need to spend additional time and resources to identify all leases and gather the data needed to apply the new standard.

We encourage you to start the process early, meet with your management, board, lenders, donors, other users of your financial statements and your accountant to discuss the standard and the impact on your organization.

About the Author: Danielle D. Martin, CPA is a Senior Audit Manager at Perry, Fitts Boulette & Fitton CPAs with 24 years of experience in the accounting world. She can be reached at danielle@pfbf.com or 873-1603.

WHAT NONPROFITS NEED TO KNOW ABOUT THE NEW TAX LAW

The number of taxpayers who itemize deductions on their federal tax return — and, thus, are eligible to deduct charitable contributions — is estimated by the Tax Policy Center to drop from 37% in 2017 to 16% in 2018. That’s because the recently passed Tax Cuts and Jobs Act (TCJA) substantially raises the standard deduction. Many not-for-profit organizations are understandably worried about how this change will affect donations. But this isn’t the only TCJA provision that affects nonprofits.

Donors have fewer incentives

In addition to reducing smaller-scale giving by shrinking the pool of people who itemize, the TCJA might discourage major contributions. The law doubles the estate tax exemption to $10 million (indexed for inflation) through 2025. Some wealthy individuals who make major gifts to shrink their taxable estates won’t need to donate as much to reduce or eliminate their potential estate tax.

UBIT takes a bigger bite

The new law mandates that nonprofits calculate their unrelated business taxable income (UBTI) separately for each unrelated business. As a result, they can’t use a deduction from one unrelated business to offset income from another unrelated business for the same tax year. However, they can generally use one year’s losses on an unrelated business to reduce their taxes for that business in a different year. The TCJA also includes in UBTI expenses used to provide certain transportation-related and other benefits. So, the unrelated business income tax (UBIT) a nonprofit must pay could go up.

High compensation risks new tax

Nonprofits with highly compensated executives may now potentially face a 21% excise tax. The tax applies to the sum of any compensation (including most benefits) in excess of $1 million paid to a covered employee plus certain large payments made to that employee when he or she leaves the organization, known as “parachute” payments. The excise tax applies to the amount of the parachute payment less the average annual compensation.

Bond interest exemption revoked

The TCJA repeals the tax-exempt treatment for interest paid on tax-exempt bonds issued to repay another bond in advance. An advance repayment bond is used to pay principal, interest or redemption price on an earlier bond prior to its redemption date.

Be informed

Note that other rules and limits may apply. We can provide you with a detailed picture of the new tax law and explain how it’s likely to affect your organization. Contact our professional staff at Perry, Fitts, Boulette & Fitton CPAs by calling 207-873-1603 or visit us at www.pfbf.com.

© 2018

Pay Attention When You Get Paid

Over the past couple of months, it has been hard to avoid the noise coinciding with what is formally known as the Tax Cuts & Jobs Act. Now that the bill has passed, and much of that noise has become a reality, the consequences of the reform are impossible to avoid.

While the broader effects of the new legislation are yet to be seen, there are some components of the law that will have an effect on the majority of Americans within the next few weeks.

On January 11, 2018, the IRS released Notice 1036, which serves to update employers on how much federal tax they should be withholding from their employee’s paychecks. Implementation of the new withholding amounts (as adjusted for the new tax landscape) is to begin “as soon as possible, but not later than February 15th, 2018”. To put it simply, this means that many of us will see a change in our take home pay very soon.

You may recall filling out a Form W-4 when you began your employment? That form is what your employer uses to calculate the amount of federal income tax they should remit from your paycheck. Using the updated withholding tables released with Notice 1036, employers will be adjusting their employees’ paychecks to more accurately cover their (new) income tax liability.

Here is what is important to remember: while employers can accurately determine the amount of tax owed based off of the wages they pay their employees, they have no way of considering the other elements that factor into an employee’s tax situation. Taxpayers need to consider a more involved approach at determining what their overall tax liability will be. In order to do so, each of us needs to develop an understanding of the new tax laws, and applicably determine how the new laws will affect them.

Take for example, an employee who gets compensated for mileage. In the past, the compensation was likely included on the employee’s W-2, as taxable income. On their tax return, the employee would pick up the mileage compensation as part of their taxable wages, then deduct the mileage as an unreimbursed business expense on Schedule A. Now, however, as a result of the recent tax reform, that deduction for unreimbursed business expenses is no longer available; meaning that the mileage compensation will still be included as taxable income, but there will no longer be an offsetting deduction. If taxpayers aren’t proactive in making sure that they appropriately adjust their withholdings, they could potentially be in for quite a surprise when they file their tax return in April of 2019.

There has a been a lot of curiosity amongst our clients lately; many of them have been asking us how they will fare under the new tax law. It is not necessary, and it might even be unwise, to wait until you file your 2018 tax return to get your answer. The tax reform act certainly did create change. If you pay federal income tax, it will bode you well to consult your tax advisor sooner rather than later; taking a comprehensive look at your new tax environment now can help you plan ahead.

John Massey is a Senior Accountant at Perry, Fitts, Boulette & Fitton CPAs. He helps individuals and businesses with tax planning preparation and works on compiled and reviewed financial statements for businesses. He can be reached at jmassey@pfbf.com or 873-1603.

Business New Year’s Resolutions

Every year, as we turn the calendar from one from one year to the next, many of us contemplate self-imposed resolutions as a means of improvement. We interpret the dawn of a new year as if it were a clean slate; as we compartmentalize years into chapters, January first provides us with a blank page.

Interestingly enough, most of us start our new chapter in a very similar manner; we resolve to exercise more, to eat less, or perhaps we are going to rid of a bad habit. As business owners, I think we can take our resolutions a step further. Of course, everyone wants to make more money than they did in the previous year, but how?

Similar to your health and wellness resolutions, you need a plan. You need to identify aspects of your business that could improve and then determine how to do so. Proclaiming that your new year’s resolution is to lose weight is merely noise unless you identify specifically what changes need to be made. Think of your business in the same regard; if you want to improve your bottom line in 2018, spend some time studying your income statement, balance sheet and statement of cash flows. Calculate your receivables turnover ratio to see how efficiently you are collecting cash, calculate your inventory turnover to learn how long items are sitting on your shelves, take a good look at your expenditures – is your money being spent wisely?

It is the details such as these that together in a conglomerate make up the composition of a company’s prosperity. Businesses can often times find themselves consumed by their top line. The rationalization that increased revenues correlate to increased profits might be true, but then again, it might not. While increases in revenue are obviously important, the money is in the margins.

Consider this: would you rather have $1 million in sales with $900k of correlated expenses? or $500k in sales with $200k of related expenses? The latter might sound less exciting, but you will have another $200k to show for it.

Closing the books at year end provides us with a unique opportunity to reflect on our company’s health. It can be difficult to step back and make an in-depth analysis during the hustle and bustle that occurs throughout the year. As you open a new ledger, I encourage you to invest some time in really looking at the numbers. After you join a gym and reluctantly commit to a new diet, consider how you might clean up your company’s balance sheet or realize better margins on your income statement. As with our personal lives, there is likely something that our businesses can improve on. It might take reflection and even analysis, but positive changes are going to pay off – literally.

Wishing you and your business a prosperous and healthy 2018.

John Massey is a Senior Accountant at Perry, Fitts, Boulette & Fitton CPAs. He helps individuals and businesses with tax planning preparation and works on compiled and reviewed financial statements for businesses. He can be reached at jmassey@pfbf.com or 873-1603.

Your Workforce-The Next Generation

Ever wonder what it will take for your business to hire and retain the best employees? Are you having trouble understanding the new generation of workers? As a Millennial myself, I hope to bridge the gap to better understand the upcoming workforce.

There seems to be no rush to get to where Millennials are heading in life. Many wait longer to get married, have children and though highly educated, even wait longer to find a career. Employers should not be surprised that the newly graduated twenty-two-year-old does not know where they want to be in five or ten years from now. The motivation for many millennials is to discover and fulfill their passion rather than to earn a higher salary. Don’t get me wrong, money is a factor in seeking the best job, but it is certainly not the number one determinate. How should employers make the most of this generation? Open up the lines of communication, support flexibility and allow employees to discover their passion, both inside and outside work.

Communication and feedback on a timely basis is crucial. Millennials have grown up with instant gratification and answers at their fingertips. Waiting for a yearly evaluation just won’t cut it. Most prefer to know how they are performing at the end of a specific task or function. This will allow them to turn constructive criticism into positive changes along the way. What could this look like? Quarterly meetings with a mentor in management is a great way to start.

Flexibility is the second key to happiness for Millennials. Allow millennials to have say in where, when, or how their work will get done to set the tone that you believe that they can make a difference. This young workforce will not react kindly to “that is just the way we do it around here”. Help them to focus on efficiencies and the quality of the work rather than do it our way just because. My employer gave me the basic requirements for meeting client needs and set up some required times, but allows the bulk of my time to be flexible. As a Millennial, being able to control a portion of my schedule and workload lets me know that my employer wants to work towards building my career.

If time is not a flexible component of your business, revamping your benefits package, including retirement savings, wellness plans or community volunteer time could prove to provide the flexibility Millennials seek. Get in touch with your Business advisors to determine which benefits might work best.

Most importantly, Millennials are not lazy, in fact just the opposite is true. They are passionate and hardworking when part of a team. To tap into their talents, it is very important to recognize and embrace the generational differences so that you too can play a part in grooming the leaders of the future.

Jessica Marin, MBA/CPA is employed as a Senior Accountant at Perry, Fitts, Boulette & Fitton, CPAs with offices in Bath and Oakland. She helps individuals and businesses with tax planning preparation and works on compiled and reviewed financial statements for businesses. She can be reached at jessica.marin@pfbf.com or 207-371-8002.

Tax Cuts & Jobs Act Is Good For Business

As I write this article, Congress is about to vote on major corporate tax reform, namely the “Tax Cuts and Jobs Act”. Supporters of the bill believe that corporate tax reform will more readily allow US corporations to keep taxable earnings in the US and that those earnings will spur new economic growth. Others protest that reform puts more money in the hands of the rich. Likely, both sides are correct. What the Act will not do, is simplify taxation for small business owners.

Clearly these tax changes will mean an increased bottom line for Corporate America. Wall Street has reacted to the anticipated change with double digit gains in many stock market indexes. And though I do not represent any of the Fortune 500 companies who will benefit most from the reform, my retirement assets are invested in those companies.

The tax cuts will undoubtedly have a significant impact on many of our local businesses as well. The final draft of the legislation gives a 20% deduction to many of those who receive business income. The Act defines trade or business income as it relates to any “qualified” trade or business of the taxpayer. For local C-Corporations, of which there are very few, the tax rate will be a flat 21%. C-Corporations with income in excess $75,000 will likely see a benefit. The more common business enterprises, such as S-Corporations, Sole Proprietors and Partnerships, will pass tax benefits along to the owners in the form of a 20% deduction on qualified business income. There are many conditions and hoops to jump through, but my reading of the bill suggests that the majority of local companies will benefit.

As an example, take the local retailer with $80,000 of income from her S-Corporation. Provided conditions are met, the $80,000 will generate a 20% deduction, or $16,000, from her taxable income. Her anticipated new tax rate will also be reduced to 22%. My estimate is that she will see an additional $3,500 in her pocket next year as a result of the business change alone. What she will do with the anticipated tax savings is anyone’s guess. Hopefully, she will spend it locally on other goods and services. Undoubtedly, she will pay a tax preparer more money to complete her tax return.

After reviewing the proposed changes, I have concluded that the majority of small businesses are likely to see tax savings. From a jobs perspective, the changes will at the very least be a major jobs act for the accounting profession. Unfortunately, Congress must have thought the same and has exempted accountants and lawyers, working in their profession, from benefiting from this deduction. Call it karma I guess.

Jamie Boulette, CPA has 30 years of tax experience and is managing director of Perry, Fitts, Boulette & Fitton CPAs with offices in Bath and Oakland. He can be reached at jboulette@pfbf.com or 371-8002.