Category Archives: Uncategorized

Spring cleaning: Review your nonprofit’s programs — and possibly replace some

Has your not-for-profit’s program lineup remained unchanged for at least a couple of years? If so, consider using the tradition of spring cleaning to review your offerings. Some of your programs might be due for replacement.

Clear out the closets

Many nonprofits keep programs long after they’ve stopped working. Instead of relying on old assumptions about their effectiveness, perform new research. Start by surveying participants, members, donors, employees, volunteers and community leaders about which of your nonprofit’s programs are the most — and least — effective and why.

You may get mixed responses regarding the same program, so consider their source. Employees and volunteers who work directly with program participants are more likely to know if your current efforts are off target than is a donor who attends a fundraising event once a year.

Right tool for the job

If you don’t already have goals for each program, you need to set them. Also put in place an evaluation system with metrics that are strategic, realistic and timely. For example, a charity that provides tutoring to high school students in low-income neighborhoods might measure the program’s success by considering exam and class grades and graduation rates as well as the students’ and teachers’ feedback.

Apply several measures, including subjective ones, before deciding to cut or fund a program. Numerical data might suggest that a program isn’t worth the money spent on it, but those who benefit from the program may be so vocal about its success that eliminating it could harm your reputation.

Shiny and newer

It’s usually easier to identify obsolete programs than to decide on new ones. If one of your programs is clearly ineffective and another is wildly exceeding expectations, the decision to redeploy funds is simple.

Keep in mind that new programs can be variations of old ones, but they must better serve your basic mission, values and goals. Also, no matter how much good programs do, they can’t be successful if they overspend. For every new program, make a tight budget and stick to it. You might want to start small and, if your soft launch gets positive results, simply revise your budget.

It takes a team

Even if it’s clear to you and your staff which programs must go, some stakeholders may object to your proposals. Handle these individuals — particularly donors — with care. Let us know how we can help.  We can be reached at msawyer@pfbf.com or 207-873-1603.

© 2018

Making The Most of Your Nonprofit’s Internal Audit Function

The key role of a not-for-profit’s internal auditors was once limited largely to testing financial and compliance controls and reporting their findings to the organization’s leadership. But today, with their cross-departmental perspective, internal audit staff (whether employees or outside consultants) can help anticipate and mitigate a variety of risks, improve processes — and even help evaluate your nonprofit’s strategies.

Core job

On its most basic level, the internal audit function provides independent assurance of compliance with a nonprofit’s internal controls and their effectiveness in mitigating financial and operational risk. Potential risks include fraud, insufficient funds to support programming and reputational damage.

Internal auditors start by identifying a nonprofit’s vulnerabilities and prioritizing them from high to low. Through testing and other methods, they then assess the effectiveness of internal controls. Auditors document their results in reports that include recommended improvements.

Internal auditors further evaluate compliance with laws, regulations and contracts. They follow up on management’s remediation actions to eliminate identified risks and assist external auditors, when applicable.

The effectiveness of the internal audit function hinges on auditor independence. Auditors should be independent from management and all areas they review to avoid bias or a conflict of interest. Auditors should report directly to the board of directors or its audit committee.

Expanded function

Although the internal audit function is often viewed mainly through the prism of compliance and internal controls, it has a lot to offer beyond risk assessments and audit plans. Savvy nonprofits have begun to tap internal audit for strategic purposes.

Auditors may serve as internal consultants, providing insights gathered while performing compliance and assessment work. For example, while reviewing invoices, internal auditors may discover a way to streamline invoice processing.

The internal audit function’s familiarity with the organization’s inner workings also affords it an unusual perspective for evaluating strategic opportunities. Does your nonprofit have a financial weakness that could undermine plans for continuing current programs or launching new ones? Your internal auditor probably knows the answer.

Ask for more

Increased public scrutiny of how nonprofits are governed and held accountable makes an effective internal audit function a must. But internal auditors can offer your nonprofit more than financial and compliance oversight. To ensure you’re making the most of this function, contact our audit team at 207-873-1603.  Ask for Gary Smith, CPA or Danielle Martin, CPA.

© 2018

2018 – 02/09

There’s never a shortage of misconceptions about taxes and tax refunds.

With the 2018 filing season in full swing, the IRS offers basic tips to help clear up some common misbeliefs. For example: Many people believe that all refunds will be delayed, but 9 out of 10 refunds will be delivered within 21 days. Also, 80% of filers will get their refunds faster using e-file and direct deposit. And the IRS won’t call, email or text you about your refund. (These are signs of a scam.) For more common misbeliefs about taxes, visit http://bit.ly/2EqRmXy or contact us at 207-873-1603. We’re happy to help! 

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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.

Time is running out to make your state income tax payments and still be provided a deduction on your Federal income tax return.

Unless you have been hiding under a rock, you are aware that both the House and Senate have passed legislation to update the tax code. Both plans are calling for a repeal of the deduction for state and local income tax expense. Although we are not yet sure of the final outcome of the tax legislation, we are strongly urging all clients who pay state income taxes to be prepared to pay any state tax due before December 31, 2017.

For those individuals who generally pay Alternative Minimum Tax (AMT) a prepayment may not benefit you. However, taxpayer’s who are scheduled to make January 15th, 2018 estimates and those who suspect that they will owe state tax on April 15th, are likely to benefit by making tax payments before December 31st.

If you have questions about how the state income tax deduction impacts you, please give us a call at 207-873-1603 or swing by one of our two locations: 259 Front Street, Bath or 46 First Park Drive Oakland.

 

How Can Life or Career Changes Affect Your Tax Return?

Have you recently changed jobs? Started your own business? Maybe welcomed a child to your family? Well, all of these situations could have tax consequences or benefits, requiring some financial planning.

When changing jobs, there are several things to consider. Did you have a 401(k), 403(b) or another form of retirement plan at your old job? If so, rolling over your retirement plan to your new employer or to an individual retirement account, may provide you with more control over your retirement savings. Also, if you recently relocated for a new job, you may be eligible to deduct moving expenses. In order to qualify, the following three requirements have to be met: your move is closely related to the start date of your new employment, your new job is at least 50 miles from your prior home, and you must have worked full-time, for at least 39 weeks during the first 12 months, in the new area where your job is located. If your job relocation satisfies these requirements, you are entitled to deduct reasonable and qualifying moving expenses. Along with considering these additional items and benefits when changing jobs, make sure you receive your W-2 from your previous employer.

Have you recently started a new business or hobby and are trying to figure out how to report the income on your tax return? The first step is to consider whether the activity is in fact a business or a hobby. The key way to differentiate between a hobby and a small business hinges on your profit motive, or lack thereof. If you have a profit motive, and spend a considerable amount of time participating in your new venture, you are likely operating a small business. Unincorporated small businesses generally report income and expense on a Schedule C of form 1040. If your new adventure is really a hobby, income is reported on line 21 “Other income”. Expenses are deductible only if you itemize deductions, and are subject the 2% limitation. In either case, it is important to keep detailed records of your income and expenses.

Finally, and most exciting to me is how a new child can affect your tax situation. If you added a child to your family at any time during the year you qualify for an additional dependency exemption, which phase out for higher income families, for 2017 are $4,050. The addition to the family may also allow you to become eligible for the child tax credit, and credit for child and dependent care expenses. These credits have income limitations, but are helpful when trying to combat the expenses of a new child.

There is a lot to consider during life and career changes, but our experienced accountants at Perry, Fitts, Boulette & Fitton CPAs are happy to assist you through these tax and financial changes. We want you to be well prepared for the 2017 tax filing season. If we can further assist, please don’t be afraid to stop in at either our Oakland or Bath offices.

Nick Deblois is a Staff Accountant at Perry, Fitts, Boulette & Fitton CPAs. He works closely with other senior staff members of the firm, honing his talents regarding tax and accounting matters. He can be reached at nick@pfbf.com or 207-873-1603.

Marijuana Sales and the Monster Hiding in the Tax Code –How To Minimize the Damage of Section 280E

Marijuana is currently legal in some form in 30 States, Washington DC, Guam and Puerto Rico. It is quickly becoming a major economic driver in many states as reflected in Colorado. Through September, the Cannabis industry in Colorado alone has surpassed the one-billion-dollar mark. Despite the overwhelming support of legalized cannabis, the federal government continues to enforce tax policy that will, if not change, tax the industry out of business.

The simple solution would be for Congress to pass legislation that would remove Marijuana from the list of Schedule 1 drugs. There are currently a host of bills that attempt to do just that. The most promising and straight forward is H.R. 1810 – Small Business Tax Equity Act of 2017. H.R. 1810, introduced by Carlos Curbelo (R- FL), is co-sponsored by 38 other members of the House from both sides of the isle. H.R. 1810 simply states that Section 280E of the Internal Revenue Code would not be applicable to “marijuana sales conducted in compliance with State law”.

Unfortunately, nothing seems that simple for our elected officials. Few members of Congress, even those members whose states have legalized cannabis, are willing to take a stand against those who are against Marijuana reform- namely big pharmaceutical and big alcohol companies.

Courts continue to strictly interpret code Section 280E by disallowing all deductions for trade or business expenses in connection with listed Schedule I & II drugs. Deductions from gross income are allowed for costs of goods sold (COGS). The IRS has taken the position that the definition of COGS is defined by code Section 471. Those businesses that both produce and distribute marijuana can take guidance from the Regulations found in section 1.471 of the code. Under these Regulations, includable costs consist of production facility: rent, maintenance, utilities, direct materials, tools, supplies, testing, production wages and production overhead. Specifically excluded costs include: general and administrative, marketing, selling, advertising, distribution, and other expenses not associated with production.

So how can cannabis companies afford to stay in business?

Let’s look to a few critical cases to better understand the constraints of Section 280E.

Review of the 2007 CHAMPS v Commissioner., 128 TC 173 case is critical in helping us to better understand that only those trade or business expenses related to marijuana trafficking should be disallowed under Section 280E. CHAMPS established that businesses can have multiple activities and that those not involving “trafficking” are not precluded by Section 280E. CHAMPS charged a fee for extensive caregiving services and provided a set amount of medical marijuana. The court concluded that the taxpayer had not one but two businesses and therefore, those business expenses not related to “trafficking” of a controlled substance were deductible. The court allowed the proration of costs between the two “businesses”

The second direction giving case is the 2012 Martin Olive v Comm., 139 TC 19, also known as the Vapor Room case. Quite the opposite from the facts presented in the CHAMPS case, Mr. Oliver kept inadequate records and was not able to establish that he conducted more than one business. The court concluded that in order for a taxpayer to establish multiple businesses, it must be engaged in these other activities with a profit motive. Simply giving away free munchies, coffee and advice did not escalate to a spate business unit. The case did, however, give guidance to an acceptable cost of goods sold percentage of roughly 75%.

In the most recent cannabis case decision released on October 23, 2017(Feinberg v. Comm., TC Memo 2017-211), the US Tax Court decided in favor of the IRS with respect to costs disallowed under Section 280E. The IRS victory in this case hinged mainly on the taxpayers’ inability to support its deduction as it related to cost of goods sold. The court concluded that the taxpayers did not “maintain sufficient reliable records to allow the Commissioner to verify the taxpayer’s income and expenditures.” The court did not rely on post audit reclassification of cost of goods sold items. Alas, there is no substitute for good record keeping.

As a Certified Public Accountant (CPA) who specializes in the industry and has represented clients through multiple IRS audits, my take away is simple: It is foolhardy for one to believe that by some magical process, Section 280E will go away or will be retroactively repealed. Until legalized cannabis is exempt from Section 280E provisions, industry businesses should make every effort to direct the predominance of their expenses into production. CEO’s, CFO’s and specialists should concentrate their time and resources on production, manufacturing and inventory controls. Multiple business units should be established, each with its own written plan for profitability. Job descriptions should indicate which positions have inventory production, control or monitoring responsibilities. CPAs familiar with cannabis can play an important role in helping business owners set up a chart of accounts, identify business units and develop strong internal controls needed for success.

It is clear to me that IRS audits in this industry will not go away any time soon. Every company should prepare themselves for this eventuality. For now, good accounting records and well thought out business units will reduce the strain of Section 280E and allow all involved to keep their heads above water. To survive the long term, however, the industry must get Congress to remove marijuana from the grips of Section 280E. It will be beneficial if all involved give their representatives in Washington, DC a heads up that H.R. 1810 – Small Business Tax Equity Act of 2017 is the simplest solution.

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