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Summer hours are in effect: Our offices close at NOON on Fridays from May 17th to July 12th
Please note: Our offices will be closed on May 20th for IT upgrades. Limited availability from May 21-24 due to team training. We may experience short delays in accessing records and responding to inquiries.
Summer hours are in effect: Our offices close at NOON on Fridays from May 17th to July 12th
Please note: Our offices will be closed on May 20th for IT upgrades. Limited availability from May 21-24 due to team training. We may experience short delays in accessing records and responding to inquiries.
Stay on top of filing and reporting deadlines with our tax calendar! Our tax calendar includes dates categorized by employers, individuals, partnerships, corporations and more to keep you on track.
Do you bite your nails before your entity’s external audit each year? Does your staff start showing signs of anxiety in anticipation of the auditors walking in the door?
If this sounds like your situation, take a deep breath. Here are five tips for making the audit experience run more smoothly for you and your auditors.
Ask your auditor for a list of items they’ll need during the audit, with deadlines for each item, if such a list isn’t provided automatically. Talk to your auditor before the fieldwork if you have questions about any of the items, and let your auditor know right away if you won’t be ready by the agreed-upon dates.
Because unpredictability is a required element in the audit, you’ll also need to produce some information on the spot, such as specific expense reports, journal entry support, or grantor or program reports. But you can still prepare by establishing files during the year to collect the information you may need.
Your expectations of the audit should mirror your engagement letter with the auditing firm. It will spell out what the audit will accomplish and your responsibilities.
Auditors once did accounting “clean-up” work for their clients during the audit, such as preparing year-end journal entries, fixed asset schedules, and various prepaid expense and accrued liability analyses. But today’s professional standards draw a clear line between accounting and auditing services, and your auditor must stay independent of your accounting processes, and as a result may be limited as to what he or she can do.
If there are accounting tasks you can’t do internally due to a lack of expertise, consider hiring a different firm to handle them. But if you’re fully capable and “own” the process, you can engage your audit firm to assist with certain analysis and adjustment information outside of the audit.
Your auditor will apply risk standards during the audit. AICPA AU-C Section 265, Communicating Internal Control Related Matters Identified in an Audit, defines deficiencies in internal control and other “material weaknesses” and “significant deficiencies.”
The auditor, for example, will look to see if there’s:
After reviewing the risk and internal control information you’ve assembled, your auditor could determine there is a “significant deficiency” or the more serious “material weakness.”
For any matter identified in the auditor’s AU-C Section 265 letter, prepare a written response including whether you have taken or intend to take any action in response to the finding. This is important to the audit committee and board as they oversee the audit and the overall system of checks and balances.
Don’t let the annual audit be the only time you talk to your auditor. If you save up all your questions, it’s likely to extend the length of the audit.
Also ask if there are new accounting pronouncements or changes for the year so you and the board aren’t surprised after year end. Be proactive in understanding the new guidance and its impact on your next audit and future financial reporting.
Although the audit — and the preparation that precedes it — requires some work, the benefits are plentiful. The audit not only assesses your overall financial condition, but also can pinpoint problems with financial management and financial reporting, identify ways to reduce risk and strengthen internal controls.
Lenders say that physicians have shown more interest in owning real estate lately than in the past. Why?
You build equity. Plain and simple, when you sell your building, you get something. Over the long term, the property can be worth more than the actual practice itself.
You lock in your cost of occupancy. Rents will always go up, but your mortgage payment won’t. This may result in higher profits in years to come when you’re likely paying less than market rental rates to occupy your facilities.
You enjoy flexibility when selling your practice. When it comes time to retire, you can include the property as part of the practice’s assets or keep the property and lease it to the new owner. These rent payments can then provide a steady retirement income.
You can replace some salary with rent payments and pay less payroll tax. Because rent is considered to be non-earned income, you can reduce your salary by the amount of rent you collect and save on payroll taxes.
Although most financial experts agree that it makes more sense to buy a home than rent an apartment, the pros and cons of office ownership aren’t quite so clear-cut. Physicians and dentists need to weigh a variety of factors when making this important decision, including:
Once you buy the property, you’ve obviously lost some flexibility if you need to move later. For this reason, purchasing may not be the best option for fast-growth practices or practices that have a hard time forecasting their space needs.
But if yours is a mature practice and you’re confident that you can take a long-term perspective, then purchasing your business facilities could be a beneficial move. And with interest rates still at lows not seen in over a generation, this could be a truly unique opportunity to lock in a low cost of occupancy for years to come.
Who better to discuss your long-term financial goals with than your accountant? Our experienced professionals can “run the numbers” and help you decide whether purchasing or leasing makes the most sense for your practice.
Accounting for rental income might at first seem like a simple concept, but in practice it may not be so simple. What is the difference between “rental income” and “advance rent”? How does one account for a security deposit, or property or services received in lieu of rent? How is personal use of a vacation home or other rental property treated? This article addresses those questions.
Rental income is any payment received or accrued for occupancy of real estate or the use of personal property. Rental income is generally included in gross income when actually or constructively received. Cash basis taxpayers report income in the year received, regardless of when it was earned.
Advance rent is any amount received before the period that it covers. Landlords are required to include advance rent in rental income in the year received, regardless of the period covered or the accounting method used by the taxpayer. An amount received by a landlord from a tenant for cancelling a lease constitutes income in the year in which it is received since it is essentially a substitute for rental payments.
Do not include a security deposit in income when received if it is to be returned to the tenant at the end of the lease. If part or all of the security deposit is retained during any year because the tenant does not live up to the terms of the lease, include the amount retained in income for that year. If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in income when received.
Expenses of renting property can be deducted from gross rental income. Rental expenses are generally deducted by cash basis taxpayers in the year paid.
If the tenant pays any expenses that are the landlord’s obligations, the payments are rental income for the landlord and must be included in income. These expenses may be deducted if they are otherwise deductible rental expenses. Property or services received in lieu of rent are reportable income as well. Landlords should include the fair market value of the property or services provided by the tenant in rental income. Services at an agreed upon or specified price are assumed to be at fair market value unless there is evidence to the contrary. There are specific rules related to leasehold improvements so please contact your tax advisor prior to entering into these transactions.
Personal use of a vacation home or other rental property requires that the expenses be allocated between the personal and rental use. If the rental expenses exceed rental income, the rental expenses will be limited.
If you have questions about how to treat expenses and income related to your rental property, our tax advisors would be happy to assist you.
Nonprofits that incorporate financial benchmarks into their operations are better at anticipating negative financial trends and may even see revenues climb, expenses drop and efficiencies improve. The word “benchmark” may strike some as organizational lingo, but the practice of benchmarking often proves quite valuable for nonprofits.
Benchmarking is an ongoing process of measuring an organization against expectations, past experience or industry norms for productivity and profitability and then making adjustments to improve performance in relation to those metrics. Ideally, your nonprofit will consider both:
Benchmarking provides essential information for effectively developing and implementing strategic plans. It helps an organization keep a watchful eye on its financial health and determine where costs can be cut and revenues increased. Nonprofits can use benchmarks to demonstrate their efficiency to stakeholders such as donors and grantors.
The first step is to define what your nonprofit needs to measure. Focus on the metrics that are most critical to the success of your mission and the key indicators of the organization’s financial health and operational effectiveness. For many nonprofits, those metrics will include:
Program efficiency (program service expenses / total expenses). This ratio identifies the amount you spend on your primary mission, as opposed to administrative and fundraising costs. This ratio is of utmost importance to stakeholders.
Fundraising efficiency (unrestricted contributions / unrestricted fundraising expenses). How many dollars do you collect for every dollar you spend on fundraising? The higher this ratio, the more efficient your fundraising. What qualifies as a good ratio depends on the organization’s size, its types of fundraising activities, and so on.
Operating reliance (program service revenue / total expenses). This ratio indicates whether your nonprofit could pay all of its expenses solely from program revenues.
Organizational liquidity (expendable net assets / total expenses). How much of the year’s total expenses is considered expendable equity or reserves? The higher the ratio, the better the liquidity.
Also consider benchmarks such as average donor contributions, expenses per member and other ratios that measure trends for liquidity, operating yield, revenue, borrowing, assets and similar metrics. No matter which benchmarks you choose, though, you’ll need reliable processes for collecting and reporting the data.
Comparing the nonprofit’s performance to benchmarks allows you to zero in on areas with the greatest potential for improvement. Armed with this information, you may be able to improve performance without making significant changes in your operations. Further, when comparing against external benchmarks, you might improve performance by simply adopting best practices used by your peers.
You can obtain information on other nonprofits’ metrics from websites such as GuideStar and Charity Navigator or from commercial software. Information also may be available from state government databases and trade associations. Take steps, though, to ensure you’re comparing apples to apples — that the two organizations you are stacking up against each other are truly comparable.
Some organizations have found it worthwhile to include staff in the benchmarking process. Their involvement in setting aggressive but attainable benchmarks — and measuring progress — can achieve buy-in and help foster teamwork as your nonprofit moves toward and surpasses its goals. Also include your financial advisor, who can help you select the most appropriate benchmarks for your organization and provide advice on how to improve your financial and operational performance.
Colorado offers a conservation easement tax credit program that could save you money while at the same time help preserve Colorado’s natural treasures. Landowners who permanently preserve part of their land for agriculture, scenic views or wildlife habitat can generate Colorado income tax credits that can then be sold to taxpayers.
Purchasing these tax credits could be an excellent strategy if you have a Colorado income tax liability of at least $10,000. The tax credit is not a tax deduction, but rather is a dollar-for-dollar reduction of state tax liability.
Landowners who desire to conserve the special qualities of their land — for example, its productive farm soils, scenic beauty or valuable wildlife habitat – can choose to place a conservation easement on all or a portion of it. Conservation easements give people the assurance that the places they love will be protected forever. A conservation easement is a legal agreement that runs with the land, in perpetuity. Conservation easements may or may not allow public access to the protected property. Over two percent of the land in Colorado is protected by conservation easements, including land in every county.
Colorado requires a conservation easement holder (typically a land trust) to have the responsibility of stewardship for the land. Landowners retain full ownership of the land. Once the easement is in place, the landowner receives Colorado conservation easement tax credits which can be used against their Colorado tax liability or sold to a third party.
Individuals and entities with Colorado state income tax liability may purchase tax credits. There is no limit to the amount of tax credits that any individual or entity may purchase.
The major benefit of purchasing conservation easement tax credits is that they can be purchased at a discount, often at a savings of 10-14%. For example, if you have a $100,000 state income tax liability, you can purchase $100,000 worth of tax credits for between $86,000-90,000, thereby saving $10,000-14,000.
Here is an example to illustrate how purchasing conservation easement tax credits could benefit you:
First, it’s good idea to have an idea of what your Colorado tax liability will be for the upcoming year. Your tax advisor can assist you in this.
Secondly, although not a requirement, it is advisable to purchase tax credits through a reputable broker. Brokers know this process intimately and can efficiently guide a buyer through each step. There are some risks involved when purchasing conservation easement tax credits; these can be greatly minimized by using a reputable broker.
A tax credit broker will match you up with a conservation easement seller and will verify the validity of the credits. The broker also prepares the documents to transfer the credits from the seller to the buyer.
In addition to conservation tax credits, Colorado also offers environmental remediation (Brownfield) tax credits and historic preservation tax credits. If you think you have a Colorado tax liability of at least $10,000 and would like more information on tax credits, please contact our office to discuss the details of your specific situation. Tax credits are in high demand and as a result some brokers have waiting lists already forming, so do not hesitate for long.
The research and development tax credit has been a great tax savings incentive to companies looking to increase their internal research and development activities. When President Obama signed the Protecting Americans from Tax Hikes (PATH) Act on December 18, 2015, the research and development (R&D) credit was finally made permanent (retroactively as of January 1, 2015). In addition, the credit now contains two new options for utilization that did not previously exist which broadens the impact of the credit for many small to mid-sized businesses.
Previously, the R&D tax credit could only be used to offset regular tax; this rule limited many small to mid-sized businesses in their ability to use the credit if they were subject to the alternative minimum tax (AMT). Beginning in 2016, businesses with less than $50 million in gross receipts will be free to use the credit to offset AMT.
In addition, certain start-up businesses (with less than $5 million in gross receipts) that may not have an income tax liability will be able to offset payroll taxes with the credit to the tune of $250,000. No longer will they have to wait until they generate taxable income to take advantage of the credit savings.
Businesses should be aware of the four part test that research activities must pass before the corresponding expenditures related to those activities will qualify for the tax credit. The four part test is as follows:
If you are planning on claiming an R&D tax credit on your business’ next tax return, please consult your tax advisor. Although the benefits of the R&D credit make it attractive, now more than ever, you will want to make certain that you meet the requirements because it has become one of the most heavily audited tax credits by the IRS in recent years.
The Office of Management and Budget’s Uniform Guidance (the Omni Circular) has brought sweeping changes for nonprofits that receive federal funding. This is particularly true with the new rule requiring agencies and other entities allocating federal dollars to reimburse organizations for indirect costs (also known as administrative or overhead costs). Nonprofits need to get up to speed on their rights and responsibilities under the rule — to avoid forfeiting reimbursement dollars.
The rule on indirect costs applies to new awards and additional funding on existing awards made after December 26, 2014. Under the guidance, federal agencies — and pass-through entities that allocate federal funding, including states, local governments and nonprofit intermediaries — must reimburse nonprofit recipients for their “reasonable” indirect costs. The guidance cites several “typical examples” of indirect costs, including:
Nonprofits are now reimbursed for indirect costs under one of three methods: according to an existing federally approved negotiated rate, a new negotiated rate or a default de minimis rate of 10% of the modified total direct costs.
The ability to recover part of their overhead should relieve some of the financial pressure on nonprofits that receive federal awards and allow them to carry out a program with less impact on the overall organization. By being able to charge overhead costs to the federal grant, organizations are able to build infrastructure and focus on sustaining their activities.
What should you be doing now?
Despite the clarity of the new reimbursement requirements, nonprofits may still encounter some obstacles to recovering their indirect costs. Grantors have obvious incentives not to get on board. Some might even attempt to persuade organizations to waive their ability to collect — waivers, however, are prohibited by the guidance. Others may not be up to speed on the requirements or may reduce other line items being funded to allow for indirect costs.
It’s critical that your accounting system distinguish between, and closely track, direct and indirect costs. To accomplish this goal, you might need to make adjustments to the method you’re using to account for indirect costs.
You also may need to reach out to government agencies and pass-through entities to negotiate an indirect cost rate. In some cases, you might find that the default rate of 10% is higher than what you can negotiate. Organizations that have an approved negotiated rate must use that rate for all federal awards and can’t opt for the default rate. If you have an existing negotiated rate, you’ll need to request a one-time extension good for up to four years. If it’s granted, you can’t request another review during that period. At the end of the period, you’ll be required to reapply for a new rate or elect the default rate of 10%.
The new indirect cost reimbursement rule ultimately should be a boon for nonprofits. But it may require you to make some critical decisions, including which reimbursement method to use, and potentially how to adapt your accounting system. Your financial advisor can assist with these decisions.