3 October

Tracking with New Tax Developments

Michael KleinArticles

Tracking with New Tax Developments

If you haven’t already noticed, there are several new developments in tax laws for 2021 (despite all the new ones we already faced in 2020!). Here’s just a few that may impact your situation:

  1. Expanded Child Tax Credit:

For 2021 alone (unless Congress acts to extend this), the American Rescue Plan expanded the Child Tax Credit from $2,000 per qualifying child to $3,000 per qualifying child (ages 6-17) and to $3,600 per qualifying child (ages 0-5). Up to 50% of the total credit per child is available through advanced payments paid by the IRS during 2021. Just be sure to remember that these advanced payments reduce the credit available to you to claim against your tax due on the final tax return.

  1. Expanded Child and Dependent Care Credit:

Also, for 2021 alone (unless Congress acts to extend this), the American Rescue Plan expanded the child and dependent care credit from up to $3,000 in eligible expenses per child (up to $6,000 for more than one child) to up to $8,000 in eligible expenses per child (up to $16,000 for more than one child). The allowable income threshold before phase-out was pushed up from $15,000 to $125,000. This makes the credit available to more filers and in greater amounts.

  1. Recovery Rebate Credit

For 2021, the first two economic stimulus measures from 2020 were carried over to a third wave early in the year. The amount of this credit is worth $1,400 per filer, including $1,400 per dependent claimed on the return. The credit begins to phase out for individuals with adjusted gross income of $75,000 or more ($150,000 or more for married filing joint filers). Some received all or a portion of this as an advanced payment during the year. The amount received will be reconciled with the 2021 filed return. If you are due more, you may receive an additional credit on the return. If you were overpaid, you do not have to repay any of this.

  1. Other Tax Provisions

A few other noteworthy tax provisions to remember include the 0% capital gains rate up to certain income thresholds, as well as the expanded federal standard deduction. These provisions have been available in recent years, and it is important to remember them with year end tax planning. California (and many other states) do not conform to the federal standard deduction amounts, so be sure to factor this into your decision to itemize.

Tax Planning is such an important tool to minimize your overall tax burden and take advantage of strategies available. We encourage this at MPK Advisors & CPAs and look forward to meeting to discuss your unique tax situation and goals!

3 September

What’s Unique About Nonprofit Financial Statements

Michael KleinArticles

What’s Unique About Nonprofit Financial Statements?

If you’ve ever read a nonprofit organization’s audited financial statements, you may notice that there are some differences from the traditional for-profit balance sheet and income statement. A full set of financial statements for a nonprofit includes: the Statement of Financial Position, Statement of Activities, Statement of Cash Flows and Statement of Functional Expenses. The first three somewhat resemble for-profit financial statements with some key differences. The last, the Statement of Functional Expenses, is unique to nonprofit organizations. We can relate nonprofit financial statements to the following for-profit statements below:

If you’ve ever read a nonprofit organization’s audited financial statements, you may notice that there are some differences from the traditional for-profit balance sheet and income statement. A full set of financial statements for a nonprofit includes: the Statement of Financial Position, Statement of Activities, Statement of Cash Flows and Statement of Functional Expenses. The first three somewhat resemble for-profit financial statements with some key differences. The last, the Statement of Functional Expenses, is unique to nonprofit organizations. We can relate nonprofit financial statements to the following for-profit statements below:

The American Institute of Certified Public Accountants (AICPA), in conjunction with the Financial Accounting Standards Board (FASB), offer the key inputs to the development of nonprofit financial reporting standards. Nonprofit financial reporting standards include a unique emphasis on transparency as to the organization’s liquidity, existence of restricted funds, as well as the breakdown of funds spent on administrative, program and fundraising-related functions (which is shown in the Statement of Functional Expenses). The audience reading these statements usually includes grantors, donors, government agencies, lenders, and other key stakeholders in the community.

The Statement of Activities and Statement of Functional Expenses have the most differences from their for-profit entity counterparts. The Statement of Activities for nonprofits includes more information about the organization’s receipt and use of donor-restricted funds. Also, it includes more information about the function or purpose of the organization’s expenses. The Statement of Functional Expenses shows a breakdown of natural expense types (like salaries, benefits and supplies) across their functional uses (administrative, programs and fundraising). Overall, the goal of these differences in nonprofit financial reporting is to emphasize how the organization is using its public funds. This helps donors and grantors decide on whether to support a given organization and how they are stewarding funds.

 

25 August

Preparing for Your Organization’s Audit

Michael KleinArticles

Preparing for Your Organization's Audit

Although not every nonprofit organization requires an audit, I always recommend that you prepare as if you were going to be audited. Why, you ask? Well, for many reasons:
  1. To protect the staff and board from accusations of financial mismanagement
  2. To help ensure that donors can rely on the integrity of their gifts
  3. To develop fiscal policies and procedures that are written and communicated
  4. To setup up internal controls over financial reporting to ensure that operational and financial objectives are being met
  5. To facilitate continuing IRS tax compliance
  6. And many more!
The thought of an audit can make many nonprofit managers shudder, but, if you prepare your organization well before you have an audit, there will be far less stress and much more confidence in your outcome. In California, nonprofits generally are not required to have an audit unless they reach the point at which they general gross revenues of $2 million or more. In the year an organization reaches this threshold for revenues, they must engage an independent CPA firm to perform a financial audit covering that fiscal year. There also may be other reasons why a nonprofit needs an audit, including grantor or other government agency requirements. What does the audit entail? Well, an audit generally involves 3 main components: 
  • Gaining an understanding and internal controls review
  • Substantive testing of transactions and account balances
  • Limited tests of compliance with laws and regulations
This can sound intimidating, but it is just validating all the great work the accounting staff and management team has done throughout the year.  If you have written and board-approved internal controls policy manuals, that will certainly help the audit process. You can obtain resources for these from the AICPA, the National Council of Nonprofits, as well as Board Source, among others. Also, if you engage a CPA for audit services who is familiar with the nonprofit industry, you can ask for input from him or her as well.  An important part of preparing for the substantive testing of balances and transactions is making sure that you have a comprehensive, written financial closing policy and a competent accountant to implement this. Without these key resources, you cannot be confident that your final financial statement balances are accurate, and this could pose issues during your audit. Lastly, in compliance with IRS rules and regulations for nonprofit tax compliance, you will want to be sure to maintain Publication 557, Tax-Exempt Status for Your Organization. This publication covers the range of several required compliance steps to which nonprofits should adhere in order to maintain their tax-exempt status. It also lists things nonprofits should avoid to prevent losing tax-exempt status. Nonprofits should also be aware of other federal, state, and local laws that could impact the organization, such as applicable state tax laws and local ordinances. If you are unsure about the future of your nonprofits tax-exempt status, or maybe you want to start preparing for your next audit, please contact us today for a complimentary consultation to see if we can help you!