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Interest in not-for-profits’ governance practices from lawmakers, watchdog groups and the general public has been growing in recent years. If your board hasn’t reviewed its roles and responsibilities recently, now is a good time.

3 primary responsibilities

Nonprofit board members — whether compensated or not — have a fiduciary duty to the organization. Some states have laws governing the responsibilities of nonprofit boards and other fiduciaries. But, in general, a fiduciary has three primary duties:

  1. Duty of care. Board members must exercise reasonable care in overseeing the organization’s financial and operational activities. Although disengaged from day-to-day affairs, they should understand its mission, programs and structure, make informed decisions, and consult others — including outside experts — when appropriate.
  2. Duty of loyalty. Board members must act solely in the best interests of the organization and its constituents, and not for personal gain.
  3. Duty of obedience. Board members must act in accordance with the organization’s mission, charter and bylaws, and any applicable state or federal laws.

Board members who violate these duties may be held personally liable for any financial harm the organization suffers as a result.

Conflicts of interest

One of the most challenging components of fiduciary duty is the obligation to avoid conflicts of interest. In general, a conflict of interest exists when an organization does business with:

  • A board member,
  • An entity in which a board member has a financial interest, or
  • Another company or organization for which a board member serves as a director or trustee.

To avoid even the appearance of impropriety, your nonprofit should also treat a transaction as a conflict of interest if it involves a board member’s spouse or other family member, or an entity in which a spouse or family member has a financial interest. 

The key to dealing with conflicts of interest, whether real or perceived, is disclosure. The board member involved should disclose the relevant facts to the board and abstain from any discussion or vote on the issue — unless the board determines that he or she may participate. 

Meet obligations

The rules concerning the liability of fiduciaries are complex. But your board members can meet their obligations by acting in good faith, putting the organization’s best interests first, making informed decisions and disclosing any potential conflicts of interest. Contact us for more information.

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The IRS has published depreciation limits for business vehicles first placed in service this year. These limits remain largely unchanged from 2016 limits. Because 50% bonus depreciation is allowed only for new vehicles, these limits are different for new and used vehicles.

* For new business cars, the first-year limit is $11,160; for used cars, it's $3,160. After year one, the limits are the same for both new and used cars: $5,100 in year two, $3,050 in year three, and $1,875 in all following years.

* The 2017 first-year depreciation limit for trucks and vans is $11,560 for new vehicles and $3,560 for used vehicles. The limits for both new and used vehicles in year two are $5,700, in year three $3,450 (up $100 from 2016), and in each succeeding year $2,075.

For details relating to your 2017 business vehicle purchases, contact us.

 

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The Trump administration has unveiled their proposal for tax reform. The proposal is NOT formal legislation but is an outline composed of broad principles.In order to become reality, the proposal will now have to be crafted into a bill, which would have to pass in the U.S. House and the Senate before going to the President to be signed into law. Proposed changes include:

For individual taxpayers:

  • Currently there are seven individual income tax rates. These would be reduced to three: 10%, 25%, and 35%. Tax brackets, or income levels where these rates would apply, have not yet been determined.
  • With the goal that fewer taxpayers would itemize, the standard deduction would be doubled.
  • The alternative minimum tax (AMT) would be repealed.
  • No specifics were provided, however there would be some sort of tax relief for child and dependent care expenses.
  • The 3.8% net investment income tax would be repealed. It was enacted as part of the Affordable Care Act.
  • The estate tax would be repealed.
  • Most “tax breaks” would be repealed. Exceptions would be made for certain provisions involving home ownership, charitable giving, and retirement savings. In taking questions from the press, Secretary Mnuchin said specifically that the mortgage interest deduction would be retained.

Business and Individual:

  • There would be a shift from a worldwide system of taxation (under which a U.S. taxpayer is generally taxed on its worldwide income regardless of where earned) to a territorial system (under which income would generally be taxed in the country where it is earned).

For business taxpayers:

  • The business tax rate would decrease from 35% to 15% for corporations, and the top tax rate for pass-through businesses (e.g., partnerships, sole proprietorships) would be reduced from 39.6% to 15%.
  • There would be a one-time repatriation tax on offshore earnings. The exact percentage of the tax rate is still being negotiated. 
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Private companies with more than one owner should have a buy-sell agreement to spell out how ownership shares will change hands should an owner depart. For businesses structured as C corporations, the agreements also have significant tax implications that are important to understand.

Buy-sell basics

A buy-sell agreement sets up parameters for the transfer of ownership interests following stated “triggering events,” such as an owner’s death or long-term disability, loss of license or other legal incapacitation, retirement, bankruptcy, or divorce. The agreement typically will also specify how the purchase price for the departing owner’s shares will be determined, such as by stating the valuation method to be used. 

Another key issue a buy-sell agreement addresses is funding. In many cases, business owners don’t have the cash readily available to buy out a departing owner. So insurance is commonly used to fund these agreements. And this is where different types of agreements — which can lead to tax issues for C corporations — come into play.

Under a cross-purchase agreement, each owner buys life or disability insurance (or both) that covers the other owners, and the owners use the proceeds to purchase the departing owner’s shares. Under a redemption agreement, the company buys the insurance and, when an owner exits the business, buys his or her shares. 

Sometimes a hybrid agreement is used that combines aspects of both approaches. It may stipulate that the company gets the first opportunity to redeem ownership shares and that, if the company is unable to buy the shares, the remaining owners are then responsible for doing so. Alternatively, the owners may have the first opportunity to buy the shares.

C corp. tax consequences

A C corp. with a redemption agreement funded by life insurance can face adverse tax consequences. First, receipt of insurance proceeds could trigger corporate alternative minimum tax. 

Second, the value of the remaining owners’ shares will probably rise without increasing their basis. This, in turn, could drive up their tax liability if they later sell their shares.

Heightened liability for the corporate alternative minimum tax is generally unavoidable under these circumstances. But you may be able to manage the second problem by revising your buy-sell as a cross-purchase agreement. Under this approach, owners will buy additional shares themselves — increasing their basis.

Naturally, there are downsides. If owners are required to buy a departing owner’s shares, but the company redeems the shares instead, the IRS may characterize the purchase as a taxable dividend. Your business may be able to mitigate this risk by crafting a hybrid agreement that names the corporation as a party to the transaction and allows the remaining owners to buy back the shares without requiring them to do so. 

For more information on the tax ramifications of buy-sell agreements, contact us. And if your business doesn’t have a buy-sell in place yet, we can help you figure out which type of funding method will best meet your needs while minimizing any negative tax consequences.

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Whether you filed your 2016 tax return by the April 18 deadline or you filed for an extension, you may be overwhelmed by the amount of documentation involved. While you need to hold on to all of your 2016 tax records for now, it’s a great time to take a look at your records for previous tax years to see what you can purge.

Consider the statute of limitations

At minimum, keep tax records for as long as the IRS has the ability to audit your return or assess additional taxes, which generally is three years after you file your return. This means you likely can shred and toss — or electronically purge — most records related to tax returns for 2013 and earlier years (2012 and earlier if you filed for an extension for 2013).

In some cases, the statute of limitations extends beyond three years. If you understate your adjusted gross income by more than 25%, for example, the limitations period jumps to six years. And there is no statute of limitations if you fail to file a tax return or file a fraudulent one.

Keep some documents longer

You’ll need to hang on to certain records beyond the statute of limitations:

Tax returns. Keep them forever, so you can prove to the IRS that you actually filed. 

W-2 forms. Consider holding them until you begin receiving Social Security benefits. Why? In case a question arises regarding your work record or earnings for a particular year.

Records related to real estate or investments. Keep these as long as you own the asset, plus three years after you sell it and report the sale on your tax return (or six years if you’re concerned about the six-year statute of limitations).

This is only a sampling of retention guidelines for tax-related documents. If you have questions about other documents, please contact us.

Is your not-for-profit association offering enough (or the right) programs to keep members active and engaged? New programs require time, effort and money. So when you commit to developing one, you want to get the biggest bang for your buck. Here are some simple dos and don’ts:

  • DO consult your members. Through focus groups, surveys and informal conversations, gather information about issues your membership is facing. Note gaps between your current program offerings and members’ wants and needs. 
  • DON’T support foregone conclusions. Spinning member feedback to match what you think your organization needs is a big mistake. 
  • DO target specific outcomes. Identify the intended outcomes of proposed programs and attach to them strategic, realistic and timely goals.
  • DON’T lose focus. Consider only program ideas that will directly contribute to your association’s mission, vision and overall goals.
  • DO protect your creation. If your new program is unique, protect it with appropriate trademarks, service marks, copyrights, and patents.
  • DON’T go it alone. Whenever possible, share expenses and resources by partnering with other organizations. Alliances can lend depth, breadth and impact to programs.
  • DO keep your promises. Deliver new programs on time and on target for the greatest impact.
  • DON’T overspend. Come up with a reasonable budget and stick to it. Make adjustments only when absolutely necessary.
  • DO start small. Launch new programs slowly and thoughtfully — and then build on initial success.
  • DON’T worry about perfection. Take chances and try new strategies. The best ideas often are those most different from what you’ve done in the past.

For more tips on making the most of your association’s budget, please contact us.

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If your estate plan calls for making noncash gifts in trust or outright to beneficiaries, you need to know the values of those gifts and disclose them to the IRS on a gift tax return. For substantial gifts of noncash assets other than marketable securities, it’s a good idea to have a qualified appraiser value the gifts at the time of the transfer. 

Adequately disclosing a gift

A three-year statute of limitations applies during which the IRS can challenge the value you report on your gift tax return. The three-year term doesn’t begin until your gift is “adequately disclosed.” This means you need to not just file a gift tax return, but also:
 

  • Give a detailed description of the nature of the gift
  • Explain the relationship of the parties to the transaction, and
  • Detail the basis for the valuation.

The IRS also may require certain financial statements or other financial data and records.
Generally, the most effective way to ensure you’ve disclosed gifts adequately and triggered the statute of limitations is to have a qualified, independent appraiser submit a valuation report that includes information about the property, the transaction and the appraisal process. 

IRS-imposed penalties

Using a qualified appraiser is important because, if the IRS deems your valuation to be “insufficient,” it can revalue the property and assess additional taxes and interest. If the IRS finds that the property’s value was “substantially” or “grossly” misstated, it will also assess additional penalties.

A “substantial” misstatement occurs if you report a value that’s 65% or less of the actual value — the penalty is 20% of the amount by which your taxes are underpaid. A “gross” misstatement occurs if your reported value is 40% or less of the actual value — the penalty is 40% of the amount by which your taxes are underpaid.

Before taking any action, consult with us regarding the tax and legal consequences of any estate planning strategies. In addition, we can help you work with a qualified appraiser to ensure your gifts are adequately disclosed.

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Providing a strong package of benefits is a competitive imperative in today’s business world. Like many employers, you’ve probably worked hard to put together a solid menu of offerings to your staff. Unfortunately, many employees don’t perceive the full value of the benefits they receive.

Why is this important? An underwhelming perception of value could cause good employees to move on to “greener” pastures. It could also inhibit better job candidates from seeking employment at your company. Perhaps worst of all, if employees don’t fully value their benefits, they might not fully use them — which means you’re wasting dollars and effort on procuring and maintaining a strong package.

Targeting life stage

Among the most successful communication strategies for promoting benefits’ value is often the least commonly used. That is, target the life stage of your employees.

For example, an employee who’s just entering the workforce in his or her twenties will have a much different view of a 401(k) plan than someone nearing retirement. A younger employee will also likely view health care benefits differently. Employers who tailor their communications to the recipient’s generation can improve their success rate at getting workers to understand their benefits.

Covering all bases

There are many other strategies to consider as well. For starters, create a year-round benefits communication program that features clear, concise language and graphics. Many employers discuss benefits with their workforces only during open enrollment periods. 

Also, gather feedback to determine employees’ informational needs. You may learn that you have to start communicating in multiple languages, for instance. You might also be able to identify staff members who are particularly knowledgeable about benefits. These employees could serve as word-of-mouth champions of your package who can effectively explain things to others.

Identifying sound strategies

Given the cost and effort you put into choosing, developing and offering benefits to your employees, the payoff could be much better. We can help you ensure you’re getting the most bang for your benefits buck.
 

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Bartering might seem like something that happened only in ancient times, but the practice is still common today. And the general definition remains the same: the exchange of goods and services without the exchange of money. Because no cash changes hands in a typical barter transaction, it’s easy to forget about taxes. But, as one might expect, you can’t cut Uncle Sam out of the deal. 

A taxing transaction

The IRS generally treats a barter exchange similarly to a transaction involving cash, so you must report as income the fair market value of the products or services you receive. If there are business expenses associated with the transaction, those can be deducted. Any income arising from a bartering arrangement is generally taxable in the year you receive the bartered product or service. 

And income tax liability isn’t the only thing you’ll need to consider. Barter activities may also trigger self-employment taxes, employment taxes or an excise tax. 

Barter in action 

Let’s look at an example. Mike, a painting contractor, requires legal representation for a lawsuit. He engages Maria as legal counsel to represent him during the litigation. Maria charges Mike $6,000 for her work on the case. 

Being short of cash, Mike agrees to paint Maria’s office in exchange for her $6,000 fee. Both Mike and Maria must report $6,000 of taxable gross income during the year the exchange takes place. Because Mike and Maria each operate a viable business, they’re entitled to deduct any business expenses resulting from the barter transaction.

Using an exchange company

You may wish to arrange a bartering deal though an exchange company. For a fee, one of these companies can allow you to network with other businesses looking to trade goods and services. For tax purposes, a barter exchange company typically must issue a Form 1099-B, “Proceeds From Broker and Barter Exchange Transactions,” annually to its clients or members.

Although bartering may appear cut and dried, the tax implications can complicate the deal. We can help you assess a bartering arrangement and manage the tax impact.

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