2016 Nonprofit Accounting and Tax Updates

Transcription

1 2016 Nonprofit Accounting and Tax Updates 1

2 Janet Holland, Partner Janet is a partner at DZH Phillips LLP and is the lead partner in charge of the firm s nonprofit niche. Her client base consists primarily of clients requiring audited or reviewed financial statements, including privately held companies and nonprofit organizations, with an emphasis on foundations, residential real estate (including affordable housing projects), nursing homes, continuing care retirement communities, religious organizations, and community service organizations. Janet graduated from the University of San Francisco with a Bachelor of Science in accounting. She is a member of the AICPA, the California Society of CPAs, and LeadingAge, an association of nonprofit retirement communities. Janet currently serves on the finance and audit committees of LeadingAge and has participated as a speaker at their annual conference and local meetings. She is also a member and past president of the Board of Regents of Sacred Heart Cathedral High School in San Francisco where she serves on the Executive and Finance committees. Additionally, Janet is a member of the Committee of the Governing Board for the Daughters of Charity and Christian Brothers, serving in an advisory role in their sponsorship of Sacred Heart Cathedral High School, and has recently joined the Finance Advisory Committee for DeMarillac Academy in San Francisco. Janet is especially interested in working with clients in the nonprofit sector, bringing to the table the aforementioned industry experience, a hands-on approach to problem solving, strong mediation skills, and a personal dedication to seeing her clients flourish. 2

3 Deborah Kaminski, Senior Tax Manager Deborah has spent over 20 years in the nonprofit taxation and trust industry. Her professional focus is on tax compliance and planning for exempt organizations. She has deep experience in the areas of taxation of non-traditional investments, functional expense allocations, grantmaking requirements and executive compensation issues. Deborah is an Enrolled Agent with a BA from the University of Nevada, Reno, and MS from the University of Alabama. She is a member of the California Society of Enrolled Agents, the American Institute of Certified Public Accountants (AICPA), and the California Society of Certified Public Accountants (Cal CPA), where she is on the planning committee of the annual Not-For-Profit Accounting Conference. She is currently on the board of the Ann Martin Center, and on the finance committee for the Family Support Services of the Bay Area. 3

4 2016 Nonprofit Accounting Update Presented by: Janet Holland Partner 4

5 Topics Covered in This Nonprofit Accounting Update Proposed changes to accounting and reporting for nonprofit organizations. Statements on standards for accounting and review services (SSARS 21). Revenue from contracts with customers. Accounting for leases. Single audit update. Changes to going concern considerations. 5

6 Proposed Changes to Accounting and Reporting for Nonprofit Organizations Proposed Changes Two classifications: Still in exposure draft: Comment period ended in August 2015 Two classes of net assets: (With and without donor restrictions) rather than three (unrestricted), temporarily restricted, permanently restricted. Effective date to be determined 6

7 Proposed Changes to Accounting and Reporting for Nonprofit Organizations Current GAAP Three Classifications: Proposed Changes Two classifications: Unrestricted Temporary Restricted Permanently Restricted Without Donor Restrictions With Donor Restrictions *Plus disclosure of nature and amounts of different types of donor-imposed restrictions, governing board designations and information about how these restrictions affect use of resources and liquidity. 7

8 Proposed Changes to Accounting and Reporting for Nonprofit Organizations Current GAAP Proposed Changes Underwater endowment amounts reported in unrestricted net assets Underwater endowment amounts reported in net assets with donor restrictions, with enhanced disclosure 8

9 Proposed Changes to Accounting and Reporting for Nonprofit Organizations Current GAAP Proposed Changes Present the amounts of the net change in three classes of net assets and of total net assets Present the amounts of the net changes in two classes of net assets and of total net assets Present two measures of operating activities; both of which are within changes in net assets without donor restrictions 9

10 Proposed Changes to Accounting and Reporting for Nonprofit Organizations Two Measures of Operating within changes in net assets without donor restrictions. Reflecting: (1) whether resources are directed at carrying out an NFPs purpose for existence and (2) whether resources are available for current period activities First Subtotal Before internal transfers Second Subtotal Includes effects of internal transfers resulting from governing board designations, appropriations and similar actions that place (or remove) selfimposed limits on the use of resources that make them unavailable (or available) for current-period operating activities. 10

11 Proposed Changes to Accounting and Reporting for Nonprofit Organizations Current GAAP Proposed Changes Present information about expense by function, nature or both with enhanced disclosures in notes if both are not on the face of the statement Present investment return net of related investment expenses 11

12 Proposed Changes to Accounting and Reporting for Nonprofit Organizations Current GAAP Proposed Changes Present the net amount for operating cash flows using the indirect method (with additional presentation of the direct method permitted) Present the net amount for operating cash flows using the direct method (with additional presentation of the indirect method permitted, but not required) 12

13 Proposed Changes to Accounting and Reporting for Nonprofit Organizations Cash Flow Activity Current GAAP Proposed Changes Purchase of long-lived assets Investing Operating Contributions restricted to acquire longlived assets Investing Operating Sales of long-lived assets Investing Operating Payment of interest on borrowings Operating Financing Receipts of interest and dividends on loans and investments other than those made for programmatic purposes Investing Operating 13

14 Proposed Changes to Accounting and Reporting for Nonprofit Organizations Enhanced Disclosures Governing board designations, appropriations and similar transfers that result in the addition or removal of self-imposed limits on the use of resources without donor-imposed restrictions. The composition of net assets with donor restriction at the end of the period and how such restrictions affect the use of resources. Management of liquidity, including quantitative information as of the reporting date about financial assets available to meet nearterm demands for cash. 14

15 Proposed Changes to Accounting and Reporting for Nonprofit Organizations Enhanced Disclosures Expenses, including amounts for operating expense by both their nature and function. The method used to allocate costs among program and support functions. So-called underwater endowment funds (i.e., donor-restricted endowment funds for which the fair value of the fund is less than either the original gift amount or the amount required to be maintained by the donor law). 15

16 Statements on Standards for Accounting and Review Services SSARS 21: Effective for periods ending on or after 12/15/15 New report language for compilations and reviews New preparation service: No accountant s report Basis of accounting disclosed in financial statement headings Legend indicating no assurance is provided Departures from GAAP or other reporting framework need to be disclosed Requires an engagement letter signed by the accounting firm and management Independence does not need to be considered; applies to financial statements with disclosures and no disclosure financial statements Eliminates management s use only financial statements prepared by CPAs Compilations: Retains requirement to indicate in report if independence is impaired 16

17 Revenue from Contracts with Customers Effective date for nonpublic companies (including nonprofit organizations) is periods beginning on or after December 15, 2017 The core principle of is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosure requirements addressing the nature, amount timing and uncertainty of revenue recognition and cash flows An entity recognizes revenue in accordance with the core principle by applying the following steps: Step 1: Identify the contract(s) with a customer: A contract is an agreement between two or more parties that creates enforceable rights and obligations Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation 17

18 Accounting for Leases Issuance of final pronouncement any day now Two types of leases Right of use asset and lease liability (discounted to present value) Short term leases excluded (12 months or less) Include lease options only if reasonably certain that option will be exercised Lease modification/subleases = separate contracts Initial direct costs are amortized over the lease term Amortize right-of-use asset over lease term Reduce liability using effective interest method Effective for years beginning on or after December 15,

19 Amendments to Single Audit Act Current New Single Audit Threshold $500,000 $750,000 Type A Program Determination $300,000 $750,000 Threshold for reporting a cost Minimum Coverage $10,000 $25,000 Low risk auditee 25% 20% Not low risk auditee 50% 40% Effective for fiscal years beginning on or after December 26,

20 Amendments to Single Audit Act OMB Uniform Grant Guidance Combines the following OMB Circulars into one: A-133 (audit) A-102 and A-110 (administrative) A-87, A-122 and A-21 (cost principles) A-89 (Federal domestic assistance program information) A-50 (audit follow-up for single audits) Effective for some new grants, including new funding from existing grants 20

21 Changes to Going Concern Considerations Issued August 2014 Applies to all entities Incorporates and expands upon certain principles that are currently in U.S. auditing standards Requires management to evaluate going concern status Effective for periods beginning after December, 15, 2016 Should be based on events known or knowable at the date that the financial statements are issued Evaluation considers events within one year after the date that the financial statements are available to be issued 21

22 Changes to Going Concern Considerations Management must consider whether it is probable that plans will be effectively implemented and that the plans will mitigate the conditions that raised substantial doubt about the entities ability to continue as a going concern Disclosure requirements If plans alleviate doubt based on consideration of managements plans: Principal conditions or events that raised substantial doubt about the Organizations ability to continue as a going concern (before consideration of managements plans) Management s evaluation of the conditions in relation to the entities ability to meet its obligations Management s plans that alleviated substantial doubt about the entities ability to continue as a going concern 22

23 Changes to Going Concern Considerations Disclosure requirements (continued) If plans do not alleviate doubt based on consideration of management s plans, would additionally disclose a statement indicating there is substantial doubt about the Organizations ability to continue as a going concern within one year after the financial statements are issued No change to auditors reporting requirements or requirements to perform procedures on management s plans 23

24 2016 Nonprofit Tax Update Presented by: Deborah Kaminski Senior Tax Manager 24

25 2016 Exempt Organization Tax Update Legislative & Regulatory Changes IRS Priorities - Including Compliance Checks & Audits 25

26 What Did Not Change? 01 The 990 Series Tax Forms Minor clarifications only. 02 Charitable Contribution Substantiation Donor Requires contemporaneous documentation of gifts over $ Private Foundation Excise Tax Rates remain unchanged at 1% or 2% based on 5-year calculation. 26

27 What Did Not Change? Schedule B Donor Identifying Data, may not be redacted from Attorney General and FTB filings. 04 California Ruling Exempt organizations Other than Private Foundations and 527 political entities 990 filers may redact donor info from the publicly disclosed version only. 27

28 California Legislative Update AB 557 & Administrative Dissolutions 02 FTB automatically dissolves organizations with no activity for 48 months or more. 01 Passed in September Inactive organizations may voluntarily dissolve with a shorter, less complicated and less expensive process beginning Both FTB & SOS promise forms soon. 28

29 Federal Legislative Update Private Foundations An alternative to Expenditure Responsibility oversight for foreign grantees. A qualified tax practitioner exercising reasonable judgment provides a good-faith determination that the operations would qualify as a U.S. public charity. Equivalency Determinations (Final Regs Issued 9/25/15) Demonstrate adequate public support - 5 year average. 29

30 Federal Legislative Update Private Foundations Additional jeopardizing investment clarification provided in Notice : Mission Related Investments vs Program Related Investments 30

31 Program-Related Investment Mission-Related Investment Included in 5% distribution requirement? Yes No Jeopardizing Investment rules apply? No Yes Included in min. investment return calc? No Yes Income included in taxable Net Investment income? Yes Yes Sec 4942 redistribution rules apply to return of principal? Yes No Expenditure responsibility for non-charitable grants? Yes No Subject to UPMIFA? No Yes 31

32 Legislative Update - The PATH Act Protecting Americans from Tax Hikes* Food Inventory Contributions Charitable deduction enhanced to the lesser of (1) Basis + 1/2 FMV minus basis, or (2) 2xbasis. Agricultural Contributions Qualified Agricultural Research Organizations donations receive higher 50% deduction rate. Charitable Deductions IRA direct contributions made permanent. Persons over 70.5 years may contribute up to $100,000 per year. Contribution counts toward the individual s annual Required Minimum Distribution (RMD). 32 S-Corp appreciated asset donation clarification Deductions are allowed for the full FMV, and Shareholder's basis is reduced only for the contributed assets. Note: S-Corp income is UBI to exempt orgs.

33 Federal Legislative Update PATH Act No Gift Tax on contributions to certain non-charitable, exempt organizations exempt under: 501(c)(4): Social Welfare Organizations 501(c)(5): Labor, Agricultural & Horticultural Organizations 501(c)(6): Business Leagues, Chambers of Commerce, Real Estate Boards, Professional Football Leagues 33

34 PATH Act and 501(c)(4): Social Welfare Organizations 02 IRS registration required within 60 days of operations commencement via a yet- to-becreated form(path Act). Enactment date indefinitely extended by Notice Allowable political activity clarifications will not be issued during the upcoming fiscal year ending 9/30/2016 per the Consolidated Appropriations Act of Election Year Considerations 04 The Treasury Inspector General for Tax Administration (TIGTA) issued its follow-up report to the 2013 investigation. TIGTA concluded IRS has eliminated the Be on the Lookout (BOLO) process, and the exemption application backlog is cleared. 34

35 IRS 2016 Priorities & Work Plan Highlights 01 Automated Redaction Program (Allows release of E-Filed 990 series returns in machine language format) Protection of 04 Assets Assets (Self dealing, protection of assets, excess benefit transactions, loans to disqualified persons) Emerging 02 Issues (Non-exempt charitable trusts and 501(r) matters) Exemption 05 Issues 35 International 03 Issues (Overseas funds oversight, foreign conduits, FBAR requirements) Tax-Gap 06 Issues

36 IRS 2016 Priorities Exemption Issues Including non-exempt purpose activities, private inurement. o o o Compliance Checks: Letter requests for fuller program &/or financial explanations. 50% result in a full audit. Always contact your tax advisor. Clearing the Exemption Application Backlog: Backlog has been a major focus, with tighter information exchange deadlines. When applicants fail to respond within two weeks, the application processed is closed. Form 1023-EZ: Resulted in 10,000 approved applications for organizations with income below $50,000. Over half were audited in their first year, and 10% subsequently disqualified. 36

37 IRS 2016 Priorities Tax-Gap Issues Particularly Employment Tax and Unrelated Business Income (UBI) Recommendation: Use an outside payroll contractor in most situations. UBI: And the direct effective connection of any allocated expenses is TE/GE's # 1 priority. o o When calculating UBI, silo each source with its direct expenses. Report the aggregate UBI from all sources on 990-T. Further Guidance Pending on the treatment of net operating losses (NOL) from multiple investment partnerships. In the past, the aggregate NOL has been allocated to the aggregate income. IRS is considering the merit of limiting losses to the specific partnership income. 37

38 Gazing into the Crystal Ball What can we expect in the next year? 8868: Application for Extension For tax years commencing 1/1/2016 and later, a single 6 month extension application will be available (instead of the current regime of two 3-month applications). IRS considers eliminating the requirement for Schedule B: Donor Identification Evaluating its merit in the enhancement of tax law enforcement. 38

39 Questions? Janet Holland Phone: (415) Deborah Kaminski Phone: (415)