Monthly Archives: September 2014

Tax Planning Important for Stock-Based Compensation

Are you concerned with tax planning and your stock-based compensation?

calcCiuni & Panichi’s group of seasoned tax planning experts can help answer all your questions.

If you’re an executive or other key employee, you might be compensated with more than just salary, fringe benefits, and bonuses.  You might also be awarded stock-based compensation, such as restricted stock or stock options.  Another form that’s becoming more common is restricted stock units (RSUs).

RSUs are contractual rights to receive stock (or its cash value) after the award has vested.  Unlike restricted stock, RSUs aren’t eligible for the Section 83(b) election that can allow ordinary income to be converted into capital gains.

But, RSUs do offer a limited ability to defer income tax.  Unlike restricted stock, which becomes taxable immediately upon vesting, RSUs aren’t taxable until the employee actually receives the stock.

So, instead of having the stock delivered immediately upon vesting, you may want to arrange with your employer to delay delivery.  This will defer income tax and may allow you to reduce or avoid exposure to the additional 0.9% Medicare tax (because the RSUs are treated as FICA income).  There are, however, other considerations.  Any income deferral must satisfy the strict requirements of Internal Revenue Code (IRC) Section 409A.

If RSUs — or other types of stock-based awards — are part of your compensation package, please contact us.  Careful tax planning is critical.  Contact Jim Komos at 216.831.7171 or jkomos@cp-advisors.com.

You may also be interested in:

Pay Professional Fees Now and Reduce Your Tax Bill

Commonly Overlooked Investment Related Tax Omissions

Pay Professional Fees Now and Reduce Your Tax Bill

Want to Pay Fewer Taxes?

At Ciuni & Panichi, Inc. our tax professionals are always looking for ways to help you reduce your tax burden.  Here is another idea you can implement today.

Expenses that may qualify as miscellaneous itemized deductions are deductible for regular tax purposes only if they exceed (in aggregate) two percent of your adjusted gross income (AGI).  Paying these expenses ahead of time may allow you to exceed this percentage and deduct more of these costs than you thought possible.

fsNow is a good time to add up your potential deductions to date.  If they’re getting close to, or they already exceed, the two percent floor, consider incurring and paying additional expenses by December 31, such as:

• Deductible investment expenses, including advisory fees, custodial
fees, and publications
• Professional fees, such as tax planning and preparation, accounting, and certain legal fees
• Unreimbursed employee business expenses, including travel, meals, entertainment, and vehicle costs

But, keep in mind that these expenses aren’t deductible for alternative minimum tax (AMT) purposes. So, don’t bunch them if you might be subject to the AMT.  Also, if your AGI will exceed certain levels ($254,200 for single and $305,050 for married filing jointly), be aware that your itemized deductions will be reduced.

Want help planning?  Ciuni & Panichi, Inc. can get you more information on miscellaneous itemized deductions, the AMT, or the itemized deduction limit.  Contact Jim Komos at 216.831.7171 or jkomos@cp-advisors.com.

You may also be interested in:

College Tax Breaks Help Save You Money

Tax Deducation:  State and Local Sales Taxes

Nonprofit: How to protect your tax-exempt status

A Titanic Loss

Tax exempt statusWhat would happen if your nonprofit lost its federal tax-exempt status? The thought might send shivers down your spine, and it should. Here are reminders about some of the actions that are required — or should be avoided — to maintain your 501(c)(3) status.

If your 501(c)(3) designation is revoked, your nonprofit will no longer be exempt from federal income tax — it will have to pay corporate tax on annual profits. It also might be subject to back taxes and penalties for failure to pay corporate income taxes as of the revocation’s effective date.

And that’s just the tip of the iceberg. Losing your tax-exempt status also might subject your organization to state taxes on income, property, and sales or usage.

The hits on your finances wouldn’t end there. Your donor base might be whittled away because donors would no longer be able to receive a tax deduction for their gift to your organization. And if you receive funding from private foundations, that would likely end, because their guidelines usually require grant recipients to be tax-exempt public charities.

But don’t despair. If you play by the rules, your organization will likely be able to keep its special status.

Reporting Duties
First of all, make sure that you’re filing required reports on time. This involves filing some type of IRS Form 990 each year — Form 990, Form 990-EZ or Form 990-N, depending on the amount of your total annual receipts and total assets. If you fail to do so for three years in a row, your tax-exempt status will be revoked.

If you’re required to file the full Form 990 or Form 990-EZ, be sure to annually complete Schedule A, Part I (“Reason for Public Charity Status”) to identify why you aren’t a private foundation. Check the box that coincides with the reason that you’re a public charity for the current tax year.

Also on Schedule A, if your nonprofit is largely supported by a government unit or the general public or is a community trust (Box 5, 7 or 8 on Schedule A, Part I), you’ll need to pass the public support test on Part II. If your organization is exempt because it receives more than one-third of its support from contributions and activities related to its exempt function, as outlined in IRC Section 509(a)(2), you’ll need to pass the public support test on Part III each year.

You also must file all required payroll tax returns for your employees and 1099 forms for independent contractors, and answer related questions about these workers on your Form 990.

Executive Compensation
Setting salaries for key employees requires a formal process. Information on the salaries and benefits you pay your executive director and “key” employees is available to the public on your Form 990. This has been identified as a primary focus of exempt organizations’ audits by the IRS.
Even more important than the compensation total is the process you use to determine that the compensation is reasonable and comparable to amounts paid by organizations of similar size and activity. The IRS sees this review and approval as a responsibility of your board of directors or one of its committees.

Not only is granting executives an out-of-whack salary frowned upon, but you also can’t operate for the “benefit of private interests.” In other words, no part of a 501(c)(3) organization’s earnings or equity can benefit individuals, such as the organization’s founders, executives or board members — or their family members.

Unrelated Business Income
As your organization carries out its operations, it must be careful not to raise what’s considered excessive unrelated business income (UBI). UBI is income from a trade or business activity that is regularly carried on that is unrelated to your exempt mission. Although the Internal Revenue Code is silent as to how much is too much, excessive UBI has been interpreted as spending a “significant” amount of time on the unrelated activity.

For example, if an organization has more expenditures for the unrelated activity than program expenses, the IRS likely will consider terminating its exempt status. But courts have considered a nonprofit spending even as little as 10% of its total efforts on a UBI activity to be too much.

Goods and Services
Your organization also must make sure that it doesn’t pay more than market rate for goods and services. It’s wise to secure at least three quotes before purchasing a significant asset or establishing a service contract or standing order for supplies. If you ever decide to do business with related parties (board members, founders, executives or their businesses), the other quotes will support the “going rate” in your market and show you aren’t providing an excess benefit to the related party.

Should the IRS determine that you’ve provided excess benefits, your organization and its leaders will be subject to penalties. The possibility of losing your exempt status also exists.

Lobbying and Political Campaign Activities
The IRS requires that tax-exempt entities avoid “substantial”  lobbying and political campaign activities. To determine whether lobbying activities are “substantial,” consider the time spent by compensated employees and volunteers on lobbying activities or use an expenditure test.
Your nonprofit can elect to use the formal expenditure test — called a 501(h) election — by filing Form 5768.  (Note that churches are ineligible.) The 501(h) election sets a defined limit on the amount of resources an organization can use to influence legislation before losing its exempt status, based on a percentage of its exempt purpose expenses.

Political campaign activities include making contributions to a political campaign fund or making public statements for or against a candidate (either written or verbal). Participating in any of these activities can result in the IRS either revoking your exempt status or imposing certain excise taxes on your organization.

Your Lifeline
Your nonprofit’s tax-exempt status is its lifeline. Make sure that you and your staff do all that is required to maintain it. Follow the suggestions above, and discuss the matter with Mike Klein, Partner-in-Charge of our Not-for-Profit Group.  Contact him at 216.831.7171 or mklein@cp-advisors.com.

You may also be interested in:

Board Responsibilities and Fraud

© 2014

Internal Controls for Business Owners to Use Today

internal controlsTightening Internal Controls can
Protect your Company

By Reggie Novak, Senior Manager, CPA, CFE, Ciuni & Panichi, Inc.

In today’s fast-moving marketplace, businesses face numerous challenges, including management of security risks and fraud. From a breach in online security to misuse or theft of company funds, organizations are susceptible to both internal and external acts of fraud. Small businesses can be the most prone to risk because they often do not have adequate protections in place to guard their assets. The best method to aid in the detection and prevention of fraud, as well as protect your company’s assets, employees, and customers, is to establish an effective system of internal controls.  The following internal controls can help all organizations fight the good fight against the risk of fraud:

1. Segregate duties. The duties of authorization (signing a check or releasing a wire transfer), custody (having access to the blank check stock or the ability to establish a wire transfer), and recordkeeping (ability to record the transaction in the accounting system) should be separated so that one individual cannot complete a transaction from start to finish. For many businesses, proper segregation of duties can be difficult to achieve. In these instances, company owners may want to consider having the bank statements delivered to them directly and unopened. The owners should then review the bank statements and the check images for any transactions that appear unusual, and follow up on these transactions to obtain an understanding of them.

2. Review authorized signors. Carefully consider who your authorized signors are (authorization of the transaction). Those individuals should not have access to the blank check stock (custody of the asset) nor have the ability to enter the transaction into the accounting system (recording of the transaction). The use of a signature stamp, although efficient, may be problematic in that you must have separate controls to ensure that the stamp is not readily available for inappropriate use.

3. Consider requiring dual signatures. Your company may also want to consider the use of dual signatures. A dual signature policy includes the establishment of a dollar threshold over which checks require two signatures. The utilization of dual signatures establishes an element of segregation of duties for disbursements over a specified dollar threshold in that these disbursements require more than one individual to authorize the transaction.

4. Controls over wire transfers. The use of wire transfers has increased significantly over the years, and segregation of duties around wire transfers is paramount. The responsibilities for establishing a wire transfer should be segregated from the responsibility of releasing the wire transfer. If this segregation is not possible, consideration should be given to using a call-back procedure in which the financial institution will call a specified individual when a wire transfer is initiated. Most important, the call back cannot go to any individual who is able to initiate a wire transfer.

5. Reconcile bank accounts in a timely manner. The bank reconciliation process should be completed in a timely manner by someone who is independent of the cash disbursement process. The bank reconciliation process should also include a review of the bank statement and the check images that are returned with the bank statement for unusual transactions. Any unusual items should be investigated and evaluated when necessary.

 6. Utilize controls offered by your banks or financial institutions.  Many banks offer services, such as positive pay, that can provide your business with the added assurance that bank transactions are properly authorized.  With positive pay for ACH transactions, a bank matches the details of ACH payments with those on a list of legitimate and expected payments provided by the account holder.  Only authorized ACH’s are allowed to be withdrawn from the account and exceptions are reported to the customer for review.

7. Controls over your vendor list and payments.  Implementing controls such as requiring vendors to sign a code of conduct annually, ensuring the vendor set-up process incorporates segregation of duties, and implementing check validation of select vendor payments can help deter and detect fraudulent activities.

 For more information contact Reggie Novak at 216-831-7171 or rnovak@cp-advisors.com.

Reggie is a Senior Manager in the Audit and Accounting Services Group.  As a Certified Fraud Examiner, Mr. Novak can assist you with prevention services, including recommending internal controls and other measures to be implemented to prevent theft or misappropriation.  If fraud is suspected, he can investigate and present his findings and recommendations.