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Navigating Audit Time for Non-Profit Organizations

By: Jordan Matulevich, Staff Accountant

When audit time arrives for your non-profit organization, you will want to be as prepared as possible to ensure that the process runs as smooth as it can. Remember, an audit is intended to aid you in your mission as it reviews the financial condition of your operation. The results of your audit and the steps you take because of them can greatly improve your fiscal standing and allow you to reach the various goals you have for the future of your organization. Also, the audit process strengthens the confidence of your donors and solidifies your stance in regards to compliance.

H&M performs a number of audits each year and we are happy to offer a few top tips for non-profits as they embark on the audit process.

1.)    Documentation is key in all audit engagements. You won’t want spend time rushing around trying to gather all audit-related documentation when the time comes. Instill an organizational process that creates an organized and efficient audit trail makes providing documentation during audit time much easier. Try giving one staff member the on-going responsibility of maintaining the company’s records in an organized fashion. This will further the objective of having sufficient audit documentation when the time comes.

2.)    Spend some time researching the details around your specific audit framework. This will help elevate some confusion about the process and give you enough insight to feel fully prepared ahead of the start of the audit. The more you know about your audit framework, the more you will understand what is being done once auditors arrive on-site to begin working.

3.)    The goal of the auditor is to endure that your financial statements accurately reflect your current financial standing. To aide them in this process ahead of time, you should review financial records to make sure they line up with generally accepting accounting principles (GAAP). You can also look at how funds are flowing in and out of the door to make sure donor and grant money is being used as intended. Also take a look at your internal controls to make sure you are protecting your organization against fraud-related events.

4.)    An important on-going tip…keep in contact with your auditor when new opportunities and events arise for your organization. This will allow the auditor to assist you in accurately recording these elements in an effort to cut down on stress and questions while the audit is occurring.

5.)    Remember, your audit manager/partner maintains a constant wealth of knowledge in accounting, picking their brain about items you find difficult may result in streamlined processes. Don’t be afraid to ask questions.

For more information about preparing for your audit or for all of the services we provide to non-profit organizations, please contact us today. We would be happy to assist you.

Understanding the Differences Between Health Care Accounts

Tax-friendly ways to pay for health care expenses are very much in play for many people. The three primary players, so to speak, are Health Savings Accounts (HSAs), Flexible Spending Arrangements (FSAs) and Health Reimbursement Arrangements (HRAs).

All provide opportunities for tax-advantaged funding of health care expenses. But what’s the difference between these three types of accounts? Here’s an overview of each one:

HSAs. If you’re covered by a qualified high-deductible health plan (HDHP), you can contribute pretax income to an employer-sponsored HSA — or make deductible contributions to an HSA you set up yourself — up to $3,400 for self-only coverage and $6,750 for family coverage for 2017. Plus, if you’re age 55 or older, you may contribute an additional $1,000.

You own the account, which can bear interest or be invested, growing tax-deferred similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year.

FSAs. Regardless of whether you have an HDHP, you can redirect pretax income to an employer-sponsored FSA up to an employer-determined limit — not to exceed $2,600 in 2017. The plan pays or reimburses you for qualified medical expenses.

What you don’t use by the plan year’s end, you generally lose — though your plan might allow you to roll over up to $500 to the next year. Or it might give you a 2½-month grace period to incur expenses to use up the previous year’s contribution. If you have an HSA, your FSA is limited to funding certain “permitted” expenses.

HRAs. An HRA is an employer-sponsored arrangement that reimburses you for medical expenses. Unlike an HSA, no HDHP is required. Unlike an FSA, any unused portion typically can be carried forward to the next year. And there’s no government-set limit on HRA contributions. But only your employer can contribute to an HRA; employees aren’t allowed to contribute.

Keep in mind that these plans could be affected by health care or tax legislation. Contact H&M  to discuss these and other ways to save taxes in relation to your health care expenses.

Moving Capital Gains to your Children

If you’re an investor looking to save tax dollars, your kids might be able to help you out. Giving appreciated stock or other investments to your children can minimize the impact of capital gains taxes.

For this strategy to work best, however, your child must not be subject to the “kiddie tax.” This tax applies your marginal rate to unearned income in excess of a specified threshold ($2,100 in 2017) received by your child who at the end of the tax year was either: 1) under 18, 2) 18 (but not older) and whose earned income didn’t exceed one-half of his or her own support for the year (excluding scholarships if a full-time student), or 3) a full-time student age 19 to 23 who had earned income that didn’t exceed half of his or her own support (excluding scholarships).

Here’s how it works: Say Bill, who’s in the top tax bracket, wants to help his daughter, Mary, buy a new car. Mary is 22 years old, just out of college, and currently looking for a job — and, for purposes of the example, won’t be considered a dependent for 2017.

Even if she finds a job soon, she’ll likely be in the 10% or 15% tax bracket this year. To finance the car, Bill plans to sell $20,000 of stock that he originally purchased for $2,000. If he sells the stock, he’ll have to pay $3,600 in capital gains tax (20% of $18,000), plus the 3.8% net investment income tax, leaving $15,716 for Mary. But if Bill gives the stock to Mary, she can sell it tax-free and use the entire $20,000 to buy a car. (The capital gains rate for the two lowest tax brackets is generally 0%. For assistance with this tax savings tactics and others, please contact Holbrook & Manter today.

Taxes and Owning a Home

By: Zac Anderson, Staff Accountant

This summer when I’m not working on projects for our clients, I am spending my time house hunting in this hectic Columbus real estate market. Since many are buying and selling houses in Columbus, I thought it was appropriate to have a refresher on some common tax implications of home ownership.

Buying, maintaining, and selling a home is generally one of the biggest financial decisions an individual can make. This is not an exhaustive list, just a few items that are can be helpful when considering the tax effects of home ownership.

Mortgage Interest Credit:

There are multiple incentive programs/credits to encourage first-time home buyers into home ownership. One such credit is the Mortgage Interest Credit. To claim this credit on Form 8396, a taxpayer must have been issued a mortgage credit certificate (MCC) by a state or local governmental unit under a qualified mortgage credit certificate program (issuance of an MCC is often subject to income limitations). This credit allows the tax payer to claim a percentage of their mortgage interest as a credit, up to $2,000 annually. If the taxpayer itemizes their deductions, they must decrease the Schedule A deduction for mortgage interest by the total of the credit.

Itemized Deductions:

For a taxpayer to itemize their deductions, their Schedule A deductions must exceed the standard deduction for the tax year. Owning a home often helps taxpayers qualify to itemize their deductions on Schedule A of their 1040. The two main deductions that relate from home ownership are real estate taxes on property owned and home mortgage interest paid on a taxpayer’s qualified home. If a taxpayer has never itemized their deductions before, here is a list of common deductions they should be aware, in addition to real estate taxes and home mortgage interest to so if the taxpayer will qualify to itemize:


Qualifying Medical Expenses

State and local taxes

Charitable Contributions

Casualty/theft losses

Unreimbursed employee expenses

Residential Energy Credits:

Unfortunately most of the residential energy credits expired at the end of 2016. However, one federal energy tax credit remains for 2017; the solar energy credit (aka Investment Tax Credit). This federal credit allows a taxpayer to deduct 30 percent of the cost of a residential solar energy system on Form 5695.


Capital Gain Exclusion on Selling Primary Residence:

It is important to track your basis of your home, especially when it comes time to sell your residence. The basis of a primary residence is the purchase price plus any qualifying improvements to the home during the period of ownership. According to IRS Tax Topic 701, if a taxpayer is selling their home for a capital gain, the IRS allows a single filer to exclude up to $250,000 and married filling joint up to $500,000 to those who qualify for the exclusion. To qualify for the capital gain exclusion, the home must meet the ownership and use test. A seller will pass these tests if the seller owns the home and used the home as their main residence for a period aggregating at least two years of the five years prior to its date of sale.

If you have any questions regarding tax implications of how buying and selling a home will have own your tax returns, please meet with a Holbrook and Manter tax professional today!

H&M Principals Pen Blog for Columbus Chamber

A blog that was collectively written by Holbrook & Manter’s six principals is now live on the Columbus Chamber of Commerce’s website. The chamber does a series on their blog entitled “Why I Love Columbus”, and the firm’s principals were happy to weigh in on what they love most about the capital city. Read the blog at the link below and thank you to the chamber for having H&M be a part of this series:



When to Convert your C Corp to an S Corp

Many private business owners elect to incorporate, turning their companies into C corporations. But, at some point, you may consider converting to an S corporation. This isn’t necessarily a bad idea, but it’s important to know the ramifications involved.

Similarities and differences

S and C corporations use many of the same recordkeeping practices. Both types of entities maintain books, records and bank accounts separate from those of their owners. They also follow state rules regarding annual directors meetings, fees and administrative filings. And both must pay and withhold payroll taxes for working owners who are active in the business.

There are, however, a few important distinctions. First, S corporations don’t incur corporate-level tax, so they don’t report federal (and possibly state) income tax expenses on their income statements. Also, S corporations generally don’t report prepaid income taxes, income taxes payable, or deferred income tax assets and liabilities on their balance sheets.

As an S corporation owner, you’d pay tax at the personal level on your share of the corporation’s income and gains. The combined personal tax obligations of S corporation owners can be significant at higher income levels.

Dividends vs. distributions

Other financial reporting differences between a C corporation and S corporation are more subtle. For instance, when C corporations pay dividends, they’re taxed twice: They pay tax at the corporate level when the company files its annual tax return, and the individual owners pay again when dividends and liquidation proceeds are taxed at the personal level.

When S corporations pay distributions — the name for dividends paid by S corporations — the payout generally isn’t subject to personal-level tax as long as the shares have positive tax “basis.” (S corporation basis is typically a function of capital contributions, earnings and distributions.)

Risk of tax audits

C corporations may be tempted to pay owners deductible above-market salaries to get cash out of the business and avoid the double taxation that comes with dividends. Conversely, S corporation owners may try to maximize tax-free distributions and pay owners below-market salaries to minimize payroll taxes.

The IRS is on the lookout for both scenarios. Corporations that compensate owners too much or too little may find themselves under audit. Regardless of entity type, an owner’s compensation should always be commensurate with his or her skills, experience and business involvement.

The right decision

For businesses that qualify (see sidebar), an S corporation conversion may be a wise move. But, as noted, there are rules and risks to consider. Also, as of this posting, there are tax reform proposals under consideration in Washington that could affect the impact of a conversion. Holbrook & Manter can help you make the right decision. Contact us today.



Joining a Non-Profit Board

By: Shannon Robinson, CPA-Senior Accountant

Before deciding to join a board one should know what a board member’s responsibilities are.  Many board positions are volunteer positions that require a time commitment and a great deal of responsibility.  Non-profits are looking for board members to contribute their expertise while helping them achieve their mission.  Board members also have legal and ethical obligations.  A board members responsibilities fall under three main areas including strategic, legal, and fiduciary. 

Strategically, the member is to help the organization achieve their mission.  The mission addresses why the entity exists, what it hopes to accomplish, and what activities it will undertake. Part of the member’s strategic responsibility includes hiring and evaluating the Chief Executive Officer (CEO) and determining the compensation of the CEO.  The CEO is who is responsible for the day to day operations of the organization so the board has to be sure they hire the right person for the job.

Legally, the member has the duty of care, duty of loyalty, and the duty of obedience.  Duty of care means that the member is to make responsible and sound judgements and show active preparation and participation in board meetings.  The duty of loyalty means putting the needs of the organization before ones own.  The duty of obedience means that one is faithful to the mission.  It also means that one is responsible to ensure compliance with laws and regulations. 

Fiduciary responsibility is the obligation to act in the best interest of another party.  A member should act to protect the property, financial assets, and the reputation of the organization.  Along with this, one should be able to read and understand financial statements, read, understand, and approve a budget, ensure all tax filing requirements and obligations have been met, and review the Form 990 before submission.  One should ask for timely financial reports so performance can be assessed.  It is ones right and duty as a board member to be informed.

This might seem like a lot of responsibility and you might be asking yourself why should one get involved in a non-profit board?  There are many reasons including networking, enhancing your resume, or to stretch your intellectual and emotional muscles.  There are other reasons that are less self-fulfilling such as committing to make your community a better place, to become more passionate about an organization, or to give back to an organization that once gave to you. 

Once one decides to join a board they should ask questions of the current board and organization to make sure they fully understand their responsibilities as each board is different.  New members should review items such as by-laws, annual report / financial statements, and a list of the directors and senior staff.  New members should also inquire of the organization to determine if they have directors and officers insurance to protect its board members in the case of any actual or alleged act or omission, error, misstatement, neglect, or breach of duty.       

Once you determine to make this commitment how do you become a member?  You can talk to those you know that might now of an opening and work through them to get a seat.  There are also websites specifically designed to help you find an opening on a board.  Another way is to do your research and find a specific organization that you want to join and reach out to them directly to see if they have any openings. 


Know the audit requirements for your company’s retirement plan

By: William Bauder, CPA, CGMA, CITP, Manager

We perform audits of all types, including to the retirement plans offered by various companies and organizations. The retirement market in our country is forever growing and changing…in 2016 the U.S. employer sponsored retirement market topped out at over $25 trillion in assets.  If your company offers a plan and is part of this statistic, you should become familiar with the requirements for audit in this space.

Knowing the various audit requirements is the first step to determining what the future holds for your operation in regards to an audit. Let’s review some of the fact/requirements you should be aware of below:

·         Nearly all benefit plans are required to annually file form 5500 with the IRS. Your accountant or third party plan administrator should assist you with this process.

·         Depending upon how many participants are eligible for the plan (eligible, not participating in) you will either file the 5500 for a small plan or for a large plan.

·         If you are under 100 participants, you will generally file as a small plan, over 100 and you generally file as a large plan.

·         Once you plan has more than 120 eligible participants as of the first day of the plan year, you are required to file as a large plan.  This means a longer form 5500 and, as a requirement to the 5500, you must attach a copy of the plans audited financial statements.  Again, your accountant should be involved in this process.

·        Once you have filed as a large plan, in succeeding years you will follow last year’s filing unless, you go below 80 participants as of the first day of the plan year.  This is  known as the 80/120 rule.

These requirements apply to defined contribution plans, defined benefit plans, 401(k) plans, 403(b) plans, Employee Stock Ownership Plans, basically any plan that is required to file a form 5500 with the IRS.

Staying compliant in this space is key. Failing to file the proper forms… on time… could result in unwelcome penalties. Contact Holbrook & Manter today to start discussing you company’s retirement plan and audit needs. We look forward to assisting you.

What is a total return unitrust?

A traditional trust can sometimes create a conflict among the lifetime and remainder beneficiaries. This makes it more difficult for your estate plan to achieve its objectives and places your trustee in a difficult position. A total return unitrust (TRU) may offer a solution.

What are the trustee’s challenges?

When a trust is designed to provide benefits for two classes of beneficiaries, often in different generations, it presents a difficult challenge for the trustee. Consider this example: Adam’s will establishes a trust that pays all of its income to his wife, Kristen, for life (the “lifetime beneficiary”), and then divides the trust assets equally among his three children from his first marriage (the “remainder beneficiaries”). The trust names Adam’s friend, Roger, as trustee. Kristen outlives Adam by 10 years.

Roger has a fiduciary duty to act in the best interests of all the beneficiaries, but traditional trust design makes it difficult for him to be impartial. Suppose Adam leaves $2 million to the trust. To provide Kristen with a steady income stream, Roger places the trust assets in fixed-income investments that generate a 5% return. Kristen receives income of $100,000 per year, and when she dies the trust’s principal — still $2 million — is distributed to Adam’s children. Not a bad inheritance, but its value has been eroded by 10 years of inflation.

Suppose, instead, that Roger invests the trust assets in growth stocks that earn a 9% annual return. Ten years later, the trust’s value has appreciated to more than $4.7 million. That’s good news for Adam’s children, but this approach likely generates little or no income for Kristen.

In an effort to make everyone happy, Roger compromises: He invests half of the assets in growth stocks and the other half in fixed-income vehicles. The $1 million in fixed-income investments generates $50,000 per year for Kristen, and at the end of the trust term the principal is just under $2.7 million.

How can a TRU help?

The advantage of a TRU is that it frees the trustee to employ investment strategies that maximize growth (total return) for the remainder beneficiaries without depriving lifetime beneficiaries of income. Rather than pay out its income to the lifetime beneficiary, a TRU pays out a fixed percentage (typically between 3% and 5%) of the trust’s value, recalculated annually, regardless of the trust’s earnings.

Going back to our previous example, suppose Adam’s trust is designed as a TRU that makes an annual payout to Kristen equal to 3.5% of the trust’s value, recalculated annually. Roger, relieved of the duty to generate income for Kristen, invests all of the trust assets in a diversified portfolio of growth stocks that yield a 9% annual return. Kristen’s payments from the trust start at $70,000 and grow steadily over the trust’s term, reaching more than $113,000 by year 10.

At the same time, the value of the trust principal grows to more than $3.4 million, which is distributed to Adam’s children at the end of year 10. Thus, the lifetime beneficiary and the remainder beneficiaries are better off with a TRU than they would have been under the compromise approach described earlier.

Can you convert an existing trust into a TRU?

If you’re concerned that an existing, irrevocable, income-only trust may be unfair to certain beneficiaries, it may be possible to convert it into a TRU. In order to do so, however, such a conversion must be permitted by applicable state law.

An IRS private letter ruling clarifies that converting a trust into a TRU according to state law shouldn’t have any negative tax implications. It doesn’t cause the trust to lose its grandfathered status for generation-skipping transfer (GST) tax purposes. (For example, GST tax doesn’t apply to irrevocable trusts in existence on Sept. 25, 1985, so long as no additions, actual or constructive, are made to the trust after that date.)

Issues to consider when creating a TRU

If you’re considering implementing a TRU, it’s important to plan carefully. Ask a financial advisor to project the benefits your beneficiaries will enjoy under various scenarios, including different payout rates, investment strategies and market conditions. Keep in mind that, for a TRU to be effective, it must produce returns that outperform the payout rate, so don’t set the rate too high.

Be sure to investigate your state’s trust laws. Some states disallow TRUs. Also, many states establish payout rates (or ranges of permissible rates) for TRUs, so your flexibility in designing a TRU may be limited. Finally, if a trust is required to pay out all of its income to a current beneficiary, be sure that unitrust payouts will satisfy the definition of “income” under applicable state and federal law.

Is a TRU right for you?

By aligning your beneficiaries’ interests, a TRU can relieve tension among your loved ones and allow your trustee to concentrate on developing the most effective investment strategy. Contact Holbrook & Manter today to learn whether a TRU is right for your family’s situation. We would be happy to assist you with all of your trust and estate planning needs.

Ohio’s 2017 Sales Tax Holiday Slated for August

Shoppers rejoice…. the Ohio Sales Tax Holiday returns later this summer. Just in time for back to school shopping. The Ohio Department of Taxation shares the following information about the holiday:

The holiday starts on Friday, August 4, 2017 at 12:00 a.m. and ends on Sunday, August 6, 2017 at 11:59 p.m.

During the holiday, the following items are exempt from sales and use tax:

  • Clothing priced at $75 per item or less;
  • School supplies priced at $20 per item or less; and
  • School instructional material priced at $20 per item or less.

Items used in a trade or business are not exempt under the sales tax holiday.

The Ohio Department of Taxation has answers to any of the questions you may have about the holiday on their website. They break down the different items that are exempt from sales and use tax during the holiday and much more here: