Accounting Treatment of Employee Discounts for a Tax Exempt Entity

Posted on November 25 2014 by admin

Many organizations offer employee discounts as a benefit of working for its entity. A common misconception is to account for these discounts the same way an entity would account for a discount to a customer: net the discount against sales. For tax exempt, or not-for profit-entities, employee discounts should be accounted for differently.

Since the discount is considered a benefit of employment, the not-for-profit should expense the discount in a similar way as expensing the employer’s portion of health insurance premiums. When the not-for-profit makes a sale to an employee, the entity should increase revenue by the full price of the product, increase cash for the amount received from the employee, and increase an expense account (employee benefits: discount on sale) for the amount given as a discount. The employee discount should be allocated among the functional expense categories based on how the employee’s salary is allocated.

For example, Suzie, an employee of ABC Charities, wants to purchase a jacket from the charity’s store. Employees are allowed to take a 20% discount on all merchandise they purchase. The coat Suzie wants is $200. This single purchase would result in an entry to the accounting system as a credit to sales of $200, a debit to cash of $160 and a debit to employee discount as an expense.

By Samantha E. Mahlen, CPA

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Are you baffled by Schedule A?

Posted on November 19 2014 by admin

Schedule A of the Form 990 is required to be completed by all public charities. This schedule shows the IRS how the Organization is a public charity (versus a private foundation) and also proves that the Organization is receiving enough support from the general public, in order to maintain its status as a public charity. The general rule is that the Organization must receive at least 33 1/3% of total support from the general public in aggregate over the last 5 years.

One area of potential confusion is on page 1 of the Schedule A, where the Organization is required to check a box to indicate which category they fit into that ensures their public charity status. In general, the box checked should match the category selected on the Organization’s original tax exemption application with the IRS (Form 1023). However, the Organization is allowed to change the category when circumstances change and a different category suits them more accurately. Although it is not required, the charity can also request an official approval of the change in category by filing Form 8940 with the IRS.

Box 7 and Box 9 are probably the two most commonly selected categories checked on page 1 of Schedule A, and sometimes there is confusion as to which of these two categories applies. In a very basic sense, box 7 should be checked when the majority of the charity’s revenue is from the general public, and box 9 should be checked when the majority of the charity’s revenue is from program service fees.

One point to remember is if you have any revenue from the government, it may meet the definition of being a contribution for purposes of the Form 990 and Schedule A, even if it doesn’t meet the definition of contribution under GAAP. This should be reviewed carefully when completing lines 1 and 2 on Part VIII of the Form 990 because where the amount is reported on that page affects where it is reported on Schedule A, and therefore affects the public support percentage calculation. For purposes of the Form 990 (and Part VIII), a government contribution would be any revenue from the government where the general public ends up receiving the primary benefit from the use of those funds, rather than the government receiving the primary benefit.

By Colette Kamps, CPA

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The Rules of Raffles

Posted on November 12 2014 by admin

There are a lot of rules to remember when nonprofit organizations hold raffles. Here is a summary of those rules to keep in mind and to help with planning in advance of the raffle.

  • If the raffle prize is valued at $600 or more AND at least 300 times the raffle ticket price, you must REPORT to the IRS by completing a Form W-2G. Keep in mind that you will need certain information from the raffle winner, such as name, address and social security number.
  • If the raffle prize is valued at $5,000 or more, you must REPORT and WITHHOLD income tax from the winner at the time of turning over the prize. For example, the raffle prize is a diamond necklace valued at $10,000. Before turning over that necklace to the winner, the winner must write you a check for the withholding amount. The withholding rate is 28%.
  • If the organization decides to pay the withholding taxes on the winner’s behalf, the amount that the organization pays in to the IRS should be 33.3% of the original prize value, since the winner is getting this “extra” value of not having to pay the withholding. Therefore, they have to include this “extra” value as income on their W-2G.
  • If the winner refuses to provide you with their social security number AND the prize is valued at $600 or more, the organization must WITHHOLD taxes at the 28% rate. Normally, you wouldn’t have to withhold if the prize value is less than $5,000, so this is a special circumstance when the winner refuses to provide his or her social security number.
  • Once you withhold taxes, you have to pay those taxes into the IRS. You do this by completing Form 945 at the end of the year. But if the amounts collected are greater than $2,500, you will need to pay those amounts before the end of the year.
  • Also at the end of the year, you will need to file the Forms W-2G with the IRS. You will need to submit these forms along with the summary Form 1096.

By Colette Kamps, CPA

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Understanding Your 403(b) Plan

Posted on November 4 2014 by admin

A common misconception is that all 403(b) employee benefit plans are exempt from filing the Form 5500 and an annual plan audit. Over five years ago this was true, and these plans were exempt from the Employee Retirement Income Security Act of 1974 (ERISA). However, beginning in 2009, some 403(b) plans are now required to follow the same requirements as 401(k) plans by filing a 5500, and if necessary, engaging an independent qualified public accountant to audit its employee benefit plan. However, if you are an exempt organization under Internal Revenue Code (IRC) section 501(c)(3), better known as a charity, you may still be exempt from filing the Form 5500, if you meet various ERISA safe harbor exceptions.

Your entity’s plan is covered under the safe harbor exception if the participant accounts are held in an annuity contract or custodial account, funded solely by the contributions of the employees through salary reduction agreements, and is not “established or maintained” by the employer. Under these guidelines, the employer has little control or influence over the plan and employee participation is voluntary. In most cases, the extent of the activity is withholding the employees’ contributions and remitting them to the plan custodian. If your plan follows these requirements, it is most likely not subject to ERISA and therefore, does not need to file a Form 5500 or have an audit. Organizing your plans under this safe harbor exception can save your entity thousands each year in audit fees and Form 5500 filings.

On the other hand, if your entity’s 403(b) plan is not exempt from ERISA, it is vital to ensure your entity is filing the Form 5500 annually and abiding by audit regulations if required. It’s important to determine your employee benefit plan status to ensure your entity is in compliance and to avoid potential penalties and interest. In most cases, your third party administrator will properly oversee your plan and its requirements. However, it is beneficial as an entity to understand your plan.

By Samantha E. Mahlen, CPA

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Henry & Horne, LLP Team Members Make a Difference for Mesa Resident

Posted on October 28 2014 by admin

October’s community service event took place on Saturday, October 25 with members of the firm participating in Make a Difference Day through Hands On Greater Phoenix. Make A Difference Day is a celebration of neighbors helping neighbors with millions of volunteers from around the world uniting in a common mission to improve the lives of others. Through Hands On Greater Phoenix’s partnership with the City of Mesa, they identified an elderly woman who suffers from arthritis and neuropathy in need of exterior house painting. We, along with a large group of community volunteers, came together to give her home a much needed makeover.

Thanks to all of our volunteers for taking time out of their Saturday to help another.

paint group

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Properly Classifying Property Held for Sale

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Proper classification of assets on your entity’s statement of financial position (SOFP) and disclosure in the footnotes is important for both accuracy and transparency purposes. The users of your financial statements should know all significant purposes and uses of the assets listed. When you contact a broker to sell any property, you may need to classify it on your SOPF as a property held for sale if it meets all of the following criteria (Per FASB Codification 360-10-45-9):

  1. Management commits to a plan to sell the asset.
  2. The asset is available for immediate sale in its present condition.
  3. An active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated.
  4. The sale of the asset is probable, and transfer of the asset is expected to qualify for recognition as a completed sale, within one year.
  5. The asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value.
  6. Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan with be withdrawn.

If all of the criteria above are not met, the asset should not be classified as held for sale. Contact your entity’s CPA for correct classification as it will vary depending on the asset.

By Samantha E. Mahlen, CPA

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What Type of Lease Do You Have?

Posted on October 21 2014 by admin

To determine the type of lease you must record, you must evaluate if the lease is non-cancellable and meets any one of the following criteria:

  1. The life of the lease is 75% or greater of the assets useful life.
  2. The lease contains a purchase agreement for less than market value.
  3. The lessee gains ownership at the end of the lease period.
  4. The present value of the lease payments is greater than 90% of the asset’s market value.

If the lease is non-cancellable and meets one or more of the above criteria, you are required by GAAP to record the lease as a capital lease. If the lease does not meet any of the criteria above, you may record the lease as an operating lease.

Each option has a different treatment to record and present the lease on the financial statement. If you determine you have an operating lease, you will record the expense as it is incurred. If the operating lease term is more than 12 months, you must disclose future payments in the footnotes to the financial statements. If you determine the lease must be recognized as a capital lease, you would treat this as an asset acquisition and record an asset and liability for the present value of the payments. As with operating leases, you must disclose future payments for the capital lease in the footnotes to the financial statements. These are the current rules for recording leases. Keep in mind that the rules may be changing, but as of now an official standard has not been set.

By Michelle Housman

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Should Rent be Included on Section B?

Posted on October 15 2014 by admin

Non-Profit entities who file the Form 990 are required by the IRS to disclose the five highest paid independent contractors on Section B of page 8 of the Form 990. Many 990 filers interpret “independent contractors” as any amounts reported on the Form 1099-MISC, which is generally used to report miscellaneous income including rent, royalties, and non-employee compensation. However, the IRS instructions for the Form 990 offer some clarification. In reference to Section B, the instructions state,” Enter the amount the organization paid, whether reported on Form 1099-MISC, box 7, or paid under the parties’ agreement or applicable state law, for the calendar year ending with or within the organization’s tax year.” The IRS instructions only reference box 7 of the 1099-MISC and never refer to rent, royalties, or any of the other boxes. According to the IRS instructions for the Form 1099-MISC, all amounts paid to “independent contractors” should be recorded in box 7. Therefore, only the amount reported in box 7 of the Form 1099-MISC should be included in Section B of page 8 of the Form 990 and all other amounts should be omitted.

By David Woods

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Requirements for Communications to Attendees at Your Special Event

Posted on October 7 2014 by admin

You may be aware of the rule for sending an acknowledgement to a donor after receiving a contribution, but are you also aware of the IRS requirements when someone attends a fundraising event? Usually, special events provide some sort of benefit back to the attendee, so that only a portion of their ticket cost is actually a contribution. For example, they may receive a meal, drinks, valet parking, entertainment, etc. in exchange for the amount paid. If it is a true fundraising event, the ticket cost will be greater than the value of the benefit they receive so that there is a contribution portion built in to the cost. The nonprofit entity operating the event is required by the IRS to provide a written statement to the attendee, which must include:

  • A statement to inform the attendee that only a portion of their ticket cost is a donation and tax deductible and that this portion is limited to the amount that is in excess of the fair market value of what was provided by the charity.
  • A “good faith estimate” of the fair market value of what the attendee received at the event.

This written statement can be in a thank you letter or acknowledgement after the event takes place, or it can be included on the invitation provided to the attendee prior to the event.

If the nonprofit organization does not meet these requirements, they can be penalized by the IRS in the amount of $10 per attendee.

By Colette Kamps, CPA

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Changes for Single Audit Submission

Posted on September 30 2014 by admin

Required to have a single audit for the 2014 fiscal year?

The Federal Audit Clearinghouse will not begin accepting submissions for audits with 2014 fiscal year ends until October 20, 2014.

The Office of Management and Budget granted an automatic extension until November 30, 2014 for any forms due on or before November 30, 2014.

Mark your calendar!

Also, beginning January 2, 2015, all 2014 fiscal year (and later) audits and FORM SF-SAC submissions must:

  • Use standard audit finding reference format; Example: 2014-001 through 2014-999
  • Be an unlocked, unencrypted and in a text searchable PDF format

By Kristin Cullen

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Our Not-For-Profit niche is a strong team of experienced professionals who focus their work in the not-for-profit industry. Henry & Horne has been a stable local firm in Arizona for 55 years, and the Not-For-Profit niche has a long history of working with charitable organizations and other tax exempt organizations of all kinds. Our focus is exceptional client service and building relationships with our clients to promote communication throughout the year, not just at the time of the annual audit. We highly value and are very proud to be helping those who help others.


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