Turning the Tables on Charity Navigator 3.0: Is the Causal Logic Plausible?

“GetInvolved Nonprofit Guide” Article for October 2013 from Cover & Rossiter, P.A.

By Pete Kennedy, CPA, CVA - Director at Cover & Rossiter, P.A.

Charity Navigator

For readers who are not familiar with Charity Navigator, I’ll begin with a quick refresher. Since it first went live in 2002, CharityNavigator.org has been a free nonprofit website whose stated mission is to guide intelligent giving.  Primarily using information from a nonprofit’s IRS Form 990, Charity Navigator synthesizes data into what it hopes are decision-useful metrics to assist donors in making gifting decisions.  Since 2008, the data has been expanded to include information gleaned from nonprofits’ websites in an effort to gauge transparency and accountability.  Many nonprofits put forth considerable effort to attain a coveted “4 Star” ranking.  Many others have howled in protest at less favorable rankings or (worst of all) inclusion in a “Bottom 10 List.”

In my opinion, the information presented often lacks necessary analysis or interpretation.  As an example, at this writing the Reynolda House Museum of American Art appears at the top of the “10 Charities Routinely in the Red” by a wide margin with a Charity Navigator computed ratio of deficit to expenses of negative 131.6%.  It doesn’t take a statistician or a CPA to know that the only way you can have such a ratio is to have the deficit exceed total expenses – not a logical result.  A little digging in this case reveals that the charity’s board made the decision to sell a large portion of its endowment and in doing so realized a large amount of previously unrecognized investment losses – large enough to eclipse all other revenue sources, push the gross revenue amount (as required to be presented on the Form 990) negative … and land at the very, very bottom of a blindly calculated Charity Navigator ratio.

CN 3.0

In its most recently announced initiative, Charity Navigator will attempt to assign ratings based on a nonprofit’s efforts to measure their effectiveness at achieving the desired outcomes.  This has been termed “CN 3.0” and is described as “the third dimension of intelligent giving.” The questions and their interpretation are prominently placed on the Charity Navigator website.

The Holy Grail of nonprofit metrics has always been outcome measurement.  Outcomes by their nature are long-term changes.  Determining a direct cause for a positive outcome is often very difficult. That an at-risk youth winds up going to Harvard may have one primary reason or be the confluence of many factors.  Trying to gauge the accuracy of any charity’s claims of outcomes given the inevitable subjectivity of such information would be next to impossible.  Recognizing this, CN 3.0 does not directly ask nonprofits to measure their outcomes.  Instead, it poses a series of questions or grading areas aimed at determining a nonprofit’s internal efforts toward measuring its own effectiveness.  A “yes” answer gets a green check mark.  A “no” means a red X.

Is the Causal Logic Plausible?

One of the questions asked by CN 3.0 is “Is the causal logic plausible?”  For folks like me that need a translation, it is explained as “Does the charity’s explanation of how it plans to achieve its goals seem possible or likely?”  More plainly still: do a nonprofit’s actions / programs align with their stated mission?

I think it’s only fair to turn the tables and pose the same question as it relates to CN 3.0: does reporting on a charity’s efforts to measure its outcomes (rather than the outcomes themselves) really provide a decision-useful metric of mission effectiveness?  Is it logical that such information can “guide intelligent giving?”

My answer would be yes, but only marginally and indirectly.  Is it a good sign that a nonprofit is diligently attempting to discover from different outside sources the impact of its programs?  Absolutely, and you have to give CN 3.0 credit for providing a roadmap of sorts as to how such an introspective effort might look through the questions that are asked.  In the absence of that Holy Grail metric of nonprofit effectiveness, this is certainly better than nothing.  But is diligent introspection a sure indicator of nonprofit effectiveness?  No.  Most dangerously of all, can the number of green checks vs. red X’s be used as a reliable means to rank the effectiveness of programs among nonprofits? Again in my opinion, no.

The Best Guide to Intelligent Giving

If you want to make gifting decisions based on derived financial ratios and a series of green check marks or red X’s, hey, it’s your money.  But we have made this statement many times before – there is no substitute for direct knowledge of a nonprofit.  The surest possible “Guide to Intelligent Giving” is your own personal experience with a charity.  If you go to events, volunteer to help with programs or even become a board member, then and only then will you have direct first-hand knowledge of how effectively your money will be spent.

If you have questions about intelligent giving or any other nonprofit topic, please contact Pete Kennedy, or any other member of our Nonprofit Practice team, at Cover & Rossiter at (302) 656-6632.

Cover & Rossiter, P.A. is one of the most respected and experienced CPA firms serving the accounting, tax and audit needs of the nonprofit community in Delaware.

IRS Exempt Organizations Branch – A Perfect Storm

By Amy Driscoll, CPA
GetInvolved Nonprofit Guide Article published in the July 2013 News Journal

After years and years of anonymity, the IRS Exempt Organizations Determinations Office is in the eye of a raging political storm. In reading the headlines, you may be thankful that you are not trying to gain exemption for a group with “Tea Party” or “Patriot” in its name, but the surge from this storm may spread farther than you think.

In 2008, the Pension Protection Act of 2006 started requiring many more organizations claiming exempt status to file reports with the IRS. All nonprofits are now required to file a form annually, even those with fewer than $25,000 in gross receipts. Small organizations are required to file a 990-N “e-Postcard,” whereas previously there was no reporting requirement at all for entities of that size.

The consequence of not filing for three consecutive years is a revocation of tax-exempt status. Starting in 2011, organizations that were unaware of these changes or did not comply for various reasons had their status revoked. Reasons for non-compliance ranged from frequent change in board members who were unaware of the requirements to previous notices to an address change whereby no IRS notices were received. The reason didn’t matter - revocation became widespread. According to the IRS website, over 1,600 entities in Delaware alone automatically lost their exempt status.

In order to be reinstated as a tax-exempt entity, organizations are basically required to start over. A 40-page Form 1023 (or 1024 depending on the type of organization) needs to be submitted, with accompanying fees ranging from $300 to $850. In what you might presume was a predictable event, a wave of re-applications has hit the IRS since the revocations began and the already-reeling Exempt Organizations Determinations Office has been trying to cope with the increased volume.

To complete the disaster, the recent scandal hit. As a quick recap, some IRS agents within the Exempt Organizations Determinations Office were found to have inappropriately targeted groups with politically sounding terms in their names, such as “Tea Party” or “Patriot.” There are continuing revelations resulting in senior officials being fired, resigning or “taking the Fifth” in congressional hearings. An ironic side note is that, as 501(c)(4) organizations, these groups had not been required to file for formal approval of their exempt status.

As someone who calls the IRS often on behalf of my clients, I can tell you that there are many helpful, professional and courteous IRS employees. There are also a few who are challenged in those areas. While some may see a high-level conspiracy here, from our experience, whether you are able to get anything accomplished often depends simply on who picks up the phone (or file) at the IRS.

The Exempt Organizations Determinations Office of the IRS is at a near standstill with reviewing applications. At the AICPA's Not-For-Profit Industry Conference on June 20, Ms. Lois Lerner was scheduled, but not available to present (she had been in charge of the Exempt Organizations Division of the IRS before infamously taking the Fifth at a congressional hearing). Her replacement at the conference, Mr. Marcus Owens, reported that the IRS Exempt Organizations Determinations Branch is in a virtual lockdown. He also noted that the Branch is now assigning for review applications received in April of 2012. That's not a typo – they are now reviewing applications that were received 15 months ago! Mr. Owens may have been channeling Ms. Lerner when he suggested that the audience of CPAs write to their representatives in Congress, implying the delay was primarily their fault.

If you have filed a Form 1023, 1024 or 8734 (used to convert private foundations into public charities) or are planning to file one in the near future, be ready to hunker down and ride out the storm – I wish we had better news. When your application is eventually reviewed and hopefully approved, the exempt status will be retroactive to the date the form was filed. It is possible to request an earlier retroactive date, but that may result in further delays in processing.

If you have questions about changes to your organization’s exempt status, please contact Pete Kennedy, Amy Driscoll or any other member of our Nonprofit Practice team, at Cover & Rossiter at (302) 656-6632.

Cover & Rossiter, P.A. is one of the most respected and experienced CPA firms serving the accounting, tax and audit needs of the nonprofit community in Delaware.

This article can also be found on our website here.

Lease Accounting: FASB Revised Exposure Draft

Director, Pete Kennedy

On May 16th, the FASB issued its revised exposure draft on Lease Accounting. This is the second time an exposure draft has been released on this topic. The draft details a major re-write to the rules around accounting for leases. In a nutshell:

Lease accounting as it currently stands separates leases into two basic types; Operating Leases and Capital Leases. The majority of all leases are accounted for as Operating Leases. The accounting is simple – you expense the lease payments ratably over the lease term. In most cases the expense is recorded as the lease is paid. Capital Leases presume that a substantial portion of the ownership of an asset has transferred due to the lease terms. If the term of the lease meets certain capital lease parameters, an asset is recorded on the books and an offsetting liability for the present value of the lease payments is recorded and those are both amortized away as the lease term progresses.

The proposed change would do away with the traditional operating lease vs. capital lease concept and would treat nearly all leases as capital leases are currently treated. This includes many mundane leases (think vehicles, construction equipment, medical equipment, copiers, office space etc.).

My opinion: Not a good idea. This will create an accounting fire drill. Where previously organizations would only need to expense lease payments as they are paid, they would now need to expend a significant amount of accounting resources calculating the net present value of lease payments (using an appropriate discount rate) to capitalize the “right of use asset” and an offsetting liability and expense the lease payment with an interest component for each and every lease with terms over one year. Where there are renewal options those may need to be incorporated also. This sets up book vs. tax differences, throws off financial ratios, renders many debt covenants invalid and in general makes a mess of a previously relatively simple accounting area for most organizations.

In reading through some of the letters in response to the initial exposure draft in 2010 (there were nearly 800 of them), I was struck by the dividing line between those in favor of the changes – generally from academia or from a State Accounting Society, and those opposed – generally someone who would actually need to implement and comply with the revised standard. As an editorial comment, although the FASB goes to great lengths to solicit public input, the volume of responses is weighted in most cases disproportionately in favor of those whose interest is more academic than practical.

The feedback I’ve been getting at seminars and the like over the past few years is that the train has left the station; that this is a done deal and we should all begin preparing to comply in the next few years.

But...all is not yet lost. There appears to now be some divided thinking on the FASB Board regarding this issue. Also; a letter to the FASB Chairman signed by 57 members of the US House of Representatives discusses a study on the projected economic costs of the change. The letter urges the FASB to conduct a detailed study on the costs and benefits of the change before proceeding. I think I see Delaware’s own John Carney on there along with Rep. Peter King (R-NY) and Rep. Maxine Waters (D-IL) – safe to say that’s a pretty broad spectrum. They can’t agree on gun control, government spending, same-sex marriages or much of anything else, but they do agree that pushing this change through is a bad idea. So here’s what we can do:

The FASB does read and consider the feedback it receives. The responses are cataloged and published on the FASB’s website so some of us have to limit our vocabulary to words that are professionally acceptable. My response is already on there. The closing date is September 13, 2013. If you have time - make your voice heard and help the FASB to see the bigger picture here. I believe that there is a possibility this change can be turned back and a significant amount of administrative effort and cost saved.

Go to www.FASB.org to see the Lease Accounting Exposure Draft. Comments can be submitted via e-mail to director@Fasb.org – indicate the File Reference # of 2013-270.

If you have any questions, please contact Pete Kennedy at pkennedy@coverrossiter.com.

The original article can be found on our website here.

Delaware CPAs: Looking to Better Manage Your Cash Flow, Payables & Receivables?

What if you could eliminate writing and mailing checks, bill payment errors, late payments and check fraud?

What if you could do it all online, anytime, anywhere?

Cover & Rossiter has a new tool available that can help you better manage your cash flow, accounts payables and accounts receivables.

As your accounting firm and trusted business advisor, we’d like to introduce you to an easy-to-use, new online A/P and A/R bill management tool that can help you pay bills and get paid faster than ever before.

We are already using this technology with many of our other clients and recommend that you use it, too. Here are some of the major benefits that this tool can offer:

• This technology eliminates manual tasks such as data entry, envelope stuffing, filing and check runs.
• All of your bills can be paid online in less than one hour.
• The technology can help you get paid faster. From our experience, receivables can be collected 2-3 times faster!

Best of all, it is an online service. We can have you up and running in less than one hour. In short, this extremely low-cost tool will help you stay on top of your business and your cash flow…by streamlining and automating your accounts payable and receivable processes with complete security and control. The technology is:

• Safe and Secure: It uses secure bank-level encryption and your data is always backed up.
• Accessible: You can securely access all of your financial documents, bills, invoices and transactions from any web browser or mobile device.
• Easy to Use: Quickly pay any vendor, large or small and invoice customers online.
• Efficient: Eliminate data entry, streamline vendor management and receive customer payments directly into your bank account.
• Collaborative: Connects you to your colleagues, customers, vendors and accountants.
• Strategic: Improve cash flow and automate Accounts Payable (A/P) and Accounts Receivable (A/R).
• Complete: Syncs with Intuit QuickBooks, Intacct, Sage Peachtree, NetSuite and other accounting packages.

If you are interested in seeing how this technology can improve how your business runs, please contact Loretta Manning at 302-656-6632 for a demonstration.

The original article can be found on our website here.

Delaware CPAs: Introducing A New Bill Payment System

We’ve recently implemented an advanced bill payment system to make every step of your bill paying process much simpler and far less time-consuming.
We have been working to provide technical solutions to reduce your administrative time. We want to you to have the ability to focus on higher valued services rather than administrative tasks. Some of the advantages are as follows:

• Takes less than one hour to set up
• Saves time on both your end and ours
• Eliminates data entry
• Cuts time spent reviewing and approving
• Eliminates late payments
• Simplifies and streamlines vendor communications
• Works with your current accounting software
• Provide organized paperless storage of your vender invoices

If you would like to learn more about this new bill payment system, we would be happy to provide a demonstration. Please contact Loretta Manning at 302-656-6632 or email LManning@coverrossiter.com.

This original article can be found on our website here.

Trauma Healing in Africa - Burundi 2013

Cover & Rossiter team member, Vickie Young Beam, is traveling to Burundi, Africa, once again for more work on the Trauma Healing in Africa project. Vickie, along with 10 other volunteers, are leaving Thursday, June 20, 2013 for 2 1/2 weeks of training, counseling and support for our local partner, THARS. This time, the group is taking a few teenagers with them. The young adults’ day will be spent in part doing various work projects as well as assisting with running the Children's Therapeutic Camp each afternoon. The adults will be providing counseling as well as presenting three different training segments: Trauma Healing and Counseling Training, Ministering Through Trauma - for pastors and community leaders, and Healing Traumatized Marriages.
We are so proud of Vickie and all of the amazing work she does in and outside of Cover & Rossiter. We are so very fortunate to have her on our team.
For more information on Trauma Healing in Africa - Burundi 2013 - visit here.
To read about the trip Vickie took to Burundi in 2011 – visit here.

Find the original article on our website here.
     

How to Survive ObamaCare – Take Two Aspirin and Keep Reading

By Pete Kennedy, CPA, CVA - Director at Cover & Rossiter, P.A. “GetInvolved Nonprofit Guide”

Article for March 2013 from Cover & Rossiter, P.A. "GetInvolved Nonprofit Guide" is changing from a bi-monthly schedule to a quarterly schedule. You can find the published version of Kennedy's article on April 25th.  Ever since the Patient Protection and Affordable Care Act of 2010 (a.k.a.

“ObamaCare”) was upheld by the Supreme Court in 2012, people have been waiting for an official diagnosis. Uncertainty around the implications of the Act has been enough to measurably raise the blood pressure of many folks who are charged with compliance. We’ve been getting many completely logical questions – “How and when will this impact my organization?” or “What changes will require compliance?” If thinking about the healthcare legislation gives you a migraine, take two aspirin and keep reading. This article will attempt to synthesize over 1,000 pages of legislation into some of the important aspects.

We will start with the good news. If your organization has fewer than 25 full-time equivalent (FTE) employees, an average salary of less than $50,000, and a qualifying healthcare plan that is at least 50% paid for by the employer, you have an excellent prognosis for getting money back. The provision that governs the Small Business Health Care Tax Credit has been in effect since 2010 and it is applicable to nonprofits, yet we continue to find small nonprofit employers who are missing the opportunity. We recently picked up a new client and calculated the credit at over $8,500 for one year – we will also be filing for back years. If you think you may qualify, but haven’t filed, contact your tax preparer (or Cover & Rossiter). You can still file for back years, but the clock is ticking and the ability to file for the 2010 credit will expire on 5/15/2014 for calendar year filers.

This credit will continue through tax-year 2013 before being replaced with Phase II, which allows a similar credit for small employers who subsidize insurance for their employees through the state-run exchanges (every state is required to establish an insurance exchange or set of coverages available to all state residents – intended to increase competition with traditional health insurance carriers).

Beginning 1/1/2014, many of the most significant provisions of ObamaCare will kick in.

If you are a small employer (fewer than 50 full-time equivalent employees), none of the significant regulatory changes apply to you – although you will probably want to think it over before you hire the fiftieth employee. If you are close to 50, you better crunch the numbers to be sure (use the instructions for IRS Form 8941 for calculations).

If you have over 50 FTEs and currently offer a qualifying healthcare plan to your employees at a cost to the employee of less than 9.5% of that employee’s income, your condition is stable – you do not need to make dramatic changes to be in compliance. You can continue offering the same benefits and not be subject to any penalties.

Employers with 50 or more FTEs may have a bitter pill to swallow. Those “large” employers are required to offer qualifying coverage at a cost of less than 9.5% of the employee’s adjusted gross income or face a penalty. To figure the maximum penalty, take the number of FTEs, subtract 30 and multiply by $2,000. For example, if you have 130, the maximum financial pain is $200,000. That will almost certainly be less than half of what it costs to offer a qualifying plan to the same number of employees – which poses an interesting scenario.

One school of thought is that it would make more sense for employers to fix their costs by abandoning their traditional health plan arrangement, pay the maximum penalty, and also increase the pay of their employees to allow them to purchase insurance through the state-run exchange. Some experts have opined that this is precisely the goal of ObamaCare.

Many folks would like to begin crunching the numbers to see what might work best for them under the new rules, but it’s hard to crunch numbers that don’t yet exist. There are two major variables which make forecasting and decision-making extremely difficult – the cost of the State Exchange policies and the cost of continuing existing policies. The states are required to have their exchanges up and running by October 2013.

The direction of private insurance rates is difficult to predict. Several ObamaCare provisions will likely put a damper on future insurance rate hikes. In one, insurance companies must specifically validate any increases over 10%. In another, insurance companies are now required to issue a rebate to their policyholders when actual claims do not equal or exceed 80% or 85% of premiums paid, depending on the size of the plan. I was thinking “Yeah, and I’ll invest my rebate money in a unicorn ranch,” but we did have a client actually receive a check recently.

Obviously, there are many facets to ObamaCare that are not covered here. If you crave more details, the Kaiser Family Foundation does an excellent job of summarizing the significant aspects of ObamaCare from different perspectives.

If you are still under the weather just thinking about the upcoming healthcare changes, please contact Pete Kennedy, or any other member of our Nonprofit Practice team, at Cover & Rossiter at (302) 656-6632.

Cover & Rossiter, P.A. is one of the most respected and experienced CPA firms serving the accounting, tax and audit needs of the nonprofit community in Delaware.  

February Edition of Tradition

Did you miss our February edition of Tradition, our bi-monthly newsletter? You can view it here.

Sign up for our mailing list here.

Cover & Rossiter Recognized As "Business of the Year"

On January 18, 2013 at the Middletown Area Chamber of Commerce (MACC) Annual Dinner, Cover & Rossiter was recognized with the Business of the Year award. Nominations for this honor are collected from the membership as well as the community and then voted on by a selection committee. The award recipients are not revealed until the Annual Dinner.

Marie Holliday, Director of Tax, accepted the award on the company’s behalf. Also in attendance were Lynn Ritter, Rachael Leberstien, Susan Marley, Jeff Willis and Luci Roseman. We are absolutely thrilled to be honored by MACC with this award. It’s been a great year for Cover & Rossiter as we have been recognized with awards from several organizations!

To read the article as published on the MiddletownTranscript.com on January 30, 2013 click here.

School Property Tax Relief for Seniors

The State of Delaware currently offers homeowners ages 65 and over a tax credit against their school property taxes of 50% (up to $500). The Senior School Property Tax Credit may be used against the property taxes on a primary residence.

• To qualify for this credit, you must be age 65 or older by June 30, 2013

• You must complete an application for the credit and submit it to the county in which you reside by April 30, 2013.
  • A copy of the Senior School Property Tax Credit application can be obtained at each county office or online for New Castle County at: http://www2.nccde.org/assessment/Exemptions/default.aspx.
• A copy of your valid driver's license or official state ID is required for each applicant at the time of the application.

• Applicants do not need to re-apply for the credit each year.
  • Once the applicant qualifies for the program, the amount of the credit will automatically be deducted from the property tax bill before it is mailed by the county.

• Taxpayers must pay their property tax bill in full by the end of each tax year in order to qualify for this credit for the subsequent property tax year.

• To receive the credit in 2013, residency must be established by December 31, 2012.
  • Individuals, who establish residency January 1, 2013 or later, must be legally domiciled within the State for at least three consecutive years to receive the credit.

Please contact Marie Holliday or Rachael Leberstien at (302) 656-6632 if you have any questions or would like additional information.

Fiscal Cliff Notes

By Pete Kennedy, CPA, CVA

GetInvolved Nonprofit Guide Article published in the January 2013 News Journal

At Cover & Rossiter, we don’t care how much Jessica Simpson weighs, we don’t know Gangnam from Gingham, we don’t know boo about “Honey Boo Boo,” we don’t keep up with the Kardashians, and, after seeing Justin Beiber on New Year’s Eve, my only lasting thought was “What’s with those pants?” But we do follow the latest changes to the tax code.

If there was an award for the most overused cliché of 2012, the “Fiscal Cliff” would win. The Cliff was intended as an artificial crisis to spur Congress and the President into action to reduce the federal deficit. But just as our elected officials can create artificial crises, they can postpone them. The American Taxpayer Relief Act, which passed in the wake of the initial “Cliff,” is a stop-gap measure that includes some significant changes to the tax code about which all nonprofits should be aware. Since the reduction of the employee portion of the Social Security tax from 6.2% to 4.2% was not extended, all workers will by now have an additional 2% taken out of their gross pay. There is a bit of irony to calling a law which effectively raises the taxes on all workers the “American Taxpayers Relief Act.” I suppose we should count our blessings that they didn’t work in a tortured acronym as well – how about the “Senators And Representatives Can’t Agree So Much” Act (SARCASM)?

The Fate of the Charitable Contribution Deduction

After the release of the Simpson-Bowles report, there was widespread concern regarding the future of the charitable contribution deduction. The 2010 report called for a vast reduction in the tax benefit of the deduction by replacing it with a very limited credit. The good news is that the deduction was not fundamentally changed, although it has been indirectly altered.

After a hiatus, the “Pease” limitation is back. This will limit all itemized deductions – including the charitable deduction - by 3% for every dollar above a stated income threshold ($300,000 for married couples for 2013). For example, let’s assume a couple with $500,000 in taxable income donates $20,000. The Pease limitation would reduce the $20,000 by $6,000 [($500,000 - $300,000) x 3%] for an effective deduction of $14,000. The limit is itself limited to 80% of the deduction, meaning that if the same couple had only donated $5,000, they would still get to claim a $1,000 deduction (since $6,000 is greater than $5,000, the limit would be limited to $4,000 ($5,000 x 80%) leaving $1,000 to claim).

In some quirky situations, the charitable deduction could actually be worth more to the donor in 2013 than it was in 2012. If the same donor above gave $110,000 to charity, the Pease limitation would leave $104,000 to deduct. But since the top tax rate has changed to 39.6% from 35% for incomes over $450,000, the economic benefit to the donor would actually be greater (all other things being equal). Obviously, this is a simplistic example and not intended to represent tax advice, but it serves to illustrate that the charitable deduction has not changed dramatically from 2012 and prior rules.

At the end of the day, donors do not give for strictly economic reasons. If that was true, they would most likely just keep their money in their pocket, pay the tax due and be farther ahead financially than gifting the money regardless of the tax break. The impact of the overall economy does far more to dictate charitable giving than changes to the tax treatment of the donation.

Other Nonprofit Tax Issues for the New Year

Direct rollover IRA contributions survived for another year as did gifts of conservation easements. The same strict rules and caveats still apply to both of those. Favorable tax treatment of contributions of book inventories and used computer equipment, however, were not allowed to continue.

The estate tax changed slightly – the top rate went from 35 to 40%, but there is a permanent $5,000,000 exclusion per person which can be transferred between spouses to create a joint $10,000,000 exclusion before the first dollar of federal estate tax kicks in. There was some concern that doing away with the estate tax altogether – as proposed during the presidential campaign – would severely curtail planned giving efforts at many charities.

Anyone who is involved in any capacity with a non-functionally integrated Type III Supporting Organization (hopefully you know who you are) received a bit of a Christmas present. IRS final rules defining the required distributions for those organizations were issued, but at 3.5% of assets instead of the 5% they had previously advertised. The requirement will be effective for 2014 based on 2013 asset values.

If your organization has questions about any existing or new tax laws for nonprofits, please contact Pete Kennedy, or any other member of our Nonprofit Practice team, at Cover & Rossiter at (302) 656-6632.

See the printable version of the article here.

IRA Qualified Charitable Distribution Reinstated

IRA Qualified Charitable Distribution Reinstated

There are very few opportunities to conduct tax planning for 2012 once the calendar year flips to 2013.  However, a unique, very limited opportunity is available for the 2012 tax year.  One of the provisions of the recently passed American Taxpayer Relief Act of 2012 was the reinstatement of the Qualified Charitable Distribution (QCD) from an IRA to a charity.  To be eligible for QCD treatment and count toward an owner’s required minimum distribution (RMD) obligation for the year:

• You must transfer funds directly from your IRA to a charity
• Distributions must be made from an IRA account (not another retirement plan like a 401(k))
• The IRA owner must be 70 ½ years of age or older on the date of the donation from the IRA to the charity.
• The limitation per person in a single year is $100,000
• The donation must be to a public charity (most private foundations, CRATs, CLATs and some other entities do not qualify)

Many of you may now be asking the question, “How can I do this now when the year-end has already passed and I have received my RMD for 2012?”  Congress added special “look-back” provisions for the QCD since the legislation did not pass until January 1, 2013.  There are two options available:  one option is to elect to have a QCD made in January of 2013 count as if it was made on December 31, 2012, and option two is to re-characterize a distribution made in the month of December 2012 as a QCD as long as the same amount is donated to a qualified charitable organization by January 31, 2013.

The second question many of you may ask at this point is “why would this be worthwhile?”  IRA owners are required to take required minimum distributions out of their IRA once the taxpayer turns 70 ½ years of age.  In some instances, a taxpayer may not be able to realize the full benefit of a charitable contribution.  For instance, their income may be so low that they don’t exceed the standard deduction threshold (i.e. not able to itemize), or their charitable contributions may be so high in a year that they exceed the charitable contribution limits.  In these situations a QCD will enable them to “circumvent” thresholds to obtain the full taxable deduction for their contribution.

If you are interested in using this planning strategy for 2012, please contact Marie Holliday at (302) 691-2211 or MHolliday@CoverRossiter.com.

 You can also access this article on our website here.

The Fiscal Cliff

Talk of “going off the fiscal cliff” has been haunting me over the last several months. I started researching the provisions, and realized that the impact was much more far reaching than I had originally understood. The combination of the expiration of the Bush-era tax cuts as well as the impending start of the Obama Care tax provisions would have resulted in significant tax increases for virtually all of the American population, which could potentially cripple economic recovery. However, most people believed that these negotiations were related only to higher income taxpayers. For several months now, Cover & Rossiter has been providing emails, conducting seminars and even meeting individually with our clients to inform them of the impact of the pending changes. It was extremely difficult to adequately predict what would actually transpire because of the differing proposals from the Democrats and Republicans. I suspected these negotiations would go to the last minute, but hoped that legislation would pass with significant time to assist each one of you with year-end planning opportunities.

However, in true Congressional fashion of recent years, nothing was agreed upon until January 1, 2013. The tax side of the fiscal cliff was averted when the American Taxpayer Relief Act of 2012 was signed into law by President Obama on January 2. Outlined below are many of the provisions of this law:

• The Bush-era tax rates were extended for taxpayers with incomes below $400,000 (single) and $450,000 (married filing jointly); a new ordinary income tax bracket of 39.6% was created for taxpayers who exceed those thresholds. Originally, President Obama proposed that these increases would apply to AGI levels of $200,000 (single) and $250,000 (married filing jointly).
• Capital gains and qualified dividends for taxpayers that exceed those thresholds will now be 20% (to the extent that their income exceeds the thresholds). Taxpayers below the thresholds will continue to be taxed at the 15% rate on this income.
• The payroll tax holiday, which reduced Social Security tax from 6.2% to 4.2% in 2011 and 2012, was not extended. All wage earners will see a 2% increase in their Social Security tax withholdings for 2013.
• Trusts will continue to be taxed at the Bush-era tax rate levels except for the highest bracket. Trusts with income in excess of $11,950 will be taxed at the top rate of 39.6%.
• A permanent Alternative Minimum Tax (AMT) “patch” was enacted increasing the 2012 exemption levels to $50,600 for single taxpayers and $78,750 for married filing jointly taxpayers. In future years, the amounts will be indexed for inflation.
• Itemized deductions will once again be subject to phaseouts when income exceeds the threshold of $250,000 for single and $300,000 for married filing jointly.
• Personal exemption phaseouts will be reinstated as well once incomes exceed the threshold levels also indicated for itemized deductions.
• The maximum federal estate tax rate will be 40% for decedents dying after December 31, 2012 who have taxable estates in excess of approximately $5.12 million. The portability election between spouses will now be permanent.
• The child tax credit level was scheduled to be reduced to $500 in 2013, but has been permanently extended to $1,000.
• The 50% bonus depreciation provisions were extended through 2013.

There are many other provisions that were extended with this Act, so if you have specific questions please feel free to contact Marie Holliday at (302) 691-2211 or MHolliday@CoverRossiter.com.  
You can view this article on our website here.

Tax Deficiencies Can Now Result in License Suspensions

Marie Holliday, CPA, MBA & Susan Marley, CPA of Cover & Rossiter, P.A. were recently published in the Medical Society of Delaware's Delaware Medical Journal.

The economic downturn of the past several years has put tremendous pressure on state budgets. As a state’s citizens experience a reduction in their levels of income there is a corresponding decrease in a state’s tax revenues. States are expanding efforts to increase tax compliance in order to deal with their dwindling tax revenues. Although the vast majority of taxpayers voluntarily comply with the requirements to file their tax returns, there is an ever-increasing trend of non-compliance, particularly at the state level. As a result, many States have begun to adopt initiatives to “encourage” compliance. One of Delaware’s initiatives was the passage of House Bill 257 in June of this year. This new law enables Delaware’s Director of Revenue to authorize the Division of Professional Regulation to suspend or deny a taxpayer’s professional or occupational license for the failure to pay taxes that exceed $1,000, and a judgment has been assessed. Therefore, in order to maintain your professional license you must comply with all provisions of the state tax code or place your ability to practice medicine in Delaware in jeopardy. Obviously, no physician wants to risk this type of penalty. Filing timely returns and responding promptly to any tax notices issued by the state are keys to avoiding any suspension of your license. It is also imperative that you are knowledgeable about what taxes you may be liable for. Listed below are some of the taxes that licensed physicians may be responsible for:

• Personal Income Tax
• State of Delaware Payroll Withholding Tax
• Gross Receipts Tax
• State Unemployment Tax
• Corporate Income Tax (not all entities will be subject to this)
• S-Corporation Non-Resident Shareholder Estimated Tax

The issuance of a tax notice or deficiency will not immediately result in the suspension of your license. The state cannot initiate the suspension process until a taxpayer has had sufficient opportunity to address the issue. We recommend that upon notification from the state of a tax deficiency that you (or your tax advisor) investigate whether the notification is accurate. The notice will indicate a deadline by which the state requires a response. If you determine that the deficiency is indeed accurate, submit the required tax payment by the due date indicated in the notice. If you cannot determine the accuracy of the assessment by the due date, make sure to inform the state either by phone or by mail correspondence, and request an extension of time to investigate the matter. If you encounter a situation in which you cannot pay in full the amount due with a tax notice, do not delay responding until you have the ability to pay. Be proactive, and contact the representative listed on the notice to arrange a payment plan. You will be assessed additional penalties and interest on your tax liability until you pay in full, but will preserve your ability to practice as a physician because the state will not initiate proceedings to suspend your license. If you or your practice needs assistance dealing with state tax notices or tax compliance issues please contact Marie Holliday at (302) 691-2211 or Susan Marley at (302) 691-2232.

The published article can be seen here. See the article on our website here.