Happy New Year! A gift from one of my students!
Form 1099-NEC
his is just a kind reminder to our friends out there in small NFP organizations getting ready to send out W-2s to employees and 1099s to other individuals who received payments of various types in the past year about the new Form 1099-NEC. Prior to 2021, your organization was required to provide a Form 1099-MISC to independent contractors who received payments. The IRS now requires Form 1099-NEC be used instead of Form 1099-MISC when reporting independent contractor income, now labeled “non-employee compensation” or “NEC”. NEC is defined as payments to individuals not on payroll on a contract basis to complete a project or assignment. This is a very common occurrence at small NFP organizations, where independent contractors, gig workers, or otherwise self-employed individuals receive stipends for services rendered.
The due date for the 1099-NEC is January 31, which is right around the corner. The 1099-MISC is due March 1 if filed by paper and March 31 if filed electronically. The familiar $600 threshold is still in place. If your organization paid an independent contractor more than $600 in 2021, it must provide that contractor with a Form 1099-NEC unless the independent contractor is a C corporation or S corporation. You can find this on the Form W-9 you are required to collect from the independent contractor.
Copy A of Form 1099-NEC is filed with the IRS and Copy B is sent to the independent contractor. Most states also require all Form 1099s be filed with them. You will need to consult your tax advisor to see if your state requires this. States have been extremely active in auditing independent contractor payments in recent years. Many states contend all independent contractors should be classified as employees and applicable payroll taxes be remitted. For instance, the State of New Jersey wanted information on the royalties I received on my books published through Amazon to see if I was in fact an employee rather than an independent contractor. Sadly, I am not that great of an author and my royalties were less than $100 for the year. The implementation of Form 1099-NEC should reduce this confusion in the future.
There are significant penalties for being late and misclassifying employees as independent contractors so NFPs do need to pay attention to these requirements. Again, it is critical that NFPs consult their tax advisors.
Cash in the Plumbing
Cash in the Bathroom Plumbing?
Lest anyone believe I only pick on the Catholic Church, let’s look at the recent revelation a plumber found $600,000 stashed away behind a toilet in Joel Osteen’s church. To be clear, the original theft had been reported to the authorities, and no one is claiming Osteen or any of his staff is connected to this theft. Nevertheless, the sheer size of Osteen’s church and the amount at stake has caused a stir.
I used this situation as a case study in my forensic accounting and auditing class. I showed the class some of the videos about this sordid affair. An example of one of these follows.
The class came back with some interesting comments. I have included some of these as well as my thoughts about them.
- Another NFP fraud? It seems NFP organizations do not take internal controls seriously. Sadly, this is often the case. Many NFPs are way too trusting. No reputable person should balk at being subject to internal controls. “Trust but verify” not only works in Strategic Arms Limitations, but also in running an organization. What donor wants to see their hard earned and generously donated money simply disappear? Donors have been known to stop giving after such an event.
- How could you leave that much money in a safe? Any bank would be willing to come each Sunday and pick up this deposit. To be sure, that is certainly a correct comment. I have participated in NFP fundraising events involving less than one-tenth of that amount of money. The local bank was more than willing to come and pick up the deposit right away as an accommodation to a good customer.
- What does the Fraud Triangle tell you about potential persons of interest? The Fraud Triangle states any fraud is the result of someone feeling financial pressure, having the means and ability to rationalize the theft. Given the fact the safe seems to have been easily opened and the perpetrators knew where to hide the money, we would be looking at an inside job. This perhaps establishes the means. What was the pressure and the rationalization though?
- Why was the loot never retrieved? The person(s) who hid the funds was not able to retrieve the money. Why? Were they fired for other causes? Did someone suspect them of the theft? An “outsider” to the organization would not count on being able to access the bathroom again, and accordingly, the funds. Could this be a “spite” theft, where the perpetrator(s) were simply doing this to embarrass the church and really didn’t want the money? In any event, any checks became stale long ago (the original theft occurred in 2014!) or the makers have put a stop on them.
This story just seems so odd my students (and I) believe more will come out. Stay tuned.
Unfortunately, there can be collateral damage to all NFP organizations from such an event. Some believe situations such as this are a reason why churches should be taxed. While this seems like a non sequitur, stranger things have happened.
NFP management needs to understand that theft and fraud of such consequence will often result in not only bad press for that organization, but for all NFP organizations. During this Pandemic any decrease in donations or other revenue resulting from such bad press can have catastrophic consequences to an NFP, even if the organization was not the cause of the bad press. The major lesson for all NFP management: Let’s be careful about internal controls. You don’t want to be on the front page of a local newspaper, sheepishly discussing why the hard earned money of the donors ended up missing because of a fraud or theft.
Tax Law Changes in 2022 Affecting NFP Stakeholders
As we begin the New Year, changes in the federal income tax law could negatively impact NFP organizations. Let’s start with charitable contributions. First, the $300 ($600 for married couples) charitable contribution for nonitemizers is set to lapse. Smaller donors may be less willing to make donations to their favorite charities. On a larger scale, the cap on corporate charitable contributions will be reduced from 25% of taxable income before charitable contributions to 15% of the same number. Additionally, individuals could donate 100% of their adjusted gross income to charity in 2021. That cap will be reduced to 60% in 2022.
These provisions were enacted to assist NFP organizations during the pandemic. Retaining them does not seem to have been a high priority in the recent negotiations between the Biden Administration and Congress in passing the infrastructure bill and Build Back Better proposals. It seems fairly certain that these provisions will in fact lapse since there doesn’t seem to be a lot of momentum behind them. The Biden Administration campaigned on increasing corporate taxes and taxpayers with an adjusted gross income over $400,000, those more likely to donate a higher percentage of their AGI to charity. It seems unlikely there will be any wind behind the sails of giving additional tax deductions to those groups the Administration said were not paying their fair share of taxes already.
On the cost side of the ledger, the IRS mileage reimbursement rate will increase by 2.5 cents from 2021 to 58.5 cents in 2022, an almost 4.5% increase. This jump reflects the recent inflation experienced in the American economy. The new rate will continue to put cost pressure on NFP organizations who may not be able to afford even the current reimbursement rates for their employees. The aforementioned inflation can also deter donations to NFP organizations as salaries and wages struggle to keep up with increased costs.
Many other provisions of the tax code potentially affecting NFP organization stakeholders such as the enhanced child tax credit and earned income tax credit were included in the Build Back Better bill, recently torpedoed by the projected “No” vote of Senator Joe Manchin. NFP management will need to watch what happens to the bill in 2022. The best bet at this point is for Democrat Congressional leaders to break up the bill into smaller pieces and then try to sell them one at a time to Manchin, who would provide the crucial vote for passage in the Senate. If this were to happen, perhaps some of the current provisions would be reintroduced and become retroactive to the beginning of the year. Only time will tell if this will happen. This course of action seems unlikely in the heated political discussions of today, but cooler heads may prevail in the months ahead.
NFP New Year’s Resolution: Get to Know Your CPA!
NFP New Year’s Resolution: Get to Know Your CPA
It is time for NFP organizations’ New Year’s resolutions. I am proposing a novel one: Get to really know your CPA, and see what help she can provide!. You might ask, Why? Let me give you a few key reasons:
- The IRS is requiring more and more tax forms used by NFP organizations to be filed online. For instance, see this article from the Accountingtoday Daily Briefing. As reported in this article, the IRS has experienced problems in keeping its systems up to date, causing frustration with many NFP organizations. The IRS is also experiencing a backlog in processing returns. Your CPA is better equipped to deal with electronic filing requirements and the IRS (if needed) than you may be.
- Implementation of the new lease accounting standard is required for fiscal years beginning after December 15, 2021. This accounting will fundamentally change your balance sheet if you have a lot of leased equipment or premises. Do not underestimate the amount of work required for this effort. Interim financial statements beginning one year later will also need to be converted to this accounting, so you don’t have much time. Additionally, the impact of the new lease accounting on prior years’ financial statements will also need to be calculated and reported on. A CPA will be able to estimate the impact of and implement the new accounting. Additionally, your CPA can help your organization negotiate any debt modifications with lenders if you have outstanding debt or a credit line from a financial institution.
- NFP mergers and acquisitions continue apace. One strategy for an NFP organization to grow quickly is by acquiring another organization. To say this is complicated would be to understate that complexity, especially when the NFP acquires a for-profit entity. Your CPA can help guide you through the acquisition process. For instance, a CPA can provide financial modeling, due diligence, and strategic advisory services if you are considering an acquisition.
- Your CPA can advise you about the level of attest services your organization may need. Audits are expensive. A lesser level of professional accounting service may be appropriate. Stakeholders understand this has been a rough spell for NFP organizations. Perhaps they do not need audited statements. Reviewed or even compiled financial statements may be adequate for their needs at a much reduced cost. Your CPA can advise you on this issue.
- Lax internal control can lead to the potential for serious frauds and some bad press. In the current economic climate, news of squandered resources lost through lax internal processes or defalcations can cause donations to dry up quickly. This could cause a great deal of disruption to your mission, if not catastrophic. Your CPA can provide information and advice about internal control best practices.
- Your CPA can be a source of volunteers. Professional accounting organizations encourage CPAs to “give back” to their community and volunteer to work at worthwhile causes. CPAs not only make excellent financial officers (treasurers, controllers and internal auditors) and board members, but often have a large network of clients that also want to volunteer. In effect, your CPA can act like a volunteer clearinghouse for your organization
These are just a few of the reasons why it makes sense for you to get to know your CPA in 2022!
Dear Santa…
December 21, 2021
Dear Santa:
It truly has been a tough year, but we were all good. We worked hard to keep our organization going, often on a shoestring budget. So, when you are making your rounds tonight and come to town, could you please bring us:
- A Web designer. We need to update our website so we can get our message out more effectively and to more people. Oh yes, we have to add a donation button to the website as well. Could you see to that as well?
- A Cyber security expert. Obviously, if we get a new website we need to make sure it is hacker resistant. Data security is so important these days. We can’t afford to get our website hacked and held for ransom.
- A CPA. Who can understand the PPP rules, not to mention that new lease accounting we have to figure out? Maybe those guys at the FASB will leave us alone this year? If they have any bright ideas about new accounting standards in 2022 we hope they keep them to themselves.
- A whole bunch of volunteers. That includes the first four people on this list and a lot of others to help us carry out our mission this year.
- People willing to serve on our board. We know these are far and few between. We also know this is a big time commitment for someone. You have a pretty wide network of friends. Perhaps you can convince some of them to donate their time and talent to help us out?
Of course, you don’t have to drop them down the chimney. They can knock on the front door and we will let them in. If you want though, could you leave us five gallons of hand sanitizer and wipes? You can definitely leave those under the tree in the office. If that isn’t possible because of supply chain issues, perhaps you can just leave a check to help us balance our budget this year?
Please kindly remember all of our volunteers,donors, employees, clients, vendors and other stakeholders this year as well. We couldn’t have done it without them. A few of them might deserve coal in their stocking like the members of the FASB, but please overlook this. They have had a tough year too. On second thought, perhaps the FASB board members do deserve coal in their stocking for that lease accounting decision they made last month. We’ll leave that up to you.
Santa, if it is not too much to ask, can you please bring an end to this Pandemic? We keep hearing about the “new normal”. However, the “old normal” was difficult enough for all of our clients and us. This new world is really putting a strain on the delivery of services to those who are most in need of them. Perhaps you can put a vaccine that works on all mutations of the COVID virus in our stockings? We know this sounds magical, but we also know you use magic to carry all of those presents in your sleigh.
Finally Santa, we are sad to tell you that there will be no milk and cookies for you tonight. The Governor won’t let anyone eat or drink in the office. Unfortunately, that includes you. When you drop in tonight, you have to wear a mask in the office as well. By the way, are you vaccinated?
Have a wonderful and restful Christmas Santa. We hope Mrs. Klaus, the elves, and you all have a great New Year as well.
Very truly yours,
The Board and Management
Any NFP Organization
PS. Don’t forget to get the elves vaccinated if there are more than 100 of them! We don’t want OSHA coming after you.
And the Runner Up for Grinch Is….
NFP organizations, like other employers, had a rough spell the last two years. In recognition of that, Congress provided for a deferral of the employer portion of payroll taxes due from March 27, 2020 until December 31, 2020 in the CARES Act. This was a deferral, and not a a forgiveness of these taxes. The chicken has now come home to roost. This is a reminder that 50% of the deferred balances must be deposited by December 31, 2021, with the balance due by December 31, 2022. Employers who do not make this deposit by year end will be subject to interest and penalties.
Given the fact the pandemic is still impacting many organizations, shouldn’t the IRS consider providing a more lenient repayment schedule? I can understand that remission of payroll taxes is out of the question, but many businesses and NFPs may struggle to make these payments. So, the runner-up in the 2021 Grinch election has to be the IRS.
Who is the New Grinch This Christmas?
The Financial Accounting Standards Board (FASB) recently delivered an unwelcome holiday season body blow to the NFP world (and privately owned companies as well).
Working hard to earn the title of Grinch, the FASB decided on November 10 not to defer the new lease accounting standard for a third time. The previous justifiable deferrals of the original implementation date were caused by the Pandemic, as many organizations were shut down or forced to adapt to their new reality.
The new lease accounting will take effect for fiscal years beginning after December 15, 2021, and for interim fiscal periods beginning one year later. This standard requires all lease obligations to be recognized on the balance sheet of the organization, with only minor exceptions. Management could be in for some surprises as bank loan covenants might be impacted because of the new debt on the balance sheet. Additionally, an NFP organization will need to not only implement the lease accounting for future years but also to retroactively recalculate the impact of the new accounting for prior years. This is required even if the NFP decides to adopt a “cumulative change” approach to implementation. In short, NFPs shouldn’t underestimate the amount of work involved in this effort. Many organizations have already found the implementation more difficult than they originally anticipated.
To say I disagree with the Grinch’s action is to put it mildly. Many NFP organizations have been operating on a shoestring budget for extended periods of time, not to mention the fact the job market for accountants is extremely tight. This means just finding the bodies to do the work is a difficult proposition. Mercifully, many NFP organizations have fiscal years such as June 30, giving them some more time to complete the required work. Nevertheless, it is imperative to begin working on this project as soon as possible so the delivery of financial statements to donors and other stakeholders is not delayed.
Perhaps the FASB should adopt green as its new official color?
Meanwhile, Back in Rome…
Meanwhile, Back in Rome…
Vatican financial reform efforts are still underway, even this far into Pope Francis’ reign. The current state of affairs is described by John L. Allen in an excellent article published on the Crux website. That article can be accessed here. It seems the Vatican sustained an eye popping loss of $130 million dollars disposing of an ill considered investment in the London real estate market. To add insult to injury the original investment was made from Peter’s Pence, the annual collection taken up in every Catholic Church in the world to help defray Vatican operating costs.
The upshot of this mess is Peters’s Pence collections, a major source of income for the Vatican, has been much reduced. There is no doubt the Pandemic was a major reason for the decline, but even the Vatican has been forced to admit the recent bad publicity has a lot to do with this. (Please click here for an article from CNA about this).
I have made similar comments such as these many times in this blog, but for those of you that are new and may be managing NFP organizations, they bear repeating:
- Changing the “corporate culture” often requires replacing the entire cast of characters and not just “the boss”. Yes, the cardinal who foolishly invested in London real estate has been dismissed, but what about all of those that assisted him? The Catholic Church has been loath to do such things. Time and time again we have seen the clergy rally to “protect itself” from “outsiders”. Extreme clericalism is not a healthy culture by any stretch of the imagination. Deep cancer often requires extensive surgery to uproot it. Has this happened at the Vatican?
- Has an investment policy been adopted? Any organization with any amount of money needs to have an investment policy. This will at least hinder miscreants from making such horrible investments as we have seen here. A proper investment policy could have prevented such speculative investments as we saw here. Is there one now in place?
- Will there ever be a real audit of Vatican finances? If the Pope and the Curia really wanted to get to the bottom of the problem then it is time to bring back PriceWaterhouse or another respected international accounting firm to give the books a good once over. The Vatican seems to be reacting like a vampire afraid of sunlight. A little more transparency please. (Note: this is good advice for bishops in their dioceses as well…)
- Does the Vatican understand the implications of prospect theory for its donors? Prospect theory, the brainchild of Daniel Kahneman and Ivan Tversky, states people on average feel economic loss more than twice as much as they feel economic gain. That is why publicly traded corporations try to get all bad news out at one shot. They do not want investors to continually keep hearing bad news and feeling pain over and over again. Such conduct will get CEOs and CFOs fired. Hopefully, the Vatican has been completely transparent about this affair and no more bad news will come out. Hopefully.
To be fair, it seems Pope Francis has taken some measures to correct the situation. He was late to the game though. Only time will tell if he has done enough to restore the confidence of the laity in the pews
Giving Tuesday
The Tuesday after Thanksgiving has become known as Giving Tuesday, a day where we who have much share with those who may need much. Obviously, the past two years have been rough on many people given the Pandemic. Many organizations, particularly NFP organizations have not completely recovered from this. On this Giving Tuesday, remember to give generously to your favorite NFP organization. It doesn’t matter which one it is. Pick a worthy one and help those who help others.
Many employers will match contributions to specific organizations or will match donations made on this day. Please take advantage of this if you are employed by such a forward thinking organization. And remember, charitable contributions up to $600 can be deducted from taxable income in 2021 without itemizing deductions.
Mark Koscinski CPA D.Litt. D.Min. 