Beyond Bookkeeping

An open-ended question one of the bloggers on the New York Times’ small-business blog posed around this time last year sparked an interesting discussion among the post’s commenters: “What should I ask of my accountant?”

 The blogger, Paul Downs, owns a cabinet making company and contracted for bookkeeping with an outside accountant. His relationship with the accountant was limited to sending her his business’ ledgers at the end of the year and receiving back the company’s tax returns in March, and although he felt satisfied with her work, he wondered—aloud, so to speak—whether such a transactional relationship was “the proper kind of relationship to have with one’s accountant.”

“I’m curious as to what the alternatives are,” Downs wrote. “Do accountants help you run your business more profitably? Do they look at your operations and provide useful guidance? Or are they just good for tax, estate and other mysterious issues?”

Accountants, CFOs and fellow cabinet makers responded voluminously in the comments section. Although, as one commenter rightly noted, “the relationship you have with your accountant can and should be whatever you and your business needs,” most of Downs’ respondents concurred that he and other small-business owners should at least consider making use of the business-advising services many accountants—including BLP—offer above and beyond bookkeeping.

Being proactive, providing training and planning opportunities, as well as being involved on a regular basis with clients to discuss their business challenges can be changed into positive opportunities—which BLP does on a regular basis—and can help foster a more productive working relationship.

These services, wrote one commenter, can “help your business become more profitable.” Another agreed, writing that accountants who “do forensic work” in addition to financial-statement and tax-return preparation “can be helpful in providing tools and guidance on important issues such as cash flow planning and different flavors of business finance.” Accountants who don’t offer advising “are primarily focused on getting figures ready for taxes, and do not tweak the way books are kept to make it easier for a business owner to analyze a company’s financial situation,” pointed out yet another commenter. “Opportunities are lost when that doesn’t happen.”

Leaving the Risk to the Wagerers: Properly Reporting Gaming Fundraiser Payments

Gaming fundraisers such as a raffle, bingo or poker can be an effective—and fun—way for a nonprofit organization to raise money. However, nonprofits that put on gaming fundraisers should be familiar with the reporting requirements for these events.

If a nonprofit organization pays a game winner more than a certain amount, it must report the amount of the payment and information about the winner to the IRS. That “certain amount” varies depending on the type of game. In addition, for some games, the paying organization is permitted to deduct the amount of a winner’s wager in calculating whether a payment is reportable; for other games, it’s not allowed to.

When a payment is indeed reportable, it is calculated by reducing the amount of the winnings by the amount of the winner’s wager. If the winnings are a non-cash item such as a car, the payment is calculated by reducing the item’s fair market value by the wager amount. These payments are reported using Form W-2G, “Certain Gambling Winnings.” To complete this form, the paying organization needs certain information from the winner (e.g., her name, address and taxpayer identification number).

Finally, if a payment amounts to more than $5,000, the paying organization must withhold federal income taxes from it (When the payment is in the form of a non-cash item, the winner typically pays these withheld taxes to the paying organization). The paying organization is required to report the total amount of taxes it withholds from payments of winnings each year on Form 945, “Annual Return of Withheld Federal Income Tax.”

Audit Costs Now Could Be Loan Savings Later, Study Finds

An audit is not cheap by any measure: For a small business, it costs between $5,000 and $75,000 (depending on the company’s size, the complexity of its financial data and other factors.

However, a new study conducted by the University of Chicago Booth School of Business indicates that an audit’s cost may actually be an investment that ultimately pays dividends in the form of a higher chance of obtaining a loan and better loan terms.

The study, which was published in the Journal of Accounting Research in May, analyzed data from more than 10,000 closely held companies and concluded that audited businesses get interest rates that are, on average, half a percentage point lower than those unaudited companies get—resulting in average savings of $6,900 for every $1 million in outstanding debt every year. A separate study done by the Michigan State University and Indiana University last year found that small businesses with audited financial statements were “significantly less likely” to be denied credit by banks.

An audit by an independent certified public accountant provides banks assurance that a company’s financial statements are correctly prepared and based on verified business data. That assurance evidently pays off, Michael Minnis, the Booth School professor who led the study, told the Wall Street Journal earlier this year.

“There appears to be a very real cost benefit to getting an audit, beyond the obvious value of having your financial statements in order,” he said.

When Being a “Control Freak” Is Required by the Feds

If your nonprofit organization is a generally fiscally responsible one, then it will have in place “internal controls” over its routine accounting-related functions: A system of self-checks that prevent impropriety. Many organizations don’t know, though, that if they receive federal grants, they must establish and maintain internal controls specifically over the grants’ compliance requirements.

According to OMB Circular A-133, which governs the administration of federal awards, grant recipients are required to “maintain internal control over Federal programs that provides reasonable assurance that the auditee is managing Federal awards in compliance with laws, regulations, and the provisions of contracts or grant agreements that could have a material effect on each of its Federal programs.”

If your organization has received a federal award, does it meet that standard? For example, are you certain…

…internal controls would prevent an unallowable cost from being charged to the grant?

…participants in the grant-funded program are indeed eligible (i.e. have been checked for eligibility since their initial assessment?)

…the case managers who actually implement the grant-funded program know the grant’s provisions?

…the “excluded parties listing system” is regularly checked to ensure your organization is not doing business with vendors that have been suspended or debarred?

…reports are being filed in an accurate and timely manner?

If the answer to any of these questions is “no,” you may need to add to and/or strengthen your organization’s internal controls over its federal grant’s compliance requirements.

Why an Audit’s Better than Having a Tooth Pulled

For most nonprofit organizations, as for most private individuals, undergoing an audit sounds about as appealing as having a tooth pulled. Audits take time and money, and opening one’s books to an outsider naturally makes even completely above-board organizations feel vulnerable.

Nevertheless, exposing your nonprofit’s finances to an independent certified public accountant’s scrutiny is a smart idea (when it isn’t actually required by the organization’s bylaws—and it often is). Here’s why:

• Funding groups such as United Way may require organizations to have been audited in order to receive allocations. Ditto for federal or state agencies that provide funding to nonprofits.
• Lending institutions may require organizations to show them audited financial statements before giving them a loan, and each year the loan has an outstanding balance.
• Potential donors—foundations, in particular—may request nonprofits’ audited financial statements in deciding whether to contribute to them.

Good reasons, all. What is perhaps the best reason to have an audit, however, has nothing to do with funders, lenders or donors: Audits prove a nonprofit is financially sound not only to outsiders, but to the organization’s own board, management and employees.

If your nonprofit hasn’t undergone an audit in a while (or has never had an audit), here are some especially good times to undergo one:

• A year or two before you launch a capital campaign
• When you expect to be involved in a merger or acquisition
• When you’re planning to build new facilities that may necessitate bank financing

IRS Gets Real Serious On Real Estate Gifts

Smart Money’s Arden Dale reports that the Internal Revenue Service has launched a “low-profile but sweeping” investigation of unreported real estate gifts, using land-transfer records from at least 15 states—including California—to sniff out the 60 percent to 90 percent of apparent gifts of property to family members that the agency believes have gone unreported.

In other words, Dale writes, “if you haven’t told the Internal Revenue Service about a real estate gift, you probably want to start talking.”

The rule on this is simple: If you give somebody a property worth more than $13,000, you must file a gift-tax return for that. That’s the reporting requirement even if you give the property to a family member, and even if the gift doesn’t cause you to exceed the current, $5 million lifetime exemption amount.

Already given property and not reported it? Well, better late than never. As attorney Beth Shapiro Kaufman reminds Smart Money readers, it’s typically smarter for a taxpayer to voluntarily report.

IRS Announces Mileage-Rate Increase

Despite ongoing gas-price increases, the pump just got a bit less painful.

The Internal Revenue Service has announced that, effective July 1, it will raise the standard mileage rate that taxpayers can claim for the last half of 2011 from 51 cents to 55.5 cents, and from 19 cents to 23.5 cents for medical and moving expenses. The rate for charitable mileage is set by Congress, not the IRS, and will remain the same—14 cents.

“This year’s increased gas prices are having a major impact on individual Americans,” said IRS Commissioner Douglas Shulman, so “the IRS is adjusting the standard mileage rates to better reflect [them].”

The business standard mileage rate is used to calculate the deductible costs of using a car for work. The federal government and many businesses also use it to calculate employee mileage reimbursements.

Interested in Deducting Home-Loan Interest? Lend Us Your Ear

If you own a home, it probably makes sense to deduct in your federal tax filing the interest on the debt associated with that residence. On this point, however, there are as many ins and outs in the tax code as there are doors and windows in your house (probably more, actually). Here are some common questions about home-loan interest deductions—and some answers:

Can I deduct the interest on my home acquisition indebtedness (mortgage) or home equity indebtedness (loan with equity as collateral)?

Yes—to a point. You can fully deduct interest on up to $1 million in home acquisition indebtedness, and you can generally fully deduct interest on up to $100,000 in home equity indebtedness.

Can I deduct the interest on my mortgage if somebody else makes the mortgage payments?

Interest on a mortgage may be deducted only if the person who owns the property makes the payments. So, no, if somebody else—say, your parents—pays your mortgage, you can’t deduct the interest on it (And they can’t, either).

For deduction purposes, what qualifies as a residence?

Only your principal residence and one other residence (If you own more than two homes, you can change which one you identify as your other residence each year). Houses, condominiums, mobile homes, boats, house trailers and some other properties that can be considered a residence count, but vacant land (even land sometimes used for camping) doesn’t. A residence that’s under construction counts, but only once building has actually begun, and only if it actually becomes a residence when it’s complete.

What if my spouse and I own two or more homes, but file our taxes separately?

You each can only take a deduction on one residence and only up to $500,000 acquisition debt and $50,000 equity debt each (regardless of how ownership is arranged or costs of homes), unless you both consent in writing that one of you can take deductions for both your residences.

Keeping the Bank From Buying You Overpriced Insurance

Paul Sullivan, The New York Times’ “Wealth Matters” columnist, recently authored a piece about the troubling and increasingly common practice of bank-imposed insurance. If you’re a homeowner—and particularly if you’re a condo owner—it could very well concern you.

Here’s how bank-imposed insurance (or force-placed insurance, as it’s technically called) works: A homeowner’s mortgage-lender notifies her that she lacks adequate insurance coverage (frequently, it’s flood protection) and that she must either provide evidence to the contrary or purchase more coverage. If she doesn’t or, as is more common, doesn’t respond quickly enough, the bank buys insurance for her—at rates higher than those available on the commercial market.

Enough homeowners have complained about being forced to pay above-market premiums for bank-imposed insurance that 50 state attorney generals recommended, as part of a national investigation of mortgage practices, that banks’ ability to use force-placed insurance be limited.

Until that recommendation is implemented, though, homeowners should reply quickly to bank notices. Condo owners, especially, should be attentive: They tend to receive notifications more because their homeowners’ insurance policies name their condo associations, rather than their mortgage companies, as a beneficiary (So the mortgage companies aren’t aware of the policy). Most importantly, homeowners should prepare themselves to lock horns with mortgagers by learning their rights.

Congress Has Repealed New 1099 Reporting Requirement

With the Obama administration’s lawyers and attorney generals from several states hitting the president’s 2010 healthcare law back and forth in the courts like a ball in a tennis rally, it can be hard for small-business owners to keep track of how the ever-changing legislation affects them.

So, in case you missed it: Congress has repealed the contentious provision of the Patient Protection and Affordable Care Act that required businesses to file a 1099 form for every vendor from which it purchases over $600 in goods. The more-stringent requirement was intended to help fund the rest of the law, but no sooner had it been announced than business groups declared their opposition, calling the provision “burdensome” for small businesses.

“This is absolutely unmanageable,” Bill Rhys, tax counsel for the National Federation of Independent Business, told The New York Times last year. “It’s not just the amount of time and money businesses will have to spend, but all that goes with collecting this information.”

In April, Senate Democrats conceded the point, passing a House Republican measure that repealed that section of the healthcare law (and others). The White House said in a statement it was “pleased Congress has acted to correct a flaw that placed an unnecessary bookkeeping burden on small businesses.”