Do you want $1 to go to charity?

Understanding Payments to Agents of Charitable Organizations

By Rebekuh Eley, CPA, MST

Many times local retail chains or restaurants ask customers to donate to a local charity with the payment of their restaurant bill or store purchase. Are these donations considered tax deductible contributions? The donation is not going directly to a charity. The donation is going to a business entity that will pay the donation to the charity on the customer’s behalf.

Payments to these businesses, or agents, in lieu of a direct contribution to a qualified Internal Revenue Code (IRC) 501(c)(3) organization, are considered tax deductible donations when paid to an agent of the organization. A valid agent of the charity may also provide the contemporaneous written acknowledgement to the donor as required to take a charitable contribution deduction. An entity that enters into this type of arrangement should comply with guidelines so a true agency relationship exists with the charity to avoid income treatment of the donations received on behalf of the charity and, to allow a charitable contribution tax deduction to the donor. These agency arrangements can also be mutually beneficial to both the charity and the business entity.

The Internal Revenue Service (IRS) has issued guidelines for entities to follow to assist with obtaining an agency relationship. According to Revenue Ruling 2002-67, the agency arrangement between a charitable organization and a person or entity acting on behalf of the charitable organization should first be established through a written agreement that is valid under the applicable state law. Not all contractual relationships will necessarily result in an agency relationship.

It is important to confirm that the state law recognizes the relationship established in the agreement as a valid agency relationship. The IRS further analyzed the terms and facts and circumstances of a written agreement to establish an agency relationship in PLR 200230005. The IRS noted the following characteristics that supported a valid agency relationship between a charity and a for-profit company receiving car donations on behalf of the charity.

  • The written agreement between the charity and the company clearly established an agency relationship pursuant to certain state agency laws.
  • The company was to act on the charity’s behalf and was subject to the charity’s control in the general performance of certain activities such as solicitation, acceptance, processing and the sale of donated property.
  • The company could exercise some discretion but this was not in conflict with state law.
  • The charity remained the equitable owners of the donated property until an authorized sale occurred.
  • The charity bore the risk of accidental loss, damage or destruction of the donated property until the donated property was sold.
  • The charity had the requisite degree of control and supervision.
  • The company agreed to provide monthly accounting reports and weekly advertising reports to the charity.
  • The charity reserved the right to inspect the company’s property donation program financial statements.

Under the written agreement, the company would pay certain costs and expenses, such as advertising and insurance. This fact did not preclude a determination that there is a valid agency relationship. Also, the fact that a related person to the company could purchase any vehicle at fair market value did not preclude the agency relationship provided the company acted in accordance with its fiduciary responsibility.

After an entity has established an agency relationship to receive contributions on behalf of a charity, the entity needs to evaluate if it is considered a charitable or professional fundraiser under state law. Many states impose additional registration and annual filing requirements on entities that are considered charitable or professional fundraisers.

After reviewing the requirements set forth by the Internal Revenue Service and various states, an entity may question the decision to establish an agency relationship. However, the agent will achieve a sense of community and purpose in helping the good cause of a charity while providing additional goodwill for its own business endeavors.

Please contact your Templeton advisor, John Templeton, with any questions you may have regarding nonprofits, john@templetonco.com or 561-798-9988.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2014). Copyright © 2014 BDO USA, LLP. All rights reserved. www.bdo.com

Health care

Health care continues to be one of the more contemptuous issues our country faces. And no wonder, in 2011 alone, the U.S. spent $8,400 per person compared to the next highest-spending country, Norway at $5,352.

Since 2002, family premiums for employer-sponsored health care have increased by a whopping 97 percent placing the cost burdens on employers and workers.

The drivers of these cost increases include an aging Baby Boomer generation that is creating more patients and more treatments, a need for long term care for chronic illnesses, more sophisticated treatments and technology, and increasing inefficiencies, malpractice and administrative costs.

On March 23, 2010 President Obama signed the Patient Protection and Affordable Care Act (otherwise known as ObamaCare) into law. This law, while intending to offer more affordable health care to individuals and families, requires much employer compliance and action.

Overall the Act requires most U.S. citizens and legal residents to have health insurance by creating state-based American Health Benefit Exchanges through which individuals can purchase coverage, with premium and cost-sharing credits. These credits are available to individuals and families with income between 133-400 percent of the federal poverty level.

Separate Exchanges will also be created that will allow small businesses to purchase coverage. Employers will be required to pay for penalties for employees who receive tax credits for health insurance through an Exchange, with exceptions for small employers. New regulations on the health plans in these Exchanges will also be imposed in the individual and small group markets. Medicaid will also be expanded to 133 percent of the federal poverty level.

As this law moves into action and even if it is repealed, one thing is certain – change. It’s clear that quality, price and service are often sacrificed in the current health care model. So the change will have to come from employers, providers, physicians, payers and insurers. This is how:

• Employer driven change – 60 percent of the under 65 population have insurance through their employers and all are negatively impacted by escalating costs and inadequate quality. As a result, educating those employees is a must as well as focusing more on wellness and prevention.

• Provider/Physician change – Health care providers will go from a fee-based model to a newer value-based model and focus on being more accountable in their care. There will be consolidation and newer business models that require increased use of data analytics and clinical intelligence.

• Payer/Insurer change – By moving the focus away from claims processing to more collaboration in an effort to improve care and manage costs. There will also be a shift from administrator to supplier of data analytics/clinical intelligence.

So the question becomes for employers – are you going to pay or play ObamaCare?

Play means employers offer minimum essential coverage to all of your full-time employees.

Pay is an excise tax if you do not offer minimum essential coverage (or any coverage) and at least one of your full-time employees is certified as having enrolled in coverage through a state health exchange for which he or she received a premium tax credit or cost sharing reduction. This tax is applicable to employers with 50 or more full-time employees on average per business day. The monthly penalty (non deductible) is $166.67 (1/12 of $2,000) times the total number of full-time employees for the month minus 30.

What to do?

Look at your workforce Employers need to evaluate their workforce and look at their employees (both full-time and part-time) and see if any could be reclassified as employees for purposes of the mandate.

Business structure Employers also need to understand if their current business structure or model could cause the company to be subject to the employer mandate – and see if there are circumstances under which they could restructure to avoid the mandate.

Learn about Health Insurance Exchanges Examine the relationship between the employer mandate and the individual mandate and how the health insurance Exchanges that will be put in place in 2014 will provide opportunities for some employers and many individuals to acquire such coverage.

Florida recently returned $1 million planning grant to the federal government and has set up a non-ACA compliant health care initiative. However, if the state doesn’t set up an ACA compliant exchange, the federal government will.

Employers need to act now and consider an overall benefit redesign with an emphasis on better employee health. They should also set up and access information systems and reporting for compliance and start discussions with payers and providers that consider risk sharing.

Though overturning ObamaCare would mean relief from this compliance burden and potential penalties, it doesn’t necessarily change the need for an employer’s strategic evaluation of their workforce, business structure, overall plan design and employee communications.

This work upfront can save you a lot of heartache and expense down the road.

 For more information, please e-mail info@templetonco.com.

Audit and Accounting Standards Updates Nonprofits Need to Know

 

In this ever changing landscape of rules and regulations, nonprofit organizations need to be especially aware of the changes that will guide their audits. Being prepared for an upcoming audit is the best way to ensure a smooth and successful process. Please see our brief overview of Audit and Accounting Standards updates nonprofits need to know.

1. SAS No. 115 Communicating Internal Control Matters Identified in an Audit
Provides guidance to auditors with respect to what should be communicated to management and those charged with governance in an organization. It requires the auditor to make communications, in writing, to management and those charged with governance regarding significant deficiencies and material weaknesses in internal controls that you note in your audits.

2. SAS No. 116 Interim Financial Information
To revise AU section 722 of AICPA Professional Standards to establish standards and provide guidance on the independent accountant’s professional responsibilities when the accountant undertakes an engagement to review interim financial information of a nonissuer when certain conditions are met.

3. SAS No. 117 Compliance Auditing
Establishes standards and provides guidance on performing and reporting on an audit of an entity’s compliance with applicable compliance requirements of a governmental audit requirement.

4. SAS No. 118 Other Information in Documents Containing Audited Financial Statements
This is effective for audits of financial statements for periods beginning on or after December 15, 2010. It establishes a number of presumptively mandatory requirements for the auditor to perform when a client provides additional information in documents containing audited financial statements.

5. SAS No. 119 Supplementary Information in Relation to the Financial Statements as a Whole
Requires additional documentation from auditors and procedures around supplementary information, using the same materiality level used during the financial statement audit. Effective for audits of financial statements for periods beginning on or after December 15, 2010.

6. SAS No. 120 Required Supplementary Information
Effective for audits of financial statements for periods beginning on or after December 15, 2010.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under Internal Revenue Service Code. The technical information here is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. For additional information, please contact our firm at info@templetonco.com or 561-798-9988.

 

Issues facing businesses

By: Steven Templeton, CPA, CVA, Managing Partner

International Financial Reporting Standards (IFRS)

After the Enron debacle, the American Institute of Certified Public Accountants (AICPA) assumed a leadership role in the rush toward an international set of accounting standards (IFRS).  The long and proud independent standard setting process in the United States of America is being phased out in favor of an international standard setting process with an international governing body, the International Accounting Standards Board (IASB).  So what’s the big deal?

Confusing Standards?

So will we have a single, simple, principles-based global set of accounting standards?  Not so fast, my friend!  Initially, public companies will be required to convert to IFRS while private US companies could choose to adopt IFRS for small- and mid-sized entities or could, along with not-for-profit organizations, continue to report under generally accepted accounting principles in the United States.  Bankers, investors, analysts and other users of financial statements will need to be cognizant of the differences and understand them in order to properly analyze financial statements and make useful industry comparisons.

The AICPA released results of a survey showing that more than 80% of AICPA Council members strongly support GAAP differences for U.S. private companies and not-for-profit entities from the international GAAP that will be required for U.S. public companies.  It’s safe to say that the support for a universal adoption of IFRS for public and private companies alike is weak.

Interestingly, Charles Niemeier is also more broadly challenging the conversion to IFRS. He was a member of the Public Company Accounting Oversight Board and was previously the U.S. Securities and Exchange Commission chief accountant in the Division of Enforcement and co-chair of the SEC Financial Fraud Task Force. Overall, he is not in favor of switching from U.S. GAAP to IFRS, and suggests that we continue to fix what’s broken as opposed to converting to a whole new set of less mature standards.

Convergence or Conversion?

Early on, the IFRS conversation centered around “convergence,” giving one the impression of an evolutionary process whereby US standard setters would work with the global International Accounting Standards Board (IASB) to achieve a common set of high-quality, accepted accounting principles.  As it stands today, there are broad areas of disagreement between IFRS and US GAAP and a myriad of issues addressed by US GAAP with a non-existing IFRS counterpart.  In short, US public companies are being required to convert from US GAAP, the gold standard of accounting principles, to the inferior, less developed international standards.  Rather than allow IFRS to converge with US GAAP over time, the international G-20 leaders have called for the new global set of accounting standards to be completed by June 2011, ready or not!

Here’s what Mr. Niemeier had to say about the process of converging United States generally accepted accounting principles with IFRS:

“I agree with the original goal of the International Accounting Standards Board and Financial Accounting Standards Board to enhance comparability of financial reporting by converging their standards based on quality.  Unfortunately, in the last few months the focus has changed from achieving comparability of financial reporting to establishing a set timetable to switch the U.S. to IFRS. This change de-emphasizes the quality of the standards in favor of speed, and appears to be more based in politics than in what is in the best interests of investors.  For a number of reasons, I believe that this new path has the potential of de-linking us from our current regulatory model. Instead, in my view, we need to return to a policy of convergence, where we focus on substantive milestones, not timing.”

At What Cost?

Larger public companies are beginning to assess the enormous cost and effort required to convert their transaction processing and financial reporting systems to accommodate IRFS.  If accounting is the language of business, IFRS adopter company personnel, including accounting staff, business managers, executives, and board members, must learn this new foreign language.

Barry C. Melancon, AICPA president and CEO, has called for a permanent, independent funding mechanism for the International Accounting Standards Committee Foundation, the governing body of the IASB.  In the United States, the AICPA will encourage the Securities and Exchange Commission to use part of the current levy on U.S. public companies for accounting standard setting activities as a permanent funding source for the IASB, Melancon said.

Who Will Write the Rules and Who Pays?

There will be 16 IASB standard writers of which only two will be from the United States.  Naturally, the United States will provide the super majority of the IFRS funding.

It’s Time to Get Involved.

IFRS is not an issue best left to the back office bean counters to deal with.  Now is the time for all U.S. financial system stakeholders to understand the movement toward IFRS and consider the possible ramifications, good or bad.  Interested parties should take the following steps:

  • Monitor the progress of the IFRS convergence/conversion and take appropriate action.
  • Learn: Attend relevant seminars on the subject matter
  • Share: Inform others within and without your organization to properly prepare for the transition.
  • Speak out: Let the AICPA, the SEC and others know your views on IFRS, its applicability to U.S. public and private companies, and the proposed implementation timetable.

It is our responsibility to our profession and our clients to stay abreast of this issue and do what we can to make sure that international politics do not trump good sense and that the baby is not discarded with the bathwater.

For more information on IFRS or any other accounting concerns,  please contact: info@templetonco.com

Perception and reality: shedding light on Level 3 assets

In the winter of 2007-2008, sweeping new financial reporting standards were launched – directly into the path of an unforeseen perfect storm.

Known as fair value accounting, these new rules had been years in development.  They were designed to unify global standards and provide greater transparency through market-based, rather than earlier cost-based, methods of valuation.

But no sooner had fair value gone into effect than markets worldwide all but evaporated in the worst economic crisis in over ninety years.  As asset values drifted erratically into what analysts called a “no man’s land,” accurate fair value reporting was put to the test.  And one obscure provision was taken head on by regulators.

We’re talking about Level 3 Inputs as defined by Accounting Standards Codification Topic 820: Fair Value Measurements and Disclosures (ASC 820), the least understood and thorniest area of fair value asset valuation, yet a category now critical to many organizations.

Do a quick internet search and you’ll get millions of hits on Level 3 Inputs, ranging from hard-to-follow bureaucratic explications to biased (often misinformed) broadsides in the blogosphere.  Our purpose here is to sift reality from perception and shed some light on this important area of financial reporting.

First, let’s briefly define terms.

As outlined by the ASC 820 (f/k/a Statement on Financial Accounting Standards No. 157: Fair Value Mearsument), fair value reporting provides for three distinct levels of inputs.

Level 1 Inputs, which in theory comprise the preponderance of most organizations’ portfolios, can be valued using independent observable market inputs: for example, stock prices as reported by the Wall Street Journal on a daily basis.  The idea is to peg an asset’s value to what it would fetch today – right now – in an “orderly transaction” between “willing market participants.”  Those two phrases are important.  Fair Value presumes the absence of compulsion or duress.

Level 2 Inputs don’t have readily-available market inputs, but can be accurately valued using comparable and observable data points.

Level 3 is unique.

This tier was created as a kind of “none of the above” category for perceptible yet hard-to-value assets with no observable inputs.  Generally speaking, Level 3 Inputs either are illiquid or traded so rarely there is no independent market price.  Examples might be private equity investments or certain long-term derivative contracts (typically managed by hedge funds).

To put all this in basic language:  Inputs in Levels 1 and 2 are “mark to market,” but assets in Level 3, where this is no market, are “mark to model.”

Constructing those models is what makes Level 3 asset valuation so exceedingly complex.  To meet fair value disclosure requirements, these valuations involve a combination of management forecasts, various macroeconomic and internal data, sophisticated mathematical models and other proprietary techniques – in other words, experience and specialized expertise from your accounting and audit firm.  Including a coordinated effort from both your accountant and your investment managed to insure that you have obtained full and adequate disclosure regarding those assets.

Sound accounting and audit procedure for Level 3 isn’t astrophysics, but in some respects it’s not far off either.

There’s an irony here.  While Level 3 assets are by definition hard to value, they are often precisely the types of investments one would expect in a widely (and wisely) diversified portfolio.  Many large organizations – foundations, for example – hold significant and sound assets in this fair value tier.  But in the current economic environment, Level 3 also is home to distressed assets such as complicated mortgage-backed securities for which markets seized up and have remained stagnant, making “orderly transactions” arguably impossible.

Thus Level 3 reporting is not only complex, it can be controversial.

What’s at stake for you?

Ultimately an organization’s board, investors, creditors and stakeholders comprise the real-world “jury” for any financial statement.  Credibility is the lynchpin of quality financial statements.  Our experience with a wide range of clients has shown, when done properly, Level 3 financial reporting can ensure a high degree of transparency and confidence going forward.

For more information on Level 3 assets or any other financial concerns, please contact info@templetonco.com.

About the authors:

John TempletonJohn R. Templeton, CPA, CVA

John Templeton is a Partner with Templeton and leads the firm’s Audit and Accounting Services Division. He is an experienced provider of accounting, auditing, and advisory services for private enterprises in a variety of industries including nonprofit, agriculture, manufacturing, and distribution. He is a hands-on professional who approaches each audit with focus and efficiency. He is an advocate for many of the younger members of the firm, and develops and mentors these young associates.