When you say you want to grow your manufacturing company, what does that mean? It may entail expanding your physical plant or warehouse or introducing new products. It could also mean opening new markets by conducting business in multiple states.

Many states have been more aggressive in going after out-of-state companies doing business in their states. Many of these businesses do not realize they have an exposure to a state’s taxes until they receive a Nexus Questionnaire from that state. That is why it is important to understand this exposure upfront then make informed decisions on whether your company is subject to a state’s income and franchise taxes.

What Taxes Could You Be Subject To?

Another state can apply its sales and use, income or franchise tax to your business if you have established a sufficient connection, or “nexus,” with that state.

Historically, nexus required a physical presence in the state, such as offices, manufacturing facilities or employees. Physical presence is still required today to trigger sales and use tax collection obligations, but many states require only a minimal presence to establish nexus for income and franchise tax purposes — and the courts have often agreed.

Federal law prohibits a state from taxing a company’s income if its only activity in the state consists of soliciting orders or sales of tangible personal property that are approved and shipped from outside the state. But this law does not apply to intangible property. Thus, several court cases have allowed states to tax an out-of-state firm’s income on intangibles, such as trademark licenses or credit cards, even though the firm had no physical presence in the state. A substantial economic presence was sufficient.

Franchise tax — a tax on the privilege of doing business in a state — often requires even less of a connection. Simply soliciting orders or sales in the state may be enough.

How Might You Trigger “Nexus”?

Whether your company is exposed to multistate taxation depends on many factors, including the nature of your business, the tax laws in each of the states in which you do business, and your activities in those states. Nexus is determined on a state-by-state basis, so if you plan to expand into two or more neighboring states, you may face different rules for each.

That said, some activities or circumstances within a state will generally trigger nexus. One example is having legal domicile or a principal place of business there, of course. But even just maintaining an office or other facility there will probably do the trick. Rendering services of any kind, performing warranty repairs or hiring others to provide them, or soliciting orders will also create a strong likelihood of nexus.

Therefore, the best course of action is to learn each prospective state’s rules and project your tax liability before expanding. Doing so will limit or eliminate any unpleasant surprises that could make the expansion less beneficial than you’d anticipated.

Can Multistate Taxation Actually Be to the Company’s Benefit?

Multistate taxation isn’t necessarily a bad thing. For example, to avoid multiple taxation of the same income, most states require that you apportion income among the states where you are subject to income tax. This typically is done using a formula based on a company’s sales, property and payroll in each state, though states weight each factor differently and some use only one or two of the factors.

Suppose that your company is located in a state with a very high corporate income tax, but you do a significant amount of business in states with low or no income taxes. Because you lack nexus with those states, all your income is taxed by your home state.

But if you create nexus with one or more of those states (by setting up a small office, for example, in a state where your sales are significant), you may be able to allocate some income to those states and lower your overall tax bill.

Taking Your Business on the Road

If you are working to expand your customer base, taking your business across state lines is an obvious step. But it is also a step that should not be taken without plenty of planning. In addition to training a sales force and ensuring you have products in place, you need to consider the tax ramifications of conducting business in other states. State tax planning should be part of your organization’s decision-making process as early as possible. If you have multi-state tax concerns or questions, please contact me at acoldwell@orba.com or 312-670-7444 to discuss your specific situation.

If your estate plan calls for making noncash gifts in trust or outright to beneficiaries, you need to know the values of those gifts and disclose them to the IRS on a gift tax return. For substantial gifts of noncash assets other than marketable securities, it is a good idea to have a qualified appraiser value the gifts at the time of the transfer.

A three-year statute of limitations applies, during which the IRS can challenge the value you report on your gift tax return. The three-year term doesn’t begin until your gift is “adequately disclosed.” This means you need to not just file a gift tax return, but also:

• Give a detailed description of the nature of the gift:
• Explain the relationship of the parties to the transaction: and
• Detail the basis for the valuation.

The IRS also may require certain financial statements or other financial data and records.

Generally, the most effective way to ensure that you have disclosed gifts adequately and triggered the statute of limitations is to have a qualified, independent appraiser submit a valuation report that includes information about the property, the transaction and the appraisal process.

Using a qualified appraiser is important because, if the IRS deems your valuation to be “insufficient,” it can revalue the property and assess additional taxes and interest. If the IRS finds that the property’s value was “substantially” or “grossly” misstated, it will also assess additional penalties.

A “substantial” misstatement occurs if you report a value that’s 65% or less of the actual value — the penalty is 20% of the amount by which your taxes are underpaid. A “gross” misstatement occurs if your reported value is 40% or less of the actual value — the penalty is 40% of the amount by which your taxes are underpaid. Before taking any action, consult with your tax and legal advisors regarding the tax and legal consequences of any estate planning strategies. In addition, your estate planning advisor can help you work with a qualified appraiser to ensure your gifts are adequately disclosed.

Contrary to conventional wisdom, conservatives and liberals are equally generous in their donation habits, though they do support different causes, according to a Massachusetts Institute of Technology study, “Who Really Gives? Partisanship and Charitable Giving in the United States.” Liberals are much more likely to donate to secular organizations and conservatives give a greater percentage to religious causes, especially their own congregation.

Additionally, charitable contributions fluctuate based on the political landscape. Individuals in Democratic states donate less money to small not-for-profits when a Republican occupies the White House and vice versa. Conversely, having a president of the same party increases the average and total donations to not-for-profits at a state level.

Spring 2013                                                                                      Editor Larry A. Sophian

Are you ready? Three Significant Developments in Outreach Technology

One of the top priorities for not-for-profits is engaging with their supporters and building relationships. It is no surprise, then, that interest is surging in technology that can help not-for-profits do just that. How can your organization maximize the potential of current technology tools and avoid wasting time with passing fads? Let’s look at what’s working.

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Not-For-Profit Mergers: When Joining Forces is the Answer

One in 12 respondents to a recent GuideStar Economic Survey said they believed their not-for-profit was in danger of closing for financial reasons. If your organization is dealing with a lack of either financial or human resources, you need to start looking for solutions — fast. Joining forces with another not-for-profit is one strategy to consider. When researched and executed carefully, a merger can make both organizations stronger.

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One of the building blocks of a strong not-for-profit organization is an active Board of Directors who can support the organization in many ways – financially, with their time, and with the skills the members possess, both personally and professionally.  While organizations should take full advantage of the resources their Board provides, they must also recognize that those resources won’t always be available.   Many boards impose term limits on their members to assure the organization gets a steady infusion of fresh thinking in its governance.  Even if you don’t have term limits, Board members will, at some point, retire from their Board service.

This fact can also pose a challenge for organizations, in that there is a need to plan for the succession of your Board members.  The strongest boards are often well diversified both in the types of people who serve on them and the skills the members bring to bear.   Organizations need to plan for the loss of those skills as people rotate off the Board.

For example, assume your organization wants to have an attorney as part of its membership, and you know that the attorney currently on the Board will be rotating off next year.  You might want to start recruiting an attorney to join the Board now.  That way, the incumbent attorney can spend some time introducing the new person to the types of legal issues that have been encountered during their service, and make the transition smoother.

The succession issue also applies to the officer positions.  These positions often rotate, with people gradually moving up to assume an officer position over time.  If your organization does have term limits, this will mean that someone who becomes, for example,  Board President, may only have that position for one or two years.  Part of the responsibility of the officers is to consider the skills of their fellow Board members and help select, and then mentor and train, someone to succeed them in their role.

Of course, most people who serve on Boards also have busy personal and professional lives, and you both want to be respectful of their time and use their time to the fullest.  Allocating some of that time to planning for an orderly succession when your current Board members are no longer serving can be key to keeping your organization strong over the long haul.

Quick — do you know your credit score? Perhaps more important, do you know what a solid credit score is today?

Your credit score is a reflection of your creditworthiness. With a high credit score, you may be able to realize lower interest rates on mortgage or auto loans and credit cards. To put yourself in the most-favored category of borrowers, you’ll need a credit score of at least 740. So it’s worth your while to achieve and maintain a score of 740 or higher.

Reviewing Your Credit Report

Credit data is maintained by three major credit-reporting agencies — Equifax, Experian and TransUnion — that share your credit information with lenders and others that request it. To obtain a copy of your credit report, consider visiting annualcreditreport.com. According to the Federal Reserve Board, this is the only authorized online source for a free credit report.

Under federal law, you’re entitled to a free report from each of the three national credit-reporting companies once every 12 months. However, you generally must pay a small fee to obtain your credit score. Be aware that there are many disreputable sources that claim to offer free credit reports or scores but then attempt to collect fees or require you to purchase other services.

When you get your report and score, don’t look at just the overall score. Go through the report line by line and make certain everything is accurate. For example, if you’re mistakenly listed as having a lower credit limit than you actually have, get it corrected. The same goes for any other mistakes that might lower your score.

How to Boost Your Score

Your credit score is determined by a number of factors, including your credit history, the amount of debt you have and the types of credit you’ve obtained. If your score is lower than you’d like, the next step is to begin paying down any credit card balances. This carries more weight than paying down installment loans, such as mortgages and car loans. Lenders typically like to see a sizable gap between the amount of credit you’re using and your available credit limits.

Getting (and keeping) your balances below 30% of your limits should put you on the right side of these requirements. Of course, paying off your balances entirely each month is even better because you’ll avoid interest charges.

Don’t be afraid to use credit; just use it wisely. This might seem counterintuitive to frugal folks who are used to paying cash for everything. Keep in mind, though, that credit scores are designed to predict how well you’ll use credit in the future based on how well you’ve used it in the past.

No Credit History?

If you have little or no credit history — even if it’s because you’ve managed your finances better than most people — you’re an unknown quantity as far as the credit-reporting agencies are concerned. The solution is to establish a credit history.

If you don’t currently have a credit card, get at least one of the major cards, such as Visa, MasterCard, Discover or American Express. A major card will build more credibility than, say, retail or gas cards. Regular, even if infrequent, use of these cards will provide the agencies with more data to indicate you can be trusted to handle credit wisely.

A Mistake to Avoid

Don’t make the mistake of assuming a late payment here or there won’t hurt your score. It will. When possible, arrange for automatic bill payments to cover at least your minimum payment — and preferably the full balance — due each month. Likewise, if you’re disputing a payment, don’t let it go. Better to pay it on time and try to recover the money later.

The good news is that, if you pay down significant portions of credit card debt, you could see improvement in your scores within 30 days. Other problems — like liens, bankruptcies and foreclosures — can take much longer to resolve.

Game On!

The benefits of achieving and maintaining a high credit score are many. If your score isn’t as high as you wish, you can take steps to boost it. If you have a solid score of around 740 or higher, congratulations! Now be sure to maintain your score by using credit judiciously and making your credit card payments on a timely basis.

In December, 2011, the IRS issued temporary regulations intended to set new standards for capitalizing or deducting dollars spent on tangible property.  These regulations were originally effective for years beginning on or after January 1, 2012, but the effective date has been postponed to tax years beginning on or after January 1, 2014.  Taxpayers have the option to apply the temporary regulations to tax years beginning on or after January 1, 2012.

Consistent with prior regulations, the new regulations center on a “unit of property.”  A “unit of property” is determined by the functional interdependence standard. Guidelines of particular interest for those involved in real estate include the following:

1. Each building and its structural components is considered a single unit of property.
2. Key building systems (like HVAC and plumbing) are separate from the building structure.
3. Leasehold improvements are a separate unit of property.

Taxpayers are required to capitalize improvements made on a unit of property based on relevant facts and circumstances.  Improvements are divided into three categories:  betterments, restorations and adaptations.  Changes have also been made to reporting the retirement of a structural component of a building.

Routine maintenance remains deductible in the current year.  Maintenance includes work that does not result in increased capacity, productivity, efficiency, strength or quality.

A de minimis rule allows materials and supplies to be deducted in the current year if the items are less than $100 and are expected to be consumed in 12 months or less.  Also, a de minimis expensing rule allows a taxpayer to deduct amounts paid to acquire property that would otherwise be capitalized if the taxpayer has an Applicable Financial Statement, written accounting procedures for expensing property under certain dollar amounts and treats the expenditure on the financial statement in accordance with the written policy.  An overall ceiling limits the amount that a taxpayer may deduct under the de minimis rule.

Also included in the temporary regulations are examples intended to clarify the treatment of roofs.  Replacement of an entire roof or a significant portion of a roof that has deteriorated over time is classified as a restoration and must be capitalized.  Replacement of shingles damaged in a storm or the cost of fixing a leaky roof (even if significant) may be considered a repair.  The treatment is based on specific facts and circumstances in a particular case.

Finally, if these new regulations differ significantly from the way repair and replacement costs have been handled in the past, it may be necessary to request a change of accounting method (Form 3115) with the 2012 tax return filed.  Most changes are automatic under Revenue Procedures issued in 2012, but guidelines should be followed to request the change.

The IRS is under pressure to clarify and simplify implementation of the regulations when they are issued in final form.  The de minimis rules, dispositions and routine maintenance are potential areas under IRS consideration for revision.

While this guidance is meant to simplify reporting dollars spent on tangible property, this area is increasingly complex.  Our goal is to help you maximize your deductions, so give us a call to discuss any questions you may have or contact me at awescott@orba.com.

In a time where funding is scarce, fraud is proving to be devastating to not-for-profit organizations and the communities that they service.  According to the 2012 Report to the Nations on Occupational Fraud & Abuse, published by the Association of Certified Fraud Examiners (ACFE), organizations lose an estimated five percent of their annual revenue as a result of fraud.  Nearly half of the victim organizations do not recover these losses.  Fortunately, there are some easy to implement controls to help prevent fraud.

• Set a strong tone from the top to let your employees and volunteers know that unethical behavior of any kind will not be tolerated.  Fraud is less likely to occur in an environment with an established fraud policy, a hotline for tips, management review and mandatory vacation for employees, to name a few.

• Define fraud.  Employee tips are the number one method of detecting fraud.  Make sure your employees are trained to look for fraud and have a safe environment to report concerns.

• Watch for red flags in employee behavior.  There are many common behavior warning signs to watch out for.  Are your employees living beyond their means?  Are they experiencing personal financial difficulties?  Have they become controlling of their work?  Do they have unusually close associations with vendors?  Changes in behavior and attitude are often a sign of something else, so don’t ignore your gut feelings.

• Review, review, review.  For fraud to occur something must be altered.  Misappropriation of assets schemes accounted for 87% of the cases in the ACFE report.  Remember, checks can be changed after signature and contributions might not make it to the bank, but that also means that a vendor did not get paid and a donor is still receiving invoices for an outstanding pledge.  Scan the monthly bank statement for unusual items, review canceled checks for changes, listen to vendor/donor complaints, and question the need for accounting adjustments and write-offs.  While it is less likely that an employee will be so bold as to steal $100,000 dollars in one transaction, instead he/she might skim $10 here and $100 there.  The frauds included in the 2012 study lasted a median of 18 months before being detected.

• Do not rely on your annual financial statement audit to detect fraud.  According to the ACFE’s study, external audits detected fraud in only three percent of the frauds reported in their study.  Your auditor is not specifically looking for fraud, however, he or she will certainly make you aware of questionable transactions as they are discovered.

• Be proactive.  Your fraud policy should change as your organization changes.  Ask yourself, what could go wrong? And what are we doing to keep that fraud from happening? If the answer is nothing you have a problem.

For those of you that are thinking, “But my organization is too small for all of this.  We cannot afford to implement these procedures.  Plus, I know my employees; everyone is honest, no one would steal.”  The truth is you can’t afford to not take fraud seriously.  The ACFE’s report states that small organizations, defined as 100 or fewer employees, suffer the largest losses.  The majority of perpetrators are first time offenders with clean employment records. Additionally, perpetrators with high levels of authority and long-time employees are the cause of the largest losses.

For more information on the 2012 Report to the Nations on Occupational Fraud and Abuse, visit www.acfe.com

March 2013                                                                                                     Editor Steven H. Lewis

Getting 20-Somethings to Jump-Start Their Retirement Savings

Whether your children (or grandchildren) are recent college graduates just starting their first job or have been employed and supporting themselves for several years, they may not be taking advantage of their employer-sponsored retirement plan. Unfortunately, for many 20-somethings, saving for retirement takes a backseat to other priorities.

While it may be difficult to get young people to focus on a retirement that may be 40 years or more away, those who get an early start on saving will be much better prepared to handle future financial challenges. To ensure your kids establish solid retirement saving habits early in their careers, consider incorporating the following topics into your own Retirement Savings 101 lesson plan.

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Should You Pay Off Your Mortgage Early?

If you’re contemplating paying off your mortgage early, congratulations. But just because you can retire your mortgage early, that doesn’t necessarily mean you should.

Arguments For and Against

Paying down your mortgage early can save you serious amounts of interest expense over the course of a 30-year loan. Consider what would happen if you increased your monthly payments on a $400,000 mortgage that charges 4% interest over 30 years. If you made the required monthly payment of $1,909 a month, you would pay $287,478 in interest over 30 years. But by bumping your payment up by an extra $500 each month, you’d pay off your loan in only 20 years. Better yet, you’d save $103,901 in interest expense over the term of the loan.

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We recommend creating a gift acceptance policy for all staff and board members to abide by and to promote to potential donors.

If this was posed to your organization today, no doubt you would respond with a rousing, “Of course!” As a not-for-profit, especially in today’s challenging economic times, this may seem like a silly question.  Not so fast, however.  There are some instances when it may not make the most sense to accept that contribution.

When a Gift Goes Bad

With a contribution, the donor may place a requirement, or restriction, on the use of the funds.  By accepting the contribution, an organization is also promising to use the funds in the manner that the donor has requested.  Here are a few questions you should ask yourself before saying the magic word “yes”:

Does this further my organization’s purpose?

If a donor promises money to help fund a program that you currently do not provide, it may make more sense to suggest to that donor to contribute to a program that your organization currently provides or, if not, to consider re-directing the donor to a more like-minded organization rather than pursue an entirely new area for your own not for profit.

Are the restrictions reasonable?

In some cases, a donor may put so many restrictions on a contribution that a not for profit cannot possibly fulfill them all.  Rather than dealing with the time and frustration that comes with this, it may be better to say “no thank you” and focus your talents and energy elsewhere.

Can I afford to accept this?

As funny as it seems, there are times when a contribution may cost more to fulfill than the value of the contribution itself!  For example, an organization receives a $100,000 grant to provide services to the underprivileged.  However, in order to achieve this result, a new building that costs $500,000 will need to be built.  If the not for profit is expecting to receive future funds for this purpose, it could make sense to pursue this grant.  However, if the organization will not continue with this program after the initial grant, they will end up with greater expenses than the grant received.  In this case, the not for profit would probably be better served to spend their current funds elsewhere.

What To Do?

In order to minimize confusion and help prevent an organization from accepting an unwanted contribution, we recommend creating a gift acceptance policy for all staff and board members to abide by and to promote to potential donors.  This policy should address items such as:

• Who has the power to accept contributions?
• What types of contributions will be accepted?
• How will contributions be recorded and tracked internal?
• How will donors be acknowledged and kept apprised of the timely use of their contributions?

As with all organizational policies and procedures, we recommend organizations work with legal counsel in drafting language that makes the most sense for the organization and abides by local, state and federal law. If you have any questions regarding gift acceptance policies and contributions in general, please contact us for assistance.