Nonprofit Newsletter Q4

Nonprofit & Government Times

FOURTH QUARTER, 2018

IN THIS ISSUE

IRS Issues Guidance for Determining Nondeductible Parking Fringe Benefits MAGDALENA M. CZERNIAWSKI, CPA, MBA TAX DIRECTOR, NONPROFIT, GOVERNMENT & HEALTHCARE GROUP ROBERT LYONS, CPA, MST TAX DIRECTOR, NONPROFIT, GOVERNMENT & HEALTHCARE GROUP W hile two sections of the Tax Cuts and Jobs Act (“the Act”) - Code section 512(a)(6) and Code section 512(a)(7) - have a direct and significant bearing on tax-exempt organizations, very little guidance has been forthcoming since the law was passed almost a year ago. The purpose of these two sections is specifically to bring parity between not-for-profit organizations and their for-profit counterparts. Recently issued IRS guidance is finally shedding light on how this will be accomplished. First, on August 21, 2018, the IRS issued Notice 2018-67 with guidance concerning Code section 512(a)(6). That notice addressed the separation of different lines of business for Unrelated Business Income Tax (UBIT) purposes.

6 TAX REFORM ’s Impact on CHARITABLE CONTRIBUTIONS Magdalena M. Czerniawski & Robert Lyons 9 THE OVERHEAD MYTH : Finding Better Ways to Measure Nonprofit INCORPORATING DATA ANALYTICS Into Your Internal Controls Michael Dovi 14 Government Update: Effects of TAX REFORM on LOCAL GOVERNMENT Melissa Szot 16 Meet the MARKS PANETH TEAM Performance John D’Amico 11

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EXCEPTIONS

In addition, it addressed the treatment of net operating losses both pre-enactment and post-enactment of the Act.

The notice points out two exceptions for tax-exempt organizations that would otherwise pay UBIT on the transportation benefits provided to employees. The first one is if the organization includes the full value of the transportation benefits as taxable wages to the employ- ee. The second one is when the organization provides the benefits to employees on the same basis as the general public. In both cases, the exempt organization wouldn’t be liable for any tax under 512(a)(7). If the organization does not meet either of these two excep- tions, it is subject to tax. Further, the notice addresses that the transportation benefits can be provided tax-free to employees up to the maximum amount allowed. That amount for 2018 is $260 per month. Any benefits provided above that amount must be included in the taxable wages of the employee, and therefore, will not be taxable to the organization. DETERMINING THE PARKING EXPENSE AMOUNT The notice specifically offers guidance to determine the nondeductible amount of parking expenses as well as the amount treated as increasing UBTI. The method of determining the nondeductible amount depends on whether the taxpayer pays a third party to provide parking for its employees or owns or leases a parking facility where its employees park. • Taxpayer Pays a Third Party for Employee Parking Spots. If a taxpayer pays a third party for a space so that its employees can park at that facility, the disal- lowed portion is generally the total amount paid to the third party. However, if the amount the taxpayer pays exceeds the monthly allowance ($260 for 2018) per employee, the excess amount must be treated by the organization as wages to the employee. In determining the value of parking facilities, multiple parking facilities within the same geographic area can be aggregated in determining the number of spaces available. However, if the facilities are located in more than one geographic area they must be de- termined on a separate basis. • Taxpayer Owns or Leases All or a Portion of a Parking Facility. Until more guidance is available, the value of

More recently, on December 10, 2018, the IRS issued Notice 2018-99 and Notice 2019-100 regarding Code section 512(a)(7), which relates to the treatment of the nonde- ductible portion of parking and transportation fringe expenses as unrelated business taxable income (“UBTI”). Notice 2018-99 provides interim guidance for taxpayers to determine the amount of parking expenses related to qualified transportation fringes (“QTFs”) that are not deductible by the organization. Those expenses under IRC 512(a)(7) are the increase in the amount of UBTI and, therefore, subject to tax. In contrast to other provisions in the Act, the transportation fringe benefit tax relates to benefits paid after December 31, 2017. Fiscal year filers will need to differentiate tax treatment of these benefits between post- and pre-January 1, 2018 benefits. • Qualified Transportation Fringes include transportation in a commuter highway vehicle between the employee’s residence and place of employment, any transit passes, and qualified parking. • Qualified Parking includes parking provided to an employee on or near the business premises of the employer, or on or near a location from which the employee commutes to work. (Does not include residential parking.) • Employee includes any individual who is currently employed by the employer. It also includes common law employees and other statutory employees such as officers of the corporation. Common law and statutory employees look to the state definition. For example, where there are leased employees that under state law meet the definition of a statutory employee, the organization would be responsible for the treatment of the related fringe benefits provided to them. • Parking Facility is defined as any indoor and outdoor garages and other structures, as well as parking lots and other areas, where employees may park on or near the business premises of the employer or on or near a location from which the employee commutes to work. BACKGROUND In order to fully understand Notice 2018-99, the below definitions are important.

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the disallowed portion can be calculated by any rea- sonable means. The notice states that the total parking expenses for purposes of determining the disallowed amount include repairs, maintenance, insurance, prop- erty taxes, interest, snow and garbage removal, land- scaping costs, parking lot attendance expenses, etc. • Notably missing from this list is depreciation expense of the parking facility. Per this notice, an allowance for depreciation on a parking structure owned by an organization is not a parking expense for purposes of 512(a)(7). IN DETERMINING THE “REASONABLE METHOD” CONSIDER THE FOLLOWING STEPS: in a parking facility exclusively reserved for the or- ganization’s employees, which could be determined by signage. The organization must determine the percentage of reserved employee spots in relation to total parking spots and multiply that percentage by the organization’s total parking expenses for the facility. This will be the amount of disallowed fringe subject to tax. 1. Calculate the disallowance for reserved employee spots . This specifically refers to the number of spots

Organizations have until March 31, 2019 to de- crease or eliminate their reserved employee spots for purposes of the disallowance retroactive to January 1, 2018. 2. Determine the primary use of remaining spots. The organization can identify the remaining parking spots in the facility and determine whether their primary use is to provide parking to the general public or to employees. If the primary use is for the benefit of the general public, then the remainder of the expenses are not taxable. Primary use of a parking spot is test- ed during normal business hours on a typical busi- ness day. Non-reserved spots that may remain empty in the normal course of business are deemed for the benefit of the general public. The general public does not include employees, partners or independent contractors of the organization. 3. Calculate the allowance for reserved nonemploy- ee spots . If the primary purpose is not to provide parking to the general public, then the organization must determine parking that is restricted for visitors and customers. If the organization has reserved nonemployee spots, it can determine the percent- age of reserved nonemployee spots in relation to the remaining total parking spots and multiply that percentage by the taxpayer’s remaining total park-

LOCAL GOVERNMENT RESPONSE TO IRC 512(A)(7)

On Friday, December 7, 2018, Governor Cuomo signed into New York law the much-anticipated bill exempting nonprofits who provide pre-tax transportation and parking benefits from the New York State level transportation tax. Prior to the bill signing, exempt organizations providing pre-tax transportation benefits to its New York employees would have been required to file Form CT-13 in New York State, in addition to filing the federal Form 990-T as required under IRC 512(a)(7). This bill exempts the transportation fringes from the state level tax only. Similar to New York, New Jersey is taking the position that pre-tax transportation benefits are unrelated business income for state purposes and, as such, not taxable on the state level since New Jersey does not tax unrelated business income. Nonprofits providing these benefits to New Jersey employees would be subject to the federal filing requirement only.

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EXEMPTION FROM FILING

ing expense. Again, this would be the amount not subject to tax.

In addition, the notice also addresses the fact that if an organization’s UBTI is below $1,000, the organiza- tion can use the specific deduction of $1,000 and is not required to file a tax return to report these benefits. Furthermore, the notice states that organi- zations having only one line of business can use the excess expenses to offset the disallowed transporta- tion fringes derived from such unrelated trade or business. However, it does not provide further guidance on how to determine that. While the notice does not specifically address pre- taxed transportation passes such as train, bus or subway passes, it does address pre-tax parking benefits and the tax treatment on the part of the organization. Since the transit passes fall within the classification of QTF, the pre-tax treatment of those passes would be the same as pre-tax parking facilities.

4. Determine remaining use and allocable expenses . If after completing steps 1-3 the

organization still has expenses that were not catego- rized, they should reasonably determine the employ- ee use of the remaining parking spots during normal business hours on a typical business day. Expenses associated with those spaces would be disallowed. The notice offers a large number of examples and has attempted to capture all the various alternatives for parking arrangements, and a few are listed below. Many situations are unique and specifically associated with the organization. Until further guidance is provided, an organization should use the four steps outlined above on a consistent basis in calculating the disallowed fringe benefit. Each set of circumstances should be evaluated separately to determine the disallowed amount, if any.

EXAMPLES

Below are a few examples included in the Notice 2018-99 as mentioned above.

Example 1 - Organization pays B, a third party who owns a parking garage across the street from the Organization, $100 per month for each of the Organization’s 10 employees to park in B’s garage - or $12,000 per year (($100X10) X 12= $12,000). The $100 per month paid for each employee for parking is excludable from their wages because it is under the $260 limitation. Thus, the entire $12,000 is subject to disallowance. Example 2 - Assume the facts in Example 1, except the Organization pays $300 per month per space for a total of $36,000. Of the $300 per month paid for each employee, only $260 is excludi- ble from the employee’s wages. As such, the total amount included in the employee’s wages (or $31,200) would be disallowed and subject to UBTI. However, the remaining amount of $4,800 would be picked up by the employees as compensation and not UBTI. Example 3 – The primary use of C’s parking lot is to provide parking to the general public because 90% of the lot is used by the public. There are no spots reserved for employees. As such, expenses allocable to the parking lot are excluded from the disallowance.

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PENALTY RELIEF

CONCLUSION

The IRS also issued Notice 2018-100, which grants relief for underpayment of estimated income tax payments resulting from the disallowed fringe benefits discussed above. Relief is only granted to tax-exempt organiza- tions that provide QTFs to an employee for which estimated income tax payments are made solely as a result of the Act and that was not required to file a Form 990-T, Exempt Organization Business Income Tax Return, for the taxable year preceding the organiza- tion’s first taxable year ending after December 31, 2017. This relief is limited to tax-exempt organizations that timely file Form 990-T (including extensions) and timely pay the amount reported for the taxable year for which relief is granted. To claim the waiver under Notice 2018-100, the tax-ex- empt organization must write “Notice 2018-100” on the top of its Form 990-T.

In summary, Notice 2018-99 provides much needed guidance on how to determine the amount of parking expenses that are subject to IRC 512(a)(7) depending on the specific circumstances. It also provides ways for an organization to avoid transportation tax altogether. This is temporary guidance, and the IRS is looking for comments, but it is very important to tax-exempt organizations. In addition, the penalty relief in Notice 2018-100 is particularly noteworthy to organizations that are filing Form 990-T as a result of this new code section. If you have further questions on how these new provisions apply to your tax-exempt organization, contact Magdalena M. Czerniawski or Robert Lyons, Tax Directors at Marks Paneth’s Nonprofit, Government and Healthcare Group.

Magdalena M. Czerniawski, CPA, MBA , is a Tax Director in the firm’s Nonprofit, Government & Healthcare Group, where she provides tax services to a wide array of nonprofits, including charitable organizations, so- cial welfare organizations, professional associations and private foundations. She specializes in matters related to ASC 740-10 (FIN 48), the reporting requirements that govern contributions, compensation, unrelated business taxable income, lobbying costs, and public support testing. Magdalena can be reached via email at mczerniawski@markspaneth.com or at 212.324.7026.

Robert Lyons, CPA, MST , is a Tax Director with the firm’s Nonprofit, Government & Healthcare Group. He brings more than 30 years’ experience providing tax and consulting services to the nonprofit, higher education and public sector industries. Rob can be reached via email at rlyons@markspaneth.com or at 212.710.1736.

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Tax Reform’s Impact on Charitable Contributions BY MAGDALENA M. CZERNIAWSKI, CPA, MBA TAX DIRECTOR, NONPROFIT, GOVERNMENT & HEALTHCARE GROUP

A lmost a year ago, the Tax Cuts and Jobs Act (TCJA) brought major tax reform to individuals, for-prof- it businesses and not-for-profit entities. Among the Act’s provisions were several modifications that affect charitable giv- ing. The most far-reaching provision in the new law is the doubling of the standard deduction amount available to taxpayers starting in 2018. The standard deduction is the amount that a taxpayer can use to reduce his/her taxable income each year. The amounts vary depending on marital and filing status.

Alternatively, if a taxpayer has certain expenses, they can itemize their deductions. This means that for certain types of expenses, such as mortgage interest, real estate taxes (with certain limitations) and charita- ble donations, both cash and non-cash, the taxpayer can deduct the actual amount paid if it was over the standard deduction limit. For some taxpayers, charita- ble deductions are the items that put them over the threshold, and therefore, they realize direct tax benefit from their charitable giving. The increase in standard deduction from $6,350 in 2017 to $12,000 in 2018 for individuals and from $12,700 in 2017 to $24,000 in 2018 for married couples filing jointly certainly changes the charitable giving landscape. However, this does not affect wealthy individuals who are generally way above the $12,000 or $24,000 limit. If a taxpayer lives in the New York Metro area and owns a home, chances are that the

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When discussing 2018 charitable contributions with your donors, there are a few things you can advise them to keep in mind if they are concerned about the impact of the new tax law.

property taxes are above $10,000 and, combined with mortgage interest, it would be relatively easy to go above the standard deduction threshold. Therefore, the amount of charitable giving with the increased threshold can have a positive impact on the amount of tax liability for the year. For non-homeowners, chances are they were using the standard deduction before and will continue to do so going forward. The National Council of Nonprofits estimated back in April 2018 that this legislative change will decrease charitable giving by about $13 billion. While that figure sounds startling, it should not be cause for panic. In 2017, according to Giving USA, Americans donated over $400 billion to various charities, which is only 5 percent higher than the prior year. About $290 billion was given by individuals. While the report for 2018 isn’t available A LOOK ON THE BRIGHT SIDE

yet, the amount will probably be below the $400 billion mark. However, this may be due to the fact that many individuals donated prior to the 2017 year-end to get the benefit of the old law. That does not change the amount given, but rather the timing of giving. Furthermore, remember that charitable giving is an important aspect of American life. While tax savings are certainly a great motivator for charitable giving, most people donate to charities because they believe in the cause and want to make an impact. With the digital age, organizations also have a much easier way to solicit donations. With the use of websites and social media, it is much easier to spread the word about the impact charities have than it used to be. Most organizations also accept donations through their website, which makes it even easier to donate. In addition, many organizations post their governing, tax and financial documents online to create even more transparency and accountability.

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CONSIDERATIONS FOR DONORS

that instead of the fair market value amount and be subject to the higher 50 percent AGI limitation. Either way, not paying capital gains tax saves tax dollars.

When discussing 2018 charitable contributions with your donors, there are a few things you can advise them to keep in mind if they are concerned about the impact of the new tax law. Publication 526 Charitable Contribu- tions provides detailed rules about giving, but the ones generating the biggest tax savings are listed below. • Qualified Charities – Generally, cash donations to qualified charities, which are typically public chari- ties, can be deducted up to 60 percent of the taxpayer’s Adjusted Gross Income (“AGI”). This is up from 50 percent under the old law. Contributions to organizations other than qualified charities have a lower limit, which was not changed by the TCJA. Generally, donations other than cash to qualified organizations can be deducted at fair market value of the property. There are additional limitations on non-cash contribu-tions that can be found in Publication 526. • Appreciated Property – Donations of appreciated property can further save tax dollars. For example, if a donor has appreciated stock, he/she could sell the stock, donate cash to a qualified charity and get a 60 percent charitable deduction for the cash donation. However, the donor would have to pay tax on the capital gain generated from the sale of that stock. If he/she donates the stock to charity instead, the deduction will be subject to the 30 percent AGI lim- itation, but it will be at the fair market value amount and not subject to capital gains tax. Alternatively, if the donor’s basis is high enough, he/she can use

• Investment Retirement Accounts – There is also a provision in the TCJA that allows taxpayers to donate to a qualified charity from their Investment Retirement Accounts (IRAs). This is called qualified charitable distribution and is another great way to save tax dollars, as the amount donated to charity doesn’t count as income for the taxpayer. It does, however, count toward the individual’s required distribution amount for the year. A taxpayer can transfer up to $100,000 to charities tax-free. If the minimum distribution is $60,000, he/she can take that amount and direct it to go to a qualified charity instead of including it in income. The donor won’t be liable for income tax and will satisfy his/her charita- ble donation wishes. In addition, there is no limit on how many donations can be made, so donors can donate to many qualified charities or few, depending on preference. In conclusion, the change in tax law should have small impact on charitable giving as most donors are motivat- ed by a cause and not tax deduction. Certainly, deduc- tion helps, but it is not the main reason. In addition, there are many tax planning strategies that can maximize donors’ tax savings under the new tax law. Educating yourself on these issues and encouraging your donors to make their donations before year-end can help position your organization for a smooth transition to the new charitable giving landscape.

Magdalena M. Czerniawski, CPA, MBA , is a Tax Director in the firm’s Nonprofit, Government & Healthcare Group, where she provides tax services to a wide array of nonprofits, including charitable organizations, so- cial welfare organizations, professional associations and private foundations. She specializes in matters related to ASC 740-10 (FIN 48), the reporting requirements that govern contributions, compensation, unrelated business taxable income, lobbying costs, and public support testing. Magdalena can be reached via email at mczerniawski@markspaneth.com or at 212.324.7026.

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The Overhead Myth: Finding Better Ways to Measure Nonprofit Performance JOHN D’AMICO, CPA DIRECTOR, PROFESSIONAL STANDARDS GROUP

T he Overhead Myth campaign, started in 2013 by Better Business Bureau’s Wise Giving Alliance, Charity Navigator and GuideStar®, aims to erad- icate the practice of judging a nonprofit’s performance primarily on its overhead ratio. Instead, the campaign, which continues to build steam, advises donors to pay attention to other factors of a charity’s performance, such as transparency, governance, leadership and results. Historically, charities have been primarily judged on how much of their budget is spent on administrative over- head as compared to their program expenses, and the Overhead Myth campaign has sought to change that. “Overhead ratio” is the percentage of a nonprofit organization’s expenses that are spent on administrative (commonly called management & general) and fundrais- ing costs, collectively called “supporting services.” It is calculated by adding administrative and fundraising costs and dividing by total expenses. The supporting services are the infrastructure of nonprofits. It might seem obvious that organizations should not be judged solely on their program/administrative expense ratio (the overhead ratio), but unfortunately, they have been, and charities have been forced to be very cognizant of what they spend administering their programs. There are numerous commercials from charities making claims

such as, “Nearly 90 cents of every dollar donated goes directly to our programs,” and most of these charities’ websites make similar claims. These claims are adver- tised to appeal to donors, but using this simplistic ratio is a poor way to decide whether to donate to a charity and/or judge its performance. Nonprofits are like any other business, requiring administrative costs to run. They need an Accounting/ Finance department, a Human Resources department, and an IT department. Also, a portion of the Executive Director’s salary should be allocated as an administra- tive expense. Fundraising expenses include any costs incurred in the process of or with the intent of asking potential donors to contribute funds, materials or time. Examples include: staff time dedicated to donor development, direct mail costs, maintenance of donor mailing lists, holding fundraising events and more. These supporting services are all necessary for the nonprofit to fulfill its mission. Low overhead costs could indicate prudence and sound judgment at a charity, but they could just as easily indicate inadequate staffing, insufficient salaries and an insufficient infrastructure. Without a proper infrastructure, a nonprofit will not be able to effectively accomplish its mission.

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• Number of homeless persons placed into temporary housing – at a social service agency • Number of animals saved, cared for, and placed into homes - at an animal rescue shelter When this program information is provided alongside details of the expenses that make up both program and overhead expenses, readers of a charity’s financial statements can make well-informed decisions on how a charity is performing rather than using the overhead ratio. Each of the three organizations involved with the Overhead Myth campaign offer additional information on the transparency and/or accountability of individual charities. Charities can access this information to become accredited with the BBB, grow their online identity with GuideStar and learn how Charity Navigator rates charities. For more information, visit their respective websites: See www.give.org for information on BBB Wise Giving Alliance’s standards-based charity accreditation activities that address charity governance, finances, results reporting, transparency, and appeal accuracy among other issues. See www.guidestar.org/update to learn about the free GuideStar Nonprofit Profiles, which enable nonprofit transparency, and empower nonprofits with Gold, Silver, and Bronze participation levels. The Gold level focuses on qualitative impact and is particularly helpful to nonprofits seeking to report meaningful results. See www.charitynavigator.org to find out more about their star-rating charity evaluations that address charity transparency, accountability and impact.

Until now, nonprofits were only required to report their expenses by functional category on their financial statements (Program, Management & General, Fundrais- ing) and not by the natural categories of expenses (salaries, occupancy costs, interest, depreciation, etc.). The only way to determine what a nonprofit’s expenses were comprised of was by accessing their IRS Form 990. However, the new financial reporting requirements for non- profits as promulgated by FASB’s Accounting Standards Update (“ASU”) 2016-14 will now require all nonprofits to report their expenses by both function and by natural category, all in one place on their financial statements. This will enable nonprofits to better tell their financial stories as readers of their financial statements will now see the types of expenses that make up the organization’s program, administrative and fundraising costs. It is encouraged that charities include a thorough discussion of all of their programs in their annual financial statements and IRS Form 990. This enables a reader of the financial statements to fully understand what the charity is doing and what they are trying to accomplish. Although not required by Generally Accepted Accounting Principals (GAAP), charities should include quantitative information about their program results in their annual financial statements as well. This information can be added to their Note 1 – Or- ganization and Nature of Activities. Examples of quantitative program-related data that can be included in the annual financial statements are: • Number of meals served – at a nonprofit soup kitchen • Number of counseling sessions provided – at a victim assistance organization

John D’Amico, CPA , is a Director with the Professional Standards Group and provides quality control services to the firm’s Nonprofit, Govern- ment & Healthcare Group. He has more than 20 years’ experience provid- ing accounting and audit services to nonprofit organizations and higher education and governmental entities – and brings extensive knowledge of nonprofit accounting and expertise in the performance of Single Audits under OMB Circular A-133 and, now, under the Uniform Guidance. John can be reached via email at jdamico@markspaneth.com or 212.710.1808.

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Incorporating Data Analytics Into Your Internal Controls MICHAEL DOVI, MBA NONPROFIT, GOVERNMENT & HEALTHCARE GROUP

T he evolution of technology has demanded that or- ganizations more deeply understand the business- es they operate but has also allowed management to gain this understanding with greater ease and efficien- cy than ever before. This shift in the business environment is fueled by the countless new products that become available each day that offer leaders the ability to develop more accurate feedback on the performance of their com- panies, operate more efficiently and discover information that they didn’t know they ever needed. At the core of these products is the vast category of data analytics tools. Data analytics is the process of inspecting and manip- ulating data to discover useful information needed to draw conclusions and support decision making. Not so simple is the process of deciding how to go about this examination and choosing the tools to accomplish this.

result and looking at how you can benefit the most from the outcome of the tests these tools can perform. For example, one area we see data analytics being valuable and underutilized in is risk management. What areas of your organization are most susceptible to fraud or error? What functions of your business rely more on hu- man involvement and less on automation? What internal controls would benefit from further testing? The importance of proper internal controls has come to the forefront of the accounting and auditing pro- fession in recent years, and the systemic lackluster implementation of effective controls within organiza- tions has become an epidemic. Data analytics tools can help prevent your organization from falling behind the curve in this area. When looking at these tools, there are two key categories of testing that all organizations can start using today: analytical tools and internal control testing.

The right place to start when selecting data analytics tools is with identifying your organization’s desired end

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ANALYTICAL TOOLS

way to continuously monitor the quality of the general ledger and fix entries that were done incorrectly, as well as identify sources of possible fraud. Cash disbursement testing is equally as valuable and, in many ways, can be more effective at finding unusual transactions. Again, organizations can identify criteria that would flag a check or wire transfer as being un- usual during the course of normal business operations. These criteria are often repeated from the above jour- nal entry testing criteria, and with cash disbursement testing, you can also incorporate the use of the vendor and employee listings. A great test for any organi- zation is to compare the addresses of your vendors to the addresses of your employees. This is a proven assessment that has uncovered fraud in the past: an employee creates a vendor in the accounts payable system with their home address and cuts unauthorized checks to this vendor. While this scenario should never get through a properly designed internal control ma- trix, this extra test would detect this if it were to occur. Data analytics can also be used to clean up these employee/vendor listings, which will help prevent fraud or errors from happening in the future. A simple extraction can find all duplicate vendors in the listing, which can then be deleted from the accounts payable system. In a time where data dumps are becoming im- mense, having the ability to make the data more accu- rate is critical to the testing results. Extracting a list of all employees that have the same address as another employee can also be a valuable test for management. While there are thousands of data analytics tools avail- able, there are three that can fulfill the needs of most organizations: The most user friendly and the lowest cost option is TeamMate Analytics (TMA) by Wolters Kluwer. This program is installed as an Excel add-in, is as easy to use as Excel itself and has more than 150 powerful Computer Aided Audit Tools (CAATS) that will be up to the task to handle the needs of a large portion of organizations. The limitation of TMA is that it only works with Excel files. SOFTWARE OPTIONS

These are tools that are simple to execute and provide valuable, immediate feedback. This can include year over year variances, ratio analyses, accounts receiv- able/payable aging schedules, depreciation/amorti- zation calculations and more. You’re probably think- ing that your accounting software can do all of this already, but data analytic tools allow you to customize tests and dive deeper into understanding your organi- zation beyond the accounting software. For example, let’s say you want to know how many of your employ- ees are between the ages of 50-65 or how many live beyond 10 miles of your organization or what percent- age of your donors pay using credit cards vs. cash. These are simple tests for any data analytics tool that can create new insights for your business that were not as easily available before and can be utilized for a wide variety of applications. For both management and external auditors, internal control testing can be incredibly tedious. Automating some of this process can prove to be very valuable for both parties. As mentioned earlier, data analytics are great for increasing the quality, efficiency and capa- bilities of testing – this is especially true with internal control testing. Journal entry and cash disbursement testing are two subsections of internal control testing that benefit the most from data analytics, and there are some new tests that may be useful for manage- ment to use to test the organization’s internal controls. Data analytic software can extract journal entries that would be deemed unusual under various chosen crite- ria. Some of these criteria can include the following: • Entries posted on a weekend or federal holiday • Entries posted outside of normal business hours • Missing journal entry numbers in the sequential listing • Entries posted and approved by the same employee • Entries matching specific, unusual words, such as “mistake, plug or error” The available tests go on and on, but the goal is to identify specific data points that may require addition- al investigation. For the organization, this provides a INTERNAL CONTROL TESTING

For data sets larger than the capacity of Excel, there is IDEA by Caseware. IDEA has all of the functions

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Do not let the fancy name fool you - data analytics tools can be easy-to-use and reasonably priced.

MOVING FORWARD

of TMA and more, but the main advantage is that this program can handle larger sets of data and from sources other than Excel. However, with this function- ality increase comes a steeper learning curve and more skills required to operate. At the top of our list for data analytics software is Ai Auditor from Mindbridge Analytics. This software utilizes artificial intelligence and is seamlessly inte- grated into your financial software to provide real time feedback and predictive analysis. It is a very advanced, highly intelligent software and, as such, it is better suited to more complex organizations.

Do not let the fancy name fool you - data analytics tools can be easy-to-use and reasonably priced. Often, no extravagant software is required. Now that the importance of using these tools is clear, the next step is finding an option that works best for your organi- zation’s specific needs. The above options are a great place to start your research—and there is no doubt that the value of immediate and accurate feedback paired with the ability to make on-demand decisions will help business leaders proactively manage the risk and exposure of their organization.

Michael Dovi, MBA , is a Semi-Senior Accountant in the Nonprofit, Government & Healthcare Group at Marks Paneth. Michael plays an inte- gral role in the firm’s development and utilization of data analytics as one of the many value-added services offered to nonprofit clients. He can be reached at mdovi@markspaneth.com or at 212.710.1716.

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GOVERNMENT UPDATE

Effects of Tax Reform on Local Government MELISSA SZOT, CPA, CGMA SENIOR MANAGER, NONPROFIT, GOVERNMENT AND HEALTHCARE GROUP

T he Tax Cuts and Jobs Act of 2017 (Public Law 115-97) (“TCJA”) is the most sweeping tax reform measure in more than 30 years. Although many of the changes significantly impact individual and business tax provisions, there were several changes that affect local government entities. Two of the more notable provisions that local governments should be aware of are the repeal of advance refunding of municipal bonds and the repeal of tax-credit bonds.

The key difference between a current and advance refunding is timing. If the refunded bonds are issued within 90 days of the call date, these are considered current refunding transactions. However, if they are issued after the 90 days, they are considered an advance refunding. Under the TCJA legislation, the interest on advance refunding bonds would no longer be tax-exempt. This is effective for all advance refundings that were issued after December 31, 2017. The legislation did not affect the current refundings, which remain tax-exempt.

REPEAL OF ADVANCE REFUNDING OF MUNICIPAL BONDS

REPEAL OF TAX-CREDIT BONDS

Advance refundings are done by municipalities to take advantage of the favorable interest rate environment, which, in turn, reduces the borrowing costs and frees up resources to complete new or ongoing projects. During an advance refunding, the bonds are refinanced by issuing new bonds, of which the proceeds are usually placed into an escrow account to pay future debt service payments on the refunded bonds.

A majority of the bonds issued by local governments are tax-exempt bonds. This means the interest payments are not included in the bondholder’s federal taxable income.

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GOVERNMENT UPDATE

A tax-credit bond offers the bondholder a federal tax credit instead of interest. Prior to 2009, the tax-credit bond activity was minimal. However, when the American Recovery and Reinvestment Act of 2009 (“ARRA”) was implemented, there was a significant influx of tax-credit bonds issued. Some of these bonds include Build America Bonds, Recovery Economic Zone Bonds, Qualified School Construction

Bonds, Qualified School Academy Zone Bonds, Clean Renewable Energy Bonds and Qualified Energy Con- servation Bonds.

With the TCJA, issuance of all tax-credit bonds after December 31, 2017 is prohibited.

Melissa Szot, CPA, CGMA , is a Senior Manager in Marks Paneth’s gov- ernment practice. Melissa has extensive experience in planning and conducting audits of governmental organizations and has worked in a wide variety of gov- ernment sectors, including education, public utilities and housing. Melissa can be reached at mszot@markspaneth.com or 212.710.1682.

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Leverage Our Expertise Marks Paneth LLP is ranked among the top 50 largest accounting firms in the U.S. and the top 10 in the Mid-Atlantic region by Accounting Today . We have a long history of serving the not-for-profit commu- nity. Today, we work with more than 150 tax-exempt clients and proudly serve 20% of New York’s 25 largest charitable organizations, as ranked by Crain’s New York Business. Our firm is ranked in the top 1% nationally in pension plan audits and is the 8th largest preparer of Form 990-PFs in the U.S. Our Nonprofit, Government and Healthcare Group consists of approximately 65 people including our Partners and Directors listed below. If you have questions, please contact one of us. More informa- tion can be found at markspaneth.com .

Nonprofit, Government & Healthcare Leadership Team

Michael McNee CO-PARTNER-IN-CHARGE, NONPROFIT, GOVERNMENT & HEALTHCARE GROUP

Hope Goldstein CO-PARTNER-IN-CHARGE, NONPROFIT, GOVERNMENT & HEALTHCARE GROUP

Joseph J. Kanjamala PARTNER

David Bolton DIRECTOR

Warren Ruppel PARTNER, GOVERNMENT SERVICES PRACTICE LEADER

Magdalena M. Czerniawski TAX DIRECTOR

Sibi Thomas PARTNER

John D’Amico DIRECTOR

Alan Becker DIRECTOR

Robert Lyons TAX DIRECTOR

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