Initial comments on new accounting standards for non-profit entities

I posted a comment to Wall Street Journal’s coverage FASB Updates Accounting Rules For Not-for-Profits

“The new accounting standards update makes it clear that this is the first update step in a planned two step process. On first reading of this update it would appear that the majority of the nation’s smaller non-profit organizations that have only one class of assets and issue financial statements on a basis of accounting where management elects to omit substantially all disclosures would be largely unaffected by these changes. From my perspective it seems like a lost opportunity to make a real difference in communicating to stakeholders. It would be great if the accounting profession could have an influence on the financial statement communications of these many smaller non-profit entities as well”.

This FASB announcement is the first update step in a planned two step process to update non-profit financial reporting standards.

The problem with your business expense records

Non-profit organizations are subject to the same substantiation requirements of business expenses as for-profit firms.

The problem with your deductible business expenses for travel, meals and entertainment is that you believe that you can support the tax deduction in an audit. The IRS knows that you can’t. As a result, tax professionals report that they are seeing more of these audits and are often unable to prevail on behalf of their client.

IRS regulations require a concurrent log containing specific information that most taxpayers do not have available. It is not permissible under the law to create these supporting documents later in the event of an audit. Taxpayers are often surprised to learn that the strict IRS-required documentation rules have been tested and upheld in tax court.

As a practical matter few of us have time to separately record details like who we were with and what was the business purpose of our activity each and every time we travel for business. More likely we say “I meet Bob every Monday morning over coffee to review sales of the past week”. Therein lies the problem. It makes sense. It is legitimate and fair business expense and certainly meets the ‘ordinary and necessary’ standard. Yet without a concurrent log, you cannot legally deduct the cost of your travel and coffee meeting.

This post skips the details of the tax requirements but I would be pleased to review them and help devise a personalized audit defense plan for your business.

Small business accounting system setup checklist

This is a list of the information that you will want to have on hand before you start setting up an electronic accounting system for your small business or non-profit organization. The list may vary depending on the type of organization and legal setup.

Company data

Company legal name and address
Federal EIN or social security number
Fiscal year dates
Name of the income tax form the client files
Accounting basis (cash or accrual)

Chart of accounts

Names, numbers, and descriptions for the chart of accounts (use the existing chart of accounts, if available)
Financial statements as of the end of the prior tax year
Trial balances as of the QuickBooks start date
List of department or location classifications (for the Class list)
Numbers and balances (from the start date through today) for the following types of accounts: bank, credit card, loan, and lines of credit
Value of assets (including original cost and accumulated depreciation for fixed assets)
Equity information including all owner’s contributions, plus retained earnings for each year the company has been operating

Customers and Jobs list

Customer numbering scheme
Information to complete the Customer list: names, addresses, contact information, taxable status, etc.
Customer payment terms
Customer shipping methods
Customer types
Open balances or outstanding invoices as of the start date

Vendor list

Vendor numbering scheme
Information to complete the Vendor list: names, addresses, other contact information
List of 1099 vendors and their tax ID numbers
Vendor payment terms
Shipping methods
Vendor types
List of outstanding bills as of the QuickBooks start date

Item list

List of all inventory, non-inventory, service, and other items to complete the Item list
Price list for all items
Inventory numbering scheme
Quantities on hand and values for inventory as of the start date
Desired reorder points for all inventory items
Taxable status for each item
List of states in which the company pays sales tax
Sales tax rates, sales tax agencies, and the sales tax liability as of the start date
Frequency of sales tax reporting (monthly, quarterly, annually)
Sales tax calculation basis (cash or accrual)
Type of sales (wholesale, retail, out of state)
Manufacturer’s part numbers for client’s vendors

Fixed Asset Item list

Asset name
Account used to track the asset
Purchase date, cost, and vendor
Description, location, and warranty information

Employee list

Employee numbering scheme
Information to complete the Employee list: names, addresses, telephone numbers, social security numbers, etc.

Determine the following items for payroll:

Form 941 Deposits:

Monthly
Each pay-period

State Withholding:

Monthly
Quarterly
Annually
Multi-state (Specify:_________________)

Local Withholding:

Monthly
Quarterly
Annually

Unemployment Tax:

FUTA
SUTA (Rate:________)

Assemble the following:

YTD information for each employee as of the start date
Accrued benefits including sick and vacation time for each employee as of the start date
Earnings, additions, and deductions for payroll processing (SEP, union benefits, 401(k), reported tips, etc.
Employer federal, state, and local tax identification numbers
YTD payroll liability payments

Entering historical transactions

Accounts receivable transactions
Accounts payable transactions
Historical payroll transactions
Bank and other transactions