Accounting Services

Understanding Percentage-of-Completion Method

Understanding the Percentage-of-Completion Method
Understanding the Percentage-of-Completion Method 850 500 smolinlupinco

If your business handles projects that take longer than a year to complete, you’ll need the “percentage-of-completion” method to recognize the associated revenue.

Let’s get into how and why to do this.

Percentage-of-completion vs. completed contract

Individuals and businesses who perform work on long-term contracts—like developers, engineering firms, creative agencies, and homebuilders—typically report financial performance with one of the two following methods:

  • Percentage-of-completion: Revenue recognition is tied to the incurrence of job costs.
  • Completed contract: Revenue and expenses are recorded upon completion of the contract terms.

Per U.S. Generally Accepted Accounting Principles (GAAP), companies that can make a “sufficiently dependable” estimate must use the more complicated percentage-of-completion method.

Those who use this method for reporting typically use the same method for taxes, as well. 

However, the federal tax code makes an exception for certain small contractors with average gross receipts of less than a certain amount over the previous three years.

For 2023, this amount is $29 million, and the number is adjusted annually for inflation. 

Estimating percentage-of-completion

Typically, companies that use the percentage-of-completion method report income sooner than those that use the completed contract method.

To estimate how much of a project is complete, companies usually compare the actual costs incurred to their total expected cost. Job cost allocation policies, change orders, and changes in estimates can complicate the process.

As an alternative, some companies choose to estimate the percentage completed via an annual completion factor.

In either scenario, the IRS requires detailed documentation to support estimates used in the percentage-of-completion method. 

Balance sheet impacts 

If your company uses the percentage-of-completion method, you’ll see an impact on your balance sheet.

You’ll report an asset for costs in excess of billings if you underbill customers based on the percentage of costs incurred. On the other hand, you’ll report a liability for billings in excess of costs if you overbill based on the costs incurred.

Imagine you’re working on a two-year projected valued at $1 million. You incur half of the expected costs in Year 1 ($400,000) and bill the customer $450,000. From a cash perspective, it appears as if you’re $50,000 ahead because you’ve collected more than the costs you’ve incurred. In reality, you’ve underbilled based on the percentage of costs incurred.

At the end of Year 1, you would have reported $500,000 in revenue, $400,000 in costs, and an asset for costs in excess of billings of $50,000. However, if you’d billed the customer $550,000, you’d report a $50,000 liability for billings in excess of costs.

Questions? Smolin can help.

The percentage-of-completion method can be complicated. Still, if your estimates are reliable, this method provides a more accurate picture of the financial performance of your long-term contracts.

If you’d like extra help navigating the percentage-of-completion method and interpreting the insights it provides, contact the helpful team at Smolin.

Is QuickBooks Right for your Nonprofit?
Is QuickBooks Right for your Nonprofit? 1275 750 smolinlupinco

Nonprofit organizations are created to serve nonfinancial or philanthropic goals rather than to make money or build value for investors. But they still need to keep track of their financial health, paying attention to factors like:

  • How much funding is coming in from donations and grants
  • How much the organization is spending on payroll
  • How much it’s spending on rent and other operating expenses

Many nonprofits use QuickBooks® for reporting their results to stakeholders and handling their finances more efficiently. Here’s an overview of QuickBooks’ specialized features for nonprofits.

Features of QuickBooks for nonprofits

Terminology and functionality. QuickBooks for nonprofits incorporates language used in the nonprofit sector to make it more user-friendly for nonprofits.

For example, the software comes with templates for donor and grant-related reporting. Accounting team members can also use it to assign revenue and expenses to specific funds or programs.

Expense allocation and compliance reporting. Many nonprofits often receive donations and grants with particular requirements regarding the expenses that can be applied. 

These organizations can use QuickBooks to establish approved expense types and track budgets for specific funding sources. They can also use the software to satisfy compliance-related accounting and reporting regulations.

Streamlined donation processing. Everyone likes convenience, and donors to nonprofits are no exception. The easier it is to donate to a nonprofit, the more likely it is that people will do so. 

QuickBooks allows for electronic payments from donors. The software also integrates with charitable giving and online fundraising sites, enabling nonprofits to process in-kind contributions, such as office furniture and supplies.

Tax compliance and reporting. Failure to comply with IRS reporting regulations could cause an organization to lose its tax-exempt status. QuickBooks provides a customized IRS reporting solution for nonprofits, which includes the ability to create Form 990, “Return of Organization Exempt from Income Tax.”

Donor management. With QuickBooks, nonprofits can store donor lists. This function includes the ability to divide the data according to location, contribution, and status.

Using these filters can make connecting with and nurturing donors who meet specific criteria easier. One example is reconnecting with significant donors who’ve stopped making regular contributions to your organization.

Data security. Data security is critical to building trust and encouraging donors to support your organization again in the future. 

QuickBooks protects donors’ personal identification and payment information by allowing the account administrator to limit access for viewing, editing, or deleting donor-related data. 

With QuickBooks, team members can only access and share data with the administrator or owner’s permission.

Not just for for-profit businesses

QuickBooks may be known as an accounting solution for small and medium-sized companies, but it also provides solutions for the nonprofit sector. 

From streamlined processes and third-party integrations to security management and robust reporting, Quickbooks can help nonprofits improve their financial management and fulfill the mission of their organization.

Have questions? Smolin can help

If you’re unsure of whether QuickBooks is right for your organization or you require other accounting services, contact the knowledgeable team at Smolin, and we’ll help you choose the best option for your nonprofit.

Reporting Non-GAAP Measures
Reporting Non-GAAP Measures 1275 750 smolinlupinco

Generally Accepted Accounting Principles (GAAP) is commonly known as the benchmark for financial reporting in the United States. However, both public and private entities occasionally use non-GAAP metrics in their press releases and disclosures or when seeking financing.

GAAP vs. Non-GAAP

GAAP comprises a framework of rules and procedures that accountants typically follow to record and summarize business transactions. These guidelines establish the basis for consistent, accurate, and fair financial reporting. While private companies are not generally obligated to comply with GAAP, many choose to do so. Public companies, on the other hand, have no choice—they’re required by the Securities and Exchange Commission to follow GAAP. 

The use of non-GAAP measures has grown over the years, and some executives and investors maintain that certain unaudited figures provide a more meaningful representation of financial performance compared to customary earnings figures reported under the GAAP. With that said, it’s crucial to understand what’s included and excluded to avoid making misinformed investment decisions.

Spotlight on EBITDA

One prominent example of a non-GAAP metric is earnings before interest, taxes, depreciation, and amortization (EBITDA). This metric was created in the 1970s to help investors assist in forecasting a company’s long-term profitability and cash flow. EBITDA is considered one of the most valuable benchmarks investors use when evaluating a company that is being bought or sold. 

Unfortunately, some companies manipulate EBITDA figures by omitting certain costs, such as stock or options-based compensation, which are undeniably a cost of doing business. This practice has made it difficult for investors and lenders to make accurate comparisons and understand the items that have been removed.

Last year, the Financial Accounting Standards Board (FASB) added a project to its research agenda to explore the standardization of key performance indicators (KPIs) within the existing regulatory framework, including the development of a standardized definition for EBITDA. During a March meeting of the Financial Accounting Standards Advisory Council, senior accountants assessed the feasibility of establishing a GAAP definition of EBITDA for use as either a one-size-fits-all formula or as a starting point for companies to make adjustments based on their specific business requirements.

For instance, a company might tailor its EBITDA calculation to align with the definition specified in its loan agreements. Any modifications to EBITDA would need to be transparently disclosed in the company’s footnotes.

Adopt a balanced approach

Many organizations opt to report EBITDA and other non-GAAP metrics to help stakeholders and investors make better-informed choices. However, it is crucial for these entities to avoid making assertions that could potentially mislead investors and lenders. 

Have questions? Smolin can help

If you’re unsure of how the regulations on reporting non-GAAP measures will affect your business, or if you want to know more about which reporting style works best for you, contact our team of professionals at Smolin and let us walk you through the ins and outs of these rules.

Beware of the Gray Areas in Accounting
Beware of the Gray Areas in Accounting 1275 750 smolinlupinco

Recent high-profile bank failures have raised concerns about the reliability of accounting auditing standards. U.S. government agencies are still investigating the reasons behind the collapses of Silicon Valley Bank and Signature Bank earlier this year. 

However, it’s likely that these banks exploited some gray areas in the accounting rules to make them appear more economically secure in their year-end financial statements than they actually were. 

Learning from Enron

Andrew Fastow often speaks publicly about issues concerning financial misstatement. A convicted felon, Fastow has a unique experience with fraud: He was the CFO of Enron in October 2001, when it the company became famous for the largest U.S. bankruptcy case of its time. 

Fasto recently addressed the Public Company Accounting Oversight Board (PCAOB), which was established by the Sarbanes-Oxley Act of 2002 to prevent future scandals like Enron. He recommended that the PCAOB consider revising the accounting and auditing rules to deter corporate fraud. 

Rather than solely focusing on detecting deliberate fraudulent activities, Fastow urged the PCAOB to pay attention to the “fraud that arises from exploiting loopholes resulting from the ambiguity and complexity of the rules.” According to Fastow, this scenario played out in the Enron case, where misleading information was often a consequence of exploiting the complexities of the rules rather than intentionally reporting false numbers.

Compliance vs. reality

To illustrate how companies can exploit the complexities of accounting rules, Fastow provided a good example of how financial statements that are fully compliant with regulations can deviate from economic reality. 

Here is that example: In 2014, the average price of oil was $95 per barrel, and although the price hovered around $110 for most of the year and dropped to $50 at the end of the year, companies were required under the accounting rules of that time to calculate an average based on the price on the first day of each of the preceding 12 months. This calculation resulted in an average of $95 per barrel despite the market price being $50 when oil and gas companies issued their financial statements.

All oil and gas companies followed this rule, reporting reserves based on $95 per barrel even though the market price had dropped precipitously to $50 by the end of the year. Consequently, they massively overstated their economically recoverable reserves, a critical metric used by Wall Street when evaluating independent oil and gas companies. 

Fastow concluded that the prevailing mindset was that as long as the rules were being followed, the misleading nature of certain financial statements was deemed inconsequential.

A complex problem

A founding member of the PCAOB, Charles Niemeier, has acknowledged that resolving the issue of financial reporting fraud extends far beyond simply revising auditing standards. The challenge becomes even more daunting when dealing with financial reporting matters that rely on subjective judgments.

For example, accounting estimates can be based on subjective or objective information involving varying degrees of measurement uncertainty. Some examples of accounting estimates include allowances for doubtful accounts, impairments of long-lived assets, and valuations of financial and nonfinancial assets. While certain estimates may be straightforward, many are inherently subjective or intricate.

Another area prone to manipulation is the going concern assessment, which forms the foundation of all financial reporting, according to the U.S. Generally Accepted Accounting Principles. 

The accounting rules grant company management the final responsibility for determining whether or not there is substantial doubt about the company’s ability to continue as a going concern and disclosing the related information in footnotes. The standard provides management with guidance that aims to reduce the inconsistencies in the timing and content of disclosure commonly found in footnotes.

Misrepresentation of finances can occur in a variety of ways when executives seek to exploit the ambiguous aspects of financial reporting for their own benefit, particularly as regulations have transitioned from historical cost in favor of fair value estimates.

Have questions? Smolin can help

When making subjective estimates and evaluating the going concern assumption, it’s important to step back and ask whether your institution’s financial statements, even while they are in compliance with regulations, could potentially mislead investors. 

If you have questions about these issues, contact our team of professionals at Smolin, and we’ll help you understand the rules and assess current market conditions.

2023-tax-limits-answering-your-faqs

2023 Tax Limits: Answering Your FAQs
2023 Tax Limits: Answering Your FAQs 1600 941 smolinlupinco

With just a few weeks to file your 2022 individual tax return (unless you filed an extension), it’s understandable if your 2022 tax bills are of greater concern than your 2023 tax circumstances. 

But it’s still important to become familiar with tax amounts that may have changed for 2023—particularly because, due to inflation, many of these amounts have been raised more than in previous years. (Note, however, that not all tax figures are adjusted on an annual basis. Some only change upon the enactment of a new law.) 

Here are some common questions (and answers) about 2023 tax limits. 

Last year, I didn’t qualify to itemize deductions on my tax return. Will that change this year? 

A law was enacted in 2017 that increased the standard deduction and reduced or eliminated a variety of other deductions, eliminating the tax benefit of itemizing deductions for many people. 

For 2023, the standard deduction amount is: 

  • $13,850 for single filers (compared to $12,950 in 2022)
  • $27,700 for married couples filing jointly (compared to $25,900 in 2022)
  • $20,800 for heads of households (compared to $19,400 in 2022)

If the amount of your itemized deductions, including mortgage interest, is lower than the standard deduction amount, you will not qualify to itemize deductions for 2023. 

How much can I contribute to an IRA this year? 

In 2023, those who are eligible can contribute $6,500 per year up to 100% of their earned income (compared to $6,000 in 2022).  

Those aged 50 or older can make an additional “catch-up” contribution of $1,000 (no change from 2022). 

How much can I contribute to my 401(k) plan through my employer? 

In 2023, you can contribute up to: 

  • $22,5000 to a 401(k) or 403(b) plan (compared to $20,500 in 2022)
  • $7,500 in catch-up contributions if you’re over 50 years old (compared to $6,500 in 2022)

If I hire a cleaner, do I need to withhold and pay FICA tax? 

In 2023, the threshold for which domestic employers must withhold and pay FICA tax for babysitters, house cleaners, and other independent contractors is $2,600 (compared to $2,400 in 2022). 

How much do I need to earn to stop paying Social Security tax? 

In 2023, you will not owe Social Security tax on amounts earned above $160,200 (compared to $147,000 in 2022). However, you must still pay Medicare tax on all amounts earned. 

Can I claim charitable deductions if I don’t itemize? 

Generally, if you claim the standard deduction on your federal income tax return, you cannot deduct charitable donations. In 2020 and 2021, non-itemizers could claim a limited charitable contribution deduction, but this tax break is no longer applicable for 2022 and 2023. 

How much can I gift someone without worrying about gift tax? 

For 2023, the annual gift tax exclusion is $17,000 (compared to $16,000 in 2022). 

Work with a tax professional

These are only a few of the tax amounts that may apply to you in 2023. If you have questions or would like assistance with your tax return, the CPAs at Smolin can help. Contact us to get started. 

how-do-auditors-evaluate-accounting-estimates

How Do Auditors Evaluate Accounting Estimates? 
How Do Auditors Evaluate Accounting Estimates?  1600 942 smolinlupinco

When businesses report their finances, they often use accounting estimates determined by management. For example:  

  • Allowance for doubtful accounts
  • Warranty obligations
  • Costs of pending litigation
  • Goodwill impairment
  • Fair values of acquired intangible assets

When auditors evaluate the amounts reported on these financial statements, how do they determine whether those amounts are reasonable? 

Methods used to evaluate accounting estimates

As part of their standard audit procedures, external auditors evaluate accounting estimates. These accounting estimates can be based on a combination of subjective and objective information, resulting in measurement uncertainty. 

Methods include: 

Inquiry

Auditors may inquire about underlying assumptions, or inputs, that were used for making estimates. They will use the information from these inquiries to determine whether the inputs seem complete, accurate, and relevant. 


Estimates based on objective inputs (i.e., published interest rates or percentages from previous reporting periods) are typically less susceptible to bias than estimates based on speculative, unobservable inputs—particularly if management does not have prior experience with similar estimates. 

Testing 

If and when it’s possible, auditors may try to recreate estimates determined by management by using the same inputs, or even their own. If the auditor’s estimate is significantly different from the estimate on the financial statement, they will ask management for an explanation. In cases involving complex items, an independent specialist may also be called in.

Auditors may also compare previous estimates to what occurred after the date of the financial statement, as the outcome of an estimate tends to differ from management’s initial estimate due to errors, unforeseeable circumstances, and/or management bias. 

While estimates that are consistently aligned with what happened later add credibility, those with significant differences may cause an auditor to become more skeptical of management’s current estimates, often necessitating additional audits. 

Updates to auditing processes

In 2018, the Public Company Accounting Oversight Board (PCAOB) published revisions to the requirements for auditing accounting estimates and using specialists (often to support accounting estimates made by management) in audits. 

These revisions were published in: 

Release No. 2018-005

Release No. 2018-005, Auditing Accounting Estimates, Including Fair Value Measurements, is a risk-based standard emphasizing the importance of professional skepticism and the attention to potential management bias among auditors when evaluating estimates made by management. 

Per the updated standard, auditors should consider both corroborating and contradictory evidence obtained during the audit. 

Release No. 2018-006 

Release No. 2018-006, Amendments to Auditing Standards for Auditor’s Use of the Work of Specialists, extends the auditor’s responsibility for evaluating specialists, requiring them to do more than simply obtain an understanding of their work. They must also perform procedures assessing the appropriateness of the company’s data, along with the assumptions and methods used. 

December 2022 analysis report

The PCAOB published a post-implementation review of these updates in December 2022. According to Interim Analysis Report: Evidence on the Initial Impact of New Requirements for Auditing Accounting Estimates and the Auditor’s Use of the Work of Specialists, approximately 33% of surveyed audit firms reported that the new requirements improved auditing practices. Other firms reported that the effects were limited, with no significant consequences on the audit process fees or hours. 

While the newer, more consistent guidance pertains to public companies, these effects filter down to private entity audits that use accounting estimates or depend on specialists. 

Accounting gray areas? Smolin can help. 

Because they involve a high level of subjectivity and judgment, accounting estimates and fair value measurements may be susceptible to misstatement. It can be particularly challenging to predict metrics that determine these accounting estimates. As a result, more auditor focus is required today than in previous, more stable accounting periods.  

It’s critical that you’re prepared to provide comprehensive documentation to support your estimates during the upcoming audit season. Need some assistance? Contact us to work with a knowledgeable accounting professional. 

5-reasons-to-outsource-your-accounting-needs

5 Reasons to Outsource Your Accounting Needs
5 Reasons to Outsource Your Accounting Needs 1600 941 smolinlupinco

CPA firms don’t just do audits and tax returns. They’re also available to help with your everyday accounting needs, from advisory services to payroll and sales tax filing. 

Is it time for your business to outsource its accounting needs? Here are five reasons you should hire a CPA. 

1. Professional insights

When you outsource your accounting to a knowledgeable CPA, you gain access to professional tax, legal, and financial advice. This helps your business remain compliant with rules and regulations while also avoiding costly errors resulting from misunderstanding complex policies. 

An accounting firm will offer you a second set of eyes, giving you the peace of mind that your company’s books accurately reflect your company’s performance. A CPA can also help streamline your accounting processes and assist you with accurately recording complex financial transactions. 

2. Scalable services

Your financial situation is bound to evolve, and a CPA will allow you to scale services up or down as needed. 

If you’re a start-up business, you won’t need to worry about outgrowing your bookkeeper or training them to take on more advanced accounting and tax tasks. And if you take on a major project—a new product launch or a merger with a strategic buyer, for example—your CPA has the knowledge and experience to guide you toward the best possible financial outcome. 

Additionally, if you unexpectedly lose your CFO, outsourcing can be a helpful temporary fix while you look for a suitable replacement (especially in today’s tight labor market). 

3. Cost-efficiency

By outsourcing to a CPA, you can save money on payroll taxes and insurance costs related to hiring an in-house accountant. Additionally, thanks to economies of scale with software purchases and usage, CPAs can likely provide some accounting service at a more affordable rate than your firm can on its own or with independent service providers. 

4. Convenience

When you delegate your accounting needs to a CPA, your team is freed up for other tasks such as marketing, product development, and more. Outsourcing will also free up resources for higher-value tasks—such as negotiating with prospects or focusing on client relationships—that can increase cash flow and optimize your organization’s efficiency. 

5. Confidence

When you involve a knowledgeable accounting professional in your business, you gain confidence with stakeholders if you plan to borrow money or solicit investment capital. 

When you hire a CPA, you also demonstrate that your business is committed to keeping accurate records and accessing the professional knowledge needed to handle complex matters. 

Outsource your accounting needs to Smolin

Could you benefit from outsourcing your daily accounting tasks? Whether you’re looking for a temporary or permanent CPA, we can offer a cost-effective service plan that works with—and adapts to—your current and future business needs. Contact us to get started. 

cash-tax-or-accrual-basis-whats-the-right-accounting-method-for-your-business

Cash, Tax, or Accrual Basis: What’s the Right Accounting Method for Your Business?
Cash, Tax, or Accrual Basis: What’s the Right Accounting Method for Your Business? 1594 938 smolinlupinco

One of the most critical aspects of running a business is having access to timely, accurate financial information. When it comes to tracking your business’s financial performance, there are several accounting methods to choose from—but how do you know what’s right for your situation? 

Here’s an overview of cash, tax, and accrual basis accounting to help you determine what’s right for your business. 

Cash basis

Startups and sole proprietorships often default to the cash method of accounting because of its simplicity. It also provides an immediate look at all available funds, which tends to suffice for small businesses with finances that aren’t overly complicated. 

While the recordkeeping process is easy, cash basis accounting can make it difficult to get an accurate picture of your finances, as transactions are only recorded when money changes hands. For example, if you bought a new computer using credit, you would only record it as an expense after paying for it in cash. (Note that this method is also not suitable for tax purposes.) 

You can often tell whether a company is using cash basis accounting by looking at its balance sheet, which won’t report accrual-basis items like accounts receivable, prepaid assets, accounts payable, or deferred expenses. 

Tax basis

Companies that want to minimize their tax liability may choose to use tax basis accounting, where transactions are only recorded when they relate to tax. With this reporting option, you use the same accounting method for both book and tax purposes. 

This can also be beneficial for businesses that don’t have complicated financial affairs and who don’t require up-to-date financial information. 

Accrual basis

As your business grows, it will have more complex reporting requirements. Larger companies may decide (or be required to) to use the accrual method of accounting, where revenue is recognized when earned (regardless of when it’s received), and expenses are recognized when incurred (rather than paid). This method matches revenue to corresponding expenses in the proper period, which helps with accurately evaluating growth and profit margins over time and against competitors. 

Businesses that issue financial statements under U.S. Generally Accepted Accounting Principles (GAAP) are required to use this accounting method—and most lenders and investors prefer this method due to its reliability for long-term financial planning purposes. 

An additional benefit of accrual basis accounting is that it can help manage cash flow. For example, timely financial data helps negotiate payment terms with suppliers, plan for significant expenses, and forecast future cash needs. 

Not sure which method is right for your business? Contact us

Choosing the right accounting method for your business is not a decision that should be made lightly. You need to consider your financial needs and accounting skills, and whether the methods used in the past have served you well. You may even choose to use a hybrid approach, incorporating elements from multiple methods. 

A knowledgeable tax advisor can help you find the right solution. Contact us to learn more. 

financial-reporting-tips-for-nonprofits

Financial Reporting Tips for Nonprofits
Financial Reporting Tips for Nonprofits 1488 875 smolinlupinco

Financial reporting isn’t just about profits. A lot that falls under the umbrella of accounting, from preparing budgets and monitoring finances to paying invoices and managing payroll tax—and nonprofits can certainly benefit from formal accounting processes. 

If you’re a nonprofit entity, consider whether your accounting processes are managed as efficiently as possible. Not sure where to start? Check out these helpful tips. 

Create invoicing policies and procedures

If you’re unsure of where to start, take a look at your invoicing. Do you have policies and procedures for monthly cutoffs of recording vendor invoices and expenses? 

One option is to require that all invoices be submitted within one week of the month’s end. Otherwise, you may spend valuable time waiting on weigh-ins from employees or other departments—and ultimately, delaying the completion of your financial statements. 

By reconciling balance sheet amounts each month, you may also be able to save time at the end of the year by catching and correcting any errors early. It’s also helpful to reconcile your accounts payable and accounts receivable ledgers to statements of financial position. 

An extra tip: when you have multiple invoices to process, it’s best to set aside a block of time to enter invoices and cut checks all at once. 

Streamline data collection

Accounting clerks and bookkeepers need a variety of information to enter vendor bills and donor bills into your accounting system. One way to make this process more efficient is to design a coding cover sheet or stamp to collect information on the invoice or donor check copy. This helps to route invoices pending approval into a folder that lists your nonprofit’s general ledger account numbers—that way, the person entering data doesn’t have to look them up every time. 

In your cover sheet or stamp, you should also include a place for invoice payment approvals. For example, multiple-choice boxes can be used to indicate the cost centers to which amounts should be allocated. 

Be sure that the invoice’s payment is also documented for reference, and that your development staff provides details for donor gifts before recording them in the accounting system. 

Make the most of your accounting software

If you’ve purchased an accounting software package, there’s a chance you’re not taking advantage of all the tools it has to offer. Have you invested enough time to learn the full functionality of your software package? If not, consider hiring a trainer to review all of its functions and teach you and your team shortcuts and other time-saving tricks.

It’s also helpful to standardize the financial reports that come from your accounting software, so you don’t have to spend extra time modifying them to meet your organization’s needs. Not only will this reduce input errors, but it will also offer helpful financial insight at any point—not just at the end of the month.

Your accounting software can also help you automatically perform standard journal entries and payroll allocations. For example, many systems can automate payroll allocations to certain programs or vacation accrual reports. That said, be sure to review any estimates against the actual figures every so often, and always adjust to the actual amount before closing your books at the end of the year. 

Monitor your processes

If they’re not consistently monitored, even the most robust accounting processes can become inefficient over time. Every so often, assess your processes for any tedious or labor-intensive steps that could be automated, or steps that don’t add value and could be removed altogether. 

Additionally, make sure that the department responsible for overseeing your finances—CFO, treasurer, or finance committee, for example—reviews monthly bank statements and financial statements promptly. The earlier you catch errors or unexpected amounts, the better. 

Need more tips? 

If you’re interested in learning more about how to improve the accounting function at your nonprofit, our knowledgeable advisors are here to help. Contact us to learn more.

end-of-year-tax-planning-for-individuals

End-of-Year Tax Planning for Individuals
End-of-Year Tax Planning for Individuals 1600 941 smolinlupinco

As we approach the end of the year, it’s important to start thinking about ways to lower your tax bill for 2022. One of the first steps you can check off your list? Determine whether you’ll take the standard deduction or itemized deductions for the year. 

Because of the high standard deduction amounts for this year—$25,000 for joint filers, $12,950 for single filers and married couples filing separately, and $19,400 for heads of household—many taxpayers won’t itemize their deductions. Also, note that many itemized deductions have been reduced or eliminated under current law. 

Those filers that do itemize can deduct medical expenses exceeding: 

  • 7.5% of adjusted gross income (AGI)
  • State and local taxes up to $10,000
  • Charitable contributions
  • Mortgage interest on a restricted debt amount

Unless they exceed your standard deduction, however, these deductions won’t save you money on your taxes. 

Working around deduction restrictions

By applying a “bunching” strategy to either push or pull discretionary expenses and charitable contributions into a tax-advantageous year, some taxpayers may be able to work around deduction restrictions. For example: if you’ll have itemized deductions for this year but not next, consider making two years’ worth of charitable contributions at one time. 

Keep reading for more ideas on how to work around deduction restrictions. 

Postpone income until 2023

By postponing income until next year and accelerating deductions into this year, you can claim larger 2022 tax breaks that are phased out over various AGI levels. 

These include: 

  • Deductible IRA contributions
  • Child tax credits
  • Education tax credits
  • Student loan interest deductions

Postponing income may also appeal to taxpayers with changed financial circumstances who anticipate being in a lower tax bracket in 2023. That said, some individuals may find it beneficial to accelerate income into 2022, especially if they anticipate being in a higher tax bracket next year. 

Convert a traditional IRA into a Roth IRA

Eligible individuals may want to consider converting a traditional IRA into a Roth IRA by the end of the year—particularly those with IRA-invested stocks or mutual funds that have lost value. 

Note that this conversion will increase your income for the current year, potentially reducing tax breaks that would otherwise be subject to phaseout at higher AGI levels. 

Account for the NIIT

For high-income individuals, it’s important to consider the 3.8% net investment income tax (NIIT) on certain unearned income—3.8% of the lesser of net investment income (NII), or excess of modified AGI (MAGI) over a threshold amount.

That threshold amount is: 

  • $250,000 for joint filers or surviving spouses
  • $125,00 for married individuals filing separately
  • $200,000 for others

Your desired approach to minimize or eliminate that 3.8% surtax will depend on your estimated NII and MAGI for the year. Note that NII does not include IRA (or most retirement plan) distributions. 

Defer bonuses

If you anticipate a bonus coming your way this year, it may work in your favor to speak to your employer about deferring it until early next 2023. 

Make qualified charitable contributions from a traditional IRA

Those who will be 70.5 years of age or older by the end of 2022 should consider making this year’s charitable donations through qualified contributions from a traditional IRA. This is especially advantageous for those who don’t itemize deductions. 

As these distributions are made directly from your IRA, the contribution amount is not included in your gross income or deductible on your tax return. 

Account for annual gift tax exclusions

Gifts of up to $16,000 made to each recipient can be sheltered by the annual gift tax exclusion if they are given before the end of the year. 

Need more ideas? Speak with a tax professional

These are just a few of the ways that you can save taxes this year. Contact us to work with a seasoned tax professional who can help you determine the best next steps for your situation.

Start Typing
in NJ & FL | Smolin Lupin & Co.