KKAJ Blog Archives for June 2016

June 24, 2016

When Not-for-Profit Organizations Join Hands

It doesn't happen often, but sometimes not-for-profit organizations merge or are incorporated into one another. For example, your not-for-profit may be contemplating an acquisition of a smaller organization or perhaps you may be merged into a larger organization. In either event, this represents a significant change for managers both personally and professionally. 
What causes not-for-profit organizations to join forces? After all, groups generally start off with a distinct mandate and a commitment from its supporters. Of course, the reasons vary according to actual circumstances, but most mergers and acquisitions in the not-for-profit world can be traced to one of these two reasons:
1. Duplication of effort - In these cases, both not-for-profits have essentially the same mission with the same basic objectives. Their collaboration is logical, especially when considering the economies involved. One may not be able to compete financially. Together, they can accomplish more at a lower overall cost. 
2. Image concerns - An organization that has been rocked by a highly-public scandal or some other event may find it difficult to recover. In this situation, a "white knight" may ride to the rescue in the form of another not-for-profit. Through acquisition, the organization can continue to grow and evolve.
At this point, it is worth noting that there are technical differences between a "merger" and "acquisition." Essentially, a merger occurs when one not-for-profit joins with another to create a separate entity. 
On the other hand, an acquisition is slightly more complicated. Typically, one not-for-profit will incorporate the other into its charter. If certain requirements are met, an acquisition may even involve a for-profit activity. 
The Financial Accounting Standards Board (FASB) issued proposed guidelines in this area (see right-hand box). Under the FASB guidelines, two not-for-profits may consolidate when one owns more than 50 percent of the other entity's outstanding voting stock or it controls a majority of the voting interests of the other governing board and has an economic interest in the entity. In this situation, an "economic interest" may be represented by a subsidiary organization set up to protect the nonprofit or when the entity's charter states that it will dissolve upon acquisition.
To effect a consolidation, the not-for-profit organization must remove from its balance sheet account balances, transactions and losses on assets remaining in the consolidated entity. For this purpose inter-organization investments and net assets of the subsidiary are not counted. If the organization does not completely own the other entity, it must report the minority interests.

Potential Risks of Joining Together

There are a number of risks that can arise in not-for-profit M&A transactions:
Inheriting financial problems. Many organizations that are looking to merge or be acquired are deteriorating. Financially viable not-for-profits aren't usually looking for these opportunities.
Culture clashes. Do the two organizations have similar philosophies and missions? Are their services complementary?
The fate of the executive director. Will he or she be forced to leave the organization? 
The composition of the board. Will the two boards combine or will a limited number from each organization be allowed on the new board?
This is just a general overview of the complexities involved in a not-for-profit merger or acquisition. If the possibility arises at your organization, consult with your accountant to help steer you down the right path. The due diligence process is critical so you can uncover the opportunities and liabilities involved in potential transactions.

Proposals for Not-for-Profit Mergers and Acquisitions

To help ensure consistency in mergers and acquisitions for not-for-profit organizations, the Financial Accounting Standards Board (FASB) proposes:
•Eliminating use of the pooling-of-interest methods of accounting.
•Recognizing identifiable assets acquired and liabilities assumed that are included in the merger or acquisition.
•Measuring assets and liabilities at their fair market value on the acquisition date.
•Realizing goodwill or gifts based on the value of acquired assets, liabilities assumed and any other consideration received.
•Fully disclosing information that will enable professionals to evaluate the nature and financial effects of mergers and acquisitions.
June 24, 2016

Dirty Dozen Tax Scams to Watch For

Every year, the Internal Revenue Service  releases its list of tax scams, spotlighting the myriad ways that people try to separate you from your money.1 

The 2016 "Dirty Dozen"

Identity Theft
Using your personal information, an identity thief can file a fraudulent tax return and claim for a refund. If you've been a victim of stolen personal information, you can contact the IRS so the agency can protect your tax account.
Be wary of fake emails or websites looking to steal your personal information. if you receive a request for information that appears to be from the IRS, contact the IRS directly (not using the links or contact information in the email) to verify the request. 
Telephone Scams
Scammers will contact you pretending to be from the IRS. They may say that you are due a large refund or owe money (even threatening arrest or revocation of your driver's license). If you receive such a call, call the IRS and contact the Federal Trade Commission using their "FTC Complaint Assistant" at FTC.gov. 
Promises of "Free Money"
Posing as tax preparers, scam artists may promise large tax refunds and charge big fees, while filing false returns with big refunds payable to them. Individuals may never know a tax filing was ever made in their name. 
Return Preparer Fraud
Dishonest preparers may use tax preparation as an excuse to steal your personal information, so only use a preparer who signs the return and has an IRS Preparer Tax identification Number.  
Hiding Income Offshore
The IRS has strengthened its ability to identify offshore holdings, and the failure to report them will be costly. 
Impersonation of Charitable Organizations
Fraudulent charities raise money or obtain private information from individuals looking to help.  Donate only to recognized charities, and beware of charities whose names sound similar to the well-known ones.
False Income, Expense or Exemptions
Falsifying your tax return is a high risk, low reward exercise, especially in this age of Big Data. 
Frivolous Tax Arguments
Ignore promoters of frivolous arguments that promise you tax relief. Not only are they expected to fail, but you may be subjected to penalties and possible jail time. 
Falsely Padding Deductions or Returns
Dishonestly reporting deductions to reduce tax bills or inflate refunds may open you up to penalties and prosecution.
Abusive Tax Structures
If someone is proposing to eliminate or substantially reduce your taxes through complex tax structures, walk away. They may be offering nothing more than illegal tax evasions.
Excessive Claims for Business Tax Credits
This happens when taxpayers or their tax preparers improperly claim the research credit or the fuel tax credit, which is generally limited to off-highway uses, such as farming.