Category: Article

First published in the Spring 2022 newsletter of the National Association of Rural Health Clinics.

Medicare bad debts present rural health clinics (RHCs) and other Medicare Part A providers an opportunity to recover reimbursement dollars they might otherwise miss. Provided that a RHC keeps a proper log, its total uncollected Medicare co-insurance and/or deductibles can be claimed on its cost report for 65% reimbursement.

Under 42 Code of Federal Regulation (CFR) §413.89 and the Provider Reimbursement Manual (PRM) 15-1 § 308, a bad debt is allowable when it results from deductible and coinsurance amounts for covered services that are uncollectible from Medicare beneficiaries. The Middle-Class Tax Relief and Job Creation Act of 2012 established the current reimbursement rate at 65%.

What is allowable bad debt?

An allowable Medicare bad debt must meet four criteria to be claimed by a facility:

1. The debt must be related to covered services and derived from deductible and coinsurance amounts.
2. The provider must be able to establish that reasonable collection efforts were made.
3. The debt was actually uncollectible when claimed as worthless.
4. Sound business judgment established that there was no likelihood of recovery at any time in the future.

Undertaking and documenting reasonable collection efforts will satisfy the second requirement, and the completion of those efforts will satisfy No. 4. Then, as long as the amount in question is a deductible or coinsurance amount that was appropriately written off during the period for which the cost report is filed, it is allowed to be claimed.

Reasonable collection efforts required

What constitutes a reasonable collection effort? First and foremost, collection efforts for Medicare beneficiaries must be similar to efforts to collect comparable amounts from non-Medicare patients. Beyond that, the collection policy must include the issuance of a bill on or shortly after discharge of the beneficiary as well as genuine collection efforts such as subsequent billings, collection letters, and phone calls. The regulations also allow for the use of a collection agency in addition to or in lieu of those efforts.

As with many areas of healthcare, the saying “if it was not documented, it did not happen” certainly applies. Any facility looking to claim Medicare bad debt reimbursement will need to maintain supporting documentation for each line on its Medicare bad debt log.

There are a couple of alternate methods to satisfy the second and fourth criteria:

• If a patient is deemed indigent by provider standards, their debt can be deemed uncollectable without going through reasonable collection efforts. However, the provider must have a codified internal policy to analyze assets, liabilities, expenses, and income of the patient. It must also seek to determine that no other source than the patient would be legally responsible for their debt. Documentation supporting these factors must be contained within the patient’s file.
• For patients who have Medicare as a primary payer and Medicaid as a secondary payer (commonly referred to as a “crossover”), billing the state Medicaid program for the unpaid amount and documenting its response will satisfy the reasonable collection effort procedures. The account can be added to the Medicare bad debt log upon receipt of the Medicaid program’s remittance advice.

Medicare bad debt is money lost for many RHCs, so taking time to explore the cost report reimbursement option could be a valuable decision. Reach out to me or any member of the Kraft Healthcare Consulting team for help.

© 2022 KraftCPAs PLLC

 

If you drive infrequently for business, it’s easy to let mileage costs slide. After all, it’s a hassle to keep track of your tax-deductible mileage in a little notebook and do all the calculations that go along with it. And even if you do rack up a lot of business miles, you probably forget to track some trips and end up losing money.

QuickBooks Online offers a much better way with the QuickBooks Online mobile app. Its Mileage tools include simple fill-in-the-blank records that allow you to document individual trips. You can either enter the starting point and destination and let the site calculate your mileage and deduction or enter the number of miles yourself. If you use QuickBooks Online’s mobile app, it can track your miles automatically as you drive (as long as you have the correct settings turned on).

Here’s a look at how all of this works.

Setting up

To get started, click the Mileage link in QuickBooks Online’s toolbar. The screen that opens will eventually display a table that contains information about your trips, but you need to do a little setup first. Click the down arrow next to Add Trip in the upper right corner and select Manage vehicles. A panel will slide out from the right. Click Add Vehicle.

You’ll need to supply the vehicle’s year, make, and model. Do you own or lease it, and on what date was the vehicle purchased or leased and put into service? Do you want to have your annual mileage calculated by entering odometer readings or have QuickBooks Online track your business miles driven automatically? When you’re done making your selections and entering data, click Save.

Entering trip data

You can download trips as CSV files or import them from Mile IQ into QuickBooks Online, but you’re probably more likely to enter them manually. Click Add Trip in the upper right corner. In the pane that opens, you’ll enter the date of the trip and either the total miles or start and end point. You’ll select the business purpose and vehicle and indicate whether it was a round trip. When you’re done, click Save. The trip will appear in the table on the opening screen, and your current possible total deduction will be in the upper left corner, along with your total business miles and total miles. If you want to designate a trip as personal, click the box in front of the trip in that table. In the black horizontal box that appears, click the icon that looks like a little person, then click Apply. Now, the trip will appear in the Personal column and will not count toward your business tax-deductible mileage.

Personal trips can count, too

If you use your vehicle(s) for personal as well as business purposes, tracking some of those miles can also mean a tax deduction. For tax year 2022, you can deduct 18 cents per mile for your travel to and from medical appointments. Note that medical mileage is only deductible if medical exceeds a certain percent of AGI. Be sure to check with the IRS yearly tax code, as they update the mileage amounts annually. And if you do volunteer work for a qualified charitable organization, the miles you drive in service of it can be deducted at the rate of 14 cents per mile. You can also claim the cost of parking and tolls, as long as you weren’t reimbursed for any of these expenses. Obviously, the IRS wants you to keep careful records of your charitable mileage, and QuickBooks Online can provide them. QuickBooks Online doesn’t track these deductions, but you’ll at least have a record of the miles driven.

Auto-track your miles

The easiest way to track your mileage is by using the QuickBooks Online mobile app. You can launch the app and have it record your mileage automatically as you’re driving. Versions are available for both Android and iOS, and they’re different from each other. They also have more features than the browser-based version of QuickBooks Online, like maps, rules, and easier designation of trips as business or personal.

In both versions, you’ll need to click the menu in the lower right corner after you’ve opened the QuickBooks Online app and select Mileage. Make sure Auto-Tracking is on. Your phone’s location services tool must be turned on, too. There are other settings that vary between the two operating systems. You can search the help system of either app to make sure you get your settings correct if the onscreen instructions aren’t clear enough.

Of course, you won’t see the fruits of your mileage deductions until you file your 2022 taxes, but you can factor these savings in as you’re doing your tax planning during the year. Reach out to me or a QuickBooks Pro at KraftCPAs if you’re having any trouble with QuickBooks Online’s Mileage tools, or if you have questions with other elements of the site.

© 2022 KraftCPAs PLLC

Tracking employee time consists of much more than capturing labor hours and issuing paychecks. It’s a complex and critical administrative task directly tied to your business and financial stability.

Improper time tracking in an industry like construction can lead to big payroll mistakes. And when working on public projects, it can result in compliance failures with prevailing wage and tax laws – and potentially adverse legal actions and penalties. By standardizing processes, training employees, and using automated tools, contractors can tackle time-tracking troubles and overcome a common challenge.

Keep up with classifications

Publicly funded projects must pay prevailing wage rates and comply with prevailing wage laws. It’s here that work (or worker) classifications come into play.

For example, if you classify a worker as a laborer when the person is actually doing ironwork, that’s a misclassification that violates the law. It could result in your construction company paying the wrong hourly rate, which includes fringe benefits and tax withholdings.

When a worker moves from task to task in the field, you must track the activity carefully so you can correctly assign and accurately report wage determinations. Unfortunately, it’s easy to overlook changing work classifications on busy job sites. Ensure your workers understand the importance of tracking both their hours and their changing roles in the field.

Verify wage determinations

Wage determinations set the hourly wage and fringe benefit rate for every classification of laborer and mechanic. These rates apply to federally funded projects and come from wage surveys conducted by the U.S. Department of Labor. Some states, counties, and cities have similar laws in place and publish their own prevailing wage determinations for state-funded or municipal projects.

Be sure your administrative staff knows where to find applicable prevailing wage rates for each jurisdiction where you work. For example, federal wage determinations are available on the website for the U.S. System for Award Mangement, a division of the General Services Administration. Most states have a similar online resource, with prevailing rates broken down by area and city where applicable. Don’t assume last year’s rates still apply — they may have changed.

Use checklists to standardize processes

Mistakes are easier to make and harder to correct if you don’t have standard processes in place. Create a checklist that outlines payroll workflow by including every step required to complete the payroll cycle. Include a timeline for submitting hours, as well as steps for the process of verifying time and double-checking work classifications and wage determinations.

Even if you use certified payroll software for reporting, keep a separate checklist that details every task required to remain compliant. Train your accounting staff to mark off tasks as they’re completed and to add notes if issues arise.

Keep good records

If you work on government-funded projects, keeping up-to-date with reporting requirements is critical to staying compliant. Avoid the mad rush to meet deadlines; that’s when mistakes typically happen.

Sometimes, despite their best efforts, construction businesses are investigated for prevailing wage issues. If that happens, you’ll want to produce a clear digital/paper trail indicating that you have sound time-tracking and payroll procedures in place. In other words, those checklists will come in handy.

Prioritize training

It’s already been mentioned but bears repeating: Provide the training your employees need to minimize mistakes and maintain compliance.

Do field workers understand the importance of tracking on-site role changes and how work misclassifications can affect their pay? Does your administrative staff know how to find and verify wage determinations? Do you provide training on these matters when you hire new team members and offer refresher training when prevailing wage laws change?

To minimize classification and wage determination errors, concentrate on continuing education. At minimum, share articles or whitepapers about prevailing wages and general labor laws, schedule time for employees to watch webinars, and send regular reminders to everyone about best practices.

Automate time tracking

Accurate time tracking impacts profitability. To clearly understand the true labor costs for each project, you need to correctly track every hour along with the task being done. Knowing your true labor costs is also key to creating competitive bids for future work. However, when using manual processes, it’s easy to forget to clock in and out on timesheets, which can lead to “guesstimating” the labor time for each task.

An easy way to avoid human error is to use digital time tracking. This single change will remove several manual steps for field and office personnel and reduce data entry mistakes. Cloud-based mobile applications instantly transmit pertinent data from jobsites, allowing managers and accounting staff to see time punches, activities performed, and project locations.

Several apps include advanced features such as geofencing, labor cost data collection, and employee accountability functions. These features make it easier to log classifications and manage wage determinations. Look for a system that makes it as simple as possible for workers to capture hours digitally and integrates well with your payroll system.

Reap the benefits

Payroll mistakes can affect morale, undermine profits, and create legal and tax problems. By tackling the challenge head-on, you can minimize mistakes in your processes and reap the benefits of a more engaged workforce and far fewer dollars wasted fixing mistakes and paying compliance penalties. Contact me or any member of our construction industry team for help assessing the cost-effectiveness and potential liabilities of your time-tracking and payroll systems.

© 2022 KraftCPAs PLLC

Businesses and nonprofit organizations continue to adapt to new lease accounting standard rules, the result of several years of federal planning and adjustments.

Accounting Standards Codification 842 (ASC 842) now applies to private companies and nonprofit organizations with fiscal years beginning after December 15, 2021, and it significantly changes the accounting for leases.

Still not sure how ASCS 842 will affect you or your balance sheet? Let’s start at the beginning.

Allocate resources

To implement the new standard, first decide who on your team will be responsible for implementing it. That person should review all current leases and review and, going forward, approve all new leases that are applicable to ASC 842. A program such as Microsoft Excel can help with some of the math and calculations, or look into any of the specialized lease software currently available.

Definition of a lease

ASC 842 defines a lease as a contract “that conveys the right to control the use of an identified asset… for a period of time in exchange for consideration.”

When reviewing any lease contract, look for these three elements:

• A clearly identified asset.
• Specified rights to control the identified asset. Consider options to extend the lease, cancel the leases, and the likelihood that those options are exercised.
• Hidden servicing contracts. Look closely for leases or contracts embedded in those agreements that also could be subject to ASC 842.

Under ASC 842, a lessee can choose a short-term lease accounting policy that’s less than 12 months and doesn’t have an option to purchase the chosen asset. A short-term lease accounting policy will  recognize the lease payment over the lease term on a straight-line basis and, as a result, right-of-use assets and lease liabilities would not be recorded for short-term leases.

Lease classification

ASC 842 retains the two-model approach of classifying leases as operating or finance leases (formerly capital leases). Regardless of the classification type, most leases will be recorded on the balance sheet as a right-to-use asset or liability.

If one or more of the following criteria are met at the start of the lease, the lease would be considered a finance lease:

• The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
• The lease grants the lessee an option to purchase the underlying asset, and the lessee is reasonably certain to exercise the option to purchase.
• The lease term is for a major part of the remaining economic life of the underlying asset.
• The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying assets.
• The underlying asset is of such a specialized nature that it’s expected to have no alternative use to the lessor at the end of the lease term.

If none of these lease classification criteria are met, the lease is classified as an operating lease.

Discount rate

To determine the current value of the sum of the lease payments, apply a discount rate. Three discount rate options are provided under ASC 842:

1. Rate implicit in the lease. The rate implicit in the lease should be used if readily determinable.
2. Incremental borrowing rate. When the rate implicit in the lease is not readily determined, the incremental borrowing rate will appl. The incremental borrowing rate is the lessee’s rate for a hypothetical, collateralized loan with similar terms as the lease.
3. Risk-free rate. Nonprofit entities may elect an accounting policy to use the risk-free rate for a period similar to the lease term. The risk-free rate is the rate of a zero-coupon U.S. Treasury instrument.

How to account for the leases

The initial accounting for the leases is the same whether it’s a finance or operating lease.

On the start date of the lease, the lessee records a lease liability for the present value of the sum of the lease payments and a right-of-use asset equal to the lease liability. The subsequent accounting for the lease costs and amortization of the right-of-use assets varies depending on the classification as a finance or operating lease.

For a finance lease, the asset is amortized straight-line over the lease term or the useful life of the underlying asset. Interest costs are recognized for the accretion of the lease liability and recognized as interest expense.

An operating lease is recorded as a lease or rent expense and is recognized on a straight-line basis over the lease term.

Implementation options

ASC 842 went into effect for calendar years beginning with the December 31, 2022, year-end financial statements. There are two options for initial implementation:

The effective date method. Using this option, the lessee will implement the standard effective January 1, 2022, and not restate the 2021 or prior comparative financial statements. The accounting standard change is made through a cumulative-effect adjustment recognized as of the effective date.

The comparative method. With this method, all periods presented will fall under ASC 842 guidelines. The accounting standards change is made through a cumulative-effect adjustment recognized as the beginning of the earliest period presented.

Changes to your financial statements

Balance sheet. Right-of-use assets and lease liabilities should be presented as a separate line item on the balance sheet or disclosed separately in the notes to the financial statements. If they aren’t presented separately on the balance sheet, the note must indicate which line items on the balance sheet include the right-of-use assets and lease liabilities.

An example of the balance sheet changes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Footnotes to the financial statements. Expanded disclosures required for both lease classifications include:

• Description of leases.
• Terms and conditions, including purchase options and termination penalties.
• Judgment and assumptions made, including capitalization thresholds.
• Amortization of right-of-use assets, interest costs, and periodic lease expense associated with leases.
• Discount rate(s) (weighted average).
• Remaining lease terms (weighted average).

Application of the standard will not result in any adjustment to equity for treatment of either type of lease.

This is an example of the footnote disclosures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASC 842 has been debated and adjusted quite a bit over the past several years before finally going into effect, so the end result can be confusing and tedious. Contact us or any of the professionals on our assurance services team if you have questions about how ASC 842 applies to you.

© 2022 Kraft CPAs PLLC

 

An external audit can help a business or nonprofit organization avoid costly and embarrassing errors, and proper preparation can greatly ease the process, minimize surprises, and potentially reduce costs.

These key steps could help simplify and maximize your next audit:

Keep a positive attitude

CFOs, finance directors, and controllers sometimes see audit fieldwork as a disruption to their workplace routine.  Cooperation and planning with your audit team can lead to a more efficient process, allowing you to get back to normal business.

Audits aren’t intended to be adversarial. An external audit team is a professional resource that can provide assurance about your financial reporting to financial statement users, such as lenders and investors.  An audit can also provide fresh insights, accounting advice, and solutions to strengthen internal controls and minimize risks.

Before fieldwork begins, gather your accounting team to explain the purpose and benefits of your upcoming audit. It may be important to distinguish your financial statement audit from an IRS audit, which could lead them to be guarded and skeptical. Be open and candid to put minds at ease and lessen anxiety.

Assign a liaison

Pick a knowledgeable person in the accounting department to be the auditor’s go-to source for questions and document requests. This will minimize confusion and duplication of effort within the accounting department, and it could minimize the time that external auditors are on your premises.

Establish a timeline

Creating a schedule for your audit team that includes the most important dates can make a difference in the time required between starting the audit to receiving a final report. Good communication on the timeline will benefit everyone. Consider the following dates:

• Preliminary planning time
• Start of fieldwork
• Agreement on adjusting journal entries and the adjusted trial balance
• Presentation of a draft of the financial statements
• Final issuance in time for deadlines, governance meetings, or bank requirements

Review this timeline for potential scheduling conflicts such as vacations, holidays, medical leaves of absence, business conferences, and regulatory deadlines.

Reconcile accounts

Before fieldwork starts, all transactions should be entered into the accounting system for the year, and each account balance should have a schedule that supports its year-end balance. Amounts reported on these schedules should match the financial statements. Be ready to explain and provide evidence supporting any estimates that underlie account balances, such as allowances for uncollectible accounts, warranty reserves, or percentage of completion for work-in-progress inventory.

Ideally, a separate member of the accounting department should review the schedules for errors, discrepancies, and unexpected variances based on the company’s budget, expectations, or the prior year’s balance. An internal review is one of the most effective ways to minimize errors and adjust journal entries during a financial statement audit.

Assemble information to provide auditors

Auditors are grateful when clients prepare their own audit workpapers to support account balances and transactions. Your accounting team already created many of these schedules when they reconciled account balances to the general ledger. Examples generally include:

• Preliminary trial balances and financial statements
• Bank reconciliations
• Accounts receivable aging reports
• Fixed asset listings (including purchases, disposals, and donations)
• Schedules of prepaid items, accrued expenses, and repairs and maintenance expenses

Review last year’s audit document request and collect the prepared-by-client (PBC) work papers. The audit team may not be aware of all significant activity that took place during the year. There may be additional documents that would be helpful if provided early in the process to help avoid last-minute questions. Examples of these may include:

• Significant sales contracts
• New leases
• Loan agreements
• Insurance policies
• Minutes of board meetings noting significant decisions
• Legal documents
• IRS or other notices

Compile these documents in your audit binder before your audit team arrives. Providing information piecemeal can delay the fieldwork process and may cause the audit team to have to fit in working through open items after the scheduled fieldwork timeframe has passed.

Evaluate internal controls

Patching gaps in internal controls minimizes the risks of fraud and financial misstatement. If you correct any deficiencies in internal control policies (such as a lack of segregation of duties, managerial review, or physical safeguards) or documentation of these controls before fieldwork, your audit will proceed more smoothly, and it could result in fewer recommendations to report when the audit is completed.

Remember that the COVID-19 pandemic has changed how transactions are processed by accounting teams, because those teams might work remotely rather than on-site. Your auditor will be on the lookout for changes that your company made (or should have made) in response to remote working arrangements. He or she needs to be able to determine whether the controls were adequately designed, put in place, and operate effectively. Changes made to the financial reporting process should be communicated to the audit team during planning through updating internal control forms or other means.

The audit can be beneficial

Financial statement audits should be a learning opportunity and an investment in your company’s future. Preparing for your auditor’s arrival not only facilitates the process and promotes timeliness, but also helps build a beneficial partnership between in-house and external accounting resources.

The KraftCPAs assurance services team can work with you to get ready for your next audit. Reach out to one of our professionals if you have questions.

© 2022 KraftCPAs PLLC

You likely keep a very close watch on the money that comes into your business. You record payments as soon as they come in and deposit them in a bank account. But are you as careful tracking your purchases?

It’s easy to go out to lunch with a client and forget to save the receipt. It’s not that much money, right? Or you quickly stop to pick up supplies at the office supply store and forget to record the purchase. When you disregard even small expenses, you can have two problems. First, your books won’t be accurate. And second, you never know how an extra $42.21 under Meals and Entertainment might affect your income taxes.

QuickBooks Online offers two ways to enter expenses:

• create a record on the site itself, or
• snap a photo with your phone using the QuickBooks Online mobile app to document the money spent

Here’s how these two methods work.

Documenting at your desk

Let’s say you just had lunch with a vendor to discuss some products you’re planning to buy for a project you’re doing for a customer. You charged it to your company credit card, which you track in QuickBooks Online. You still have to enter it as an expense on the site so that when your credit card statement comes, you can match the credit card transaction to the expense you recorded.

Hover over Expenses in the navigation toolbar and click on Expenses. Click the down arrow in the New transaction button and select Expense. Fill in the fields at the top of the screen with details like Payee, Payment date, and any Tags you want to specify. Under Category details, select the correct category from the drop-down list and enter a Description and Amount.

Since you’re going to bill this to the customer as a part of your project fee, click in the Billable box to create a checkmark. Select the Customer/Project. Add a Memo to remind yourself of the reason for the lunch (very important!) and attach a photo of the receipt if you take one. Click Save. Your record of the lunch will now appear on the Expense Transactions screen. It will also show up in the Expenses by Vendor Summary and Unbilled Charges reports, among others.

Recording on the road

In the example we just went through, attaching a photo of the receipt was the last thing we did to record an expense in QuickBooks Online. There’s another way to document a purchase that starts with a photo of a receipt and should save you a bit of data entry: using the QuickBooks Online mobile app. The app uses Optical Character Recognition (OCR) to “read” the receipt and transfer some of its data to fields on an expense record.

(If you haven’t installed the QBO app on your smartphone, you should. You can do a lot of your accounting work that synchronizes automatically with QBO. It’s free, too.)

Open the app and log in. On the opening screen, you’ll see an icon labeled Snap Receipt. Click on it, and your phone’s camera will open (you’ll be asked for permission to use it). Position your phone over the receipt and move it around until you see the blue box covering the content of the receipt.  Take the picture. You’ll see it displayed on the phone with a message saying, “Use this photo.” If it seems OK, click the link.

A message on the screen will tell you that the upload is complete and that the app is extracting the information from it. Click “Got it!” Then it should only take about a minute for your receipt to appear in the list on the Receipt snap screen. You’ll see the details that the app has pulled from your receipt. Tap the matching expense and click Done on the next screen.

When you’re back at your computer, open QuickBooks Online and go to Transactions|Receipts. At the end of the row that contains your receipt, click the down arrow next to Delete and select Review. QBO will display the partially completed receipt form next to the photo you took of the receipt. Fill in any missing fields and save the transaction. Click Create expense on the screen that opens. Then open the Expenses menu and select Expenses, and there should be an entry for the receipt you just added.

This tool isn’t perfect, of course. Every receipt has different fields in different places, and sometimes they’re just not very readable. But in our tests, the app picked up an average of four fields.

Documenting your expenses using one of these two methods is so important. It will help you remember why you stored the receipt and make your reports more accurate. As long as you categorize each transaction correctly, it will make your tax preparation easier and faster and ensure that you’re charging customers for billable expenses. And if you’re ever audited, your careful work will come in handy.

QuickBooks Online is a great way to handle your expense management, but there are enough moving parts in these recording tools that you may have questions. Reach out to me or any of our QuickBooks ProAdvisors at KraftCPAs for help along the way.

© 2022 KraftCPAs PLLC

Many companies will put diversity, equity, and inclusion (DEI) issues on their agendas for 2022. Increasingly, investors, lenders, customers, employees, and new recruits want to know the extent to which boards and management teams are diverse in terms of race, ethnicity, gender, and sexual identity. These groups increasingly recognize the quantitative and qualitative benefits that diversity offers.

In a corporate boardroom, diversity can enhance the audit committee’s ability to monitor financial reporting. Academic research has found that boards with diverse membership have better financial reporting quality and are more likely to hold management accountable after a poor financial performance. This concept also extends to private companies, where management teams with people from diverse backgrounds and/or functional areas expand their company’s abilities to respond to growth opportunities and potential threats.

On a broader level, getting input on major decisions from people from a wide variety of backgrounds and experience levels helps enhance corporate value. Plus, providing an equitable and inclusive workplace is good corporate citizenship.

How diverse, equitable, and inclusive is your workplace?

A company’s leadership sometimes perceives DEI issues differently than its frontline workers do. Assembling a formal DEI task force can help company leaders get a more objective picture of strengths and weaknesses in these areas.

One of the group’s first tasks should be creating a survey to distribute throughout your organization. Once the responses have been tallied, the task force should meet regularly to discuss the findings and, if necessary, take corrective actions.

Reporting hotlines can also provide insight into DEI issues. In some cases, management may be blind to harassment and discrimination that’s happening on the frontlines by co-workers, suppliers, and customers. Remember, some forms of harassment and discrimination can be subtle. Frank insights from rank-and-file employees, customers, and suppliers can be eye-opening — and discussions about real-life incidents can lead to awareness and change.

How effective is your DEI program?

Another critical task for the diversity-and-inclusion task force is developing a list of quantitative metrics — such as recruitment, retention, and pay rates for minorities and women — to help track progress over time. Historical results can be used to benchmark your company against competitors and establish goals for the future.

Your company can also make DEI surveys or focus groups part of its annual review process. To encourage participation in DEI initiatives, consider tying part of executive leadership bonuses to achieving quantifiable goals. Alternatively, if goals aren’t met, evaluate why and whether the program may need to be redesigned to be more effective.

Conducting DEI surveys creates an expectation that management intends to implement changes to become more diverse, equitable, and inclusive in its business practices. So, it’s important to communicate with employees about the company’s DEI initiatives. These communications should showcase the company’s strengths and the steps it has taken to improve weaknesses.

In addition to providing footnote disclosures in their financial statements, some companies issue separate DEI reports to highlight improvements made during the current year and other additional planned DEI initiatives.

The use of an outside consultant can make these reports more objective and professional. Plus, outsiders can conduct training programs for managers and employees, along with providing guidance on DEI best practices that have been successful at other companies.

Diversity counts

Building an effective DEI program doesn’t happen overnight. It takes time, attention, and a commitment from the company’s leadership. Contact me to discuss best practices and how your financial reporting process can be used to highlight your progress in these areas.

© 2021 Kraft CPAs PLLC

The holiday season is here, and that might put you in the mood to donate to a charity or bestow gifts or assets to loved ones. Even though the act of giving is the ultimate reward, don’t overlook the tax rules designed to encourage charitable giving.

Donating to charities

In the past, taking the standard tax deduction meant losing out completely on possible deductions for charitable gift-giving. Under a temporary rule in effect for 2020 and 2021, taxpayers can claim a limited charitable deduction in addition to the standard deduction on their personal income tax returns. The deduction is for cash donations to public charities only and is limited to $300 for single filers or $600 for a married couple filing jointly.

What if you want to give gifts of investments to your favorite charities? There are a couple of points to consider.

First, don’t give away investments in taxable brokerage accounts that are worth less than what you paid for them. Instead, sell the shares and claim the resulting capital loss on your tax return. Then give the cash proceeds from the sale to charity.

The second point applies to securities that have appreciated in value — these should be donated directly to charity. That’s because if you itemize, donations of publicly traded shares owned for more than a year result in charitable deductions equal to the full current market value of the shares at the time the gift is made. In addition, if you donate appreciated stock, you avoid the capital gains tax on those shares. Meanwhile, the tax-exempt charity can sell the donated shares without owing federal income tax. Keep in mind that your charitable deduction for donating appreciated stock will be limited to 30% of your adjusted gross income (20% if given to a private foundation).

Donating from your IRA 

IRA owners and beneficiaries who have reached age 70½ are allowed to make cash donations of up to $100,000 a year to qualified charities directly out of their IRAs. You don’t owe income tax on these qualified charitable distributions (QCDs), but you also don’t receive an itemized charitable contribution deduction. (Get in touch with your KraftCPAs tax advisor if you’re interested in this type of gift.)

Gifting assets to family and other loved ones

The principles for tax-smart gifts to charities also apply to gifts to relatives, meaning that it is more advantageous to sell investments that are now worth less than you paid for them and then claim the resulting capital losses on your personal income tax return, rather than gifting the stock directly to loved ones. You can give the cash proceeds from the sale to your loved ones instead.

Likewise, you should give appreciated stock directly to those to whom you want to give gifts. You will avoid paying tax on the unrealized gain, and if they sell the shares, they’ll pay a lower tax rate than you would if they’re in a lower tax bracket.

In 2021, the amount you can give to one person without gift tax implications is $15,000 per recipient. The annual gift exclusion is available to each taxpayer; so, if you’re married and make a joint gift with your spouse, the exclusion amount is doubled to $30,000 per recipient for 2021.

Make gifts wisely

Whether you give to charity or loved ones this holiday season — or both — it’s important to understand the tax implications. For answers to your specific questions, reach out to me or any member of the KraftCPAs tax team.

© 2021 Kraft CPAs PLLC

It’s not uncommon to consider a move to another state during retirement – maybe to be closer to family, find more suitable weather, or maybe just a change of scenery. But before you put much thought into your out-of-state relocation, be sure to factor in state and local taxes. Establishing residency for state tax purposes may be more complicated than it seems.

What are all applicable taxes?

It may seem like a good option to simply move to a state with no personal income tax. But, to make a good decision, you must consider all taxes that can potentially apply to a state resident. In addition to income taxes, these may include property taxes, sales taxes, and estate taxes.

If the state you’re considering has an income tax, look at what types of income it taxes. Some states, for example, don’t tax wages but do tax interest and dividends. And some states offer tax breaks for pension payments, retirement plan distributions, and Social Security payments.

Is there a state estate tax? 

The federal estate tax currently doesn’t apply to many people. For 2021, the federal estate tax exemption is $11.7 million (or $23.4 million for a married couple). But some states levy estate tax with a much lower exemption and some states may also have an inheritance tax in addition to — or in lieu of — an estate tax.

How do you establish domicile? 

If you make a permanent move to a new state and want to make sure you’re not taxed in the state you came from, it’s important to establish legal domicile in the new location. The definition of legal domicile varies from state to state. In general, domicile is your fixed and permanent home location and the place where you plan to return, even after periods of residing elsewhere.

When it comes to domicile, each state has its own rules. You don’t want to wind up in a worst-case scenario: Two states could claim you owe state income taxes if you establish domicile in the new state but don’t successfully terminate domicile in the old one. Additionally, if you die without clearly establishing domicile in just one state, both the old and new states could claim that your estate owes income taxes and any state estate tax.

The more time that elapses after you change states and the more steps you take to establish a domicile in the new state, the harder it will be for your old state to claim that you’re still domiciled there for tax purposes. Some ways to help lock in domicile in a new state include:

• change your mailing address at the post office
• change your address on passports, insurance policies, will or living trust documents, and other important paperwork
• buy or lease a home in the new state and sell your home in the old state (or rent it out at market rates to an unrelated party)
• register to vote, get a driver’s license, and register your vehicle in the new state
• open and use bank accounts in the new state and close accounts in the old one

If an income tax return is required in the new state, file a resident return. File a nonresident return or no return (whichever is appropriate) in the old state. For the year of your move, you may need to file a part-year resident return in both states.  We can help file these returns.

Before deciding where you want to live in retirement, reach out to a KraftCPAs professional to weigh the pros and cons. It could help you avoid surprise tax issues later.

© 2021 Kraft CPAs PLLC

During the pandemic, many audit procedures have been performed remotely, forcing auditors to rely more heavily on analytical procedures, such as trend, ratio, and regression analysis, than in the past. But so-called “analytics” isn’t a novel concept for auditors. They’ve been using analytics for decades to make audits more efficient and effective.

Audit analytics

The American Institute of Certified Public Accountants (AICPA) publishes guidance on using analytics during a financial statement audit. The auditing standards define analytical procedures as “evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. Analytical procedures also encompass such investigation, as is necessary, of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.”

Auditors use analytics to understand or test financial statement relationships or balances. The type of procedures is customized, depending on the size and complexity of the company.

Five steps

When performing analytics, auditors generally follow this five-step process:

1. Form an independent expectation based on the company and its industry
2. Identify differences between expected and reported amounts
3. Brainstorm all possible causes for the discrepancy
4. Determine the most probable cause(s) for the discrepancy
5. Evaluate discrepancies to determine the nature and extent of any additional auditing procedures

Any discrepancy is compared to the auditor’s threshold for analytical testing. If the difference is less than the threshold, the auditor generally accepts the recorded amount without further investigation and the analytical procedure is complete. If the difference is greater than the threshold, additional procedures may be needed.

A closer look

Additional investigation is required for significant fluctuations or relationships that are materially inconsistent with other relevant information or that differ from expected values. For differences above the threshold, the auditor will likely inquire about the reason.

Many discrepancies have “plausible” explanations, usually related to unusual transactions or events or accounting or business changes. Plausible explanations typically require corroborating audit evidence. For example, if a manufacturer’s gross margin seems off, the accounting department might explain that its supplier increased the price of raw materials. To corroborate that explanation, the auditor might confirm the price increase with its top supplier.

In some cases, a discrepancy may warrant more in-depth testing. Other times, the analytical test or the data itself is problematic, and the auditor needs to apply additional analytical procedures with more precise data.

For differences that are due to misstatement (rather than a plausible explanation), the auditor must decide whether the misstatement is material (individually or in the aggregate). Material misstatements typically require adjustments to the amount reported and may also necessitate additional audit procedures to determine the scope of the misstatement.

Creating a paper trail

Auditors document analytical procedures in audit work papers. These are the files the auditor creates to support their audit conclusions. In general, work papers document the procedures applied, tests performed, information obtained, and conclusions reached in the audit.

For each analytical procedure performed during the audit, the work papers will explain the factors considered when developing the expectation and how the expectation compares to the recorded amounts or ratios developed from recorded amounts. The auditor also must document the results of any additional auditing procedures — such as management inquiry, research, and testing — performed in response to significant unexpected discrepancies.

Help us help you

Analytical procedures can help make your audit less time-consuming and more effective at detecting errors and omissions. You can facilitate these procedures by forewarning your auditors about any recent changes to the company’s operations, accounting methods, or market conditions. This insight can help auditors develop more reliable expectations for analytical testing and identify plausible explanations for significant changes from the balance reported in prior periods.

In addition, now that you understand the role analytical procedures play in an audit, you can anticipate audit inquiries, prepare explanations, and compile supporting documents before the start of audit fieldwork. Contact a member of your KraftCPAs audit team for more information.

© 2021

Users of QuickBooks already know how it’s transformed their daily bookkeeping practices. Users can create sales forms like invoices quickly and find them when they need them. Customer and vendor records are organized and stored neatly for fast retrieval. And it’s easy to accept online payments, track inventory, and record billable time.

But if you’re not using QuickBooks’ built-in reports, you’re missing out on one of the software’s most powerful components. While you can look at lists of invoices, sales receipts, and payments, you can’t see in a few seconds who owes you money and how late they are in paying, for example. You’re not able to get an instant overview of who you owe. You can’t call up a customer’s history instantly, and it will take an enormous amount of time to see which of your items and services are selling and which aren’t.

These are just a few of the insights you get from using QuickBooks reports. Beyond learning about your company’s past and present financial states, you can make better business decisions that will improve your future.

Before you start

QuickBooks’ reports are exceptionally customizable, as you’ll see. But before you start creating them, you should see what your general report options are. Open the Edit menu and select Preferences, then Company Preferences (which only administrators can modify).

You’ll see that you can control your reports’ general settings. For example, some reports can be created on the basis of either Accrual or Cash. You can designate your preference here. Do you want the aging process to begin on the due date or transaction date? How much information should appear when Items or Accounts are displayed? What additional data should appear on your report pages (Report Title, Date Prepared, Report Basis, etc.)? You can specify your own Format or just accept the Default.

Note that Statement of Cash Flows is an advanced report, one we don’t recommend you try to modify or analyze on your own. We can help with that when the report is needed, which is usually monthly or quarterly.

When you’re done here, click OK.

Learn what’s there

The best way to familiarize yourself with the reports that QuickBooks offers is to open the Reports menu and click Report Center. The content here is divided by type (Customers & Receivables, Sales, Purchases, etc.). Click around these lists and use the icons in each box to Run the current report, get more Info on it, mark it as one of your Favorites, or view a Help file. You can choose the date range before you run it with your company’s own data.

Customizing your content

We mentioned before how customizable QuickBooks’ reports are. Customization options vary from report to report, but we’ll look at one example here. You’re likely to want to run Sales by Item Detail frequently to see what your most popular items are as well as what’s not doing so well. Find it in the Report Center by clicking the Sales tab, selecting it, and clicking Run. If you don’t have a lot of data in QuickBooks yet, open one of the sample files that came with the software (File | Open Previous Company).

With the report open, click Customize Report in the upper left corner and see that there are four tabs here. Click on each to see what your options are.

• Display. Includes options like Report Date Range and Columns.
• Filters. What cross-section of your QuickBooks data do you want to see? Choose a filter, and the middle column will change to reflect your options there. You can add and remove as many filters as you’d like.
• Header/Footer. If you want to change the settings you established in Company Preferences, you can do so here.
• Fonts & Numbers. Contains display options.

When you’ve finished customizing your report, click OK to create it. Your modified report format will not be saved unless you click Memorize and give it a name.

You can customize and run many QuickBooks reports yourself, or reach out to a KraftCPAs QuickBooks Professional for help understanding how QuickBooks reports can help you make better business decisions.

© 2021