Incentive

Article Dean Dorton

Written by Kaydee Ruppert, Accounting and Financial Outsourcing Manager

One of the greatest compliments that I’ve ever received was this – “You brought a humanity to our accounting department that I didn’t know could exist.” Wow was I floored! Even though I’ve moved away from that workplace, as I work with new clients, I carry a commitment with me to not let that guy down. Leading an exceptional accounting/business function and being viewed as human should not be mutually exclusive!

People who are drawn to nonprofit organizations tend to put their hearts and souls into their work. We challenge ourselves daily to find better ways to advance the mission and make a difference. This common mission is our compass, providing direction as we conduct the business of our organization. We all have this in common and that’s a powerful truth to keep front of mind. When frustration creeps, remembering that we stand on this significant plot of common ground can make all the difference.

The accounting/business function should be like air for your organization. It’s necessary, life-giving, and can even be refreshing. If the air is stale and distracting, it’s difficult for the people in the room to give their best attention to the mission. Accounting information should be simple, straightforward, and relevant to your organization. As accounting and finance people, it’s our job to listen actively and unobtrusively to the whole room and open windows as needed, even before we’re asked to do so. With the financial basics taken care of, leadership can focus on strategy and outcomes instead of compliance.

A common problem in nonprofit accounting is clutter. Many nonprofit organizations don’t have the budget to ideally staff a best-practice accounting department, so instead, they tap individuals better suited for program or admin work to perform multiple roles. These individuals do the best they can, but often create financial reports akin to indecipherable hieroglyphics. Make time at regular intervals to step back and ask yourself if your financial process is effective for the leaders in your organization. Is your accounting function supporting your organization’s management, or are you expecting management to bend to the accounting function?

Managing the calendar is a challenge for us all, but follow through is an essential component in trust. Reports need to be available when their users need them, not when it’s most convenient for the accounting team. Identify the barriers to follow-though and tackle them systematically. Simple recognition of the importance of being dependable goes a long way in the authentic development of a team.

Inevitably we all make mistakes, we all miss deadlines, and we all occasionally miscalculate the importance of an ask to the person doing the asking. When this happens, biology takes over and suddenly you’re enveloped in “fight or flight” adrenaline. Pause, but don’t freeze. Resist becoming defensive or burrowing into your office shell. Seize on these situations as opportunities to demonstrate humility and your commitment to continuous improvement. Be quick to apologize and eager to learn. That vulnerability is exactly what makes us human. And once you’re assured status in the human race, you’ll have a much easier time getting things done well!

I would love to talk to you about your accounting and finance function. I have over 25 years of accounting, finance, and administrative leadership experience in the nonprofit sector. It is my passion and I’m here to help.

As a manager in Dean Dorton’s Financial & Accounting Outsource team, Kaydee Ruppert puts the humanity in accounting for numerous nonprofit organizations and ensures they have the financial data they need to advance their missions in our communities.

Kaydee Ruppert, CPA, MSA
Accounting and Financial Outsourcing Manager
kruppert@deandorton.com • 859.425.7730

Article Dean Dorton

Incentive stock options (ISOs) allow you to buy company stock in the future at a fixed price equal to or greater than the stock’s fair market value on the grant date. If the stock appreciates, you can buy shares at a price below what they’re then trading for. However, complex tax rules apply to this type of compensation.

Current tax treatment

ISOs must comply with many rules but receive tax-favored treatment:

  • You owe no tax when ISOs are granted.
  • You owe no regular income tax when you exercise ISOs, but there could be alternative minimum tax (AMT) consequences.
  • If you sell the stock after holding the shares at least one year from the exercise date and two years from the grant date, you pay tax on the sale at your long-term capital gains rate. You also may owe the 3.8% net investment income tax (NIIT).
  • If you sell the stock before long-term capital gains treatment applies, a “disqualifying disposition” occurs and any gain is taxed as compensation at ordinary-income rates.

So if you were granted ISOs in 2016, there likely isn’t any impact on your 2016 income tax return. But if in 2016 you exercised ISOs or you sold stock you’d acquired via exercising ISOs, then it could affect your 2016 tax liability. And it’s important to properly report the exercise or sale on your return to avoid potential interest and penalties for underpayment of tax.

Future exercises and stock sales

If you receive ISOs in 2017 or already hold ISOs that you haven’t yet exercised, plan carefully when to exercise them. Waiting to exercise ISOs until just before the expiration date (when the stock value may be the highest, assuming the stock is appreciating) may make sense. But exercising ISOs earlier can be advantageous in some situations.

Once you’ve exercised ISOs, the question is whether to immediately sell the shares received or to hold on to them long enough to garner long-term capital gains treatment. The latter strategy often is beneficial from a tax perspective, but there’s also market risk to consider. For example, it may be better to sell the stock in a disqualifying disposition and pay the higher ordinary-income rate if it would avoid AMT on potentially disappearing appreciation.

The timing of the sale of stock acquired via an exercise could also positively or negatively affect your liability for higher ordinary-income tax rates, the top long-term capital gains rate and the NIIT.

Planning ahead

Keep in mind that the NIIT is part of the Affordable Care Act (ACA), and lawmakers in Washington are starting to take steps to repeal or replace the ACA. So the NIIT may not be a factor in the future. In addition, tax law changes are expected later this year that might include elimination of the AMT and could reduce ordinary and long-term capital gains rates for some taxpayers. When changes might go into effect and exactly what they’ll be is still uncertain.

If you’ve received ISOs, contact us. We can help you ensure you’re reporting everything properly on your 2016 return and evaluate the risks and crunch the numbers to determine the best strategy for you going forward.

Article Dean Dorton

The Energy Policy Act of 2005 was enacted to provide immediate tax savings opportunities for energy efficient improvements. For commercial buildings, the Energy Policy Act of 2005 allows for a tax deduction of up to $1.80 per square foot for energy-efficient features of the building’s construction or retrofit under IRC §179D. Commercial buildings also include multi-family residential buildings with more than three stories. For instances where a non-taxpaying entity, such as the government or a municipality owns the building, the Energy Policy Act of 2005 allows for the primary designer, typically the architects and engineers, to claim the deductions. If the market downturn is a factor in current year profitability, this may still be beneficial due to the ability for certain small businesses to carry back net operating losses up to five years, thus, creating immediate cash benefits.

To claim a tax deduction under the Energy Policy Act of 2005, there are three different areas that qualify for a tax deduction of up to $.60 per square foot for each area:

  • Interior lighting systems
  • HVAC
  • Building envelope, e.g. the perimeter of the building including the roof, walls, windows, doors and floor/foundation

The deductions apply to buildings or systems placed in service or remodeled during calendar years 2006-2016. To qualify for those deductions, a project – whether an entire building or one of the three subsystems – must cut energy use compared to the limits specified in ASHRAE 90.1-2001.

Of the three areas available for these tax incentives, the one that is drawing the most attention is interior lighting systems. With substantial improvements in recent lighting product efficiency, most products currently available meet the requirements of the Energy Policy Act of 2005. The incentive for lighting systems can also be taken advantage of without energy modeling, which is required by the two other areas. Owners of commercial buildings have the opportunity to take advantage of the combination of savings from the energy efficient lighting and the savings from the tax incentives available. To demonstrate the economic benefit of a commercial building that qualifies for the maximum deduction for lighting systems, a 100,000 square foot building will generate an immediate federal tax deduction of $60,000 and in most states an additional $60,000 state deduction.

In order to qualify for these deductions for commercial buildings, a certification must be obtained by an engineer or contractor that is properly licensed as a professional engineer or contractor in the jurisdiction in which the building is located. Dean Dorton has the resources available to provide you with this certification and walk you through the cost/benefit analysis of taking advantage of these tax incentives.