Fall is here, and many not-for-profits are starting to think about their 2023 budgets. If your budget process is on autopilot, think about changing things up this year — particularly if you’ve experienced recent shortfalls or found your budget to be less resilient than you’d like. Here are some ways for you to rethink your budgeting:

A holistic approach

Your nonprofit may not always approach its budget efficiently and productively. For example, budgeting may be done in silos, with little or no consultation among departments. Goals are set by executives, individual departments come up with their own budgets, and accounting or finance is charged with crunching the numbers.

You’d be better off approaching the process holistically. This requires collaboration and communication. Rather than forecasting on their own, accounting and finance should gather information from all departments.

Under-budgeting tendencies

Another habit to break? Underbudgeting. You can improve accuracy with techniques such as forecasting. This process projects financial performance based on:

• Historical data (for example, giving patterns),
• Economic and other trends, and
• Assumptions about circumstances expected to affect you during the budget period (for example, a major capital campaign).

Forecasting generally takes a longer-term view than budgeting — say, five years versus the typical one-year budget. It also provides valuable information to guide budget allocations and strategic planning.

You also might want to do some budget modeling where you game out different scenarios. Consider your options if, for example, you lost a major grant or were (again) unable to hold big, in-person fundraising events.

If the COVID-19 pandemic has proven anything for nonprofits, it’s the necessity of rainy-day funds. If you don’t already have a reserve fund, establish one. If you do have a reserve fund, avoid the temptation to skip a budget period or two of funding for it.

More ideas

Another idea is to switch from your annual budget to a more flexible, rolling budget. You would still budget for four quarters but set certain intervals during which you’d adjust the numbers as circumstances dictate. Typically favored by organizations that experience volatile financial and service environments, rolling budgets can empower nonprofits to respond better to both crises and opportunities in a timely manner. Reach out for more ideas on crafting an accurate and effective budget.

Does your business need real estate to conduct operations? Or does it otherwise hold property and put the title in the name of the business? You may want to rethink this approach. Any short-term benefits may be outweighed by the tax, liability and estate planning advantages of separating real estate ownership from the business.

Tax implications

Businesses that are formed as C corporations treat real estate assets as they do equipment, inventory and other business assets. Any expenses related to owning the assets appear as ordinary expenses on their income statements and are generally tax deductible in the year they’re incurred.

However, when the business sells the real estate, the profits are taxed twice — at the corporate level and at the owner’s individual level when a distribution is made. Double taxation is avoidable, though. If ownership of the real estate were transferred to a pass-through entity instead, the profit upon sale would be taxed only at the individual level.

Protecting assets

Separating your business ownership from its real estate also provides an effective way to protect it from creditors and other claimants. For example, if your business is sued and found liable, a plaintiff may go after all of its assets, including real estate held in its name. But plaintiffs can’t touch property owned by another entity.

The strategy also can pay off if your business is forced to file for bankruptcy. Creditors generally can’t recover real estate owned separately unless it’s been pledged as collateral for credit taken out by the business.

Estate planning options

Separating real estate from a business may give you some estate planning options, too. For example, if the company is a family business but some members of the next generation aren’t interested in actively participating, separating property gives you an extra asset to distribute. You could bequest the business to one heir and the real estate to another family member who doesn’t work in the business.

Handling the transaction

The business simply transfers ownership of the real estate and the transferee leases it back to the company. Who should own the real estate? One option: The business owner could purchase the real estate from the business and hold title in his or her name. One concern is that it’s not only the property that’ll transfer to the owner, but also any liabilities related to it.

Moreover, any liability related to the property itself could inadvertently put the business at risk. If, for example, a client suffers an injury on the property and a lawsuit ensues, the property owner’s other assets (including the interest in the business) could be in jeopardy.

An alternative is to transfer the property to a separate legal entity formed to hold the title, typically a limited liability company (LLC) or limited liability partnership (LLP). With a pass-through structure, any expenses related to the real estate will flow through to your individual tax return and offset the rental income.

An LLC is more commonly used to transfer real estate. It’s simple to set up and requires only one member. LLPs require at least two partners and aren’t permitted in every state. Some states restrict them to certain types of businesses and impose other restrictions.

Proceed cautiously

Separating the ownership of a business’s real estate isn’t always advisable. If it’s worthwhile, the right approach will depend on your individual circumstances. Contact us to help determine the best approach to minimize your transfer costs and capital gains taxes while maximizing other potential benefits.

© 2022

Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

Note: Certain tax-filing and tax-payment deadlines may be postponed for taxpayers who reside in or have businesses in federally declared disaster areas.

Monday, October 3

The last day you can initially set up a SIMPLE IRA plan, provided you (or any predecessor employer) didn’t previously maintain a SIMPLE IRA plan. If you’re a new employer that comes into existence after October 1 of the year, you can establish a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence.

Monday, October 17

• If a calendar-year C corporation that filed an automatic six-month extension:
  • File a 2021 income tax return (Form 1120) and pay any tax, interest and penalties due.
  • Make contributions for 2021 to certain employer-sponsored retirement plans.

Monday, October 31

• Report income tax withholding and FICA taxes for third quarter 2022 (Form 941) and pay any tax due. (See exception below under “November 10.”)

Thursday, November 10

• Report income tax withholding and FICA taxes for third quarter 2022 (Form 941), if you deposited on time (and in full) all of the associated taxes due.

Thursday, December 15

• If a calendar-year C corporation, pay the fourth installment of 2022 estimated income taxes.

Contact us if you’d like more information about the filing requirements and to ensure you’re meeting all applicable deadlines.

© 2022

Roth&Co’s latest video series: Real Estate Right Now.

Presented by Alan Botwinick and Ben Spielman, co-chairs of the Roth&Co Real Estate Department, this series covers the latest real estate trends and opportunities and how you can make the most of them. This episode discusses more critical valuation metrics used to calculate the potential of an investment property.

Watch our short video:

In our last video we talked about three useful tools to help calculate the potential of an investment property: GRM (Gross Rent Multiplier), PPU (Price Per Unit) and Cap Rate (Capitalization Rate). Moving forward, here are additional metrics that can help an investor dig even deeper.

IRR

The Internal Rate of Return (IRR) is a metric used in financial analysis to estimate the profitability of a potential investment. It represents the annual rate of return on your investment, over the life of that investment. The higher the IRR, the healthier the return.

The IRR is calculated by computing the net present value of the investment. The Net Present Value (NPV) is the amount that the investment is worth in today’s money. To successfully analyze the data, future values must be considered against today’s values. Why? Because today’s money is more valuable than the value of the same money later on. This is also known as the time value of money.

When we calculate the IRR, we solve for “a rate”, so that the Net Present Value of the cash outflows and inflows  is  zero. That “rate” is the IRR. We achieve this by plugging in different interest rates into our IRR formula until we figure out which interest rate delivers an NPV closest to zero. Computing the Internal Rate of Return may require estimating the NPV for several different interest rates. The formulas are complex, but Microsoft Excel offers powerful functions for computing internal return of return, as do many financial calculators.

Simplified, here is how it works:

If you invest $10,000 in year one and receive an $800 return annually through Year 5, then exit the investment for $15,000, you would calculate the IRR as follows:

This scenario yields an IRR of 18%.

Here’s a similar scenario that yields a different result:

This scenario yields an IRR of 15%

Which scenario provides a better return? Looking at the bottom line is deceptive. By calculating the IRR for both investments, you would see that the IRR on the second investment, 15%, is a nice return. However, the first investment, with an 18% IRR, would be a better use of your money.

CoC Return

The Cash-on-Cash Return tells the investor how much cash the investment will yield relative to the cash invested. It measures the annual return the investor made on a property after satisfying all debt service and operating costs. This is a helpful analytic for many real estate investors who commonly leverage investments by taking out mortgages to reduce their cash outlay. The metric is the most helpful when liquidity during the investment period is important to the investor. One of the most important reasons to invest in rental properties is cash flow, and Cash-on-Cash return measures just that. Put simply, Cash-on-Cash return measures the annual return the investor made on the property after satisfying all debt service and operating costs.

Here is a simple CoC Return example:

Let’s say you buy a multifamily property for $200,000, putting down a $40,000 deposit, and assuming a $160,000 mortgage. Your gross rents are $30,000 monthly, with $20,000 of operating expenses. Additionally, you have $9,000 monthly debt service payment comprised of $7,000 interest and $2,000 principal. Because principal payments are not an expense, Net income is $3,000 annually.

However, when calculating Cash-on-Cash, you consider the debt service as well, bringing your return to $1,000 monthly, or $12,000 annually.

Comparing your investment’s yearly net income of $12,000 to the $40,000 down payment, you have a Cash-on-Cash annual return of 30%. While there is no specific rule of thumb for what constitutes a good return rate, the general consensus amongst investors is that a projected Cash-on-Cash return between 8% to 12% implies a worthwhile investment.

Financial metrics are important and useful tools that can help an investor make smart, informed decisions. Whereas any one metric may have limitations, by considering a combination of metrics commonly used for comparing, in addition to tracking performance or value, an investor can target a strategy and analyze risk in a potential investment opportunity.

This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.

On Monday, December 20th, Roth&Co and Korsinsky & Klein hosted a webinar detailing important employment laws, including discrimination laws, leave laws and social media policies. It was presented by Avi Lew, Esq., partner at Korsinsky & Klein, and moderated by Chaya Salamon, Director of Human Resources at Roth&Co. Below is a detailed recap of the webinar. You can also watch the full video recap here.

Federal, State and City Employment Discrimination Laws

Avi’s comprehensive overview of diverse federal, state and city employment laws illustrated how complex and illusive they are and how they impact every employer. Whether yours is a small or large business, as an employer, you need to be educated, knowledgeable, and have access to competent legal support when it comes to employee related laws.

The primary federal employment discrimination laws which were discussed include: Title VII of the Civil Rights Act; the Americans with Disabilities Act; the Age Discrimination in Employment Act; the Equal Pay Act; the Fair Labor Standards Act; the Family and Medical Leave Act; and the Older Workers Benefit Protection Act.

These laws prohibit employers from discriminating against employees on the basis of – among other factors – color, race, religion, gender, age, national origin, marital status and disability. The list is long and constantly expanding, as is the definition of ‘employee.’ Title VII of the Civil Rights Act of 1964 has expanded to include discrimination by gender identity and now defines even independent contractors as ’employees.’

Employee Handbooks

Providing an employee handbook to your employees is no longer optional – it is required by law. An employee handbook is a vital resource in an employee claim of discrimination or harassment. An employee handbook protects the employer from liability and educates employees about the business’ policies and procedures.

An employee handbook is not a document you want to write yourself; using the wrong language can inadvertently violate a law or create a contract with the employee. Don’t include policies that your business doesn’t actually adhere to, and consider including provisions that address restrictive covenants, alternative dispute resolution terms and cyber-security obligations.

It is vital to document that your employees actually read and received your business’ employee handbook, which will be helpful to you in the event of future employee claims against you. Reviewing and updating your company’s employee handbook annually is necessary to ensure that you have policies and procedures in place before an issue arises.

Social Media Policies

Do you use social media sites to screen applicants? Have you ever rejected a potential employee because of something you found online? The National Labor Relations Act protects the rights of employees when it comes to certain work-related conversations conducted on social media, such as Facebook and Twitter.

This is a very grey area of the law and employers are advised to protect themselves by developing a clear policy that serves the company’s legitimate business interests without compromising the rights of its employees. It is important for the company to regularly review handbooks for potential violations and encourage management training.

Reasonable Accommodation

This is an important term that effects both employers and employees. It is usually unlawful to refuse to provide reasonable accommodation to someone with disabilities or to someone who claims hardship due to his religious belief. In order to avoid a charge of discrimination, an employer must be able prove that making accommodations to such an employee would fundamentally alter the nature of the business or cause it an undue burden. An undue burden is defined as a significant difficulty or expense.

Discrimination laws aren’t limited to federal law. For example, the NYC Human Rights law is one of the most powerful anti-discrimination laws in the country – even stronger than federal law. If you employ four or more employees (which includes independent contractors), this law applies to you.

The threshold for making a claim of discrimination under this law is very low and makes it easy for an employee to sue. Under the NYC Human Rights law, litigation is easily triggered and often becomes prolonged and expensive.

Small and Large Companies

Employment laws apply to small and large companies and it is the employer’s responsibility to be aware of its business’ obligations. Here are a few examples:

• Title VII discrimination laws apply to employers with 15 or more employees.

• The federal Fair Labor Standards Act sets standards for wages and overtime pay. It applies to all employers, regardless of how many employees they have.

• The ADA (American with Disabilities Act) and the Pregnancy Discrimination Act guards against discrimination for the disabled and for pregnant employees. It applies to businesses with 15 or more employees.

• The Age Discrimination and Employment Act (ADEA) protects seniors and applies to employers with over 20 employees.

• The Family and Medical Leave Act of 1993 (FMLA) is a federal law requiring covered employers to provide employees with job-protected, unpaid leave for qualified medical and family reasons. Both the FMLA and the Affordable Care Act apply to employers with over 50 employees.

• The NYC Paid Safe and Sick Leave Law provides employees with mandated sick leave time and requires that New York City employers provide up to 40 hours of paid leave each calendar year (or up to 56 hours if the company has 100 employees or more).

• The Stop Sexual Harassment in NYC Act requires all employers located in New York City with 15 or more employees to conduct an annual anti-sexual harassment training for all employees, supervisors and managers.

Employers have a responsibility to safeguard and protect both their businesses and their employees. When a business delays addressing an employment issue, it will most likely intensify, resulting in prolonged and expensive litigation that will damage the business and erode its work environment. Conversely, when an employment issue is addressed promptly and at its source, it can be remediated much more easily, avoiding costly violations, penalties and litigation. Employers must be vigilant in creating and documenting clear policies, abide by those policies and educate management to report issues promptly. Lastly, employers must be mindful of the constant changes in employment law that can impact their business, their employees and their bottom line.

This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.