Qualified Charitable Distribution – What You Need to Know

Qualified Charitable Distribution – What You Need to Know

If you are age 70 ½ or older, IRS rules require you to take a required minimum distribution each year from your tax-deferred retirement accounts. This additional taxable income may push you into a higher tax bracket and reduce your eligibility for certain tax credits and deductions. To eliminate or reduce the impact of required minimum distribution income, you may want to consider making a qualified charitable distribution.

A qualified charitable distribution is a direct transfer of funds from your IRA to a qualified charity. Amounts distributed as a qualified charitable distribution may be counted toward satisfying your required minimum distribution for the year and be excluded from your taxable income.

An eligible qualified charitable distribution must meet the following conditions:

  • Be at least 70 ½
  • The funds must come out of your IRA by your required minimum distribution deadline – typically December 31
  • Funds must be transferred directly from your IRA to one or more qualified charities
  • Qualified charitable distributions are limited to the amount that would otherwise be taxed as ordinary income
  • The maximum annual distribution amount qualifying a qualified charitable distribution is $100,000. However, if you are a joint tax filer, both you and your spouse may make a $100,000 qualified charitable distribution from your own IRAs.

Qualified Charitable Distributions & Required Minimum Distributions

You are allowed to make a qualified charitable distribution in excess of your required minimum distribution amount, up to $100,000. However, any amount donated above your required minimum distribution does not count toward satisfying a future year’s required minimum distribution. If your qualified charitable distribution does not fulfill your required minimum distribution for the year, you will need to withdraw additional funds to satisfy your required minimum distribution.

Example: You take a required minimum distribution in February, and then in November decide you want to do a qualified charitable distribution. You cannot retroactively deem the February distribution to be a qualified charitable distribution. You may still make the qualified charitable distribution and exclude this distribution from taxable income, but you will still need to include the February distribution as income.

If you take a regular withdrawal from an IRA and use it to make a charitable contribution, you still need to include this required minimum distribution in your taxable income. In order to meet the requirements of a qualified charitable distribution, it must be made directly to the charitable organization. A distribution in the form of a check must be made payable to the organization.

Qualified Charitable Distributions & Charities

For purposes of making a qualified charitable distribution, a eligible charity is any 501(c)(3) organization. This DOES NOT include private foundations or donor-advised funds. You are not allowed to receive any benefit in return for your qualified charitable distribution.

Example: If your donation covers tickets to a gala, your gift would not qualify as a qualified charitable distribution.

The charitable organization must cash your check before year-end for the qualified charitable distribution to satisfy your required minimum distribution. If you are planning to use a qualified charitable distribution as part of your year-end giving strategy, ensure you allow plenty of time for the charity to cash the check. Make certain you receive acknowledgement of the donation because you will need this to claim a deduction for a regular charitable contribution.

Qualified Charitable Distributions & Brokerage Accounts

Brokerage firms process each qualified charitable distributions differently. Contact your broker to learn exactly how to make a qualified charitable distribution from your account. The default option on many IRA distributions is to have tax withheld since most distributions are considered taxable income. If you are making a qualified charitable distribution, confirm with your broker you are not automatically having tax withheld, because the distribution is not taxable.

Questions?

Create a strategy. Gain value beyond the next tax return. 

Expense Creep – 3 Simple Steps to Improve Business Profitability

Expense Creep – 3 Simple Steps to Improve Business Profitability

As a time goes by, normal expenses for a business tend to “creep up” and begin to erode a portion of profits. Has this happened to you and your business?

3 simple steps to improve the profitability of your business:

1. Identify general ledger expenses as one of the following:

  • Discretionary. These are expenses that could be eliminated and it would not directly affect the operations of the business.
    • Examples – Entertainment/tickets, sponsorships and 401(k) match.
  • Controllable. These are expenses monitored by management and can be controlled to increase profitability. 
    • Examples – Supplies, office related expenses and labor. 

Management of these expenses is an important area to examine for expense creep.

  • Non-controllable Expenses. All remaining expenses should be classified in this bucket. They are not discretionary and cannot be controlled by management.

2. Now that you have properly identified expenses, we recommend examining each of the discretionary expenses and determining if the incurrence is adding value to the business. If not, consider either eliminating or reducing the expense amount moving forward.

3. Finally, you should review each of the controllable expenses. Identify what is the appropriate amount or percentage each expense should maintain. We recommend creating a system to monitor and report expenses and compare them to the pre-determined goal.

“What gets measured gets managed, and what gets managed gets improved.”

This simple exercise is a very effective way for your business to better manage expenses and reduce the effect of expense creep. If you would like assistance implementing a program such as this, please contact a Smith Schafer professional.

Free Download: Bookkeeping Class Presentation

Free Download: Bookkeeping Class Presentation

We teamed up with CEDA to offer a free bookkeeping class to local businesses on August 6, 2019! Smith Schafer Principal, Trisha White, discussed:

  1. Why bookkeeping is important
  2. Choosing software
  3. Basics of hiring employees
  4. Budgeting and why it’s important
  5. Accounting methods (cash vs accrual)

Enter your email below to download your copy of the presentation.

FREE Presentation Download: Understanding Revenue Recognition & Leases

FREE Presentation Download: Understanding Revenue Recognition & Leases

Do you understand the impact of the new accounting standard on your business? Revenue recognition has been around since 2010, when the first draft of the new standard was released. Three exposure drafts and numerous accounting standards later, it will be required to recognize income under the five-step approach.


We hosted a free breakfast seminar event at the Golden Valley Country Club on July 30 and attendees learned…

1. GAINED A BETTER UNDERSTANDING.

The new revenue accounting standards requires a consistent, single model for recognizing revenue and disclosure requirements on financial statements. This new standard was effective January 1, 2019 for all industries.

2. HOW TO PLAN FOR CHANGES.

In 2020, nearly all leases will need to be disclosed on the balance sheet. This may have a major affect on business banking relationships and access to new capital.

3. RECEIVED GUIDANCE ON THE IMPACTS.

At this educational seminar, we provided attendees with awareness and advice on these key issues and how they may impact business decisions.

Don’t miss out on our upcoming events – click to see what’s next!

Enter your email below to download a copy of the seminar presentation.

Minnesota Wage Theft and Employer Record Keeping Law

Minnesota Wage Theft and Employer Record Keeping Law

On May 30th, Minnesota enacted a new Wage Theft Law amending existing state labor laws adding significant recordkeeping and notice requirements for all Minnesota employers. The new law is effective today, July 1, 2019 with penalty enforcement effective as early as August 1, 2019. This means additional recordkeeping and changes to employer paystubs are required starting July 1, 2019.

Wage Theft

The law will make it a crime to commit wage theft, which could be any of the following actions by an employer with intent to defraud:

  • Failing to pay an employee all wages, salary, gratuities, earnings, or commissions
  • Require an employee to provide a wage receipt greater than the wages actually paid
  • Demand an employee a refund or rebate from wages owed to the employer
  • Making it appear that the wages paid were greater than the amount actually paid

The law allows for fines of up to $100,000 and 20 years in prison, if convicted.

Recordkeeping and Additional Wage Statements Requirement

Earnings Statements (Paystubs) Include New Information

The law adds additional requirements to an employee earnings statement. Paystubs will now be required to include these additional items:

  • Employee’s rate or rates of pay and basis thereof, including whether the employee is paid by the hour, shift, day, week, salary, piece, commission or other method.
  • Allowances, if any, claimed for permitted meals and lodging.
  • Employer’s telephone contact.
  • Physical address of employer’s main office or principal place of business and a mailing address, if different.

Signed Wage Statement for Each Employee

Previous to this enactment there was not a requirement to have a signed wage statement. The law creates a new wage statement which requires employers to provide a new employee with written notice of certain items at the start of employment:

  • Employee’s employment status and whether an employee is exempt from minimum wage, overtime and other state wage and hour laws, and on what basis. 
  • Number of days in the employee’s pay period and the regularly scheduled payday. 
  • Date the employee will receive the first payment of wages. 
  • Employee’s rate or rates of pay and the basis thereof, including whether the employee is paid by the hour, shift, day, week, salary, piece, commission or other method and the specific application of any additional rates. 
  • Allowances, if any, that may be claimed for permitted meals and lodging. 
  • Provision of paid vacation, sick time or other paid time off (PTO), how the paid time off will accrue and terms for its use. 
  • A list of deductions that may be made from the employee’s pay. 
  • Employer’s legal name and the operating name, if different. 
  • Physical address of employer’s main office or principal place of business and a mailing address, if different. 
  • Employer’s telephone number. 

This notice must be signed by the employee and kept by the employer.  

Written Notice Required When a Change is Made

The law requires an employer to provide written notice to an employee whenever changes are made to the original written notice. Including a change of pay rate, change of PTO and other payroll and benefit changes.

Wage Statements for Existing Employees

The law does not require employers to provide and obtain signed wage statements from existing employees. However, the Department of Labor strongly encourages employers to provide the written notice with the information required under the new law to all employees when the law takes effect. Employers are required to provide written notice to all employees when changes are made to items included in the wage statement. 

Employers Keep Additional Records

The law requires employers to keep additional employment records for a minimum of three years. The new requirements include:

  • Each employee’s hours worked each day and week, including, for all employees paid at piece rate, the number of pieces completed at each piece rate.
  • A list of personnel policies with brief descriptions of each policy that were provided to each employee, including the date the policies were given.
  • A signed copy of the new wage statement which must include the items noted above.

Other Provisions

The law also includes additional provisions (not discussed in detail here) related to timing of payments to employees for wages, salary, gratuities and commissions. Restrictions on retaliation against employees for asserting their rights as well as broadened enforcement authority for the Attorney General.

For additional information on the wage theft legislation seek legal counsel or the Minnesota Department of Labor and Industry website. The website has employer guides, sample notices and FAQ’s related to the law changes. 

401(k) Plan Tips from a CPA Firm

401(k) Plan Tips from a CPA Firm

A 401(k) plan is one of the best options available to help employees save for retirement. However, these plans will only be successful if managed properly. Below are tips for effective and efficient management of your company’s 401(k) plan.

Plan Management Responsibilities

Fiduciary Responsibilities

  • As fiduciaries, you are responsible for the best interest of plan participants. The plan should have an oversight group who meets regularly to review plan features, monitor service providers, discuss investment options and review processes related to the plan. Minutes of these meetings should be documented and maintained with other audit documentation.

Over Reliance on Service Providers

  • Plan management and/or trustees are required to monitor the management and performance of all service providers with which the plan has contracted. Plan management and/or trustees should make sure all responsibilities in all areas of the plan are clearly understood and stated between the plan fiduciaries and the plan service providers.

Plan Effectiveness

  • It is important to educate your employees on the benefits and provisions of the plan. Knowing all of the options makes it easier for employees to enroll in the plan and to subsequently increase their savings amount.

Fidelity Bond Coverage

  • The Department of Labor requires those who handle retirement plan funds must be covered by a fidelity bond. This is not the same as the plan sponsor’s crime or D&O policy. The fidelity bond covering the plan, must specifically name the plan as a covered party, cannot have a deductible, and must cover at least 10 percent of plan assets (with a maximum of $500,000 of coverage). The bond must also be issued by an authorized surety company. A list of these approved companies may be found on the Department of Labor website.

Plan Operations

Investment Policy Statement

  • Your plan should maintain a written investment policy statement. This statement provides the general investment goals and objectives of the plan and describes the strategies the investment manager should employ to meet these objectives.

Discretionary Contributions

  • Plan management should document any discussions and eventual decisions regarding discretionary employer contributions to the plan. Generally, this issue should be addressed annually.

Use of Forfeitures

  • Forfeitures are typically used to reduce future employer contributions or pay reasonable plan expenses. Forfeitures may also be allocated among remaining participants as an additional contribution. The plan document will specify how forfeitures are to be used. Plan management should ensure forfeitures are utilized on a regular basis and in accordance with the plan document.

Required Minimum Distributions

  • Required minimum distribution rules require a participant to withdraw a portion of his or her funds from the plan at a certain rate once they reach the later of age 70½ or retirement. Plan management should ensure participants and former participants are aware of this requirement so the required minimum distributions are timely paid.

Retirement Plan Audits

Personnel Files

  • One of the focal areas of any retirement plan audit is the review of personnel files. Plan management should ensure these files are complete, including hire and termination date, pay rates, loan and hardship withdrawal support, and any other important benefit elections. Files should also be clean, organized and consistent in order to ensure documentation is maintained to be in compliance with the plan document and all participants are treated consistently.

Transaction Documentation

  • Two common areas where documentation can be lacking are hardship withdrawals and loan withdrawals. Hardship withdrawals must be specifically allowed by your plan document and must be for an immediate and heavy financial need of the employee. Hardship withdrawals are meant to be a last resort after all other resources have been used. Plan management is responsible for verifying these criteria and maintaining any documentation related to these withdrawals.
  • Loan withdrawals must also be specifically allowed by your plan document. These withdrawals are commonly processed by a plan’s third party administrator; however, plan management is still responsible for monitoring the status of these loans for default or early payoff. All documentation relating to loan withdrawals should also be maintained by plan management.

Questions?

Retirement plan compliance is complex, requiring help from trusted professionals who understand the challenges, rewards and opportunities associated with effective retirement planning. For more information about the above tips or to learn about how we can help, please contact a Smith Schafer professional.