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Nonprofit organizations often shine as beacons of hope, actively making a difference in their communities. However, they also encounter serious financial hurdles. This is particularly true for small nonprofits, which may lack the robust resources and expertise seen in larger organizations. Small nonprofits also suffer from each incident of fraud being a organization killing incident. According to the Association of Certified Fraud Examiners (ACFE), 9% of all fraud happens within nonprofits at a median loss of $75,000. To protect the financial health of your nonprofit, it's crucial to have strong internal controls and proper segregation of duties in place. In this guide, we will explore the significance of these principles for small nonprofit boards. We will outline best practices, common pitfalls, and actionable steps to strengthen your organization against financial mismanagement. Understanding Internal Controls Internal controls are a system of processes and practices designed to ensure the accuracy of financial and accounting information, foster accountability, and prevent fraud. For nonprofits, effective internal controls are especially important given their dependence on donations and grants. By establishing a well-defined system of internal controls, nonprofit boards can ensure that funds are utilized properly, reflecting both donor intentions and legal obligations. Key Components of Internal Controls Policies and Procedures : Written policies form the backbone of effective internal controls. These policies should encompass areas such as fund management, donation handling, and financial reporting. For instance, a clear policy could dictate the steps for processing donations over $1,000, ensuring accountability. Financial Reporting : Regular and precise financial reporting is vital. It enables boards and stakeholders to gauge the organization’s financial well-being. Audits : Conducting regular audits, whether internal or external, is essential. Audits serve as a crucial check, providing unbiased assessments of financial practices and adherence to policies. In Illinois, Nonprofits with donations between $300,000 and $500,000 are required to undergo a financial statement review, and all organizations above $500,000 donations are required to get an audited financial statement. Monitoring : Continuous oversight of financial activities is essential. By conducting at a minimum quarterly reviews, organizations can quickly identify discrepancies or irregularities in their finances. The Importance of Segregation of Duties Segregation of duties (SoD) is another key aspect of financial integrity. It involves dividing responsibilities among different individuals to minimize the risk of errors or fraud. While smaller nonprofits may struggle with SoD due to limited staffing, practical strategies can still be applied. Risks of Insufficient Segregation Inadequate segregation of duties can expose organizations to various risks: Fraud : Without proper checks on access to funds, individuals could misappropriate resources without detection. Errors : Oversight gaps can lead to financial misstatements resulting from mistakes, deliberate or otherwise. Poor Accountability : Blurred lines in responsibilities reduce accountability, making it challenging to trace financial actions back to individuals. Best Practices for Implementing Internal Controls and Segregation 1. Define Roles Clearly Everyone involved should have a precise understanding of their financial responsibilities. For example, assign specific individuals to handle donations, maintain records, and execute audits. This clarity helps build accountability and transparency. 2. Implement Dual Approval Processes Introduce a dual approval system for significant transactions. For instance, require two signatures on checks over $500 or both the finance director and executive director must approve expenses exceeding a defined limit. This practice can deter potential fraudulent activities. 3. Use Technology Wisely Embrace technology to enhance financial reporting and record-keeping. Accounting software can automate processes, improve accuracy, and provide built-in controls to minimize errors. Features like invoicing automation can save staff up to 25% of their time on financial tasks. 4. Conduct Regular Reviews Hold regular financial reviews to keep income and expenses in check against budgets. Monthly meetings focused on finances can identify inconsistencies and keep staff informed about the organization's financial status. 5. Educate Staff and Board Members Organize training sessions focusing on the importance of internal controls and segregation of duties. This investment in education fosters a culture of accountability. Engaging workshops can help all team members recognize their role in upholding financial integrity. Common Challenges for Small Nonprofits Despite the necessity for strong financial oversight, small nonprofits face unique obstacles: Limited Resources : Many small nonprofits operate within constrained budgets and may struggle to assign separate individuals to distinct financial roles. Volunteer Reliance : Organizations often depend on volunteers who lack formal financial training, complicating the implementation of strict financial controls. Lack of Awareness : Some board members may not fully grasp their role in safeguarding the organization’s finances, leading to complacency about financial oversight. Overcoming Challenges with Commitment and Creativity While these issues may seem daunting, there are effective strategies to address them: Part-Time or Shared Roles : Hiring part-time financial staff or sharing resources with another nonprofit can enhance your financial structure. Utilize Volunteer Skills : Engage volunteers with financial expertise to help establish or improve internal controls. Fundraising for Financial Support : Launch fundraising initiatives designed to boost financial health, including potential hires for financial management roles. Volunteers come together, demonstrating teamwork and unity, prepared to create a positive impact and help the organiation. The Role of the Board in Ensuring Financial Integrity The board of a nonprofit carries a vital responsibility in maintaining financial integrity. This involves several key actions: Setting the Tone : Establish a culture of transparency and accountability. This can start by discussing financial policies in every board meeting. Regular Discussions : Keep financial topics on meeting agendas to remain focused on expenditures and compliance. Engaging in Risk Management : Assess risks associated with financial management regularly and develop plans to mitigate them effectively. Ensuring Compliance : Remain updated on regulations affecting nonprofit finances. Maintaining compliance not only protects the organization’s reputation but also safeguards its funding. Final Thoughts In the complex landscape of nonprofit finance, the principles of internal controls and segregation of duties are indispensable, particularly for small nonprofits. By implementing best practices, clearly defining roles, and ensuring thorough monitoring, organizations can shield themselves from the threats of fraud and financial mismanagement. Board commitment to a culture of accountability and transparency is paramount. With determination, proactive planning, and ongoing training, small nonprofits can secure their financial futures and pursue their missions with confidence. Ultimately, the strength of any nonprofit lies in both its mission and its financial integrity. By prioritizing internal controls and segregation of duties, small nonprofits can safeguard their resources and ensure long-term sustainability.

The Tax Cuts and Jobs Act (TCJA), passed in December 2017, has influenced the economic landscape for small businesses in the United States significantly. While the act brought about remarkable changes, many of its provisions are set to expire or "sunset" after 2026. This blog aims to dissect these sunsetting elements and their impact on small business owners. With careful planning and strategic foresight, small business owners can navigate these changes effectively. Overview of the Tax Cuts and Jobs Act The TCJA introduced several tax reforms aimed at stimulating economic growth and providing tax relief. Notably, corporate tax rates were slashed, an increased standard deduction was introduced, and various deductions and credits were altered. However, with the enactment of the TCJA, many provisions were designed with a preliminary end date, meaning their benefits may not last indefinitely. Understanding these sunsetting provisions is critical for small business owners, as it allows for the anticipation of potential tax increases and strategic planning. Sunsetting Provisions Overview To grasp the implications of the sunsetting provisions, small business owners must understand which benefits will come to an end after 2026. Some of the key components include: Individual Tax Rates The TCJA significantly lowered income tax rates across various brackets. After 2026, these rates are scheduled to revert to their previous, higher levels unless Congress intervenes. Qualified Business Income Deduction (QBI) under Section 199A This deduction allowed many small business owners to deduct up to 20% of qualified business income, significantly reducing tax liabilities. Once the sunsetting occurs, small business owners will lose this valuable deduction. Bonus Depreciation The provision allowed business owners to deduct a significant portion of the costs of qualifying assets immediately. Currently in 2024, businesses can deduct 60% of eligible asset costs, which will decrease by 20% each year until being 0% for assets placed in service in 2027. Each of the above provisions plays a crucial role in maximizing profitability for small business owners. Their expiration could lead to increased tax burdens and a reassessment of financial strategies. Implications for Small Business Owners The potential sunsetting of the TCJA provisions has several implications: Increased Tax Liability The expiration of these tax benefits will likely result in a higher tax code burden for many business owners. As income tax rates revert to their previous levels, small businesses should prepare for a potential increase in overall tax liability. Strategic Planning Required With impending changes to deductions and rates, strategic planning becomes more critical than ever. Small business owners should work closely with a Tax Accountant to analyze current financial strategies and adjust them for the future. By reviewing projected income, planned capital expenditures, and potential changes in business models, owners can anticipate their tax liabilities more effectively. Considering Future Investments Investing in equipment or capital assets now may yield valuable tax benefits if done before the sunset deadline. Owners should evaluate their growth plans and consider whether to accelerate investments to take advantage of current depreciation rules, or to defer investment until a later date to try and decrease the increased tax liability in these future years. Navigating Tax Changes Given the impending changes, navigating these tax provisions will require a proactive approach: Stay Informed Small business owners must stay updated on any legislation that might alter the timelines or details around the sunsetting provisions. Engaging in tax forums, subscribing to financial updates, or participating in local business organizations can provide valuable insights. Consult Professionals Small business owners should consult a qualified Tax Accountant with expertise in the TCJA and its implications for small businesses. With personalized guidance, owners can develop tax strategies that align with their business goals and mitigate potential liabilities. Plan for Best Outcomes Using scenario analysis can lead to informed decision-making. By considering various business scenarios—projected income levels, potential tax rates, and capital expenses—business owners can tailor their strategies to achieve optimal results. A modern workspace waiting for planning sessions. Conclusion The impending sunsetting of provisions established by the Tax Cuts and Jobs Act requires attention from small business owners. Understanding how these changes will impact personal and business finances is crucial. By actively engaging in strategic tax planning, staying informed, and consulting with financial professionals, small business owners can navigate this transitional period effectively. With proactive planning, business owners can prepare themselves for a landscape that may bring challenges but can also unveil opportunities for growth and success. As the year 2026 comes closer, now is the time to assess and adjust business strategies accordingly. Embrace the advantages of existing provisions while remaining adaptable to ensure sustainability through the upcoming changes. At Pathfinder, we are able to help you plan for these changes to ensure you are optimizing your business tax planning for the changes to come. So feel free to reach out to Brendan to ensure your business is optimizing for the potential sunsetting of this landscape changing tax provision.

Small business owners often wear many hats, from marketing to customer service, and perhaps the most challenging of all: managing finances. While many entrepreneurs initially choose to handle their own accounting to save money, this decision can lead to unforeseen expenses and complications. What starts as a cost-saving measure might become a trap of hidden costs that can affect the health of your business. In this blog post, we will explore the often-overlooked financial burdens of DIY accounting and provide insights for small business owners on how to navigate this complex landscape. Understanding the Allure of DIY Accounting For many small business owners, the appeal of DIY accounting is undeniable. The idea of saving on bookkeeping fees while gaining a hands-on understanding of their financials seems practical. However, as the adage goes, "you get what you pay for." When business owners attempt to manage their own bookkeeping, they often underestimate the complexity of accounting principles and tax laws. This ignorance can lead to mistakes that may result in costly penalties or missed deductions. Moreover, the time spent managing finances often takes away from valuable time that could be better spent on growth and customer relations. Time is Money: The Opportunity Cost of DIY Accounting One of the most significant hidden costs of DIY accounting lies in opportunity costs. Time invested in bookkeeping is time not spent on essential business activities such as marketing, product development, or building customer relationships. For small business owners, every hour counts. Instead of engaging with customers or improving services, countless hours might be wasted on reconciling accounts, tracking expenses, and understanding tax obligations. The untapped potential of this time can result in a direct impact on sales and revenue. The Risk of Errors: Accounting Mistakes that Can Cost You Mistakes in bookkeeping can have severe repercussions. Common errors include misrecording expenses, failing to reconcile accounts, or even overlooking tax deadlines. These issues could lead to potential audits, fines, and an overall lack of financial clarity. Few small business owners realize how detrimental small mistakes can be to their financial health. A misspelled supplier name or an incorrect calculation can snowball into larger problems, including legal implications. The Hidden Costs of Software and Training While many entrepreneurs turn to accounting software to facilitate DIY bookkeeping, these tools come at a cost. The initial expense of software might seem justifiable, but there are additional costs associated with training and updates. To effectively use accounting software, business owners often need to spend time learning how to utilize it efficiently. Failing to do so can lead to ineffective use of the software, negating its advantages. Furthermore, software updates, licenses, and subscriptions can add up over time, contributing to the financial burden. The Tax Time Crunch: Added Stress and Financial Implications Tax season can cause significant stress for small business owners who manage their own accounting. Without the expertise of an accountant, it’s easy to misinterpret deductions or fail to capitalize on available credits. The complexity of tax laws is daunting, even for seasoned professionals. Mistakes made during tax preparation can lead to scrutiny from tax authorities and potential audits. Compounding this stress is the time limitation—many business owners scramble to gather necessary documents with looming deadlines. Lack of Financial Insight: Missing Out on Strategic Decisions Proper financial management goes beyond mere number-crunching. To make informed decisions, business owners need to interpret their financial data effectively. DIY accounting often results in a lack of understanding of key performance indicators (KPIs) that can guide business strategy. When accounting is unprofessional, business owners may overlook valuable insights into cash flow, profitability, and operational efficiency. Conversely, investing in professional bookkeeping services can provide analytical insights that can inform growth strategies and financial planning. The Final Cost: Emotional Toll on Business Owners Lastly, DIY accounting can take a significant emotional toll on business owners. Balancing finances can lead to feelings of overwhelm and anxiety, negatively affecting both mental well-being and productivity. Many entrepreneurs grapple with financial fear—worries about cash flow, tax compliance, or unnecessary expenses can distract from the passion that fueled their entrepreneurial journey. Investing in professional accounting services can alleviate these stresses and restore focus on core business activities. Organized chaos: a stack of binders filled with paperwork, essential for meticulous bookkeeping. Conclusion: Weighing Your Options for Financial Management Ultimately, small business owners must weigh the potential savings of DIY accounting against the hidden costs that could hinder their success. While tackling bookkeeping on your own may seem like a smart choice at first, the reality is often more complicated. Investing in professional bookkeeping or accounting services may initially appear as an added expense; however, it can deliver greater value in the long run. From improved accuracy to reduced stress and more partial focus on growth, the benefits can far outweigh the costs. By taking a proactive approach to financial management, small business owners can steer clear of the hidden costs of DIY accounting and instead focus on achieving their business goals. Whether you decide to harness the affordability of DIY or invest in professional services, understanding the true costs involved is crucial for navigating your path to success.

Beneficial Ownership Reporting is dead! Well not really, some wish. The Eastern District Court of Texas paused the requirement for Beneficial Ownership Reporting as part of the Coprorate Transpirancy Act, or CTA, which was due to start racking up eye watering fines for the federal government starting at the beginning of 2025. The CTA was signed into law back in 2021 to combat money laundering, tax evasion, and trafficking to name a few. The information that is submitted to the Financial Crimes Enforcement Network (finCEN) is meant to only be disclosed to authorized government authorities and financial institutions.  The required information would have been used to disclose the owners of more than 25% of any business, or a beneficial owner. Most small business entities which have filed with their Secretary of State, mostly Limited Liability Companies and Corporations, would have been required to file this report and to keep them up to date in case of any ownership changes, including address change of any owners within 30 days of said change.  According to the Journal of Accountancy, only 6.5 Million out of 32 million reports have been filed thus far . That would have left a lot of small businesses open to the steep penalties for not completing the filing on time. Even though the requirement has been paused, for now, finCEN has been vague about what a new deadline or timetable would look like if the act makes it out of judicial purgatory. In order to counteract finCEN not being forthcoming with information, it is recommended that all businesses should file their reports timely according to the old deadline in case they retroactively fine businesses. If you are ar DIY person, finCEN was so nice to provide a video on how to do the reporting yourself. See below:

As tax season approaches, strategic tax planning is crucial for solo entrepreneurs and small business owners. Effective planning not only ensures compliance but also minimizes your tax burden and maximizes your financial health. Here’s how to get started:     1. Review Financials Regularly : Keep a close eye on your income and expenses throughout the year, and making sure your records are up-to date. Regular financial reviews help you identify deductible expenses and adjust your tax strategies to make sure you are prepared come January.     2. Utilize Tax Deductions : Familiarize yourself with available deductions relevant to your business, or contract with someone who can. Especially if you have income at the end of the year, making sure you utilize all available strategies like Section 179 or bonus depreciation, especially for vehicle and equipment heavy businesses.     3. Plan for Estimated Taxes : If you’re self-employed, making estimated tax payments throughout the year is a requirement to avoid penalties. Accurate forecasting can help you set aside the right amount and manage cash flow effectively, ensuring you aren’t stuck with an unwelcome surprise come tax time.    At Pathfinder Accounting & Tax, we specialize in helping small business owners navigate the complexities of tax planning. Our expertise ensures you stay ahead of tax season with tailored strategies that align with your unique financial situation. Partner with us to turn tax season into an opportunity for financial optimization and peace of mind.