Category

Tax

Nov 18
0

Three Ways AI Transforms Accounting

By | Accounting, Audit, Nonprofit, Tax | No Comments

Artificial intelligence (AI) is transforming every aspect of accounting. It’s vital for accountants to embrace this new technology and incorporate it into their daily workflows. And for those of you thinking, “I’ll never use AI,” you probably are already using it. It’s been part of several accounting platforms for years, just in older forms. So, embrace it. Learn how to use it. AI is here to stay and can be an important adjunct to an accountant’s work.

Safe Use of AI

Before we discuss the three ways in which AI is transforming accounting, let’s take a moment to talk about the safe use of AI.

First, never input confidential information into publicly available AI tools, such as the free version of ChatGPT, CoPilot, and others. Although some of these tools promise to keep information confidential, and you can determine confidentiality parameters in your account settings, there is no guarantee that the information will be kept out of the public domain.

In fact, this past August, ChatGPT admitted that it had accidentally released chats from a number of users; they had failed to disclose what happened when users hit the ‘share’ button (many thought it was a private link). Err on the side of caution when using public AI tools or use a paid version with embedded security features.

AI is powerful, but it makes mistakes. One of the first rules of AI use is “trust but verify.” In other words, double-check whatever information you receive from your AI platforms. If using an AI tool that seeks information online, ask it to cite source links and click through to read them to make sure it is accurately quoting the information.

Three Ways Accountants Can Use AI to Enhance Efficiency

Assuming you’re taking appropriate precautions when using AI, it can be a game-changer to your daily workflows. AI is very good at analyzing vast amounts of data quickly and can perform numerous tasks to make an accountant’s life easier.

Improving Audits

The auditing process often relied on sampling rather than analyzing all data due to the volume of material available. As mentioned, AI is very good at analyzing large amounts of data quickly. AI can swiftly analyze data sets to detect abnormal patterns and flag fraud. A skilled CPA or accountant can then review AI findings and determine the next steps. This is definitely a huge time-saver for those preparing for and conducting audits.

Financial Planning and Analysis

Another task that relies on data is financial planning and analysis. AI can quickly review cash flows, receivables, and external data sources to provide baseline financial analysis. From there, it can act like an assistant during the planning process. You can also use AI to model best and worst-case scenarios. After performing the analysis, you can then step in and help your clients interpret and understand the results.

Assist with Tax Preparation and Compliance

Taxes are one of the most complex areas of accounting, and keeping track of tax changes can be a full-time job for some organizations. AI embedded within accounting programs can help accountants monitor, track, and report the appropriate taxes. It can also help you prepare tax returns and flag any inconsistencies or missing information. Both can be a huge help to a busy accountant.

Artificial Intelligence: Like a Smart Entry-Level Employee

For those still hesitant to tap into the power of artificial intelligence, it may help to think of it like an entry-level employee, rather than a computer program. Just as you wouldn’t trust an entry-level accountant to prepare a full audit, you wouldn’t trust an AI program to complete and submit audit findings. You would review the work of a newcomer to the profession, make corrections to their work, and then share it with the client.

While AI will never rise to the level of a CPA, it can provide support just like an entry-level employee and handle tasks quickly. It can improve many areas of your work, including audits, financial planning and analysis, and taxes. Using your skills and experience with AI’s speed can be a game-changer for your team and deliver better outcomes for your clients.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.

Nov 11
0

Adjusting Course: Selected Nonprofit Impacts from the One Big Beautiful Bill

By | Accounting, Nonprofit, Tax | No Comments

On July 4, 2025, President Trump signed the One Big, Beautiful Bill (OBBB) into law. This sweeping bill includes numerous tax changes that impact many, including nonprofit organizations. Because numerous changes in the bill affect nonprofits, organizations should review their potential impact now for both challenges and opportunities, and plan accordingly.

Here, we highlight several that have the potential to impact many of our readers. For those who would like a more in-depth analysis, BDO USA offers a comprehensive article on the topic.

Excise Tax on “Excess” Compensation

Section 4960 in the OBBB expanded those included in the limits of excess compensation. In the past, this was limited to the top five executives in the current or the five prior years. Now, according to the new bill, all employees and former employees are subject to Section 4960. The bill applies only to employees of the organization who were employed on December 31, 2016. It begins with the tax year starting December 31, 2025.

Employee Retention Credit Changes

The OBBB makes several changes to employee retention credits. The bill extends the statute of limitations for ERC claims to six years. It increases penalties on preparers and promoters and bars refunds after the date of enactment for claims filed after January 31, 2024.

Charitable Contributions Deductions

Section 170(b)(2)(A) has been extended in the OBBB to allow corporations to claim a charitable contribution deduction only if it exceeds 1% of taxable income (up to the current 10% cap). Corporations may carry excess contributions, as well as contributions disallowed by the 1% floor, for up to five years. According to BDO, “… if the aggregate corporate charitable contributions do not exceed 10% of taxable income, there will be no carryforward of charitable contributions disallowed due to the 1% floor.”

60% Limitation on Individual Charitable Giving Now Permanent

Another change impacting nonprofits is in individual charitable giving. The current 60% deduction limitation of AGI is now permanent for charitable contributions of cash made by individuals to public charities (as well as certain private foundations as defined in Section 170(b)(1) (F)). These changes appear to allow individuals to deduct up to 60% of AGI even if they make total cash contributions to public charities that are less than 60% of AGI. It also looks as if they can use this deduction if they make charitable contributions of noncash property to eligible ones that are not public charities.

Nonitemized Deduction Amount Increased

Another bit of good news for nonprofits is that the amount of non-itemized charitable deductions individuals can take has been increased to $2,000. The OBBB permanently reinstates the partial deduction for charitable contributions made by individuals who don’t itemize deductions on their tax returns. For people who are married and filing jointly, the amount is now $2,000. For all others, it is $1,000. This doesn’t include non-cash contributions, and it is only available for cash contributions made to certain charities. These changes are effective for the tax year starting after December 31, 2025.

Action Steps for Nonprofits

Clearly, there are many other changes in the OBBB that impact nonprofits. But these are the ones that impact most nonprofits.

This is a good time to revisit your organization’s strategic plans and determine how to adjust your approach considering the changes. For example, the increase in non-itemized donation amounts may encourage higher than average donations among certain donors. Do you have a donor plan ready to go for 2026? How can you maximize charitable giving and encourage more donations in light of the increased deduction amount?

Another area that has the potential for significant impact is among nonprofits that pay more than $1 million to more than five individuals or provide certain severance packages. Now is the time to work with your human resources personnel to review compensation considering the OBBB changes.

The new year is almost upon us, and with it, many changes like these will impact finances, marketing, human resources, and more. Take the time now to review, reflect, and consider how your organization can leverage them for benefit or minimize negative impacts.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.

Oct 23
0

When Education Meets Medicine: What the Mayo Clinic Case Means for Nonprofit Tax Exemptions

By | Accounting, Nonprofit, Tax | No Comments

The Mayo Clinic is famous both for its medical care and patient education. In fact, its website is often cited by news organizations and others when reporting on medical stories; it is known for its accuracy and excellence. When the IRS determined that the Mayo Clinic was not entitled to its refund claim for substantial Unrelated Business Income Tax (UBIT), which the Mayo Clinic claimed based on its educational activities, the Clinic took action. Here’s the whole story, and what it means for nonprofits.

What Is Unrelated Business Income Tax (UBIT?)

Financial/tax concept about Unrelated Business Taxable Income UBTI with phrase on piece of paper

UBIT stands for Unrelated Business Income Tax. It’s a tax imposed on income that tax-exempt organizations such as nonprofits earn from activities not substantially related to their core exempt purpose. The Mayo Clinic claimed education as an activity substantially related to its core purpose.

The IRS Said No

The IRS felt differently, however. They assessed $11,501,621 in unpaid acquisition indebtedness UBIT for tax years 2003, 2005-2007, and 2010-2012. This amount was based on the acquisition indebtedness of property held by the Mayo Clinic. The property produced income. While the Mayo Clinic paid the debt, they initiated the request for a refund in 2016, which brings us to the current ruling.

Why did the IRS question the Mayo Clinic’s report? The IRS concluded that for the years in question, the Mayo Clinic did not meet the definition of a § 170(b)(1)(A)(ii) qualified organization as defined in Treasury Regulation § 1.170A-9(c)(1). To sum up the regulation, if the Mayo Clinic claimed education, it must be formal instructional activities, not merely incidental educational activities. Given that the clinic’s primary purpose is to provide medical services, at first, this seemed reasonable.

The Case Winds Its Way Through the Courts

The Mayo Clinic contested these findings, and as the case wound its way through the court system, various courts interpreted the IRS rulings differently. At issue was whether the Mayo Clinic’s educational activities were in addition to or inexorably intertwined with its medical services.

After much debate, the final district court found that “primary” purpose in this case means “substantial” and that the Mayo Clinic did meet the definition of education in the context of a substantial portion of its activities. Equally as important, its educational context was not “non-essential” but deemed an essential part of its primary mission. Given this, the court ruled that the Mayo Clinic was entitled to a full refund. The government is appealing this decision.

Context for Nonprofits

This case highlights several nuances in assessing a nonprofit’s educational purpose. To government entities such as the IRS, it means that education must be the primary purpose of the nonprofit, such as the activities of a college, school, or other institution of learning. However, many nonprofits, such as the Mayo Clinic, engage in significant educational activities with their constituents, but primarily engage in other services, such as medical care.

At issue in the case is whether or not such activities count as “substantial” enough to justify the requested refunds, or whether the organization’s primary purpose must be education in order to qualify under the IRS ruling.

Why This Matters

This ruling sets a powerful precedent for nonprofit organizations with hybrid missions. It signals that substantial commercial activities do not automatically disqualify an institution from being considered educational, as long as those activities are integrated with and serve the educational purpose.

For CPAs, nonprofit advisors, and academic institutions, the case offers a roadmap for navigating UBIT exemptions. It emphasizes the importance of demonstrating how various functions support a unified, exempt purpose.

Final Thoughts

The Mayo Clinic case is more than a tax dispute. It’s a reaffirmation of how education can be effectively integrated into complex, real-world operations. It challenges narrow definitions and opens the door for more nuanced evaluations of nonprofit missions. For organizations walking the line between service and instruction, this decision offers clarity with context.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.

Sep 02
0

ACA Compliance for Nonprofits: New Penalties, New Priorities in 2026

By | Accounting, Government, Nonprofit, Tax | No Comments
clipboard with paper which says ACA affordable care act compliance for nonprofits 2026

The IRS recently released Rev. Proc. 2025-26, providing the indexing adjustments for the upcoming calendar year 2026. These indexing adjustments affect applicable large employers (ALEs) starting next year. ALEs are defined as entities having 50 or more employees. Such organizations must either offer minimum essential coverage that is affordable (i.e., provides minimum value to full-time employees and their dependents) or make an employer shared responsibility payment to the IRS, all part of the Affordable Care Act’s employer shared responsibility provisions.

Nonprofit status does not matter in the context of this law; it’s the number of full-time employees that counts. If your organization employs 50 or more full-time employees, it’s important to understand the indexing adjustments to ensure full compliance with the ACA and avoid potential penalties.

What Is an Employer Shared Responsibility Payment?

The Employer Shared Responsibility Payment is a financial penalty imposed by the IRS on ALEs who fail to meet specific health coverage obligations under the Affordable Care Act.

To avoid the ESRP, an ALE must offer its full-time employees and their dependents health insurance that:

  • Qualifies as minimum essential coverage
  • Is affordable based on IRS standards and
  • Provides minimum value, meaning it covers at least 60% of expected healthcare costs

If an ALE does not offer coverage to at least 95% of its full-time employees, or if the coverage offered is unaffordable or inadequate, and at least one employee receives a premium tax credit through the Health Insurance Marketplace, the employer may owe one of two types of ESRPs:

  • A penalty for not offering coverage to enough employees
  • A penalty for offering coverage that fails the affordability or value tests

These payments are calculated monthly and assessed annually, with amounts indexed for inflation. Importantly, ESRPs are non-deductible and apply regardless of an employer’s tax-exempt status.

IRS Implements Updated Penalty Amounts in 2026

Beginning in 2026, the IRS will implement updated penalty amounts under the Employer Shared Responsibility Provisions of the Affordable Care Act. Nonprofit organizations classified as Applicable Large Employers (ALEs) must be especially mindful of these changes. If an ALE does not offer minimum essential coverage to its full-time employees, it may face a penalty of $3,340 per employee annually. Alternatively, if coverage is offered but is deemed unaffordable or does not meet minimum value standards, the penalty rises to $5,010 for each affected employee. These penalties are indexed for inflation and apply to plan years starting after December 31, 2025.

ESRPs are non-deductible expenses, meaning nonprofits cannot offset them through tax savings. This can pose a significant financial strain, especially for organizations operating on tight budgets or relying heavily on grant funding and donations.

Avoid the Penalty and Stay in Compliance

To avoid the Employer Shared Responsibility Payment, companies must first determine whether they qualify as an Applicable Large Employer, which generally means having 50 or more full-time employees or full-time equivalents in the previous calendar year. If they meet this threshold, they are required to offer minimum essential health coverage to at least 95 percent of their full-time employees and their dependents. This coverage must be affordable according to IRS safe harbor standards. It must also provide minimum value, meaning it covers at least 60 percent of expected healthcare costs.

Employers should also accurately track employee hours to determine full-time status and use IRS-approved methods for measurement. In addition, they must report coverage information to both the IRS and employees using the appropriate forms, such as Form 1095-C and Form 1094-C. If contacted by the IRS regarding a potential penalty, employers have a 90-day window to respond and provide documentation. Monitoring and meeting these requirements can help your organization avoid steep penalties from the IRS.

Preparing Nonprofits for ACA Compliance: Why Early Action Matters

As the 2026 updates to the Employer Shared Responsibility Payment take effect, nonprofit organizations must recognize that compliance affects them too. These provisions apply equally to tax-exempt employers as well as for-profit companies. If you don’t follow the IRS rules, your organization will face a steep penalty.

By understanding the rules, evaluating coverage, and proactively preparing for the new thresholds, nonprofits can protect their budgets and continue focusing on their mission. Early planning and informed decision-making will ensure your organization remains compliant and avoids costly penalties in the years ahead.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.