adamkotz

[adamkotz]

An Introduction to Carbon Accounting

The American Institute of Certified Public Accountants (AICPA) is the nation's premier organization for certified public accountants (CPAs) in the United States. Established in 1887, AICPA consists of more than 428,000 members. The organization provides members with a depth of resources, including informative webcasts and workshops on topics such as practical strategies for calculating carbon footprints.

Carbon accounting is an emerging field of accounting designed to help individuals and businesses mitigate the impact of climate change. By using carbon accounting strategies, businesses can gain clarity regarding their carbon footprint, which can be defined as the volume of greenhouse gases (GHGs), such as methane and carbon dioxide, produced by a person or organization's activities. According to The Nature Conservancy, the average American produces 16 tons of emissions each year, far greater than the global average of about four tons.

Carbon accounting provides insight into the size of an organization's carbon impact, as well as the greatest sources of its emissions. With this knowledge, business leaders can adjust processes to minimize emissions. Accurate carbon accounting reports also make it easier to submit sustainability impact reports to the government and relevant regulatory bodies. Organizations can also promote their reduced carbon footprint among stakeholders and use favorable sustainability reports to enhance brand reputation. Numerous reports have found that many American citizens are willing to pay higher prices for sustainably sourced goods and services, and more than a quarter of Americans would pay 25 percent more for "green" goods.

After a business minimizes its carbon footprint, carbon accounting processes can be used to map out climate investment strategies, allowing organizations to achieve net zero emissions. A net zero corporation removes an amount of GHG from the atmosphere equal to the GHGs the company produces. Net zero should not be confused with "carbon neutral," a condition some businesses claim after investing in ineffective carbon capture strategies.

Accountants with carbon accounting training can further serve businesses in areas of GHG Protocol compliance. GHG Protocol is a nonprofit, nonpartisan provider of emissions standards and tools.

Carbon accounting professionals can also assist business leaders when it comes to understanding different types of emissions, including scope 1, scope 2, and scope 3 emissions.

Scope 1 emissions are also known as direct GHG emissions, meaning the emissions can be attributed to activities directly controlled by the business. For instance, a trucking company is directly responsible for the carbon output of its vehicles. Scope 1 emissions are the easiest to control but require leaders to make notable changes to daily business operations.

Scope 2 emissions, meanwhile, are referred to as indirect GHG emissions. Virtually every business in the country has some level of electricity, heating, and cooling needs. Producing electricity and heat creates carbon emissions, and while these emissions typically occur off-site, they must still be included in a company's carbon report. It can be difficult to calculate indirect emissions, and businesses may need to find new vendors that are willing to adhere to GHG Protocol standards.

Finally, scope 3 emissions derive from processes a business has no direct or indirect control over. Also known as value chain emissions, scope 3 emissions account for the majority of a typical company's total carbon footprint. Examples of scope 3 emissions include those associated with the transportation and distribution of goods or how products are treated and disposed of at the end of their lifecycle.

These are only a few areas of emphasis for carbon accounting professionals. AICPA members can take courses on relevant topics such as supplier engagement, setting achievable emissions targets, and decarbonization. More information about AICPA education can be found online at aicpa-cima.com.

[adamkotz]

Donor Advised Funds and Private Foundations in Charitable Giving

Charitable giving allows individuals to support causes and allocate assets in ways that generate tax savings. Individuals can use various strategies, such as a donor-advised fund (DAF), a private account managed through a 501(c)(3) public charity and set up to coordinate charitable donations on behalf of an individual, family, or organization. They can also use DAFs to aggregate contributions across several donors, providing maximum charitable impact.

Since DAFs have public charity status, they are eligible for IRS charitable income tax deductions. Contributions are tax deductible, even if individuals set up installment plans that gradually distribute funds to qualifying public organizations. Alternatively, some may wait to distribute the funds, allowing the capital time to grow. This also enables the DAF funder to establish a nuanced giving plan.

DAFs make sense when holding securities that have risen substantially in value. By contributing to the DAF in the current tax cycle while holding off on deciding which charities to support, individuals avoid capital gains tax assessed on the potential profit. The funds grow tax-free while an optimal charitable giving approach is developed.

Donor-advised funds offer flexibility since individuals can fund them with stocks, bonds, mutual funds, and assets not publicly traded, such as life insurance, restricted stock, and cryptocurrency. DAFs often also accept items that require appraisal, such as art, automobiles, and property.

The fair market value of the stock or other asset written off is often more than the original cash basis, which helps eliminate capital gains taxes. For example, a valuable painting contributed to a DAF is sold, not by the original owner, but by the foundation that operates the fund. This makes it tax exempt, while the appraisal performed at the time of donation provides a benchmark of fair market value, which can amplify the tax deduction.

A private foundation, also set up as a charitable organization, stands as an alternative to the DAF. This requires a single large donation, the endowment, with funds managed and disbursed through directors or trustees tasked with following the founders’ mission. Private foundations provide greater administrative control over funds than a DAF. They make grant-making decisions that extend to the operations of IRS-qualified 501(c)(3) public charities.

Private foundations fall into two basic categories: private nonoperating and private operating foundations. The latter utilizes investment income generated from the endowment in directly operating the charitable organizations or activities they fund. The IRS requires that the foundation spend its minimum investment return, or 85 percent of adjusted net income (whichever is less), to fund charitable activities annually. This differs considerably from the DAF, where funds can lay untouched for years, and the fund does not directly operate philanthropic activities.

Private nonoperating foundations are more common. They are similar to donor-advised funds in the way they simply disburse capital to charitable organizations, with goals matching their mission and mandate. In such cases, the IRS requires that the foundation distribute an amount each year equal to the minimum investment return (subject to adjustments).

Both DAFs and private foundation pathways to charitable funding offer distinct benefits and restrictions, both of which have tax implications. It’s important to consult with a financial advisor in finding the best pathway forward.

[adamkotz]

The Difference Between Tax Evasion and Tax Avoidance

Tax avoidance and tax evasion are two terms that are often erroneously used interchangeably. However, these terms bear significant differences. Tax avoidance involves the use of legal means to reduce the tax load or the amount of tax a business or an individual is expected to pay. People and businesses go about reducing their tax load in different ways. For instance, they might focus on investments that have tax advantages. They might also claim several credits and dedication as are permissible by law.

On the other hand, tax evasion refers to the use of illegal means to avoid paying taxes. These illegal methods might include falsifying deductions or underreporting one’s income. Because tax evasion is a crime, it often comes with legal penalties like fines and, in extreme cases, jail terms.

Individuals and organizations usually take different measures to reduce their tax bills. For instance, an individual can claim tax credits like the Child Tax Credit. They can also reduce their tax burden by investing their money in a health savings account (HSA), claiming a mortgage tax deduction, and investing in a retirement account while maximizing annual contributions. All tax deductions and credits have to be duly passed by Congress and assented to by the president before they can be considered as a part of the Tax Code of the United States.

The United States Internal Revenue Code (IRC) recognizes tax avoidance. It makes provisions for instances where a corporation or an individual can be exempt from paying taxes or enjoy certain tax holidays or reductions. Legislators usually use tax codes to get taxpayers to spend and invest in specific policy directions. For instance, they might offer tax reductions, exemptions, or credits in order to get taxpayers to invest in charity, higher education, insurance, and retirement savings. Similarly, they can use tax codes to get customers to invest in policy directions like renewable energy, energy efficiency, and sustainability.

On the other hand, tax evasion refers to illegal and deliberate measures that an individual or organization takes in order not to pay their true tax liability. Individuals or corporations caught evading tax can be subject to both criminal and civil charges. The Internal Revenue Service (IRS) tax code states that a willful failure to pay taxes is a federal offense. Also, the IRS can determine if a corporation or individual has evaded tax regardless of whether or not they have filed tax forms with the IRS. To establish that a party has committed tax evasion, the burden of proof is on the IRS to determine if the avoidance was willfully or deliberately done.

Different factors are usually considered to determine if an individual or organization has committed tax evasion. The IRS will be obligated to consider if the individual made a deliberate effort to conceal income that they are obligated to report. Also, the IRS will investigate the taxpayer’s financial situation in order to determine if their refusal to pay tax is a product of fraudulent intentions. For instance, if a taxpayer conceals or refutes ownership of an asset by claiming it does not belong to them but to another individual, they will be considered to have fraudulent intentions. Also, reporting one’s income under a false name and social security number also reveals to the IRS that an individual has fraudulent intentions.