How to Prepare for Your Nonprofit Financial Statement Audit

Date May 17, 2024
Authors Anthony Savasta

Remaining transparent and open is crucial to being a successful nonprofit in the eyes of stakeholders, donors, and the public. One way to demonstrate transparency is through your financial statements via an independent audit. But before committing the time and resources, your organization should first determine if an audit is necessary. You have other options, such as a review, compilation, or preparation engagement that could satisfy financial transparency at less cost to your organization. This article will discuss the factors in determining whether an organization needs a financial statement audit and how best to prepare for that audit.

Do you need an audit?

There are multiple factors to consider when determining if an audit is necessary, including:

  • Internal requirements: Organizations have internal documents that can dictate their financial reporting requirements. An organization’s bylaws might state that a financial statement audit is required annually for the organization to remain transparent with donors.
  • Charity registration requirement: The state where you are registered might require an audit based on revenue or other financial metrics. For example, in New Jersey, a registered nonprofit organization is required to attach a certified audit with its charity registration renewal each year if its gross revenue exceeds $1,000,000.
  • Grant funding requirement: Organizations that expend more than $100,000 in combined federal and state funds in a fiscal year require a Generally Accepted Government Auditing Standards (GAGAS) Audit, frequently called a Yellow Book Audit. Additionally, organizations that expend more than $750,000 in combined federal and state funds in a fiscal year require a Single Audit.
  • Grant Application Requirement: At times some grantors require a financial statement audit
    regardless of the amount awarded to ensure trustworthiness relative to the funds. This could
    come in the form of a requirement to include your most recent audit with an application in consideration of grant renewal.
Understanding the audit process

Once an audit has been determined necessary, the next steps are to understand the audit process
and properly plan for it. An audit involves a thorough review of financial records, internal controls,
and compliance with other requirements to ensure that financial statements are fairly presented in
accordance with the applicable accounting standards. Here are some tips to help you prepare for a
successful audit:

  • Maintain accurate financial records. Accurate and up-to-date financial records and reports are essential for a smooth audit. Accounts should be reconciled and reviewed by management and/or the board of directors on a regular basis not only to ensure proper documentation for an audit but to assist in identifying errors and discrepancies that can be addressed prior to the audit.
  • Be cognizant of changes in accounting standards. In recent years, the Financial Accounting Standards Board (FASB) has put many new standards in place, including ASC 606 Revenue Recognition and most recently ASC 842 Lease Standard, that have had significant impacts on nonprofit organizations. It is important for management to stay up to date on new standards as they enter the pipeline so the organization can properly prepare for them. Some new standards can be complicated enough to require additional training of accounting personnel prior to implementation.
  • Engage professional auditors. Selecting a reputable and experienced audit firm is essential for a thorough and unbiased examination of financial statements. The board of directors and/or audit committee should seek recommendations, conduct due diligence, and ultimately choose an audit firm with a track record in nonprofit auditing. The process of selecting an auditor can take one to three months, so getting started early is key.
  • Develop a timeline and establish responsibilities. As part of the process of engaging an auditor to perform a financial statement audit, the auditor will provide an engagement letter laying out the terms of the engagement, including expectations, responsibilities, start date, and expected issuance date. It is important to review and agree to the terms laid out and make sure that your accounting department is aware of the timeline and the expected fieldwork dates.
  • Prepare for the auditors. An auditor typically prepares a document request list prior to the start of an audit, listing what they need and expect to receive prior to and during the scheduled audit fieldwork. Here is a checklist of some requests to expect for individual accounts:
    • Reconciliations for all bank and investment accounts
    • Aging schedules for accounts receivable and payable
    • Schedule of capitalized assets along with the related capitalization policy
    • Schedules and statements for debt and other long-term liabilities
    • Schedule of donor restricted net assets
    • Schedules of major sources of revenue
    • Schedule of expenses allocated by functional categories

Preparing for a nonprofit financial statement audit requires careful planning, attention to detail, and a commitment to transparency. By understanding audit requirements, maintaining accurate records, staying up to date on new standards and pronouncements, engaging a professional, and understanding the timeline, responsibilities and audit requests, your nonprofit organization will be able to navigate the audit process successfully and efficiently. Proactive measures, clear communication, and a commitment to continuous improvement contribute to building a strong financial system of integrity and fair financial reporting.

For more information on nonprofit auditing efficiencies, see “Nonprofit Audits Made Easy or Easier” by Kathleen M. Clayton, CPA, PSA, Principal and Co-National Director of HBK Nonprofit Solutions.

Read the latest issue of Insights, the HBK Nonprofit Solutions quarterly newsletter.

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Advanced Manufacturing Assistance is Available through YBI’s Power Grant

Date May 17, 2024
Authors Elizabeth P. Becherer

In today’s manufacturing sector, the applications of Advanced and Additive Manufacturing continue to take hold. Rapidly expanding technology calls many manufacturers to question how they can best get involved with aspects of Advanced Manufacturing, such as adopting internet connectivity for their machines (often referred to as the Industrial Internet of Things, or IIoT), utilizing 3D printing in their operations, or otherwise optimizing their production with modeling.

The Youngstown Business Incubator (YBI) can be a helpful resource for companies hoping to get started or grow in these areas. YBI supports manufacturers in various areas, including in using Advanced Manufacturing technologies.  Recently, they received funding, called “Power Funding” through the Appalachian Regional Commission (ARC) for Appalachian Region Ohio Manufacturers looking to integrate Advanced Manufacturing or Additive Manufacturers in areas such as:

  • Reverse Engineering and 3D scanning
  • Identification of Cost Reduction Opportunities
  • 3D printing services and prototyping
  • 3D printed tooling
  • IIOT adoption and integration
  • Solid modeling and design
  • Advanced Manufacturing Sourcing
  • Post-processing
  • Material properties education and selection
  • Process modeling and simulation
  • Solution optimization

ARC grants act as a match of costs related to the expenditures above, with up to 50-75% subsidies available for projects led by YBI’s team. HBK spoke with YBI’s Engineering Program Manager, Dylan Negro, who added “The goal of this funding is to allow manufacturers to dip their toes into new and Advanced Manufacturing technologies and processes without having to invest new capital themselves. This includes all of the services we can assist with at YBI and other proposed applications.”   

Applications for ARC grants are being accepted until August 31, or until funding resources are exhausted. To learn more about eligibility requirements or what integrating Advanced Manufacturing could look like for your business, please contact HBK Manufacturing Solutions at 330-758-8613 or YBI can also be contacted directly by emailing Dylan Negro at or Stephanie Gaffney at

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Florida Sales Tax Holidays – 2024

Date May 14, 2024

The Florida Department of Revenue has a dedicated webpage addressing each of the sales tax holidays in effect in 2024. The list of sales tax holidays includes:

  • Disaster Preparedness – June 1, 2024 through June 14, 2024 and August 24, 2024 – September 6, 2024
  • Freedom Month – July 1, 2024 through July 31, 2024
  • Back to School – July 29, 2024 – August 11, 2024
  • Tool Time – September 1, 2024 through September 7, 2024

The following sales tax holidays will expire on June 30, 2024:

  • Energy STAR Appliances
  • Home Hardening
  • Gas Stoves

The sales tax holidays will drive additional sales for retailers, but they need to ensure that their point-of-sale systems are properly set up to administer the exemptions. Many of the exemptions are limited by the cost of the item, for example, during Freedom Month there is an exemption on the first $5 of bait or fishing tackle. The exemptions apply to in-store and online sales, so it is imperative that even remote sellers apply the exemptions properly to avoid customer service issues.

The Department’s website contains details on each of the sales tax holidays, including lists of qualifying items and information specific to consumers and retailers. The Department’s webpage can be accessed here. If you have questions about any of Florida’s sales tax holiday, please contact HBK’s SALT Advisory group at

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Ohio Healthcare Association Argues State Medicaid Reimbursement Rates Fall Short

Date May 13, 2024

The Ohio Healthcare Association (OHCA) is suing the state’s Medicaid program in the Ohio Supreme Court over its new reimbursement rates, which the OHCA contends are inadequate to cover the cost of providing quality care to Medicaid patients.

The OHCA represents hundreds of skilled nursing facilities, assisted living communities, and is a non-profit association that also advocates for home health and hospice service providers, as well as care and services for individuals with developmental and intellectual and developmental disabilities. This broad representation underscores the OHCA’s commitment to a healthy Ohio, collaborating with health systems to improve healthcare across the state. The Ohio Department of Medicaid distributes funding to 926 nursing homes serving more than 66,000 residents, an estimated 65 percent of Ohio nursing home residents.

“We tried every avenue to convince the department that they are misinterpreting the clear language of the statute, to no avail,” Pete Van Runkle, executive director of the OHCA, said in a statement. “Our members read the budget bill and expected a much stronger commitment to quality-based funding. They are extremely disappointed that it did not materialize.”1

The OHCA is joined in the suit by the Academy of Senior Health Sciences and LeadingAge Ohio.

The OHCA claims that the current reimbursement rates are so low that many facilities are struggling to cover their operating costs, let alone invest in upgrades or improvements to better serve their residents, what the OCHA describes as among the state’s most vulnerable citizens. The Association proposes that the reimbursement rates put the quality of care at risk and jeopardize the well-being of Medicaid beneficiaries who rely on these facilities for essential services. The lawsuit also raises concerns about the impact of the reimbursement rates on staffing levels and wages for healthcare workers.

The Ohio Department of Medicaid has argued that the rates are fair and in line with federal requirements, that they are set based on a formula that takes into account a variety of factors, including the cost of providing care, geographic variations, and other considerations. The Department maintains that they are committed to ensuring that Medicaid beneficiaries have access to quality care while also being responsible stewards of taxpayer dollars.

As the legal battle unfolds, stakeholders are monitoring the proceedings and considering the potential implications of the outcome. Healthcare providers, Medicaid beneficiaries, policymakers, and advocacy groups all have a vested interest in the outcome of the lawsuit, as they see it as having the potential to shape the future of healthcare in Ohio for years to come.

Justices with the Ohio Supreme Court have asked both parties to attempt mediation before moving ahead with court proceedings.

Ultimately, the lawsuit between the Ohio Healthcare Association and Ohio Medicaid shines a spotlight on the ongoing challenges facing the healthcare system in Ohio and underscores the need for comprehensive reform to ensure that all residents receive the care they need to lead healthy and fulfilling lives. 

HBK is a member of the OCHA and provides advising services to approximately 100 facilities within Ohio. For more information on how this development affects your organization, contact Josh Zarlenga at

1Zuckerman, Jack. (2024, May 9). Nursing homes sue Ohio Medicaid, with hundreds of millions on the line. Cleveland.

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Is Charity Gaming Worth the Effort?

Date May 7, 2024

Many exempt organizations bet on gaming activities for raising funds, or to allow members to socialize and foster fellowship. The support from the community through these gaming events can be essential for the success of charity initiatives, helping to provide much-needed assistance and resources to those in need.

But any exempt organization that conducts any type of gaming must clearly understand the relationship between the gaming activity and its own exempt purposes to avoid jeopardizing its exempt status or generating unexpected tax liabilities. Whether the organization conducts a gaming activity for one night or throughout the year, it is important to know the federal and state requirements governing these activities, and how these activities can impact exempt status.

What activities are considered gaming? Gaming includes bingo, pull-tabs/instant bingo, Texas Hold-Em poker, most card games, raffles, scratch-offs, break-opens, hard cards, banded tickets, jar tickets, pickle care, Lucky Seven cards, pari-mutuel betting, Nevada Club tickets, fantasy leagues, casino nights, Las Vegas nights, and coin-operated gambling machines. Coin-operated games include slots, electronic video slots or line games, video poker, blackjack, keno, bingo and pull-tabs. Lawful gaming requires adherence to federal law and in many states, state and local laws. In many jurisdictions, licenses are required to conduct gaming activities.

In general terms, gaming does not further the exempt purpose of most organizations and is considered no different than the exempt organization operating a trade or business carried on for profit. There are exclusions and exceptions to the general rule, which usually depend on the section of the Internal Revenue Code governing the organization’s exempt status. Unless an exception applies, unrelated business income tax must be paid on the receipts derived from gaming.

Charities, Churches, Religious Organizations, Hospitals, Schools — 501 (c)(3) organizations

Organizations classified as 501 (c)(3) organizations are operated for a specific charitable purpose and their activities must further that purpose. Gaming is not considered a “charitable” activity. Although the proceeds of the gaming might benefit the organization, gaming does not further any charitable purpose. It is important to remember that gaming cannot be more than an “insubstantial” part of the exempt organization’s activities. The IRS measures “substantial” based on the facts and circumstances of each situation, including dollars raised and spent on the activity as well as the time and resources dedicated to it.  The conclusion here is of paramount importance, as the result could be the loss of exempt status.

Another concept to consider is that of private benefit.  501(c)(3) organizations cannot be organized or operated for the private benefit of any individual or private interest. Gaming activities that result in inurement or private benefit to individuals or private purposes violate the “private inurement” rules.

Social Welfare Organizations – 501(c)(4) organizations

These organizations operate to further the common good and general welfare of the community. Like the 501 (c)(3) organizations, no part of net earnings may benefit private individuals. While gaming is considered both a business and a recreational activity, it does not usually promote social welfare. 

Social Clubs and Fraternal Organizations – 501(c)(7), 501(c)(8), 501(c)(10) organizations

Many of these organizations include social and recreational activities for their members and members’ guests. Gaming may be considered one of these activities, but there are thresholds on gaming activities with nonmembers and exceeding those limits may put the organization’s exempt status in jeopardy and render the income taxable.

Bingo Games and Other Gaming Unrelated Business Income (UBI)

Unrelated Business Income is generated when an organization carries on a trade or business that is not substantially related to its exempt purpose and may be subject to tax. Generally, gaming is considered an unrelated business activity. There are three conditions that must be met for an activity to be an unrelated “trade or business.”

  • The activity must be considered a trade or business, i.e., it produces revenue.
  • The activity must be carried on regularly, i.e., conducted with some frequency and usually more than on an occasional basis, such as at a special event.
  • The activity must be related to the organization’s exempt purpose. 

Let’s assume the gaming activities meet the three requirements above, there are still exceptions to the UBI tax rules that might apply:

  • Certain bingo games are excluded.
  • The gaming activities are conducted with substantially all volunteers, the unofficial threshold being 85 percent.
  • The activity qualifies as public entertainment, much like games at a fair or expo.
Reporting and Paying Taxes

If the gaming activity is determined to be UBI and gross receipts equal or exceed $1,000, a Form 990T must be filed. The organization will normally also file either a 990 or 990EZ and report its gaming activities on Schedule G. It is important to remember that the 990T taxes are subject to the estimated tax rules for reporting and remitting taxes on a quarterly basis.

501(c)(3) organizations may also be subject to an excise tax on wagering and an occupational tax on persons in the business of accepting wagers. In the case of the wagering tax, it’s important to understand the definition of a wager and which wagers may be exempt from this taxation. Most exempt organizations will be exempt from the tax on wagers provided that no part of the net proceeds from the drawing benefit a private shareholder or individual. If applicable, the organization reports and pays the wagering excise tax on Form 730, Monthly Tax on Wagering.  The occupation tax, much like a stamp tax, is an annual fee imposed on organizations and their employees who receive the wagers. Form 11C is used to pay this tax and must be filed before wagers are accepted. 

Taxation on the Gamers

Amounts paid to an exempt organization for any type of gaming are not considered charitable donations. In auction situations, specific rules apply if the wager exceeds the known fair value of the item. Often, the organization will also have annual reporting requirements to the IRS using Form W2G, Certain Gambling Winnings. The threshold at which winnings must be reported depends on the type of game. There may also be regular withholding required on the cash winnings, subject to a 25 percent rate. If the winnings are greater than $5,000, and the wager is in a sweepstake, wagering pool or lottery, or any transaction if the proceeds are at least 300 times as large as the bet made.

Noncash winners are taxed if the fair market value of the prize exceeds $5,000 after deducting the price of the wager:

  • If the winner pays the withholding tax, the rate is 25 percent.
  • If the organization pays the withholding tax, the rate is 33 percent.

Certain types of winnings are generally exempt from the requirement to withhold income tax.  Organizations must fully understand these reporting requirements before the gaming occurs in order to best manage the information and withholding required after the activity occurs.

Still More Rules to Know

Beyond the tax and reporting rules, there are numerous other considerations to fully understand. Many are dictated by state law rather than federal law. For example:

  • Some states require that the proceeds from games of chance be kept in a separate bank account.
    • Some states limit the use of the gross proceeds in some way.
    • In-person gaming might be regulated differently than on-line gaming in a state.
    • Some mobile apps allow ticket sales for games to be purchased through the app, others do not.
    • Some payment processors prohibit using their service for any activity considered gaming. 
    • Most states require some type of license before the gaming activity begins.
    • State regulations are changing all the time. Stay current!
A Few Tips from HBK Nonprofit Solutions
  • Understand the federal and state laws and reporting requirements before you get in the game. This is a crucial first step in joining the charity gaming community and ensuring your organization complies with all legal standards.
    • Be ready for increased record keeping for things like volunteer versus employee time spent in the gaming activities.
    • Understand that you might or might not generate a big pocket of cash for your organization. However, engaging in charity gaming isn’t just about fundraising; it’s also an opportunity to play games that bring an opportunity for camaraderie and socialization among members and guests.  By participating, you’re contributing to a greater cause beyond financial gains.

For more details consult the IRS’ Publication 3079, Tax Exempt Organizations and Gaming, or contact HBK Nonprofit Solutions at (732) 453-6528.

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Unveiling Your Options: Business Valuation & Goal Setting – The Cornerstones of Exit Planning

Date May 6, 2024
Authors Tyler R. Cerveny, Manager, HBK TAS Practice

As a business owner, you might often think about what it will be like when you decide to step away from your business. Before you start dreaming about a perfect retirement, there’s an important initial step in your exit planning journey, called the Discover Gate, as recommended by the Exit Planning Institute (EPI). This step involves understanding the actual value of your business and making sure it matches up with your personal financial goals. The process of planning your exit is thorough and aims at boosting the value of your business while ensuring it continues to operate smoothly after you leave. This first look at your business’s value and goals helps prepare you for a successful transition, no matter what might trigger your exit—like health issues, personal conflicts, or even unexpected events.

According to the Exit Planning Institute’s report from August 2023, a notable 57% of business owners prefer the idea of an internal transfer, aiming to keep the business within the company, while 27% are considering selling to external buyers. However, the report also highlights a concerning trend: over half of the business owners surveyed have not yet established an exit advisory team. This lack of preparation could significantly hinder a smooth and structured business transition. However, it’s important to know that even with careful planning, only about 20% to 30% of businesses that go up for sale actually end up selling. This fact highlights how essential it is to have a well-thought-out and expertly advised exit strategy to increase your chances of a successful sale.

Charting a successful and fulfilling exit from your business requires thorough planning and goal setting. It’s a good idea to consider working with a certified exit planning professional. These experts possess specialized training and hold credentials such as Certified Exit Planner (CExP) and Certified Exit Planning Advisor (CEPA). Their qualifications underscore the significance of adhering to professional standards and the value of receiving expert guidance in this field. Engaging a certified professional can ensure that your exit strategy is both effective and aligned with best practices.

Here’s how you can align your business’s valuation with your personal financial goals to create an effective exit strategy.

Understanding Business Valuation

Business valuation is essentially about determining your company’s fair market value. This value is a critical piece of information because it sets the foundation for the entire exit strategy. It allows you to:

  • Set Realistic Expectations: Knowing the worth of your business helps ensure that you don’t sell yourself short and that potential buyers or partners see the true value of your enterprise.

  • Maximize Value: By understanding what contributes to your business’s market value, you can make strategic decisions to enhance these aspects, much like polishing a diamond before sale. This can involve improving operational efficiency, diversifying client bases, or innovating product offerings.

  • Plan Financially: With a clear idea of what your business is worth, you can better plan for your life post-exit, ensuring financial security and the ability to fund your retirement or other ventures.

Financial Planning with HBKS Wealth Advisors: Your Trusted Financial Advisor

In the complex terrain of exit planning, leveraging the expertise of certified professionals can be invaluable. Certifications such as Certified Exit Planner (CExP) and Certified Exit Planning Advisor (CEPA) signify professionals who have specialized knowledge and adhere to high standards. These experts can guide you through the nuanced process of aligning your business valuation with your personal financial goals, ensuring a smooth transition.

Crafting Your Exit Strategy

To craft an effective exit strategy, consider these steps:

  1. Market-Based Valuation: Look at recent sales of similar businesses. This helps provide a benchmark and contextualizes your valuation.

  2. Professional Help: Utilize specialists, like those from HBK, who can provide access to market data and analyses of comparable companies. This detailed insight helps refine your strategy and valuation

By understanding the value of your business and setting clear, aligned goals, you prepare not just for an exit, but for a successful transition into your next chapter. This strategic approach ensures that when the time comes, both the financial and emotional investments in your business are acknowledged and rewarded.

Key Elements of Goal Setting for a Fulfilling Exit

To navigate your business exit smoothly and satisfyingly, certain key goals need to be set and aligned with your future plans. Here are the crucial areas to consider as you prepare for this significant transition.

  1. Desired Exit Timeline
    • Determining When: When do you plan to exit the business? Your timeline could range from a quick sale to a gradual transition spanning several years. This choice affects how you prepare the business for sale and your life post-exit. Even when meticulously planned, transitioning from the onset of a sale to sealing the deal with an external buyer generally takes anywhere between six to nine months.

  2. Financial Objectives
    • Setting Financial Goals: What are your financial needs for retirement? Whether you require a steady income stream, a large lump sum, or a combination of both, these objectives will guide your exit strategy. It’s also vital to integrate tax planning to optimize these strategies for tax efficiency.

  3. Transferring Business Ownership
    • Ownership and Tax Implications: Consider how you will transfer ownership. Are you passing it to a family member, selling to a third party, or considering an employee stock ownership plan (ESOP)? Each method has different tax implications, and tools like an Intentionally Defective Grantor Trust (IDGT) might be used to manage these efficiently.

  4. Legacy Considerations
    • Maintaining Your Legacy: Think about the legacy you want to leave. Do you wish to ensure the business continues along the vision you set, or are specific individuals you want to take over? This will influence both the exit strategy and the preparations you make.

  5. Lifestyle Changes
    • Planning Your Post-Exit Life: What lifestyle do you envision after exiting? Whether it’s traveling, pursuing hobbies, or engaging in philanthropy, understanding your post-exit aspirations is crucial. This helps in determining the financial planning needed to support your new lifestyle.

Role of Financial Advisors in Planning Your Exit

Engaging with a trusted financial advisor, such as those at HBKS Wealth Advisors, can provide crucial support in navigating these aspects:

  • Retirement Planning: Advisors can help tailor a retirement plan that considers your expected exit proceeds along with your existing investments and potential social security benefits. They can simulate various scenarios to ensure your retirement funds sustain your desired lifestyle.

  • Tax Minimization Strategies: Exiting a business can lead to significant tax implications. Financial advisors can assist in developing strategies to minimize your tax burden, ensuring more of your hard-earned money remains with you or is invested according to your wishes.

  • Investment Management: Post-exit, managing your investments is critical. HBKS Wealth can craft a personalized investment portfolio that matches your risk tolerance and long-term goals, helping to grow and protect your wealth.

The Path Forward

By carefully valuing your business and aligning this with your personal financial goals, you establish a solid foundation at the start of your exit planning journey. This ensures that your exit strategy is not only financially sound but also aligns with your broader life goals. The steps you take now empower you to move forward with confidence, knowing you are well-prepared for a successful and fulfilling transition into the next chapter of your life.

Insurance products are offered through HBK Sorce Insurance LLC.  Investment advisory services are offered through HBK Sorce Advisory LLC, doing business as HBKS Wealth Advisors.   NOT FDIC INSURED – NOT BANK GUARANTEED – MAY LOSE VALUE, INCLUDING LOSS OF PRINCIPAL – NOT INSURED BY ANY STATE OR FEDERAL AGENCY

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DEA Recommends Rescheduling Cannabis to Schedule III

Date May 1, 2024
Authors Kurt P. Seifert
Geoffrey Lippset
Ofek Peer

On Tuesday, April 30, the Drug Enforcement Administration (DEA) announced its recommendation to reclassify cannabis from Schedule I to Schedule III of the Controlled Substances Act, emphasizing the significance of this move within the context of federal legislation. The change has significant implications for canna-businesses, including removing cannabis operators from the scope of Section 280E of the Internal Revenue Code (280E) and easing barriers to medicinal research. This reclassification could alleviate the conflict between state laws where cannabis has been legalized and federal law, under which cannabis remains a controlled substance.

The growing trend of legalized cannabis across various states and countries, including medical and recreational uses, underscores the potential impact of the DEA’s recommendation on these legal landscapes. Under 280E, cannabis operators have only been capable of deducting costs pertaining directly to the purchase, creation, or development of inventory (Costs of Goods Sold) at the federal level. If the rescheduling is approved by the White House Office of Management and Budget after the public comment period, those same operators will experience tax relief from ordinary and necessary expenses that come with operating a business, such as costs for personnel, management, general and administrative expenses, interest, security, and rent, which should result in significantly reduced tax liabilities and thus improve cash flow.

The DEA’s announcement marks change in policy that has existed for more than four decades, during which cannabis has been classified as a Schedule I drug, a classification reserved for substances with no accepted medical use and the highest potential for abuse. The change recognizes cannabis’s already widely applied medical utility in treatments for conditions such as chronic pain, chemotherapy-induced nausea, and multiple sclerosis, reflecting the contributions of medical marijuana to its proposed reclassification and what many states have already decided including Washington D.C., that its potential for abuse is relatively low.

The “proposed rule” will be subject to review by the White House Office of Management and Budget and subsequent notice and comment rulemaking before it is finalized. The DEA’s recommendation follows a similar recommendation in August 2023 by the U.S. Department of Health and Human Services.

For more information on how the schedule change will affect industry operators, contact an advisor at HBK Cannabis Solutions at (239) 263-2111.

HBK Cannabis Solutions is a dedicated team of cannabis industry subject matter experts within HBK CPAs & Consultants, an Accounting Today Top 100 CPA firm. We were among the first accounting firms to specialize in the cannabis industry and have worked beside entrepreneurs in all industry segments—cultivators, processors, retailers—from single facility to multi-location and integrated operations. We counsel owners, management and investors in multiple states and countries, helping them with key financial activities: from planning start-ups to connecting operators with investment bankers to facilitating M&A; from pre-offering projections, state applications, and licensing to management planning and operations. Our cannabis-specific expertise is recognized throughout the industry; we regularly address industry meetings and conferences, and are active in the organizations and associations dedicated to moving the industry forward.

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Foreign Derived Intangible Income (FDII) Deduction from Services

Date May 1, 2024
Authors Inna Kisseleva

Have you heard of the Foreign Derived Intangible Income deduction also known as FDII, but never thought it may apply to your business because it applies to manufacturers and distributors of tangible property?  This article will review how FDII also applies to domestic corporations that provide various types of services.  FDII is actually meant to incentivize U.S. corporations to retain their intangible assets and associated profits in the United States and to reduce the tax burden on foreign income.

In general, a domestic corporation may claim a deduction, equal to 37.5 percent of its foreign-derived eligible income. It is only available for income from sales of goods or services, and notably, after December 31, 2025, the 37.5 percent rate of the deduction is set to be reduced to 21.875 percent. To calculate FDII, a corporation must first determine the amount of income from the sale of goods or services for use abroad that exceeds an assumed normal return on assets. The corporation can then deduct for tax purposes 37.5 percent of that amount.

Different types of services qualify for FDII deduction, and these include “general” service, electronically supplied service, property service, and transportation service. A “general” service is defined as a service to a consumer or business recipient located outside the United States.1  The services that qualify for FDII can be provided physical or electronic form.

An “electronically supplied service” that qualifies for FDII is one delivered primarily over the internet or an electronic network.2 For example, it may include streaming content, on-demand network access to networks, servers, storage, and software, the provision or support of a business or personal website, online intermediation platform services, and so on.  It is important to note that electronically supplied services do not include services that primarily involve the application of human effort by the renderer, such as legal, accounting, medical, or teaching services that are provided electronically.3  These would be considered general services.

Before the FDII deduction can be taken, however, the taxpayer should gather appropriate substantiation that general or electronic services provided were to the consumers or business recipients outside the United States.  For example, a support of consumer’s residence outside the United States when the service is provided. If the service provider cannot identify the residency of the consumer, then the consumer’s billing address can be used to substantiate the location of the recipient. However, if there is a belief that the consumer does not reside outside the United States, the rule allowing the use of a consumer’s billing address does not apply.4 On the other hand, when a general service is provided to a business recipient it is eligible for the deduction only if the provider substantiates its determination of the extent to which the service benefits a business recipient’s operations outside the United States.

Services that qualify for FDII deduction also include “property” service with respect to tangible property located outside the United States, and “transportation” service to a recipient, or with respect to property, located outside the United States. Note that the requirement for a recipient of these services to reside outside the United States does not necessarily apply to property or transportation services, which are different from general services.

Generally, “property” service includes service substantially (i.e., 80 percent) performed at the location of the property and results in physical manipulation of that property. The examples of physical manipulation are manufacturing, assembly, maintenance, or repair.5 Even if the property was temporarily brought to the U.S., it may still be considered to be located outside the United States depending on circumstances and certain other facts.

Transportation service, on the other hand, is defined as a service to transport a person or property using aircraft, train, vessel, motor vehicle, or any other mode of transportation. It also includes freight forwarding and similar services.6 The transportation service provided to a recipient, or with respect to the property, would be considered located outside the United States only if both the origin and the destination of the service are outside of the United States. However, in the case of a transportation service provided where either the origin or the destination of the service is outside of the United States, then only half of the gross income derived from the transportation service would be considered derived from services provided to a recipient, or with respect to the property, located outside the United States.7

The FDII deduction can result in tax savings to qualifying service providers. Should you have any questions about whether the services your company provides qualify for the FDII deduction, reach out to the HBK Tax Advisory Group at (239) 263-2111.

1 IRC Reg. §1.250(b)-5(b)

2 IRC Reg. §1.250(b)-3

3 IRC Reg §1.250(b)-5(c)(5)

4 IRC Reg. §1.250(b)-5(d)(1)

5 IRC Reg §1.250(b)-5(c)(7)

6 IRC Reg §1.250(b)-5(c)(9)

7 IRC Reg §1.250(b)-5(h)

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Key Takeaways from the National Association of Manufacturers Q1 2024 Outlook Survey

Date April 29, 2024
Authors Elizabeth P. Becherer

With the first quarter of 2024 behind us, many American manufacturers reflected on the challenges of 2023 and await the remainder of 2024 with positive outlooks. In the National Association of Manufacturers’ (NAM) survey of 300 respondents, regulatory burdens, staffing struggles, and increasing healthcare costs were at the forefront of the industry’s challenges. However, there were indications of growth in sales and production, as well as employee retention, that contributed to optimism for the year ahead.

According to NAM’s survey respondents in February, American manufacturers anticipate 2.2% growth in sales over the coming 12 months. This is coupled with anticipated production hikes of an average of 2.3%. However, on a drearier note, survey respondents also expect that the costs of raw materials and other inputs will rival this growth with an increase of 2.4%. Inflation and employee retention costs remain large drivers of this cost trend.

Notably, one of the fastest-growing threats to production in the industry thus far in 2024 is reportedly rapid growth in federal regulation. Over 2023 and 2024, manufacturers witnessed the rollout of numerous new compliance requirements mainly issued by the Environmental Protection Agency (EPA). These spanned many areas of production including emissions and chemical processing. Respondents maintained that these regulations would burden their industry, as they require significant time to understand and comply, with regulations being costly to implement and potentially detrimental to the efficiency of daily manufacturing operations.

Another key area of concern in the first quarter was rising health insurance costs. As much as a 7.1% increase is expected over the next 12 months for such benefits; this already follows increases that took effect in 2023. NAM respondents cited supply chain middlemen such as “pharmacy benefit managers” as key contributors to rising costs for their companies.

Lastly, recent federal tax policy saw lessened monetary incentivization for research and development (R&D) and capital investments. Beginning on January 1, 2022, R&D costs must be amortized over time rather than fully expensed in the current tax year.  Many manufacturers expressed that this has, and will continue to, cause them to scale back on hiring now that fewer funds are available to incentivize this activity.

However, in spite of the challenges that respondents faced in recent months, most still expressed positive sentiments for 2024. With employment, the industry’s main concern in recent surveys, companies have finally seen some progress. Full-time employment in the manufacturing sector is expected to rise 1.0% over the next twelve months, a step that many employers tied back to their efforts to increase wages and benefits (predicted to grow 2.8% in the coming year).

With sales on the rise, more demand, and minor improvements in retention, NAM respondents face the remainder of 2024 with optimism.

To read the Q1 2024 NAM Outlook survey, click here.

To discuss issues specific to your manufacturing company, contact a member of HBK Manufacturing Solutions at 330-758-8613 or

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Insights for Nonprofit Professionals, April 2024

Date April 29, 2024

Welcome to the April 2024 issue of Insights, a newsletter from HBK Nonprofit Solutions designed to help you navigate the financial challenges of operating a nonprofit organization. 

In this issue:

  • Senior Manager Anthony Savasta, CPA, helps you prepare for your nonprofit financial statement audit.
  • High Performance Principal Michael B. Ross explains how to set clear expectations for board members to ensure your board is engaged, active, and supportive.
  • Three members of the HBK Nonprofit Solutions team share their takeaways from the three days of seminars at the 2023 AIDPA National Nonprofit Conference.
  • HBK Principal and Assurance Director Sean Kocan, CPA introduces us to Charity Navigator’s “four beacons,” and explains the ratings service’s importance to both donors and nonprofit organizations.
  • Through an interview with Cancer Bridges Executive Director Stephanie Ciranni, we learn how the nonprofit has provided critical emotional and social support to thousands of cancer patients, families, and friends throughout their cancer journeys. 

Read about the best practices of highly effective nonprofit organizations in the attached April 2024 issue of Insights, a publication of HBK Nonprofit Solutions. We hope you find Insights as interesting as it is informative, and we welcome your thoughts and input via the author contact information provided with each article.

Read the full issue here.

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