Nonprofit News Articles
Volume 8, Issue 3, Spring 2008
Nonprofit Boards: Leave a Lasting Memory
By Robert E. Reynolds, CPA
It is up to your nonprofit’s board of directors to create the vision for the organization and set the course for achieving objectives. This entails a wide variety of tasks that can take years or even decades. However, perhaps the most important task for a board is the final one: Paving the way for the next board of directors.
Background: The board that succeeds the founding board of directors can help the nonprofit organization thrive as well as survive or it can start it on a downward spiral that may ultimately lead to dissolution. Thus, it is important that your current board of directors implements the steps needed to replace itself with a new board that shares a common plan for the future.
Typically, the board of directors will play a pivotal role in its successor while working in conjunction with the chairperson and the chief executive officer. With input from the board, the “next generation” should take shape, probably within five years of the board’s founding. Here are several recommendations that can help pave the way for a smooth transition of power.
*Know and understand the key issues inside out. This includes the main challenges facing the organization, the optimal opportunities for the future, the fulfillment of the mission, strategic alliances and the revenue methodology. What will it take for the organization to become more effective? How can it make an impact?
*Determine the best ways in which the board can “add value.” What sort of expertise, flexibility and strategic relationships will be needed in the future? For instance, it may be critical to develop diversity in funding sources as the nonprofit grows out of its infancy. Consider the enhancements that are most likely to be beneficial.
*Make projections for the coming decade. Envision the character of the people who can build on the nonprofit’s current foundation. Describe the qualifications and expertise of the board members who can take the organization to the next level.
*Create a plan for finding successors. How will you entice the “right people” to join the board? You might assign responsibilities to current board members for reaching out to the best candidates.
*Shore up the accounting aspects. Make sure that any potential fiscal problems are addressed or resolved. Prime prospects for future board positions may shy away from the organization if its financials are not in order.
*Map out a timetable for the succession. This will depend on the particulars of the nonprofit and how and when the current board is willing to cede control. It may be difficult to come to a consensus, but it is important to begin the process. Otherwise, inertia takes over and the board can become stagnant.
Practical advice: Board members should not rest on their laurels. The best way to leave a lasting impression is to build for the future.
If you have questions on ways you can pave the way for your next board of directors, email Bob at rreynolds@bradyware.com.
Volume 8, Issue 2, Winter 2008
New Filing Requirement For Non-Profits
By John P. Dales, CPA
If you are a volunteer board member of a small not-for-profit organization, you need to know that ALL exempt organizations must file a report with the IRS for tax periods beginning after 2006, regardless of the organization’s size. Failure to file will lead to the organization’s loss of its exempt status.
Until now, small exempt organizations did not need to file any annual tax return if their total annual receipts were normally less than $25,000. This rule was eliminated by the Pension Protection Act of 2006 which requires these organizations to update their status annually by filing an electronic notice with the IRS.
The required notice will ask for the organization’s legal name, address, website (if one exists), federal identification number, the name and address of a principal officer of the organization, its accounting year end and any other names the organization uses. Organizations will also be asked to confirm that annual gross receipts are still less than $25,000 and that the organization has not terminated its operations.
This filing requirement is clearly simple enough that any organization should be able to comply. So, if you are a member of the board, you need to make certain that the requirement is met. Failure to file this simple report for three consecutive years will lead to the automatic revocation of your organization’s exempt status. The guidance on this revocation is clear, after a termination for failure to file, your organization will need to re-apply for its exempt status and pay the applicable filing fees.
In order for your supporters to deduct contributions they make to the organization, you must maintain your exempt status. Small exempt organizations have a tough enough time raising funds for their various causes; they certainly don’t need to alienate supporters by losing their exempt status. If an exempt organization loses its status due to failure to file, that status can be restored retroactively; but only by reapplying for exempt status and demonstrating that failure to file the annual notice was for a “reasonable cause”. The reasonable cause standard can be difficult to meet.
To assure that your organization remembers to file its 2007 Annual Electronic Notice, I suggest that you sign up for the IRS Exempt Organizations electronic newsletter. Do this at www.irs.gov/eo. This newsletter will keep you informed regarding the filing requirement and remind you to file when the new electronic form becomes available.
The IRS began mailing notices of this new requirement to small exempt organizations. Many small exempt organizations have moved or have been exempt from filing for so long that the IRS will not have contact information and will not receive the notice. Your organization will not be excused simply because it did not receive a notice.
If you are a volunteer member of a small exempt organization’s board of directors, bring this requirement to the attention of the board and make certain that your board assigns the task to one of its members.
Brady Ware can help ensure your nonprofit is on target with federal requirements. For more information about the Brady Ware nonprofit services team, contact John at (937) 223-5247 or jdales@bradyware.com.
Volume 8, Issue 1, Fall 2007
Nonprofit Organizations: Create a Reserve Fund
By Melessa L. Behymer
Even historically successful nonprofit organizations may face financial risks in the months and years ahead. For instance, your nonprofit might begin losing significant “market share” to other organizations. Similarly, the loss of a major donor or a key staff member could have dire results.
It makes good practical sense to establish a reserve fund that can sustain you through the down times. This will enable your nonprofit to continue functioning smoothly when economic difficulties arise.
If your nonprofit does not have a reserve policy, make this one of your top priorities. Here are four basic steps for implementing a reserve policy.
1. Identify potential threats to the organization’s well-being. Of course, this will depend, at least in part, on the nature and size of your nonprofit. Once the key areas of concern have been identified, you will be able to estimate the amount of the necessary reserve. Moreover, you should specify the sources of revenue for the reserve, such as an Endowment Campaign.
2. Establish the parameters for your reserve policy. This will define the amount set aside for operating expenses. The exact amount will depend on a number of factors, including your nonprofit’s mission, the amount of your operating expenses and the annual level of contributions. Although there are no hard-and-fast rules, creating a reserve that covers three to six months of operating expenses is relatively common.
3. Indicate how the operating funds will be used if emergencies occur and the procedures to be followed under such circumstances. Furthermore, as part of the reserve policy you should establish how your nonprofit will handle funds that exceed the operating reserve balance. For instance, the board may want to authorize information technology upgrades or other expenditures when there is a surplus. For example, designate the reserve as board controlled funds.
4. Adopt appropriate accounting procedures. It is recommended that you separate your nonprofit’s reserve as a designated amount in the net asset section of the financial statement. This can show potential supporters that the organization is fiscally sound and that it has adopted sensible techniques for preserving its viability.
In summary: Virtually every nonprofit will face financial challenges at some point in its existence. Successful organizations acknowledge this fact and will have a plan to weather financial risks as they arise.
Creating a reserve fund is smart business for a nonprofit. To find out how Brady Ware can assist your organization with its financial needs, contact Missy at (937) 223-5247 or mbehymer@bradyware.com.
Volume 7, Issue 3, Spring/Summer 2007
"Suggested" IRS Governance Guidelines for Tax Exempt Organizations Released
By Mary T. Colegate, CPA
The Internal Revenue Service has released a set of suggested governance guidelines for 501(c)(3) organizations. Although the IRS does not have the power to require that organizations adopt these guidelines, it is anticipated that, after public comment, a substantial part of these guidelines will become widely adopted as they are incorporated in the IRS form 1023, Application for Recognition of Exemption, and through the exercise of the IRS's oversight and regulatory powers.
The guidelines focus on nine areas, and specifically recommended that every 501(c)(3) organization adopt:
-
A mission statement.
-
A code of ethics and whistleblower policies, (this is currently required by the Sarbanes Oxley).
-
Policies and procedures to fully inform each director of its operations and financial status and ensure that directors act consistent with their duty of care.
-
Policies to ensure transparency in its activities and finances, such as by posting tax returns and financial statements on its website and otherwise making these documents publicly accessible.
-
Policies to ensure that fundraising activities comply with applicable laws, keep expenses to a minimum, and require that paid fundraisers be registered with the state and their performance be monitored.
-
Policies requiring the performance of an annual audit by an independent auditor or certified professional accountant that also requires the auditor be periodically reviewed.
-
Encouraging the use of the IRS intermediate sanctions "rebut table presumption" to ensure that compensation of officers and employees is reasonable.
-
Policies and procedures for document retention, including electronic documents, (this is currently required by the Sarbanes Oxley).
-
A conflicts of interest policy to ensure that directors act consistent with their duty of loyalty, prevent any self-dealing, and require the annual disclosure of any potential conflict of interest. This policy should also cover the board of directors.
In addition to these guidelines, the IRS cautions organizations with excessively large or small boards, noting that small boards may not represent a public interest and the large boards may not be attentive to the oversight. The IRS recommends that large boards establish an executive committee.
The release of these guidelines indicates that the IRS plans to continue to focusing on the governance of tax-exempt organizations. As a practical matter, organizations should consider performing a comprehensive review of the organizational documents, governance practices, and compensation policies in 2007.
Brady Ware employs a team dedicated to servicing the particular needs of nonprofits. For information regarding these guidelines or how Brady Ware can help your nonprofit organization, contact Mary at (937) 913-2509 or mcolegate@bradyware.com.
Volume 7, Issue 2, Winter 2007
For Nonprofits: Measuring Financial Performance from the Donor’s Perspective
By Graig J. Tuschong, CPA
Charitable organizations are competing for a limited supply of donor and grantor resources. How does your organization measure up to other charitable organizations? Management of your organization may have specific indicators that are used internally to evaluate financial performance; but do these indicators include those used by donors and other resource providers?
Donors may use a variety of indictors in evaluating whether or not to support an organization. Several of these indicators may be included in the Standards of Charity Accountability produced by the Better Business Bureau (BBB) Wise Giving Alliance. The standards are applicable to organizations conducting charitable solicitations, and encourage fair and ethical practice among these organizations.
The importance of an individual standard may vary from donor to donor when determining whether or not to give. However, two of the standards quantify financial information into ratios that perhaps simplify the evaluation for a donor. These two standards are as follows:
1. Total program service expenses as a percentage of total expenses. The BBB standard calls for organizations to spend at least 65% of total expenses on program activities. The 65% is a minimum target. A higher percentage of program service expenses to total expenses is viewed more favorably from a donor’s perspective.
2. Total fund-raising expenses as a percentage of total related contributions. The BBB standard calls for organizations to spend no more that 35% of related contributions on fund-raising. Related contributions are further defined as donations, legacies and other gifts received as a result of fund raising efforts.
As these two performance indicators are commonly used by donors and other resource providers, management of charitable organizations should also be using such indicators to evaluate the organization internally. The indicators can assist in monitoring the use of funds received in order to sustain viability from the donor’s perspective, which can further assist in maintaining and growing a donor base.
The Standards of Charity Accountability are located on the BBB Wise Giving Alliance website at www.give.org. How does your organization currently measure when evaluated by such standards?
If you’d like more information about performance measurement tools and ratios useful to nonprofits, give Graig a call at (937) 223-5247 or email gtuschong@bradyware.com.
Volume 6, Issue 4, Summer 2006
IRS Requires Nonprofits to Toe the Line
By Mary T. Colegate, CPA
The tax-exempt community's response to devastating events is a recent reminder of the inspiring work charities do everyday both here and abroad and the public's reliance on the services they provide. Protecting the public trust in these organizations and guarding the financial benefit of tax-exempt status necessitates close scrutiny by the IRS. Fortunately, the overwhelming majority of tax-exempt organizations try hard to comply with the letter and spirit of the law, and the tax-exempt community, itself, recognizes the need to protect the reputation of the sector. This was exemplified by the recommendations in the report by the Panel of Nonprofit Sector; in particular, the recognition of the need for a stronger enforcement presence by the IRS.
For many years, nonprofit organizations operated slightly below the radar, as far as the IRS was concerned. But now the IRS is putting these charitable organizations on the alert. In 2004, the IRS established the Exempt Organization Compliance Unit (EOCU). This new unit was created to examine Form 990s for errors, inconsistencies, incomplete entries and other items of a suspicious nature. The EOCU will be using electronic records to ensure compliance. As a result of this focus, it is expected that audits for charitable organizations will begin to increase significantly.
But that's not all. On January 12, 2005, the IRS released regulations that require certain tax-exempt organizations to e-file annual exempt organization returns beginning in 2006.
1. For 2005 returns due on after December 31, 2005, the regulations require organizations with total assets of $100 million or more who file at least 250 returns including income, excise, employment tax and information returns during a calendar year, to file electronically. Example: If a tax-exempt organization has 245 employees, it must electronically file Form 990 because each W-2 and quarterly Form 941 is considered a separate return; therefore, the organization files a total of 250 returns.
2. For tax years ending on or after December 31, 2006, the electronic filing requirement will be expanded to include tax year 2006 of tax-exempt organizations with $10 million or more in total assets if they file 250 or more returns a year. In addition, private foundations and charitable trusts will be required to file Forms 990PF electronically regardless of there asset size, if they file at least 250 returns.
3. Large tax-exempt organizations that prepare their own returns must be authorized by the IRS as a Large Taxpayer or use a tax professional who is IRS Authorized e-file provider.
Tax-exempt organizations can request waivers from the electronic filing requirements:
1. Where the exempt-organization can not meet the electronic filing requirement due to technology constraints; or
2. Where compliance with the requirements would result in undue financial burden on the filer.
Word to the wise: as you can see, it's important than ever for tax-exempt organizations to comply with the IRS filing requirements. The best advice: Don't try to go it alone. Contact Mary at (937) 913-2509 or mcolegate@bradyware.com to assist you.
Volume 6, Issue 3, Spring 2006
Noncash Contributions Received By Nonprofits
By Twana L. Cheek, CPA
Often times, qualified nonprofits, including most churches, charitable and educational organizations are the recipients of noncash contributions. Common examples include donation of items for an auction or raffle, contributions of stock, usage of office space at no cost or donation of services.
Tax Issues
The Internal Revenue Service (IRS) has very specific requirements for donations of noncash items. Please note that the burden of proof is on the donor NOT the receiving nonprofit organization. However, nonprofit organizations should supply the required acknowledgements to the donor for their records as follows:
1. Total deductions of less than $250 – The nonprofit organization should provide a receipt or acknowledgment including the date and a detailed description of the items.
2. Total deductions of $250 - $5,000 – The nonprofit organization should provide a written acknowledgment including the date and a detailed description of the items (same as preceding requirement) and a statement and explanation, if applicable, of whether the donor received any goods or services (other than token items) as a result of the contribution.
3. Total deductions over $5,000 – The nonprofit organization must provide the same information as required for contributions $250 - $5,000. In addition, you should be asked to sign IRS Form 8283 Noncash Charitable Contributions – Part IV: Donee Acknowledgment. Please note that if your organization sells or disposes of the donated property within two years after the date of receipt, you must file a Form 8282 with the IRS and give the donor a copy of that form.
The donor is responsible for determining the value of the contribution for their own tax purposes. Therefore, no receipts or letters should be given to the donor including any dollar amount.
From a procedural standpoint, you may find that it is easier to have a standard letter, incorporating the maximum disclosure above, used for all qualifying noncash donations, regardless of the dollar amount.
The IRS specifically states that the value of time and services are not deductible to the donor. In addition, there are more stringent requirements concerning donation of automobiles.
Accounting Issues
Although you should not provide a fair value to the donor for tax purposes, if your organization maintains its financial records on an accrual basis, contribution revenue should be recorded at the fair value of the donation.
If donated items have no value and no alternative use, they should not be recognized in the financial statements. Fair values can be determined by using appraisals, actual receipts or other reasonable methods of measurement. In the case of auctions or sales, the fair market value recorded would be the actual sale price.
There are specific accounting regulations that govern noncash donations for financial statement reporting purposes.
The IRS tax and accounting requirements may be complex in areas such as these. Call Twana at (765) 966-0531 or email tcheek@bradyware.com for assistance.
Volume 6, Issue 2, Winter 2006
IRS Requires Nonprofits to Toe the Line
By Robert E. Reynolds, CPA
For many years nonprofit organizations operated slightly below the radar, at least as far as the IRS was concerned. The nation’s tax collectors simply figured that there were bigger fish to fry. But now the IRS is putting these charitable organizations on alert: It has established a new division to scrutinize nonprofit returns and has imposed new filing requirements for many charities.
Although charitable organizations generally do not have to pay any tax, they still must file annual information returns (Form 990) within 4½ months of the close of their fiscal year. Note: Certain organizations with limited assets or revenue, and churches and related organizations are exempt from this requirement. This is the main source of information that the IRS receives about nonprofits.
New crackdown: In 2004, the IRS established the Exempt Organization Compliance Unit (EOCU). This new unit was created to examine Form 990s for errors, inconsistencies, incomplete entries and other items of a suspicious nature. The EOCU will be using electronic records to ensure compliance. As a result of this focus, it is expected that audits for charitable organizations will begin to increase significantly.
But that’s not all. The IRS has also released new regulations requiring certain tax-exempt organizations to file annual returns electronically. The new regulations apply to the 2005 information returns that will be filed in 2006.
*For 2005 returns that are due in 2006, electronic filing is required by tax-exempt organizations with total assets of $100 million or more.
*For 2006 returns, this requirement will be expanded to include annual returns of organizations with $10 million or more in total assets.
*In addition, private foundations and charitable trusts will be required to file Form 990-PF electronically, regardless of their asset size.
Note: The new electronic filing requirements apply to entities that file at least 250 returns (including income tax, excise tax, employment tax and information returns) during a calendar year.
Word to the wise: It’s more important than ever for nonprofit organizations to comply with IRS filing requirements. The best advice: Don’t try to go it alone. Call Bob at (937) 913-2510 or email rreynolds@bradyware.com.
Volume 6, Issue 1, Fall 2005
Does your nonprofit organization have unrelated business income?
In general, nonprofit organizations are not subject to income tax on the income generated from activities that relate to their exempt purpose. With changes in public support, funding levels and programs, organizations are challenged to identify new sources of revenue. Some of these revenue sources may not be related to the organization’s exempt purpose and the organization may become subject to unrelated business income tax on that revenue.
There are three conditions that must exist for a nonprofit organization to be conducting an unrelated trade or business.
The three conditions are:
- The activity must be a trade or business;
- The trade or business must be regularly carried on; and
- The trade or business must not be substantially related to the organization’s exempt purpose. The fact that the income generated is used only for tax-exempt purposes does not matter. The determining factor is how the money is obtained, not how it is spent.
Some examples of activities that may be unrelated business income include advertising, joint ventures, sale of member lists, certain retail activities or public parking lots.
In addition to paying the unrelated business income tax, organizations that derive significant amounts of unrelated business income could place their exempt status in jeopardy.
If you have experienced any changes in your sources of revenue, or if you anticipate future changes in your revenue sources, please contact Patty Ioas at (973) 223-5247 or email her at pioas@bradyware.com.
Volume 5, Issue 4, Summer 2005
For Nonprofits: Do’s and Don’ts of Technology Funding
By Robert E. Reynolds, CPA
How can your nonprofit organization keep pace with technological advances? It takes money—perhaps more than you can expect to generate through regular donation programs. If you are hoping to drum up support from the government or a major corporate sponsor, be aware that competition in this arena is fierce.
The trick is to differentiate your proposal from the countless others being pitched at potential sources of technology funding. Here are some practical “do’s” and “don’ts” to follow:
*Don’t focus on cutting-edge technology. This is not necessarily attractive to the leading funding sources. It is usually more persuasive to add high-tech aspects to proven ideas. Demonstrate how the new technology can be used to further your mission.
*Don’t request funding for basic operations. It is likely you will be shut out if you take this simplistic approach. In other words, you cannot expect the funding entity to balance your nonprofit’s budget on its back. You stand a much better chance of success if the funding proposal is linked to one or more specific nonprofit projects.
*Do the homework. Indicate that you are aware of what other nonprofits are doing in this area, how your proposed project will fit into your overall operation and what the level of complexity is. Technology funders are less likely to be swayed if you are simply jumping onto the bandwagon so you can latch onto the latest high-tech gizmo.
*Don’t get in over your head. Delegate technical matters to the person in your organization who is best qualified to explain what you are hoping to accomplish. Caveat: He or she must be able to express your position in “plain English.” If there’s no one aboard up to the task, seek assistance from the business community.
*Do develop an evaluation plan. This is as critical as it is with most other funding proposals. In this “bottom line” era, you must be able to produce results with the money you are given. An evaluation plan also demonstrates that you are taking a long-term approach to the project.
*Don’t ignore potential problems. Your proposal cannot be just about the computer hardware and the software. Be sure to address such issues as the need for comprehensive training, maintenance of equipment, provisions for down time and obsolescence. With advances continuing at breakneck speed, today’s cutting-edge technology could be old hat in just a few years.
*Do follow procedures. If the funding organization has established guidelines for obtaining a grant, follow them precisely. Don’t try to take short cuts or skimp on information. It is better to provide too much detail about your proposal than not enough.
Finally, make sure that your proposal is related to your charitable function. Simply asking for a bank of new computers won’t leave much of an impact. However, if you can show how a new computer system or software improves an existing service, you will make a better impression, especially if the funding organization already supports your cause.
If you’d like more information about Nonprofits and how to maximize funding, give Bob a call at (937) 237-5247 or email rreynolds@bradyware.com.