Nonprofit Accounting Questions

Here are some more questions and answers from recent nonprofit accounting trainings trainings I have done.

Q: What is the difference between a 501c3 and a trade group?
A: Check out these publications from the CA Attorney General's office and this listing of resources from the IRS.

Q: What is admin? Just what are administrative costs:
A: Please read this from the National Center of Charitable Statistics.

Because of the diverse characteristics and accounting practices of non-profit
organizations, it is not possible to specify the types of cost which may be classified as indirect cost in all situations. However, typical examples of indirect cost for many non-profit organizations may include depreciation or use allowances on buildings and equipment, the costs of operating and maintaining facilities, and general administration and general expenses, such as the salaries and expenses of executive officers, personnel administration, and accounting.

Q: What is the minimum reporting threshold for filing a w2-g?
A: Please read this from the IRS (opens in a PDF).

Q: What is deferred revenue?
A: Check out these search results for the answer.

Q: Where to find compliance questions and answers from the IRS? How do we stay exempt?
A: The IRS has some good information here.

Q: Where can I find more information on the rules governing commercial fundraisers?
A: From the CA Attorney General's office here and here.

Q: Where are some discussions regarding excessive fundraising costs?
A: In the above commercial fundraiser links and here and here.

Again, if you have any other questions please let me know.

More 990 Resources

The last post listed an IRS webinar for the new 990 and I put up a to-do list a while back. You think I would be done touting new 990 resources but you would be wrong! In the spirit of making sure there are enough resources noted out there to satisfy as many people as possible I give you one more. A big hat tip to Nancy at Non-profit accounting help for pointing out this resource from avenue2possibilities. It includes samples of many of the policies the new form 990 will be asking about and a workbook and checklist to go through to help make sure you are ready. So now all you have to do is put the policies in place!

And if they ever create a New 990 Comic Book you will hear about it here first thing, promise.

IRS Update

From the IRS comes this announcement:

IRS Sends Compliance Questionnaires to 400 Colleges and Universities
Approximately four hundred U.S. colleges and universities will begin receiving compliance questionnaires from the Internal Revenue Service in the next few days as part of the agency’s focused effort to study key areas in the tax-exempt community. The college and university questionnaire will focus on unrelated business income, endowments and executive compensation practices. The questionnaires are being sent to a cross-section of small, mid-sized and large private and public four-year colleges and institutions.

Private nonprofit universities are generally exempt from tax under Internal Revenue Code section 501(c)(3) and like state universities are to unrelated business income tax.

Click here to read the rest.

This is part of a new compliance project for colleges and universities by the IRS. Will this effort by the IRS broaden out to other 501(c)3 organizations? Probably. I think they are looking at the biggest fish first but I'll bet it is just a matter of time until more of these types of letters will be sent.
Are there any lessons to be learned here? I think two at least:

• I'd say make sure that if you are doing any activities that might generate unrelated business income you should learn the rules (link opens a PDF) that apply.
• Make sure your salaries are justified.

Probably making sure your ready in general for the new 990 reporting will help as well.

New 990 To Do List

Even if your nonprofit is lucky enough to have a November 30 year end there is still plenty of stuff you need to be doing right now to get ready for this new reporting form. Thanks to Brian for this great list, it has been something I have been meaning to do for CAN as well as share with everybody. This is a work in progress, some things will be added as we go through this stuff but here is where it is so far:

THE NEW 990:
WHAT DO WE NEED TO DO RIGHT NOW?

Required Policies

• Conflict of interest policy
• Whistle blower policy
• Document retention and destruction policy
• Joint venture policy
• Expense reimbursement policy
• Non-standard gift acceptance policy
• Written debt collection policy (hospitals)

Practices & Procedures

• Need to prepare a written document which sets forth the procedures by which the Board of Directors will review the Form 990 before it is filed
• Document compensation reasonableness processes
• Professional fundraisers agreement
• Documentation regarding eligibility to receive grants

To Do List

• Estimate the total number of volunteers utilized during the year
• Identify any new program service activities conducted during the year
• Identify revenue and expenses for three largest program service activities
• Ensure that filing all 1099s when required to do (non-employee services in excess of $600)
• Prepare documentation to support classification of independent contractors
• Ensure that organization is preparing Form W-2G when required
• Make sure register with California Attorney General if conducting raffles and make sure undertake backup withholding if necessary
• Identify non-cash contributions in excess of $5,000 for which public charity disposed of within 3 years after receiving
• Document meetings of Board of Directors committees with authority to act
• Write-up re how satisfy public disclosure requirements
• Identify all key employees under the expanded definition
• Break out the revenue and expenses from gaming activities from the general fundraising activities
• Update Chart of Accounts (and audited financial statements) to include the expense categories listed on Part IX of the redesigned Form 990

Even if the phrase, "new 990" wants to make you stick your finger in your ears and say, "lalalalalalalalalalala" you can still go through this list and make sure your organization is more prepped than it is right now for the big event.

And please let me know if you think anything is missing from the list!

Why Your Financial Systems Matter

Thanks to the Independent Sector for the heads-up: From the Los Angeles Times comes a story about a local chapter of the Service Employees International Union. This story has everything -- everything that can give the public a reason to think nonprofits are poorly run or are run solely as a scam to make money for the founders: undisclosed payments made to businesses owned by family members, poor financial record keeping, lavish spending and possible misstatements of fundraising expenses.

Even if all the issues mentioned in the story are found to be justified, it is still almost a perfect example of everything you should not do. And just because something is legal doesn't mean it is ethical. Taking the time to think, "How will this look?" to the media, regulators, other nonprofits and especially the community you serve can only help your decision making, financial or otherwise. Having a strong financial system in place and people knowledgeable about those systems, as well as other nonprofit accountability measures, are key for all organizations regardless of mission or size.

Threats to Nonprofit Tax Exemptions

From the New York Times on May 26th.

In case folks out there have not heard of the recent challenges to nonprofit tax exemption and the Minnesota case I thought I would pass this along. Some concerns may be justified; how big should a university endowment be? Does that nonprofit hospital do enough to be considered a charity? Or maybe not. But those big dollars will get people talking and those nonprofits need to have a story to tell or one will be told to them.

A quote from the article really hits the mark for me:

The nonprofit sector is being pressed to be more business-like and to find new ways to fill the gaps between what [funders] will pay and what services cost, but then assessors want to treat us like businesses, which pay taxes.

I think this will be a big issue in the coming years as both charities and governments struggle to find more sources of revenue, especially in a troubled economy.

Efficient Charities

Two stories from the Chronicle of Philanthropy last Thursday caught my eye.

The first is about congressional rumblings to have nonprofits post fundraising ratios and costs on a Postal Service web site.

Seriously.

No information was given on where the charities would pull this information from, when it would be updated and weather it would be checked out or not for accuracy. Not to mention who would maintain this database, how it would be funded or what kind of education and outreach about the information on said site and how to use it.

The second article is more in depth. It starts out with the IRS Commissioner Steven T. Miller stating that, even though the IRS may not have the jurisdiction to, it will be more aggressive in monitoring the "efficiency and effectiveness of charitable organizations." He was also disappointed that the IRS gave up the idea of placing "efficiency indicators." on the front of the 990 because he wants to help make "apples-to-apples" comparisons possible.

I was against having the "efficiency indicators" there precisely because I don't think that it helps much for comparison. Standard benchmarks like the ones listed in the article may be informative but I do not believe they tell you how efficient a charity is, especially in comparison to other charities. For profit businesses are formed to make profit. A dollar of profit is the same at one business as it is at another, so ratios work and are comparable. But nonprofits are formed to do many different things, too many to be able to come up with easy ratios and benchmarks that cross the sectors of the charitable universe.

Would you compare a big nonprofit hospital to a small after school sports program? You could but I don't think you would get much that is useful. Now hospital to hospital, sports program to sports program? You could make some comparisons with benchmarks and ratios that could yield some interesting information.

The myopic thinking that all nonprofits are the same just because they are nonprofits still baffles me. Especially in people who task themselves to regulate us.

Is A Donation To An Individual Tax Deductible?

The short answer, according to the IRS and Publication 526, is no. I have been asked this question several times over the years and there is one thing people always get stuck on: They want to donate money to a specific person that charity XYZ works with. They will write the check to the charity but specify who the money should be spent on. That is a charitable donation, right? Wrong. To quote from the IRS:

You cannot deduct contributions to specific individuals, including the following.

• Contributions to individuals who are needy or worthy. This includes contributions to a qualified organization if you indicate that your contribution is for a specific person. But you can deduct a contribution that you give to a qualified organization that in turn helps needy or worthy individuals if you do not indicate that your contribution is for a specific person.

  Example. You can deduct contributions for flood relief, hurricane relief, or other disaster relief to a qualified organization. However, you cannot deduct contributions earmarked for relief of a particular individual or family.

• Payments to a member of the clergy that can be spent as he or she wishes, such as for personal expenses.

• Expenses you paid for another person who provided services to a qualified organization.

  Example. Your son does missionary work. You pay his expenses. You cannot claim a deduction for your son's unreimbursed expenses related to his contribution of services.

• Payments to a hospital that are for a specific patient's care or for services for a specific patient. You cannot deduct these payments even if the hospital is operated by a city, state, or other qualified organization.
  

This is not to say that those donors cannot donate to those individuals at all, just that those donations will not be tax deductible.

IRS 2008 Implementation Guidelines

The IRS has just released a PDF of its FY 2008 Implementation Guidelines. It contains the program guidance for implementing the Exempt Organizations portion the IRS's Strategic and Program Plan for the coming fiscal year.

Among the highlights:

1. Details of the updated form 990 will not be released until the first quarter of 2008 rather than the end of 2007 as previously reported by the IRS.
2. More attention to executive compensation.
3. Further looking into charitable trusts.

Download a copy to find out what the IRS has in store for us in 2008, I'll also try to keep updates here as soon as they happen.

New stats and trivia

Well, kinda new. The IRS release its Fall 2007 Statistics of Income Bulletin. The "new" info is from tax year 2005, here is a taste:

• A look at private foundations: The number of private foundations that filed Form 990-PF remained nearly the same between tax years 2003 and 2004,while the number of nonexempt charitable trusts treated as private foundations that filed the return increased by 12 percent. In tax year 2004, private foundations distributed $27.6 billion in contributions, gifts, and grants and other outlays for charitable purposes, while nonexempt charitable trusts distributed $314 million.
• Recent data on charities: For tax year 2004, nonprofit charitable organizations exempt from income tax under Internal Revenue Code Section 501(c)(3) filed more than 276,000 information returns, an increase of 5 percent from 2003. These organizations held more than $2.0 trillion in assets, a real increase of 5 percent from the previous year and 52 percent over the past decade.

New IRS Publications and Resources

Please note: all links in this post download PDF documents.

Publication 4630, The Exempt Organizations Products and Services Navigator lists all the resources available from the IRS to nonprofits. This is a nice, consolidated reference for everything they have for us.

Two other updated pieces are publications 4221pc (for charities) and 4221pf (for private foundations) provide an overview of activities that could jeopardize exempt status as well as information on record keeping, reporting and disclosure compliance requirements.

Both publications seem easy to follow and are further example of how (I think at least) the IRS is trying to make compliance info easier to access and grasp. As nonprofits we have A LOT to keep track of and rules to follow, so I appreciate the efforts the IRS is making to help.

Upcoming IRS Events in CA

Two events are coming up. Info on both are here.

The first is a one day event in Sacramento and there are three dates in December, the 18th through the 20th. "This introductory workshop is designed for administrators or volunteers who are responsible for an organization's tax compliance."

The second is in Los Angeles and is the Western Conference on Tax Exempt Organizations, a big two day event for "attorneys, accountants, and executives of tax-exempt organizations, co-sponsored by Loyola Law School and IRS Exempt Organizations; early bird registration rate available until October 15."

More on the New 990

Well some of the first criticisms of the new IRS form 990 are up. I'm interested to know what you think about what the president of Charity Navigator has to say.

I have some initial thoughts on the core form. I like the summary section of part 1. It lays out the more important aspects of the form in a fairly straight forward way, what the casual reader of a 990 really will want to see. We do still need a way to educate readers on what the information means, maybe a new Peter Swords book?

Overall the form feels easier to understand and grasp. The Parts have an ordered feel to their layout, every part is a complete section. The form is longer by page count but it goes faster.

Some questions that came up during the first go through:

• Part I number 8b, what is it trying to show? What is a “good” metric? I don’t think that benchmark needs to be on the form.
• Part I number 9, if there is no other explanation a person who doesn’t understand how a NP operates numbers here may make them think the NP is doing something wrong. I don’t see a reason for listing 9 on the summary page, don’t see what it serves in the big picture.
• Part I number 15, if this is a larger number it could at first glance be a bit misleading.
• Part IV number 1f, “gifts grants,” what does that mean? Typo?
• Part V number 23, great! I like the added criteria, forces people to not be lazy.

I’ll list more as I come across them upon more in depth reading.

990-T Disclosure Rules

I have mentioned this before but it looks like there is new guidence out there for how it will work.

The Internal Revenue Service recently issued interim guidance (Notice 2007-45) regarding the public disclosure of Form 990-T by tax-exempt organizations. The new disclosure requirements were initially set forth in the Pension Protection Act of 2006; Notice 2007-45 now provides the following additional specifics:

• The new Form 990-T public disclosure rules apply to all Forms 990-T filed after August 17, 2006
• The public disclosure rules for Form 990-T are the same as they are for Form 990
• Any religious or governmental entities not currently required to file a Form 990, but who file a Form 990-T, are required to publicly disclose their Form 990-T
• The Internal Revenue Service will not be making copies of the Form 990-T available to Guidestar
• The tax-exempt organization is not required to put a copy of the Form 990-T on their web site
• Tax-exempt organizations preparing a Form 990-T solely for purposes of claiming the telephone excise tax refund are not required to make such Form 990-T available for public inspection

Thanks Brian for the heads up!

New Electronic Filing Requirement for Small Organizations

e-Postcard (Form 990-N)
Beginning in 2008, small tax-exempt organizations that previously were not required to file returns may be required to file an annual electronic notice. With the enactment of the Pension Protection Act of 2006 (PPA), these small tax-exempt organizations will now be required to file electronically Form 990-N, also known as the e-Postcard, with the IRS annually for tax periods beginning after December 2006.

WebCPA | Regulatory spotlight shines on NFPs

WebCPA | Regulatory spotlight shines on NFPs

Thanks to a board member for sending me this link. The article is another good round up of what is going on out there.

IRS Launches On-Line Workshop for Exempt Organizations

Have I mentioned the Nonprofit Risk Management Center before? I am remiss then, as I have found them to be an invaluable resource over the years. They have too many resources to list here so check them out.

In their e-newsletter I was tipped off to this handy site, http://www.stayexempt.org/. From the Center's email:

The Internal Revenue Service has launched a new Web-based version of its popular Exempt Organizations Workshop covering tax compliance issues confronted by small and mid-sized tax exempt organizations.

The free online workshop — Stay Exempt — Tax Basics for 501(c)(3)s — consists of five interactive modules on tax compliance topics for exempt organizations.

You can complete the modules in any order and repeat them as many times as you like. The online-training Web site doesn’t require registration and visitors will remain anonymous.

Neat! I will be sure to check it out to see how it works.

Multi State Solicitation Rules

Thaks to Shannon at Public Law Center for the information and link to filing for charitable solicitation in multiple states. Unified Registration Statement Kit

More Q&A

Questions we have received recently...

Question:
Executive Director salary justification - who do we submit this report to? What are examples of how to justify the salary and is it only for the Executive Director?

Answer:
The intermediate sanctions requires that the board be able to show that they did proper research to determine that the salary of the exec is not excessive. The minutes should verify that some kind of salary survey was conducted that compared the salary being offered with organizations of similar size and type. The board needs to justify to itself that the salaries it offers top level staff, board members, contractors, etc. are not excessive.

The regulation applies to all salaries (mostly top level salaries), contracts, income paid to board members, any "insiders". More information on Intermediate Sanctions can be found here.

Question:
What is the deal with UBIT?

Answer:
From the Nonprofit Times enewsletter:

Finance...

Getting hammered with UBIT

Many nonprofit organizations embark on ventures that cross over into the for-profit world, sometimes by design and sometimes by accident.

The Internal Revenue Service (IRS) has strict regulations governing Unrelated Business Income Tax (UBIT), which can be regarded as money a nonprofit makes that is not part of its nonprofit operations.

In her book Something Ventured, Something Gained, Laura Landy offers several options for a nonprofit that has 15 percent or more of its total income that is unrelated income.

Those options are:

-- Revise the charter of the organization. Depending on the nature of the business, the nonprofit can file with the IRS to amend its charter.

-- Alter the business to make it related. Although possible, this course of action is not recommended.

-- Stabilize or reduce the income to below 15 percent. This may be counterproductive, since the point of a nonprofit and a for-profit is to raise as much money as possible.

-- Sell the business. Caution is needed here, because the income from the sale may be unrelated and thus taxable.

-- Establish another nonprofit organization in which the business activity is related. A cooperative partnership can be established under which the second nonprofit donates its profits to the parent nonprofit.

-- Establish a separate profit-making corporation. This can be complicated, but often it is the best course of action.

Also check the links to the right for more info on UBIT.

Does the hiring of undocumented workers pose an exemption threat?

From what I have been able to find I would still say no. I have emailed others more knowledgeable than I and will let you know if they say different.

UPDATE - what they have said:
In theory, it should not be a threat to the exemption. However, this will depend on several factors, namely,

1. The type of exemption. A church will have a better stance than say a hospital.
2. The facts. Did the organization know they were employing an undocumented individual? What did they do about it when they found out?
3. How was it discovered? By the IRS, the organization, who?
4. Do they continue to break the law? Continued disregard for the law may jeopardize the exemption.