Category Archives: Nonprofit Organizations

Conflict-of-interest policies are too important for nonprofits to neglect

Does your not-for-profit organization have a conflict-of-interest policy in place? Do your board members, trustees and key employees understand how the policy affects them? If you answer “no” to either (or both) of these questions, you have some work to do.

A duty

Nonprofit board officers, directors, trustees and key employees all must avoid conflicts of interest because it’s their duty to do so. Any direct or indirect financial interest in a transaction or arrangement that might benefit one of these individuals personally could result in bad publicity, the loss of donor and public support, and even the revocation of your organization’s tax-exempt status.

This is why nonprofits are required to have a written conflict-of-interest policy. To stress the importance of this requirement, the IRS asks tax-exempt organizations to acknowledge the existence of a policy on their annual Form 990s.

Define and provide procedures

In general, conflict-of-interest policies should define all potential conflicts and provide procedures for avoiding or dealing with them. For example, to prevent a board member from steering a contract to his or her own company, you might mandate that all projects are to be put out for bid, with identical specifications, to multiple vendors.

It’s critical to outline the steps you’ll take if a possible conflict of interest arises. For instance, board members with potential conflicts might be asked to present facts to the rest of the board, and then remove themselves from any further discussion of the issue. The board should keep minutes of the meetings where the conflict is discussed. You should note the members present, as well as how they vote, and indicate the final decision reached.

Making it effective

As with any policy, conflict-of-interest policies are only effective if they’re properly communicated and understood. Require board officers, directors, trustees and key employees to annually pledge to disclose interests, relationships and financial holdings that could result in a conflict of interest. Also make sure they know that they’re obliged to speak up if issues arise that could pose a possible conflict.

For help crafting a thorough policy, contact us.

© 2020

Congress rolls back burdensome UBIT on transportation benefits

A much-hated tax on not-for-profit organizations is on the way out. At the end of 2019, Congress repealed a provision of 2017’s Tax Cuts and Jobs Act (TCJA) that triggered the unrelated business income tax (UBIT) of 21% on nonprofit employers that provide employees with transportation fringe benefits. Unequipped to handle the additional administrative burdens and compliance costs, thousands of nonprofits had complained — and legislators apparently listened.

Same benefits, new costs

At issue is the TCJA provision saying that nonprofits must count disallowed deduction amounts paid for transportation fringe benefits such as transit passes and parking in their UBIT calculations. UBIT applies to business income that isn’t related to the organization’s tax-exempt function. Thus, simply by continuing to provide some of the same transportation benefits they’ve always provided employees, nonprofits were liable for additional tax.

For example, employers were forced to assign a value to parking spaces provided to employees. Such activities were time-consuming and burdensome, and the additional costs forced nonprofits to divert funds from pursuing their missions. Nonprofit coalition Independent Sector estimates that the transportation tax and related administrative costs set back nonprofits by an average $12,000.

Fortunately, the repeal of the UBIT provision will be retroactive. Although the details haven’t yet been hammered out, nonprofits that paid the tax on applicable transportation benefits in 2018 and 2019 are expected to get their money back.

Other developments

Repealing the UBIT on certain transportation benefits isn’t the only recent legislation of interest to nonprofits. Last month, Congress also streamlined the foundation excise tax. The current two-tiered tax that many foundations protested will be replaced with a 1.39% revenue-neutral tax.

Congress is likely to address other nonprofit demands — for example, for the introduction of a universal charitable deduction — in future sessions. We can help you stay current with the latest tax developments affecting nonprofits. Contact us.

© 2020

Avoid excess benefit transactions and keep your exempt status

One of the worst things that can happen to a not-for-profit organization is to have its tax-exempt status revoked. Among other consequences, the nonprofit may lose credibility with supporters and the public, and donors will no longer be able to make tax-exempt contributions.

Although loss of exempt status isn’t common, certain activities can increase your risk significantly. These include ignoring the IRS’s private benefit and private inurement provisions. Here’s what you need to know to avoid reaping an excess benefit from your organization’s transactions.

Understand private inurement

A private benefit is any payment or transfer of assets made, directly or indirectly, by your nonprofit that’s:

  1. Beyond reasonable compensation for the services provided or the goods sold to your organization, or
  2. For services or products that don’t further your tax-exempt purpose.

If any of your nonprofit’s net earnings inure to the benefit of an individual, the IRS won’t view your nonprofit as operating primarily to further its tax-exempt purpose.

The private inurement rules extend the private benefit prohibition to your organization’s “insiders.” The term “insider” or “disqualified person” generally refers to any officer, director, individual or organization (as well as their family members and organizations they control) who’s in a position to exert significant influence over your nonprofit’s activities and finances. A violation occurs when a transaction that ultimately benefits the insider is approved.

Make reasonable payments

Of course, the rules don’t prohibit all payments, such as salaries and wages, to an insider. You simply need to make sure that any payment is reasonable relative to the services or goods provided. In other words, the payment must be made with your nonprofit’s tax-exempt purpose in mind.

To ensure you can later prove that any transaction was reasonable and made for a valid exempt purpose, formally document all payments made to insiders. Also ensure that board members understand their duty of care. This refers to a board member’s responsibility to act in good faith, in your organization’s best interest, and with such care that proper inquiry, skill and diligence has been exercised in the performance of duties.

Avoid negative consequences

To ensure your nonprofit doesn’t participate in an excess benefit transaction, educate staffers and board members about the types of activities and transactions they must avoid. Stress that individuals involved could face significant excise tax penalties. For more information, please contact us.

© 2019

When nonprofits need to register in multiple states

Many not-for-profit organizations use fundraising methods that cross state boundaries. If your nonprofit is one of them, it may need to register in multiple jurisdictions. But keep in mind that registration requirements vary — sometimes dramatically — from state to state. So be sure to determine your obligations before you invest time and money in registering.

The critical activity

How do you know if your nonprofit needs to register in other states? The critical activity is soliciting donations, not receiving them. So if your charity receives occasional contributions from out-of-state donors, you may not need to register in those states if you never asked for the contributions. However, email and text blasts and social media appeals are likely to be considered multistate solicitations.

Even so, a handful of state don’t require certain nonprofits to register. For example, they may exempt houses of worship as well as nonprofits with total annual income under certain thresholds. Other states may require charities to register but exempt them annual filing. All of the states have varying rules, income thresholds, exceptions, registration fees and fines for violations. Even the agencies that regulate charities differ by state.

No easy way

Unfortunately, there isn’t a simple way to register with every state. Most states require you to complete a general information form and submit it with:

  • Your last financial statement,
  • A list of officers and directors,
  • A copy of your originating document, and
  • Your IRS-issued tax-exempt determination letter.

 

Registration fees range from $0 to $2,000.

First-time registrants can use a Unified Registration Statement in most states. However, even those states mandate that annual renewals and reports be submitted using individual state forms.

Possible consequences

If your nonprofit fails to register in states where it raises funds, the consequences can be severe.Your organization, officers and board members could face civil and criminal penalties. Your charity might lose its ability to solicit funds in certain states or even lose its tax-exempt status with the IRS. Nonprofits must also list the states where they’re registered on their Form 990s.

For some nonprofits — particularly smaller organizations — cross-state registration requirements and potential penalties may lead them to limit fundraising to their own states. Contact us for help determining your registration obligations.

Does your nonprofit need a CFO?

Your not-for-profit’s ability to pursue its mission depends greatly on its financial health and integrity. If your nonprofit is growing and your executives are struggling to juggle financial responsibilities, it may be time to hire a chief financial officer (CFO).

Core responsibilities

Generally, the nonprofit CFO (also known as the director of finance) is a senior-level position charged with oversight of accounting and finances. He or she works closely with the executive director, finance committee and treasurer and serves as a business partner to your program heads. A CFO reports to the executive director or board of directors on the organization’s finances. He or she analyzes investments and capital, develops budgets and devises financial strategies.

The CFO’s role and responsibilities vary significantly based on the organization’s size, as well as the complexity of its revenue sources. In smaller nonprofits, CFOs often have wide responsibilities — possibly for accounting, human resources, facilities, legal affairs, administration and IT. In larger nonprofits, CFOs usually have a narrower focus. They train their attention on accounting and finance issues, including risk management, investments and financial reporting.

Making the decision

How do you know if you need a CFO? Weigh the following factors:

  • Size of your organization,
  • Complexity and types of revenue sources,
  • Number of programs that require funding, and
  • Strategic growth plans.

Static organizations are less likely to need a CFO than not-for-profits with evolving programs and long-term plans that rely on investment growth, financing and major capital expenditures.

The right candidate

At a minimum, you want a CFO with in-depth knowledge of the finance, accounting and tax rules particular to nonprofits. Someone who has worked only in the for-profit sector may find the differences difficult to navigate. Nonprofit CFOs also need a familiarity with funding sources, grant management and, if your nonprofit expends $750,000 or more of federal assistance, single audit requirements. The ideal candidate should have a certified public accountant (CPA) designation and, optimally, an MBA.

In addition, the position requires strong communication skills, strategic thinking, financial reporting expertise and the creativity to deal with resource restraints. Finally, you’d probably like the CFO to have a genuine passion for your mission — nothing motivates employees like a belief in the cause.

Consider outsourcing

If your budget is growing and financial matters are becoming more complicated, you may want to add a CFO to the mix. Otherwise, consider outsourcing CFO responsibilities to a CPA firm. Contact us for more information.

© 2019

Developing a fundraising plan that works

A not-for-profit can have many strengths — a prominent board of directors, dedicated volunteers, committed staff members and effective programs — and still struggle to meet fundraising goals. Often, such nonprofits lack a strategic fundraising plan. Here’s how to develop one that can get better results.

Get the committee rolling

The first step is to form a fundraising committee consisting of board members, your executive director and other key staffers. You may also want to include major donors and active community members.

Committee members should start by reviewing past sources of funding and past fundraising approaches, and weighing the advantages and disadvantages of each. Even if your overall fundraising efforts have been less than successful, some sources and approaches may still be worth keeping. Next, brainstorm new donation sources and methods and select those with the greatest fundraising potential that are also likely to succeed.

As part of your plan, outline the roles you expect board members to play in fundraising efforts. For example, in addition to making their own donations, they can be crucial links to corporate and individual supporters.

Set it in motion

Once the committee has developed a plan for where the funds will hopefully come from and how to ask for them, it’s time to create a functional budget that includes operating expenses, staff costs and volunteer projections. Then, after the plan and budget have board approval, develop an action plan for achieving each objective and assign tasks to specific individuals.

Most important, once you’ve set your plan in motion, don’t let it sit on the shelf. Continually evaluate the plan and be ready to adapt it to organizational changes and unexpected situations. Although you want to give new fundraising initiatives time to succeed, don’t be afraid to cut your losses if it’s obvious an approach isn’t working.

Planning pays off

Developing a strategic plan for successful fundraising can take time and effort. However, it’s been said that every hour in effective planning saves three to four hours of work. Just remember that planning doesn’t replace doing.

Contact us for more ideas on how to meet fundraising objectives and grow your nonprofit’s revenues.

© 2019

Holding on to your nonprofit’s exempt status

If you think that, once your not-for-profit receives its official tax-exempt status from the IRS, you don’t have to revisit it again, think again. Whether your organization is a Section 501(c)(3), Sec. 501(c)(7) or other type, be careful. The activities you conduct, the ways you generate revenue and how you use that revenue could potentially threaten your exempt status. It’s worth reviewing the IRS’s exempt-status rules to make sure your organization is operating within them.

Hot buttons

There are many categories of tax exemption — each with its own rules. But certain hot-button issues apply to most tax-exempt entities. These include:

Lobbying. Having a Sec. 501(c)(3) status limits the amount of lobbying a charitable organization can undertake. This doesn’t mean lobbying is totally prohibited. But according to the IRS, your organization shouldn’t devote “a substantial part of its activities” trying to influence legislation.

For nonprofits that are exempt under other categories of Sec. 501(c), there are fewer restrictions on lobbying activities. Lobbying activities these groups undertake must relate to the accomplishment of the group’s purpose. For instance, an association of teachers can lobby for education reform without risking its tax exemption.

Campaign activities. The IRS considers lobbying to be different from campaign activities, which are completely off limits to Sec. 501(c)(3) organizations. This means they can’t participate or intervene in any political campaign for or against a candidate for public office. If you’re not a 501(c)(3) organization, campaign restrictions vary.

Excess profit and private inurement. The cardinal rule about profits is that a nonprofit can’t be operated to benefit private interests. If your fundraising is successful and you have extra income, you must put it back into the organization through additional services or by creating a reserve or an endowment. You can’t use extra income to reward an individual or a person’s related entities.

Unrelated revenue. If you’re generating income through a trade or business you conduct regularly and it’s outside the scope of your mission, you may be subject to unrelated business income tax (UBIT). Examples include a university that rents performance halls to nonuniversity users or a charity selling advertising in its newsletter.

Almost all nonprofits are subject to this provision of the tax code, and, if you ignore it, you could risk your exempt status. That said, losing an exempt status from unrelated business income is rare.

Know the rules

IRS Publication 557, Tax-Exempt Status for Your Organization, outlines the rules for all nonprofits that qualify for exempt status. We can help your nonprofit interpret and apply the information based on its specific situation. Contact us today!

© 2019

Writing a winning grant proposal

Competition is as fierce as it has ever been for private and public grants to not-for-profits. If your funding model depends on receiving adequate grant money, you can’t afford to submit sloppy, unprofessional grant proposals. Here are some tips on writing a winner.

Do your research

Just as you’d research potential employers before applying for a job, you should get to know grant-making organizations before asking for their support. Familiarize yourself with the grant-maker’s primary goals and objectives, the types of projects it has funded in the past, and its grant-making processes and procedures.

Performing research enables you to determine whether your programs are a good fit with the grant-maker’s mission. If they aren’t, you’ll save yourself time and effort in preparing a proposal. If they are, you’ll be better able to tailor your proposal to your audience.

Support your request

Every grant proposal has several essential elements, starting with a single-page executive summary. Your summary should be succinct, using only the number of words necessary to define your organization and its needs. You also should include a short statement of need that provides an overview of the program you’re seeking to fund and explains why you need the money for your program. Other pieces include a detailed project description and budget, an explanation of your organization’s unique ability to run this program, and a conclusion that briefly restates your case.

Support your proposal with facts and figures but don’t forget to include a human touch by telling the story behind the numbers. Augment statistics with a glimpse of the population you serve, including descriptions of typical clients or community testimonials.

Follow the rules

Review the grant-maker’s guidelines as soon as you receive them so that if you have any questions you can contact the organization in advance of the submission deadline. Then, be sure to follow application instructions to the letter. This includes submitting all required documentation on time and error-free. Double-check your proposal for common mistakes such as:

  • Excessive length,
  • Math errors,
  • Overuse of industry jargon, and
  • Missing signatures.

Take the time

To produce a winning proposal, you need to give yourself a generous time budget. Researching the grant-maker, collecting current facts and statistics about your organization, composing a compelling story about your work and proofreading your proposal all take more time than you probably think they do. Above all, don’t leave grant proposal writing to the last minute. Contact Langdon & Company LLP if you have any questions!

© 2019

How to convince donors to remove “restricted” from their gifts

Restricted gifts — or donations with conditions attached — can be difficult for not-for-profits to manage. Unlike unrestricted gifts, these donations can’t be poured into your general operating fund and be used where they’re most needed. Instead, restricted gifts generally are designated to fund a specific program or initiative, such as a building or scholarship fund.

It’s not only unethical, but dangerous, not to comply with a donor’s restrictions. If donors learn you’ve ignored their wishes, they can demand the money back and sue your organization. And your reputation will almost certainly take a hit. Rather than take that risk, try to encourage your donors to give with no strings attached.

Personal touch

Some donors simply don’t realize how restricted gifts can prevent their favorite charity from achieving its objectives. So when speaking with potential donors about their giving plans, praise the benefits of unrestricted gifts. Explain how donations are used at your organization, offering hard numbers and examples where needed. Be as upfront as possible and give them as much information as you can about your organization.

To make unrestricted giving as easy as possible, give donors (and their advisors) sample bequest clauses that refer to the general mission and purpose of your organization. Also encourage them to include wording that shows “suggestions” or “preferences” for their donations, as opposed to binding restrictions. Prepare documents that give wording samples for these cases.

Words of intent

Unless you’re holding a fundraiser to benefit a specific program, include general giving statements in your fundraising materials. For example, you might say: “All gifts will be used to further the organization’s general charitable purposes,” or “Your donations to this year’s fundraiser will be used toward the continued goal of fulfilling our organization’s mission.”

Reinforce this message in your donor thank-you letters. They should state your nonprofit’s understanding of how the gift is intended to be used. For example, if a donor stipulated no restrictions, explain that the money will be used for general operating purposes.

Gentle persuasion

Obviously, you’ll need to be respectful if a donor is determined to attach strings to a gift. (Before accepting it, just make certain you’ll be able to carry out the donor’s wishes.) But if you can persuade contributors that their gifts will be used in a responsible and mission-enhancing way, many are likely to remove restrictions.

Contact us for more information on using restricted and unrestricted funds.

© 2019

5 questions can help nonprofits avoid accounting and tax mistakes

To err is human, but some errors are more consequential — and harder to fix — than others. Most not-for-profit organizations can’t afford to lose precious financial resources, so you need to do whatever possible to minimize accounting and tax mistakes. Get started by considering the following five questions:

  1. Have we formally documented our accounting processes? All aspects of managing your nonprofit’s money should be reflected in a detailed, written accounting manual. This should include how to accept and deposit donations and pay bills.
  2. How much do we rely on our accounting software? These days, accounting software is essential to most nonprofits’ daily functioning. But even with the assistance of technology, mistakes happen. Your staff should always double-check entries and reconcile bank accounts to ensure that transactions entered into accounting software are complete and accurate.
  3. Do we consistently report unrelated business income (UBI)? IRS officials have cited “failing to consider obvious and subtle” UBI tax issues as the biggest tax mistake nonprofits make. Many organizations commonly fail to report UBI — or they underreport this income. Be sure to follow guidance in IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations. And if you need more help, consult a tax expert with nonprofit expertise.
  4. Have we correctly classified our workers? This is another area where nonprofits commonly make errors in judgment and practice. You’re required to withhold and pay various payroll taxes on employee earnings, but don’t have the same obligation for independent contractors. If the IRS can successfully argue that one or more of your independent contractors meet the criteria for being classified as employees, both you and the contractor possibly face financial consequences.
  5. Do we back up data? If you don’t regularly back up accounting and tax information, it may not be safe in the event of a fire, natural disaster, terrorist attack or other emergency. This data should be backed up automatically and frequently using cloud-based or other offsite storage solutions.

 

If your accounting and tax policies and processes aren’t quite up to snuff and potentially put your organization at risk of making serious errors, don’t despair. We can help you address these shortcomings. Contact Langdon & Company today!

© 2019