Tag Archives: nonprofit

To find new revenue opportunities, think like an auditor

Erin MiranteOctober 27, 20200 Comment

Want to increase your not-for-profit’s revenue? First try analyzing current income as a professional auditor might. Then, you can apply your conclusions to setting annual goals, preparing your budget and managing other aspects of your organization.

Compare contributions

Compare the donation dollars raised inpast years to pinpoint trends. For example, have individual contributions been increasing over the past five years? What campaigns have you implemented during that period? You might go beyond the totals and determine if the number of major donors has grown.

Also estimate what portion of contributions is restricted. If a large percentage of donations are tied up in restricted funds, you might want to re-evaluate your gift acceptance policy or fundraising materials.

Measure grants

Grants can vary dramatically in size and purpose — from covering operational costs, to launching a program, to funding client services. Pay attention to trends here, too. Did one funder supply 50% of total revenue in 2015, 75% in 2016, and 80% last year?

A growing reliance on a single funding source is a red flag to auditors and it should be to you, too. In this case, if funding stopped, your organization might be forced to close its doors.

Assess fees

Fees from clients, joint venture partners or other third parties can be similar to fees that for-profit organizations earn. They’re generally considered exchange transactions because the client receives a product or service of value in exchange for its payment.

Sometimes fees are charged on a sliding scale based on income or ability to pay. In other cases, fees are subject to legal limitations set by government agencies. You’ll need to assess whether these services are paying for themselves.

Membership dues

If your nonprofit is a membership organization and charges dues, determine whether membership has grown or declined in recent years. How does this compare with your peers? Do you suspect that dues income will decline? You might consider dropping dues altogether and restructuring. If so, examine other income sources for growth potential.

By performing these exercises, you should be able to gain a basic understanding of where funds are coming from and where greater potential lies. For specific tips and help applying revenue data strategically, contact us.

Should your nonprofit accept that new grant?

Erin MiranteOctober 2, 20200 Comment

Current financial pressures mean that your not-for-profit probably can’t afford to pass up offers of support. Yet you need to be careful about blindly accepting grants. Smaller nonprofits that don’t have formal grant evaluation processes are at risk of accepting grants with unmanageable burdens and costs. But large organizations also need to be careful because they have significantly more grant opportunities — including for grants that are outside their current expertise and experience.

Here’s how accepting the wrong grant may backfire in costly and time-consuming ways.

Administrative burdens

Some grants could result in excessive administrative burdens. For example, you could be caught off guard by the reporting requirements that come with a grant as small as $5,000. You might not have staff with the requisite reporting experience, or you may lack the processes and controls to collect the necessary data. Often government funds passed through to your nonprofit still carry the requirements that are associated with the original funding, which can be quite extensive.

Grants that go outside your organization’s original mission can pose problems, too. Managing the grant may involve a steep learning curve. You could even face an IRS challenge to your exempt status.

Cost inefficiencies

Another risk is cost inefficiencies. A grant can create unforeseen expenses that undermine its face value. For example, new grants from either federal or foundation sources may have explicit administrative requirements your organization must satisfy.

Additionally, your nonprofit might run up expenses to complete the program that aren’t allowable or reimbursable under the grant. Before saying “yes” to a grant, net all these costs against the original grant amount to determine its true benefit.

Lost opportunities

For any unreimbursed costs associated with new grants, consider other ways your organization might spend that money (and staff resources). Could you get more mission-related bang for your buck if you spend it on existing programs?

Quantifying the benefit of a new grant or program can be equally or more challenging than identifying its costs. Evaluate every program to quantify its impact on your mission. This will allow you to answer the critical question when evaluating a potential grant: Are there existing programs that can be expanded using the same funds to yield a greater benefit to your mission?

Do your homework

Grants from the government or a foundation can help your nonprofit expand its reach and improve its effectiveness in both the short and long term. But they also can hamstring your organizations in unexpected ways. Contact us for help or more information.

Avoid excess benefit transactions and keep your exempt status

Erin MiranteOctober 22, 20190 Comment

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:

Beyond reasonable compensation for the services provided or the goods sold to your organization, or
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.

Does your nonprofit need a CFO?

Erin MiranteJuly 10, 20190 Comment

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.

Developing a fundraising plan that works

Erin MiranteJune 17, 20190 Comment

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.

Holding on to your nonprofit’s exempt status

Erin MiranteJune 5, 20190 Comment

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!

Writing a winning grant proposal

Erin MiranteMay 24, 20190 Comment

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!

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

Erin MiranteFebruary 27, 20190 Comment

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.

5 questions can help nonprofits avoid accounting and tax mistakes

Erin MiranteFebruary 20, 20190 Comment

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:

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.
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.
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.
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.
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!

What Nonprofits Need to Know About the New Tax Law

Pam WilliamsJanuary 24, 20180 Comment

The number of taxpayers who itemize deductions on their federal tax return — and, thus, are eligible to deduct charitable contributions — is estimated by the Tax Policy Center to drop from 37% in 2017 to 16% in 2018. That’s because the recently passed Tax Cuts and Jobs Act (TCJA) substantially raises the standard deduction. Many not-for-profit organizations are understandably worried about how this change will affect donations. But this isn’t the only TCJA provision that affects nonprofits.

Donors have fewer incentives

In addition to reducing smaller-scale giving by shrinking the pool of people who itemize, the TCJA might discourage major contributions. The law doubles the estate tax exemption to $10 million (indexed for inflation) through 2025. Some wealthy individuals who make major gifts to shrink their taxable estates won’t need to donate as much to reduce or eliminate their potential estate tax.

UBIT takes a bigger bite

The new law mandates that nonprofits calculate their unrelated business taxable income (UBTI) separately for each unrelated business. As a result, they can’t use a deduction from one unrelated business to offset income from another unrelated business for the same tax year. However, they can generally use one year’s losses on an unrelated business to reduce their taxes for that business in a different year. The TCJA also includes in UBTI expenses used to provide certain transportation-related and other benefits. So, the unrelated business income tax (UBIT) a nonprofit must pay could go up.

High compensation risks new tax

Nonprofits with highly compensated executives may now potentially face a 21% excise tax. The tax applies to the sum of any compensation (including most benefits) in excess of $1 million paid to a covered employee plus certain large payments made to that employee when he or she leaves the organization, known as “parachute” payments. The excise tax applies to the amount of the parachute payment less the average annual compensation.

Bond interest exemption revoked

The TCJA repeals the tax-exempt treatment for interest paid on tax-exempt bonds issued to repay another bond in advance. An advance repayment bond is used to pay principal, interest or redemption price on an earlier bond prior to its redemption date.

Be informed

Note that other rules and limits may apply. We can provide you with a detailed picture of the new tax law and explain how it’s likely to affect your organization. Contact Langdon & Company for more info.