Non-Profits Archives - Page 8 of 42

Reviewing — and possibly revising — your nonprofit’s spending policy

Non-Profits|August 18, 2022

A spending policy is the formula used to determine how much of the value of investments a nonprofit organization will tap each year for such expenses as operating costs and capital projects. Although it’s usually a good idea to stick with an established spending policy, circumstances may warrant changes.

There’s no one-size-fits-all optimal spending policy. But five general types have emerged — each with pros and cons:

1. Fixed rate. Also known as the simple spending rule, this approach specifies a spending rate you apply annually to the beginning-period market value of your nonprofit’s investment portfolio. It’s simple to understand and apply but can result in big swings in spending from one year to the next based on the investment portfolio’s performance. In a multi-year period of strong investment performance, the fixed-rate approach can lead to the highest spending increases compared with alternative techniques. This may undermine the portfolio’s growth. It also could be problematic in years when the beginning-period portfolio value was likely at a high point but may have dropped significantly as the year progressed.

2. Rolling average. Here, your organization would apply a spending rate to a moving market value average of its investment portfolio, usually determined over a three-year period. A rolling average helps ensure more consistency in spending from year to year. But it’s vulnerable to market volatility and could dictate more spending than would be wise in a year when the portfolio value has dropped substantially.

3. Inflation-based. With this method, you set an initial dollar amount for spending, and then adjust it annually for inflation. This method can simplify budgeting, stabilize spending and help grow your investment portfolio because the spending amounts tend to be smaller. But it doesn’t take into account your portfolio’s market value. And it can facilitate more spending in challenging times when compared with the rolling average method. This also could be problematic in years when there’s high inflation and your portfolio may have experienced a significant drop in value as higher expenses will use a larger percentage of your portfolio.

4. Geometric spending. The formula for geometric spending is complicated, but it reflects movement in both inflation and the market. Although it can be difficult to calculate, a geometric spending rule reduces volatility between years and can lessen the impact of market declines on spending. Nonprofits that have chosen this type of spending policy might find that they’re in a better position to weather market drops and high inflation.

5. Hybrid. This approach typically considers both inflation and market value. Using it, a large chunk of your yearly spending is based on an inflation adjustment to the previous year’s spending. The remainder is based on, for example, the application of a fixed rate to your portfolio’s market value or a percentage of the rolling-average rule amount. Hybrid spending policies tend to result in stable spending.

If you don’t know which approach makes the best sense for your nonprofit or whether you should switch to a different policy, contact us. We can review such factors as your financial assumptions, available resources and long-term goals to help ensure you’ve arrived at a spending policy that works in good times and bad.

What charitable givers need to know about taxes

Non-Profits|June 21, 2022

Although most charitable donors aren’t primarily motivated by potential tax breaks, they still need to know how donations affect their taxes. It’s important for your not-for-profit to educate them — particularly as tax laws change. For example, in 2020 and 2021, even nonitemizers were allowed to deduct up to $300 and itemizers could deduct cash gifts up to 100% of their adjusted gross income (AGI).

These breaks have lapsed and aren’t available for 2022, unless Congress acts. The following summarizes laws that continue to affect donors.

Cash and certain property donations

Generally, donors who itemize can deduct total cash contributions up to 60% of their AGI. To be deductible, cash gifts under $250 must be supported by a bank record (such as a canceled check or credit card statement) or receipt (such as a thank-you letter from your nonprofit showing the date and amount of the gift). Cash gifts of $250 or more must be substantiated by a contemporaneous written acknowledgment from your nonprofit.

Total donations of ordinary-income property usually are deductible up to 50% of the donor’s AGI but limited to the donor’s tax basis in the property (typically the purchase price). Property is ordinary-income property when donors would recognize ordinary income or short-term capital gains if they sold it at fair market value (FMV) on the date of donation. Examples include stocks and bonds held for one year or less.

Capital gains property

Donors of capital gains property usually can deduct the property’s FMV, but a lower AGI limit of 30% applies. Property is considered capital gains property if the donor would have recognized long-term capital gains had he or she sold it at FMV on the donation date. This includes capital assets held more than one year. But in some circumstances, such as when the donation is intellectual property, only the donor’s tax basis of the property is deductible.

If your nonprofit uses tangible donated property for its tax-exempt purpose — for example, a museum displays a donated painting — the donor can deduct its fair market value. But if the property is put to an unrelated use (a hospital sells the donated painting), the deduction is limited to the donor’s basis in the property.

For donations of property, the substantiation requirements depend on the deductible value. If someone donates an item worth less than $250, a receipt is sufficient. However, for gifts:

Of $250–$500 in value, the donor must have a contemporaneous written acknowledgment from your nonprofit.
Of $501–$5,000 in value, the donor must also file Form 8283.
Of more than $5,000 in value, the donor must also obtain a qualified appraisal.

In general, only donations of the full ownership interest in property are deductible. The right to use property usually is considered a contribution of less than the donor’s entire interest in the property.

What isn’t deductible

Finally, make sure donors understand they can’t claim a deduction for the donation of their professional services. Related out-of-pocket costs, such as supplies and miles driven, on the other hand, are deductible as charitable contributions. Contact us for tax advice if you’re working with a donor making a major gift or complicated donation.

CFO, yes or no? Here’s how to decide

Non-Profits|June 16, 2022

Whether your not-for-profit organization needs a chief financial officer (CFO) depends on many factors, such as the size of your organization, the complexity and types of revenue sources, and the number of programs you have. Static organizations are less likely to need a CFO than those with evolving programs and long-term plans that rely on investment growth, financing and major capital expenditures. So if your organization is expanding quickly, it might be time to consider hiring a financial executive.

Accounting and finance oversight

Generally, nonprofit CFOs (also known as directors of finance) are senior-level executives charged with oversight of accounting and finances. They work closely with executive directors, finance committees and treasurers and serve as business partners to program heads. CFOs report to the executive director or board of directors on their organization’s finances. They analyze investments and capital, develop budgets and devise 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.

Qualifications for the job

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 and grant management. If your organization expends $750,000 or more of federal assistance, your CFO will need to oversee an independent financial audit (also known as a “single audit”), as well as possible state-mandated audits.

The ideal candidate for the job 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 nonprofit employees like a belief in the cause.

Finding candidates

Your nonprofit’s ability to pursue its mission depends on its financial health and fiscal integrity. If your budget is swelling and your executives are struggling to manage financial tasks, it may be time to hire a CFO. Contact us if you need suggestions for finding candidates.

No audit required? Do it anyway

Non-Profits|March 15, 2022

Your not-for-profit may not be required to undergo regular audits. But an audit can reassure donors and other stakeholders that you take seriously your responsibility. An audit can also help you identify risks before they become intractable problems. Here’s how to initiate and prepare for an audit.

Find and meet with an auditor

Start by drafting a request for proposal (RFP) for prospective auditors. The RFP should describe your organization, its programs, major funding sources and the type of service you need. Once you select an auditor, the firm will provide an engagement letter outlining the scope of services to be performed and assign responsibility for various tasks to your staff or the auditors.

The preaudit meeting with your auditors comes next. Finance staff and management should attend, as well as representatives from your board of directors or audit committee. Those involved will draw up a timeline for the work, and the auditors can answer any questions about the information they’ll need.

During this meeting, inform the auditors of any changes in your nonprofit’s activities since you first met. Also communicate new or eliminated programs, new grant reporting requirements, and changes to internal controls and staff.

Do your part

Collecting and organizing the documentation auditors need before they arrive saves them time and saves you money. Usually auditors will provide a list of documents — such as financial statements, accounting records, physical inventories and investment-related documents — and the date when each item is needed. Auditors also generally need organizational records such as:

Articles of incorporation,
Financial policies,
Exemption letters,
Board meeting minutes,
Grant agreements,
Pledges and other funding documents,
Contracts, and
Insurance policies.

You should gather support for footnote disclosures, as well. This includes documentation of significant estimates, pending litigation, restricted contributions and related-party transactions.

Head off issues

Don’t wait for auditors to find problems and ask questions. You can expedite the audit process and reduce costs when you identify and address issues before they’re raised by auditors.

For example, after making year-end closing entries, reconcile all your schedules and workpapers to the trial balance and review for obvious anomalies. Double-check manual journal entries, accrual calculations, entries that require estimates and in-kind donation valuations. Compare actual figures with budgeted ones and be ready to explain any significant variances.

No mandate?

Some nonprofits are required to conduct audits due to their large size (generally if they expend more than $750,000 a year). Grantmakers, banks and some states and municipalities may also require audited financial statements. But consider conducting regular audits, even if no mandate applies. Contact us for more information.

What your nonprofit needs for a successful capital campaign

Non-Profits|February 8, 2022

Many nonprofits have put major purchases and other ambitious initiatives on hold during the pandemic. But if you need to buy or expand a facility, purchase expensive equipment, or seed an endowment, your organization may not want to wait any longer.

A capital campaign to raise funds can be more difficult at this time — but it’s possible. You just need to ensure your not-for-profit’s stakeholders fully support your goals and are willing to go the extra mile to achieve them.

A small army

Capital campaigns generally are long-term projects — often lasting three or more years. To carry out yours, you’ll need a champion with vision and stamina. Consider board members or look to leaders in the greater community with a fundraising track record, knowledge of your community, the ability to motivate others, and time to attend meetings and fundraising events.

Your leader will require a small army to achieve capital campaign goals. Volunteers, board members and staffers will be required to raise funds through direct mail, email solicitations, direct solicitations and special events. If you need more help, look to like-minded community groups and clients who have benefited from your services.

Fundraising smarts

The biggest challenge of any capital campaign is securing donations. To this end, identify a large group — say 1,000 individuals — to solicit. Draw your list from past donors, area business owners, board members, volunteers and other likely prospects. Then narrow that list to the 100 largest potential donors and talk to them first.

Traditional fundraising wisdom holds that you shouldn’t go public with your campaign until you’ve secured significant “lead gifts” from major donors. The percentage varies, with an organization commonly waiting until 50% to 65% of its fundraising goal is reached before announcing a campaign. Even if you decide not to follow this model, know that it’s generally easier to solicit donations under $1,000 after you’ve already landed several large gifts.

Keep in mind that your campaign will cost money to execute. Fundraising events, marketing materials, consultant fees and other expenses can eat into donations.

The right message

To engage key constituents, break down your ultimate target into smaller objectives. Celebrate as you reach each goal. Also regularly report gifts, track your progress toward reaching your ultimate goal and measure the effectiveness of your activities.

Pay attention to how you craft your message. Potential donors must see your organization as capable and strong, but also as the same group they’ve championed for years. Instead of focusing on what donations will do for your nonprofit, show potential donors the impact on their community.

Remember hidden costs

Is now the time for a capital campaign? It depends on many factors, including your organization’s fiscal health. Contact us for help evaluating your nonprofit’s financial fitness.

Are your social media accounts working for — or against — you?

Non-Profits|January 28, 2022

Social media is an essential tool for not-for-profit outreach, engagement and fundraising. But social media also poses a reputational threat if your organization doesn’t clearly communicate rules for its use and prepare for “emergencies.” If you haven’t already, it’s time to implement some best practices.

Rules of the road

The line between employees’ personal and work lives was already blurry, and the shift to remote work has only exacerbated this effect. This raises the risk of inappropriate posts on personal and organizational accounts.

The best defense is a formal social media policy. The policy should set clear boundaries about the types of material that are and aren’t permissible on both kinds of accounts. For example, it should prohibit employees from posting nonpublic information they’ve learned on the job. Also share the policy with board members and volunteers and emphasize that they could possibly harm your organization with their personal accounts.

Around the clock attention

Social media is 24/7, and incidents can escalate quickly. So be sure to devote the necessary resources to monitor your accounts and others that refer to your nonprofit.

With organizational accounts, check the posts and comments. Both can go viral and create trouble. That said, don’t get drawn into an exchange with a troll who’s posting in bad faith and simply trying to stir things up. Give your staff guidelines to help them determine when to engage and when to let it go. You can establish a zero-tolerance policy for offensive comments or disable comments altogether.

Consider subscribing to a “social listening” tool, such as Sprout Social or Brandwatch, that will alert you when your nonprofit’s name is trending on social media. These tools help you follow what people are saying about your organization and respond to them directly when appropriate.

Ready to respond

Mistakes — or intentionally damaging posts — can occur despite comprehensive policies. Create a formal response plan so you’ll be able to weather such events. The plan should assign responsibilities and include contact information for several spokespersons. Identify a specific trigger when it’s time to involve the executive director and board and include a list of potential responses, such as issuing a press release or bringing in a crisis management expert.

After a situation has resolved, you’ll want to sit down and review your plan’s effectiveness. Ask what worked and what didn’t.

Avoiding mistakes

You’ve probably seen other organizations mishandle ill-advised posts and attacks from outsiders on social media. Take their experience as an object lesson and put policies in place to help prevent the same from happening to your nonprofit.

Your Board can’t do its Job without Information from You

Non-Profits|November 11, 2021

If your not-for-profit’s board members don’t have the information they need to make decisions, the repercussions can be severe. Board time can be wasted, voting may be delayed and your organization may be unable to act when it needs to. Worse, board members might make decisions based on faulty information, negatively affecting your mission. Here’s how to prevent such outcomes.

For Fiduciary Success

To properly fulfill their fiduciary duties, your board needs certain information. The first is financial. To help your board fully understand your nonprofit’s position, provide it with copies of your Form 990. The board president or treasurer should review this document and approve it before it’s filed.

The board also must get the results of any audit you’ve conducted, salary information for key staff, and monthly and quarterly financial reports showing income and expenses. If your organization provides directors and officers insurance, provide proof to board members.

Share and Share Alike

Board members also need strategic information. This includes reports on your nonprofit’s work, such as how programs are being carried out and how they’re used, progress on event timelines, and membership statistics. If your organization collects information from the audience it serves, provide at least an executive summary of your findings to your board. Occasionally sharing with the board articles that relate to your nonprofit’s mission, locations or audiences also may be useful.

Sharing should go both ways. To help foster teamwork and commitment to the cause, ask that members provide brief bios and other relevant background information. Also publicly share thank-yous when board members make special efforts — whether those efforts are individual (such as securing an event sponsor) or group (performing due diligence on a new executive director).

Funneling Material

To prevent board members from wasting time reviewing irrelevant information, funnel all material through your executive director or another senior manager. Only executive-approved material should be provided to board members. If you have questions about your board’s fiduciary role, please contact us.

As always, please do not hesitate to call our offices for additional information and to speak to your representative about how this could affect your situation.

Getting Personal for Fundraising Success

Non-Profits|November 2, 2021

According to a recent survey conducted by fundraising platform FrontStream, the vast majority (87%) of Americans say they’re donating to charity in 2021. And almost 20% claim they’re giving more this year than they did in 2020. However, remaining uncertainty surrounding COVID-19 and the economy is making fundraising challenging for many not-for-profits right now.

Social media and mobile apps have made asking for donations easier in some ways. However, one of the most effective strategies for raising money remains the personal appeal. Donors consistently are more likely to give if the request comes from a friend, colleague or family member who’s committed to your mission. Use this fact to put your nonprofit on stronger financial footing.

Board Members are Usually Best

All of your organization’s stakeholders can promote your nonprofit and request support from their contacts. But development staffers aside, board members generally make the most effective fundraisers because they’re knowledgeable about your organization, passionate about your mission and typically have a wide range of contacts in business and philanthropic circles.

You can support their efforts by making sure they have the proper information and training. Consider equipping them with a wish list of specific items or services your nonprofit needs. Keep in mind that not all of their friends or family members may be in a position to make a monetary donation. However, some people may be able to contribute goods (such as auction items) or in-kind services (such as website maintenance).

Effective Methods

When making a personal appeal to prospective donors, your board members should, when possible, meet in person. Letters and email can save time, but face-to-face appeals are more effective. This is especially true if your nonprofit offers donors something in exchange for their attention. For instance, they’re more likely to be swayed at an informal coffee hour or cocktail gathering (contingent, of course, on local COVID-19 threats and restrictions).

It’s also important for board members to humanize your cause. Say that your nonprofit raises money for cancer treatment. If board members have been affected by the disease, they might want to relate their personal experiences as a means of illustrating why they support your organization’s work.

Even when appealing to potential donors’ philanthropic instincts, it’s critical to mention other possible benefits. For example, if your nonprofit is trying to encourage business owners to buy ad space in your newsletter, board members could explain that your supporters are a desirable demographic, both in terms of spending power and an eagerness to “buy local.”

Work Every Channel

Although personal appeals are extremely effective, don’t dismiss any fundraising technique — particularly if it’s low- or no-cost and is easy to use, such as social media. The most successful nonprofits work every available channel to increase interest and donations. Contact us to discuss your fundraising challenges and goals.

As always, please do not hesitate to call our offices for additional information and to speak to your representative about how this could affect your situation.

Nonprofit Restructuring has Become Easier, but Not Without Challenges

Non-Profits|October 20, 2021

A few years ago, IRS Revenue Procedure 2018-15 changed the rules regarding not-for-profit restructuring. If you’ve participated in a restructuring in the past, you’ll be relieved to know that in many cases it’s now easier. Even so, if recent challenges have led your organization to consider restructuring, it’s important to work with a professional advisor, such as a CPA.

That was Then

Under previous IRS rules, tax-exempt organizations were required to file a new exemption application when they made certain changes to their structure. Filing this application created a new legal entity.

To apply for new exempt status, nonprofits had to file a final Form 990 under their initial Employer Identification Number (EIN), obtain a new EIN and apply for exemption for the new entity. In addition to being a time-consuming and often expensive process, the new nonprofit risked failing to receive its tax-exempt status. The process also required changing the EIN on all bank and investment accounts.

This is Now

Now in many situations restructuring nonprofits are required only to report significant organizational changes on their Forms 990. To be eligible, the restructuring must satisfy certain conditions. Your organization must be:

A U.S. corporation or an unincorporated association,
Tax exempt as a 501(c) organization,
In good standing in the jurisdiction where it was incorporated or, in the case of an unincorporated association, formed.

And your reorganization must do one of the following: change from an unincorporated association to a corporation; reincorporate a corporation under the laws of another state after dissolving in the original state; file articles of domestication to transfer a corporation to a new state without dissolving in the original state; or merge a corporation with or into another corporation.

The “surviving” organization must carry out the same exempt purpose that the original organization did. For a 501(c)(3) organization, the new articles of incorporation must continue to satisfy the IRS’s organizational test that requires your nonprofit’s organizing documents to limit its purposes and use of its assets to exempt purposes.

Special Circumstances

Note that there are additional limitations. For example, the new rules don’t apply if your surviving organization is a “disregarded entity,” limited liability company (LLC), partnership or foreign business entity. Also, surviving organizations still have reporting obligations — for instance, to report the restructuring on any required Form 990 for the applicable tax year. And, these rules apply only to federal income tax exemptions. Your state’s laws could require you to file a new exemption application.

As always, please do not hesitate to call our offices for additional information and to speak to your representative about how this could affect your situation.

Associations Should Prioritize Common Interests, Not Individual Services

Non-Profits|October 5, 2021

Watch out, nonprofit trade associations! If your group is a 501(c)(6) organization, your activities could potentially threaten your tax-exempt status. To ensure you’re in compliance with IRS rules, you need to routinely review your member offerings and any business you might conduct.

Support Common Interests

Trade associations exist to promote their members’ common interests and improve business conditions or “one or more lines of interest.” Typically, associations get into trouble when they interpret terms such as “promote common interests” and “improve business conditions” too broadly. For example, they might provide customized sales training for only some of their members. But associations don’t qualify for tax-exempt status if they exist only to perform services for individual members.

Another potential violation is engaging in business that’s normally carried out on a for-profit basis. And groups that are primarily social or that exist to promote a hobby generally don’t qualify for 501(c)(6) status.

Don’t Favor Individual Members

To avoid IRS scrutiny, you must be able to differentiate between qualified and nonqualified activities. For example, you are generally allowed to:

Attempt to influence legislation relating to the common business interests of your members,
Test and certify products and establish industry standards,
Publish statistics on industry conditions to promote your members’ line of business, and
Research effective business practices to share with your members.

But you should limit activities if they benefit specific members rather than your industry or profession as a whole. These might include selling advertising in member publications; facilitating the purchase of supplies for members; and providing workers’ compensation insurance to members. Your association’s “primary purpose” is key. Most 501(c)(6) groups perform some activities that don’t primarily serve common interests. But these activities should be limited in scope and number.

Be Careful with Unrelated Business

Even when certain activities don’t threaten your exempt status, performing services for members can trigger unrelated business income tax (UBIT). Typically, members pay for such services directly, instead of through dues or other common assessments. Depending on the services your association provides and the revenues raised, additional reporting may be required and you may owe UBIT.

Stop and reassess if you’re performing more services, or more substantial ones, for individual members. Instead, you might want to consider forming a separate for-profit organization to offer those services.

Observing Limits

It’s not always easy to differentiate between acceptable and unacceptable association activities. To help you remain on the right side of the IRS and preserve your tax-exempt status, contact us with questions.

As always, please do not hesitate to call our offices for additional information and to speak to your representative about how this could affect your situation.

Reviewing — and possibly revising — your nonprofit’s spending policy

What charitable givers need to know about taxes

CFO, yes or no? Here’s how to decide

No audit required? Do it anyway

What your nonprofit needs for a successful capital campaign

Are your social media accounts working for — or against — you?

Your Board can’t do its Job without Information from You

For Fiduciary Success

Share and Share Alike

Funneling Material

Getting Personal for Fundraising Success

Board Members are Usually Best

Effective Methods

Work Every Channel

Nonprofit Restructuring has Become Easier, but Not Without Challenges

That was Then

This is Now

Special Circumstances

Associations Should Prioritize Common Interests, Not Individual Services

Support Common Interests

Don’t Favor Individual Members

Be Careful with Unrelated Business

Observing Limits

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