Why uncertainty calls for a more flexible budget | accounting firm in harford county md | Weyrich, Cronin & Sorra

Why uncertainty calls for a more flexible budget

Economic, social and political events in 2024 have the potential to negatively influence your not-for-profit’s budget. So if you generally prepare static budgets well in advance of each fiscal year, you may want to switch things up. Rolling budgets can provide your organization with greater flexibility. And in the event of major changes, you may even want to consider reforecasting your current budget.

Rolling budgets

Rather than leaving a budget in place for the year, organizations with rolling budgets set periodic dates to adjust the numbers. For example, you might budget four quarters ahead. At the end of each quarter, you would update the budgets for the next three quarters and add a new fourth quarter.

The rolling approach anticipates changes and encourages your organization’s leaders to take a forward-looking perspective. It works well for nonprofits dealing with shifting ground and evolving strategies. Plus, it provides more useful information for decision making than a backward-looking static budget.

Reforecasting

Some nonprofits may require an even more dramatic budget fix. Reforecasting your entire budget could boost your nonprofit’s odds of survival in tough times. This option generally makes sense if you’ve undergone a major change that has implications for overall operations, such as securing or losing a large grant. Reforecasting also typically makes sense if it becomes clear your existing budget is materially inaccurate.

This process begins by identifying costs and revenues that are variable (for example, supplies and program revenue) and the effect that a trigger event might have on them. For example, during the COVID-19 pandemic, the fixed expenses (such as payroll or rent) of many organizations changed dramatically. You should reforecast any items that are likely to differ substantially from your original estimates.

You may also find it worthwhile to apply budget modeling with different scenarios. For instance, what would happen if a major revenue source were cut by half? Or if it disappeared altogether? Would you seek a loan, cancel a capital project or trim staff? The final reforecasted budget is a fully revised document, not simply a handful of line-item adjustments.

Going forward

Even if this isn’t your nonprofit’s budget season and you already have a budget in place for the year, think about how you might change the process in the future. Contact us for budgeting help.

© 2024

 

3 tips for making the financial statement auditing process smoother | accountant in baltimore county md | Weyrich, Cronin and Sorra

3 tips for making the financial statement auditing process smoother

Not-for-profits aren’t required to produce audited financial statements. But audited statements are more likely to reassure big donors and grant makers about your financial stability and generally will be required if your organization applies for a bank loan. When you hire a CPA to audit your statements, the auditor is responsible for expressing an opinion on them and obtaining reasonable assurance that they’re free of material misstatements. Here are three tips for making the process as smooth as possible.

1. Understand roles

You’ll need to prepare estimates (such as an allowance for bad debts), adopt sound accounting policies, and establish, maintain and monitor internal controls. Auditors may make suggestions about these items, but it isn’t their responsibility to implement them.

Your auditor is required to evaluate whether internal controls, accounting policies and estimates are adequate to prevent or detect errors or fraud that could result in material misstatements. But remember, all decision making is strictly your nonprofit’s responsibility.

2. Involve your board

Sometimes nonprofits overlook their board’s role in annual financial statement preparation. That’s a mistake. Your board should have a strategic and oversight role in the process, which is part of its overall fiduciary duty. The board also can be a good resource for certain technical matters, depending on the members’ professional backgrounds.

3. Understand statement formats

Financial statement items — such as debt ratios, program vs. administrative expense ratios and restricted vs. unrestricted resources — can help tell you how your nonprofit is doing. So when your organization’s financial team is preparing them, make sure statements are as user-friendly as possible.

One of the best ways to see the big financial picture is to compare your budget, your year-end internally generated financial statements and the financial statements generated during an annual audit. This task can be completed more easily if the format of your annual audited statements is similar to that of your internal financial statements and budgets. If audited financial statements are formatted differently than internally generated reports, you may need to develop a bridge between them, perhaps in the form of an internal memo.

When reviewing internal vs. audited statements, look for any large differences in individual accounts resulting from audit correcting adjustments. These often are an indication of an internal accounting deficiency. You’ll also be able to spot any significant discrepancies between what was budgeted for the year and the actual outcome.

First timers

If you’re engaging an auditor to prepare financial statements for the first time, don’t be anxious. Just provide your auditor with every requested document and keep the lines of communication open. Your auditor will let you know if there’s anything you should be concerned about.

© 2024

 

Why your nonprofit shouldn’t operate like a for-profit business | tax preparation in alexandria va | Weyrich, Cronin & Sorra

Why your nonprofit shouldn’t operate like a for-profit business

Charlotte thought she knew everything about running a not-for-profit community hospital. So the CEO was shocked when the IRS contacted her hospital about potentially losing its tax-exempt status. The IRS mentioned several issues, including the hospital’s increasingly wide operating margins and its extensive use of advertising. As the dispute proceeded to litigation, Charlotte learned that the hospital had tripped over the commerciality doctrine.

This is a fictitious example. But the commerciality doctrine can be all too real.

Exception to the rule

The commerciality doctrine, along with the operational test, was created to address concerns over nonprofits competing at an unfair tax advantage with for-profit businesses. The operational test generally requires nonprofits to be both organized and operating exclusively to accomplish their exempt purpose. The test also mandates that no more than an “insubstantial part” of an organization’s activities further a nonexempt purpose.

What this means for your nonprofit is that you can operate a business as a substantial part of your activities so long as the business furthers your exempt purpose. However, under the commerciality doctrine, courts have ruled that the otherwise exempt activities of some organizations are substantially the same as those of commercial entities. As a result, the entities are not tax exempt.

Don’t operate like a business

No single factor is decisive, but courts and the IRS consider several issues when evaluating whether an organization fails the commerciality doctrine. In general, you risk your exempt status if you operate like a for-profit business. So, for example, has your nonprofit set prices to maximize profits or has it accumulated unreasonable reserves?

Other potential pitfalls include providing fewer lower cost services than your nonprofit peers and advertising your services to the general public. Also consider the extent to which your organization relies on charitable gifts. Donations should be a significant percentage of your nonprofit’s total support.

The UBIT threat

There’s another risk for nonprofits operating a business. Even if you pass muster under the commerciality doctrine and retain your tax-exempt status, your organization could end up liable for unrelated business income tax (UBIT). Revenue generated from a regularly conducted trade or business that isn’t substantially related to furthering an organization’s tax-exempt purpose often is subject to this tax.

Determining UBIT liability or, worse, whether you could lose your exempt status under the commerciality doctrine, can be complex. Contact us to discuss the many factors that go into these determinations and for help avoiding missteps.

© 2023

 

When are sponsorship and advertising payments subject to tax? | business consulting firms in dc | Weyrich, Cronin & Sorra

When are sponsorship and advertising payments subject to tax?

Sponsorship and advertising dollars can provide a real boost to your not-for-profit organization’s income. However, if sponsors or advertisers receive a “substantial benefit” or if providing benefits isn’t a related business activity, you may owe unrelated business income tax (UBIT) on the payments. Here’s a quick look at what is and isn’t taxable.

UBIT typically doesn’t apply to sponsorships

Sponsorship dollars generally aren’t taxed. Qualified sponsorship payments are made by a person engaged in a trade or business with no arrangement to receive — or expectation of receiving — a substantial benefit from the nonprofit in return for the payment. The IRS allows exempt organizations to use information that’s an established part of a sponsor’s identity, such as logos, slogans, locations, phone numbers and URLs.

There are exceptions. For example, if a payment amount is contingent upon the level of attendance at an event, broadcast ratings or other factors indicating the quantity of public exposure received, the IRS doesn’t consider it a sponsorship. Therefore, the payment would likely trigger UBIT.

Providing facilities, services or other privileges to a sponsor (such as complimentary tickets to a concert or admission to a golf tournament) doesn’t automatically disallow a payment from being considered qualified. If the privileges provided aren’t what the IRS considers a “substantial benefit” or if providing them is a related business activity, the payments won’t be subject to UBIT. But when services or privileges provided by an exempt organization to a sponsor are deemed to be substantial, part or all of the sponsorship payment may be taxable.

UBIT usually does apply to advertising

Payment for advertising a sponsor’s products or services is generally considered unrelated business income, so it’s subject to UBIT. According to the IRS, advertising includes endorsements, inducements to buy, sell or use products, and messages containing qualitative or comparative language, price information, or other indications of value.

Some activities often are misclassified as advertising. Using logos or slogans that are an established part of a sponsor’s identity is not, by itself, advertising. And if your nonprofit distributes or displays a sponsor’s product at an event, whether for free or remuneration, it’s considered use or acknowledgment, not advertising.

Contact us

Recognizing the difference between taxable and nontaxable payments can be challenging. Be sure to contact us if you’re soliciting support from possible sponsors and advertisers and aren’t sure what crosses the tax line.

© 2023

 

When do 501(c)(6) organizations risk their exempt status? | tax preparation in harford county md | Weyrich, Cronin & Sorra

When do 501(c)(6) organizations risk their exempt status?

Even when they’re nonprofits, trade associations and chambers of commerce generally qualify for a tax exemption under Section 501(c)(6) of the Internal Revenue Code, not Sec. 501(c)(3). And these “business leagues” (as the IRS terms them) must adhere to a different set of rules. In fact, if you haven’t looked at the rules recently, your organization may not be in compliance and could be risking its exempt status.

Potential business league violations

Business leagues exist to promote their members’ common interests and improve business conditions of “one or more lines of interest.” Typically, these groups get into trouble if they interpret terms such as “promote common interests” and “improve business conditions” too broadly. For example, your organization might provide customized sales training for only some of its members. That’s generally a no-no.

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 usually don’t qualify for 501(c)(6) status.

Group vs. individuals

To avoid IRS scrutiny, you must be able to differentiate between qualified and nonqualified activities. For example, you’re typically allowed to attempt to influence legislation relating to the common business interests of your members. You can also test and certify products, establish industry standards and publish statistics on industry conditions to promote your group’s line of business. In addition, you’re allowed to research effective business practices to share with your members.

But you should limit activities that 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.

The key is your association’s “primary purpose.” 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.

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.

When to consider a for-profit offshoot

If you find your organization is performing more (or more substantial) services for individual members than is “safe,” you might consider forming a separate for-profit organization. Then any services that benefit individuals can be shifted under this taxable umbrella and you can preserve your association’s not-for-profit status. Contact us for information about how to establish a for-profit offshoot.

© 2023

 

Help donors help your nonprofit with a planned gift | tax accountants in baltimore city | Weyrich, Cronin & Sorra

Help donors help your nonprofit with a planned gift

Most established not-for-profits are already equipped to solicit and accept planned gifts. But if your nonprofit is new to planned giving and doesn’t yet understand the long-term advantages of deferred gifts, it’s a good time to get up to speed. You’ll likely need to educate donors about the advantages — for them and your organization — of this form of support.

3 forms

Planned gifts typically are made using one of three methods:

  1. Direct gifts and bequests. These are made from a donor or a donor’s estate directly to your nonprofit. Generally, the bigger the donation, the bigger the tax benefit. Direct gifts provide donors with a current income tax deduction if they itemize, subject to annual limits. In addition, donated assets are removed from the donor’s taxable estate, which can reduce any estate tax due. Direct bequests don’t generate an income tax deduction, but they usually are 100% deductible for estate tax purposes.
  2. Charitable gift annuities. These allow donors to gift substantial assets during their lifetimes. Annuities can be structured to minimize current income tax and future estate tax while providing donors with a consistent income stream during their lifetimes.
  3. Charitable trusts. With a charitable lead trust, the donor contributes assets to a trust, which pays income to your charity for a set number of years. Then the property reverts to the donor or another beneficiary. With a charitable remainder trust, the donor or another beneficiary receives income from the donated assets for a specified period or for life, and the remainder goes to your nonprofit. Depending on the structure of a trust, donors may enjoy income and estate tax savings.

Other options that might be appropriate for charitable gift- and tax-planning objectives are donor-advised funds, supporting organizations or foundations.

Choose what you’ll accept

Of course, your nonprofit doesn’t have to accept planned gifts in all forms. If, for example, your organization is going to accept endowments (gifts that permanently restrict the principal) or contributions that temporarily restrict use, you’ll need an infrastructure that handles them.

If you haven’t already, decide what type of gifts you’ll accept. Do you want to accept donations of appreciated securities (which typically provide donors with a greater tax benefit)? If so, establish a policy for them, such as whether you’ll liquidate these assets in a certain period of time. Then, adjust your investment policy on restricted gifts and get board approval. Also make sure your accounting system is set up to receive these types of gifts.

Getting the word out

You might start seeking planned gifts among your nonprofit’s board members. Even if they don’t make planned gifts themselves, they can be effective evangelists for your nonprofit’s mission and the benefits of planned giving.

Next, you may want to target outside resources such as financial advisors. Meet with prominent advisors in your community and explain your needs and willingness to enter into planned giving arrangements. Also develop strong relationships with local community foundations. These entities can act as intermediaries between your organization and potential donors, helping you to reduce or eliminate internal investment and infrastructure costs.

Long-term thinking

To take advantage of planned gifts, your staff and board members should be prepared to discuss them when opportunities arise. Provide training on how they work and how your organization’s policies affect what you accept. Contact us with questions.

© 2023

 

How to get the financing your nonprofit needs | accounting firm in hunt valley md | Weyrich, Cronin & Sorra

How to get the financing your nonprofit needs

Relatively high interest rates and tight lending standards are making it difficult for even for-profit businesses to apply and qualify for bank loans. But not-for-profits, which may lack adequate collateral or steady cash flow, generally face a greater uphill battle when it comes to obtaining financing.

If you’ve ruled out finding a grant or launching a capital campaign to fund your expansion or cover the cost of a large project, one of the following financing options may work for you.

Traditional lenders and products

Bank financing generally comes in two basic forms:

1. Line of credit. This is a negotiated amount that you can draw against as needed. If your goal is to smooth out cash flows over the year, it’s usually the best option. A maximum amount is available to you, but you use only what you need. Required monthly payments may be limited to interest expense and principal payments can be made any time. So you have flexibility in how much you repay each month.

2. Term loan. Here, you receive a lump sum, usually for a specific purchase. The application process is usually more complicated, and approval typically takes more time. Repayment is in installments, which means you’d make equal monthly payments consisting of interest and principal throughout the entire loan term.

Bank lenders usually look at an applicant’s financial statements, cash-flow predictability, management and governance, collateral, and repayment plan. But even if your nonprofit is approved for a loan, the interest rate may be prohibitive. Banks almost always charge higher rates for what they perceive as higher risk loans.

Credit unions may be more likely than traditional banks to take a chance on nonprofits. Because they’re also nonprofit entities and don’t pay income tax, they may extend loans with lower interest rates.

Other possibilities

Although credit cards usually are much easier to obtain than a loan, avoid using them to finance any large amount you can’t repay quickly because the interest will add up fast. If your project is relatively small, a crowdfunding campaign through GoFundMe, Donorbox or a similar online platform, may be a less expensive way to go — particularly if you already have a large online following.

Also take a look at nonprofit loan funds — such as the Nonprofit Finance Fund or Propel Nonprofits — that specialize in servicing charities. They may offer a range of products (including lines of credit and emergency and mortgage loans) at low to no interest and favorable terms.

A tax-exempt bond issued by your municipality, county or state government is another possible option. Tax-exempt interest rates generally are two to three percentage points lower than on loans from other sources and the Internal Revenue Code generally allows nonprofits to use the proceeds of a bond issue to further their stated charitable purpose.

However, the process can be lengthy, complicated and expensive. Bond issues usually involve stringent financial disclosure requirements and tighter overall scrutiny. A line of credit or term loan can be approved in a matter of weeks, but bond financing can take six months to a year before funds are received.

Don’t despair

If none of these options seem viable, don’t despair. We can help your nonprofit by preparing financial documentation for lender scrutiny and suggesting the best possible approaches for obtaining the financing you need.

© 2023

 

Build a better nonprofit board with term limits | tax accountant in alexandria va | Weyrich, Cronin, & Sorra

Build a better nonprofit board with term limits

Are your not-for-profit’s board members subject to term limits? If not, you might want to consider implementing what’s widely considered a best practice.

Some board members lose enthusiasm for the job over time or might even become ineffective or disruptive. Negative attitudes at the board level can easily trickle down and harm your organization’s programs and initiatives, not to mention its financial health. Then there are the board members who invest so much time and energy in your nonprofit that they risk burnout. Term limits give all of these board members a way to make a graceful exit.

Pros and cons

One of the great advantages of term limits is that they can help your organization build a more diverse board over time. They allow you to add people with certain skills and perspectives (such as financial or political expertise) as needed and make it easier to ensure your board represents its community’s gender, racial, economic, religious and other diverse groups. And as board positions open up, you can expand your circle of invested stakeholders beyond the usual core group of volunteers.

Another advantage is that term limits preempt “power hoarding” issues that can occur when authority is concentrated in the hands of a small, entrenched group. Sometimes, such cliques intimidate new members, as well as staff, and block necessary change. Regular turnover provides opportunities to eliminate domineering personalities and improve group dynamics.

Also, term limits can help prevent insider fraud. It’s generally easier for long-term board members who know an organization’s ins and outs to override internal controls and hide fraudulent schemes.

Term limits could have some disadvantages, however, including potential loss of institutional knowledge, expertise and donations from both board members and their networks. You could lose significant volunteer hours, as well. Regular turnover also requires time and resources. You’ll need to regularly identify, recruit and train new members and work to build the cohesiveness required for collaboration.

Setting terms

If term limits sound like a good idea, you’ll need to establish rules. Don’t adopt terms that are too long because it could discourage new members from applying. On the other hand, terms that are too short don’t give members sufficient time to make meaningful contributions, at least if they’re combined with tight limits on the number of terms a member can serve. Short terms also mean holding frequent elections.

You might, for example, allow two consecutive three-year terms or a total of six years with a minimum one-year hiatus between terms. To reduce disruption, structure it so that only one-third of the board departs at a time. Consider conferring emeritus status or establishing advisory boards to keep these departing board members invested.

Amending bylaws

If you don’t already have term limits, you’ll need to amend your bylaws to establish them. Contact us for help doing so or to discuss other governance issues.

© 2023

 

Do you have to return a donation when a donor requests it? | tax preparation in baltimore md | Weyrich, Cronin & Sorra

Do you have to return a donation when a donor requests it?

If a donor has never asked your not-for-profit to return a gift, it may only be a matter of time. Although uncommon, donors can change their minds. They may come to believe your organization is misusing or wasting donated funds or decide it’s no longer fulfilling its charitable mission. Although you’re probably inclined to cooperate with requests, doing so can be difficult if you’ve already spent the money or if other factors are in play. Let’s look at the problem — and a potential solution.

What the law says

In general, federal law doesn’t require nonprofits to return donations. Individual states have enacted various laws, but these generally are vague about returning contributions. They usually assume that a gift is no longer the property of a donor once a charity accepts it. And because nonprofits are expected to act in the public interest, state regulators may rule that returning a donation harms the public good.

However, to avoid potential lawsuits, some situations require you to return a donation. One such situation is the violation of a donation agreement. If, for example, a donor stipulates that money must go directly to hurricane relief and the funds are instead spent on mobile devices for staffers, the charity is legally obligated to return the donation. Another situation where donations should be returned is when a donor pays for a ticket to a fundraising or other event and the event is cancelled. At the very least, nonprofits should offer a refund for the canceled event, but can ask supporters to donate the amount.

As a gesture of goodwill, it’s usually best to return small donations when asked. Larger gifts may be harder to return. In such circumstances, talk to your attorney and financial advisor — and possibly your state’s nonprofit agency.

Heading off unwanted return requests

No nonprofit wants to return donated funds. Fortunately, you can head off unwanted return requests by adopting a written donation refund policy. State that most donations aren’t eligible for return and explicitly describe the circumstances under which a donation is eligible for return.

Also document large gifts using a standard agreement form that includes your return policy and consider including a “gift-over clause.” This permits a donor to request that a gift be transferred to another organization if the donor believes it has been misused. Finally, observe best fundraising practices. By adhering to the highest ethical standards, you may be able to avoid misunderstandings and conflicts that could result in refund requests.

Get to the bottom of it

Supporters can request the return of donations for many reasons. Try to get to the bottom of each case so you can prevent other donors from following suit. For instance, supporters may object to a recent decision or trend — or simply dislike how something was worded in your newsletter. In these circumstances, you may be able to smooth ruffled feathers and keep the donation. Just be certain you respond quickly to requests and enlist the help of advisors when there’s a threat of legal or financial repercussions.

© 2023

 

Trust and internal controls can coexist in your nonprofit | tax preparation in baltimore county md | Weyrich, Cronin & Sorra

Trust and internal controls can coexist in your nonprofit

Within a period of just a month, a Minnesota woman was charged with skimming more than $300,000 from her animal rescue charity, a Florida man was charged with multiple felonies for running several charities for his personal benefit, and a New York man was sentenced to 18 months in prison for defrauding his trade association employer. Not-for-profit organizations have about a 9% chance of being defrauded, according to the Association of Certified Fraud Examiners. Think of it this way: That’s almost one in 10.

Fortunately, strong internal controls can reduce your nonprofit’s risk. You may not think you need them, particularly if your leaders, staffers, volunteers and clients consider themselves to be one big happy family. But controls and trust can coexist.

Are your controls effective?

Internal controls are policies and procedures that govern everything from accepting cash to signing checks to training staff to keeping your IT network secure. Most nonprofits have at least a rudimentary set of internal controls, but dishonest employees and other criminals can usually find gaps in environments where controls aren’t thorough or adequately followed.

Why might nonprofits skimp on controls or enforcement? They may be so focused on programming that they don’t allocate enough budget dollars and other resources to fraud prevention. It’s not uncommon for executives or board members to indicate that fraud prevention is low on their priority list — probably because they underestimate their fraud risk.

Nonprofit boards may inadvertently enable fraud when they place too much trust in the executive director and fail to challenge that person’s financial representations. Unlike their for-profit counterparts, nonprofit board members may lack financial oversight experience.

Which controls are critical?

Some of the most common types of employee theft in nonprofit organizations are check tampering, expense reimbursement fraud and billing schemes. But proper segregation of duties — for example, assigning account reconciliation and fund depositing to different staff members — is a relatively easy and quite effective method of preventing such fraud. Strong management oversight and confidential fraud hotlines open to all stakeholders also have been proven to reduce employee theft.

Indeed, although you should trust staffers, you should also verify what they tell you. Conduct background checks on all prospective hires, as well as volunteers who’ll be handling money or financial records. Also, provide an orientation to new board members to ensure they have a clear understanding of their fiduciary role and the potential consequences of committing fraud.

Finally, handle fraud incidents seriously. Many nonprofits choose to quietly fire thieves and sweep their actions under the rug. But if an incident is hushed up, rumors could do more reputational damage than publicly addressing the issue head-on. It’s better to file a police report, consult an attorney and inform major stakeholders about the incident.

Do you trust too much?

Trust tends to be the biggest potential fraud weakness for nonprofits. Although it’s fine to regard your staff, volunteers and other stakeholders like family, you need to set guardrails. Contact us for help determining which controls you might lack and how to implement them.

© 2023