Executive Perspective on Top Risks for 2014 – Comparison of for-profit concerns with those of tax-exempt organizations

Protiviti reported their survey results from executives in the for-profit sector regarding their Top Ten Risks for 2014:

  • Regulatory changes and scrutiny
  • Economic conditions
  • Uncertainty surrounding political leadership
  • Succession planning for key employees and board
  • Organic growth
  • Cyber threats
  • Organizational resistance to change
  • Privacy and identity security system protection
  • Compliance with healthcare reform legislation
  • Volatility in financial markets

Other concerns include setting appropriate executive compensation and addressing the growing demands of compliance oversight.

Not surprising, the risk concerns stated above are very similar to those experienced by executives in the tax-exempt sector. Why is that? To remain viable within a commercial setting, a for-profit business must remain healthy, relevant and profitable. To compare, a tax-exempt organization must also remain healthy and relevant in order to meet its mission statement into the future.  The similarity is the need for relevance and strong financial health.  The contrast is that the goal of a for-profit enterprise is solely profitability, not the specific product or service it provides. This differs fundamentally from a tax-exempt organization that exists to accomplish its mission. In other words, for the tax-exempt organization, financial health is a means to accomplish its goal, not the goal itself.

Discussed at the 2014 AICPA NonProfit Conference – Combinations of NonProfit entities

According to the National Center for Charitable Statistics (NCCS), more than 1.5 million nonprofit organizations are registered in the United States.  No wonder that a topic discussed this week during the 2014 National NonProfit Industry Conference was how nonprofit organizations can come together to share resources and increase effectiveness.  Discussed were such diverse ideas as mergers, acquisitions and collaborative arrangements.

In a merger, two or more nonprofit entities come together and create a new entity.  Because this is truly a combination of entities, with none of the entities considered the “survivor” of the transactions, the assets and liabilities from the separate entities are combined as of the merger date.  No goodwill or intangibles are recognized as a result of this transaction.  In addition, accounting policies of the entities need to be conformed into the new entity.

To contrast, an acquisition between entities leaves one of the original entities in control.  If the acquiring entity determines that the operations of the acquiree are expected to be predominantly supported by contributions and return on investments, any excess of value in the transaction is recorded as a contribution.  No change is made to accounting policies as all policies are conformed to those of the acquirer.

A third type of transaction is a collaborative arrangement, which is a contractual arrangement that involves a joint operating activity between two or more nonprofits who are all active participants in the activity and thus are exposed to significant risks and rewards dependent on the commercial success of the activity.  In this situation, no new entity is formed, and each participating nonprofit reports costs incurred and revenue generated from transactions on a gross basis.

If you are contemplating a combining transaction with another nonprofit, please contact an Eide Bailly professional for more information.

Charitable Contribution Disclosure Requirements: A Guide to Compliance With IRS Rules and Regulations

Virtually every nonprofit in the United States conducts fundraising activities in one way or another. These activities can include in-person solicitations, mail solicitations, phone calls, or special fundraising events. Charitable organizations exempt under section 501(c)(3) must understand the IRS regulations surrounding substantiation and disclosure requirements for charitable contributions in order to protect the tax-deductible nature of the donation as well as protect themselves from IRS penalties.

The tax regulations put the burden of obtaining the proper written acknowledgement of a contribution on the donor, not on the charity itself. An organization that does not acknowledge a contribution (subject to exceptions discussed below) incurs no penalty, but the donor will not be able to claim a tax-deduction. This could lead to unhappy donors who may choose to move their donations to other organizations in the future. It is critical for all charitable organizations to become familiar with and comply with the substantiation requirements to ensure their donors sustain their charitable contribution deductions. Here are some of the main requirements you should consider when acknowledging your donors:

Gifts Less Than $250
In order to claim a tax deduction for any contribution of cash, check, or other monetary gift a donor must maintain a record of the contribution in the form of either a bank record or a written communication from the charity showing the name of the charity, the date of contribution, and the amount of the contribution. While the IRS requirement for a written acknowledgement only applies to contributions of $250 or more, we recommend organizations send acknowledgement letters for all donations. This practice not only keeps you in contact with your donors, but most donors expect to receive acknowledgement of their donation no matter what the amount is.

Gifts of $250 or More
A donor cannot claim a tax deduction for any single contribution of $250 or more unless the donor obtains a contemporaneous, written acknowledgement of the contribution from the recipient organization. Again, an organization that does not acknowledge a contribution of $250 or more does not incur a penalty, but the donor cannot claim the tax deduction without it. The written acknowledgement should contain the following information:

  • Name of the organization
  • Date of donation
  • Amount of cash contribution
  • Description (but not value) of non-cash contributions

The acknowledgement also needs one of the following depending on the circumstances of the donation:

  • Statement that no goods or services were provided by the organization in return for the contribution and that the only benefit to the donor was an intangible benefit, if that was the case, or
  • Description and good faith estimate of the value of goods or services provided in return for the contribution

Deadline for a Contemporaneous Acknowledgement
An organization is required to provide “contemporaneous” acknowledgement for contributions. For the written acknowledgement to be considered “contemporaneous” the donor must receive the acknowledgement by the earlier of: the date on which the donor actually files his or her tax return for the year of the contribution; or the due date (including extensions) of the return. Tax court rulings have denied charitable contributions for the mere fact that the acknowledgement letter was not “contemporaneous”.

Quid Pro Quo Donations
In addition to the requirements for documenting cash contributions, an organization that provides goods or services in exchange for a donation of more than $75 (such as meals and entertainment at a special event), must provide a written disclosure to the donor identifying the fair market value of goods and services received, and inform them that only the portion of the contribution that exceeds this fair market value is tax deductible. A donor may only take a contribution deduction to the extent the contribution exceeds the fair market value of the goods or services the donor receives in return for the contribution. The statement must be in writing and must be presented in a manner that is likely to come to the attention of the donor. A disclosure in small print within a larger document might not meet the requirement. The IRS may impose a penalty on an organization that fails to provide this disclosure. The penalty is $10 per contribution, not to exceed $5,000 per fundraising event or mailing.

Before you conduct your next fundraising activity you should take a movement to review your current policies and procedures to insure your donor acknowledgements comply with IRS regulations. Internal Revenue Service Publication 1771 provides some examples and guidance to help you substantiate the contributions you receive.

Save the date for the 2015 NonProfit Conference!

Save the date for the 2015 NonProfit Conference!  Just announced is the AICPA’s 2015 National NonProfit Industry Conference – to be held at the newly built Gaylord National Resort & Convention Center in National Harbor, Maryland during June 15-17, 2015.  Early registration is open now, and by registering by July 31, 2014 you can lock in the 2014 conference price!  Promised in 2015 is expanded content, more sessions, more exhibitors and additional CPE credits.

The Conference brings together the industry’s top experts and thought leaders to offer their perspectives on the most crucial issues facing nonprofits and those who serve them. Learn how to deal with new regulatory and existing issues affecting tax, compliance, accounting & auditing, and governance. Join your peers for Ask the Experts Panels, in-depth workshops, and targeted Yellow Book sessions.

During the 2015 Conference, you’ll get your comprehensive update for the year. It’s your chance to get your questions answered by the industry’s top experts, hear insightful perspectives from thought leaders and discover financial management strategies to best fit your organization’s needs. You’ll learn what the future may hold, how to create innovative new ways to position your organization, drive fundraising and stay true to your mission values.

We’ll see you there!

Top Tax Issues for Your Organization to Know

Today at the AICPA Not-for-Profit conference in D.C., I had the opportunity to attend the session on “The Top 10 Tax Issues Your CFO and Board Need to Know.” This was co-presented by Doug Boedecker (Tate & Tyron) and Craig Neyman (The David and Lucile Packard Foundation). The key takeaway I want to share relates to the importance of the Schedule A public support test. Mr. Boedecker joked that when a CPA firm is presenting the Form 990 to an audit committee or the board, this schedule is commonly not touched on for fear of losing the audience in the complexity of it. This resonated with me because the schedule does have a complex set of calculations and limitations and is often not understood. However, I am in agreement that it is important for committee members and board members to understand the importance of the schedule and how to monitor whether or not there should be concern for maintaining the public charity status.

The purpose of the public support test is to show the IRS that you receive funds from the broad public and should not be categorized as a private foundation. The IRS doesn’t necessarily care what type of public charity you are, as long as you can pass the public support test. For example, if you are in a situation where you are unable to pass the public support test as a 509(a)(2), but could pass by completing the test as a 509(a)(1) public charity, the IRS says that is OK.

Next time your committee members and board members are reviewing the Form 990, take a minute to look at Schedule A and consider any risks related to maintaining your public charity status via computation of the public support test.

The other top tax issues mentioned in this session related to governance, intermediate sanctions, lobbying and political activities, UBI traps, foreign filing requirements, employees vs. independent contractors, and state considerations.

Accounting Standards You Should Consider When Closing Your Books for the Fiscal Year

As non-profits with June fiscal year ends start the process of closing their books for the year and begin the financial reporting process, there are new accounting standards that should be considered.  There is one new accounting standard in 2014 financial statements, and some that will affect 2015 financial statements, but should be applied to operations beginning in July of 2014. A summary of these accounting standards follows.

Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows
In October 2012, the FASB issued an accounting standard that requires a non-profit to consistently classify, within a statement of cash flows, cash receipts from the sale of donated financial assets with cash donations received for similar purposes. The cash receipts from the sale of donated financial assets must, upon receipt, have been directed without any non-profit imposed limitations for sale and converted nearly immediately into cash. Accordingly, the cash receipts from the sale of those financial assets should be classified as cash inflows from operating activities, unless the donor restricted the use of the contributed resources to long-term purposes, in which case, those cash receipts should be classified as cash flows from financing activities. Otherwise, cash receipts from the sale of donated financial assets should be classified as cash flows from investing activities by the non-profit.

The accounting standard provided a decision tree to illustrate the process that can be used to help determine the appropriate presentation of the cash receipts in the cash flow statement. This accounting guidance is effective prospectively for June 30, 2014 fiscal year ends. Retrospective application to prior periods is permitted but not required in the case where comparative financial statements are presented.

Obligations Resulting from Joint and Several Liability Arrangements
In February 2013, the FASB issued an accounting standard to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date. Examples of obligations within the scope of this accounting guidance include debt arrangements, other contractual obligations, and settled litigation and judicial rulings.

This accounting guidance requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors, and any additional amount the reporting entity expects to pay on behalf of its co-obligors.

Entities are also required to disclose the nature and amount of the obligation as well as other information about those obligations.

This accounting guidance is effective for December 31, 2014 fiscal year ends. The changes required by this accounting guidance should be applied retrospectively to all prior periods presented if comparative financial statements are presented, so non-profits that present comparative financial statements should determine the applicability of this accounting guidance to determine what effects it may have on the current year financial statements when it is required to be adopted in the upcoming fiscal year.

Recognizing Services Received from Personnel of an Affiliate
In April 2013, the FASB issued accounting guidance which addresses the situation in which employees of a separately governed affiliated entity regularly perform services (in other than an advisory capacity) for, and under the direction of, the recipient entity. This new accounting guidance requires a recipient non-profit to recognize all services received from personnel of an affiliate that directly benefit the recipient non-profit. Generally, those services should be measured at the cost recognized by the affiliate for the personnel providing those services. However, if measuring a service received from personnel of an affiliate at cost will significantly overstate or understate the value of the service received, the recipient non-profit may elect to recognize that service received at either the cost recognized by the affiliate for the personnel providing that service, or the fair value of that service.

This accounting guidance is effective for fiscal years ending June 30, 2015, so non-profits that receive services from personnel of an affiliate will need to consider how the services are being recorded beginning this July.

Service Concession Arrangements
In January 2014, the FASB issued an accounting standard which provides specific accounting guidance related to service concession agreements. This accounting guidance clarifies that an arrangement should not be accounted for as a lease when it contains both of the following conditions:

  • The grantor controls, or has the ability to modify or approve, the services that the operating entity must provide with the infrastructure, to whom it must provide them, and at what price.
  • The grantor controls, through ownership, beneficial entitlement, or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement.

This accounting guidance is effective beginning with December 2015 fiscal year-end entities, so December year-end non-profits will need to begin following this accounting guidance January 1, 2015.

If you have questions about any of these new accounting standards, please contact an Eide Bailly professional. They will be happy to answer your questions.

Reducing Fraud Risk for Nonprofit Organizations

Nonprofit organizations can be more susceptible to fraud than other organizations as a significant portion of their revenue stream may come from donations and fundraising for which there is no accounts receivable on the books.

A recent article in the June 2014 issue of the Journal of Accountancy titled “How Not-for-Profits Can Reduce Fraud Risk” highlights the following areas in which management can ensure proper controls are in place to prevent and detect possible fraud:

  1. Protect Donations at Fundraisers
  • Payments received at a silent auction should be received in dual custody, with one person receiving the bidding documentation and the other person receiving the physical payments. A third person should prepare the deposit and another individual should reconcile the bid documentation, the payment received and the deposit to ensure all funds received were deposited.
  • If payment is to be made at a later date, the winning bidder should be informed of where the payment should be sent. Subsequent write-offs of receivable balances should be approved by someone other than the individual responsible for receivable activity.
  • Payments for attending the event which are received at the event should be placed in an envelope and all envelopes should be collected and opened in dual custody. Receipts should be sent to the donor and any complaints by donors should be received by an individual other than the one responsible for collecting and depositing the funds.
  1. Secure Donated Merchandise
  • An organization should have policies and procedures for handling the receipt and disposition of donated merchandise. The policies should address how and by whom the merchandise will be used and how it will be disposed of at the end of its life. Periodic inventories should be performed and records should be maintained of such merchandise.
  1. Strong Hiring Practices
  • Organizations should ensure they have good hiring practices. References should be checked and criminal background checks should be performed. In addition, when hiring a person in a fiscally responsible position, the individual’s credit should be checked. Oftentimes, nonprofit organizations have difficulty finding well-qualified personnel as they may offer lower pay than for-profit organizations. This creates the potential for “rationalization” that they deserve higher pay, which can lead to fraud. In addition, many nonprofits place a lot of trust in their personnel which creates the opportunity for fraud.
  1. Segregation of Duties
  • No single person should have complete control over a single transaction. The same person should not be able to set up new vendors, enter invoices, print and mail checks, and reconcile bank accounts. By involving a second person in the process, an organization reduces the opportunity for fraud as now collusion may be necessary to commit the fraudulent act.
  • Bank reconciliations should be performed by someone other than the individual involved in recording of the day-to-day transactions.

Nonprofit organizations need to understand the risks affecting their organization and ensure they have appropriate controls in place to secure their resources.