IRS Releases Priorities for FY2016

By:  Deb Nelson

The IRS recently released its work plan for the upcoming year, which includes the vision of Moving Forward Together – The Road Ahead. The IRS intends to achieve this vision through data-driven decisions focused on identifying existing and emerging high-risk areas of non-compliance. The IRS will focus on issues in five areas within exempt organizations:

Exemption

Issues identified include non-exempt purpose activity and private inurement. The IRS will address these issues through field examinations.

Protection of Assets

Issues identified include self-dealing, excess benefit transactions, and loans to disqualified persons. The IRS will address these issues through correspondence audits and field examinations.

Tax Gap

Issues identified include employment tax and unrelated business income tax liability. The IRS will address these issues through compliance checks, correspondence audits, and field examinations.

International

Issues identified include oversight on funds spent outside the U.S., including funds spent on potential terrorist activities, exempt organizations operating as foreign conduits, and Report of Foreign Bank and Financial Accounts (FBAR) requirements. The IRS will address these issues through compliance reviews, correspondence audits, and field examinations.

Emerging Issues

Issues identified include non-exempt charitable trusts and IRC 501(r) related to tax-exempt hospitals. The IRS will address these issues through compliance reviews, correspondence audits, and field examinations.

In addition to these areas, the IRS will also look at issues surrounding the Patient Protection and Affordable Care Act (ACA) and review organizations receiving exempt status through submission of Form 1023-EZ.

 

Notification Requirement for Type III Supporting Organizations

By:  Deb NelsonDebNelson

If you are a June 30 year-end and are classified as a 509(a)(3) Type III Supporting Organization, the due date for providing information to your supported organization(s) is quickly approaching. The Final Regulations for Type III Supporting Organizations now stipulate a Notification Requirement to be met. All Type III’s, functionally and non-functionally integrated, must provide the following documents annually to each of its supported organizations:

  • A written notice addressed to the principal officer(s) of the supported organization(s) describing the type and amount of support provided by the supporting organization;
  • A copy of the supporting organization’s Form 990 or 990-EZ that was most recently filed as of the date the notification is provided; and
  • A copy of the supporting organization’s governing documents, as most recently amended, to the extent not previously provided.

A principal officer is anyone who has ultimate responsibility for managing the finances; implementing the decisions of the governing body; or for supervising the management, administration or operation of the supported organization.

This information must be postmarked or electronically transmitted by the last day of the fifth month following the close of the taxable year to which the information pertains. This date is November 30th if you are a June 30 year-end.

Simple Rules for Board Communication

HansonBy: Laurie Hanson

Common to every successful nonprofit organization is a Board of Directors that communicates well with each other and the Executive Director. Achieving this degree of communication requires dedication and hard work by the organization and its Board. However, the payoff can result in an organization that effectively fulfills its mission, exceeds the goals set for itself, and performs well above other organizations of its type.

There are several key elements that are necessary to build a Board that communicates well including, but not limited to, respecting peers, honest communication, focus on the issues, respect of each other’s time, and methods of communication.

Establish Respect

First and foremost, board members need to have respect for each other and the Executive Director. Respect can be built through formal processes, such as board retreats, or through less formal means, such as gathering for dinner or drinks. A large part of earning respect for one another is simply to get to know each other.

Be Honest

In order to have successful board meetings and resulting actions, board members and the Executive Director need to communicate in an honest way, allowing for an open discussion. This is important for raising concerns, asking questions, and discussing subjects where there is disagreement amongst the board members. Honest, open communication helps the organization to avoid legal problems and ethical dilemmas, and promotes constructive dialog about difficult subjects and strategic issues. If this is a challenge, check out resources like the book Difficult Conversations (Stone, Patton, and Heen)  or Shari Harley’s blog, Candid Culture.

Focus on the Issues

It can be difficult to separate an issue from the messenger. However, keep in mind that the messenger, if communicating in an honest manner, is only raising the issue because he feels it’s significant to the organization. Often times, the messenger has expertise in the issue that’s being raised and has experience in dealing with others who’ve not properly dealt with this particular issue. For example, if a board member is an intellectual property lawyer, she may spot a trademark issue with the photos being used on your marketing materials. Focusing on the issue and not the person raising the issue keeps the board on track for good governance and furthering the mission.

Respect Time

Be honest about the expected time commitment when recruiting. If it’s known that the position will require five hours per week, don’t try to sell it as less than that. Recruiting board members through deception of any type will result in board members who are resentful toward the organization. This is not a good way to start a relationship! Also, remember that board members are busy people. In addition to their responsibility of serving the organization, many also have full-time jobs, children and/or parents that require their time, and other volunteer commitments. Be respectful by limiting the amount of communication to only what’s needed and limiting the time of day for contacting board members. Very few people appreciate a midnight call that’s anything short of an emergency.

Agree on (and Stick to) One Communication Method

There are many ways to communicate information with the Board. Emails, text messages, phone calls, and traditional mail are a few of those methods. Depending on the organization’s size, it may make sense to set up a portal through the organization’s website where board-related items can be posted. The board should come to a consensus on what its preferred communication method is, and stick to that method. This will help the Executive Director to develop a format and communication method that is consistent and relied upon by everyone involved. It is unrealistic to expect specific communication methods be used for each board member. Agreement on the method to use will allow for streamlining and reduce confusion.

 

Putting the above into practice will go a long way toward achieving and surpassing the organization’s goals for its mission and growth. It will result in a strong governing board that works toward the same goal and delivers a cohesive message about the organization and the great work that it does.

Differences Between Nonprofit and For-Profit Financial Documents

By:  Jodi Kimmerle

While many aspects of NPO and for-profit entity financial statements are similar, there are significant differences. These differences arise principally due to the varying sources of revenue along with the requirements of reporting expenses and presentation of separate classes of net assets.

To begin, there are some differences in terminology when referring to key financial documents. The chart below outlines these:

Financial Docs Chart

More Details about Differences:

Besides having a different name than the balance sheet, the statement of financial position for an NPO contains categories of assets that are not applicable to for-profit entities, such as promises to give. Promises to give consist of resources that have been promised to the NPO (preferably in writing) but for which the NPO will not receive the resources until a later date. For instance, an individual promises to give an NPO $50,000 a year from now. That promise is recorded as a receivable and contribution revenue and discounted for time value of money as appropriate. The other area that is different for an NPO on the statement of financial position is the category of net assets. This category can consist of three different sections; unrestricted, temporarily restricted and permanently restricted net assets. Temporarily restricted net assets consist of contributions given to the NPO for which the donor has placed either a time restriction (resources cannot be spent until a future reporting period) or a purpose restriction (resources can only be spent on the purpose designated by the donor). Permanently restricted net assets consist of contributions given to the NPO for which the donor has stated that the principal can never be spent. The earnings on assets held as permanently restricted net assets are usually temporarily restricted for a purpose provided by the donor and can be spent when earned.

One of the differences found between a statement of operations and a statement of activities is that a statement of activities shows activity by each class of net assets. In other words, there is a column for unrestricted, temporarily restricted, permanently restricted net assets (as applicable) and then a total column. The activity in the temporarily restricted and permanently restricted net asset columns consist of the contributions discussed previously. In addition, the temporarily restricted net assets column also shows releases from restrictions. Once temporarily restricted contribution have been either spent on the specified purpose or the time restriction has lapsed these resources get reclassified in to the unrestricted net assets column. Another difference lies in the recording of donated goods and services. NPOs can record non-cash contributions of goods and services at their fair market value as of the date of donation. In order to be recorded in the financial statements the donated services need to either create or enhance nonfinancial assets or require specialized skills performed by people with those skills and would have been purchased if not donated.

Another item unique to an NPO statement of activities is the functional expense breakdown. This breakdown includes all expenses incurred during the year and whether those expenses were incurred for program services, administrative costs or for fundraising activities. All expenses are included on the statement of activities as a reduction of unrestricted net assets. This breakdown is sometimes presented as a basic financial statement, a schedule that is included as supplementary information to the basic financial statements, or at a minimum summarized in a footnote. The breakdown totals are required to be shown somewhere in the financial statement packet.

 

With even a limited knowledge of the differences between NPO and for-profit financial statements, a reader of NPO financial statements will be able to make better decisions about the health of an organization and be able to make educated decisions about which NPO they would like to support through personal contributions, board service, and/or volunteerism.