Summer hours are in effect: Our offices close at NOON on Fridays from May 17th to July 12th
Our offices are closed tomorrow 1/7/25 from 8am – 1pm for a firm event. Thank you.
Summer hours are in effect: Our offices close at NOON on Fridays from May 17th to July 12th
Our offices are closed tomorrow 1/7/25 from 8am – 1pm for a firm event. Thank you.
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For-profit subsidiaries of nonprofit organizations are strikingly diverse. Consider these real-life examples: In one part of the country, a nonprofit health maintenance organization (HMO) creates a for-profit subsidiary to offer health insurance unavailable through HMOs. Elsewhere, a university business school starts a venture capital company to fund worthy startups and give students a first-hand look at what makes businesses tick. And, an investors association acquires a software developer to broaden its product line and add investor clubs and individual investors to its target market. Sound interesting? In the wake of a severe recession — with a drop in public grants and private donations — for-profit endeavors can have a magnetic appeal as nonprofit survivors look for new sources of revenue. What’s the draw?What factors should a nonprofit consider before taking on the significant cost and responsibility of operating a for-profit company? You’ll need, of course, to weigh the pros and cons of this strategic move. Unrelated business income (UBI) is the top reason why nonprofits decide to create a for-profit enterprise. As a nonprofit, an organization can conduct a certain amount of revenue-producing activities unrelated to its mission, but it will pay tax on UBI profits. And if the IRS determines that your organization is pulling in too much gross revenue or net income, it could lose its coveted tax-exempt status. The same risk exists if the IRS decides that your staff is spending too much time on UBI activities. To avoid such scenarios, the nonprofit can usually transfer its UBI activities to a for-profit subsidiary and conduct activities under that umbrella. The organization can generate after-tax surpluses through the subsidiary and, after paying tax in the subsidiary, use the profits (in the form of stock dividends) to fund activities that fulfill the nonprofit’s mission. Care must be taken to keep the nonprofit and the for-profit separate. For instance, neither the subsidiary nor the nonprofit should distribute the proceeds to the nonprofit’s board members or key employees. That action could be considered private inurement and is strictly prohibited for nonprofits. Some see creating a for-profit subsidiary as a way to, in effect, pay for the next phase of a not-for-profit’s growth. For example, the fictitious American Society for the Prevention of Cruelty to Ferrets (ASPCF) has a profitable publishing arm in the nontraditional-pets field, and draws over 15% of its revenue from the publishing operation. The nonprofit should create a for-profit subsidiary to handle its publishing activities — or it might risk endangering its tax-exempt status if publishing profits continue to grow. Are there other incentives?Additional reasons why a nonprofit might want to launch a for-profit subsidiary involve internal flexibility and reduced risk in some areas. More leeway in setting compensation. Let’s say that the ASPCF wants to hire a nationally respected animal nutritionist to create a line of nontraditional pet food. With a subsidiary, one is able to attract and keep highly skilled employees in ways that are unavailable to tax-free entities — for example, through stock compensation and profit-sharing. Better outlet for research. If the nonprofit conducts research, it would automatically have a commercial outlet for marketing its discoveries. Taking the ASPCF example further, if the organization developed a nutritionally balanced snack for pet lizards, it could market the snack via the subsidiary. Reduced liability. Imagine, for instance, that a nonprofit leases to area businesses employees with criminal backgrounds and, thus, some risk of recidivism. The nonprofit may want to contain that activity within a subsidiary and thus protect itself from liability. What are the drawbacks?Despite the potential pluses, running a for-profit subsidiary comes with pitfalls. The nonprofit shouldn’t allocate too much of its resources to the for-profit or it will endanger its tax-exempt status. Additionally, the nonprofit must have a realistic idea of what taking on a for-profit endeavor will mean for the organization. Operating a separate entity has its own costs and complexities, such as management, personnel, tax, audit and other requirements. Ask yourself: Could the same function be done less expensively within your nonprofit? Spinning offIf your organization is considering creating a for-profit subsidiary, seek legal and tax advice at the onset. You’ll need to decide, for example, if either of the most popular structures for nonprofit subsidiaries — C corporations and, to a lesser extent, limited liability companies — is right for your goals. Additionally, your CPA can help you conduct a feasibility study and, if your idea survives, form a business plan and work out how to capitalize your endeavor. |
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The Department of Housing and Urban Development (HUD) has made several changes to the reporting requirements for supervised mortgagees. Beginning with HUD Mortgagee Letter 2009-31, supervised lenders were required to submit annual audited financial statements electronically through HUD’s LASS on-line system.
In January 2011, HUD issued Mortgagee Letter 2011-05 that revised the audit reporting requirements for supervised lenders. The revised reporting requirements allow a supervised lender in a parent-subsidiary structure to submit audited consolidated financial statements of the parent company if the parent company executes a written guarantee of the on-going net worth and liquidity compliance of the FHA approved subsidiary. The FHA approved lender is also required to submit their fourth quarter Call Report, a Compliance Report and an Internal Control Report. This Mortgagee Letter still requires submission of audit reports on the LASS system.
In July 2011, HUD issued Mortgagee Letter 2011-25 that further revised the reporting requirements for small supervised lenders and provided a reprieve from the audited financial statements requirement. Supervised lenders with assets of less than $500 million are not required to submit audited financial statements nor an audited computation of net worth. This new exemption for audited financial statements will expire on April 7, 2012 and there has been no guidance regarding what will happen after the expiration date. The lender must still submit their fourth quarter Call Report and Compliance and Internal Control Reports issued by an independent auditor.
HUD has issued Frequently Asked Questions for Mortgagee Letter 2011-25 in which HUD states that supervised lenders with less than $500 million in assets may mail hard copies of the required reports rather than submitting them on the LASS system. This is because the LASS system has not yet been updated to accept submissions under these revised reporting requirements. There are specific requirements for mailed hard copies such as
1) you must submit two copies of each report,
2) you must include a cover letter with the FHA lender/mortgagee identification number that claims the exemption for supervised lenders under the April 7, 2011 waiver, and
3) the FHA lender/mortgagee identification number must be written on the upper right-hand corner of each separate document.
Financial institutions need to engage a CPA firm to perform the necessary compliance and internal control audit procedures and to issue the compliance and internal control reports. The procedures to be performed by the CPA firm and report examples are outlined in chapters 1, 2 and 7 of the HUD Handbook Consolidated Audit Guide for Audits of HUD Programs.
In summary, as it stands right now, if you are an FHA Supervised Lender with total assets under $500 million, there is no financial statement audit requirement for 2011. You are required to submit your fourth quarter call report and both the Compliance and Internal Control Reports as previously discussed. These reports may be submitted via mail which is a significant reprieve from the challenges of the LASS system.
If you have any questions on these reporting requirements, please feel free to contact Ellen Fisher at any time by phone at (719) 630-1186 or email efisher@skrco.com.
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If you’re thinking of making year-end donations to your favorite charities, you only have a little bit of time left! We've put together a list of tips to keep in mind to make sure the donations result in a deduction that will help minimize your 2011 tax liability.
