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.
|
||
|
Having people "like" you on popular social media sites may cost more than you think and is worth tracking. The fourth annual Nonprofit Social Network Benchmark Report found that the average cost of a "like" on Facebook was $3.50, while the average cost of a Twitter "follower" was $2.05. The report surveyed more than 3,500 nonprofit professionals about their organization's use of social media to build their supporter base.
Don't let the costs scare you off, though. The survey also found that the average yearlong value of a supporter acquired via Facebook — that is, the amount of revenue received from a supporter over the 12 months following acquisition — was almost $215. It's no surprise, then, that 81% of the respondents deemed their social network communities as somewhat or very valuable.
The Financial Accounting Standards Board (FASB) is conducting two projects directly related to nonprofits. The "Not-for-Profit Financial Reporting: Financial Statements" project is re-examining existing accounting standards for organizations' financial statements, with a focus on improving 1) net asset classification requirements, and 2) the information provided in financial statements and notes about liquidity, financial performance and cash flows. FASB will likely propose a revised standard and request feedback in the future.
FASB also is conducting a research project called "Not-for-Profit Financial Reporting: Other Financial Communications." That project is looking at other types of communications nonprofits use to tell their financial stories. FASB's staff, for example, is reviewing existing best practices followed by organizations to determine how such communications may enhance the understanding of donors, creditors and other stakeholders of the organizations' financial health and performance.
A study of donors to the national humanitarian organization CARE suggests that engaging donors through both online and offline approaches can pay off for nonprofits. According to the study, dual-channel donors (those who give both online and offline) have the highest annual donor value, returning about 46% more value than donors giving only through direct mail.
The study also found that dual-channel donors gave almost as much through offline channels as offline-only donors ($74 vs. $85). This led the researchers to conclude that adding digital channels of donation doesn't materially cannibalize revenue from direct mail. Moreover, traditional offline direct response donors who were engaged through online communications demonstrated higher retention rates than offline donors not engaged online.
The ability to accept and make online payments and maintain databases with detailed profiles of constituents offers obvious benefits to nonprofits under constant time and money pressures. But it may also be subject to fraud attempts that can dodge your traditional internal controls. Fortunately, measures are available to combat these risks.
Many nonprofits are now paying their bills online, rather than mailing payments. Of course, the ability to make online payments essentially makes the employee who does so a check signer who can, in turn, make unauthorized payments. Similarly, the employee who oversees direct deposit payroll transactions may choose to pay “ghost” employees, give unauthorized raises or otherwise divert funds.
If your not-for-profit makes these types of online disbursements, ensure that all payments are subject to an independent review by a different employee. The reviewer can check payments online or examine the bank statements for discrepancies. The reviewer should also study payroll reports that come straight from the payroll system (vs. coming from the employee who oversees payroll). Of course, the reviewer should be aware that those two employees might be working together to commit fraud. Your bank also might offer verification services to confirm that payments are authorized before they clear.
One of the most significant changes in how nonprofits conduct business in recent years has been the widespread adoption of systems that allow online payments for event registrations, membership fees, product purchases and donations. These payments generally are deposited directly into an organization’s bank account.
The risk is that the employee responsible for the online payment system could redirect the ultimate destination of payments. If the accounting department records income based on bank deposits, this fraud could go undetected. To close this control gap, make sure you take the added step of reconciling the bank deposits against online income from the donor system.
Many nonprofits possess their members’ and donors’ credit card information and other personal data, making them potential targets for both internal and external hackers and fraudsters. Imagine the consequences if criminals were to access your constituents’ data. It could be disastrous in terms of remedial costs, legal liability and reputational damage.
Perhaps the most effective privacy control is adherence to the Payment Card Industry (PCI) Data Security Standard (DSS). DSS applies to all entities that store, process or transmit credit cardholder data and outlines technical and operational system requirements to protect that data. Although DSS isn’t technically a law, several states have enacted legislation mandating compliance with some of its provisions.
The DSS requirements vary depending on the number and type of credit card transactions an organization conducts, both online and offline. It’s a good idea, though, to take steps to comply with the strictest requirements, including:
Although it isn’t a requirement, PCI also strongly recommends “segmenting” (or isolating) the cardholder data environment from the rest of your network. (To learn more, visit https://www.pcisecuritystandards.org/.)
There’s no turning back from the technological advances nonprofits are currently enjoying. The key is to remain vigilant against the evolving risk of fraud.
The IRS has publicly stated it plans to crack down on organizations that improperly classify workers as independent contractors instead of employees. Are you confident your employee classifications would stand up to IRS scrutiny?
If a worker is an employee, your nonprofit must provide a Form W-2 annually and withhold income tax and the employee’s portion of Social Security and Medicare taxes from the employee’s pay. You also must pay the employer portion of Social Security, Medicare and unemployment taxes on the employee’s wages.
If a worker is an independent contractor, your organization generally should provide a Form 1099-MISC, which reports the amount you’ve paid to the person that year. The independent contractor is responsible for paying employment taxes (both the employee and employer portions) and income taxes on his or her own.
While the IRS generally should receive the same amount of total income and employment taxes regardless of whether someone is an employee or an independent contractor, the agency has found that it’s more difficult to collect from independent contractors. Thus, the IRS tends to favor employee status.
Should the IRS determine you’ve improperly classified an employee as an independent contractor, you may be held liable for that worker’s applicable employment taxes.
To determine whether a worker is an employee or an independent contractor, you must consider your nonprofit’s degree of control and the person’s level of independence. The IRS has assembled a number of questions to help employers decide. Commonly referred to as the “20-factor test” or “common law rule,” the questions revolve around:
The IRS has suggested asking certain questions when determining status. For example, must a worker follow someone else’s instructions regarding when, where and how he or she completes work? If so, the person is probably an employee.
More examples: Employees are typically trained how to perform a given job, whereas independent contractors are expected to already know how to do it. Independent contractors must pay their own assistants. And someone who retains the ability to set his or her own daily hours (within reason) is generally regarded as an independent contractor.
Another factor to consider is whether the person works for more than one business at a time, which would indicate contractor status. Someone paid by the hour, week or month (rather than by the job), on the other hand, typically signals employee status.
If you’re unsure whether an individual should be classified as an employee or an independent contractor, you can complete Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding,” and the IRS will decide for you. The process is free, though it might take six months or more to receive the determination.
Organizations that inadvertently misclassify an employee as an independent contractor may be able to mitigate the consequences under the IRS’s Voluntary Classification Settlement Program. Ask your tax advisor for details.
The IRS has reported that it loses millions in unpaid taxes and uncollected penalties for misclassified workers each year — and is looking to get it back. Make sure your nonprofit is following the rules.
Nonprofits often struggle with valuing noncash and in-kind donations, including the value of houses or other buildings. Whether for record-keeping purposes or when helping donors understand proper valuation for their charitable tax deductions, the task isn’t easy.
Although the amount that a donor can deduct generally is based on the donation’s fair market value (FMV), there’s no single formula for calculating FMV for every type of gift. (Note: This article focuses on valuing gifts for tax purposes rather than financial accounting purposes.)
The IRS defines FMV as the price that property would sell for on the open market. (A donor can’t claim a deduction for the contribution of services.) For example, if a donor contributes used clothes, the FMV would be the price that typical buyers actually pay for clothes of the same age, condition, style and use.
If the property is subject to any type of restriction on use, the FMV must reflect that restriction. Say a donor contributes land to your not-for-profit and restricts its use to agricultural purposes. The land must be valued for agricultural purposes, even though it would have a higher FMV for nonagricultural purposes.
Ultimately, FMV must consider all facts and circumstances connected with the property, such as its desirability, use and scarcity.
According to the IRS, there are three particularly relevant FMV factors:
1. Cost or selling price. The cost of the item to the donor or the actual selling price received by your organization may be the best indication of the item’s FMV. Because market conditions can change, though, the cost or price becomes less important the further in time the purchase or sale was from the date of contribution.
For example, you may have paid $2,500 for a top-of-the-line computer in 2005. But that computer certainly isn’t worth $2,500 in 2012 because it’s no longer top of the line. It may still have some value, though.
A documented arm’s-length offer to buy the property close to the contribution date may help prove its value to the IRS. The offer must have been made by a third party willing and able to complete the transaction.
2. Comparable sales. The sales price of a property similar to the donated property often is critical in determining FMV. The weight that the IRS gives to a comparable sale depends on:
The degree of similarity must be close enough that reasonably well-informed buyers or sellers of the donated property would have considered that selling price. The greater the number of similar sales for comparable selling prices, the stronger the evidence of the FMV.
It’s important, though, that the transactions take place in an open market. If the sales were made in a market that was artificially supported or stimulated, they might not be representative or indicative of the FMV. For example, liquidation sale prices typically don’t indicate FMV.
3. Replacement cost. FMV should consider the cost of buying, building or manufacturing property akin to the donated item, but the replacement cost must have a reasonable relationship with the FMV. And if the supply of the donated property is more or less than the demand for it, the replacement cost becomes less important to FMV.
If a business contributes inventory, it can deduct the smaller of its FMV on the day of the contribution or the inventory’s basis. (The basis of donated inventory is any cost incurred for the inventory in an earlier year that the business would otherwise include in its opening inventory for the year of the contribution.) If the cost of donated inventory isn’t included in the opening inventory, its basis is zero and the business can’t claim a deduction.
Inventory that may receive a better valuation than other inventory includes that which is used solely for the care of the ill, needy or infants; book inventory or food for public schools; and scientific property for research. The special provisions for books, food, and inventory for the care of the ill, needy or infants expired at the end of 2011 and have not been extended; however, they have been extended retroactively in the past. In addition, certain industries, such as the pharmaceutical industry, have specific standards for valuing donated inventory.
Even if a donor can’t deduct a noncash or in-kind donation (usually a piece of tangible property or property rights), in some instances you may need to record the donation on your financial statements. Recognize such donations (including the donation of services) at their fair value, or what it would cost if your not-for-profit were to buy the donation outright from an unrelated third party.
|
|
||
|
The word “benchmark” may strike some as organizational lingo, but the practice of benchmarking often proves valuable for nonprofits. Nonprofits that incorporate financial benchmarks into their operations are better at anticipating negative financial trends and may even see revenues climb, expenses drop and efficiencies improve.
Benchmarking is an ongoing process of measuring an organization against expectations, past experience or industry norms for productivity and profitability and then making adjustments to improve performance in relation to those metrics. Ideally, your nonprofit will consider both:
Benchmarking provides essential information for effectively developing and implementing strategic plans. It helps an organization keep a watchful eye on its financial health and determine where costs can be cut and revenues increased. Nonprofits can use benchmarks to demonstrate their efficiency to stakeholders such as donors and grantors.
The first step is to define what your nonprofit needs to measure. Focus on the metrics that are most critical to the success of your mission and the key indicators of the organization’s financial health and operational effectiveness. For many nonprofits, those metrics will include:
Program efficiency (program service expenses / total expenses). This ratio identifies the amount you spend on your primary mission, as opposed to administrative and fundraising costs. This ratio is of utmost importance to stakeholders.
Fundraising efficiency (unrestricted contributions / unrestricted fundraising expenses). How many dollars do you collect for every dollar you spend on fundraising? The higher this ratio, the more efficient your fundraising. What qualifies as a good ratio depends on the organization’s size, its types of fundraising activities, and so on.
Operating reliance (program service revenue / total expenses). This ratio indicates whether your nonprofit could pay all of its expenses solely from program revenues.
Organizational liquidity (expendable net assets / total expenses). How much of the year’s total expenses is considered expendable equity or reserves? The higher the ratio, the better the liquidity.
Also consider benchmarks such as average donor contributions, expenses per member and other ratios that measure trends for liquidity, operating yield, revenue, borrowing, assets and similar metrics. No matter which benchmarks you choose, though, you’ll need reliable processes for collecting and reporting the data.
Comparing the nonprofit’s performance to benchmarks allows you to zero in on areas with the greatest potential for improvement. Armed with this information, you may be able to improve performance without making significant changes in your operations. Further, when comparing against external benchmarks, you might improve performance by simply adopting best practices used by your peers.
You can obtain information on other nonprofits’ metrics from websites such as GuideStar and Charity Navigator or from commercial software. Information also may be available from state government databases and trade associations. Take steps, though, to ensure you’re comparing apples to apples — that the two organizations you are stacking up against each other are truly comparable.
Some organizations have found it worthwhile to include staff in the benchmarking process. Their involvement in setting aggressive but attainable benchmarks — and measuring progress — can achieve buy-in and help foster teamwork as your nonprofit moves toward and surpasses its goals. Also include your financial advisor, who can help you select the most appropriate benchmarks for your organization and provide advice on how to improve your financial and operational performance.
Does your charity understand how to treat quid pro quo arrangements? “Quid pro quo” describes an arrangement in which a contributor gives money in exchange for something else. Whether it’s a supporter buying a ticket for your charity ball or an attendee at your charity auction successfully bidding on a hotel stay, such situations create an obligation for your nonprofit.
According to IRS rules, you may ignore contributions of less than $75, but if your not-for-profit receives more than $75 and provides a benefit to the donor, you must advise the donor that it’s a quid pro quo contribution. With such contributions, donors can deduct only the amount they pay in excess of the value of the goods or services.
Additionally, the charity must put in writing the amount donated, the goods or services provided in return, and a good-faith estimate of their value. You must also provide written acknowledgment when the donation is solicited or when it’s received.
If you’re holding a musical performance for which tickets are sold, for example, each ticket should disclose the tax-deductible portion of the ticket price (in this case, the market value of a similar event in your area). You must make the disclosure in a readily visible format. You can find examples in IRS Publication 1771, Charitable Contributions — Substantiation and Disclosure Requirements.
Your organization could be penalized for failing to furnish the proper acknowledgment and disclosure. Fines are $10 per contribution, up to $5,000 for the fundraising event. If the contribution is $250 or more, failure to provide and describe a good-faith value of the benefit may cost the donor their contribution deduction.
A key task for the charity is to value the goods or services. An example: Your organization takes a group of supporters to a sporting event and pays for their tickets. The supporters then make large donations. Determining quid pro quo is fairly simple in such cases: The amount your organization paid for the tickets would be considered the fair market value, and only the amount of the contributions in excess of this valuewould be a tax-deductible contribution for the donor.
It’s not as easy when some of the items given away have been donated to your organization. Let’s say, for instance, that your charity put on a one-day chocolate lovers’ event with live chamber music. The hosting hotel charged you a reduced amount for the candy and desserts as its contribution, and the chamber quartet performed at no cost. To establish the value to be reported to the donor, you must determine what it would cost someone to attend a similar event. In this case, you might be able to find a comparable activity in a nearby community.
All items auctioned at a charity auction (silent or regular) must have a value placed on them. The charity should ask the donor to put a value on the item unless it’s readily apparent, such as with a $50 gift certificate. The value should be the amount that a willing buyer would pay for the item in an “arm’s length” transaction — that is, in the marketplace.
The charity can then publish the item’s value on bid cards or in a catalog of auction items. This serves as the acknowledgment, and the buyers will be entitled to a deduction for the amount paid in excess of that value.
There are a few instances when quid pro quo reporting isn’t necessary:
Membership exception. This exception happens when membership benefits (free admission or free parking, for example) are provided, but the annual membership fee is $75 or less.
Token exception. This exception takes place when a contribution is for $49.50 or more and the goods cost less than $9.90, or the value of the benefit to the donor doesn’t exceed 2% of the donation or $99, whichever is less.
Intangible religious exception. This exception pertains to religious benefits, such as religious services or classes that are provided by an organization operated exclusively for religious purposes (excluding travel, education and consumer goods).
In other situations, it’s safer to report quid pro quo than not.
Making decisions on the value of items you give to contributors in exchange for contributions often involves a degree of subjectivity — value is sometimes in the eye of the owner. If you have any disclosure or reporting questions concerning contributions to your nonprofit and quid pro quo arrangements, contact your CPA.
Board members are your nonprofit’s ambassadors to the constituencies you serve. But when someone from the outside takes a look inside, does she or he see a reflection of your community, or are the images a mismatch?
In its infancy, a nonprofit may simply want to get the word out about its mission. So recruiting as many loved ones, friends and friends of friends as possible may be the most efficient approach. As time passes, however, the not-for-profit might find that it’s represented solely by one race, sex, religion or economic class.
Such lack of diversity can signal an underlying problem: a disconnect from the community. A nonprofit can improve its funding and program effectiveness when it reflects the population it serves, as well as the community (or communities) in which it operates.
What’s considered “healthy” diversity will vary from organization to organization. But think of it like this: The more diverse your board is in attributes, the more diverse it will be in thoughts and ideas. This diversity can come in many forms — physical, societal or economic. The goal is to mirror the population you serve in your appointees to the board.
If your bylaws limit the number of board members you can have at any given time, you might consider amending them to include the nonprofit’s commitment to board diversity. Be very careful, though, that the size of your board doesn’t become unwieldy. There are other ways to commit to well-balanced leadership and community input. (See the sidebar “Other paths to diversity.”)
The first step to a great mix is to ask board members to write their own profiles. In the instructions you give — or on the form you provide — include the attributes you consider important, such as skill sets and a particular demographic. From this information, you’ll be able to see what the board may lack.
Look at the group as a whole and assess where the organization lies on the diversity continuum. Imagine a scale from “1” to “5” with “5” displaying your nonprofit’s ideal diversity. Assess your members and give yourself a score. The diversity, or lack thereof, should be obvious. You may find, for example, that the board is underrepresented by females, persons of color, young adults or individuals with a financial background.
Identifying that your board needs more diversity is easy. Figuring out what to do about it can be more difficult. Start with your current board members. Communicate with them the need for diversity — if they haven’t already vocalized the need themselves. Ask members to dip into their personal and professional networks to help find the right individual(s) for your nonprofit.
Also gather input from your community and the organizations that serve it. Your chamber of commerce might be a place to start, but there are many options. If your nonprofit lacks the perspective of young professionals, for example, contact a local “young professionals” group, such as Colorado Springs’ Chamber Rising Professionals, Leadership Pikes Peak, or recent college graduates. Does your organization need diversity via a financial perspective? Express your need to a local CPA firm.
Local nonprofit associations can prove very helpful to your organization. Both the Colorado Nonprofit Association and the Center for Nonprofit Excellence (CNE) offer many resources and opportunities to help you find the right board members and to equip them for their board service.
Building an effective board of directors should be a challenge that your not-for-profit happily faces. Every time a board member resigns, an opportunity to give your organization the wings of diversity emerges.
|
|
||
|
