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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.
If your nonprofit chooses to engage in some lobbying, make sure that you follow IRS rules. Straying from the requirements could jeopardize your tax-exempt status. In addition to tax issues, federal and some state governments regulate organizations that lobby. While there are exemptions for some nonprofits and small amounts of lobbying, consult with your attorney about your specific requirements.
Part of playing it safe is knowing the difference between lobbying and advocacy. Lobbying is defined as a communication that attempts to change particular legislation. Advocacy, on the other hand, promotes general causes and issues. Nonprofits may do unlimited advocacy work, but the IRS limits the extent of lobbying activities.
Lobbying always involves advocacy, but advocacy doesn’t necessarily involve lobbying. The key to determining whether an activity is considered lobbying or advocacy depends in part on whom you’re trying to influence: Does the audience of your lobbying efforts make the laws or simply follow and enforce them? Do you want these individuals to vote a certain way on proposed legislation or simply be more aware of issues?
If your audience makes laws and you’re attempting to change legislation by encouraging these lawmakers to vote a certain way, it’s lobbying. If, on the other hand, you’re speaking with an administrative official or other non-lawmaking individual or group about a broad policy change, it’s advocacy.
Keep in mind that promoting a point of view and providing public education aren’t considered lobbying activities — even if you’re speaking with a public official. The discussion crosses the line only when specific legislation is discussed or you urge a particular vote.
Nonprofits often shy away from lobbying for fear of losing their tax-exempt status. And some organizations worry they don’t have the proper resources, time or qualifications to lobby.
But the fact is that nonprofits can lobby without endangering their tax-exempt status and without major financial resources or expert assistance. The Center for Lobbying in the Public Interest suggests that even small nonprofits can make an impact by devoting as little as three hours a week to the endeavor.
The IRS evaluates lobbying based on whether a nonprofit chooses to report its activities under the 1976 lobby law or uses the “no substantial part” test. The lobby law provides nonprofits with a clearly defined set of rules, and requires organizations to file Form 5768, known as the “h” election. The “no substantial part” rule is more vague and subject to interpretation.
If, for example, an organization chooses to use the lobby law, it may spend 20% of its first $500,000 in annual expenditures on lobbying tax free. This percentage decreases as annual expenditures increase, and annual nontaxable lobbying expenses are capped at $1 million. An excise tax will apply when spending limits are exceeded.
If a nonprofit doesn’t report lobbying under the 1976 law, it must meet the “no substantial part” test, which stipulates that nonprofits can spend only an insubstantial amount of their resources on lobbying. The specific dollar amount isn’t defined, but courts have ruled that more than 5% of an organization’s budget, time and effort is substantial. Most organizations, therefore, aim for a percentage below 5%.
Lobbying can help you get your organization’s voice heard and raise public awareness of your mission. Some social goals can only be fully addressed by changes in law, which may be encouraged by lobbying. If you strictly follow IRS rules, you can accomplish these goals without putting your tax-exempt status in danger.
Unless you’re a small nonprofit with no outside audit, it’s likely that your organization has an audit committee. No matter how long it’s been up and running, the board of directors should monitor the committee’s performance.
The audit committee’s main responsibilities are to assist the board in its oversight of the organization’s processes for financial reporting, internal controls and the audit and to see that the not-for-profit complies with applicable laws and regulations and a code of conduct. The following checklist will give you a broad reading on how your audit committee is doing — and any “no” answers will help to pinpoint areas for improvement.
There are many other components of a strong audit committee, including having effective processes in place to orient new committee members, investigate allegations and recommend the approval or modification of the annual audit to the board. Your CPA can review with your board best practices as well as state and national audit committee requirements.
For nonprofit executives and board members, accurate, relevant and timely financial information is key to making good decisions. But do all of your board members really understand the numbers they receive and what they mean to your organization? And do the numbers provide the right information — for example, when you’re trying to determine how and when to initiate a new program?
If your answers to these questions are “no” — or “I’m not sure” — you may want to reassess the usefulness of the financial information you provide.
Your board members probably come from different walks of life and different positions in the community. Some of them may have financial backgrounds, but many of them might not. And it’s this latter point you need to keep in mind as you supply financial data.
For example, don’t assume that everyone on your board of directors understands financial language. Provide them with some working definitions to help them along. Here are some commonly used financial terms and ways you can describe them in everyday language:
Liquidity — the nearness of an asset or liability to cash or cash conversion, or to a requirement to satisfy an obligation in cash.
Board-designated net assets — net assets set aside for a particular purpose or period by the board, such as safety reserves or a capital replacement fund, that have no external restriction by donors or by law.
Net assets released from restrictions — the transfer of funds from donor-restricted to unrestricted status based on satisfying donor-imposed stipulations with respect to the timing or purpose of the contribution (or, in rare cases, due to permission of a donor of permanently restricted funds).
Also consider providing your board with financial training. Bringing in outside speakers, such as accountants, investment advisors, and bankers, is a good start. Additionally, financially savvy individuals on your board — they may make up a separate finance committee — can be asked to share their financial expertise with the rest of the board.
One of the most common financial documents to circulate is the statement of financial position (the balance sheet). It shows an organization’s assets (cash, accounts receivable, and property and equipment), liabilities (accounts payable and long-term debt) and net assets (unrestricted, temporarily restricted and permanently restricted resources). Long lists of numbers can have a dizzying effect on readers.
But adding a pie chart can quickly show your board the composition of your nonprofit’s assets. See the chart “Breakdown of total assets.” At a glance, anyone can see that cash and cash equivalents are the largest part of this nonprofit’s total assets and a much smaller percentage is composed of investments and accounts receivable.
Or, you could create a two-slice pie chart that shows what portion of total assets can quickly be converted to cash (cash equivalents, investments and accounts receivable) vs. the portion that cannot (property and equipment).
A different example: You could create a pie chart to show how your annual event was funded last year: money from attendees, sponsors and general contributions. This tool can help a board make quicker and better-informed decisions — in this case, guiding them in setting or readjusting their funding expectations this year.
The statement of activities (the income statement) is another commonly circulated financial document. It generally starts with total support and revenue, including reclassifications from restricted to unrestricted. Then expenses, including program, management and general, and fundraising, are deducted to arrive at the overall change in net assets.
A bar chart is a good way to present this information: It can visually compare current revenues and expenses with those of previous periods. By updating the bar graphs on, say, a monthly basis, you can help nonfinancial board members easily compare revenues and expenses to the budget on a continuing basis.
Your annual budget assumes a particular level of support and revenue. If you don’t obtain certain grants — or if you sell less in program services than anticipated — your board will need to revisit anticipated expenses and make adjustments accordingly. An informational graphic is one way to quickly relay a heads-up.
Many entities have experienced cuts in funding and donations in the sluggish economy and, as a result, have reduced costs. If you supply board members with ratios for both the current year and prior year, they can see at a glance if these costs have been cut sufficiently.
Useful ratios include 1) management and general costs to total support and revenue, 2) program services to total support and revenue, 3) fundraising expenses to total support and revenue, and 4) fundraising expenses to donations (including deferred gifts). These ratios allow your board to see if the nonprofit’s costs and revenues are in line with its expectations, as expressed, for example, in the budget.
Let’s say that your management and general costs are $200,000 for the coming year and the total support and revenue for the organization is $2 million. You’d have a highly impressive ratio of 1:10 — 10% of every dollar earned is spent on administrative costs, with the remaining 90% available to fund programs and supporting activities.
Another useful ratio is the “current ratio.” This comparison of current assets to current liabilities is commonly used as a measure of short-term liquidity. For example, a ratio of 1:1 means an organization would have just enough cash to cover current liabilities if it ceased operations and converted current assets to cash.
With so many nonprofits finding themselves in a cash crunch, you should consider adding another report to your repertoire: a cash flow analysis. You can present your total cash for the period in a simple spreadsheet, as well as anticipated cash inflows and outflows for the coming month. This can help your board make important short-term decisions, such as applying for, or drawing down on, a line of credit.
Members of the community agree to become board members because they want to make a difference. And it’s up to you to supply them with information they fully understand so that the decisions they make are informed ones.
SKR Nonprofit Newsletter
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Our Inaugural SKR Nonprofit Newsletter Welcome to our first edition of the SKR Nonprofit Newsletter! It is our desire to serve those in our nonprofit community with excellence, and that means helping you get the information you need. So on a regular basis, we will email this newsletter with articles and tidbits we feel you can use.
Steve Hochstetter, CPA, CVA, Audit Partner
Jeff Talus, CPA, Tax Partner Stockman Kast Ryan + CO Nonprofit Services include:
For more information on any of our nonprofit services, please contact us at (719) 630-1186. We welcome your feedback! Please use this Secure Email link to tell us what you found helpful and what topics you would like to see in the future.
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Does your organization agonize over setting prices for your products? Next time your staff starts assigning or shifting price tags, consider these dos and don’ts:
With the economy still down, city, state and regional governments are looking under every rock for ways to remedy budget shortfalls. Momentum seems to be building to reverse the property and sales tax exemptions of nonprofits. Pittsburgh, Pa., and the State of Kansas, for example, are looking at revoking nonprofits’ property tax exemptions. Kansas is also considering eliminating its sales tax exemption for nonprofits.
Hawaii’s state legislature recently passed a bill lowering the cap for itemized deductions, including charitable contributions.
Other moves that could affect nonprofits include the imposition of new fees and delay of payments under government contracts. For instance, the Minneapolis city council voted last year to subject nonprofits to the streetlight fees charged to businesses and residences. Illinois is reportedly more than five months behind in contract payments to some nonprofits.
The IRS on May 17 issued new guidance to make it easier for tax-exempt organizations to find out if they qualify for the new health care tax credit and to estimate the amount of that credit. Under the Patient Protection and Affordable Care Act, for 2010 to 2013 a small tax-exempt employer may be entitled to a maximum credit of 25% of the employer’s health insurance premium expenses that count toward the credit. Notice 2010-44 can be found on http://www.irs.gov/pub/irs-drop/n-10-44.pdf. The largest credit is available to an organization with 10 or fewer “full-time equivalent” employees. But even an employer with 50 employees — assuming most are part-time — may benefit.•
Like many other not-for-profits, you might have cut staff during the recent recession — and that means fewer people to “mind the store.” As the economy continues to mend, now is a good time to inspect the condition of the internal controls that safeguard your organization’s finances.
“Reality-check” your risks
Review your risk assessment to identify any new risks in light of organizational changes. Many of your employees (and volunteers) may be under greater pressure in their personal lives to make ends meet. This can result in greater temptation and fraud risk. Maintaining strict controls is essential to minimizing those risks.
Handle inflows wisely
Receiving funds is an important job that shouldn’t be overlooked or undersupervised. This pertains to cash donations from a fundraiser, routine receivables or investment interest.
Your internal control policies should specify that no one person has sole responsibility for tasks such as opening the mail, recording incoming payments and making bank deposits. The risk increases if a person is involved in these functions and also performs financial or accounting functions such as making journal entries, writing checks, or performing bank reconciliations.
If you’re a small organization or have limited accounting staff, consider providing the necessary checks and balances by enlisting help. This could be from an employee in another department, a trusted board member or an outside accounting service.
Monitor outflows closely
You also need to maintain policies for financial outlays, such as requiring dual signatures on checks over a certain amount. In fact, you may want to lower your current threshold of expenses or payments that trigger review or a co-signature, and perform more random check audits.
But keep in mind: Many fraud perpetrators write unauthorized checks that are just under the review limit. And first-time offenders are likely to start small before they move on to bigger schemes.
Many fraudsters set up an illegitimate vendor and draft invoices for services or work that’s never done. Of course, the money comes back to the fraudster. Or the vendor is legitimate, but payments are diverted to personal use. Review and approval of journal entries and adjustments is a key control for all organizations.
Consider outside help
With budgets tight, you may have eliminated outside bookkeeping, accounting or audit help and brought these tasks in-house. But consider the bigger picture. In many cases, outsourcing provides you with expertise you might lack and a level of monitoring you need. So to reduce risks, you may want to reinstate this function.
Additionally, asking outside professionals to look into your books and interact with your staff is one of the best ways to prevent fraud. A third-party assessment of your transactions can identify potential irregularities. And like an alarm-system sign in the window of your home, a third party’s presence may deter those tempted to exploit vulnerabilities.
Too important to overlook
Remember, good governance is a critical, nonnegotiable responsibility. A key fiduciary duty of every board is the oversight and monitoring of internal controls sufficient to protect and safeguard the organization and its people. Despite staff and budget cuts, consistently make sure that your internal controls are up to par.•
Don’t rely on your audit
Many nonprofit managers mistakenly think their annual audits will detect fraud. Although auditors do review internal controls, an audit isn’t designed for fraud detection.
That’s why you need to stay on top of your organization’s risk assessment and internal controls, revisiting and updating them regularly. Your financial advisor can help you customize internal controls based on your specific needs and compliance requirements.
New rules from the Financial Accounting Standards Board (FASB) have a bearing on your organization if it recently merged with or acquired another not-for-profit organization. They also merit review if you’re contemplating such a move.
Statement of Financial Accounting Standards (SFAS) No. 164, Not-for-Profit Entities: Mergers and Acquisitions, issued in 2009, sets rules especially for nonprofits. The rules are now listed under Section 958-805 of the Financial Accounting Standards Codification (FASC), the FASB’s new system for accounting standards. Before the new rules, nonprofits followed accounting rules designed for for-profit business.
The new rules
The new rules outline how a nonprofit should determine if a new combination of entities is a merger or an acquisition. They also provide guidance on how to apply the carryover method in accounting for a merger, or the acquisition method for an acquisition. Additionally, they show how to determine what information to disclose to enable financial statement users to evaluate the nature and financial effects of a merger or an acquisition.
The rules took effect prospectively for mergers occurring on or after an initial reporting period beginning on or after Dec. 15, 2009, and for acquisitions occurring on or after the first annual reporting period beginning on or after Dec. 15, 2009.
Mergers and the carryover method
In general, a nonprofit involved in a merger must use the carryover method, under which the merged nonprofit’s first set of financial statements carry forward the merging entities’ assets and liabilities. These assets and liabilities are measured at their carrying amounts in the merging entities’ books at the merger date. Unlike past practice, the merger itself isn’t reported in the statements.
The merged nonprofit doesn’t recognize additional assets and liabilities — or changes in the fair value of recognized assets and liabilities — that weren’t already recognized under Generally Accepted Accounting Principles (GAAP) in the merging entities’ financial statements before the merger. Be aware, however, that there are some exceptions.
Acquisitions and the acquisition method
The acquisition method is required when one nonprofit acquires another nonprofit (or a business). The rules are similar to those followed previously by nonprofits — and still followed by for-profit businesses. But FASC 958-805 adds guidance that’s unique or particularly important to a nonprofit and uses nonprofit terminology.
FASC 958-805 specifies that assets and liabilities should be measured at fair value. This also applies to any noncontrolling interest in the acquiree as of the acquisition date. But there are many exceptions to the recognition and measurement rules; for example, a nonprofit isn’t allowed to recognize acquired “donor relationships” separately from goodwill.
FASC 958-805 makes a distinction between nonprofits that operate much like for-profit businesses — getting most, if not all, of their revenue from fees for services, sales and tuition — and those that rely heavily, if not entirely, on contributions and investment returns. Different rules for recording goodwill apply to these two nonprofit types.
For nonprofits largely supported by contributions and investment returns, any excess of the fair value of identifiable assets over liabilities is recognized as a “separate charge” in the statement of activities rather than as goodwill. And in certain cases, the reverse could result in a reported “contribution.”
For nonprofits predominantly supported by business-like revenue, any excess of the fair value of identifiable assets over liabilities is recognized as goodwill.
Following these rules in your financial statements can be complicated, and significant new disclosures for mergers and acquisitions also are required. Your financial advisor can help you determine how the new rules will affect your organization if it joins forces with another entity.
When you receive a gift from a contributor, do you immediately feel fortunate and quickly send a thank-you note from your organization? If you do, that’s likely a mistake, because all gifts aren’t created equal. Having a gift acceptance policy to refer to — and using it to decide if you should accept a donation — is important to your organization’s balance sheet, workload and reputation.
Saying “no” to a gift
While it might be human nature to accept gifts graciously, some nonprofits are turning certain gifts down, citing issues of condition, space limitations and unsuitability to their missions.
A gift acceptance policy provides an objective way to decline a gift but still maintain a good relationship with the contributor. A representative of your nonprofit can explain to the donor that previously set policy doesn’t allow your organization to accept the gift — in other words, “it’s nothing personal.”
Moreover, a gift acceptance policy contributes to good governance because it disciplines your organization to weigh the advantages and disadvantages of accepting and administering a gift. Also, the revised IRS Form 990 asks nonprofits receiving more than $25,000 in noncash contributions whether they have a gift acceptance policy. (A policy isn’t legally required, and the form currently solicits no details.)
Finding a perfect fit
A strong gift acceptance policy describes what kinds of gifts are acceptable and how they will be managed by your organization. It also should state your organization’s mission, the policy’s purpose, and the types of gifts that should be reviewed by an attorney before they’re accepted. And it should include the role of your nonprofit’s gift acceptance committee, if you have one, and the steps involved in an annual review of your gift policy and who will conduct it.
Mold your policy to fit your nonprofit’s size and characteristics and involve both your staff and your board in the development process.
Judging what you can handle
When forming your gift acceptance policy, start with a self-assessment. Your nonprofit must determine its ability to manage each type and form of gift. For example, it may not want to accept gifts of real estate if it isn’t staffed to manage the property or isn’t willing to act as the landlord.
Another example: Tangible personal property, such as furniture or collections, may need insurance, special display cases or off-site storage. This could require your organization to incur substantial out-of-pocket costs for years to come. Ask yourself if your nonprofit has the resources to manage such gifts — and whether it wants to do so.
All policies should state that gifts that conflict with your organization’s mission should be rejected. The policy also should address how gifts will be managed and invested (if applicable) and how the nonprofit will dispose of them.
Pay special attention to any restrictions that donors place on gifts. Almost all organizations prefer unrestricted gifts so they can use the funds as they wish. But donors of personal tangible property likely will want to specify how their gift will be used.
Understanding what’s what
Gifts typically fall into two categories. With current gifts, your charity receives property or money from a donor, and the donor receives no financial benefit other than a tax deduction. There may be restrictions on how the gift can be used, but your organization — not the donor — has control.
In the case of split interest gifts, the donor transfers an asset (or an interest in it) to your organization but draws income from the gift or receives a remainder interest at some point in the future. Or the donor names another beneficiary to receive the income or remainder interest. Common forms of split interest gifts are charitable gift annuities, charitable remainder trusts and charitable lead trusts.
Investment responsibilities and obligations to the donor or the donor’s family come with a split interest gift, so make sure you have the resources to monitor it properly. Your administration of the gift should demonstrate fairness to both your nonprofit and the donor.
Considering all the angles
Some gifts will incur extra expense, such as a special cabinet to display that rare coin collection or an insurance policy to protect its value. Here are examples of two other types of gifts requiring special attention:
Securities. While publicly traded securities are easy to convert to cash, closely held stock may be hard to value and sell. So different policies are needed for each type of security.
For example, because donors of publicly traded stock often have the expectation that the nonprofit will hold on to the stock, gift acceptance policies typically state that stocks are to be sold upon receipt. That way the donor won’t be unpleasantly surprised if you sell the stock. This also ensures flexibility managing your investment portfolio.
Gifts of closely held stock, on the other hand, require scrutiny before acceptance because of the valuation, liquidity and other complex issues that affect such stock. Your gift acceptance policy should outline the steps your organization must take before acceptance.
Real estate. Many steps precede accepting a gift of real estate, including getting a recent appraisal from the donor and a disclosure of any property liens or other encumbrances. And your organization likely will need to contract a hazardous waste audit.
Additionally, there are different types of intangible personal property that may be donated to a charity, such as life insurance policies, intellectual property and royalties. Your policy should describe how these gifts will be valued and administered.
Getting an outside opinion
Your financial advisor and an attorney should review your gift acceptance policy before it comes before the full board for approval. After your policy is in place, review it annually. Resources could change, and your experiences might dictate revision.•
