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Supporting Your Faith with Fiscal Accountability

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He has the gift of being able to know in depth matters financial, including IRS details and changes, and being able to translate the CPA world and its requirements and value to laity and clergy alike.

Rev. Louis R. Lothman, Th.D., Director, Pastoral Counseling Services, Presbyterian Minister, Presbyterian Church (U.S.A.)

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If your not-for-profit has lost financial support during the pandemic, you may be looking for ways to raise new revenue. But if your proposed solution is a side business, be careful. Even when business ventures are related to a nonprofit’s exempt purpose, they can run afoul of the commerciality doctrine — and jeopardize an organization’s tax status.

Countering an unfair tax advantage

The commerciality doctrine was created along with the operational test to address concerns over nonprofits competing at an unfair tax advantage with for-profit businesses. In general, the operational test requires that a nonprofit be both organized and operating exclusively to accomplish its exempt purpose. The test also requires that no more than an “insubstantial part” of an organization’s activities further a nonexempt purpose. This means that your organization can operate a business as a substantial part of its activities as long as the business furthers your exempt purpose.

Here’s the catch: Under the commerciality doctrine, courts have ruled that the otherwise exempt activities of some organizations are substantially the same as those of commercial entities. Courts and the IRS consider several factors when evaluating commerciality. No single factor is decisive, but asking the following questions about your nonprofit and its business activities can help you evaluate risk:

  • Have you set prices to maximize profits?
  • To what degree do you provide below-cost services?
  • Do you accumulate unreasonable reserves?
  • Do you use commercial promotional methods such as advertising?
  • Is the business staffed by volunteers or paid employees?
  • Do you sell to the general public?

Also consider the extent to which your organization relies on charitable donations. They should be a significant percentage of total support.

Avoiding UBIT

There’s another risk for nonprofits operating a business. You could pass muster under the commerciality doctrine but end up liable for unrelated business income tax (UBIT).

Revenue that a nonprofit generates from a regularly conducted trade or business that isn’t substantially related to furthering the organization’s tax-exempt purpose may be subject to UBIT. Much depends on how significant the business activities are to your organization as a whole. There are also several exceptions, so be sure to check with us.

Reducing risk

If you’re thinking about launching a new business venture to raise revenue, talk to us first. We can review your proposed idea and help you reduce the risk that the commerciality doctrine or UBIT will trip it up. We want to help your nonprofit succeed! Contact the Online Stewardship team of accountants at (904) 398-4747 or Lynn@OnlineStewardship.com

© 2021


Nonprofits: Get the word out in 2021

Many not-for-profits have been too busy trying to stay afloat to put a lot of resources and energy into public relations. But as the new year begins, you might start thinking about how you’ll promote your organization, mission and programming in 2021. Here are five suggestions:

1. Report regularly. Raise your nonprofit’s profile by releasing news releases often rather than just occasionally. The addition of a key staff member, an operational milestone, a new grant you’ve received or the kick-off of a fundraising campaign, can warrant a press release. Social media platforms are especially useful for publicizing news less formally — not to mention quickly.

2. Choose the best outlet. Focus on outlets that are most likely to use your press releases such as local television stations that cover community news. Get to know producers, editors and publication and broadcast schedules. By taking the time, you can pinpoint the most suitable outlets for your news.

3. Tell a good story. Human beings are naturally attracted to compelling narratives and are more likely to remember stories than disconnected facts. Work with your communications team to craft a story that dramatizes your nonprofit’s challenges and features real constituents. Your story will resonate if you focus on situations many people have experienced — such as mourning the death of a family member or struggling to find a new job.

4. Time it right. When it comes to good publicity, timing can be everything. You might increase your odds of coverage by submitting requests to certain outlets at the start of new publication cycles. Another tactic is to host an event or release an important announcement on a typically slow news day. Also connect your mission and programs to current events. Over the past year, many nonprofits have pivoted to address pandemic-related needs. Such pivots call for publicity so you can keep current supporters on board and attract new support.

5. Stay close to home. Providing a local angle on an issue of national importance will increase your appeal to the media. Whenever possible, offer an expert source from your organization who can talk knowledgeably about the local impact of a national story. By positioning yourself and your organization as an authority and noting trends and other interesting items, you can grab attention.

As nonprofits recover from an incredibly challenging period, they need to place new emphasis on public relations. It’s not enough to hold on to your supporter base — you also need to grow it.

If you need advice on how to manage the finances of growing your nonprofit, contact the Online Stewardship team of accountants at (904) 398-4747 or Lynn@OnlineStewardship.com.  

© 2021


Principles to guide your nonprofit’s relationship with donors

In 1993, a consortium of philanthropic organizations came up with the Donor Bill of Rights to guide not-for-profits in their interactions with financial supporters. For the most part, the basic principles remain valid. But over the past quarter century, some in the nonprofit and donor communities have suggested amendments and additional “rights.” If you aren’t already familiar with the Bill, it’s a good idea to review it and recent updates while thinking about ways you might improve your organization’s relationship with donors.

Bill of Rights

The original list states that donors have these 10 rights:

  1. To be informed of the organization’s mission, how it intends to use donated resources and its capacity to use donations effectively for their intended purposes.
  2. To be informed of who’s serving on the organization’s governing board, and to expect the board to exercise prudent judgment in its stewardship responsibilities.
  3. To have access to the organization’s most recent financial statements.
  4. To be assured gifts will be used for the purposes for which they were given.
  5. To receive appropriate acknowledgment and recognition.
  6. To be assured that donation information is handled with respect and confidentiality to the extent provided by law.
  7. To expect that relationships between individuals representing organizations and donors will be professional.
  8. To be informed whether fundraisers are volunteers, employees of the organization or hired solicitors.
  9. To have the opportunity for donors’ names to be deleted from mailing lists that an organization may intend to share.
  10. To feel free to ask questions and receive prompt, truthful and forthright answers.

List update

Obviously, a lot has changed since 1993. Notably, web-based and digital communications have largely replaced traditional methods of getting the word out. And new technologies, including mobile devices and apps, have changed how many supporters donate. The 2019 eDonor Bill of Rights, assembled by the Association of Fundraising Professionals, addresses this new world.

Among the additions to the original list are technology-specific items. For example, nonprofits are advised to provide secure donation methods that protect personal information and to enable supporters to opt out of data lists and email solicitations. Charities are also encouraged to provide donors with communication channels other than email and web-based apps.

One item that isn’t technology-related is an increasingly important obligation that nonprofits have to donors: To inform them that “a contribution entitles the donor to a tax deduction, and of all limits on such deduction based on applicable laws.” You can read the entire amended Bill at afpglobal.org/principles-edonor-bill-rights. If you have any additional questions, contact the OnlineStewardship team at (904) 398-4747 or Lynn@OnlineStewardship.com

© 2020


Nonprofits: How to acknowledge donor gifts

Holiday-inspired generosity and the desire to reduce tax liability makes the end of the year a busy time for charitable giving. According to Network for Good and other sources, approximately 30% of charitable gifts are made in December alone. For nonprofits, an important part of processing these donations is sending thank-you letters that acknowledge gifts. To ensure your letters contain everything they should, here’s a refresher course.

The basics and more

The IRS mandates that taxpayers substantiate single contributions of $250 or more with written acknowledgments from donation recipients. You can help build good relationships with donors by providing them with all of the information they need in a timely manner.

Along with the basics, such as your nonprofit’s name, the amount and date of the donation, make sure your acknowledgment letters state whether donors received anything in exchange for their gifts. For example, you might state that no goods or services were provided to the donor. If donors did receive something, you may need to provide a description and good faith estimate of the value of the goods or services. Religious organizations may want to say that any goods or services provided consisted entirely of intangible religious benefits.

If your state requires it, also include a tax-exempt status statement with your organization’s Employer Identification Number. And if a donor made a noncash contribution, briefly describe the contribution in your acknowledgement letter.

Details, details

Referring to such acknowledgements as “letters,” is, of course, a convention. The IRS leaves it up to nonprofits to decide on the appropriate medium for donation acknowledgments, be it a letter, postcard, email or text.

Donation letters must be sent contemporaneously with the donation. According to the IRS, this means that supporters receive them by the earlier of:

  1. The date they actually file their income tax returns for the year of the contribution, or
  2. The due date of the return.

However, you’ll probably earn greater donor goodwill by sending acknowledgments within a few days of receiving a donation.

Don’t make a habit of it

You probably won’t lose your tax-exempt status for forgetting to send one donor acknowledgment letter. But you don’t want to make a habit of it or force donors to follow up with you to get the tax information they need. If you need help with tax or compliance issues, contact the Online Stewardship team at (904) 398-4747 or Lynn@OnlineStewardship.com.

© 2020


Using footnotes to disclose your nonprofit’s financial information

Does anyone actually read footnotes? If they’re financial statement footnotes, the answer is usually “yes.” Footnotes can provide donors, governmental supporters and other stakeholders with critical information about your not-for-profit. So it’s important to work with your CPA to make sure your footnotes are accurate and thorough.

Operations and accounting policy snapshot

One important set of footnotes is the summary of significant accounting policies. This includes two sections. The first is a brief description of your operations (featuring your chief purpose and sources of revenue). The second is a list of the significant accounting policies that have been applied in preparing your statements.

Your summary should outline specific policies such as:

  • The accounting method you used,
  • Classification of cash equivalents,
  • Fixed asset capitalization levels,
  • Depreciation methods,
  • Uncertain tax positions,
  • Recognition of contributions and grants as revenue, and
  • Recognition of in-kind contributions.

Investment lowdown

Footnotes are also used to disclose information related to investments. This includes the types of investments held, the carrying amounts for each major type of investment you own and the current year income.

You also must disclose any related-party transactions such as those between board members, senior management and major donors. Include the nature of the relationships between the parties, the dollar amount of the transactions and any amounts owed to or from the related parties as of the date of the financial statements.

Note existing contingencies

Your footnotes should further cover any reasonably possible loss contingencies. Contingencies are existing conditions that could create an obligation in the future and that arise from past transactions or events. Disclose the nature of a contingency and provide an estimate of the loss (or state that an estimate can’t be made).

Contingencies might include:

  • Pending or threatened lawsuits,
  • Claims against your organization,
  • Costs already incurred where reimbursement could be disallowed under a government grant, or
  • IRS examinations related to tax-exempt status, unrelated business income and excise taxes.

Be sure to disclose any time that your organization hasn’t used funds in compliance with donor restrictions.

Your statements’ footnotes should also disclose information that allows users to compare the total amount of fundraising costs with related proceeds. If a ratio of fundraising expenses to funds raised is disclosed, you should cite the method used to calculate it.

Get help

As you can see, most financial statement footnotes contain technical information best prepared by an accounting professional. For assistance with your financial statements, contact the Online Stewardship talented team of nonprofit accountants at (904) 396-5400 or Lynn@OnlineStewardship.com

© 2020


Smart nonprofit leaders know how to delegate

Delegation ideally gives not-for-profit executives time to focus on mission critical tasks and provides growth opportunities to staffers. However, you need to approach delegation strategically. This means assigning the right tasks to the right staffers — and following up on assigned work to ensure it’s completed to your standards.

Projects and people

First, consider potential tasks that could be delegated. You should try to devote your time to the projects that are the most valuable to your organization and can best benefit from your talents. For example, public speaking engagements and meetings with major donors are probably best left to you and other upper-level executives. On the other hand, prime delegation candidates are tasks that frequently reoccur, such as sending membership renewal notices, and jobs that require a specific skill in which you have minimal or no expertise, such as reconciling bank accounts.

Before you delegate a task to an employee, consider the person’s main job responsibilities and experience and how those correlate with the project. At the same time, keep in mind that employees may welcome opportunities to test their wings in a new area or take on greater responsibility. Before assigning new tasks, check staffers’ schedules to confirm that they actually have time to do the job well.

Making and managing the assignment

When handing off a task, be clear about goals, expectations, deadlines and details. Explain why you chose the individual and what the project means to the organization as a whole. Also let employees know if they have any latitude to bring their own methods and processes to the task. A fresh pair of eyes might see a new and better way of accomplishing it.

Keep in mind that delegation doesn’t mean dumping a project on someone and then washing your hands of it. Ultimately, you’re responsible for the task’s completion, even if you assign it to someone else. So stay involved by monitoring the employee’s progress and providing coaching and feedback as necessary. Remember, however, there’s a fine line between remaining available for questions and micromanaging.

Credit where credit is due

A good delegator never takes credit for someone else’s work. Be sure you generously — and publicly — give credit where credit is due. This could mean verbal praise in a meeting, a note of thanks in a newsletter or a letter to the person’s manager. For more ideas about managing your organization more efficiently, contact the Online Stewardship team at Lynn@OnlineStewardship.com or (904) 396-5400.

© 2020


A warning if your not-for-profit organization is looking for expenses to cut: Don’t skimp on insurance. Should your nonprofit experience a fire, major theft or other calamity, you’ll be glad you have the coverage. Of course, you may also be required by your state, certain funders, lenders and your own bylaws to carry adequate insurance. Donors certainly expect you to protect their investment in your nonprofit by managing risk with insurance. But to ensure you’re not wasting money, consider what you need — and what you might not.

General liability is critical

Many kinds of insurance coverage are available, but it’s unlikely your organization needs all of them. One type you do need is a general liability policy for accidents and injuries suffered on your property by clients, volunteers, suppliers, visitors and anyone other than employees. Your state also likely mandates unemployment insurance as well as workers’ compensation coverage.

Property insurance that covers theft and damage to your buildings, furniture, fixtures, supplies and other physical assets is essential, too. When buying a property insurance policy, make sure it covers the replacement cost of assets, rather than their current market value (which is likely to be much lower).

Depending on your nonprofit’s operations and assets, consider such optional policies as automobile, product liability, fraud/employee dishonesty, business interruption, umbrella coverage, and directors and officers’ liability. Insurance also is available to cover risks associated with special events. Before purchasing a separate policy, however, check whether your nonprofit’s general liability insurance extends to special events.

Setting priorities

Because you’re likely to be working with a limited budget, prioritize the risks that pose the greatest threats. Then discuss with your financial and insurance advisors the kinds — and amounts — of coverage that will mitigate those risks.

Be careful you don’t assume insurance alone will address your nonprofit’s exposure. Your objective should be to never actually need insurance benefits. To that end, put in place internal controls and other risk-avoidance policies such as new employee orientations and ongoing training.

It’s about responsibility

Your nonprofit is responsible for securing the safety of its physical assets, your employees and (in many cases) individuals who participate in your programs. To discuss how insurance can fit into your larger risk management plan, contact the Online Stewardship team of nonprofit accountants at (904) 396-5400 or Lynn@OnilneStewardship.com

© 2020


Your nonprofit may have a license to print money

In this pandemic year, many not-for-profits are scrambling to find new sources of revenue to replace donor contributions and other lost income. If this sounds like your charity, you might want to consider licensing your name and brand to a for-profit business.

Ensuring success

When licensing arrangements work, both charities and companies can experience significant benefits. One example is AARP, which licenses its name to a variety of companies, including UnitedHealthcare, The Hartford and ExxonMobil. But such arrangements can also cause problems. For example, if a product “endorsed” by a nonprofit is found to be ineffective or harmful, the nonprofit may suffer by association. By the same token, a nonprofit mired in controversy could harm the public perception of a product or service bearing its name.

To ensure a license arrangement doesn’t become a public relations problem, thoroughly research any potential partner’s business, products and the backgrounds of its principals. Also confirm that your mission and values align. If you determine that a potential licensee’s products or services have the potential to undermine your brand, take a pass — no matter how high the promised royalties.

Look before you leap

Work with your attorney to include certain provisions in any license agreement. Specify how the licensee can use your name and brand, mandate quality control standards and detail termination rights. And realize that signing the agreement doesn’t end your responsibility — you’ll need to actively monitor the licensee’s use of your name and intellectual property throughout the agreement period. If it sounds like all this will require additional staff time, you’re right.

In fact, the resource-intensive nature of licensing leads some nonprofits to outsource the work. Outsourcing allows your organization to focus on its mission, but you’ll probably pay upfront fees, a monthly retainer and a percentage of the royalties that your consultant secures. So it’s important to crunch the numbers and make sure your license arrangement is worth this expense and effort.

Don’t forget the tax implications of licensing. Nonprofits enjoy a royalty exclusion that generally exempts licensing revenues from unrelated business income taxes (UBIT). But certain arrangements can jeopardize this. You can’t receive compensation based on your licensee’s net sales — only on gross sales. And you must play a passive role, meaning you don’t actively provide services to the licensee.

Make a positive impression

Any licensing arrangement your nonprofit enters into should generate revenue and, probably even more important, promote a positive impression of your brand. To evaluate your financial options and find what’s best for your non-profit, contact the Online Stewardship accounting team at Lynn@OnlineStewardship.com.

© 2020


What to do when the audit ends

Financial audits conducted by outside experts are among the most effective tools for revealing risks in not-for-profits. They help assure donors and other stakeholders about your stability — so long as you respond to the results appropriately. In fact, failing to act on issues identified in an audit could threaten your organization’s long-term viability.

Working with the draft

Once outside auditors complete their work, they typically present a draft report to an organization’s audit committee, executive director and senior financial staffers. Those individuals should take the time to review the draft before it’s presented to the board of directors.

Your organization’s audit committee and management also should meet with the auditors prior to the board presentation. Often auditors will provide a management letter (also called “communication with those charged with governance”), highlighting operational areas and controls that need improvement. Your nonprofit’s team can respond to these comments, indicating ways they plan to improve the organization’s operations and controls, to be included in the final letter. The audit committee also can use the meeting to ensure the audit is properly comprehensive.

Executive director’s role

One important audit committee task is to obtain your executive director’s impression of the auditors and audit process. Were the auditors efficient, or did they perform or require redundant work? Did they demonstrate the requisite expertise, skills and understanding? Were they disruptive to operations? Consider this input when deciding whether to retain the same firm for the next audit.

The committee also might want to seek feedback from employees who worked most closely with auditors. In addition to feedback on the auditors, they may have suggestions on how to streamline the process for the next audit.

No material misrepresentation

The final audit report will state whether your organization’s financial statements present its financial position in accordance with U.S. accounting principles. The statements must be presented without any inaccuracies or “material” — meaning significant — misrepresentation.

The auditors also will identify, in a separate letter, specific concerns about material internal control issues. Adequate internal controls are critical for preventing, catching and remedying misstatements that could compromise the integrity of financial statements. The auditors’ other suggestions, presented in the management letter, should include your organization’s responses.

If the auditors find your internal controls weak, promptly shore them up. You could, for example, implement new controls or new accounting practices.

If you have questions about audits and post-audit procedures, contact the Online Stewardship accounting team at Lynn@OnlineStewardship.com.

© 2020


When should you pay nonprofit board members?

Most for-profit companies compensate the directors who serve on their boards. But not-for-profit board members generally serve on a voluntary basis. However, there are circumstances in which you might want to consider compensating those who serve on your board.

Advantages and drawbacks

Board member compensation comes with several pros and cons to consider. Your organization might, for example, find it worthwhile to offer compensation to attract individuals who are: prominent or bring highly specialized expertise; are expected to invest significant time and effort; or who represent diverse backgrounds.

Also, if your nonprofit has a business model that competes with for-profit organizations, such as a nonprofit hospital, board compensation may be appropriate. In general, providing compensation can improve board member performance and promote professionalism. It may incentivize meeting attendance and accountability.

But there are several drawbacks. First, it can look bad. Donors expect their funds to go to program services, and board compensation represents resources diverted from your organization’s mission. Further, there are legal and IRS implications. For example, in some states volunteer board members are protected from legal liability, while compensated members may not be.

Compliance matters

If you decide to compensate board members, make sure your arrangement complies with the Internal Revenue Code’s private inurement and excess benefit regulations, as well as the IRS rules about “reasonable compensation.” Failure to do so can result in excise taxes, penalties and even the loss of your tax-exempt status.

Independent directors, an independent governance or compensation committee, or an independent consultant should set the amount of, or formula for, board compensation. Whoever sets the amount should be guided by a formal compensation policy and make the amount comparable to that paid by similar nonprofits.

Put it in your policy

Make sure your compensation policy includes four elements:

  1. How compensating board members benefits your organization (for example, by allowing it to attract a member with financial expertise).
  2. Which members are eligible for compensation (the chair, the officers or all members).
  3. How compensation is structured (for instance, flat or per-meeting fee).
  4. Expectations for board members in exchange for compensation, such as meeting attendance, qualifications and experience.

Also document all compensation discussions. This includes your board’s formal vote approving the policy and compensation amounts.

Arriving at an amount

If you decide to compensate board members, you may find the most difficult aspect is arriving at an amount. If you need assistance figuring out what will be best for your unique organization, contact the Online Stewardship team at Lynn@OnlineStewardship.com. We can make suggestions based on what comparable organizations pay as well as the nature of your nonprofit and its revenues.

© 2020


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