Monday, January 31, 2011

What is Pennsylvania Act 141?

Monday, January 31, 2011 0
Pennsylvania Act 141 is a state law that changed the rules for how not-for-profit organizations can invest and spend the income from permanently restricted endowment funds. This Act does not apply to endowment funds internally designated as such by the Organization's Board of Directors. The Act which became law in December 1998 repealed the state’s old “9 percent rule”. Organizations need to act wisely to take full advantage of the basic strategies of the law.

Organizations must make a choice between two basic strategies:

  • Principal and Income –Organization may only spend the restricted endowment funds’ income, primarily interest and dividends, not the capital gains or the principal.
  • Total Return Policy –Organizations may elect under this Act to follow a “total return policy” for the determination of income from a restricted endowment. Total return includes the interest, dividends, and the net capital appreciation, both realized and unrealized. Annual spending is on a percentage of the fair market value of the investments in the restricted endowment. The board of directors may elect to spend between 2 and 7 percent of the fair market value of the investment in the restricted endowment.
The Board of Directors must elect to be governed by this Act. If the Organization does not specifically select a policy, it will automatically fall under the Principal and Income Policy. The Board of Directors must approve a statement that says that it is the policy of the Organization to use a total return policy. This document must be a permanent part of the Organization's records and should include the following:

  • A statement that the Organization will use the total return policy adopted under Act 141 and that the Organization is making an election to be governed by Act 141.
  • The spending rate percentage (between 2 and 7 percent) to be applied to the fair market value of the endowment, and the calculation of the spending rate. Spending rates can be calculated on a three to five year average of the market value of the endowment funds' assets. If the asset has been held for less than three years, the average is calculated over the period the assets have been held.
The Board of Directors can always change the election or the spending rate in future years, which gives the Organization more flexibility in planning.

This next point is very critical - Donor restrictions on contributions always overrule this Act. If a donor specifies that the earnings (interest, dividends, realized and unrealized gains) on an endowment must be used for a specific purpose, than that restriction must be followed. The earnings must be used for the intended purpose and the Organization cannot apply a spending rate percentage for that donation.

Under the Principal and Income policy the interest and dividend are recorded as unrestricted. The realized and unrealized gains/losses are recorded as permanently restricted.

Under the Total Return Policy the income (spending rate amount) is unrestricted. If the actual income exceeds the spending rate amount, the excess is recorded to temporarily restricted income. If the spending rate is higher than the actual return, the difference reduces the amounts that were previously recorded as temporarily restricted.

As you can see, the total return policy is a more advantageous policy for not-for-profit organizations to follow. The Organization must make sure that this policy is formally adopted and it is a part of the permanent records. If not the organization automatically falls under the principal and income policy which limits the not-for-profit to spend only the interest and dividends.

In August 2008, new accounting standards for classification and disclosure of endowments were issued and require that all of the above information be disclosed in the financial statements of the not-for-profit organization.

Please contact us if you have any questions about this matter.

Monday, January 24, 2011

Don’t take the “fun” out of fundraising

Monday, January 24, 2011 0
For many organizations, fundraising and fundraising events are the lifeblood of the organization. In addition to bringing in revenue for the organization, fundraising events also help the organization get its name, and more importantly its mission, in front of a large group of potential donors and volunteers. But, along with the fun and enjoyment that can come with a fundraising event, there are rules and policies that must be followed and established so that your fundraising event doesn’t become an “unfun” raising event (since it’s my blog, I reserve the right to make up words).

Examples of fundraising events include concerts, golf outings, dinners, dances, auctions and carnivals. Obviously, the primary purpose of a fundraising event is to raise additional revenue for the organization. These events are usually planned and executed on an irregular basis and include an exchange of a fair value item. An organization holding fundraising events needs to be very cognizant of the “quid pro quo” contribution and related rules. A quid pro quo transaction occurs when a donor makes a payment partly in return for something, e.g. a meal, a theatre ticket, a round of golf, and partly as a contribution. The difference between the amount paid and the fair market value of the benefit received (the meal, etc.) is the contribution amount which is deductible by the participant. The Internal Revenue Service (IRS) has specific substantiation rules requiring nonprofit organizations to report the amount of the deductible component to the participant. In most cases, the ticket for the event will state that the “deductible” amount of your payment is “X” dollars. As stated above, the organization is required to provide this information to the donor.

The IRS requires separate identification of fundraising revenue and expenses. It is important not to confuse fundraising revenue with other typical types of revenue of a nonprofit organization, such as program service revenue, qualified sponsorship income and straightforward contribution income. These separate categories of income need to be reported in different places on the Form 990. In addition, when an organization’s fundraising revenue exceeds $15,000, the organization is required to attach Schedule G to its Form 990/990-EZ. The Schedule G is used to report additional fundraising information to the IRS such as state registrations, detail for the two largest fundraising events and specific information on any gaming activities.

Another concern with fundraising events is that the organization should make sure that the event will not result in unrelated business income (UBI) and UBI tax. The general rule is that a nonprofit organization’s activity will generate taxable UBI if a three prong test is met. The activity must be:

1. a trade or business;

2. that is regularly carried on;

3. and is “not substantially” related to the organizations exempt function/purpose.

Contrary to popular belief, raising funds so that an organization can continue to carry out its exempt purpose does NOT make the activity substantially related to the organizations exempt purpose. However, on the bright side, IRS regulations state that a fundraising event held on an “annual” basis will not be treated as regularly carried on. In addition, there are certain activities that will allow for a statutory exclusion from UBI. Therefore, proper planning of an event can turn what would be UBI into non-taxable income. The two most common exclusions are the volunteer labor exclusion, where a significant portion of the events activities are performed by volunteer labor, and the exclusion for activities which are carried out for the convenience of the organization’s members.

On a final note, an organization that holds “gaming” activities as a way to raise funds may need to be concerned with some additional issues. Gaming includes raffles, bingo, pull tabs, card games and coin-operated gambling devices…just to name a few. Organizations that conduct or sponsor gaming activities need to become familiar with any federal income, employment and excise tax implications as well as any state requirements for registration or licensing. An organization that carries on gaming activities on a “regular” basis will have a UBI issue to deal with unless one of the statutory exclusions (i.e. volunteer labor) applies. There is also a specific exclusion from UBI for bingo games, if the game meets certain requirements. Other ways to avoid gaming UBI is if the gaming activity is conducted only on an infrequent basis or is substantially related to the organizations exempt purpose (e.g., social/recreational activities to/for members that constitutes the basis for the organizations exemption). There may be other filing requirements in addition to completing the Schedule G and the Form 990-T. For example, a W-2G to report gambling winnings, a Form 845 to report and pay income tax withheld from gambling winnings and any state gaming licensing or registration that may be necessary.

So organizations should continue to go out and raise revenue by sponsoring those “fun” fundraising events. But the organization needs to be careful what it is doing and how things are being done. Know the rules, follow the rules and keep the “fun” in fundraising.

Friday, January 7, 2011

Pennsylvania Decennial Filing

Friday, January 7, 2011 0
In November 2010, the Pennsylvania Department of State sent out notices with decennial filing requirements to entities registered to do business in Pennsylvania. Many are asking - "What is a decennial filing?"

Generally, a decennial filing is a report filed with the Pennsylvania Department of State which gives notice of an entity's continued existence or use of certain "marks". (54 Pa.C.S. § 503, § 1314, § 1515) It's a filing that ensures protection of the "corporate name". Decennial filings are made every ten years in years ending with the number "1" (e.g. 2011, 2021). The filing period for 2011 is January 1, 2011 through December 31, 2011, and the filing fee is $70.

If an entity fails to file a decennial report during the filing period noted above, it will no longer have exclusive use of its name effective January 1, 2012. The entity will continue to exist, but its name will become available to any entity registering to do business in the Commonwealth of Pennsylvania. If the entity files after December 31, 2011, the filing will reinstate the name of the entity unless its name has been appropriated during the period of delinquency. (54 Pa.C.S. § 504)

If an entity with a registered insignia or "mark used with articles and supplies" fails to file the report timely , that insignia or mark will no longer be deemed to be registered. Such registration may be restored only by filing an original application for registration. (54 Pa.C.S. § 1314(c); 1515(c))

"But I can't afford the $70 filing fee!" - there is an out for nonprofit corporations!

If a nonprofit corporation filed an "Annual Statement" with the Pennsylvania Department of State within the 10-year period from January 1, 2002 through December 31, 2011, then it does not have to file a 2011 Decennial Filing. An Annual Statement is required when there has been a change in officers of the nonprofit corporation; a requirement many nonprofit organizations fail to comply with.

If you are a Pennsylvania nonprofit corporation and want to protect your corporate name and/or registered insignia, but don't want to pay the $70 filing fee, then consider filing an Annual Statement if you changed officers in calendar year 2010. This Statement is due on or before April 30, 2011 (see Annual Statement - Nonprofit Corporation). By making this filing, the nonprofit corporation is giving notice to the PA Department of State that they are an active organization.

If you have any questions about your filing requirements or completion of the form, please contact Elko & Associates Ltd.
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