Tuesday, August 23, 2011

Board Governance – How to run an effective Board meeting

Tuesday, August 23, 2011 0
I would hope by now your organization has completed its budget for the next fiscal year, and the budget has been approved by the Board of Directors (see May 2011 blog, “It’s Budget Time!”). Now it is time to get ready for the first Board meeting of the year. In my first blog (January 2010, “How Effective is Your Board of Directors?”), I addressed Board governance and, among other things, described the elements of an effective Board meeting as follows:

• Meet regularly

• Give notice of meetings

• Provide an agenda

• Begin meetings on time

• Invite staff and outsiders when appropriate

• Know the decision making methods

I currently serve on the Board of a nonprofit organization. We have six board meetings a year. Our Executive Director makes it a practice to send the Board members the list of Board meetings for the year before the first meeting of the year, which gives each of us notice of the regularly scheduled meetings. Each meeting has an agenda (which is sent to Board members with attachments prior to each meeting).

So what special items are on our agenda for the first meeting?

• We review and affirm our mission statement and our roles and responsibilities as Board members, by signing the Board Member Pledge

• We review our Conflict of Interest policy and complete the annual statement

• We begin our annual Board Appeal, striving to achieve 100% Board giving

• Since our audit is usually completed by our first Board meeting, we invite the auditor to review the draft of the audited financial statements and the federal form 990

These standing agenda items for our first meeting help set the stage (and tone) for the fiscal year. It gives new and existing Board members consistent notice of their fiduciary responsibilities as Board members, and opens the door for questions and dialogue around policies, procedures and best practices.

Does your Board meet on a regular basis? Is your Board given sufficient notice of the meeting(s)? Is there a proper agenda, and is that agenda followed? Help your organization set a positive tone for the upcoming fiscal year. If you need assistance running effective Board meetings, contact Elko & Associates Ltd. We would be happy to offer some tips and best practices!

As I mentioned in my first blog, the Board has the legal duty and authority to set policies and monitor compliance with those policies. The new form 990, which most nonprofits are now required to file (final phase in year was 2010), asks whether your organization has certain policies. In June 2010, I discussed conflicts of interest and creating a Conflict of Interest policy (“Does Your Organization Have a Written Conflict of Interest Policy?”). Next month we’ll begin discussing other governance policies (if no other pressing matter surfaces to discuss). Stay tuned!

Saturday, August 6, 2011

Be careful with rental income and the UBIT rules

Saturday, August 6, 2011 0
What’s the problem? We all know that certain types of income are statutorily excluded from being treated as unrelated business income (UBI). These include interest, dividends, royalties, as well as “rent” from real property. So again, why all the hub-bub? Blog over, let’s move on.

Whoa, not so fast. Let me take a few minutes and share with you some of the hub-bub. Just as we know that certain forms of income are excluded from UBI, we also know that, for every tax rule, there are exceptions, buts and howevers as far as the eye can see. And, the rule that rental income is excluded from UBI is no exception to that exception. There are specific situations and fact patterns that will result in an organization’s rental income being taxed as UBI. Some fairly common, some not so common.

The most common situation that will convert normally tax free rental income into UBI is when the property being rented has debt related to it such as a mortgage. If there is acquisition indebtedness on a property that is being rented by a tax-exempt organization, the income will be treated as UBI under the debt-financed income rules. So if you have this situation, get ready to prepare a Form 990-T. Also, the calculation of the amount taxable is not as straight forward as it may sound. The organization needs to calculate, on the Form 990-T, how much of the income and directly related expenses should be taken into account in arriving at the amount taxable as UBI. The calculation involves comparing the average basis of the property to the average debt on the property and applying that fraction to the income and expenses. Enough about that.

Another common situation triggering taxable rental income is when services are provided to the lessee as part of the rental arrangement. This requires close scrutiny of the lease to make sure that the organization is not running afoul of this rule. The services that will trigger this exception are services that are more for the convenience of the tenant, rather than services that are normally part of a lease arrangement, such as furnishing of heat and light. For example, providing personnel to help the lessee with a rental by setting up the room or providing kitchen services will cause the rental income to be treated as UBI.

What if personal property is rented along with the real property that is being rented? Any problem? Maybe. Let’s start out again with a general rule. Income from the rental of personal property is taxable as UBI. However, if the personal property is leased in conjunction with real property, and the rental amount allocable to the personal property is incidental (10% or less) compared to the amount allocable to the real property, all the rental income can be excluded from UBI. Not bad, huh? Well as we know, Congress giveth and Congress taketh away. On the flip side, if more than 50% of the rental income is attributable to personal property, then all the rental income is taxable as UBI, even the amount allocable to the real property. Damn them! If the amount allocable to personal property is between 10% and 50%, an allocation of the rental income between taxable and non-taxable can be made.

Another common situation that creates taxable rental income is when the rental income is based in whole or in part on the “net income” of the tenant. Other situations resulting in taxable UBI are if the rental income is received from a controlled corporation or in a situation where the owner-lessor is a social club, a VEBA, or supplemental unemployment benefit trust.

So what are the take-away’s? One, as always, if you see a general tax rule, always look for the exceptions. Going back to the days when our research was paper documents, the rule was “always turn the page”. I guess now it would be keep scrolling down. The second, and just as important take-away is, if you have an exempt organization that has rental income, look into the circumstances surrounding the lease. Is it debt-financed? Who is the lessee? Is the lease for real and/or personal property? Is the organization providing any services as part of the lease? You will be glad you did a little digging. You want to find any issues before the IRS does.

Well, I think that is enough “hub-bub” for now. I’ll be back in a few weeks with more fun stuff.
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