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.

Friday, July 29, 2011

Reporting a Winner

Friday, July 29, 2011 0
Every year, at the start of the spring season, your organization hosts a raffle in order to raise money to support its mission. This year there was an exceptional turnout and sales of raffle tickets went through the roof. A local resident was the lucky winner of the raffle. The payout was $5,000 and that is all the winner could talk about for weeks. Your organization was equally happy because it raised $20,000, net of the prize, almost doubling the amount raised last year. At board meetings, staff meetings and at lunch it was a topic of discussion for the remainder of the year and encouraged thoughts of how to raise even more funds in the coming year.

Several months later, on January 31st of the following year, your astute bookkeeper wonders aloud, “we had a raffle winner last year. Do we need to send a tax form or something”? In a panic a call is made to the organization’s accounting firm. I am sure this scene plays out like this every year either in your organization or another organization. So, what does your organization do as far as reporting winners of games you host during the year?

Reportable Winnings

Generally speaking if your organization pays a winner or winners of a game more than a certain amount, you are required to report the amount and information about the winner(s) to the Internal Revenue Service. The threshold amount at which the winnings become reportable depends on the type of game involved (i.e., raffle, bingo, slot machines, poker, to name a few) and ranges from as low as $600 to as high as $5,000. In addition, some games allow you to reduce the amount of winnings by the wager (“proceeds from a wager”) in determining whether the threshold has been met. Other games do not permit this option and require the full winnings be reported.

Reporting Winnings

Reportable winnings are defined as the amount of your winnings that exceeds the amount of your wager. With cash prizes such as a sweepstakes, wagering pool, lottery, raffle or poker tournament your reportable winnings are the amount of cash you received less the amount you paid to purchase the ticket(s). With non-cash items (e.g., a car) your reportable winnings are the difference between the fair market value of that non-cash item and the amount you wagered.

Each time you pay reportable winnings, you must complete a Form W-2G, Certain Gambling Winnings, to report the winnings to the IRS and to the winner (the “payee”). To complete this form you will need certain information from the payee – name, address, taxpayer identification number (e.g., social security number for an individual). This information should be provided on Form W-9 and signed by the payee. You may want to verify the information given to you. Additional rules apply if there is a group of two or more winners.

Income Tax Withholding

By now you are thinking “what a lot of work!”. Well, did you know you may also have to withhold income tax from those winnings? If reportable winnings of cash are more than $5,000 you must withhold income tax from payment of these winnings (see “Reportable Winnings” above). Exceptions to this rule apply to games such as bingo, keno, slot machines and other wagering transactions.

Reportable winnings of non-cash items, such as a car, in excess of $5,000 are also subject to withholding. But how do you withhold tax from a non-cash item? Typically, the winner pays the withholding tax to the organization. But there are other means of withholding the tax.

All winners (cash and non-cash) from which you are required to report and/or withhold tax should sign the Form W-9 before any winnings are distributed. The amount of the winnings and taxes withheld from winnings are reported on Form W-2G. The winner must sign the Form W-2G if he is the only person entitled to the winnings.

Backup Withholding

What if your organization did not obtain a correct W-9 beforehand or did not properly withhold the required backup withholding and the winner refuses to furnish the correct taxpayer identification number? You will not be able to properly complete the Form W-2G. What happens next? Your organization could be responsible for paying the backup withholding amount (if unable to obtain from the winner). The rate of backup withholding may be higher than the regular withholding rate.

Other Filing Requirements

Taxes withheld from gaming winnings are called non-payroll withheld taxes. The total amount of federal income taxes withheld (regular or backup) during the year on payments of winnings, and reported on all the Forms W-2G filed during the year, must be reported on Form 945, Annual Return of Withheld Federal Income Tax. Depending upon the amount of the income taxes withheld for the year, you may pay the tax with your annual Form 945, or on a monthly or semi-weekly schedule. Again, threshold amounts dictate when to deposit the tax. Be sure that these non-payroll taxes are deposited separately from any payroll taxes for which your organization is liable.

The Last Word

After reading this blog you probably have a lot of questions. And, rightly so. Remember that the reporting requirements become a reality at the time you are paying out the proceeds of the winnings from a game to the payee. Avoid the panic at the end of the year.
  • Know when you have reportable winnings.
  • Collect the necessary information from the winner (payee) before paying out the winnings.
  • Withhold income taxes, if necessary.
  •  Report those winnings and withheld taxes on the proper forms and file timely.

Please contact Elko & Associates Ltd if you have any questions or need assistance in the accounting and reporting of winnings from gaming activities. I also encourage you to read a related blog, Don’t take the “fun” out of fundraising (1/24/2011), which delves into other issues your organization may encounter with gaming activities, in general.

Thursday, May 5, 2011

It's Budget Time!

Thursday, May 5, 2011 0
Many nonprofit organizations are in the process of preparing their budgets for the upcoming fiscal year. A well-prepared, well thought out budget is an Important and useful management and Board oversight tool. It helps an organization’s management and its Board effectively analyze revenue and expenses throughout the year to monitor how the organization is doing. Simply comparing current year revenue and expenses to prior year revenue and expenses may not be useful if there are expected changes in the organization’s activities from one year to the next.

Budgeting methods range from baseline budgeting, which uses the current year’s revenue and expense information as a “base” or starting point; to zero-based budgeting, which starts with a “clean sheet of paper”; to a combination of baseline and zero-based budgeting. Whatever budgeting method is used, an effective budget generally has the following qualities:

• Realistic – The budget should present a reasonable estimate of revenue the organization expects to raise in the coming year. Expenses should realistically reflect the cost of the upcoming year’s activities and programs; and should be consistent with revenue estimates.

• Consistent – Budget should be consistent with the organization’s mission and long-term objectives.

• Flexible – Budgets are based on assumptions and must be monitored and possibly amended if major changes occur, such as short-falls in funding or changes in program activities.

• Appropriately Descriptive – The budget should be formatted using the same account detail as the general ledger to streamline the "budget to actual" review process.

The budget process should be a team effort, involving appropriate members of management and the Board, and should be broken down into the following steps:

• Determine programs and activities for the coming year – Important first step! Management needs to decide if programs should be added or expanded, eliminated or scaled back.

• Budget expenses and revenues – This is the most difficult and time-consuming step. Each program should be budgeted separately to the extent possible, using assumption lists to keep track of assumptions used in the budget process. Using linked spreadsheets with formulas is a useful tool. Also, do not utilize every dollar; leave some unallocated revenue for contingencies!

• Assemble draft budget document – To ease the review and approval process and decrease the number of questions, include the prior year’s budget and actual along with the current year budget and budget narrative (assumptions).

• Review draft budget and modify as necessary – The Finance committee usually reviews the budget with management and recommends modifications before a final draft is presented to the Board for approval.

• Present draft budget for Board approval – Once passed by the Board, the budget becomes the final budget for the coming year.

• Monitor budget versus actual throughout year – Approved budget should be entered into the organization’s accounting system in order to effectively and efficiently monitor activity throughout the year. Budget versus actual reports should be reviewed by the Board monthly, or at least quarterly, in order to make any necessary modifications.

How the budget process gets implemented will depend on the size and structure of the organization. It’s an important process that should be given the attention it deserves, and should never be rushed. Budgets should be complete, accurate and current. They should be flexible and have contingency plans for when things don’t go as planned or when things go better than planned. This is good management and good stewardship of supporters’ funds. To learn more about nonprofit budgeting, or to obtain assistance and guidance with your nonprofit budget process, contact Elko & Associates Ltd.

Friday, March 11, 2011

Schedule of Expenditures of Federal Awards (SEFA)

Friday, March 11, 2011 1
Has your organization established appropriate procedures to determine whether funds received from government agencies are federal sourced? For federal sourced funds was the correct CFDA (Catalog of Federal Domestic Assistance) number provided in the agreement? After preparing the SEFA, did you reconcile the schedule with applicable revenues and expenditures in your general ledger?

In reviewing the SEFA for completeness and accuracy, we often find that many of our clients are not properly distinguishing between federal and non-federal sourced revenues, they are not documenting the correct CFDA number and they are not reconciling the SEFA to the general ledger. The granting government agency is required to inform the recipient whether and how much of the funds are federal sourced. Although required, the appropriate information is not always provided to the recipient. The implementation of the following procedures will assist you, the recipient of government funding, in ensuring that your SEFA is complete and accurate:

Read and document your understanding of the funding agreement, and look for clues.
  • What type of agency provided the agreement (i.e. federal, state or local government)
  • Was a CFDA number provided in the agreement?
  • Are there specific audit provisions included in the agreement which may indicate federal sourced funds?
After reading and understanding the funding agreement, consider contacting the grantor agency to ensure your understanding is correct. Items to consider discussing with the grantor agency:
  • If absent from the agreement ask if any of the funds are federal sourced, and if they are, obtain the CFDA number.
  • Discuss allowable contract expenditures and the appropriate documentation needed to support expenditures.
  • Discuss the reporting requirements (financial and/or programmatic) and the level of detail required.
  • Document your conversation with the grantor agency.
Maintain a detailed schedule of all funding agreements to include the following:
  • Grantor name and number
  • Term of the funding agreement contract
  • Dollar amount of funds provided in agreement
  • Distinguish between federal and non-federal funding sources
  • CFDA number
  • Year-to-date and cumulative program expenditures (reconciled to the general ledger)
  • Reporting deadlines

American Recovery Reinvestment Act (ARRA) Funds

Will things change? Yes!

The ARRA imposes new transparency and accountability requirements on Federal awarding agencies and their recipients. The Single Audit process is a key factor in the achievement of accountability objectives of the Office of Budget and Management.
  • The recipients and uses of all funds are transparent to the public, and the public benefits of these funds are reported clearly, accurately, and in a timely manner;
  • And funds are used for authorized purposes and instances of fraud, waste, error, and abuse are mitigated.
Federal agencies are required to specifically identify ARRA awards, regardless of whether the funding is provided under a new or existing CFDA number.
  • New programs—Federal agencies will use new CFDA numbers for new ARRA programs or for existing programs for which the ARRA provides for compliance requirements that are significantly different for the ARRA funding.
  • Existing programs—Federal agencies may or may not use a new CFDA number for ARRA awards to existing Federal programs.
Key items which are most critical to ARRA accountability:
  • Have your ARRA funds been segregated and separately identified on your SEFA? This would include those awards which fall within a cluster. Were procedures in place to capture pertinent information
  • Were your quarterly reports submitted as required by ARRA?
  • Have you obtained your Dun and Bradstreet Data Universal Numbering System (DUNS)? DUNS Number is a unique nine-digit identification number for each physical location of your business. DUNS number assignment is FREE for all businesses required to register with the U.S. Federal government for contracts or grants. Obtain additional information on http://www.dnb.com./
  • Increased documentation for expenditures is essential. ARRA dollars are going to be watched more closely.
  • Your auditor will likely identify the award as high risk, which means it could be tested. It is possible that more awards will be tested in current year compared to the past.
  • Ensure ARRA funds are tracked separately in your general ledger and ensure internal controls are in place and the process is documented in order to provide sufficient audit trail.
Please contact us if you have any questions or need assistance in preparing your Schedule of Expenditures of Federal Awards.

Wednesday, February 23, 2011

Private Operating Foundations

Wednesday, February 23, 2011 0
Many of us are familiar with private foundations, which are basically charitable organizations that are “privately” funded. They do not rely heavily (and sometimes not at all) on contributions from the public, as does a publicly supported charitable organization. Many private foundations are family foundations or are set up after an individual passes away with the assets from the estate. This standard type of private foundation will provide grants directly to other charitable organizations that will use those funds to carry out the charitable activities or programs.

A private “operating” foundation on the other hand, while still being privately supported or funded, will actively conduct charitable programs or activities rather than simply distribute funds to other organizations for those purposes. Thus, a private operating foundation sponsors and manages its own programs. A typical example of this would be a day camp for underprivileged children. Rather than providing grants to another organization to administer such a camp, which a standard private foundation would do, the private operating foundation will actually “operate” the camp. The private operating foundation will maintain a qualified staff as well as other personnel needed to carry out the program on a continuing basis. The private operating foundation meets its required annual charitable distribution requirements by making these types of payments to accomplish its tax-exempt purpose.

A private foundation qualifies as a private operating foundation by satisfying two numerical tests. These tests ensure that the private operating foundation is conducting its exempt activities directly and not simply making grants to other organizations. The first of the two tests is an income test, which requires a specific amount of income to be spent on direct charitable activities. The second test is actually made up of three different tests, an asset test, an endowment test and a support test. However, the private operating foundation only has to satisfy one of these three tests, in addition to the income test to qualify. Similar to the income test, these other three tests help to ensure that the private operating foundation is using its funds to meet the requirement of conducting direct charitable activities.

When the private operating foundation files its annual Form 990-PF, these tests are applied for the current year and the three preceding years. There are two methods that the foundation can use in order to show that it meets the tests and qualifies as a private operating foundation. Under the first method, the foundation can aggregate all four years, showing that over the four year period it met the income test and one of either the asset, endowment or support tests. For the second method, if the foundation can meet the income and one of the other tests for three out of four years standing alone, they would continue to qualify as a private operating foundation. Based on these tests, if the foundation fails to qualify as a private operating foundation for any year, it is treated as a standard private foundation for that year. It can return to being a private operating foundation in the year that it again qualifies under the income and asset, endowment or support tests.

Why would a private foundation want to qualify to be or go through the trouble of trying to meet the bevy of tests necessary to be considered a private operating foundation? The first advantage of a private operating foundation over a standard private foundation is that for any donors, the contribution deduction limits are higher if the contribution is made to a private operating foundation. In this case, the private operating foundation limitations are the same as they are for public charities. Contributions to private operating foundations can shelter up to 50% of a donor’s adjusted gross income. Contributions to a standard private operating foundation can only shelter up to 30% of the donor’s income. This could be an important factor for potential donors. Another advantage is that both standard and operating private foundations have minimum distribution requirements, however, in many cases, the distribution requirement will be lower for a private operating foundation. One disadvantage for a private operating foundation is that it does not have the one year time delay for making its required distributions that a standard private foundation is allowed. Once a standard private operating foundation calculates its minimum distribution requirement for a particular year, it has until the end of the following year to satisfy this requirement. A private operating foundation must satisfy its tests as of the last day of a particular year or cumulatively for three out of four years.

Since the qualification as a private operating foundation is based on numerical tests, there should be no requirement for Internal Revenue Service (IRS) approval for a switch to or from a private operating foundation. However, when we recently converted a standard private foundation to a private operating foundation, we sought out and received IRS approval and a revision of the determination letter. The foundations directors and trustees may also want the comfort of a formal IRS approval.

You may want to review the status of any private foundations you are associated with to determine if they could possibly qualify as a private operating foundation. Once the foundations activities have been reviewed, a determination can be made as to whether a conversion is warranted, and then you can move ahead with the proper plan. For more information about private operating foundations, please contact me.

Tuesday, February 8, 2011

Small employer health care tax credit

Tuesday, February 8, 2011 0
Many of my small nonprofit clients have been asking about a postcard they received from the IRS regarding a new tax credit for providing health insurance for their employees. What I’ve told them was millions of small employers received these postcards from the IRS last year alerting them to the new small business health care tax credit, and encouraging them to check their eligibility. Whether or not you received this postcard, I encourage you to check your organization’s eligibility. I’ve outlined some of the basic criteria below (there are much more specific criteria as you can imagine with the IRS). In general, the tax credit is available to small employers that paid at least half the cost of single health care coverage for their employees in 2010. The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ low- and moderate-income workers afford the cost of health insurance for their employees.

Who is eligible for the health care tax credit?

  • A qualifying employer who covers at least 50% of the cost of health care coverage for some of its workers based on the single rate
  • A qualifying employer who has less than the equivalent of 25 full-time workers (e.g. an employer with fewer than 50 half-time workers may be eligible)
  • A qualifying employer who pays average annual wages below $50,000
What is the amount of credit for tax-exempt organizations?

  • 2010 – 2013: maximum credit is 25% of premiums paid by employer
  • 2014: maximum credit increases to 35% of premiums paid by employer
  • Phase-out – the credit phases out gradually for organizations with the equivalent of between 10 and 25 full-time workers and for organizations with average wages between $25,000 and $50,000.

How can my tax-exempt organization claim the credit?

  • Small employers, including tax-exempt organizations, will use new Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the refundable tax credit
  • Tax-exempt organizations will claim the credit on Line 44f of revised Form 990-T, Exempt Organization Business Income Tax Return. Form 990-T will be used by eligible tax-exempt organizations to claim the credit, even if they are not subject to tax on unrelated business income.
The following is an example of the tax credit calculation for a tax-exempt organization:

  • Employees: 9
  • Wages: $198,000 total, or $22,000 average per worker
  • Employee Health Care Costs paid by the Employer: $72,000


  • 2010 Tax Credit: $18,000 ($72,000 x 25%)
  • 2014 Tax Credit: $25,200 ($72,000 x 35%)
To determine whether your organization is eligible for the new health care tax credit and how large a credit your organization can potentially receive, please contact Elko & Associates. We are offering a complimentary analysis to determine your eligibility. If we find that you are eligible, we would be happy to discuss the details of preparing the necessary tax forms for you.

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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