tag:blogger.com,1999:blog-77476856287602301692024-03-12T18:27:38.159-07:00Nonprofit After HoursA nonprofit accounting blogNonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.comBlogger27125tag:blogger.com,1999:blog-7747685628760230169.post-20277583575571694302012-02-24T10:26:00.001-08:002012-02-24T10:27:40.835-08:00Announcement: Moved to a New Location!Dear Readers,<br />
We are super excited to announce a big move for us. In order to allow our readers to more easily interact with our website and view our other blogs, we have moved our nonprofit blog from this site to a new location, <a href="http://blog.elkocpa.com/topics/nonprofit-tax-exempt">http://blog.elkocpa.com/topics/nonprofit-tax-exempt</a>. We will continue to provide you the content that you have become accustomed to, at this new location. Please follow us over there!<br />
The old domain of nonprofitafterhours.blogspot.com will still be up and contain all old posts through March. After that, it will no longer be in service.<br />
Thanks,<br />
Nonprofit BloggersNonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com0tag:blogger.com,1999:blog-7747685628760230169.post-43345324562490647442011-08-23T12:51:00.001-07:002012-02-24T10:08:27.604-08:00Board Governance – How to run an effective Board meeting<div class="separator" style="clear: both; text-align: left;">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, <a href="http://nonprofitafterhours.blogspot.com/2011_05_01_archive.html">“It’s Budget Time!”</a>). Now it is time to get ready for the first Board meeting of the year. In my first blog (January 2010, <a href="http://nonprofitafterhours.blogspot.com/2010/01/how-effective-is-your-board-of.html">“How Effective is Your Board of Directors?”</a>), I addressed Board governance and, among other things, described the elements of an effective Board meeting as follows:</div><br />
• Meet regularly<br />
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• Give notice of meetings<br />
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• Provide an agenda<br />
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• Begin meetings on time<br />
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• Invite staff and outsiders when appropriate<br />
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• Know the decision making methods<br />
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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). <br />
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So what special items are on our agenda for the first meeting?<br />
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• We review and affirm our mission statement and our roles and responsibilities as Board members, by signing the Board Member Pledge<br />
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• We review our Conflict of Interest policy and complete the annual statement<br />
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• We begin our annual Board Appeal, striving to achieve 100% Board giving<br />
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• 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<br />
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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. <br />
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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 <a href="http://www.elkocpa.com/company/our_team/sandra_lutz">Elko & Associates Ltd.</a> We would be happy to offer some tips and best practices!<br />
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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 (<a href="http://nonprofitafterhours.blogspot.com/2010/06/does-your-organization-have-written.html">“Does Your Organization Have a Written Conflict of Interest Policy?”</a>). Next month we’ll begin discussing other governance policies (if no other pressing matter surfaces to discuss). Stay tuned!Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com0tag:blogger.com,1999:blog-7747685628760230169.post-43621147298708217272011-08-06T05:30:00.001-07:002012-02-24T10:11:44.984-08:00Be careful with rental income and the UBIT rulesWhat’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. <br />
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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.<br />
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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.<br />
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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.<br />
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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. <br />
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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. <br />
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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.<br />
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Well, I think that is enough “hub-bub” for now. I’ll be back in a few weeks with more fun stuff.Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com0tag:blogger.com,1999:blog-7747685628760230169.post-75649870247209499072011-07-29T06:39:00.001-07:002012-02-24T10:12:46.590-08:00Reporting a Winner<div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: left;">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. </div><br />
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?<br />
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<div><u>Reportable Winnings</u></div><br />
<div>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.</div><br />
<div><u>Reporting Winnings</u></div><br />
<div>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. </div><br />
<div>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.</div><br />
<div><u>Income Tax Withholding</u></div><br />
<div>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. </div><br />
<div>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.</div><br />
<div>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.</div><br />
<div><u>Backup Withholding</u></div><br />
<div>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. </div><br />
<div><u>Other Filing Requirements</u></div><br />
<div>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.</div><br />
<div><u>The Last Word</u></div><br />
<div>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.</div><ul><li>Know when you have reportable winnings.</li>
<li>Collect the necessary information from the winner (payee) before paying out the winnings.</li>
<li>Withhold income taxes, if necessary.</li>
<li> Report those winnings and withheld taxes on the proper forms and file timely.</li>
</ul><br />
<div>Please contact <a href="http://www.elkocpa.com/company/our_team/john_nihill">Elko & Associates Ltd</a> 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, <a href="http://nonprofitafterhours.blogspot.com/2011/01/dont-take-fun-out-of-fundraising.html">Don’t take the “fun” out of fundraising</a> (1/24/2011), which delves into other issues your organization may encounter with gaming activities, in general.</div><br />
<div></div>Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com0tag:blogger.com,1999:blog-7747685628760230169.post-19389575652819619962011-05-05T11:06:00.001-07:002012-02-24T10:13:27.364-08:00It's Budget Time!<div class="separator" style="clear: both; text-align: left;">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.</div><br />
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:<br />
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• 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.<br />
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• Consistent – Budget should be consistent with the organization’s mission and long-term objectives.<br />
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• 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.<br />
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• Appropriately Descriptive – The budget should be formatted using the same account detail as the general ledger to streamline the "budget to actual" review process.<br />
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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:<br />
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• 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.<br />
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• 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!<br />
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• 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).<br />
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• 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.<br />
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• Present draft budget for Board approval – Once passed by the Board, the budget becomes the final budget for the coming year.<br />
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• 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.<br />
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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.Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com0tag:blogger.com,1999:blog-7747685628760230169.post-54472423769720118952011-03-11T06:48:00.001-08:002012-02-24T10:14:00.839-08:00Schedule of Expenditures of Federal Awards (SEFA)<div class="separator" style="clear: both; text-align: left;">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?</div><br />
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:<br />
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Read and document your understanding of the funding agreement, and look for clues.<br />
<ul><li>What type of agency provided the agreement (i.e. federal, state or local government)</li>
<li>Was a CFDA number provided in the agreement?</li>
<li>Are there specific audit provisions included in the agreement which may indicate federal sourced funds?</li>
</ul>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:<br />
<ul><li>If absent from the agreement ask if any of the funds are federal sourced, and if they are, obtain the CFDA number.</li>
<li>Discuss allowable contract expenditures and the appropriate documentation needed to support expenditures.</li>
<li>Discuss the reporting requirements (financial and/or programmatic) and the level of detail required.</li>
<li>Document your conversation with the grantor agency.</li>
</ul>Maintain a detailed schedule of all funding agreements to include the following:<br />
<ul><li>Grantor name and number</li>
<li>Term of the funding agreement contract</li>
<li>Dollar amount of funds provided in agreement</li>
<li>Distinguish between federal and non-federal funding sources</li>
<li>CFDA number</li>
<li>Year-to-date and cumulative program expenditures (reconciled to the general ledger)</li>
<li>Reporting deadlines</li>
</ul><br />
<div><strong>American Recovery Reinvestment Act (ARRA) Funds</strong></div><br />
<div>Will things change? Yes!</div><br />
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.<br />
<ul><li>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;</li>
<li>And funds are used for authorized purposes and instances of fraud, waste, error, and abuse are mitigated.</li>
</ul>Federal agencies are required to specifically identify ARRA awards, regardless of whether the funding is provided under a new or existing CFDA number.<br />
<ul><li>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.</li>
<li>Existing programs—Federal agencies may or may not use a new CFDA number for ARRA awards to existing Federal programs.</li>
</ul>Key items which are most critical to ARRA accountability:<br />
<ul><li>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</li>
<li>Were your quarterly reports submitted as required by ARRA?</li>
<li>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 <a href="http://www.dnb.com./">http://www.dnb.com./</a></li>
<li>Increased documentation for expenditures is essential. ARRA dollars are going to be watched more closely.</li>
<li>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.</li>
<li>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.</li>
</ul>Please <a href="http://www.elkocpa.com/company/our_team/john_nihill">contact us</a> if you have any questions or need assistance in preparing your Schedule of Expenditures of Federal Awards.Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com1tag:blogger.com,1999:blog-7747685628760230169.post-90403895703424603722011-02-23T11:49:00.001-08:002012-02-24T10:14:32.305-08:00Private Operating Foundations<div class="separator" style="clear: both; text-align: left;">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.</div><br />
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.<br />
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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.<br />
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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. <br />
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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.<br />
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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.<br />
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<div style="text-align: left;">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 <a href="http://www.elkocpa.com/company/our_team/edward_doran">contact me</a>.</div>Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com0tag:blogger.com,1999:blog-7747685628760230169.post-38683289841549585002011-02-08T10:39:00.001-08:002012-02-24T10:15:11.457-08:00Small employer health care tax credit<div class="separator" style="clear: both; text-align: left;">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.</div><br />
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<div>Who is eligible for the health care tax credit?</div><br />
<ul><li>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</li>
<li>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)</li>
<li>A qualifying employer who pays average annual wages below $50,000</li>
</ul>What is the amount of credit for tax-exempt organizations?<br />
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<ul><li>2010 – 2013: maximum credit is 25% of premiums paid by employer</li>
<li>2014: maximum credit increases to 35% of premiums paid by employer</li>
<li>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.</li>
</ul><br />
<div>How can my tax-exempt organization claim the credit?</div><br />
<ul><li>Small employers, including tax-exempt organizations, will use new Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the refundable tax credit</li>
<li>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.</li>
</ul>The following is an example of the tax credit calculation for a tax-exempt organization:<br />
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<div><u>Facts:</u></div><ul><li>Employees: 9</li>
<li>Wages: $198,000 total, or $22,000 average per worker</li>
<li>Employee Health Care Costs paid by the Employer: $72,000</li>
</ul><br />
<div> <u>Result:</u></div><br />
<ul><li>2010 Tax Credit: $18,000 ($72,000 x 25%)</li>
<li>2014 Tax Credit: $25,200 ($72,000 x 35%)</li>
</ul>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 <a href="http://www.elkocpa.com/company/our_team/sandra_lutz">Elko & Associates</a>. 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.<br />
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<div></div>Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com0tag:blogger.com,1999:blog-7747685628760230169.post-60625141392355159192011-01-31T12:03:00.001-08:002012-02-24T10:15:43.946-08:00What is Pennsylvania Act 141?<div class="separator" style="clear: both; text-align: left;">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. </div><br />
<div>Organizations must make a choice between two basic strategies:</div><br />
<ul><li>Principal and Income –Organization may only spend the restricted endowment funds’ income, primarily interest and dividends, not the capital gains or the principal. </li>
<li>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. </li>
</ul>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:<br />
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<ul><li>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.</li>
<li>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. </li>
</ul>The Board of Directors can always change the election or the spending rate in future years, which gives the Organization more flexibility in planning. <br />
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<div>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. </div><br />
<div>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.</div><br />
<div>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. </div><br />
<div>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.</div><br />
<div>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. </div><br />
<div>Please <a href="http://www.elkocpa.com/company/our_team/john_nihill">contact us</a> if you have any questions about this matter.</div>Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com0tag:blogger.com,1999:blog-7747685628760230169.post-1490409539362685952011-01-24T07:14:00.001-08:002012-02-24T10:16:09.999-08:00Don’t take the “fun” out of fundraising<div class="separator" style="clear: both; text-align: left;">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). </div><br />
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.<br />
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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.<br />
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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:<br />
<br />
1. a trade or business;<br />
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2. that is regularly carried on;<br />
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3. and is “not substantially” related to the organizations exempt function/purpose. <br />
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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. <br />
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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. <br />
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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.Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com0tag:blogger.com,1999:blog-7747685628760230169.post-78341711981845262242011-01-07T08:21:00.001-08:002012-02-24T10:16:43.209-08:00Pennsylvania Decennial Filing<div class="separator" style="clear: both; text-align: left;">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?"</div><br />
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.<br />
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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)<br />
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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))<br />
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"But I can't afford the $70 filing fee!" - there is an out for nonprofit corporations!<br />
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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.<br />
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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 <a href="http://www.portal.state.pa.us/portal/server.pt/gateway/PTARGS_0_160329_494397_0_0_18/5110.pdf">Annual Statement - Nonprofit Corporation</a>). By making this filing, the nonprofit corporation is giving notice to the PA Department of State that they are an active organization.<br />
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If you have any questions about your filing requirements or completion of the form, please <a href="http://www.elkocpa.com/company/our_team/sandra_lutz">contact Elko & Associates Ltd.</a>Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com0tag:blogger.com,1999:blog-7747685628760230169.post-47375767134024092622010-07-20T14:01:00.001-07:002012-02-24T10:17:09.894-08:00Supporting your Mission with Social Media<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">With so many different social media outlets available we’re sometimes left wondering, “Where do we even start and what makes sense for our organization?”</div><br />
<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; text-align: justify;">Over the past several years, I have seen marketing take a positive shift. The social media wave that we are experiencing has opened up more opportunities for organizations to reach their audience. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">In the past, an organization’s reputation often was based around what the public said and thought about them, whether it be their fundraising efforts through the events they hosted, the strength of their boards, public financial information, or the funding they received to help carry out their mission. Now, organizations have the opportunity to regularly communicate with their audience and let their own voices and more importantly, their mission, be heard.<br />
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</div><div style="text-align: justify;">Not sure where to start? Start simple. Before you start any type of marketing initiative, do your homework. What are comparable organizations doing? Have their efforts been successful? <br />
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</div><div style="text-align: justify;">My suggestion would be to begin by creating a “Linked In” account. If you haven’t done this already, take advantage of a free resource that gives you access to over 50 million professionals worldwide. To join, all you need is a valid email address and a password. After you’ve signed in, complete your profile with as much information as possible, by adding a photo of yourself, your work history, and most importantly your organization’s website to the section labeled “Websites”. Adding this information is crucial for making it easy for people to find you. The great thing about Linked In is that it is Google friendly; meaning once you have created one, the more likely you are to show up on the first page of a Google search. After you’ve done this, you can begin doing your research. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Using the “People Search” with the “Advanced” feature on Linked In, select a location. Location may not matter if your primary goal is to learn as much as you can about what non-profit organizations are doing nationwide regarding Social Media. Next under Industry, choose “non-profit organization management”. Then, take time to click through different individual’s profiles that show up through your search results. You’ll see that some profiles have added websites; some even have Facebook pages, and Twitter accounts and blogs- be sure to explore these as well. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Eventually, you will come across a few you like and that will give you ideas for what you’d like to start doing for your organization to become more recognized using social media. In addition to searching for ideas, you’ll also want to take advantage of searching for and connecting with your board members, contributors, co-workers, and other contacts. I’d strongly recommend that all employees in your organization consider joining Linked In as well.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">The next step to become more visible in the online community is to start a blog. Think about what you want to say about your mission and what you want your audience to know about you? Blogs are conversational and informative. If you’re not sure how to begin your first blog, why not talk about an upcoming event your organization is hosting, it’s an extra opportunity to get the word out. Once you begin researching other blogs and seeing what they’re communicating, it will become more natural for you to discuss a topic. Encourage your supporters to visit your blog and solicit their feedback. If you know any experts, ask them to guest blog on a topic that would impact your audience. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Use this resource as much as you can to communicate your mission with the public. Set up links from your website to your blog and from your blog to your Linked In. Put these links in any print or electronic communication you distribute. The more traffic you can drive to your organization’s websites, the better.<br />
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</div><div style="text-align: justify;">Once you have decided that your organization is committed to social media, develop a social media policy to be followed by those in your organization. This way, everyone is on the same page about what they want to communicate and how. Just make sure that everyone realizes this is a commitment, and will not happen overnight. Your social media initiative will take time, but if you track your efforts, you will see results. So break out of your traditional marketing shell and be "social"!</div>Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com0tag:blogger.com,1999:blog-7747685628760230169.post-48639281342568511682010-07-07T11:44:00.001-07:002012-02-24T10:17:43.792-08:00Controlling Audit Fees<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; text-align: justify;">In these difficult economic times marked by decreases in donor contributions and public and private funding, non-profits, like other organizations, are looking closely at their expenses to determine ways to cut costs and save money. Accounting and audit fees are no exception.</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; text-align: justify;"></div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; text-align: justify;"><br />
</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; text-align: justify;">Accounting firms, like other businesses, operate in a competitive environment, and should work with management to determine a reasonable fee for their services, while at the same time meet their quality control requirements under professional standards. In other words, quality shouldn't be sacrificed for price.<br />
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</div><div style="text-align: justify;">Management should be meeting or having conversations with their auditor at various times throughout the year, discussing their operations, changes in the accounting rules and regulations and their impact on the organization, as well as their financial status and related challenges. In the normal course of these meetings it would be appropriate to bring up the topic of fees and how they relate to the changes in the nature and operations of the entity. This shouldn't necessarily be a difficult conversation if you have a good working relationship with your auditor. <b>Communication</b> is the key to a good working relationship.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Now that you've broken the ice with your service provider, consider the following ideas that satisfy the needs and concerns of both the non-profit and the accounting firm that result in fees that are satisfactory to both sides:</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">• Have a Planning Meeting - Remember good communication? Meet with your auditor before the audit to establish a time-line for the audit, including timing of the deliverables (i.e. financial statements, tax returns), as well as meetings with the audit/finance committee or full Board of Directors.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">A key discussion point at that meeting should be what financial/other information management will be providing, and when that information will be available to the auditor. Consider committing this to writing so everyone is clear on the information that will be "Prepared By Client" (often referred to as the "PBC" list). Some accounting firms include this information/list in their engagement letter.<br />
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</div><div style="text-align: justify;">• Get Audit Ready - Now that you know what you need to provide, do you have the internal resources and do you know what you need to do to get ready for the audit? </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Consider an "internal" planning meeting similar to the one noted above to determine "who" in the organization is doing "what" for the audit. Review the trial balance in as much detail as necessary and determine what supporting information is needed and will be provided (and who in the organization is responsible for providing that information).</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">If you determine you don't have the necessary internal resources to provide the information promised, consider engaging the auditor for a special project, with a separate fee, to assist management in getting "audit ready". However, depending on the scope of services needed, there may be an issue with regard to auditor independence which may put the auditor in a position that prevents him/her from assisting the organization with this special project. For this or other reasons, management may also need to consider engaging the services of <a href="http://bookminders.com/">another service provider capable of performing these services for a reasonable fee</a>.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">• Get it Right - Now that you've determined "who" is doing "what" in the organization, make sure the information provided is <b>complete</b> and accurate. Supporting documentation/account reconciliations should be complete and provide enough detail to allow the auditor to understand what's in the account.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Make sure this information is <b>accurate</b> and that the supporting schedule/account reconciliation agrees with the amount in the trial balance. In situations where the trial balance has been "closed" and given to the auditor without the supporting documentation, you may need to provide the auditor with an accurate account reconciliation along with an adjusting journal entry to adjust the account in the trial balance to the accurate amount. In most cases this "PBC" client journal entry should not be considered an "audit adjustment" by the auditor in determining deficiencies or matters to be communicated to those in the organization charged with governance.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">• What's New - Discuss with the auditor the changes in the organization since the last audit to assist the auditor in determining the scope of the audit and their assessment of the risk of material misstatements in the financial statements. While new items may surface that need to be addressed, the auditor may determine that time can be saved in other areas that have not changed or may have been assessed as having low risk based on the results of previous audits, as well as the auditors understanding of the current operations.<br />
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</div><div style="text-align: justify;">As part of the "ongoing communication" throughout the year, you and your auditor should be discussing new accounting and audit rules and regulations and their impact on the audit and related fees. Remember SAS 99 "Consideration of Fraud in a Financial Statement Audit" and the recent suite of "risk based audit standards" and their impact on the audits/fees? If not, you and your auditor are failing the test of good communication.<br />
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</div><div style="text-align: justify;">Working together as a team with frequent and ongoing communication, management and their auditor need to address the timing, scope, responsibilities, and deliverables in connection with the year-end audit. Such communication will provide the forum for discussion to determine reasonable fees for the services to be provided. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Need assistance? <a href="http://www.elkocpa.com/vertical_markets/non_profit">Contact us today.</a></div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;"></div>Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com0tag:blogger.com,1999:blog-7747685628760230169.post-22641642197417361582010-07-02T06:43:00.001-07:002012-02-24T10:18:11.741-08:00SOCIAL CLUBS - DON’T LOSE THAT TAX-EXEMPT STATUS<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; text-align: justify;">The Internal Revenue Code (IRC) exempts from federal income taxation organizations or “clubs” which are organized for pleasure, recreation, and other non-profitable purposes, as long as substantially all of the club’s activities are for such purposes. Examples of such organizations are country clubs, hobby clubs, garden clubs, and amateur hunting, fishing, tennis, swimming and other sports clubs. Therefore, your golf country club or family swim club has applied for and has been granted tax-exempt status under IRC Section 501(c)(7). Hopefully. If not, that’s a discussion for another time. </div><br />
<div style="text-align: justify;">Over the last few years, we have seen an overall emphasis by the Internal Revenue Service (IRS) on increasing the examination of tax-exempt organizations. Social clubs will not be left out. With an electronic filing requirement for most Form 990’s, it is becoming easier for the IRS to determine which organizations may need a “further review”. <br />
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</div><div style="text-align: justify;">So what could your social club be doing, or not doing, to get it into trouble with the IRS? Well, for starters, and one that all tax-exempt organizations have to deal with, is whether the club is organized and still operating in accordance with the tax-exempt purpose under which it was formed. In other words, is your organization still doing what it is supposed to be doing, and what it told the IRS it was going to be doing, when the IRS granted the organization tax-exempt status? Other areas of IRS interest for clubs are unrelated business income (UBI), carrying on nontraditional activities and record keeping.<br />
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</div><div style="text-align: justify;">Now, with all this being said, please understand that the IRS is not “out to get” clubs and other tax exempt organizations. They just want to make sure that the organizations are following the rules. Another big area of concern for clubs is the amount of business the club does with the general public. A lot of the clubs have found themselves in hot water with the IRS because they exceeded the 15% limit on nonmember business, and the income from the nonmember sources benefited the club’s members.<br />
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</div><div style="text-align: justify;">As with most tax-exempt organizations, a club will still be taxed on, and the IRS will still be looking at, its unrelated business activities and income. Generally for a club, ALL income is considered UBI except for dues, fees, charges, or similar amounts paid by members for services provided them, their dependents, or their guests. Other UBI exceptions include investment income set aside for charitable purposes, and under specific circumstances, gain on the sale of club property. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Due to the nonmember income issue for clubs alluded to above, accurate record keeping is key. Clearly, in order to calculate the correct amount of UBI, a club must be well equipped for proper record keeping. If the club cannot prove that income or receipts are member income, the default position for the IRS is nonmember income. As mentioned above, in order to retain tax-exempt status, no more than 15% of a club’s gross receipts may be from the use of its facilities or services by nonmembers. Going further, to retain tax exempt status, a club must not receive investment and nonmember income exceeding 35% of its gross receipts. A club without good records will have a difficult time in an IRS audit proving that it has not exceeded these thresholds.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Another concern for clubs that could jeopardize their exempt status is engaging in nontraditional activity. The IRS has provided an unofficial 5% safe harbor for clubs in regard to nontraditional activity. An example of a nontraditional activity is the sale of alcoholic beverages by a club for off-premises consumption. The 5% will be included in the 15% mentioned above regardless if the service is provided to members.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">In wrapping up, I think you can see that once a club has been granted tax-exempt status by the IRS, it’s not all fun and games after that. Maybe a good bit of fun and games for the members (remember the club was organized for pleasure and recreation), but the organization and the members have to remember that they are organized and operated as a tax exempt organization, and that means there are rules to be followed. So before you take that next lap in the pool or get ready to tee off, make sure someone is paying attention to the rules and what needs to be done to retain that tax exempt status. </div>Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com0tag:blogger.com,1999:blog-7747685628760230169.post-33298610972625522672010-06-14T13:52:00.001-07:002012-02-24T10:18:48.607-08:00Does Your Organization Have a Written Conflict of Interest Policy?<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; text-align: justify;">Any organization that has had to prepare the new Federal Form 990 has seen this question - page 6, Section B, item 12a. Furthermore, if your organization does have a written conflict of interest policy, "are officers, directors or trustees, and key employees required to disclose annually interests that could give rise to conflicts?"</div><div style="text-align: justify;"></div><div style="text-align: justify;"></div><div></div><div style="text-align: justify;">What is a conflict of interest, and why do I need a policy for this? </div><div style="text-align: justify;"></div><div></div><div style="text-align: justify;">Back in January 2010 my first blog addressed Board governance, describing a Board member's fiduciary responsibility to protect the assets of the organization it serves, which includes putting the interests of the organization ahead of his or her own personal interests. If a Board member or staff member in a decision making role has a personal interest that conflicts with the interests of the organization it serves, and he or she may be influenced by that personal interest when making a decision for the organization, there is a conflict of interest (Board Source, Managing Conflicts of Interest: A Primer for Nonprofit Boards, 2006). This conflict could potentially prevent the Board member from fulfilling his or her legal and fiduciary responsibilities, and ultimately jeopardize the organization's tax exempt status.</div><div style="text-align: justify;"></div><div></div><div style="text-align: justify;">The following are a few simple examples of potential conflicts of interest:</div><ul><li><div style="text-align: justify;"> the organization rents office space in a building owned by a board member or related family member;</div></li>
</ul><ul><li><div style="text-align: justify;">the organization purchases goods or services from a company owned by a board member or related family member;</div></li>
</ul><ul><li><div style="text-align: justify;">a board member serves on the Board of more than one nonprofit organization, and has to approach the same donors for a substantial contribution on behalf of both organizations; </div></li>
</ul><ul><li><div style="text-align: justify;">a key staff member or volunteer accepts a gift from a vendor which does business, or seeks to do business, with the organization.</div></li>
</ul><div style="text-align: justify;">Public confidence is important to most nonprofit organizations. Even the appearance of impropriety could be damaging to the reputation of the nonprofit organization. Creating a written conflict of interest policy based on the needs and circumstances of the organization can help prevent actual conflict of interest situations. A conflict of interest policy should apply to all Board and staff members, as well as certain volunteers. Each member and volunteer should agree in writing to uphold the policy.</div><div style="text-align: justify;"></div><div></div><div style="text-align: justify;">Key elements of a written conflict of interest policy include:</div><div style="text-align: justify;"></div><div></div><div style="text-align: justify;">1. Full disclosure of the potential conflict (known relationship/interest)</div><div style="text-align: justify;"></div><div></div><div style="text-align: justify;">2. Board member abstention from discussion and voting when it pertains to transactions involving the potential conflict (known relationship/interest)</div><div style="text-align: justify;"></div><div></div><div style="text-align: justify;">3. Staff member abstention from decision-making when it pertains to transactions involving the potential conflict (known relationship/interest)</div><div style="text-align: justify;"></div><div></div><div style="text-align: justify;">A written conflict of interest policy should require full disclosure from each new Board and staff member and each new volunteer at the time he or she first becomes associated or involved with the organization, and then it should be required annually. The policy should also require members and volunteers disclose conflicts that may arise during the year as soon as they are known. Making this an agenda item for each board meeting would help the Board keep abreast of potential conflicts that may arise throughout the year. Once these disclosures are made, they need to be independently reviewed and approved perhaps by the Executive Committee or some other similar Committee of the Board of Directors.</div><div style="text-align: justify;"></div><div></div><div style="text-align: justify;">If you have questions about situations in your organization that may appear to be conflicts of interest, or if you want assistance in creating a written conflict of interest policy for your organization, please contact <a href="http://www.elkocpa.com/">Elko & Associates Ltd.</a> Remember, even the appearance of impropriety could damage the organization's reputation as well as jeopardize the organization's tax exempt status. So address those potential conflicts of interest now!</div><div style="text-align: justify;"></div><div></div><div style="text-align: justify;"></div>Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com0tag:blogger.com,1999:blog-7747685628760230169.post-17404845192981247482010-06-08T10:51:00.001-07:002012-02-24T10:19:14.740-08:00When it Comes to Fraud Risks, "Cash is King"<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; text-align: justify;">By now most of you are familiar with or at least aware of SAS 99, Consideration of Fraud in a Financial Statement Audit, which requires the auditor to gather, assess, and respond to information regarding fraud that could lead to the risk of material misstatement in an organization's financial statements. Subsequently the AICPA issued the set of risk assessment audit standards requiring auditors to obtain a more in-depth understanding of an organization in order to better identify the risks of material misstatements in the financial statements they were auditing, including the risk of fraud. While these standards discuss financial reporting risks and misstatements of an organization's financial statements, there's also a call to address misappropriation of assets, i.e. theft of assets or fraudulent expenditures. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Most times when you read about the occurrence of fraud in a non-profit organization, it’s usually about theft or misappropriation of assets, and it usually involves cash; and these are the ones that make the papers. Most non-profits don't want those outside the organization to know that theft has occurred; it’s just not good PR, particularly if you're a local organization looking for donations from the public or some other donor who wants to know the money is being put to good use (not the bookkeeper’s vacation home). Those in the organization who have incentive, opportunity, and attitude to rationalize their behavior will generally "go for the green" if you let them. So how should this risk be addressed?</div><div style="text-align: justify;">Familiar battle cries...."Where was the Board", "Where was management", "Why didn't the auditors catch this", just to name a few. You've heard them before.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Good governance by the Board includes financial oversight - we've addressed this in some of our <a href="http://nonprofitafterhours.blogspot.com/2010/03/governance-practices-assessment.html">previous Blogs</a>. If the organization is small and doesn't have the luxury of adequate personnel to provide proper segregation of duties, someone on the Board, preferably someone with knowledge of financial matters, needs to be involved. Things for the Board to consider:</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">• review and signoff on monthly bank reconciliations and credit card statements</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">• obtain access to bank account, credit card, and general ledger information for review purposes</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">• require a second signature on all checks (or at least the larger ones - set a limit)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">These or similar practices can be used by management where there's limited personnel and a shortage of controls. If possible, management should perform its own internal fraud risk assessment, focusing on the use of cash and related controls for cash receipts and disbursements. (see “<a href="http://nonprofitafterhours.blogspot.com/2010/03/does-my-non-profit-need-audit.html">Managing the Business Risk of Fraud: A Practical Guide</a>”.</div><div style="text-align: justify;">For us auditors, as we gain a thorough understanding of the organization’s control environment, policies, procedures, systems and controls (as outlined above), we need to then verify that such oversight and preventative measures are, in fact, in place and working. Consider using data extraction software and similar tools to identify certain populations or trends, i.e. payments to “cash”, individuals, similar vendors, as well as common addresses, etc. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">A commonly used small business general ledger software package allows the user to “turn off” the audit trail feature, so a check can be generated and the payee subsequently changed in the system. Depending on the general ledger software and the ability to manipulate transactions in the software, consider examining original cancelled checks (or copies received directly from the bank) to ensure the payees and endorsements are consistent with the payee recorded in the general ledger. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Remember, non-profits don’t get bad press because their employees or volunteers steal office supplies and office furniture and equipment. When it comes to fraud risks and the related financial losses, “CASH IS KING”. Make sure this asset is well protected and being put to good use in achieving the organization’s mission.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;"><a href="http://www.elkocpa.com/company/our_team/john_nihill">Contact us for assistance</a>. </div>Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com0tag:blogger.com,1999:blog-7747685628760230169.post-66588327222525311222010-05-19T08:11:00.001-07:002012-02-24T10:19:37.369-08:00Special Events Reporting<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; text-align: justify;">Many non-profit organizations conduct fundraising activities which are considered “special events”. Special event revenues and expenses have specific financial reporting requirements, which are defined by professional accounting standards. So what is a “special event” and what are the specific reporting requirements?</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; text-align: justify;"></div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; text-align: justify;"><br />
</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; text-align: justify;">Special events, as defined by accounting standards, are generally fundraising events where attendees usually receive a direct benefit such as a meal, entertainment, a “parting” gift, etc. Examples of special events are: fundraising dinners, auctions, theater parties, golf outings, races, raffles, etc.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Professional accounting standards <em>require</em> revenues and expenses from special events which are ongoing “major and central” activities to be reported gross (revenues and expenses are separately reported). These standards <em>permit</em> (but do not require) receipts and related costs from special events, which are “peripheral or incidental” activities, to be reported net (expenses are netted against revenue). (AICPA A&A Guide,<em> “Not-for-Profit Organizations”,</em> para. 13.21)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">So how do I know if my event is “major and central” or “peripheral or incidental”? The standards provide us with some guidance. There are two factors to consider when determining if an event is “major and central” or “peripheral or incidental” – 1) frequency of the events, and 2) significance of the gross revenue and expenses.</div><div style="text-align: justify;">Events are ongoing <strong>major and central</strong> activities if - </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">1) they are normally part of an organization’s strategic plan and the organization normally carries on such activities (e.g. an annual art auction), <em>or</em></div><div style="text-align: justify;">2) the event’s gross revenues or expenses are significant in relation to the organization’s annual budget (e.g. Budget $500,000, event gross receipts $50,000, event gross expenses $30,000)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Events are <strong>peripheral or incidental</strong> activities if – </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">1) they are not an integral part of the organization’s usual activities, or</div><div style="text-align: justify;">2) their gross revenues or expenses are not significant in relation to the organization’s annual budget.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">If you’ve determined your event is “major and central”, the special event revenue should be reported as a separate line item in the revenue section of the Statement of Activities. The cost of the direct benefit to the donors can be reported as either – </div><div style="text-align: justify;">• a line item deducted from the special event revenue in the revenue section, or </div><div style="text-align: justify;">• as a specific expense in the expense section of the Statement of Activities</div><div style="text-align: justify;">Other expenses associated with this “major and central event” will be reported with your other fundraising expenses.</div><div style="text-align: justify;">In addition to financial reporting requirements, there are also specific reporting requirements for special events on the Federal Form 990. These requirements will be addressed in a future “blog”.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">The discussion above is a very general description of the financial accounting and reporting requirements for special events. For more information or guidance on accounting for and reporting on special events, please contact<a href="http://www.elkocpa.com/contact_us/locations"> Elko & Associates Ltd. </a>See you at the next “Special Event”!</div>Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com2tag:blogger.com,1999:blog-7747685628760230169.post-42016288152663913932010-05-11T12:13:00.001-07:002012-02-24T10:19:58.634-08:00Is Your Charitable Organization Eligible for Real Estate Tax Relief?<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">In the Commonwealth of Pennsylvania, charitable organizations may qualify for real estate tax relief if the organization qualifies as a “purely public charity”. Other states may have similar laws that allow for a charitable organization to eliminate or reduce its real estate tax burden if certain tests or requirements are met. Since the majority of my experience is with Pennsylvania, I will focus on how an organization can attain this exemption in Pennsylvania.</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; text-align: justify;"></div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">As stated above, if an organization meets the requirements to qualify as an institution of purely public charity, they will qualify for real estate tax exemption. The basic requirements for an organization to be an institution of purely public charity are described in Pennsylvania Act 55 and the Hospital of the University of Pennsylvania (HUP) court decision. They are:</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">1. Advancement of a charitable purpose;</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">2. Operate entirely free from a profit motive;</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">3. Donate or render gratuitously a substantial portion of its services;</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">4. Benefit a substantial and indefinite class of persons who are legitimate subjects of charity; and </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">5. Relieve the government of some of its burden.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Act 55 provides some objective and measureable standards to use when interpreting the court decision in HUP. An institution of purely public charity must satisfy each of the basic requirements using specific criteria stated in the Act.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Act 55 also provides for a rebuttable presumption. Basically, an institution is presumed to meet the standards of a purely public charity if it applies for and receives a sales tax exemption from the Pennsylvania Department of Revenue. However, this rebuttable presumption is not available to organizations with annual program service revenues exceeding $10 million (increasing 1% per year commencing July 1, 1999) unless the organization has entered into a voluntary agreement (PILOT-payment in lieu of taxes) with a political subdivision wherein the organization conducts substantial business operations. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Our experience has been that most charitable organizations can meet requirements #1, #4 and #5. However, organizations have a difficult time proving that they meet the Act 55 standards to satisfy requirements #2 and #3. Particularly troublesome to organizations is supporting the fact that they donate or render gratuitously a substantial portion of their services, requirement #3. Even though there are seven different tests that can be met to satisfy this requirement, the complexity of the mechanics of certain tests, along with the vagueness of the Act 55 legislation, makes for a difficult challenge. However, all is not lost. The fact that portions of Act 55 are somewhat vague and ambiguous creates a two-edged sword that can be used by both the taxing authority and the charitable organization to bolster their positions on any of the five basic requirements.</div><div style="text-align: justify;">How do you make this happen? Our experience has been that in most cases the charitable organization will file an appeal with the taxing authority, claiming that they are exempt from real estate tax under the provisions of Act 55. In mostly all cases the taxing authority will deny the appeal and then the fun begins. Both sides engage legal counsel to represent them. Documents are exchanged, meetings are held, and depositions are taken. The attorneys for the taxing authority may hire accountants and other experts to analyze the mountain of paperwork provided by the charitable organization to support their position. Expert reports are prepared by both sides and exchanged. More meetings are held to see if there can be a compromise worked out. If not, it is off to court for a judge to make the final determination.</div><div style="text-align: justify;">If you are a Pennsylvania charitable organization, and you are paying real estate taxes, you may want to take a look at Act 55 and the HUP court decision to see if you can meet the tests and be exempt from real estate taxation. </div><div style="text-align: justify;"><br />
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</div>Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com2tag:blogger.com,1999:blog-7747685628760230169.post-46179175731919844372010-03-29T11:34:00.001-07:002012-02-24T10:20:25.952-08:00Functional expense reporting - What does this mean and why is it necessary?<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">Non-profit organizations that present their financial statements in accordance with generally accepted accounting principles ("GAAP") are required to report their expenses by their "functional" classification either in the Statement of Activities or in the Notes to the Financial Statements. </div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><br />
</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"></div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; text-align: justify;">Tax exempt organizations who file the Federal Form 990 must report their expenses in the Statement of Functional Expense, and document the method of allocation in their records.</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; text-align: justify;">The Financial Accounting Standards Board defines functional classification as "a method of grouping expenses according to the purpose for which costs are incurred. The primary functional classifications are program services and supporting activities". (SFAS No. 117, par. 168)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Program services are activities that provide goods and services to the beneficiaries, customers and members of the non-profit organization that fulfill the purpose or mission for which the non-profit organization exists. (SFAS No. 117, par. 27)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Supporting services are activities not directly related to the purpose or mission for which the non-profit organization exits, but which are necessary for the non-profit organization to operate. Supporting services generally include management and general, fund raising and membership-development activities. (SFAS No. 117, par. 28)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Most financial statement users are more interested in the functional classification of expenses than in the natural classification (e.g. payroll, rent, supplies, travel, etc.). Functional classifications help management see exactly where funding is going, so they can better run the organization. Board members look at functional classification to assess how well the organization is performing. Funders and the general public want to know how much of each dollar they contribute is spent on achieving the organization's purpose or mission. </div><div></div><div style="text-align: justify;">While GAAP and the Federal Form 990 are very specific in saying that you must report costs by functional classification, they are somewhat vague about how a non-profit organization should do this. Direct costs that are associated with a specific program or supporting service should be charged directly to that functional category. That's the easy part! But what if I have a cost that pertains to more than one functional expense category, i.e. indirect costs? Both GAAP and the Form 990 require these costs to be allocated using a method that is both reasonable and consistent from year to year.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Considerable freedom is allowed in applying judgment when determining reasonable allocation methods. Here are some guidelines to follow: </div><ul><li><br />
<div style="text-align: justify;">Objective allocation methods are preferred over subjective methods. For example, it's better to allocate salaries based on time sheets or a time study rather than on a subjective estimate of how time was spent.</div></li>
</ul><ul><li><br />
<div style="text-align: justify;">Different allocation methods may be used for different types of expenses. For example rent and utilities might be allocated based on square footage. You need to review each expense account and determine an appropriate allocation method to use for each.</div></li>
</ul><ul><li><br />
<div style="text-align: justify;">Consistency from year to year is strongly recommended, but facts and circumstances may change from year to year, necessitating a change in allocation method.</div></li>
</ul><ul><li><br />
<div style="text-align: justify;">Review your allocation methods each year to be sure they are still appropriate under the current circumstances.</div></li>
</ul><div style="text-align: justify;">For more information or guidance on reporting functional expenses or the cost allocation process, please <a href="http://www.elkocpa.com/contact_us/locations">contact Elko & Associates Ltd</a>. We can help you understand the accounting rules described above and the appropriate methodologies to apply to your internal accounting records (including chart of accounts), so that management, the Board, funders and the general public have the right information to make sound business and giving decisions.</div><br />
<div></div>Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com3tag:blogger.com,1999:blog-7747685628760230169.post-7729760578060159922010-03-16T13:19:00.001-07:002012-02-24T10:20:57.873-08:00The Misunderstood "Foundation"<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">Although I have developed a special affinity for and interest in tax-exempt organizations, my real bread and butter, so to speak, is as a tax professional. And as I look at the calendar, today is March 15. This means we are right in the belly of the tax season beast. I also lost an hour of sleep over the weekend which I am not too happy about.</div></div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Corporate returns need to be filed or extended today! Then we get into the stretch run, the march towards April 15. “Into the valley of death……”. No food or water for days. Your family forgets who you are, sometimes intentionally. You get home at night only to find that your 70-pound greyhound (“Roxy”) has taken over your side of the bed, and isn’t moving for anybody. Off to the couch and Seinfeld reruns.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Now you might be asking, what has any of this to do with foundations? I will respond- absolutely nothing! That’s why blogging is so much fun. However, the real point of my tirade is that I haven’t really had the time to focus on a specific topic to blog about. And, with all kidding aside, these blogs are important to me and my non-profit colleagues, as well as our firm. Thus, here’s a little conversation about foundations.<br />
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</div><div style="text-align: justify;">The reason I use the word misunderstood is based on my experiences over the years with individuals who are thinking about, or who are in the process of, forming a charitable organization. About 50% will say that they are forming a charitable foundation, at which time I will put on my “Mr. Smarty Pants” hat and say, “Are you talking about forming a private foundation?” And, even though they may be on the telephone, I can see their face transforming into a large question mark. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Inevitably, they are simply talking about forming a “publicly” supported public charity, not a “privately” supported private foundation. To their defense, we do see many publicly supported charities use the term foundation within the name of the organization. There are also many private foundations that do not have the word foundation as part of their name. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">So, when someone is talking to you about a foundation, be sure you know exactly what they are talking about. This is important from an advisory standpoint since each type of charitable organization, whether it be publicly supported or a private foundation, has specific issues, guidelines, etc. that must be addressed and adhered to. For example, after 5 years in existence, a publicly supported charity will need to make sure that it does not fail the public support test for 2 years in a row. A private foundation does not have this concern. However, a private foundation does have to calculate a required distribution each year. This required distribution amount is a percentage of the foundation’s average non-charitable use assets, and the foundation has until the end of the following year to make the distribution. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Private foundations pay tax on their net investment income. Publicly supported charities as a rule do not, unless the income is determined to be unrelated business income. One area where both types of these charitable organizations have to “toe the line” is in regard to situations where a private individual may personally benefit from the organization’s assets or income. Public charities have the private inurement, private benefit and intermediate sanction rules to deal with when these types of transactions arise. Private foundations have the self-dealing rules which are in place to prevent these types of activities.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Well, I could go on and on about private foundations, but it is time to get back to the tax returns and the long march to April 15. Let’s raise a glass to large tax refunds, pleasant client relationships, and getting home before Roxy gets into the bed!</div><div style="text-align: justify;"><br />
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</div>Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com0tag:blogger.com,1999:blog-7747685628760230169.post-19118201510289721692010-03-08T07:49:00.001-08:002012-02-24T10:21:26.164-08:00Does My Non-profit Need an Audit?<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; text-align: justify;">I get a lot of phone calls from prospective clients inquiring if we do audits, and the cost to do an audit. After I advise them that we do provide audit and other attest services, I ask them a simple question – Why do you need an audit? Often times there's silence on the other end of the phone or the answer is “I’m not sure” or “My boss asked me to call” or “I’m a non-profit, aren’t I supposed to have an audit?” </div><div style="text-align: justify;"><br />
</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; text-align: justify;">While the question is simple the answer might not always be as simple. The fact is, there may be several reasons a non-profit organization should have an audit, and reasons you may not need an audit. The following are reasons your non-profit may need or require an audit:</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Grantors/Donors – As more non-profit organizations increase their fundraising efforts they often seek grants from various foundations and public/private sector agencies. These agencies may require that audited financial statements be provided or accompany the grant application. These agencies want to make sure that their money is going to legitimate, financially stable organizations that have reasonable controls in place to ensure the money will be spent for the purpose requested. These grantors may also request a copy of a management/deficiency letter that may be the by-product of the audit and addresses control or operational deficiencies and related recommendations to address these deficiencies. These grantors may require audited financial statements throughout the grant period as well for the same reasons, to monitor the use of the proceeds and the financial health of the non-profit grantee.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Federal, state and local government agencies – Some non-profit organizations receive grants or other awards from government agencies, and the related agreement may require that the recipient organization have an organization-wide audit that includes some level of testing of compliance and internal controls. The infamous “Single Audit” or audit in accordance with OMB Circular A-133 may be a requirement of the grant agreement, and is generally required for organizations that have total expenditures of federal awards in excess of $500,000 during the organization’s fiscal year. These federal awards may be direct awards from the federal government or pass-through awards to state or local government agencies that are ultimately passed through to the non-profit organization.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">State law - Pennsylvania, for instance, requires organizations soliciting funds for a charitable purpose to register with the Department of State's Bureau of Charitable Organizations, file an annual registration statement, a copy of its IRS Form 990, and the appropriate financial statements. Organizations receiving $300,000 and over must file audited financial statements with the annual registration form.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Banks, vendors, landlords or other independent third parties - Loan agreements may have covenants or other provisions requiring the borrower to submit annual audited financial statements so they can get an accurate picture of the organization's financial status. Vendors, landlords, and other third parties may have the same requirements depending on the level of financial interaction and resources at stake.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Internal control - Management and/or those charged with governance (i.e. the Board of Directors) may believe that having an annual audit is a good internal control over financial reporting and safeguards assets of the organization. In general, an audit should not be relied upon as a primary internal control. This can be expensive, and while testing may be done for transactions that occurred throughout the year, the annual audit is performed once a year at the end of the organization's fiscal year. Management should ensure that good internal controls are in place throughout the year to safeguard the organization’s assets and promote good financial reporting. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">In summary, while an audit may be perceived as a good<a href="http://nonprofitafterhours.blogspot.com/2010/02/does-your-non-profit-organization-need.html"> annual check-up for the organization</a>, management needs to consider the cost vs. benefit before making such an investment. In some cases, as noted above, the decision may be out of your control and a third party may be the one making the decision for you. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Still not sure? <a href="http://www.elkocpa.com/company/our_team/john_nihill">Contact us</a></div>Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com0tag:blogger.com,1999:blog-7747685628760230169.post-13780450636250363092010-03-01T07:52:00.001-08:002012-02-24T10:21:52.325-08:00Governance Practices Assessment<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; text-align: justify;">Public charities BEWARE! IRS audits are becoming more intrusive. Although the IRS doesn’t mandate the governance practices it’s inquiring about on Part VI of the Federal Form 990, it is focusing on the answers to those questions. The IRS recently created the Governance Check Sheet (Form 14114) that its examining agents will use to capture data about the governance practices and related internal controls of your public charity. The IRS claims they are gathering this data in an attempt to gain a better understanding of the relationship between governance practices and tax compliance. Hmmm . . . The IRS believes that prudent governance practices lead to better tax compliance. Perhaps this explains the motive behind the numerous governance questions in Part VI of the Federal Form 990?</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">The Governance Check Sheet will explore the following areas:</div><div style="text-align: justify;">• Governing Body and Management – includes questions about the public charity’s<br />
<ul><li>Mission statement</li>
<li>By-laws and articles, and</li>
<li>Board members and board meetings</li>
</ul></div><div style="text-align: justify;">• Compensation – includes questions about<br />
<ul><li>Compensation arrangements for trustees, directors, officers, and key employees,</li>
<li>Compensation determinations, and</li>
<li>Comparability data considered</li>
</ul></div><div style="text-align: justify;">• Organizational Control – includes questions about the public charity’s<br />
<ul><li>Family and business relationships, and</li>
<li>“Effective control” of the organization</li>
</ul></div><div style="text-align: justify;">• Conflict of Interest – includes questions about the public charity’s<br />
<ul><li>Conflict of interest policy</li>
</ul></div><div style="text-align: justify;">• Financial Oversight – includes questions about the public charity’s<br />
<ul><li>Use of its assets</li>
<li>Financial reports provided to/discussed with board members</li>
<li>Board’s review of the Federal Form 990 before filing</li>
<li>Independent accountant’s report</li>
<li> Management letter</li>
</ul></div><div style="text-align: justify;">• Document Retention – includes questions about the public charity’s<br />
<ul><li>Document retention and destruction policy</li>
<li>Minutes of board meetings</li>
</ul></div><div style="text-align: justify;">So what can public charities do to prepare themselves? They can perform a governance practices self-assessment! This assessment should be performed even if the public charity currently files the Federal Form 990-EZ. Beginning in 2010, an organization exempt from income tax under IRC Sec. 501(a), which includes organizations described in Sec. 501(c)(3), must file Federal Form 990 if it has either gross receipts of $200,000 or total assets of $500,000 at the end of the tax year. The Governance Check Sheet is available <a href="http://www.irs.gov/pub/irs-tege/governance_check_sheet.pdf">here.</a></div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Are you a new organization that is applying for recognition as a tax-exempt organization? Then you should consider the questions in this Governance Check Sheet when you complete the application for recognition of exemption. And, whether you’re an existing tax-exempt or an organization applying for tax-exempt status, be sure to maintain documentation to support your answers. Revenue agents are being asked whether their examinations were “hindered by a lack of necessary documentation” (question #26 of the check sheet).</div><div style="text-align: justify;"></div><div style="text-align: justify;"></div><div style="text-align: justify;">Feel free to <a href="http://www.elkocpa.com/vertical_markets/non_profit">contact us</a> if you have any questions or need assistance with any of these matters. But don’t wait – it’s better to have the answers before the IRS asks the questions!!</div><br />
<div></div>Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com1tag:blogger.com,1999:blog-7747685628760230169.post-57157461933289740582010-02-23T12:40:00.001-08:002012-02-24T10:22:52.512-08:00Who Regulates the Non-Profit Sector?<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">The last tax blog is a tough act to follow. Who can compete with the non-profit BLOB? Is this the same Blob from the 1988 movie which consumes everyone in its path? I certainly hope not. </div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"></div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><br />
</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">Some of you who are involved with non-profit organizations may think there is a so-called Blob in the non-profit world; the Internal Revenue Service (IRS). I wouldn’t go as far as saying that the IRS “consumes everyone in its path,” but the IRS does monitor and regulate the activities of all non-profit organizations.</div><br />
Some responsibilities of the Internal Revenue Service’s Division on Tax-Exempt and Government are:<br />
<br />
• Reviewing applications for tax exempt status (Forms 1023)<br />
<br />
• Granting tax exempt status<br />
<br />
• Revoking tax exempt status<br />
<br />
• Reviewing and auditing the Forms 990 filed<br />
<br />
• Enforcing the tax code<br />
<br />
• Asserting penalties<br />
<br />
As you can see, the IRS has many responsibilities and limited resources to monitor all non-profit organizations. The public cannot depend on the IRS alone to govern the non-profit sector.<br />
<br />
State governments have their own laws governing nonprofit organizations. In most states, the attorney general is responsible for regulating non-profits. Many states have filing requirements in addition to the federal filing requirements. States are responsible for enforcing their laws and investigating complaints of consumers. In order to figure out the requirements of your state refer to the IRS’ <a href="http://www.irs.gov/charities/article/0,,id=129028,00.html">State Links</a>, which is a collection of state government websites for tax-exempt organizations.<br />
<br />
The most important regulators of the non-profit world are the donors. Would you give your hard-earned money to anyone who asks? I think not. I would need more information in order to make an educated decision. How do they intend to use the money? Have they used the money as intended in the past? Is anyone profiting? These are just some of the questions you may ask before giving an individual money, so ask the same questions before supporting a non-profit organization. The IRS may provide us with valuable tools to monitor and review, such as the Form 990, but the responsibility for oversight is truly the donors.Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com2tag:blogger.com,1999:blog-7747685628760230169.post-41686375393682995642010-02-15T06:29:00.001-08:002012-02-24T10:24:02.819-08:00Welcome to My Blog<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">Hello to everyone out there in Cyberspace (is that still what it’s called?) and welcome to our BLOG! </div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; text-align: justify;"></div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; text-align: justify;"><br />
</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; text-align: justify;">My 4 year-old daughter wanted to know why I was writing to a BLOB. Sad to say, I have been accused of worse.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Anyway, what do you think of the name of our blog? NON-PROFIT AFTER HOURS. Yep, you guessed it, my idea! We have gotten positive feedback on the name, and just one or two negative comments. Some people need to lighten up! </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">This is what I am supposed to be doing, correct? Just saying what is on my mind.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">I’m blogging…….I’m blogging…..I’m blogging…… </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">How am I doing so far? </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Our blog is to be centered around the non-profit world, and for me, the tax related aspects of non-profits. Now, synonymous with the term “non-profit” organization is “tax-exempt” organization. Well, as I have heard from more than one person, if the organization is tax-exempt, there can’t be many tax-related aspects, and if there are, they can’t be that complex.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Well, as for me and my 4 year-old daughter’s BLOB, we say think again!</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">I have dealt with non-profits throughout my 30 plus year career working in taxes. However, I have focused on or “specialized” in this niche area for the last 10 plus years. And I will tell you, that some of the issues that arise in the non-profit area can rival any that come up in the for-profit arena. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Sure, you for-profit guys and gals have your Section 382 loss limitation rules, special allocation and substantial economic effect rules for partnerships, transfer pricing studies, S-corporation shareholder basis and at-risk-rules, blah, blah, blah…. But how many of my for-profit brethren work with religious organizations? Yes, we answer to a higher authority. Oh, and don’t even get me started with the issues surrounding joint ventures with tax-exempt organizations and the crazy, excise tax laden, world of Private Foundations. Private inurement…snap…don’t even go there! </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">The numerous issues that are out there along with the heightened scrutiny that non-profits are under from Congress, the IRS and state authorities make the non-profit world both an interesting and challenging area to practice. I was told that there is an internal struggle within the government regarding the “monitoring” of tax-exempt organizations. One school of thought is to increase regulation and oversight while the other says to let the organizations go about their business with minimal governmental intervention. We will see as time goes on, how this will play out. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">I mean no offense to anyone as my blog is meant for all to read and from time to time, enjoy. Over the next few weeks, months and hopefully years, we will be exploring, together, the “tax related aspects” of “tax-exempt” organizations.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Until next time…….beware the non-profit BLOB!</div>Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com0tag:blogger.com,1999:blog-7747685628760230169.post-45015094620346274922010-02-08T10:31:00.001-08:002012-02-24T10:24:29.710-08:00Does Your Non-profit Organization Need a Physical Examination?<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; text-align: justify;">I recently turned the big “5” – “0”, and everyone, friends and family alike, told me I needed to get a physical. It had been a number of years since the last check-up with the doctor. Why do I need a physical? I feel fine (typical “guy” response, right?). Even though things seem to be OK on the outside and there were no noticeable problems that I could identify, how do I know that everything is OK on the inside? I don’t – hence the need for a physical examination.</div><br />
<div style="text-align: justify;"></div><div style="text-align: justify;">What about your non-profit organization? Things seem to be going well on the outside – you’re meeting the objectives of your mission; you’re running at or near budget; the Board meets regularly and they seem happy with what they see and hear. So far, so good. But how are things going on the inside? Did you ever read in the paper or hear on the news how there was another theft in a non-profit organization (someone was stealing money over a long period of time), or the local NFP is going out of business due to lack of funding? I‘m sure with these entities that things seemed good on the outside while problems were brewing on the inside over a period of time. Maybe the situation would have been different if the non-profit had a periodic examination.<br />
<br />
</div><div style="text-align: justify;">Here are some ideas to consider for your non-profit organization’s physical examination:<br />
<br />
</div><div style="text-align: justify;"></div><div style="text-align: justify;">• Board of Director involvement – do you have the right committees focused on key oversight roles, including – audit/finance committee, strategic planning, mission related committees, executive review (addressing performance and compensation of key executives) – and do the people on these committees have the appropriate skills to perform these oversight roles.<br />
<br />
</div><div style="text-align: justify;"></div><div style="text-align: justify;">• Adequacy of internal controls – consider periodic review and testing of internal controls (can rotate cycles each year – for instance, if the organization has good internal controls in payroll, maybe this cycle doesn’t need to be reviewed each year unless there are major changes in the policies, procedures or personnel).<br />
<br />
</div><div style="text-align: justify;"></div><div style="text-align: justify;">• External audit – the organization may already be required to have an annual external audit due to state, regulatory, or by some other third party user (i.e. bank or donor). If not, consider obtaining an external audit by an independent accounting firm.<br />
<br />
</div><div style="text-align: justify;"></div><div style="text-align: justify;">• Initiate/update a fraud/general risk assessment program – identify and evaluate fraud risk factors that may indicate the presence of:</div><div style="text-align: justify;"><ul><li>Incentives or pressures for management, employees, or volunteers to commit fraud.</li>
<li>Opportunities to commit fraud, usually combined with a belief that the fraud will go undetected.</li>
<li>Attitudes/rationalizations on the part of management, employees, or volunteers to justify committing fraud.</li>
</ul></div>A tool you may find helpful in this area is <a href="http://fvs.aicpa.org/NR/rdonlyres/98BD10EC-CC12-4D14-848D-E5BDB181F4EE/0/managing_business_risk_fraud.pdf">“Managing the Business Risk of Fraud: A Practical Guide”. </a>The guide is sponsored by The Institute of Internal Auditors, The American Institute of Certified Public Accountants, and the Association of Certified Fraud Examiners. <br />
<div style="text-align: justify;"><br />
</div><div style="text-align: justify;">• Audit/Finance Committee oversight – this committee is key to making sure the items noted above (and others) are being addressed and the financial affairs of the organization are being monitored. This committee should:</div><div style="text-align: justify;"><ul><li>Work with management to establish financial budgets and assist with monitoring budget vs. actual performance.</li>
<li> Ensure the organization has good internal controls (which are reviewed and tested as needed - discussed above).</li>
<li>Review internal financial statements and make sure they make sense and will be understood by the full Board.</li>
<li>Participate in selecting external auditors and work with them to understand the results of the external audit and any related communications (i.e. management recommendation letters).</li>
<li>Review and evaluate investment policies and performance (especially if the organization does not have a separate investment committee).</li>
</ul></div>These are a few ideas to consider and get you started; we’ll discuss these topics in greater detail in the future. For now, the important thing to do is meet with your doctor (management and the Board) and determine the frequency and needs of your physical examination. Don’t procrastinate and wait until there’s a big problem. Do it now while you feel good and things are going well. You never know what’s happening on the inside unless you check. Feel free to <a href="http://www.elkocpa.com/company/our_team/john_nihill">contact us</a> if you need a consult or a “second opinion”.Nonprofit Bloggershttp://www.blogger.com/profile/08903579835181394363noreply@blogger.com0