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Nonprofits Pay Income Taxes

It may come as a surprise to many, but nonprofits can have taxable income, known as Unrelated Business Taxable Income (UBTI).  Even if they get a tax exemption from the IRS.

If an organization has UBTI of $1,000, it must submit 990-T Unrelated Business. You can check out his form at the IRS website –https://www.irs.gov/pub/irs-pdf/f990t.pdf

The government defines taxable income as income not substantially related to the organization’s tax-exempt purposes or activities. The idea is to prevent nonprofit organizations from competing with for-profit firms unfairly. The tax due is known as Unrelated Business Income Tax (UBIT), and it conforms to the corporate tax rate. Often, an activity generates unrelated business income if it meets three requirements:

  1. It’s a trade or business
  2. It’s regularly carried on, and
  3. It’s not substantially related to furthering the exempt purpose of the organization.

For example, an organization runs a pizza parlor selling pizza to the public. The nonprofit’s mission and programs don’t relate to the parlor’s business. The nonprofit pays employees to run the pizza place. All this information points to the pizza parlor generating unrelated business income that’s taxable.

On the other hand, a humanitarian-service organization holds a bake sale. While the sale is unrelated to the mission, It’s likely to be tax-exempt if not “regularly carried on.” Nonprofit’s activities are considered regularly carried on if they show a frequency, continuity, similarity to comparable commercial activities of for-profit businesses.

Some unrelated business activities may not be taxed. For instance, if an organization sells donated items, or if volunteers perform all the labor involved in the business, proceeds are exempt from taxes.

Note that if the IRS notices too much UBTI, it may revoke the tax-exempt status, which can spell disaster for a nonprofit. To avoid this potential risk, organizations should consider the following:

  • Resources and volunteers must spend most of the time on the mission, not business activities
  • Most of the revenue must come from the public and mission-related programs. The percentage of business income should be minimal

 

Interested on CPE credits regarding nonprofits?  Online Practical CPE Courses

You can also check out my books:

Nonprofit Finance: A Practical Guide — Nominated for a  2016 McAdam Book Award

15 Quick Tips on Becoming a Great Consultant  — Free on Kindle Unlimited

 

 

Is Your Nonprofit Data Safe?

Many nonprofits keep confidential information on their computers, including sensitive data and items that cannot be lost. Membership or donor information, accounting data, and other confidential information should be safeguarded against snooping eyes.

A typical control here is to have a disaster preparedness plan, which includes a recovery strategy for the nonprofit’s functions. But that’s not enough.  Organizations should consider the following issues with software, hardware, and the cloud.

Software

Risks when dealing with software include unauthorized entry, loss of data, and confidentiality issues. Some internal control mechanisms to minimize these risks are:

  • Use anti-virus and firewall programs to prevent malware from infiltrating the system.
  • Do daily backups of all systems and keep the backed up file outside the premises.
  • Require IDs and passwords on all systems.
  • Acquire programs to identify and stop unauthorized entry using the Internet and other means.
  • Require information system’s authorization for program purchases to be sure the program is indeed needed and is compatible with existing software.
  • Once employees leave the organization, they should not have access to the nonprofit’s systems
  • Include security to prevent information systems personnel access to passwords or confidential information.
  • Create policies and procedures about computer usage and safety.

Hardware

The risks with hardware involve theft, maintenance, and obsolescence of the machines. Below are some controls to minimize these risks:

  • Place all equipment, including servers and printers, in a safe location.
  • Label all equipment with numbers and create a list of all equipment using the number and description.
  • Maintain this list, doing physical audits to identify equipment disappearances, losses and damages.
  • Centralize maintenance services and schedule them regularly.
  • IT management should approve purchases, retirement or sales of hardware.
  • Dispositions of old computers must be done carefully since they contain confidential information that may be recovered unless the nonprofit takes certain
  • Dispositions of old computers and peripherals must comply with laws to avoid poisoning the environment and possible fines.

Using the Cloud

Many nonprofits have been using accounting and other programs “in the cloud.” This means that organizations’ management and staff access these computerized programs through the Internet, making the software very convenient since employees can access the system anywhere as long as they have proper online connections, login IDs, and passwords.

-Organizations using old, unreliable equipment may benefit from the cloud since the data is not saved locally. If the server or individual computers stop working, the information is not lost and is still available.

However, there are risks associated with the cloud system. For example, the program may not be available online for long periods. So, before selecting a cloud system, check its reliability through Internet searches and word-of-mouth.

Once the organization decides to go online, management must trust the Internet provider to provide adequate security for the data, which may include donor information. Not surprisingly, data security of cloud systems is a major concern for both for-profit and nonprofit users.

Another issue with the cloud is the data transfer. If a nonprofit employs the cloud and then moves to another system, the existing data will need to be downloaded and transferred to another program. The cloud provider should allow for such transfers and help the organization in this matter, but some charge fees, so inquiries about this matter are beneficial to avoid surprises later.

Interested on CPE credits regarding nonprofits?  Online Practical CPE Courses

You can also check out my books:

Nonprofit Finance: A Practical Guide — Nominated for a  2016 McAdam Book Award

15 Quick Tips on Becoming a Great Consultant  — Free on Kindle Unlimited

 

Another Nonprofit Exec in Jail

Not to be too paranoid here, but I just read an article about the Simi Valley Community Foundation whose former executive director stole over $45,000. According to the news, she forged a second signature on the checks used to pay her own mortgage.  Sadly, this embezzlement cost the organization its reputation as it had to stop operations, at least for now.  A total disaster.

It’s not clear how exactly the theft was discovered, but board members noted something odd, hired a forensic accountant to review the records, and went to the police with evidence of embezzlement. So, I give credit to the board for finding this out, but this theft had been going on for awhile.

So, what can a board do to prevent or identify financial fraud faster?

1- Knowledge –Get people on the board who understand financial matters and can ask the right questions. The board cannot have the obligation to fundraise and provide oversight only. Board members should have different backgrounds with least one person having the education and experience to really understand the information provided and ask good questions. Had this person been on the board of this Simi Valley nonprofit, the fraud may have been identified earlier.

2- Online Access –Have someone from the board check on the bank accounts of the organization online. He or she should review checks and deposits, looking for checks that don’t look right. Just having a policy about this review may deter fraud. Employees may think twice before forging signatures or doing something odd when they know that someone would be looking at the bank transactions regularly.

3- Pay attention –Listen to complaints from staff, donor, and vendors. Oftentimes, information that could be construed as gossip can be useful in pointing you in the right direction. People talk. Even though it’s not clear how the board of the nonprofit became aware of something wrong, my bet is that someone saw something and talked about it. Some nonprofits have started using hotlines for people to report possible fraud anonymously, a very good idea.

4- Variances –Pay attention to the actual vs. budget reports. Looking at this fraud, one may wonder how the $45,000 theft was classified and shown on the financial reports. The amount didn’t show up all at once, but it was likely classified as a budget item. So, if an overage is noted, the board should ask for back up documentations, such as bills.Talk only doesn’t explain financial issues.

5- System reports –Review new vendor/change vendor reports once a month to question any odd new vendor or changes. In this situation, the bank where the mortgage was paid to would have been added at a certain point to the accounting system. Had this report been reviewed, it may have flagged the bank as an odd vendor. Some accounting systems can send an email whenever a new vendor is added or changed, making this task automatic.

6- Bank reconciliations — Check on bank reconciliations, making sure they are done monthly. Keep an eye on deposits that are recognized in the accounting records, but don’t seem to be in the bank.  Also, look at the detailed outstanding checklist. This can be done online using the accounting system and can be emailed to someone at the board. If a check shows up at the bank, but not on the accounting records of the organization, it could be a red flag.

7- Self-reliance –Don’t count on auditors to notice embezzlement. Audits are designed to assure reasonableness of financial statements and they may identify fraud, but not always, especially when done by management. When something seems wrong, not it, and don’t wait for the auditors to figure it out. Insiders are the first people to note things that don’t seem right.

8- Education — Educate all employees on fraud and embezzlement. Nonprofits should have this topic on its policies and procedures documentation and not be embarrassed about it. Fraud happens not just with stealing funds, but in other areas as well, such as equipment theft and overtime pay without authorization. Just showing this awareness and clarity over fraud may prevent it in the first place.

It’s a shame that nonprofit boards must be always on alert for fraud and embezzlement, but that’s the reality of the situation.  Once a scandal happens, it’s hard for the organization to regain the trust and respect of donors, making it hard to move forward.

So, it’s time to talk about this issue openly and set up written policies and procedures with tasks specifically designed to prevent and identify fraud and theft.  The ideas presented here won’t assure boards that they are safe from this issue, but are steps in the right direction.  Each organization is different and I’m sure many will need more control features than the ones presented here.  The crucial point here is that fraud signs cannot be ignored by the board.

Interested on CPE credits regarding nonprofits?  Online Practical CPE Courses

You can also check out my books:

Nonprofit Finance: A Practical Guide — Nominated for a  2016 McAdam Book Award

15 Quick Tips on Becoming a Great Consultant  — Free on Kindle Unlimited

Setting up an Accounting Dept– Some Pointers

 

Many growing for profit and nonprofit organizations find themselves with financial reports that make no sense, “forgotten” revenues and slow bill paying processes. They may be at a point where the part-time bookkeeper is over his or her head and flooded in work. So, what can you do? Below are some ideas to get you going.

Identify accounting tasks

You can look at accounting tasks and divide the work within these tasks. For example, a typical accounting department performs the following work:

  • Pay bills – Accounts Payable
  • Recognize revenues – Accounts Receivable
  • Process payroll – Payroll Administrator

Other tasks associated with an accounting department are: Cash management, bank reconciliations, budgets, financial reporting, and taxes. In large businesses, each of these functions is performed by one individual or more. In smaller firms, tasks are shared and the staff is supervised by a manager or a controller, who often is responsible for financial policies and procedures for the organization.

Analyze functions

Many businesses, including nonprofits, organize their accounting department using flowcharts and job descriptions. You don’t want to have the same task be performed twice or three times, but also,  you don’t want to miss an important process. Some nonprofits hire outside consultants to help them in organizing their department for maximum efficiency, while considering risks and controls. Unfortunately, this last option is usually used after a fraud or loss situation, when people are traumatized and willing to pay for professional advice.

Hire people with proper accounting skills

A common mistake is to assume that accounting is easy and can be done by the person who is a receptionist or works in another part of the organization. Without training or education, this person should be able to perform accounting functions of a full-charge bookkeeper. That’s a mistake and is not fair. Hire accounting people who have the proper education and experience. Accounting managers or controllers should have at least a bachelors’ degree in accounting. Someone with a four-year degree in business and a few years of accounting experience may also qualify.

Segregation of duties

As you organize the department, consider segregation of duties. For example, the person who opens the mail or receives money should NOT be the person who books revenues in the accounting system. If the person running accounts payable is also doing bank reconciliations, then a manager or controller should review the reconciliation and look at cashed checks. Why?  To have check-and-balances, internal controls, to prevent and correct mistakes or misappropriations.

Background checks 

Don’t forget to run background checks on all employees and volunteers dealing with accounting and cash functions. Make this a policy within your organization, so that people understand the situation as one of internal controls, not just paranoia.  Actually, many insurance companies require this step before issuing policies against theft and fraud.

Interested on CPE credits regarding nonprofits?  Online Practical CPE Courses

You can also check out my books:

Nonprofit Finance: A Practical Guide — Nominated for a  2016 McAdam Book Award

15 Quick Tips on Becoming a Great Consultant  — Free on Kindle Unlimited

Working at a Nonprofit — Tips

Thinking about working for a nonprofit?  This sector is an important segment of the US economy with the Bureau of Labor Statistics reporting that in 2014 nonprofits accounted for 11.4 million jobs, 10.3 percent of all private sector employment. So, there are jobs out there within the nonprofit world, but it’s important to note some cultural issues that generally apply to most jobs within this sector. The fact that nonprofits don’t care about profits creates certain differences in the workplace that may not be that obvious.

Here are some pointers about the nonprofit environment to consider:

Supportive environment

While the for-profit business expects employees to be outgoing, ambitious, go-getters, the nonprofit organization looks for employees to get along, to be part of a team. To this end, nonprofits’ employees may receive more hand-holding and more support than in other environments.  Also, the workplace is likely to be more flexible and less formal with good benefits and time-off policies. This type of culture is suitable for those who want to be part of something bigger than themselves and value team processes and causes over personal ambitions.

More time to make decisions

Decisions, including major ones, are made in a team setting, built on consensus. Although there are a structure and managers, teamwork and team decisions are the norms. This means that many decisions take a long time to be made,  after meetings and considerations. Compared to the for-profit model, the nonprofit is more democratic, but it comes with the price of things moving at a slower pace. This can be frustrating for those used to the for-profit world, but it can also give you the opportunity to be heard.

External forces

Nonprofits usually depend on donors and grantors to operate and any changes within these groups can affect the organization in unexpected and swift ways. Employees need to change priorities quickly and to adapt to a new situation regardless of what the boss said just a few days before. This can be disconcerting and stressful to many, so employees need to be flexible and calm. If you’re looking for work at nonprofits, inquire about funding and programs stability.

Variety of contacts

Employees at nonprofits have contacts with customers, government entities, and volunteers, making the people very versatile in dealing with different situations. In addition, many people are attracted to nonprofits because they are bright, passionate and committed to the organization. This combination can result in a very interesting workplace, albeit it can also get too dramatic. Since many employees have personal investments in the organization, disagreements and issues may become emotional. Understanding this situation can help in not taking things personally and not becoming part of the drama.

These are just a few pointers that are general in nature based on my experience. As you can tell, working at a nonprofit is not for everyone, but it can be very rewarding on a personal level to certain individuals. Salaries may not be as competitive as regular businesses, but perks like flex schedule, benefits and the ability to make a difference in a community are very attractive for many people.

 

Interested on CPE credits regarding nonprofits?  Online Practical CPE Courses

You can also check out my books:

Nonprofit Finance: A Practical Guide — Nominated for a  2016 McAdam Book Award

15 Quick Tips on Becoming a Great Consultant  — Free on Kindle Unlimited

Yikes— Nonprofit fraud again….

It’s too common to hear that a trusted person has taken money from a nonprofit illegally. Even a little bit makes my blood boil. Stealing from any business is bad, but from a nonprofit that provides goods and services to a community is just despicable. The problem is that the organization staff and managers may not aware that something is amiss or odd. People are busy with their own jobs and day-to-day activities to focus on situations that may point to internal fraud. Ghost employees and unauthorized overtime pay come to mind…

Ghost Employee

A ghost employee situation happens when someone is hired and paid, but he or she doesn’t really exist and, not surprisingly, never shows up for work. But nobody notices it. I have this happening with a nonprofit program for youth where a manager hired this new person, Mary, who filled out timesheets and was very, very quiet.  This manager was an old-timer with the organization and could control many aspects of the program, which was located in a different building. When asked, she would give glowing reviews of Mary, a great find.

This situation went on for a few months. Mary was too busy to show up at the HR office to sign papers and the manager would take all to her, as to not inconvenience the HR dept. that was busy with other activities. Paychecks and other stuff were always picked up by the manager as well. Things were going well for Mary, until someone in HR had to talk to her about benefits. And she was nowhere to be found. Actually, Mary never existed.

The manager used a relative’s name and social security to “hire” Mary.  In fact, the manager was cashing all payroll checks after Mary would endorse them to a “business checking account” the manager had.

This ruse may not have worked with a smaller nonprofit, where everybody knows everybody, but it can happen with large ones that operate in various locations and have many employees in various programs. What can be done to avoid this situation?

1- HR should meet every employee and match the face with a drivers’ license or other identification. If one cannot meet personally, then at least a video talk can be utilized.

2- Run background checks on all employees. In the case of Mary, for example, the last job the real one had was in the seventies, so a background check would have helped to identify strange jobs or situations that may raise suspicion.

3- If a nonprofit is large enough to have an internal audit department, auditors should always check on new hires to make sure they are working where they are supposed to be.  They also could personally meet all employees.

4- Payroll should distribute checks or check stubs to employees personally at least once every quarter or year. The point is to meet new employees.

5- Watch out for employees who claim very little or nothing to be withheld in taxes. They could be just fake employees used for someone else to cash in.

Unauthorized Overtime Pay

This type of theft happens when someone gives him or herself a bump in pay by showing overtime that wasn’t authorized and never happened. While many organizations have policies regarding payment of overtime, this fraud keeps going on in government, for-profit and nonprofit sectors. Take Amtrak, for instance, that paid $200 million in overtime in 2014. Unfortunately, a lot has been deemed as fraudulent according to the Amtrak’s Office of Inspector General  (Dailysignal.com).

The fake overtime bid can be perpetrated by staff, managers and payroll personnel  Actually, I have seen this happening when finance managers and others were not paying attention, didn’t supervise the guy running payroll, and didn’t know much about controls. He paid himself overtime running into the 5 figures, which was material for the nonprofit. Since overtime pay can be time and a half or even more, the nonprofit lost quite a lot of money with this fraud.

Sometimes employees fake a supervisor approval signature or may change a time sheet after it’s approved. This problem is minimized with online or electronic time sheets, but odd things can still happen, as the authorization may be automatic and not reviewed carefully by a supervisor.

Like the ghost employee fraud, this one is harder to identify with larger organizations, where details may get lost and certain people may work in more than one department, making payroll a bit complex and allowing the fraud to happen.

What can nonprofits do to minimize the problem of unauthorized overtime pay?

1- Any overtime claimed by managers should be scrutinized since managers are usually exempt from overtime.

2- Be sure managers, especially the ones supervising payroll, have the time and focus to reviewing payroll reports. Oftentimes, managers, especially in the administrative area, wear too many hats, are spread too thinly to don’t a good job in paying attention to payroll issues, including overtime and exceptions reports.

3- Department leaders should sign off on payroll reports at least once every quarter to document that they looked at the information.  The act of manually sign off usually make people pay a bit more attention to such reports.

4-Know the total payroll amount for each department and if totals on payroll reports are very different, inquire about it.  Usually, this is done using budget numbers related to wages and benefits.

It’s a shame that people are willing to take advantage of nonprofits to enrich themselves. But it does happen and organizations should do whatever they can to minimize this problem or they may lose funds and credibility, which could spell disaster for any business.  Don’t wait until something happens to take action to prevent these types of fraud.
Interested on CPE credits regarding nonprofits?  Online Practical CPE Courses

You can also check out my books:

Nonprofit Finance: A Practical Guide — Nominated for a  2016 McAdam Book Award

15 Quick Tips on Becoming a Great Consultant  — Free on Kindle Unlimited