How Nonprofit Tax Form Helps Management

The nonprofit tax form 990 contains interesting questions and requirements that should be reviewed by the board, not just by the financial people. I highly recommend to download and print the full form, even if the nonprofit doesn’t need to file it.  You can check out the core pages at https://www.irs.gov/pub/irs-pdf/f990.pdf

Take a look at the 990 page 6- “Part VI Governance, Management and Disclosure “section” and what is asked in this page– it may be an eye-opener for many.

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As you can see, this form raises good questions that may be used to improve operations.  According to the instructions on the top, saying “yes’ to lines 2 through 7b requires explanations and management should review these items carefully.

Line 2 is about identifying people who may personally benefit from the organization, a possible private inurement situation, usually a no-no for tax-exempt organizations or a hefty excise tax. The take away here — be careful with business relations involving board members.

Line 5 is about the loss of assets, an intriguing item on the tax return. A “significant diversion of assets” according to the IRS is embezzlement, fraud, theft or other inappropriate use of funds that is the lesser of 5% of current annual gross receipts, 5% of total assets at year-end, or $250,000.  According to a Washington Post report in 2013, more than 1,000 organizations marked “yes” here and most were for embezzlement.  Besides giving details of the problem, it’s a good idea to also disclose any new internal controls used after the problem was disclosed to prevent it from happening again. Note that this is NOT confidential information.

Line 11 specifically asks about top management getting copies of the tax return and how reviews are conducted.  The board must be engaged in this process, even if they are not financial people.  They cannot say that they don’t know or understand the tax returns.

Line 12 asks about conflicts of interest while line 13 is about whistleblowing, and line 14 covers document retention and destruction policy.  These lines underscore the need for written policies, and under the conflict of interest item, the need to monitor those regularly.  The idea is to say “yes” to all of these.  And the take away for management is to make sure these policies are followed up by procedures to make sure they’re not just “lip service.”

Line 18 reminds organizations to make certain forms available for review, as required by law.   Such reminders are all over the tax form, including reminding nonprofits about reporting contractors and gambling winnings.  Management could highlight those items and follow up on them with the finance department.

Also, note that the 990 asks for the nonprofit’s mission statement as the first line, and also on Part III- Statement of Program Services Accomplishments.  The idea here is to match the mission statement to the programs.  If an organization mission is to provide food for the homeless, but programs relate to buying books to schools, the nonprofit may be at risk to lose its tax-exempt status, which can be a major problem.

 

You can check the new edition of the book Nonprofit Finance A Practical Guide at https://goo.gl/M563u9

 

 

 

#Nonprofit Jobs Tips

If you’re interested in working with a nonprofit, the best approach is to volunteer first to figure out the culture and style.  If that doesn’t pan out, then it’s time to search for jobs online.  Besides general job websites like monster.com, you could narrow your search to websites that specialize in the nonprofit sector. Below are some options:

https://www.workforgood.org/jobs/

https://www.idealist.org/

https://www.bridgespan.org/

https://www.philanthropy.com/

https://careers.councilofnonprofits.org/

http://nonprofit-jobs.org/

To get a job at a nonprofit, a passion for the organization programs is a must.  Read up on it online, including the latest news on it in the media to emphasize your interest.  Next are some issues I noted many people do when trying to get a job with a nonprofit.

Dress formally — Don’t assume that just because it’s a nonprofit, you can go in wearing sweatpants, for instance.  Proper dressing shows respect and professionalism. It’s better to overdress since most employers understand that people want to make a good impression.

Don’t talk badly about other organizations — This could be done saying that a place has a toxic environment or something more subtle.  Sometimes when giving examples of situations, people slip and show issues that should have been kept private.

Check tax returns at guidestar.com — Tax returns- 990- can show how the organization is doing financially, details about each program, and even salaries of board members and the five highest employees. Look at page 7- Part VII.

Happy job hunting!!

You can check the new edition of the book Nonprofit Finance A Practical Guide at https://goo.gl/M563u9

 

 

 

 

 

Nonprofit Finance and Management Explained

The second edition of my book, “Nonprofit Finance: A Practical Guide,” is out.  It includes detailed coverage of FASB update regarding reporting, details about liquidity and other details effective in 2018.   For example, the official financial reporting will show only two net assets, but internally, a nonprofit should maintain the three net assets separately and combine the temporarily and permanently restricted for reporting only.

Internal controls are covered in detail for cash, payables and computerized systems, giving ideas about how to minimize certain risks specific to the nonprofit sector.

Like the first edition, nominated for a McAdam Book Award, this second one has many examples and suggestions based on real-life experience, not just theories.  It was written with both the accountant and the non-accountant in mind, so that people of different backgrounds can benefit from the material and put it to good use right away.

You can check the new edition at https://goo.gl/M563u9

Is Your Nonprofit Well-Organized?

Are you starting or organizing your nonprofit?  Any business needs a setup to operate effectively, and nonprofits are no different. A basic organization may be a no-brainer for some people, but may not be that obvious many as well.

One of the challenges of nonprofits is to create and manage a structure that works well. Many founders of nonprofits are not managers and do not have a background in management. They are “program” people. They created the nonprofit to fulfill a goal, a dream that they are familiar with, but management is not their expertise.  Knowing the basic structure of a nonprofit can only help in setting up an organization that is functional.

It is important for founders and boards of directors to realize this issue and to find proper personnel or volunteers to fill out the needed spots. I have seen new, small organizations fail to follow their mission statements because they didn’t have a basic infrastructure, management, personnel to deal with proper insurance, and other risk factors.

A common structure is for nonprofit operations to be divided into three areas,  all supervised by the board of directors that often employs an executive director to oversee operations.

  • Programs/ Services — MOST IMPORTANT 

With no program, the organization has no reason to exist, so this area is crucial to any nonprofit. Programs follow the mission statement of the organization.  If the mission is to feed the homeless, for instance, you won’t see programs to improve antique cars.  When in doubt, read the mission statement carefully.  Most expenses are expected to be happening in this area.

  • Management and General — usually overhead

Management and General area is the backbone of the organization, including administration and accounting.  It’s also called General and Administration or G&A. Someone needs to pay the bills,  select insurance, pay employees, all functions of this area.  Usually, tasks cannot be assigned to a specific program and are considered to be overhead by many grantors.  This area typically incurs the most expenses after programs.

  • Fundraising

This is the marketing arm of the nonprofit, dealing with grants, events, and overall fundraising activities.  Also known as “development,” people in this area contact donors, write grant proposals, follow up on prospective donors, including business and foundations. Fundraising should have the least costs of a nonprofit, unless the org. is a new one or starting a new major program.

Identification of these three main areas of nonprofit operations is crucial to set up proper accounting systems, internal controls, reporting, and management.  Sometimes it’s not that obvious.  For example, someone working in contract compliance is most likely part of management, even though the work relates to programs as well.  Cost allocation can be a challenge to many nonprofits.

BEWARE>>> Note that tax returns and most financial reports are classified by these three areas, and the IRS asks about the organization mission statement on its 990 forms to verify that indeed the programs are linked to the org. mission.

Check out the book “Nonprofit Finance: A Practical Guide” ––  First edition Nominated for the McAdam Book Award
 

Four Quick Financial Tips for Nonprofit Board Members

Confused about what to look for when reviewing financial statements? Maybe a bit intimidated by all the numbers? Well, you are not alone. Many board members don’t really have a framework to evaluate financial reports and may miss important details. You don’t need to have an accounting background or to understand debits and credits to be able to focus on relevant areas. Below are four important areas to look for:

1 – Approve budgets that show most expenses in programs.

Programs are the most important part of a nonprofit and should be the main focus on any budget. If most of the expenses are allocated to administration or fundraising, it may mean that the organization will be launching a new program, or it could mean that the nonprofit lost its focus and needs to re-think its budgets as it relates to programs. If the focus is not on programs, something is wrong.

2 – Always look at the cash on the Balance Sheet/ Statement of Financial Position.

Many boards only review revenues and expenses, but not the cash balances. Cash is indeed king and should be evaluated carefully, as revenues and expenses may or may not show cash transactions, depending on the accounting basis used. If you see $10,000 in income and $1,000 in expenses, but only $100 in the cash balance, you should start questioning how the nonprofit is paying its bills.

3 – Pay attention at variances between actual and budget numbers cumulatively.

As budget vs. actual reports are presented, you should look for small variances in revenues and expenses that may end up becoming large differences after a few months. If revenues, for instance, are below budget by 5% every month, at the end of three months, the cumulative difference could be 15%, and the nonprofit may not have the resources to pay for its expenses as time passes. So, be sure to review cumulative variances as well as monthly ones.

4 – Review tax returns before they are filed.

The IRS promotes the idea of boards of directors reviewing tax returns before they are filed, as the 990, the nonprofit tax form, specifically asks if the board had reviewed the returns. The point here is to make the board accountable. Whether they like it or not, board members are responsible for the 990 information filed.

Check out the book “Nonprofit Finance: A Practical Guide- Second Edition” –– First Edition nominated for the McAdam Book Award

Tax Forms Nonprofits Need

It may come as a shock that nonprofits may be tax-exempt, but they may need to file tax returns and even pay taxes on certain income, including those at local, state, and federal levels. If nonprofits fail to file the forms, they may lose their tax exemption,  be liable for penalties and interest, making tax compliance a priority to many organizations. This article focuses on federal and California tax forms and requirements.

Below are some tax issues and forms nonprofits should mind:

Sales Tax

States and local authorities may collect sales tax on fundraising efforts, including proceeds from auctioned items. Some states allow for exemptions if the nonprofit files an exemption form before the event.

In California, sales taxes are applied to certain auction items, and the nonprofit must remit the tax using the form BOE401a2. Depending on the case, you may need to file the taxes online and pay using a regular check, e-check or another method.

Payroll Taxes

Nonprofit organizations must follow the law when it comes to payroll taxes, including withholdings and paying their share of Social Security tax unless the nonprofit has its own approved retirement plan.

Nonprofits file the same payroll forms, as for-profit business do, such as the form941, Employer’s Quarterly Federal Tax Return, and form 940- Employer’s Annual Federal Unemployment Tax Return. Also, a nonprofit distributes tax forms W-2 to employees in the beginning of the following year with summaries of salaries and withholding.

Note that states have their own payroll taxes that nonprofit must comply with and pay. California has the form DE1NP Registration Form for Nonprofit Employers and DE-9 Quarterly Contribution Return and Report of Wages.

Annual Information Tax Returns

Except for religious organizations and a few others, nonprofits are required to file a form within the 990 tax series a few months after their year-end. Small organizations may file online the e-card 990-N, giving the IRS basic information, such as name and address of the nonprofit. Larger organizations file the forms 990 Return of Organization Exempt from Income Tax, or the 990-EZ, which are more detailed, requiring specific numbers for revenues and expenses along with information on programs and board of directors. If the nonprofit doesn’t file taxes for 3 years, its tax-exemption may be revoked, including smaller organizations.

In addition, states like California have their own reporting and paying system. In California, for instance, requires annual reporting – FTB 199N of smaller organizations, with larger ones filing longer, more detailed form 199.

Unrelated Business Income Tax

There are instances where nonprofit may compete unfairly with for-profit businesses, such as a nonprofit opening a restaurant with no connection to its mission. Many exceptions apply, but if the organization is deemed to have unrelated business income, it must file form 990-T with the IRS and pay the proper tax, also known as UBIT.

Note that California requires that nonprofits with taxable income to fill out the form 109 Exempt Organizations Business Income Tax Return.  Other states may have their own reporting and paying requirements.

>>Be sure to double check the requirements for these forms at least once a year, since things change often and you don’t want to be out of compliance. For instance, Obamacare has requirements for businesses, including nonprofits, to provide health insurance for employees if the organization has a certain number of employees.  It also may be possible for smaller nonprofits to get the Small Employer Tax Credit.  Since Obamacare may change in the future, keep an eye of this and other issues.

 

Check out the book “Nonprofit Finance: A Practical Guide- Second Edition” –– First edition Nominated for the 2016 McAdam Book Award

What you need to organize a nonprofit well – Article-Blog

Nonprofits – Mind Your Programs

The program area is the most important facet of a nonprofit organization. It defines the organization and it justifies its existence.  Without programs, the nonprofit has no reason to exist.  It doesn’t mean that all programs should be the same since nonprofits have different goals. For instance, if the purpose of an organization is to help the homeless, the nonprofit will offer programs in accordance with this goal. Most likely programs would involve temporary housing, food distribution, and job training.

Identification

This seems to be a no-brainer, but sometimes it can be a challenge. A program in one place may be fundraising in another organization. For instance, a nonprofit could sell used clothes in a thrift shop. The thrift shop is most likely part of the fundraising area and not the program. However, if the organization provides job training for teens, the thrift shop may be part of a program, especially if it has teens working there, being trained in the shop’s operations and selling techniques.

The first step in identifying programs is to look at the organization’s mission statement. A good, clear mission statement is critical. The clearer and simpler the mission statement, the easier it is to identify major programs–the reasons for the organization to exist. Suppose a nonprofit’s mission statement is to “provide temporary shelter to the homeless.” It is simple and focused. If the organization hosts a car race, then it is not part of a program–most likely it’s fundraising.

On the other hand, an organization with the mission statement “helping people to become self-sufficient” is too general, increasing the chances of confusion about what is a program and what is not. The more focused the mission statement, the easier it is to identify programs versus other operational areas. It makes it easier for the organization to stay on track, as well.

It’s worth noting that the IRS is also interested in this area, as both program information and mission statement are required on the tax form 990. If programs don’t connect well to the mission statement, the organization tax-exempt status may be at risk.

>>> Beware

“Mission creep” is an important item that should be reviewed often.  This creep usually happens when certain stakeholders want to take the nonprofit in directions not really related to its mission statement.  Donors and grantors may also contribute to this creep by offering funds for programs outside the scope of the organization’s mission. It’s management responsibility to identify and avoid mission creep. Or the nonprofit will be all over the place without a real path or strategy. Depending on the case, it may jeopardize its tax exemption as well.

Check out the book d“Nonprofit Finance: A Practical Guide- Second Edition” –– First edition was nominated for the 2016 McAdam Book Award.