Summer hours are in effect: Our offices close at NOON on Fridays from May 17th to July 12th
Please Note: Our office will be closed Wednesday, April 16th.
Summer hours are in effect: Our offices close at NOON on Fridays from May 17th to July 12th
Please Note: Our office will be closed Wednesday, April 16th.
The word “benchmark” may strike some as organizational lingo, but the practice of benchmarking often proves valuable for nonprofits. Nonprofits that incorporate financial benchmarks into their operations are better at anticipating negative financial trends and may even see revenues climb, expenses drop and efficiencies improve.
Benchmarking is an ongoing process of measuring an organization against expectations, past experience or industry norms for productivity and profitability and then making adjustments to improve performance in relation to those metrics. Ideally, your nonprofit will consider both:
Benchmarking provides essential information for effectively developing and implementing strategic plans. It helps an organization keep a watchful eye on its financial health and determine where costs can be cut and revenues increased. Nonprofits can use benchmarks to demonstrate their efficiency to stakeholders such as donors and grantors.
The first step is to define what your nonprofit needs to measure. Focus on the metrics that are most critical to the success of your mission and the key indicators of the organization’s financial health and operational effectiveness. For many nonprofits, those metrics will include:
Program efficiency (program service expenses / total expenses). This ratio identifies the amount you spend on your primary mission, as opposed to administrative and fundraising costs. This ratio is of utmost importance to stakeholders.
Fundraising efficiency (unrestricted contributions / unrestricted fundraising expenses). How many dollars do you collect for every dollar you spend on fundraising? The higher this ratio, the more efficient your fundraising. What qualifies as a good ratio depends on the organization’s size, its types of fundraising activities, and so on.
Operating reliance (program service revenue / total expenses). This ratio indicates whether your nonprofit could pay all of its expenses solely from program revenues.
Organizational liquidity (expendable net assets / total expenses). How much of the year’s total expenses is considered expendable equity or reserves? The higher the ratio, the better the liquidity.
Also consider benchmarks such as average donor contributions, expenses per member and other ratios that measure trends for liquidity, operating yield, revenue, borrowing, assets and similar metrics. No matter which benchmarks you choose, though, you’ll need reliable processes for collecting and reporting the data.
Comparing the nonprofit’s performance to benchmarks allows you to zero in on areas with the greatest potential for improvement. Armed with this information, you may be able to improve performance without making significant changes in your operations. Further, when comparing against external benchmarks, you might improve performance by simply adopting best practices used by your peers.
You can obtain information on other nonprofits’ metrics from websites such as GuideStar and Charity Navigator or from commercial software. Information also may be available from state government databases and trade associations. Take steps, though, to ensure you’re comparing apples to apples — that the two organizations you are stacking up against each other are truly comparable.
Some organizations have found it worthwhile to include staff in the benchmarking process. Their involvement in setting aggressive but attainable benchmarks — and measuring progress — can achieve buy-in and help foster teamwork as your nonprofit moves toward and surpasses its goals. Also include your financial advisor, who can help you select the most appropriate benchmarks for your organization and provide advice on how to improve your financial and operational performance.
Does your charity understand how to treat quid pro quo arrangements? “Quid pro quo” describes an arrangement in which a contributor gives money in exchange for something else. Whether it’s a supporter buying a ticket for your charity ball or an attendee at your charity auction successfully bidding on a hotel stay, such situations create an obligation for your nonprofit.
According to IRS rules, you may ignore contributions of less than $75, but if your not-for-profit receives more than $75 and provides a benefit to the donor, you must advise the donor that it’s a quid pro quo contribution. With such contributions, donors can deduct only the amount they pay in excess of the value of the goods or services.
Additionally, the charity must put in writing the amount donated, the goods or services provided in return, and a good-faith estimate of their value. You must also provide written acknowledgment when the donation is solicited or when it’s received.
If you’re holding a musical performance for which tickets are sold, for example, each ticket should disclose the tax-deductible portion of the ticket price (in this case, the market value of a similar event in your area). You must make the disclosure in a readily visible format. You can find examples in IRS Publication 1771, Charitable Contributions — Substantiation and Disclosure Requirements.
Your organization could be penalized for failing to furnish the proper acknowledgment and disclosure. Fines are $10 per contribution, up to $5,000 for the fundraising event. If the contribution is $250 or more, failure to provide and describe a good-faith value of the benefit may cost the donor their contribution deduction.
A key task for the charity is to value the goods or services. An example: Your organization takes a group of supporters to a sporting event and pays for their tickets. The supporters then make large donations. Determining quid pro quo is fairly simple in such cases: The amount your organization paid for the tickets would be considered the fair market value, and only the amount of the contributions in excess of this valuewould be a tax-deductible contribution for the donor.
It’s not as easy when some of the items given away have been donated to your organization. Let’s say, for instance, that your charity put on a one-day chocolate lovers’ event with live chamber music. The hosting hotel charged you a reduced amount for the candy and desserts as its contribution, and the chamber quartet performed at no cost. To establish the value to be reported to the donor, you must determine what it would cost someone to attend a similar event. In this case, you might be able to find a comparable activity in a nearby community.
All items auctioned at a charity auction (silent or regular) must have a value placed on them. The charity should ask the donor to put a value on the item unless it’s readily apparent, such as with a $50 gift certificate. The value should be the amount that a willing buyer would pay for the item in an “arm’s length” transaction — that is, in the marketplace.
The charity can then publish the item’s value on bid cards or in a catalog of auction items. This serves as the acknowledgment, and the buyers will be entitled to a deduction for the amount paid in excess of that value.
There are a few instances when quid pro quo reporting isn’t necessary:
Membership exception. This exception happens when membership benefits (free admission or free parking, for example) are provided, but the annual membership fee is $75 or less.
Token exception. This exception takes place when a contribution is for $49.50 or more and the goods cost less than $9.90, or the value of the benefit to the donor doesn’t exceed 2% of the donation or $99, whichever is less.
Intangible religious exception. This exception pertains to religious benefits, such as religious services or classes that are provided by an organization operated exclusively for religious purposes (excluding travel, education and consumer goods).
In other situations, it’s safer to report quid pro quo than not.
Making decisions on the value of items you give to contributors in exchange for contributions often involves a degree of subjectivity — value is sometimes in the eye of the owner. If you have any disclosure or reporting questions concerning contributions to your nonprofit and quid pro quo arrangements, contact your CPA.
Board members are your nonprofit’s ambassadors to the constituencies you serve. But when someone from the outside takes a look inside, does she or he see a reflection of your community, or are the images a mismatch?
In its infancy, a nonprofit may simply want to get the word out about its mission. So recruiting as many loved ones, friends and friends of friends as possible may be the most efficient approach. As time passes, however, the not-for-profit might find that it’s represented solely by one race, sex, religion or economic class.
Such lack of diversity can signal an underlying problem: a disconnect from the community. A nonprofit can improve its funding and program effectiveness when it reflects the population it serves, as well as the community (or communities) in which it operates.
What’s considered “healthy” diversity will vary from organization to organization. But think of it like this: The more diverse your board is in attributes, the more diverse it will be in thoughts and ideas. This diversity can come in many forms — physical, societal or economic. The goal is to mirror the population you serve in your appointees to the board.
If your bylaws limit the number of board members you can have at any given time, you might consider amending them to include the nonprofit’s commitment to board diversity. Be very careful, though, that the size of your board doesn’t become unwieldy. There are other ways to commit to well-balanced leadership and community input. (See the sidebar “Other paths to diversity.”)
The first step to a great mix is to ask board members to write their own profiles. In the instructions you give — or on the form you provide — include the attributes you consider important, such as skill sets and a particular demographic. From this information, you’ll be able to see what the board may lack.
Look at the group as a whole and assess where the organization lies on the diversity continuum. Imagine a scale from “1” to “5” with “5” displaying your nonprofit’s ideal diversity. Assess your members and give yourself a score. The diversity, or lack thereof, should be obvious. You may find, for example, that the board is underrepresented by females, persons of color, young adults or individuals with a financial background.
Identifying that your board needs more diversity is easy. Figuring out what to do about it can be more difficult. Start with your current board members. Communicate with them the need for diversity — if they haven’t already vocalized the need themselves. Ask members to dip into their personal and professional networks to help find the right individual(s) for your nonprofit.
Also gather input from your community and the organizations that serve it. Your chamber of commerce might be a place to start, but there are many options. If your nonprofit lacks the perspective of young professionals, for example, contact a local “young professionals” group, such as Colorado Springs’ Chamber Rising Professionals, Leadership Pikes Peak, or recent college graduates. Does your organization need diversity via a financial perspective? Express your need to a local CPA firm.
Local nonprofit associations can prove very helpful to your organization. Both the Colorado Nonprofit Association and the Center for Nonprofit Excellence (CNE) offer many resources and opportunities to help you find the right board members and to equip them for their board service.
Building an effective board of directors should be a challenge that your not-for-profit happily faces. Every time a board member resigns, an opportunity to give your organization the wings of diversity emerges.
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Too few nonprofits keep healthy operating reserves. A study of charities in the Washington, D.C., area, for instance, found that 57% of the organizations had insufficient operating reserves to cover three months of expenses — the minimum level many experts consider necessary to maintain financial stability.
Forgoing reserves leaves your nonprofit vulnerable to rapid or unexpected drops in revenue or jumps in expenses. You may regard such funds as optional or a luxury, but that’s just not the case these days.
The Nonprofit Operating Reserves Initiative Workgroup defines “operating reserves” as the portion of unrestricted net assets that nonprofits designate to sustain financial operations. The assets would be tapped in the event of significant unbudgeted increases in operating expenses or losses in operating revenues. Reserves also should be liquid, or easily converted to cash.
Note that operating reserves and cash on hand are not the same. Cash is often restricted for specific purposes, such as future projects or programs, and is therefore unavailable for other uses, unlike reserves.
Operating reserves also are distinct from endowments. Endowments are restricted, as well, and the organization can typically spend only the interest generated by the principal funds, making that money unavailable for daily operations.
The times are turbulent, and even when the economy gets solidly back on its feet, it won’t stay that way indefinitely. Operating reserves can help nonprofits bridge the gap when revenue streams or donations fall off because of a wobbly economy.
Robust reserves also allow organizations to seize unexpected opportunities, set aside funds for long-term goals and plans, and cover increased expenses after a natural disaster or other emergency hits.
You also can tap reserves to ramp up your staff and deliver services under federal contracts that don’t provide payment for 30 to 60 days. Reserves will come in handy, too, if grants fail to come through, or major fundraising events are delayed or canceled.
There’s no universal operating reserves benchmark that applies to every organization, and the question of an appropriate operating reserves amount can raise some thorny issues among stakeholders. Some may argue, for example, that the nonprofit has an ethical obligation to devote as much of its available resources as possible to carrying out its mission. Others might worry about the appearance or difficulty of soliciting additional donations while sitting on significant reserves.
Reserves, however, aren’t about accumulating wealth. They’re about securing the financial stability necessary to function effectively for the long run.
According to the Workgroup, you need to consider several questions when setting the goal amount, including:
The Workgroup recommends a minimum reserves level of 25% or three months of your nonprofit’s annual expense budget. The adequacy of reserves beyond that amount will depend on specific circumstances.
Organizations without sufficient operating reserves can run into trouble meeting payrolls, paying bills, providing services and retaining qualified staff. Your CPA can help you determine the amount of reserves you need to minimize such risks.
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For-profit subsidiaries of nonprofit organizations are strikingly diverse. Consider these real-life examples: In one part of the country, a nonprofit health maintenance organization (HMO) creates a for-profit subsidiary to offer health insurance unavailable through HMOs. Elsewhere, a university business school starts a venture capital company to fund worthy startups and give students a first-hand look at what makes businesses tick. And, an investors association acquires a software developer to broaden its product line and add investor clubs and individual investors to its target market. Sound interesting? In the wake of a severe recession — with a drop in public grants and private donations — for-profit endeavors can have a magnetic appeal as nonprofit survivors look for new sources of revenue. What’s the draw?What factors should a nonprofit consider before taking on the significant cost and responsibility of operating a for-profit company? You’ll need, of course, to weigh the pros and cons of this strategic move. Unrelated business income (UBI) is the top reason why nonprofits decide to create a for-profit enterprise. As a nonprofit, an organization can conduct a certain amount of revenue-producing activities unrelated to its mission, but it will pay tax on UBI profits. And if the IRS determines that your organization is pulling in too much gross revenue or net income, it could lose its coveted tax-exempt status. The same risk exists if the IRS decides that your staff is spending too much time on UBI activities. To avoid such scenarios, the nonprofit can usually transfer its UBI activities to a for-profit subsidiary and conduct activities under that umbrella. The organization can generate after-tax surpluses through the subsidiary and, after paying tax in the subsidiary, use the profits (in the form of stock dividends) to fund activities that fulfill the nonprofit’s mission. Care must be taken to keep the nonprofit and the for-profit separate. For instance, neither the subsidiary nor the nonprofit should distribute the proceeds to the nonprofit’s board members or key employees. That action could be considered private inurement and is strictly prohibited for nonprofits. Some see creating a for-profit subsidiary as a way to, in effect, pay for the next phase of a not-for-profit’s growth. For example, the fictitious American Society for the Prevention of Cruelty to Ferrets (ASPCF) has a profitable publishing arm in the nontraditional-pets field, and draws over 15% of its revenue from the publishing operation. The nonprofit should create a for-profit subsidiary to handle its publishing activities — or it might risk endangering its tax-exempt status if publishing profits continue to grow. Are there other incentives?Additional reasons why a nonprofit might want to launch a for-profit subsidiary involve internal flexibility and reduced risk in some areas. More leeway in setting compensation. Let’s say that the ASPCF wants to hire a nationally respected animal nutritionist to create a line of nontraditional pet food. With a subsidiary, one is able to attract and keep highly skilled employees in ways that are unavailable to tax-free entities — for example, through stock compensation and profit-sharing. Better outlet for research. If the nonprofit conducts research, it would automatically have a commercial outlet for marketing its discoveries. Taking the ASPCF example further, if the organization developed a nutritionally balanced snack for pet lizards, it could market the snack via the subsidiary. Reduced liability. Imagine, for instance, that a nonprofit leases to area businesses employees with criminal backgrounds and, thus, some risk of recidivism. The nonprofit may want to contain that activity within a subsidiary and thus protect itself from liability. What are the drawbacks?Despite the potential pluses, running a for-profit subsidiary comes with pitfalls. The nonprofit shouldn’t allocate too much of its resources to the for-profit or it will endanger its tax-exempt status. Additionally, the nonprofit must have a realistic idea of what taking on a for-profit endeavor will mean for the organization. Operating a separate entity has its own costs and complexities, such as management, personnel, tax, audit and other requirements. Ask yourself: Could the same function be done less expensively within your nonprofit? Spinning offIf your organization is considering creating a for-profit subsidiary, seek legal and tax advice at the onset. You’ll need to decide, for example, if either of the most popular structures for nonprofit subsidiaries — C corporations and, to a lesser extent, limited liability companies — is right for your goals. Additionally, your CPA can help you conduct a feasibility study and, if your idea survives, form a business plan and work out how to capitalize your endeavor. |
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With election season heating up, not-for-profits must take care not to stray into prohibited political activity that could jeopardize their tax-exempt status. The IRS has addressed the acceptability of several common activities. Knowing the agency’s position on these activities could save you tax trouble down the road. Ban on political campaign interventionThe Internal Revenue Code is clear: For a nonprofit to maintain its status, it can’t “participate in, or intervene in (including the publishing or distributing of statements) any political campaign on behalf of (or in opposition to) any candidate for public office.” But that doesn’t mean your hands are completely tied. If certain conditions are met, not-for-profits can indeed be active — though nonpartisan — players in the political arena. Voter contactNonprofits can conduct voter registration and get-out-the-vote drives if they’re conducted in a neutral, nonpartisan manner. But you can’t, for example, refer to any candidate or party, either in support or opposition. Voter education activities, such as the preparation and distribution of voter guides, are similarly allowed if conducted in a nonpartisan way. The IRS will consider whether the questionnaire used to solicit candidate positions or the guide itself demonstrates a bias or preference in content or structure with respect to the views of a particular candidate. The timing and distribution of voter education materials also could be relevant. Candidate appearancesA not-for-profit can invite a candidate to speak at an event in his or her capacity as a candidate if 1) it provides to all of the candidate’s rivals an equal opportunity to participate, 2) it doesn’t indicate support for or opposition to any candidate (including in introductions and communications about a candidate’s attendance), and 3) no political fundraising takes place. When evaluating whether equal opportunity to participate has been provided, the IRS will consider both the manner of presentation and the nature of the event to which each candidate is invited. You’ll probably violate the prohibition if, for example, you invite one candidate to speak at a heavily attended annual banquet but invite his or her opponent only to a poorly attended general meeting. If you invite a candidate to appear in his or her individual, noncandidate capacity, you must ensure that:
Candidates also may attend a not-for-profit’s event that’s open to the public as long as the organization doesn’t publicly recognize the candidate or invite him or her to speak. Business activitiesAn activity such as selling or renting mailing lists, leasing office space or accepting paid political advertising may constitute prohibited activity. The determination will depend on several factors. These may include whether the good, service or facility is available to rival candidates on an equal basis, whether it’s available to the general public, whether the fees charged are the nonprofit’s usual rate, and whether the activity is an ongoing activity of the organization (as opposed to conducted for only a particular candidate). Proceed with cautionViolation of the ban on political activity could result in the denial or revocation of your nonprofit’s tax-exempt status, as well as the imposition of an excise tax on the amount spent on the prohibited activity. The determination of whether an activity is political will ultimately depend on the specific facts and circumstances. But remember, the underlying criterion for an activity not to be political is generally that the activity clearly be nonpartisan. |
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If you’re thinking of making year-end donations to your favorite charities, you only have a little bit of time left! We've put together a list of tips to keep in mind to make sure the donations result in a deduction that will help minimize your 2011 tax liability.