Successful nonprofits typically proceed along a standard life cycle. Their early stage precedes a growth period that runs several years, followed by maturity. The maturity (or governance) stage generally begins around an organization’s eighth year. By this time, the nonprofit has built its core programs and achieved a reputation in the community.

But no organization can afford to rest on its laurels. In fact, mature not-for-profits often face a critical fork in the road. The next step can lead to renewal — or stagnation and eventual decline.    

Shift to financial sustainability

If you lead a nonprofit in the maturity stage, you should set your sights toward sustainability. By now, your organization should have a good handle on its current resources and be adept at forecasting its needs. From a financial perspective, that means maintaining sufficient cash on hand to support daily operations, as well as adequate operating reserves. This also may be the time to initiate your planned giving and endowment efforts to sustain programs into the future.

Your organization probably requires more funds than ever. However, a nonprofit of this age must be wary of “mission drift,” which happens when an organization begins to make compromises to generate funds rather than stick to its mission.

At this point, organizations often may need more program and operational coordination and more formal planning and communications. Your nonprofit also may explore the possibility of alliances with other organizations. Such affiliations can both extend your organization’s impact and increase its financial stability. Alliances also can help reinforce your mission focus and prevent your nonprofit from getting too bogged down by policy and procedures.

The mature board of directors

Another way to increase financial stability is to add members to your board. A mature nonprofit’s brand identity may enable it to attract more wealthy, prestigious and well-connected members. Ideally, these members will have more to offer than simply money, such as expertise in a certain area or a strong personal commitment to your mission.

As your executive director and staff concentrate more on operations, your board needs to take an even greater leadership role by setting direction and strategic policy. The board may become more conservative, though. (The boards of younger nonprofits are usually more entrepreneurial and willing to take risks because less is at stake.)

Program considerations

When it comes to programming, mature nonprofits must take care not to be lulled into complacency. It is important to regularly review your programming, including the actual curriculum or content, for relevance and effectiveness. Your strategic plan should focus on the long range and may outline new opportunities.

Surveys can be a good way of keeping up to date on your constituents’ needs and interests, which can change over time. The results might lead to dramatic changes. One literacy nonprofit, for example, stayed relevant to its community by shrinking its literacy programming and offering more English as a Second Language services instead.

Celebrate but strive

In today’s competitive environment, any nonprofit that makes it to maturity has reason to celebrate. To continue to serve your mission, though, your organization must be strategic in both financial and program planning.

Dividends, interest, rents, annuities and other investment income are generally excluded when calculating unrelated business income tax (UBIT). But tax law provides two exceptions where such income will indeed be deemed taxable. And with IRS scrutiny of unrelated business income intensifying these days, nonprofits need to know about these potential pitfalls.

1.   Debt-financed property

When a nonprofit incurs debt to acquire an income-producing asset, the portion of the income or gain that’s debt-financed is generally taxable unrelated business income (UBI). Such assets are usually real estate — for example, an apartment building with income from rents not related to the nonprofit’s mission. But the assets also could be stocks, tangible personal property or other investments purchased with borrowed funds. 

Income-producing property is debt-financed if, at any time during the tax year, it had outstanding “acquisition indebtedness” — debt incurred before, during or shortly after the acquisition (or improvement) of property if the indebtedness wouldn’t have been incurred but for the acquisition. 

Certain property is exempt from this treatment:

Related to exempt purposes. If 85% or more of the use of the property is substantially related to a not-for-profit’s exempt purposes, it’s not excluded as debt-financed property. Related use can’t be solely to support the organization’s need for income or its use of the profits.

Used in an unrelated trade or business. To the extent that income from a property is treated as income from an unrelated trade or business, the property isn’t considered debt-financed, as the income is already UBI.

Used in certain excluded activities. Debt-financed property doesn’t include property used in a trade or business that’s excluded from the definition of “unrelated trade or business” either because it’s used in research activities or because the activity has a volunteer workforce, is conducted for the convenience of members, or consists of selling donated merchandise.

Covered by the neighborhood land rule. If a not-for-profit acquires real property intending to use it for exempt purposes within 10 years, the property won’t be treated as debt-financed property as long as it’s in the neighborhood of other property the organization uses for exempt purposes. The latter exception applies only if the intent to demolish any existing structures and use the land for exempt purposes within 10 years isn’t abandoned.

2.    Income from controlled organizations

Interest, rents, annuities and other investment income aren’t excluded from UBI if they are received from a for-profit subsidiary or controlled nonprofit. The payment is included in the parent organization’s taxable UBI to the extent it reduces the subsidiary organization’s net taxable income or UBI.
The IRS generally considers a corporation to be “controlled” if the other organization owns more than 50% of the “beneficial interest” — either stock in a for-profit or voting board positions in a nonprofit. For example, if a for-profit leases space from an organization that owns more than 50% of its stock, the lease payments are valid deductions from taxable income. But when these lease payments are received by the controlling nonprofit, they aren’t excluded from UBI.  

Proceed with caution

Failing to pay UBIT on debt-financed property or income from controlled organizations could have negative consequences, ranging from taxes, penalties and interest to, in extreme cases, the loss of tax-exempt status. Your CPA can help you stay on the right side of the UBIT law. 

The IRS recently announced a reduced user fee from $400 to $275 for filing the simplified form for recognition of tax-exempt status, Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Form 1023-EZ is shorter (only two pages) and more user-friendly than the regular Form 1023. The reduced fee became effective on 7/1/16.

To determine whether you are eligible to complete this simplified form, read the form instructions and click on the Form 1023-EZ Eligibility Worksheet link in the instructions. 

Prohibited campaign intervention

• Makes or solicits contributions to or for candidates or political organizations,
• Endorses a candidate or rates the candidates,
• Publishes or distributes partisan campaign literature or written statements (including online material), or
• Lets its representatives speak out about a candidate. 

Voter education

Voter guides 

Candidate questionnaires

Candidate appearances

Consequences of political intervention

In a update issued January 28, 2016, the Internal Revenue Service stated that beginning February 29, 2016, Form 990-N electronic submissions will be accepted through IRS.gov instead of Urban Institute’s website. 

Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or Form 990EZ, is used by small, tax-exempt organizations for annual reporting and can only be submitted electronically.

Registration required

Aside from the submission site change, 990-N filers will be required to complete a short, one-time registration before submitting their electronic form to IRS.gov. 

Previously-registered organizations may continue using the Urban Institute website through February 28, 2016.

For more information, visit the Form 990-N webpage.

Additional information

• Form 990-N, e-Postcard, Frequently Asked Questions
• Form 990-N, e-Postcard, Required Information
• Exempt Organizations educational website, StayExempt.irs.gov

Nonprofits often struggle with valuing noncash and in-kind donations, including the value of houses or other buildings. Whether for record-keeping purposes or when helping donors understand proper valuation for their charitable tax deductions, the task isn’t easy.

Although the amount that a donor can deduct generally is based on the donation’s fair market value (FMV), there’s no single formula for calculating FMV for every type of gift. (Note: This article focuses on valuing gifts for tax purposes rather than financial accounting purposes.)

FMV basics

The IRS defines FMV as the price that property would sell for on the open market. (A donor can’t claim a deduction for the contribution of services.) For example, if a donor contributes used clothes, the FMV would be the price that typical buyers actually pay for clothes of the same age, condition, style and use.

If the property is subject to any type of restriction on use, the FMV must reflect that restriction. Say a donor contributes land to your not-for-profit and restricts its use to agricultural purposes. The land must be valued for agricultural purposes, even though it would have a higher FMV for nonagricultural purposes.

Ultimately, FMV must consider all facts and circumstances connected with the property, such as its desirability, use and scarcity.

3 FMV factors

According to the IRS, there are three particularly relevant FMV factors:

1. Cost or selling price. The cost of the item to the donor or the actual selling price received by your organization may be the best indication of the item’s FMV. Because market conditions can change, though, the cost or price becomes less important the further in time the purchase or sale was from the date of contribution.

For example, you may have paid $2,500 for a top-of-the-line computer in 2010. But that computer certainly isn’t worth $2,500 in 2016 because it’s no longer top of the line. It may still have some value, though.

A documented arm’s-length offer to buy the property close to the contribution date may help prove its value to the IRS. The offer must have been made by a third party willing and able to complete the transaction.

2. Comparable sales. The sales price of a property similar to the donated property often is critical in determining FMV. The weight that the IRS gives to a comparable sale depends on:

• The degree of similarity between the property sold and the donated property,
• The time of the sale,
• The circumstances of the sale (was it at arm’s length?), and
• The market conditions.

The degree of similarity must be close enough that reasonably well-informed buyers or sellers of the donated property would have considered that selling price. The greater the number of similar sales for comparable selling prices, the stronger the evidence of the FMV.

It’s important, though, that the transactions take place in an open market. If the sales were made in a market that was artificially supported or stimulated, they might not be representative or indicative of the FMV. For example, liquidation sale prices typically don’t indicate FMV.

3. Replacement cost. FMV should consider the cost of buying, building or manufacturing property akin to the donated item, but the replacement cost must have a reasonable relationship with the FMV. And if the supply of the donated property is more or less than the demand for it, the replacement cost becomes less important to FMV.

Gifts of inventory

If a business contributes inventory, it can deduct the smaller of its FMV on the day of the contribution or the inventory’s basis. (The basis of donated inventory is any cost incurred for the inventory in an earlier year that the business would otherwise include in its opening inventory for the year of the contribution.) If the cost of donated inventory isn’t included in the opening inventory, its basis is zero and the business can’t claim a deduction.

Inventory that may receive a better valuation than other inventory includes that which is used solely for the care of the ill, needy or infants; book inventory or food for public schools; and scientific property for research. In addition, certain industries, such as the pharmaceutical industry, have specific standards for valuing donated inventory.

An important reminder

Even if a donor can’t deduct a noncash or in-kind donation (usually a piece of tangible property or property rights), in some instances you may need to record the donation on your financial statements. Recognize such donations (including the donation of services) at their fair value, or what it would cost if your not-for-profit were to buy the donation outright from an unrelated third party.

If you have questions about determining fair market value, we would be happy to help you. 

IRS substantiation rules apply to contributors

Your donors are gearing up for tax-filing season soon. It’s not too late to make sure that your organization is following the IRS donation “substantiation rules” so that your benefactors have the proof they need to deduct financial gifts. Proper documentation is also crucial so that your donors don’t have any future problems with the IRS.

Legal precedents exist

Case law generally supports the IRS. In the court ruling Durden v. Commissioner, a church had received $25,171 in contributions from a married couple. The taxpayers had canceled checks documenting these 2007 donations, and the church sent them a written acknowledgment of receipt. But the acknowledgment didn’t note whether the taxpayers had received any goods or services in exchange for their contributions. The IRS requires such a statement, so it disallowed the taxpayers’ deduction.

The taxpayers then obtained a second receipt from their church, stating that they hadn’t received any goods or services in exchange for their donations. The second receipt was dated June 21, 2009, and the IRS rejected it for failing to meet the “contemporaneous” requirement, which requires the notification to be obtained at the time of the gift.

The taxpayers appealed the IRS decision. Concluding that the couple had “failed strictly or substantially to comply with the clear substantiation requirements of Section 170(f)(8),” the Tax Court upheld the IRS’s disallowance of the deduction.

What’s required by the IRS?

For donors’ charitable contributions to be eligible for deductions on their income tax returns, they must follow the IRS “substantiation rules.” These requirements vary with the nature and amount of the donation, but clearly state that, if a taxpayer fails to meet the substantiation and recordkeeping requirements, no deduction will be allowed.

For cash gifts of under $250, a canceled check or credit card receipt is generally sufficient substantiation. If, however, any goods or services were provided in exchange for a cash gift of $75 or more, the charity must provide a contemporaneous written acknowledgment that includes a description and good-faith estimate of the value of the goods or services.

For cash gifts of $250 or more, as well as noncash gifts of $500 up to $5,000, the rules generally also require a contemporaneous written acknowledgment from the charity, which must include these four elements: 1) the donor’s name, 2) the amount of cash or a description of the property contributed (separately itemized if one receipt is used to acknowledge two or more contributions), 3) a statement explaining whether the charity provided any goods or services in consideration, in whole or in part, for the gift, and 4) if goods or services were provided, a description and good-faith estimate of their value.

If the only benefit the donor received was an “intangible religious benefit,” this must be stated. Goods or services of “insubstantial value,” such as address labels or other small incentives in a fundraising campaign, don’t need to be taken into account.

The requirements for noncash donations valued over $500 include attaching a completed Form 8283 to the donor’s tax return and, if valued over $5,000, include obtaining a qualified appraisal of the donated property. Before you accept such donations, it may be wise to confirm with the donors that they are aware of the requirements and have obtained an appraisal, if necessary.

Quid pro quo

A donation at the end of the year might be your supporters’ holiday gift to your nonprofit. Make sure that you reciprocate by giving them credit and verifying that their donations are properly documented.

The IRS has issued its cost-of-living adjustments for 2016. Inflation remains low, so many amounts are the same as last year, and those that did increase did so only modestly. Nonetheless, it’s helpful to know the 2016 amounts as you evaluate which 2015 year-end tax planning strategies to implement.

Individual income taxes

Tax-bracket thresholds increase for each filing status but, because they’re based on percentages, they increase more significantly for the higher brackets. For example, the top of the 10% bracket increases by $50 to $100, depending on filing status, but the top of the 35% bracket increases by $1,050 to $2,100, again depending on filing status.

The personal and dependency exemption increases by only $50, to $4,050 for 2016. The exemption is subject to a phaseout, which reduces exemptions by 2% for each $2,500 (or portion thereof) by which a taxpayer’s adjusted gross income (AGI) exceeds the applicable threshold (2% of each $1,250 for separate filers).

For 2016, the phaseout starting points increase by $700 to $1,400, to AGI of $259,400 (singles), $285,350 (heads of households), $311,300 (joint filers), and $155,650 (separate filers). The exemption phases out completely at $381,900 (singles), $407,850 (heads of households), $433,800 (joint filers), and $216,900 (separate filers).

Your AGI also may affect some of your itemized deductions. An AGI-based limit reduces certain otherwise allowable deductions by 3% of the amount by which a taxpayer’s AGI exceeds the applicable threshold (not to exceed 80% of otherwise allowable deductions). For 2016, the thresholds are $311,300 (up from $309,900) for joint filers, $285,350 (up from $284,050) for heads of households, $259,400 (up from $258,250) for singles and $155,650 (up from $154,950) for separate filers.

AMT

The alternative minimum tax (AMT) is a separate tax system that limits some deductions, doesn’t permit others and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT.

Like the regular tax brackets, the AMT brackets are annually indexed for inflation. For 2016, the threshold for the 28% bracket increased by $900 for all filing statuses except married filing separately, which increased by half that amount.

The AMT exemptions and exemption phaseouts are also indexed. The exemption amounts for 2016 are $53,900 for singles and heads of households and $83,800 for joint filers, increasing by $300 and $400, respectively, over 2015 amounts. The inflation-adjusted phaseout ranges for 2016 are $119,700–$335,300 (singles and heads of households) and $159,700–$494,900 (joint filers). (Amounts for separate filers are half of those for joint filers.)

Education- and child-related breaks

The maximum benefits of various education- and child-related breaks generally remain the same for 2016. But most of these breaks are also limited based on the taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGIs are within the applicable phaseout range are eligible for a partial break — breaks are eliminated for those whose MAGIs exceed the top of the range.

The MAGI phaseout ranges generally remain the same or increase modestly for 2016, depending on the break. For example:

The American Opportunity credit. The MAGI phaseout ranges for this education credit (maximum $2,500 per eligible student) remain the same for 2016: $160,000–$180,000 for joint filers and $80,000–$90,000 for other filers.

The Lifetime Learning credit. For 2016, the MAGI phaseout range for this education credit (maximum $2,000 per tax return) increases only for joint filers, to $111,000–$131,000 (up $1,000). The phaseout range remains at $55,000–$65,000 for other filers.

The adoption credit. The MAGI phaseout ranges for this credit also increase for 2016 — by $910, to $201,920–$241,920 for joint, head-of-household and single filers. The maximum credit increases by $60, to $13,460 for 2016.

(Note: Married couples filing separately generally aren’t eligible for these credits.)

These are only some of the education- and child-related breaks that may benefit you. Keep in mind that, if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible.

Retirement plans

Retirement-plan-related limits remain unchanged for 2016:

Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Most IRA-related MAGI phaseout range limits remained unchanged in 2016:

Traditional IRAs. MAGI phaseout ranges apply to the deductibility of contributions if the taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan:

• For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:

   

  • For a spouse who participates, the 2016 phaseout range limits remain the same as 2015: $98,000–$118,000.
  • For a spouse who doesn’t participate, the 2016 phaseout range limits increase by $1,000, to $184,000–$194,000.
• For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2016 phaseout range limits remain the same as 2015: $61,000–$71,000.

Taxpayers with MAGIs within the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

But a taxpayer whose deduction is reduced or eliminated can make nondeductible traditional IRA contributions. The $5,500 contribution limit (plus $1,000 catch-up if applicable and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.

Roth IRAs. Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:

• For married taxpayers filing jointly, the 2016 phaseout range limits increase by $1,000, to $184,000–$194,000.
• For single and head-of-household taxpayers, the 2016 phaseout range limits also increase by $1,000, to $117,000–$132,000.

You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

(Note: Married taxpayers filing separately are subject to much lower phaseout ranges for both traditional and Roth IRAs.)

Gift and estate taxes

The unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption are both adjusted annually for inflation. For 2016 the amount is $5.45 million (up from $5.43 million for 2015).

The annual gift tax exclusion remains at $14,000 for 2015. It’s adjusted only in $1,000 increments, so it typically increases only every few years. It increased to $14,000 in 2013, so it might go up again for 2017.

New year, the same or similar numbers

With inflation in check this year, many 2016 cost-of-living adjustment amounts are $0, and where there are adjustments, they’re minimal. If you’re unsure how this may affect your year-end tax planning or retirement planning, please contact us. We’d be pleased to help you tweak your plans based on next year’s adjustment amounts.

“Checkbook Philanthropy” Breeds Donor Dissatisfaction

A report from UBS Wealth Management Americas found that nine in ten millionaires say they make significant donations to charity, yet only 20% rate their giving approach as “extremely” or “very” effective. While the millionaires surveyed consider giving to be important, they often give haphazardly, in response to requests that come in. Only one in ten incorporates philanthropic giving into their financial planning. This “checkbook philanthropy” translates into lower satisfaction with the effect the donations have on the donors’ communities and broader society.

Notably, most millionaires see giving time to be as valuable as giving money and find the former more personally meaningful. Investors whose friends and family also are involved reap more satisfaction from the impact of their philanthropy than those who give or volunteer on their own.

So, what can not-for-profit's do if they want to address these findings? Encourage contributors to donate their time as well as their money. Also ask them to recruit family and friends for volunteer work and donations.

Not-For-Profit CEO Pay on the Rise

The Chronicle of Philanthropy’s annual compensation survey has found that executives of large not-for-profit's and foundations are starting to see bigger raises. This follows a long dry period during which the median annual increases basically just kept up with inflation.

For the 82 organizations on which the Chronicle had 2011 and 2012 data, the median change in salary was 4.9%. Since the end of the financial crisis in 2009, not-for-profits have increased top executive compensation modestly — on average about 3% per year. Excluding the organizations that reduced pay or kept it flat, the remaining organizations surveyed boosted their CEO pay in 2012 by 6.8%. The survey also found 18 CEOs with compensation exceeding $2 million. In comparison, chief executives of S&P 500 companies saw median compensation rise 9.5% in 2013, to $10.1 million.

New Tool Assigns Dollar Values to Social Projects

Based on social-science research, a new online tool designed by the Low Income Investment Fund (LIIF) puts dollar values on the social impact of investments in areas such as affordable housing, child care centers and improved schools in impoverished neighborhoods. LIIF developed its “social impact calculator” to assess how effective it is in creating opportunity and reducing inequality.

The calculator estimates the monetized impact of investments. For example, the impacts of a high-performing school would include boosted lifetime earnings, reduced odds of incarceration and decreased health care costs for students. LIIF is making the calculator and its methodology fully accessible to others at liifund.org/calculator.

Fall is upon us and kids are back at school. Working parents may need childcare before, during or after school. And we all know that the costs of childcare can certainly add up.

 

But there is good news: You may qualify for a federal tax credit that can lower your taxes. The IRS has put together some facts you should know about the Child and Dependent Care Credit.

10 Facts you should know about the Child and Dependent Care Credit:

1. Care for Qualifying Persons. Your expenses must be for the care of one or more qualifying persons. Your dependent child or children under age 13 usually qualify. For more about this rule see Publication 503, Child and Dependent Care Expenses.

2. Work-related Expenses. Your expenses for care must be work-related. This means that you must pay for the care so you can work or look for work. This rule also applies to your spouse if you file a joint return. Your spouse meets this rule during any month they are a full-time student. They also meet it if they’re physically or mentally incapable of self-care.

3. Earned Income Required. You must have earned income, such as from wages, salaries and tips. It also includes net earnings from self-employment. Your spouse must also have earned income if you file jointly. Your spouse is treated as having earned income for any month that they are a full-time student or incapable of self-care. This rule also applies to you if you file a joint return.

4. Joint Return if Married. Generally, married couples must file a joint return. You can still take the credit, however, if you are legally separated or living apart from your spouse. 

5. Type of Care. You may qualify for the credit whether you pay for care at home, at a daycare facility or at a day camp.

6. Credit Amount. The credit is worth between 20 and 35 percent of your allowable expenses. The percentage depends on the amount of your income.

7. Expense Limits. The total expense that you can use for the credit in a year is limited. The limit is $3,000 for one qualifying person or $6,000 for two or more.

8. Certain Care Does Not Qualify. You may not include the cost of certain types of care for the tax credit, including:

• Overnight camps or summer school tutoring costs. 
• Care provided by your spouse or your child who is under age 19 at the end of the year.
• Care given by a person you can claim as your dependent. 

9. Keep Records and Receipts. Keep all your receipts and records. Make sure to note the name, address and Social Security number or employer identification number of the care provider. You must report this information when you claim the credit on your tax return.

10. Dependent Care Benefits. Special rules apply if you get dependent care benefits from your employer. See Publication 503, Child and Dependent Care Expenses.

These tips are taken from IRS Special Edition Tax Tip 2015-12