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Office alert – Friday March 15th, 2024.
Due to the road conditions, majority of our staff will be working remotely today.
We want you to be safe, we have a drop off at COS on 3rd floor. If you are planning to come by the Denver and Springs office please make contact with your SKR contact first.
Office alert – Friday March 15th, 2024.
Due to the road conditions, majority of our staff will be working remotely today.
We want you to be safe, we have a drop off at COS on 3rd floor. If you are planning to come by the Denver and Springs office please make contact with your SKR contact first.
Because donations to charity of cash or property generally are tax deductible (if you itemize), it only seems logical that the donation of something even more valuable to you — your time — would also be deductible. Unfortunately, that is not the case; however, you can potentially deduct out-of-pocket costs associated with your volunteer work.
The basic rules
As with any charitable donation, for you to be able to deduct your volunteer expenses, the first requirement is that the organization be a qualified charity. You can use the IRS’s Tax Exempt Organization Search tool to find out.
Assuming the charity is qualified, you may be able to deduct out-of-pocket costs that are:
Supplies, uniforms and transportation
A wide variety of expenses can qualify for the deduction. For example, supplies you use in the activity may be deductible. As well as, the cost of a uniform you must wear during the activity may also be deductible (if it is required and not something you wear when not volunteering).
Transportation costs to and from the volunteer activity generally are deductible, either the actual cost or 14 cents per charitable mile driven, but you have to be the volunteer. If, say, you drive your elderly mother to the nature center where she is volunteering, you cannot deduct the cost.
You also cannot deduct transportation costs you would incur even if you were not volunteering. For example, if you take a commuter train downtown to work, then walk to a nearby volunteer event after work and take the train back home afterwards, you will not be able to deduct your train fares. But, if you take a cab from work to the volunteer event, then you potentially can deduct the cab fare for that leg of your transportation.
Volunteer travel
Transportation costs may also be deductible for out-of-town travel associated with volunteering. This can include:
Lodging and meal costs also might be deductible.
The key to deductibility is that there is no significant element of personal pleasure, recreation or vacation in the travel. That said, according to the IRS, the deduction for travel expenses will not be denied simply because you enjoy providing services to the charitable organization. But you must be volunteering in a genuine and substantial sense throughout the trip. If only a small portion of your trip involves volunteer work, your travel expenses generally will not be deductible.
Volunteer Time
Donations of time or services are not deductible. It does not matter if it is simple administrative work, such as checking in attendees at a fundraising event, or if it is work requiring significant experience. Regardless of the service being costlier to the charity if it had to pay for it, such as skilled carpentry or legal counsel, this volunteered time is still not deductible.
Keep careful records
The IRS may challenge charitable deductions for out-of-pocket costs, so it is important to keep careful records. If you have questions about what volunteer expenses are and are not deductible, please contact your tax adviser.
Charitable giving may help some filers reduce tax liability, particularly for high-income earners or those who have itemize deductions in excess of the new standard deduction. This 18 minute webinar shares a brief overview of tax reform and illustrates three approaches to planning for charitable giving.
As the new tax bill worked its way through Congress last fall, nonprofits across the country raised their voices high to share concerns about its disincentives for charitable donations — as well as the proposed repeal of the Johnson Amendment. Little was heard, though, about changes to the rules for unrelated business income tax (UBIT). It turns out that the final law, the Tax Cuts and Jobs Act (TCJA), includes several provisions that have the potential to boost your organization’s liability for the tax, regardless of whether you operate an unrelated business.
Why your UBI may grow
The most important change relates to how unrelated business income (UBI) is computed. The new law requires nonprofits to calculate UBI separately for each unrelated business, with the $1,000 deduction typically allowed applied to the aggregate UBI for all businesses.
Your UBI also can increase because net operating losses (NOLs) can only be claimed against future income from the specific business that generated the loss. Under previous law, you could use NOLs from one business to offset the income of another or to offset gains from alternative investments or pass-through entities, also considered UBI.
UBI also might grow due to a change in how certain fringe benefits are treated under the TCJA. In previous years, you could provide your employees qualified transportation benefits (including commuter transportation and transit passes), qualified parking fringe benefits and on-site athletic facilities free of income tax for both you and employees.
The TCJA, however, treats the payments for such benefits as UBI unless they are directly connected to an unrelated business (for example, parking benefits provided employees of an unrelated business). Congress made the change to create parity between nonprofits and taxable organizations. For-profit businesses lost a previous tax exemption for certain fringe benefits under the TCJA. The end result, though, is that nonprofits may owe UBIT even without operating any unrelated businesses.
It’s not all bad news. The new law also changes the corporate tax rate that nonprofits pay on UBI to 21% from a range of 15% to 35%. In some cases, a nonprofit’s UBIT liability might fall despite your higher UBI.
What you can do
Fortunately, you have some options to avoid the worst effects of these changes. For example, you may conduct an audit of your unrelated businesses. You might find that you have been over-reporting your UBI because you have not captured all the related business expenses.
Another option for nonprofits with multiple unrelated businesses is forming a single taxable corporate subsidiary to hold all of them, which would permit you to again offset their income and losses. Any restructuring will likely carry some implications, whether tax-related, financial or operational.
Act now
Changes to the UBIT rules have not received as much coverage as some of the other TCJA provisions, but they may impact your organization. Consult with your CPA to determine steps you can take to minimize the impact of tax reform on your bottom line.
If your organization anticipates raising big amounts with a raffle at your next fundraising event, you might want to step back and revisit your assumptions. States vary, but in the State of Colorado you must apply for a State Bingo-Raffle License. The IRS has new rules related to unrelated business income (UBI) and raffle income may be subject to UBI tax. Learn what you need to know before you place all your bets on this event.
The Children’s Hospital of CO sought a property tax exemption for its day care center, which gave tuition discounts to some clients. The CO Court of Appeals affirmed the Board of Assessment Appeals’ denial, stating the center didn’t meet the statutory requirements for an exemption. One reason: It wasn’t used strictly for charity. Also, tuition discounts were the same for everyone below the federal poverty line, and not “on the basis of ability to pay.”
Nonprofits typically work hard to make the world a better place and their success depends greatly on financial health and integrity. That is why many nonprofits need to employ a chief financial officer (CFO). Depending on your size and other factors, you may be one of them.
What are the CFO’s responsibilities?
Generally, the nonprofit CFO is a senior-level position charged with oversight of the organization’s accounting and finances. He or she works closely with the CEO/executive director, finance committee and treasurer and often serves as a business partner to your program heads. CFOs typically report to the CEO/executive and director or board of directors on the organization’s finances, analyze investments and capital, develop budgets and devise financial strategies.
The CFO’s role and responsibilities will vary significantly based on the organization’s size, as well as the complexity of its revenue sources. In smaller nonprofits with budgets of $1.5 million to $10 million, CFOs often have wide responsibilities — possibly for accounting, human resources, facilities, legal affairs, administration and IT. Midsize organizations, with budgets running up to $40 million and simple funding and programming, also may require their CFOs to cover such diverse areas.
In larger nonprofits, though, CFOs usually have a narrower focus. They train their attention on accounting and finance issues, including risk management, investments and financial reporting. CFOs of midsize organizations with diverse programs (for instance, several programs that generate revenue) or governmental funding may have a similar focus.
What are your requirements?
Nonprofits with small budgets and straightforward operations probably assign these responsibilities to the executive director or choose a more affordable option, such as hiring an outsourced CFO. As organizations grow and their financial matters become more complex, though, CFOs can help steer the ship.
Experts suggest weighing the following factors when determining whether to bring a CFO on board:
Static organizations are less likely to need a CFO than nonprofits with evolving programs and long-term plans that rely on investment growth, financing and major capital expenditures.
Who is right for you?
With CFOs playing such an essential role, your nonprofit should devote considerable time and effort to hire someone with the right qualifications. At a minimum, you want a person with in-depth knowledge of the finance and accounting rules particular to nonprofits. A CFO who has only worked in the for-profit sector may find the differences difficult to navigate. Nonprofit CFOs also need a familiarity with funding sources, grant management and, if your nonprofit expends $750,000 or more of federal assistance, single audit requirements.
What about educational and professional credentials? The ideal candidate should have a certified public accountant (CPA) designation and optimally an MBA.
In addition, the position requires strong communication skills, strategic thinking, financial reporting expertise and the creativity to deal with resource restraints. It also is useful if the CFO has had experience in an organization with a wide range of functions — for example, human resources and IT — so that he or she can identify when outside professional expertise vital to the success of your organization is needed.
Finally, it is beneficial to find a CFO who has a genuine passion for your mission is highly beneficial as it makes it easier for the CFO to understand that success for a nonprofit is not only about the bottom line.
Asset to your organization
CFOs bring many advantages to the table. Not only can they help maintain fiscal health and assist the organization in achieving its goals, but they also can boost your credibility with potential donors and watchdogs. If your budget is growing and financial matters are becoming more complicated, you may want to add a CFO, or outsourced CFO, to the mix.
Sidebar: The outsourcing alternative
Does your organization lack the size or complexity to warrant having a full-time chief financial officer (CFO) on staff, but desire the financial peace of mind the position may provide? Nonprofits often look to existing staff when filling the CFO position, but in-house accounting staff may not possess the requisite financial expertise. A popular option is to outsource CFO responsibilities to your CPA firm. With outsourcing, you gain cost-efficient access to top-notch expertise as well as other benefits at a far less cost. An outsourced CFO may also provide a strategic sounding board for the CEO/executive director and board of directors. To learn more, please contact SKR+CO’s Business Advisory team.
More than three-quarters of nonprofits are at least “somewhat likely” to pursue growth through expanded fundraising efforts during the next 12 to 18 months, according to a recent study. Nonprofit Finance Study: Managing Growth, conducted by nonprofit software firm Abila, also found that 84% of the financial professional respondents expect to seek new grant funding opportunities. Nonprofits are at least “somewhat likely” to pursue partnerships with other organizations (72%), provide new services that will bring in new revenue (69%) and seek corporate sponsorships (67%).
The results don’t only highlight a desire to grow among nonprofits. They also reflect the respondents’ recognition that growth makes risk management more challenging. More than 60% indicated that, as their organization grows, their ability to manage risk becomes somewhat or much harder.
If your organization is poised for growth, the report suggests a number of risk management activities. Among them: creating contingency plans for future funding uncertainty, maintaining compliance with funding requirements, assessing internal controls and training employees.
One out of three nonprofits that file paper Forms 990-EZ make a mistake. That’s according to the IRS, which is attempting to reduce errors with an updated form. The form has 29 “help” icons to help small and midsize nonprofits avoid common missteps.
The icons describe key information you need to complete many of the form’s fields, and provide links to useful information on the IRS website. Once organizations complete their forms, they can print them for mailing to the IRS. SKR+CO can work with you to ensure your 990 EZ is filed properly.
When natural disasters hit, many people look for ways to help the survivors get back on their feet. And some nonprofits have found particularly innovative approaches to compound the efforts they make and donations they receive. The Los Angeles Times reports, for example, that one charity, Direct Relief, received over $500,000 from thousands of online gamers in the wake of the 2017 hurricanes.
Gamers also raised more than $5 million for Save the Children over the last five years by holding marathon gaming sessions on live-stream platforms such as Twitch and Gaming for Good. The platforms let viewers watch and talk to their favorite players. The resulting donations — largely from young, male first-time donors — have prompted more nonprofits to reach out to the gaming community to build alliances.
Most nonprofits are understandably laser-focused on their mission, and other, seemingly less-critical matters may fall between the cracks. But if the finance function does not receive the attention it deserves, you run the risk of IRS penalties, reputational damage and lost revenue.
Here are four common mistakes related to managing the finance function:
According to the IRS, unreported business income ranks as one of the most common tax filing errors made by nonprofits. Revenue generated from a trade or business that your organization regularly engages in, but that is not substantially related to furthering its tax-exempt purpose (other than the need for funding), may well be subject to the unrelated business income tax (UBIT).
Generally, an exempt organization with $1,000 or more of gross income from an unrelated business activity must file Form 990-T. The nonprofit must also pay estimated tax if it expects its tax for the year to be $500 or more.
Nonprofits have long turned to independent contractors in the face of tight budgets and small staffs. Contractors can provide valuable flexibility, reduce administrative work and cut your costs and potential liability.
The IRS, however, has strict tests for determining whether an individual is indeed an independent contractor or is actually an employee for whom you must withhold, and pay, payroll taxes. If the IRS reclassifies any of your contractors as employees, you will likely find yourself on the hook for back payroll taxes, interest and penalties. You also may be subject to minimum wage and overtime laws, Social Security and Medicare contributions, and unemployment and workers’ compensation premiums.
Nonprofits sport plenty of choices when it comes to off-the-shelf accounting software packages. Although these products can improve efficiency, you can rely on them too much. The fact is that accounting software is not fail-safe; it may not flag a mistake or spot possible fraud.
Even with the most expensive and sophisticated software, garbage in means garbage out — the output, in other words, is only as reliable as the input. For example, if an employee enters cash receipts for the wrong amounts or dates, or simply fails to enter them at all, that may have a domino effect. Everything from financial statements to tax filings potentially may be impacted. You need a knowledgeable individual (someone other than the person who makes the entries) to review journal entries, reconcile account balances and perform other checks and balances.
An overreliance on software also may lead to inadequate investment in accounting resources. Some organizations may count on volunteers to serve as their accountants. Think about the critical role your financial reporting plays in obtaining funding, though. Can you really afford to leave it to underinformed volunteers or one-size-fits-all software?
An option some nonprofits are turning to is to hire part-time or interim CFO and controller contractors. By design, this service is performed by an independent, c-suite level executive at a fraction of the budget.
Mistakes in the oversight of the finance function can get in the way of accomplishing your organization’s mission. By allocating sufficient resources to this area, you can fortify your financial footing, protect your reputation and arm your leadership with vital information for decision-making.
When President Trump signed the massive federal income tax overhaul into law on December 22, 2017, much was made of nonprofits’ understandable concern that the higher standard deduction would reduce incentives for charitable giving. The concern is, of course, extremely important, but the new law also includes several other provisions that may affect nonprofits.
The Tax Cuts and Jobs Act (TCJA) has substantially lowered the corporate tax rate to 21%, a significant benefit to any nonprofits already paying unrelated business income tax, which is imposed at the corporate rate. But when it comes to calculating the income that is subject to this tax, the new law brings a significant change for nonprofits.
The TCJA requires nonprofits to compute unrelated business taxable income (UBTI) separately for each unrelated business activity and pay tax on any activity with net income. That means nonprofits cannot use a loss from one unrelated business to offset income from a different unrelated business for the same tax year.
They may, however, use one year’s losses on an unrelated business to offset profits in a different year for that business, subject to certain restrictions. For example, if your nonprofit incurred a loss in its bookstore business in 2018, it can use that loss to offset bookstore profits in 2019.
The TCJA also makes certain fringe benefits includable in UBTI. These include qualified transportation benefits (for example, transit passes), qualified parking benefits and access to any on-site athletic facility.
The TCJA also imposes a 21% excise tax on “excessive” executive compensation. The tax applies to the sum of any compensation (including most benefits) in excess of $1 million paid in the tax year to a covered employee plus certain large payments to that employee upon his or her departure from the organization (known as “excess parachute payments”).
A “covered employee” means a current or former employee reported as one of the five highest paid employees for any taxable year beginning after 2016. Licensed medical professionals are not covered employees for this tax.
But what is an “excess parachute payment?” A payment generally is considered an excess parachute payment if two conditions are met:
The excess parachute payment subject to the excise tax is the amount of the parachute payment less the base amount.
The increase in the standard deduction — it is expected to reduce the number of taxpayers who itemize and, thus, can deduct charitable contributions — is not the only change that may affect giving.
For example, the TCJA doubles the estate tax exemption to $10 million (indexed for inflation) through 2025. With fewer wealthy individuals at risk of paying this tax, fewer people may make the generous donations that have been partly motivated by a desire to shrink their taxable estates. Plus, the TCJA eliminates any deduction for donations made in exchange for the right to buy season tickets to college athletic events.
The TCJA does raise the limit on cash donation deductions from 50% of adjusted gross income to 60%. But cash donations at this level are uncommon, so the higher limit may not stimulate much additional giving.
Some nonprofits issue tax-exempt bonds to finance construction and other capital activities. These bonds typically pay lower interest rates than other bonds. But investors are willing to accept the lower rates because they are not required to pay income taxes on the interest.
The TCJA, however, repeals the tax-exempt treatment for interest paid on a bond issued to refinance another tax-exempt bond. An “advance refunding bond” is used to pay principal, interest or redemption price on a prior bond issued more than 90 days before redemption of the refinanced (refunded) bond.
Let’s say you issue tax-exempt bonds at 4% interest but later discover you can refinance the bonds at 3% interest. Under the TCJA, the interest payments on the 3% advance refunding bonds will not be tax-exempt for investors — that means you will need to pay a higher interest rate because of the new bonds not being tax-exempt as recompense for the investors’ increased tax liability.
Despite the advantage of a lower tax rate on unrelated business income, the new income tax law may reduce overall charitable giving while simultaneously increasing some nonprofits’ costs. Your CPA may help identify the potential impact of charitable giving on your nonprofit as well as chart the best course forward.
Nonprofits nationwide are increasingly considering shared workspace arrangements to lower rising facility costs. These arrangements are particularly appealing in areas where nonprofits are being priced out of the real estate market and to those determined to cut operating costs. In the Pikes Peak region, the “health care” desert of services is in the 80916/10 area.
The term “shared space” refers to workspaces shared by small businesses, freelancers, consultants, start-ups and others. Depending on their needs, tenants can pay for short- or long-term access to private offices, conference rooms and common areas. Office equipment and services, such as high-speed Internet; photocopiers, printers and scanners; and coffee and office supplies, are shared among the tenants.
The shared space trend in recent years has led to the development of several options. For example, you could rent space in a dedicated shared workspace facility that also might provide “back-office” services such as HR. Many of these arrangements welcome a variety of businesses, but some cater primarily to nonprofits.
Similarly, some private foundations, with more space than they require, lease out the excess to nonprofits. As tax-exempt organizations, they avoid steep property taxes and pass the savings along to their tenants in the form of reduced rent.
When two or more nonprofits serve the same population, they may rent a shared facility and slice the cost in half. You may also rent out unused space to other organizations, generating revenue to offset your rent obligations.
The most obvious benefit of sharing space lies in potential cost savings. Why, for example, pay annual rent on space that includes a conference room you only use for semiannual board meetings? Organizations of all sizes benefit by efficient use of supplies and equipment, utilities and maintenance expenses.
Flexibility is especially valuable for nonprofits in the early stages of development or entry into a new market. Organizations usually do not want to commit to long-term leases before they have a handle on how much space they will need in the future.
Workspace is not the only expense you can share with other organizations to reap impressive savings. You also can cut your costs by:
Sharing staff. Your organization may, for instance, be too small to justify a full-time IT person — you might not have the need or the budget. But perhaps you and another organization together have sufficient need and funding for such support.
Sharing equipment. You probably have equipment that goes unused or is used below capacity. Think about sharing it with another organization whose needs for such equipment complement yours. (For example, a summer music program could share instruments with a program that operates during the school year.)
Sharing buying power. Consolidate your buying power with that of other nonprofits to obtain lower rates, discounts and possibly even improved service.
Shared space is not all rainbows and unicorns, though. Organizations need to take a variety of factors into consideration before taking the plunge. Some nonprofits, for example, may not want to share space with “competing” organizations that serve the same population or pursue similar funding sources.
You also should think about:
You can assess many of these issues by making site visits, both scheduled (to get the sales pitch) and unscheduled (to get a more realistic lay of the land).
As nonprofit budgets get tighter and come under more scrutiny, cutting your space-related costs may provide some peace of mind and pave the way to sustainability. Your CPA can help you determine whether moving your operations to shared space is a solid financial decision.