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Summer hours are in effect: Our offices close at NOON on Fridays from May 17th to July 12th
Please note: Our offices will be closed on May 20th for IT upgrades. Limited availability from May 21-24 due to team training. We may experience short delays in accessing records and responding to inquiries.
The U.S. Department of Labor’s new overtime rules, which will make many more employees eligible for overtime pay under the Fair Labor Standards Act (FLSA), take effect December 1, 2016 — and nonprofits aren’t exempt. Even if an organization isn’t covered by the FLSA, its employees may be covered as individuals and thus eligible for overtime. Make no mistake: The new rules could have significant repercussions for the compensation of your white-collar workers — and, in turn, your ability to provide services.
The final rule increases the salary-level threshold for white-collar exempt employees from $455 to $913 per week or $23,660 to $47,476 per year. White-collar employees now can only be exempt from overtime if their jobs meet certain tests for executive, administrative or professional employees, and they also are paid an annual salary of at least $47,476.
The new rule also increases the salary threshold for highly compensated employees (HCEs) from $100,000 per year to $134,004 per year. The HCE threshold is used to evaluate the fairness of contributions to an organization’s retirement plan. HCEs must receive at least the full standard salary amount — or $913 — per week on a salary or fee basis without regard to the payment of nondiscretionary bonuses and incentive payments. But such payments will count toward the total annual compensation. The standard salary and HCE annual compensation levels will automatically update every three years.
The FLSA may apply to 1) businesses or similar entities (what’s known as enterprise coverage), or 2) individuals (individual coverage). Under enterprise coverage, the law applies to businesses with annual sales or business of at least $500,000. For nonprofits, this coverage applies only to activities performed for a business purpose (for example, operating a gift shop). Income from contributions, membership fees, many dues, and donations used for charitable activities don’t count toward the $500,000 threshold.
Under individual coverage, employees may be covered by the FLSA if they’re engaged in interstate commerce or in the production of goods for interstate commerce — regardless of whether an employee is engaging in such activities for a business purpose. For example, an employee is covered if he makes or receives interstate phone calls, ships materials to another state or regularly calls an out-of-state vendor and uses a credit card to buy food for a homeless shelter.
The new rule has obvious budget implications — the money to pay overtime to newly eligible employees will have to come from somewhere. Many have expressed concern that compliance with the rule will lead to the cutting of services.
In addition, according to the National Council of Nonprofits, organizations with government grants and contracts could find themselves in the position of having to cover higher labor costs than were contemplated at the time they entered into the agreements. They’ll be contractually bound to maintain services despite increased costs that might not be covered by the existing arrangements.
The new rule has some notable exceptions. The DOL has stated that teachers are exempt, as well as administrative personnel who help run higher education institutions. For example, academic counselors and advisors and intervention specialists aren’t subject to the FLSA’s overtime requirements if they’re paid at least the entrance salary for teachers at their institution. However, other types of nonprofits won’t be so lucky with their white-collar employees.
The DOL has also indicated that it won’t enforce the higher salary thresholds until March 17, 2019, for providers of Medicaid-funded services for individuals with intellectual or developmental disabilities in residential homes and facilities with 15 or fewer beds. During the nonenforcement period, the DOL will engage in outreach and technical assistance efforts to these providers.
December 1 will be here before you know it. Consult with your financial advisor to determine your best course of action for minimizing the negative repercussions associated with the new salary-level test if the FLSA applies.
Nonprofits have several options available for complying with the new overtime rules. Your options include:
Raising salaries. For employees who meet the duties test, have salary near the new salary level of $913 per week or $47,476 per year and regularly work overtime, you can increase their salaries to meet the new threshold and maintain their exempt status.
Paying overtime above a salary. You could continue to pay newly overtime-eligible employees a salary and pay overtime for any hours in excess of 40 in a week.
Redistributing workloads. You can redistribute workloads to ensure appropriate staffing levels while minimizing overtime.
Adjusting base pay and paying overtime. You could adjust an employee’s earnings to reallocate it between regular rate of pay and overtime compensation. The revised pay may be on a salaried or hourly basis but must include overtime payment when the employee works more than 40 hours in a week.
The DOL doesn’t require or recommend any one approach.
Microsoft’s philanthropic arm has announced that it’ll donate $1 billion in cloud computing resources over the next three years to nonprofits and nongovernmental organizations worldwide. The donation is part of an initiative that includes providing a suite of Microsoft cloud services, expanding access to cloud resources for 900 faculty researchers at universities and reaching 20 underserved communities in 15 countries with broadband connectivity and cloud services.
Microsoft’s goal is to serve 70,000 nonprofits through one or more of the offerings in its cloud services suite by the end of 2017. The company will focus on increasing that number in subsequent years. Nonprofits must work through TechSoup (Microsoft’s partner in the donation program) to satisfy a variety of eligibility requirements to participate. To determine if your organization is eligible, visit http://bit.ly/1RSECd2.
According to the annual “Volunteering and Civic Life in America” report issued by the Corporation for National and Community Service and the National Conference on Citizenship, approximately one in four Americans, or 25.3%, volunteered with an organization in 2014 — which has remained relatively constant since the increase reflected after 9/11.
In addition, 62.5% of Americans engaged in informal volunteering in their communities, helping neighbors with tasks such as watching each other’s children, shopping or house sitting. Notably, the research also found that volunteers are almost twice as likely to donate to charity as nonvolunteers. Almost 80% of volunteers donated, compared with 40% of nonvolunteers.
Your organizations can use information in this report to help fine-tune your volunteer program. To keep your numbers healthy, you also can find out more about your volunteers’ skills and interest, and assign them to tasks accordingly. And you can offer incentives for volunteering, such as greater recognition and free admittance to your events.
A survey conducted by the Chronicle of Philanthropy — the first to measure public confidence in charities since 2008 — has found that two-thirds of Americans have a fair amount of confidence in charities. More than 80% indicated that charities do a “very good” or “somewhat good” job helping people.
A significant number of respondents, however, expressed concerns about charities’ money management. One-third said charities do a “not too good” or “not at all good” job spending money wisely, and 41% said their leaders are paid too much. Notably, half said that, when deciding where to donate, it’s “very important” to know that charities spend a low amount on salaries, administration and fundraising. And 34% said such knowledge is “somewhat important.”
Consider these statistics when you complete your next Form 990 or draft your next annual report. Are you clear about how you help your constituents while you manage your nonprofit’s money wisely?
In the wake of the most recent recession, many nonprofits are taking a hard look at their sustainability over the long term to be ready to face uncertain economic times. After all, an organization in poor financial health may find itself forced to cut programs and services when they’re needed the most. Fortunately, steps you can take now may help reduce such risks while allowing your nonprofit to fulfill its core mission.
Having a limited number of funding sources is the biggest sustainability challenge for many organizations. U.S. nonprofits typically receive funds from the government, foundations and individual and corporate donors, and often depend heavily on a few funding sources — for example, an annual government or foundation grant.
The danger in such limited reliance was amply illustrated when government and foundation support dried up during the economic downturn, and many nonprofits were forced to close their doors. The problems compounded for nonprofits serving low-income populations that could no longer provide any financial support themselves.
If you don’t have a variety of funding sources, it’s imperative that you branch out. The broader the base, the more stability and protection from economic challenges your organization will have.
A nonprofit needn’t rely solely on outside funders to improve financial sustainability. It might increase revenue by expanding its fee-based service offerings to new locations or populations. For example, an organization that provides services to children with disabilities in schools also could offer the services to children with disabilities in foster homes.
More and more, nonprofits are pursuing formal partnerships with other organizations — sometimes at the prompting of funders — to share costs. Organizations with similar missions and serving similar populations can collaborate to make better use of limited resources while reducing competition for funding. They also can more quickly scale up high-demand programs or services by joining forces.
Maintaining an adequate reserve is a key component of financial sustainability, but some organizations still lack such a fund. Even some nonprofits that have reserves haven’t established a formal policy for determining the appropriate amount, maintaining that amount and allocating funds when necessary.
Of course, having multiple funding sources is no guarantee of security — a harsh economy can have widespread consequences that affect multiple sources. Additional strategies that more indirectly affect financial sustainability include the following:
Step up branding. Strategic marketing and branding are key for promoting an organization and achieving stable financial standing, yet many organizations neglect this approach. A brand that clearly communicates a nonprofit’s mission and services helps to establish a solid reputation that builds trust among donors. This can be particularly crucial when funding pools are shrinking.
Evaluate outcomes. Donors and other nonprofit stakeholders are showing greater interest in the outcomes of programs and services and other nonfinancial measures. Often the number of lives improved has a greater impact on funders than the number of dollars spent. And they want to fund programs that are successful. By evaluating and sharing outcomes, a not-for-profit can demonstrate value, effectiveness and accountability.
Outcome evaluation also is an essential tool for decision making. You can use the process to identify underperforming programs and make necessary tweaks or to prioritize expenditures if funding declines or additional funding becomes available.
Assess your financial standing. No organization can accurately evaluate its financial sustainability without timely, comprehensive and accurate financial reporting. How can a nonprofit know how much funding it needs to support its programs and services without knowing how much it costs to operate?
In addition to providing a current picture of financial standing, financial reports should compare actual figures with historical and projected numbers. Some nonprofits also are introducing “dashboards” that give real-time financial data, ratios and trends in easily understood graphic form.
Involve the board. It’s not enough for the board to simply review financial statements before its meetings. Board members also must provide true fiscal oversight and not leave major financial decisions to staff, no matter how trusted and loyal.
Every board member should undergo training on relevant financial issues and be able to understand financial statements. The finance committee should report regularly to the full board and engage in dialogue about their reports and the organization’s financial health. The board shouldn’t merely take a backward-looking view but should also consider the future — for example, taking into account how current trends and developments might affect future plans for funding the nonprofit’s mission.
Plan for contingencies. When budgeting, every nonprofit should take the time to engage in annual contingency planning exercises. How could your organization continue to serve its mission if it suffered a 10% drop in funding? A 20% drop? Evaluating such scenarios in advance can provide valuable guidance and preserve mission-critical programs and services in times of crisis.
Achieving financial stability is a critical part of sustainability and should reflect both the organization’s mission and its financial needs. Your financial advisor can help you objectively assess and improve your nonprofit’s position.
In a recent blog post to AICPA Insights, guest blogger Tom Pender recognized the importance of not-for-profit organizations' mission and vision but then turned to galvanizing the staff and board to lead. "Having the right staff is critical and having the right board of directors is equally important. Scaling an organization’s impact means not just maintaining core processes, but also constantly sharing knowledge to build the organization’s capacity to affect change. Without leadership to keep the organization focused, staff can fall victim to fighting the daily fires that are a distraction from the larger goal of expanding the organization’s reach."
He gave four considerations to supercharge your board. The full post can be read here.
The Financial Accounting Standards Board (FASB) has issued the first major changes to the accounting standards for nonprofits’ financial statement presentation in more than two decades. Accounting Standards Update (ASU) No. 2016-14, Not-for Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, affects just about every nonprofit, including charities, foundations, private colleges and universities, nongovernmental health care providers, cultural institutions, religious organizations, and trade associations.
The new standard is intended to provide improved net asset classification requirements and information about nonprofits’ resources (and changes in those resources) to donors, grantors, creditors and other users of nonprofits’ financial statements. It changes the classification of net assets and the information presented in the financial statements and footnotes about an organization’s liquidity, financial performance and cash flows. As a result, stakeholders should find it easier to understand how nonprofits manage their funds.
Nonprofits’ financial statements currently are prepared according to guidance published in 1993 as Statement of Financial Accounting Standards No. 117, Financial Statements of Not-for-Profit Organizations (incorporated into Topic 958 in the FASB Accounting Standards Codification). The FASB believes that this reporting model remains sound, but stakeholders have expressed concerns regarding several areas, including:
In response, the FASB issued an Exposure Draft, Presentation of Financial Statements of Not-for-Profit Entities, in April 2015. After receiving an unusual amount of feedback, much of it negative, the FASB decided to split its deliberations into two phases.
The issuance of ASU No. 2016-14 represents the conclusion of Phase 1. Phase 2 will focus on certain issues considered more challenging, such as aligning the presentation of measures of operations between the statements of activities and cash flows, as well as those that might depend on a related FASB project addressing financial performance reporting by for-profit entities. The FASB hasn’t yet announced a timeline for the second phase.
One of the more notable changes in the new standard is the replacement of the existing three net asset classes (unrestricted, temporarily restricted and permanently restricted) with two new classes (net assets with donor restrictions and net assets without donor restrictions). The FASB expects this to reduce the complexity of financial reporting for nonprofits, while increasing the understandability for stakeholders.
The new approach recognizes changes in the law that now allow organizations to spend from a permanently restricted endowment even if its fair value has fallen below the original endowed gift amount. Such “underwater” endowments will now be classified as net assets with donor restrictions, rather than the current presentation as unrestricted net assets. The guidance also requires expanded disclosures regarding underwater endowments.
In addition, the new standard eliminates the current “over-time” method for handling the expiration of restrictions on gifts used to purchase or build long-lived assets such as buildings. Nonprofits must use the placed-in-service approach (in the absence of explicit donor stipulations to the contrary). In other words, nonprofits must reclassify these gifts as net assets without donor restrictions when the asset is placed in service, rather than over the asset’s useful life. As a result, organizations won’t be able to match the depreciation expense with the release of these restricted net assets unless stipulated by the donor.
The new standard includes specific requirements to help financial statement users better assess a nonprofit’s available financial resources. Organizations must provide:
An asset’s availability may be affected by its nature; external limits imposed by donors, grantors, laws and contracts with others; and internal limits imposed by board decisions. Disclosure is also required for board designations or other internal limits on the use of net assets without donor restriction.
To provide a clearer picture of a nonprofit’s spending, the new standard requires reporting of expenses by both function (which is already required) and nature in one location. This presentation, showing how the nature of expenses (for example, salaries and wages, employee benefits, supplies, and rent) relates to the functions (program services and supporting activities), can be presented on a separate statement, on the statement of activities or in the footnotes. In addition, the standard calls for enhanced disclosures regarding specific methods used to allocate costs among program and support functions.
This information will help financial statement users assess the degree to which expenses are fixed or discretionary, how the related resources are allocated, and the costs of the services provided.
Nonprofits will now be required to net all external and direct internal investment expenses against the investment return presented on the statement of activities. Financial statement users will be better able to compare investment returns among different nonprofits, regardless of whether investments are managed externally (for example, by an outside investment manager who charges management fees) or internally (by staff).
The new standard also eliminates the current required disclosure of those netted expenses. This should eliminate the difficulty some nonprofits had with identifying management fees embedded in investment returns.
One of the more controversial components of the FASB’s Exposure Draft was its requirement that organizations use the “direct method,” not the “indirect method,” to present net cash from operations on the statement of cash flows. The two methods produce the same results, but the direct method provides more understandable information to financial statement users.
The final version of the new standard allows nonprofits to use either method. But, should an organization opt for the direct method, it will no longer need to include an indirect method reconciliation. The FASB hopes this change, which should reduce the costs of the direct method, will encourage more nonprofits to use it.
The new standard takes effect for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Early application is allowed.
Nonprofits should resist the temptation to delay preparations even though they may also be dealing with the implementation of the new accounting standards for lease accounting and revenue recognition. If you have questions about how the new standard will affect your nonprofit, please contact us.
The Office of Management and Budget’s Uniform Guidance (the Omni Circular) has brought sweeping changes for nonprofits that receive federal funding. This is particularly true with the new rule requiring agencies and other entities allocating federal dollars to reimburse organizations for indirect costs (also known as administrative or overhead costs). Nonprofits need to get up to speed on their rights and responsibilities under the rule — to avoid forfeiting reimbursement dollars.
The rule on indirect costs applies to new awards and additional funding on existing awards made after December 26, 2014. Under the guidance, federal agencies — and pass-through entities that allocate federal funding, including states, local governments and nonprofit intermediaries — must reimburse nonprofit recipients for their “reasonable” indirect costs. The guidance cites several “typical examples” of indirect costs, including:
Nonprofits are now reimbursed for indirect costs under one of three methods: according to an existing federally approved negotiated rate, a new negotiated rate or a default de minimis rate of 10% of the modified total direct costs.
The ability to recover part of their overhead should relieve some of the financial pressure on nonprofits that receive federal awards and allow them to carry out a program with less impact on the overall organization. By being able to charge overhead costs to the federal grant, organizations are able to build infrastructure and focus on sustaining their activities.
What should you be doing now?
Despite the clarity of the new reimbursement requirements, nonprofits may still encounter some obstacles to recovering their indirect costs. Grantors have obvious incentives not to get on board. Some might even attempt to persuade organizations to waive their ability to collect — waivers, however, are prohibited by the guidance. Others may not be up to speed on the requirements or may reduce other line items being funded to allow for indirect costs.
It’s critical that your accounting system distinguish between, and closely track, direct and indirect costs. To accomplish this goal, you might need to make adjustments to the method you’re using to account for indirect costs.
You also may need to reach out to government agencies and pass-through entities to negotiate an indirect cost rate. In some cases, you might find that the default rate of 10% is higher than what you can negotiate. Organizations that have an approved negotiated rate must use that rate for all federal awards and can’t opt for the default rate. If you have an existing negotiated rate, you’ll need to request a one-time extension good for up to four years. If it’s granted, you can’t request another review during that period. At the end of the period, you’ll be required to reapply for a new rate or elect the default rate of 10%.
The new indirect cost reimbursement rule ultimately should be a boon for nonprofits. But it may require you to make some critical decisions, including which reimbursement method to use, and potentially how to adapt your accounting system. Your financial advisor can assist with these decisions.