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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.
Overheard in a nonprofit’s office: “It’s so hard to find good board members. It’s going to be really difficult to fill these board openings.”
If your organization struggles each time it needs to fill a board vacancy or does not always come up with the candidates it desires; it may be time to consider creating a board compensation program.
Add up the pluses and minuses
Board member compensation comes with several pluses and minuses your nonprofit should consider. Different organizations might assign different weight to each of the factors.
On the plus side, offering compensation could help attract board members with specialized expertise, such as fundraising or a well-regarded community presence. It also could give you an edge when courting potential board members who would receive generous compensation from for-profit organizations for serving on their boards.
Compensation could be in order, as well, if your board members are expected to invest significant time and effort, or if your nonprofit has a business model that competes with for-profit organizations, such as a nonprofit hospital. In addition, providing compensation can help create an obligation to perform on the board member’s part and promote professionalism. This also might:
Board compensation also comes with several minuses. In general — and this is a big one — it can look bad. Donors expect their funds to go to program services, and board compensation represents resources diverted from the organization’s mission.
Further, there are IRS and legal implications. The IRS looks carefully at whether any arrangement could create a conflict of interest. And, board members receiving compensation of more than $10,000 aren’t independent members of the board by the IRS definition. Reimbursing for expenses under an accountable plan is not considered compensation for measuring independence. Also, in some states, volunteer board members are protected from legal liability, while compensated members may not be. So you will need to check on your state’s laws.
Launch a compensation program carefully
If you decide to compensate board members, do it correctly. First and foremost, the compensation arrangements must comply with the Internal Revenue Code’s private inurement and excess benefit regulations, as well as the IRS rules about “reasonable compensation.” Failure to do so can result in steep excise taxes, penalties and even the loss of your organization’s tax-exempt status.
Independence is indispensable when setting the amount of, or formula for, board compensation. It should be set by independent directors (who aren’t among those to be compensated), or an independent governance or compensation committee, with insight from an independent consultant. The amount should be comparable to that paid by similar nonprofits, as determined by compensation surveys or other data. Whoever sets the amount should be guided by a formal compensation policy.
The policy should include clear objectives outlining how compensating board members pays off for the organization (for example, by allowing it to attract a member with financial expertise). It should specify which board members are eligible for compensation (the chair, the officers or all members) and how compensation is structured (for instance, flat fee, retainer or per-meeting fee).
The policy also should address expectations for the board members in exchange for their compensation. Expectations can be described, for instance, in terms of number of meetings attended, hours worked or qualifications and experience.
Finally, document, document, document. You’ll want written evidence of a formal board vote approving the policy and the compensation amounts, related discussion and copies of the data the board relied on to make the decisions.
Leave no loose ends
Making a shift to a board compensation program is a major change. Your preparation also should include checking to see how other nonprofits with compensation programs handled communicating the change to the public, which can help you develop your own communication plan.
Be sure to seek advice from an attorney who’s familiar with laws governing nonprofits in your state. And you may also want to get feedback from supporters and donors before making a final decision.
With the end of the year on the horizon, your supporters may be thinking about making charitable contributions they can deduct on their 2017 federal tax returns. If a nonprofit wants to keep donors on its side, it needs to explain that different types of donations can carry different tax benefits and that some donations are not deductible at all.
What can be deducted?
Generally, donors can deduct contributions of money or property. The amount of the allowable deduction varies based on the type of donation:
Cash. Cash donations are 100% deductible, including donations made by check, credit card or payroll deduction.
Ordinary income property. Donations of this type are generally limited to the donor’s tax basis in the property (usually the amount the donor paid for it). Specifically, donors can deduct the property’s fair market value less the amount that would be ordinary income or short-term capital gains if they sold the property at fair market value (FMV).
Property is ordinary income property when the donor recognizes ordinary income or short-term capital gains if he or she sold it at FMV on the date of donation. Examples include inventory, donor-created works of art, and capital assets (for example, stocks and bonds) held for one year or less.
Capital gains property. Donors of capital gains property can usually deduct the property’s fair market value. Property is considered capital gains property if the donor would have recognized long-term capital gains had he or she sold it at FMV on the donation date. This includes capital assets held more than one year. But there are certain situations where only the donor’s tax basis of the property may be deducted, such as when the donation is intellectual property (for instance, a patent or copyright) or, interestingly, “certain taxidermy property.”
Tangible personal property. As the name implies, tangible personal property can be seen or touched. Examples include furniture, books, jewelry and paintings. If your nonprofit uses the donated property for its tax-exempt purpose — for example, a museum displays a donated painting — the donor can deduct its fair market value. But if the property is put to an unrelated use — for example, a nonprofit children’s hospital sells the donated painting at its charitable auction — the deduction is limited to the donor’s basis in the property.
Vehicles. Generally, if a vehicle has an FMV greater than $500, the donor can deduct the lesser of the gross proceeds from its sale by the organization or the FMV on the donation date. But if the nonprofit uses the vehicle to carry out its tax-exempt purpose — for instance, an animal welfare organization that uses a donated van to transport rescued dogs and cats — the donor can deduct the FMV. Make sure you provide Form 1098-C, which your donor must attach to his or her tax return to take the deduction.
Use of property. Say a supporter donates a one-week stay at his vacation home for an auction. Unfortunately, he cannot take a deduction because generally only donations of the full ownership interest in property are deductible. The right to use property is considered a contribution of less than the donor’s entire interest in the property. But there are some situations in which a donor can receive a deduction for a partial-interest donation, such as with a qualified conservation easement.
Donors also might want to claim a deduction for the donation of their services, such as when a hair stylist donates one free haircut and color for your auction, or a graphic designer lays out each issue of your quarterly newsletter for free. These types of donations are not deductible as contributions, only as normal costs of doing business. But the related out-of-pocket costs, such as supplies and miles driven for charitable purposes (14 cents per mile), are deductible as charitable contributions.
Help donors help you out
Be aware that there are additional limits on charitable deductions. Proposed tax law changes could also affect charitable deductions, though most likely not for 2017. So keep an eye on federal developments in Washington.
While tax education may seem beyond your responsibility, you cannot afford disgruntled donors. Taking the time to make sure your donors understand the tax implications of their gifts can avoid unpleasant surprises down the road, and keep donors on board as long-term supporters.
What other limits apply to charitable deductions?
As you probably know, there’s a limit to the amount of charitable deductions a taxpayer can claim in a given year. The taxpayer’s total deduction generally cannot exceed 50% of his or her adjusted gross income (AGI). (A higher limit applies for certain qualified conservation contributions.) But donations of capital gains property are generally limited to 30% of AGI.
In some cases, the limits are even lower. For example, deductions for contributions to certain private foundations, veterans’ organizations, fraternal societies and cemetery organizations are limited to 30% of AGI. And capital gains property contributions to such organizations are limited to 20% of AGI.
Donors and other stakeholders continue to look for more accountability and transparency from nonprofits, especially regarding fundraising. Not only is the sum of money raised in campaigns meaningful, but how efficiently you’re able to raise it, too.
Interested parties look beyond total dollars raised to also consider associated costs in fundraising efforts. Cost ratios that present fundraising costs as a percentage of funds raised (also known as cost-per-dollar) focus on the expense of fundraising, while return on investment (ROI), importantly, focuses on the returns. It makes sense to track both.
Determining ROI vs. cost ratios
The formula for ROI uses the same inputs as the cost ratio but flips them:
ROI = Fundraising revenue / Investment in fundraising (Fundraising expense)
Focusing not only on the big picture but on specific fundraising activities will allow your organization to identify its weaker methods and strategies and improve its overall fundraising performance. Which of your fundraising activities generates the highest return? Once you establish a baseline, you can see where your results are improving and which programs are most effective.
Some organizations feel it’s more meaningful to measure gross revenues raised compared to the fundraising expenses for that effort. However, many follow a more traditional method of measuring ROI using net revenues (revenues minus the related expenses) when comparing to costs. Either way is OK, but you must be consistent by measuring your revenues in the same way for each year and campaign. And remember, these metrics are only meaningful when you compare fundraising activities or trends from one year to prior years.
Calculating the inputs
There are other considerations. How, for instance, do you compute your “fundraising expense”? Although the revenue information is easily available to your development staff, your accounting staff should be recruited to gather data on expenses at the same level of detail by campaign or fundraising effort.
Your fundraising expense should include the direct costs of the initial effort, as well as later efforts. Initial costs might include the investment to create a new donor relationship (for example, online advertising costs or the costs of a phone campaign), while subsequent costs include those associated with maintaining that relationship (for instance, the costs of a renewal mailing).
What about indirect or overhead costs? Be consistent! If you exclude those that you would incur with or without the monitored activity, such as the costs for your website or donor database, make sure they are excluded from every campaign metric. For both costs and revenues, you should use rolling averages that cover three to five years. This will reduce the effect of “one-offs,” whether in the form of a significant donation or an economic downturn. You’ll also avoid penalizing fundraising activities, such as a major gift campaign, that require some time to show results.
Calculating these metrics will help you make better decisions when it comes to allocating your fundraising resources. But keep in mind that ROIs can vary greatly by activity, and a lower ROI doesn’t necessarily mean you should cut the activity. One fundraising expert suggests striking a balance between high-cost, high-potential long-term activities and low-cost, short-term activities.
A win-win scenario
Going to the effort of computing the cost ratios and ROIs is a win-win. With this information in hand, you can make more informed decisions and satisfy your stakeholders. Your CPA can help you in these efforts.
When the Financial Accounting Standards Board’s (FASB’s) new revenue recognition standard was released in 2014, it caused quite a stir across industries. But the standard applies only to revenue from “exchange transactions,” also known as reciprocal transactions. Contributions to nonprofits are nonreciprocal, and your grants may be, too — meaning different rules apply.
In Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, the FASB defines a contribution as an unconditional transfer of cash or other assets to an entity in a voluntary nonreciprocal transfer. It specifically distinguishes contributions from exchange transactions, which it describes as reciprocal transactions where each party receives and sacrifices approximately equal value.
That means that contributions don’t fall within the rules in ASU 2014-09, including its voluminous disclosure requirements. Instead, you generally should report contributions in the period you receive the pledge or commitment to donate. Restrictions imposed — directions given by the donor — as to how or when the funds may be used do not change the timing of recognition.
However, when the donor’s gift is available only after certain requirements are met by your organization, the timing may be different. Specifically, you should not recognize a conditional promise to give as revenue until the conditions are substantially satisfied. For example, a promise to give, requiring a minimum matching contribution, can not be recognized until the match is received.Transfers of assets with donor-imposed conditions should be reported as refundable advances until the conditions are substantially met or explicitly waived by the donor.
But you can recognize a conditional promise to give upon receipt of the promise, if the possibility is “remote” that the condition will not be met. An example is a grant requiring you to submit an annual report to receive subsequent annual payments on a multiyear promise.
Determining whether a grant is an exchange transaction, where the grantor expects goods and services for its money, or a type of restricted or conditional contribution, where the grantor intends to make a gift to support the organization, can be more complicated. For example, a grant based on the number of meals or beds a nonprofit provides its client population could be considered an exchange transaction because it is essentially a contract to provide goods or services. Similarly, a research and development grant could be characterized as an exchange transaction, if the grantor retains intellectual property rights in the outcomes.
A grant that is an exchange transaction is subject to ASU 2014-09’s five-step framework:
1. Identify the contract (or contracts) with a customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognize revenue when (or as) you satisfy a performance obligation.
Say you received a fixed-fee grant to perform specific research for a governmental agency, and the agency will own the outcome. The grant is a contract because each party receives something of equal value (grant funds and research) (step 1). The provision and delivery of the research is the performance obligation under the contract (step 2). The fixed fee is the transaction price (step 3). With only one performance obligation, the entire transaction price is allocated to it (step 4), and you will recognize the grant revenue when you deliver the research to the agency (step 5).
This is a simplified example. Nonprofits can find it challenging merely to determine whether a grant is an exchange transaction or a contribution — or a combination of the two, requiring bifurcation for proper accounting treatment. And, when a grant is an exchange transaction, it can be tough to identify the performance obligations, when they’re satisfied and the proper allocation of the transaction price to those obligations.
ASU 2014-09 will take effect for some nonprofits as soon as 2018. Now is the time to start analyzing all of your revenues to determine when and how you should report them.
Determining how and when to recognize grant and contribution revenue can be tricky for many nonprofits, particularly those receiving government funds. The good news is that the Financial Accounting Standards Board (FASB) is at work on an Accounting Standards Update that will provide more guidance. As part of its “Revenue Recognition of Grants and Contracts by Not-for-Profit Entities” project, the board is considering two main issues:
• How to distinguish between grants and similar contracts that are exchange transactions (subject to the FASB’s five-step revenue recognition framework) and those that are contributions (not subject to the framework), and
• How to distinguish between conditions and restrictions for contributions.
Although still in the early stages of the project, the FASB has tentatively decided that a donor-imposed condition will require: 1) a right of return (either a return of the assets transferred or a release of the donor from its obligation to transfer the assets), and 2) a barrier that must be overcome before the recipient is entitled to the assets transferred or promised. (For example, the recipient must raise a threshold amount of contributions from other donors.) A final ASU is expected in first quarter 2018.
With baby boomers — the largest and wealthiest generation in U.S. history — expected to transfer trillions of dollars worth of assets in the next few decades, this could be the right time to launch an endowment. Nonprofits have long turned to endowments for help providing the necessary financial resources to carry out their mission, now and into the future.
All endowments are not created equal. With a permanent endowment, the original gift is usually intended to be held into perpetuity, with only certain income available for use in operations. With a term endowment, you are generally allowed to also use the principal after the designated term has ended. Either way, though, you need to consider several key issues before making the move.
Endowments appeal to nonprofits for several reasons. For example, the funds provide financial stability and can help ensure that programs stay focused on areas your board and donors rank as most important. An endowment also can reduce the headaches and uncertainty often experienced when you are forced to rely solely on work-intensive annual campaigns, special events and fundraising. Moreover, less event planning often equals more time to devote to your actual mission!
Endowments can help you attract additional donors, too. They demonstrate that your not-for-profit has earned the trust of other donors and will be around for the long haul. Endowments may also provide the added benefit of approaching donors from a position of strength and confidence, rather than neediness.
Be forewarned, however: An endowment can turn off potential donors, who might think your organization does not really need their contributions. Administrative tasks also could consume staff time, diverting it from the organization’s current needs.
Not surprisingly, endowments come with some restrictions. The Uniform Prudent Management of Institutional Funds Act (UPMIFA) lays out the standards for managing and investing endowments. You wil need to establish a written investment policy for your endowment that satisfies those standards by addressing, among other things, asset allocation and spending.
Your board’s investment committee, with input from an investment advisor, should determine the best allocation across asset classes (for example, stocks, bonds and real estate) to earn your desired return on investment. If board members do not have expertise in this area, consider hiring an investment manager to advise you. Each investment decision must be made in the context of the endowment’s total portfolio, taking into account the risk and return objectives of the endowment and the organization.
When it comes to spending, UPMIFA lets you spend or accumulate at a rate the board determines is prudent for the endowment’s uses, benefits, purposes and duration — subject to seven specific criteria. These include the purposes of the organization and the endowment, general economic conditions and the organization’s other resources. And UPMIFA lets you base spending on the expected total returns of the endowment, including earnings on original principal and appreciation.
If a traditional endowment does not seem like a good fit, do not worry — you are not necessarily out of luck. You can establish a “quasi endowment,” also known as a board-designated endowment or funds functioning as endowments. A quasi endowment could work well if your organization isn’t quite ready for a full-blown endowment campaign but wants the financial stability and other benefits associated with endowments, and has the funds to set aside for this purpose.
Unlike traditional endowments, quasi endowments are established by the board — not a donor. They are usually funded by unrestricted donor gifts or excess operating funds, and are not subject to UPMIFA. A quasi endowment may be more flexible than permanent or term endowments because the board can change its designation(s) at any time and for any reason.
If you decide to pursue an endowment of any kind, keep in mind that the arrangements are more complicated than for funds raised through ordinary fundraising or capital campaigns. You will need to make sure you have, or can acquire, the requisite expertise in areas such as drafting investment policies, managing the investments and related financial reporting.
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.
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.
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.)
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.
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.
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When reviewing financial statements, nonprofit board members and managers sometimes make the mistake of focusing solely on bottom-line figures, but these statements also may include a wealth of information in their disclosures. Savvy constituents and potential supporters know this, so nonprofit executives need to be familiar with the common types of disclosures and the information they make available for scrutiny. This article notes the information that statements provide regarding accounting policies, related party transactions, contingencies and other matters. A sidebar describes a particular Form 990 disclosure that has gotten renewed attention.
Fraud doesn’t just hurt a nonprofit’s bottom line — it also could do devastating damage to its reputation. However, this article discusses how, by implementing some simple controls, an organization can help protect itself from these risks. These controls involve segregation of accounting duties, fraud awareness training for all employees, establishment of a fraud hotline, and risk assessment.
Types of funding vary greatly in how they can — or cannot — be used. This article discusses the differences between permanently restricted funds, temporarily restricted funds and unrestricted funds, and how to beef up donations of the latter.
In this issue, “Newsbits” takes a look at Office of Management and Budget rules that reduce the burden on smaller nonprofits by increasing the threshold that triggers compliance audits. It also discusses a study showing that most organizations have room for improvement with online fundraising, and notes an online tool that provides free and open access to data on nearly 82,000 independent, corporate, community and grantmaking operating foundations.
