Making Your Nonprofit’s Financial Picture Stand Out from the Crowd!

1. Making Your Nonprofit’s Financial Picture Stand Out from the Crowd!

2. Common Accounting and Tax Issues of Tax-Exempt Organizations: • Failing to file a tax return and losing an organization’s exempt status. While it can be reinstated, it is costly in both dollars and reputation. • Assuming that because all the revenue of an activity goes to the exempt purpose of the organization, it is exempt from unrelated business income or otherwise ignoring the organization’s unrelated business income tax liability.

3. Private Benefit/Private Inurement: IRS Definition: A section 501(c)(3) organization must not be organized or operated for the benefit of: private interests, such as the creator or the creator's family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization. Private foundations may make the mistake of providing aid to an individual in need when the foundation’s application for exempt status did not include making grants to individuals.

4. Private Benefit/Private Inurement Continued: c. There are certainly many news worthy accounts of public charities providing financial benefits to insiders that are beyond acceptable compensation for services rendered. A 2016 Charity Navigator report looked at 4,587 charities and the average CEO’s compensation was $123, 362. Generally, the larger the charity’s budget, the larger the CEO’s salary. CEO’s salary differs depending on the nonprofit sector. Just like the for-profit-sector, location also impacts salaries. d. Embezzlement by employees or board members could also be viewed as private benefit/inurement due to the lack of controls and oversight.

5. Payroll & Sales Tax Related Issues: Treating employees as independent contractors

6. Not properly filing payroll tax returns and not making payroll tax deposits timely. Payroll taxes cannot be ignored. Failing to pay attention to sales tax collection for certain sales made by the organization.

7. Donations and • Not providing donors with the fair market value of any goods and services received in exchange for their donation. Even if the organization did not incur a cost associated with the goods or services received, the fair market value should be reported to the donor. • Not providing donors with acknowledgment letters for donations in excess of $250.

9. Not keeping good records of the donations received by persons in order to complete Schedule A properly.

10. Internal Control and Accounting Issues: Reviewing accounting policies and procedures to insure that employees are trained and a segregation of duties exist to protect the organization and its employees. Not reconciling the bank accounts on a timely basis and having the reconciliations reviewed by someone other than the person preparing the bank reconciliations.

11. Internal Controls Continued: Making entries in QuickBooks with a prior year date after the tax return for that year has been completed. If an employee is unsure how to record a transaction, contact your tax preparer. Making entries to Net Assets (or Retained Earnings).

12. An unengaged board. Board members have a duty to oversee the financial, programs, and image of the organization. Does your board need training? Consider coming to the November 2, 2017 “Building Better Boards” training with Chuck Loring.

13. Common Accounting and Tax Issues for Private Foundations: • Private Benefit/Private Inurement: Private foundations make the mistake of providing aid to an individual in need when the foundation’s application for exempt status did not include making grants to individuals. Of course, the provision of more than reasonable compensation to insiders is well-documented nationally.

14. Self-Dealing Issues: Transactions with disqualified persons, including substantial contributors, foundation managers, and related persons, which is known as self-dealing. Self-dealing includes even arms-length transactions or other transactions that are favorable to the foundation, other than a loan to the foundation with no interest or the disqualified person providing facilities for rent-free are allowable.

15. Self-Dealing Issues Continued: Providing a low interest loan or below market rent are acts that are still self-dealing and such transactions are subject to penalties. Sharing expenses with the foundation and having one party pay the expense and the other reimburse. This becomes a self-dealing issue.

16. Failing to distribute the required distribution amount within 12 months of the close of the tax year. Making grants to other private foundations without exercising expenditure authority. Failure to file employment tax returns timely or deposit employment taxes timely.

17. Failure to file a Form 990PF. Failure to file will cause the revocation of the foundation’s exempt status, but doesn’t end its responsibility to file a Form 990PF; therefore, penalties on unpaid tax and penalties for failure to file continue to accrue.

18. Tips from Funding Professionals: • Read the instructions for grant applications more than once….and again after the application is complete and BEFORE submission to be sure all is correct. A nonprofit does not want their application to be rejected because of incomplete information. • Make sure your nonprofit fits the criteria of the grant to be awarded. Do not complete a grant proposal “in hopes” you might get the funding.

19. Many nonprofits have internal organizational weaknesses, but the board members are not ACTIVELY engaged in using their time, talents and resources to address and solve those weaknesses. Grant applications are submitted without meaningful metrics. Measurable criteria which support the need for the grant and explain how the grant’s success will be measured is critical.

20. Applications for funding often are not tied to the strategic aspect (mission) or the goals of the nonprofit’s strategic plan. The organization’s mission or strategic plan should be periodically reviewed by staff and the board of directors. Changes to the mission and strategic plan are made as programs are expanded or concluded. Are our clients better or worse off because of this program? Administrative efficiencies and training of employees should have a positive impact on the organization.

21. Often grant applications are brimming with acronyms which are not explained. Explain what your acronyms are so that it is clear what services your organization provides for the community and how the funding will benefit those services.

22. Applications are confusing when categorizations and/or labels are not consistent throughout. Make sure your financial statement titles, line items, schedules and narrative are consistent. If you are discussing one particular program, clearly present all of the information for that program. Tie this program into the funding request and the corresponding data.

23. Often there are recognizable and dramatic changes in certain financial statement line items from one year to the next but there is no explanation of those changes in the narrative. Use the narrative to tell the full story and not “hope the grant committee will not ask follow up questions.” Sometimes events or daily operations go better or worse than planned.

24. Financial comparatives statement or statement column headings are not well labeled and it is difficult to discern current period, year-end total and prior year end information. Just because it is a computer generated report does not mean that the funder automatically understands your presentation. Instead, spend some time setting up a custom report in QuickBooks or modifying the column headings in your software. Once the adjustments are made, it will be available going forward.

25. Spreadsheets submitted as supporting documentation with a grant application are poorly set up/laid out, making it difficult for grant organization professionals and grant committees to understand them. Excel Spreadsheets should tie to your financial statements or state a specific purpose or highlight specific program information. As pointed out above, use similar titles, line item descriptions, etc. that are used in your financial statements. The schedule should make things clearer for the grant committee and not leave them wondering why it was submitted or question whether any of your information is correct.

26. When submitting a reimbursement request after a grant has been awarded, nonprofits submit poor documentation, explanation and labeling. An expense reimbursement should include clearly labeled receipts, highlighted for the appropriate expense which was incurred in relation to the specific grant. For example, a cover page or schedule could be prepared for each category of expense. It should include the amount of original grant request budgeted each expense item.

27. It should show the invoice and/or checks spent by the organization. For example, if books were purchased for an after school reading program using three suppliers, the three invoices should be listed individually with a total amount for books purchased. If multiple expense reimbursement requests are submitted over a given period, a “year to date” column summarizing by category should be included so that funders can determine how the expense reimbursements compare to the original grant request. An example would be for a computer upgrade that is being installed in phases or the remodeling of an office or building. If there is a difference between the amount of grant funds awarded and the amount the organization has spent, quantify the difference and explain.

28. Verify with a financial professional that the financials being submitted are correct AND that they are the financials requested for the grant application. Verify that the budgets are complete, math is correct and the budget is in balance. If the grant instructions ask for the audited financial statements AND the management letter from the CPA, be sure the management letter is submitted.

29. ASU 2016-14 Presentation of Financial Statements of Non-for-Profit Entities • The standard is effective 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.

30. ASU 2016-14 Presentation of Financial Statement of Non-for-Profit Entities Key Changes in the NewASU Investment Return NetAsset Classes Expense Reporting Liquidity & Availability Statementof CashFlows

31. Classification of NetAssets Temp. Restricted Perm. Restricted Current GAAP Unrestricted Without Donor Restrictions ASU 2016-14 + With DonorRestrictions Amount and purpose ofboard designations Nature and amount of donorrestrictions Disclosures “Underwater”Endowments Revised net asset classification: Reflected in net assets with donor restrictions rather than in net assets without donorrestrictions

32. Board Designated Net AssetDisclosures • New requirement that all NFPs provide disclosuresabout: • amounts and purposes of governing boarddesignations • appropriations and similar actions that result inself-imposedlimits on the use ofresources

33. Board Designated Net AssetDisclosures(continued) • Internal limits imposed by actions of the governingboard • May be made by management with board authority to doso • Common examples are operating reserves, capital funds,quasi- • endowments, contingency funds, and futureprograms • No requirement to have board designated netassets

34. UnderwaterEndowments • Endowments that have a current fair value that is less than the original gift amount (or amount required to be retrained by donor or by law) is known as an “underwater” endowment. • Should be reflected in net assets with donor restrictions rather than in net assets without donorrestrictions

35. UnderwaterEndowments Continued • Enhanced DisclosureRequirements: • NFP’s endowment policy and any changes during theperiod • Aggregate fair value of endowedfund • Aggregate amount of originalgifts • Aggregate amount by which funds areunderwater

36. Investment Return – CurrentRequirements • US GAAP currently provides 2 options for presenting investment expenses on the statement ofactivities: • Netted against investment return • Presented as a component ofexpenses • Required to disclose components of investment return including investment income, gains and losses, and any netted investment expenses

37. Investment Return – NewRequirements • Requiredto report all external and direct internal investment expensesnettedagainst investment return on the statement of activities • Eliminated the requirement todisclose: • Composition of investment returnand • Amount of investment expenses • Endowment fund disclosure rollforward only required to present net investmentreturn

38. InvestmentExpenses • External- Amounts paid to third parties to generate investment returns • Direct Internal– direct conduct or supervision of strategicand • tactical activities to generate investment returns suchas: • Salaries and related costs for those responsible for the development and execution of investmentstrategy • Costs associated with supervising, selecting and monitoring external investment managementfirms

39. Expense Reporting: Functional ExpenseReporting • The new standard requires all not-for-profits to report expenses by BOTHfunctional and naturalclassification • Option 1: Present a statement of functional expensesalong • with other financial statements (before thefootnotes) • Option 2: Present as a footnotedisclosure

40. Functional Expense Reporting(continued) Option 3: Present functional categories of expenses disaggregated by natural category on the statement ofactivities

41. Functional Expense Reporting(continued) Functional and natural expense presentation should include all expenses including those netted with revenues on the statement of activities such as direct costs of special events (investment expenses areexcluded).

42. Statement of CashFlows • Continue to allow freedom to choose between the DIRECT METHOD and the INDIRECT METHOD in presenting cash flows from operatingactivities. • However, the new rules eliminate the requirement to presentan • indirect reconciliation if the direct method ispresented.

43. Benefits of theChange • Allows an organization to select the presentation method that best serves the needs of theentity • Greater flexibility in financialreporting • Potential reduction in time and effort to prepare the financial statements

44. Operating CashFlows Indirect Method Direct Method

45. QualitativeInformation Liquidity and Availability ofResources • Communicates how the NFP manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheetdate. • QuantitativeInformation • Communicates the availability of the NFP’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheetdate.

46. Top Five KeyTake-Aways Identify areas that will beaffected Discuss the implementationplan Consider cost implications Update and approve policies Review boarddesignations

47. Questions or Comments