Look at ALL requirements of such grants, or you can get in trouble and may need to return the funds. This can get really sticky.
Look at ALL requirements of such grants, or you can get in trouble and may need to return the funds. This can get really sticky.
The nonprofit tax form 990 contains interesting questions and requirements that should be reviewed by the board, not just by the financial people. I highly recommend to download and print the full form, even if the nonprofit doesn’t need to file it. You can check out the core pages at https://www.irs.gov/pub/irs-pdf/f990.pdf
Take a look at the 990 page 6- “Part VI Governance, Management and Disclosure “section” and what is asked in this page– it may be an eye-opener for many.
As you can see, this form raises good questions that may be used to improve operations. According to the instructions on the top, saying “yes’ to lines 2 through 7b requires explanations and management should review these items carefully.
Line 2 is about identifying people who may personally benefit from the organization, a possible private inurement situation, usually a no-no for tax-exempt organizations or a hefty excise tax. The take away here — be careful with business relations involving board members.
Line 5 is about the loss of assets, an intriguing item on the tax return. A “significant diversion of assets” according to the IRS is embezzlement, fraud, theft or other inappropriate use of funds that is the lesser of 5% of current annual gross receipts, 5% of total assets at year-end, or $250,000. According to a Washington Post report in 2013, more than 1,000 organizations marked “yes” here and most were for embezzlement. Besides giving details of the problem, it’s a good idea to also disclose any new internal controls used after the problem was disclosed to prevent it from happening again. Note that this is NOT confidential information.
Line 11 specifically asks about top management getting copies of the tax return and how reviews are conducted. The board must be engaged in this process, even if they are not financial people. They cannot say that they don’t know or understand the tax returns.
Line 12 asks about conflicts of interest while line 13 is about whistleblowing, and line 14 covers document retention and destruction policy. These lines underscore the need for written policies, and under the conflict of interest item, the need to monitor those regularly. The idea is to say “yes” to all of these. And the take away for management is to make sure these policies are followed up by procedures to make sure they’re not just “lip service.”
Line 18 reminds organizations to make certain forms available for review, as required by law. Such reminders are all over the tax form, including reminding nonprofits about reporting contractors and gambling winnings. Management could highlight those items and follow up on them with the finance department.
Also, note that the 990 asks for the nonprofit’s mission statement as the first line, and also on Part III- Statement of Program Services Accomplishments. The idea here is to match the mission statement to the programs. If an organization mission is to provide food for the homeless, but programs relate to buying books to schools, the nonprofit may be at risk to lose its tax-exempt status, which can be a major problem.
You can check the new edition of the book Nonprofit Finance A Practical Guide at https://goo.gl/M563u9
Nonprofit Finance: A Practical Guide is available now as a kindle book on Amazon:
The second edition of my book, “Nonprofit Finance: A Practical Guide,” is out. It includes detailed coverage of FASB update regarding reporting, details about liquidity and other details effective in 2018. For example, the official financial reporting will show only two net assets, but internally, a nonprofit should maintain the three net assets separately and combine the temporarily and permanently restricted for reporting only.
Internal controls are covered in detail for cash, payables and computerized systems, giving ideas about how to minimize certain risks specific to the nonprofit sector.
Like the first edition, nominated for a McAdam Book Award, this second one has many examples and suggestions based on real-life experience, not just theories. It was written with both the accountant and the non-accountant in mind, so that people of different backgrounds can benefit from the material and put it to good use right away.
You can check the new edition at https://goo.gl/M563u9
Don’t let consultants run amok. Nonprofits usually have limited budgets and should use consulting services wisely to get the most of it. Remember that consultants are there temporarily to solve a problem or to create a software, create documentation for an audit, or…the possibilities are endless. These people should be managed well even though they are not regular employees and may be there short-term only. Below are some tips to keep things straight:
Identify a specific project for a consultant to work on — Select a particular area for the consultant to work on. The more specific, the better. Have a plan and don’t wait for the consultant to define his or her work. Give the consultant a place to work and all resources for the person to succeed and get the job done. If you have many goals, prioritize it and give the consultant the more important one to work on. When the consultant seems scatter-brained, he/she may be working on too many things at the same time, so clarify the primary goal and help the person focus.
Set up timelines and deliverables — Determine a reasonable schedule and get reports and updates regularly, at least once a week. Double check that the project and goals set for the consultant are being met and worked on. It’s very easy to get side-tracked and to focus on something else. Be sure the consultant is on target and not just following someone else’s ideas or requests, which is easy to do. Consultants want to be accepted and liked, and while they do that, they may be too willing to work on areas that are not that important.
Take advantage of the consultant’s “fresh eyes” — One of the main advantages of a consultant is to give nonprofits the benefit of his/her experience and background. This person is not supposed to agree with you all the time. Expect and consider ideas, processes, and recommendations made by a consultant, especially when he/she is new and hasn’t been “tainted” by group-think or politics. In addition, after a while, it gets easier to accept things that at one point seemed odd or non-functional. If you see this going on, ask about ideas from the person’s past that could be used, and remind the consultant about his/her value as “fresh eyes.”
Value your employees — Last, but not least, listen to your employees. It’s too easy to assume consultants are “all that” and forget that the employees should also be considered. Don’t take the consultant’s side right away if there is a conflict with one of the employees. Remember that employees will be there after the consultant leaves, and they need to show that you have their backs. I have seen executives lose good people because of this problem — just because someone is an outsider, doesn’t mean that he/she is a god. Get some perspective here.
Finally, consider consultants as helpers that can do a lot of good to many nonprofits when utilized properly. Beware of consulting firms that start to hire your employees — the idea may be to make you so dependent on them so that they never leave. Don’t fall for that. I have seen this happening in the IT department of a large nonprofit that slowly kept losing employees to the point that the consulting firm became the IT department and that was not a good thing. Remember — you’re the boss.
Check out the second edition of the book”Nonprofit Finance A Practical Guide”– First Edition nominated for a McAdam Book Award.
Nonprofits need to plan for their future as any other firm. However, because of the nature of nonprofits, planning can be quite a challenge. While for-profits rely on the sale of goods and services, nonprofits must count on grants and donations for operations. Expenses are mostly related to programs and are very dependent on the income stream. Since the point of a nonprofit is not to generate profits, many don’t have that much left over after they spend all revenues. So detailed planning is a must. Some of the challenges of planning for nonprofits are:
Bills are a sure thing, but income may be received after a campaign, a gala event or gifts and grants. Nonprofits may not be able to ascertain the amounts and timing of such income as donors that may have given certain funds in the past may not be able to keep on giving at the same level. Grants may be cut or delayed with no prior notice. Also, grant income may decrease if auditors find noncompliance items and those could be substantial and unexpected. The key here is for the organization to learn of any changes in income stream the earliest possible time to be able to adjust for those.
Because of this instability, it’s always good for a nonprofit to keep a “cushion,” also known as a reserve to be used when the unexpected hits. Add a bit to budgeted expenses, just in case, and contact major donors and grantors to verify any changes in revenue.
Lack of financial knowledge
Many nonprofits are headed by kind people with the best intentions and good contacts. But too often the organization lacks financial education and experience. Basic financial concepts may be missing. Sometimes people are not aware that they need help in this area until something happens that doesn’t make sense to them. This vacuum can pose additional challenges on planning since many concepts may be new to management.
Boards of directors must have people with financial expertise to help in this process and provide guidance in these matters. Also, management should make efforts to learn about accounting and finance so that they can make right decisions. Usually, having a bookkeeper with some experience with nonprofits is not enough to see “the big picture.”
Lack of Time
Typically, nonprofit managers wear many hats, are hands-on, and there is no time to focus on planning and financial matters. It’s hard to think about financial planning and strategy when so many things need to be done today. The result is that usually information is pulled in a hurry and not analyzed, resulting in poor planning and errors.
It’s a good idea to have appointments and set schedules for managers to talk about planning and strategy, A bookkeeper or accountant can only do so much in financial planning. He or she needs input from various areas such as from managers regarding new programs and fundraising folks about new grants or changes in donations.
Planning for nonprofits pose particular challenges but can be done. Management can learn from past mistakes and try to get a better planning model moving forward. The concept here is that nonprofits must take planning seriously and keep on improving it. Donors and grantors like to see a nonprofit planning ahead and not just putting off fires.
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Thinking about working for a nonprofit? This sector is an important segment of the US economy with the Bureau of Labor Statistics reporting that in 2014 nonprofits accounted for 11.4 million jobs, 10.3 percent of all private sector employment. So, there are jobs out there within the nonprofit world, but it’s important to note some cultural issues that generally apply to most jobs within this sector. The fact that nonprofits don’t care about profits creates certain differences in the workplace that may not be that obvious.
Here are some pointers about the nonprofit environment to consider:
While the for-profit business expects employees to be outgoing, ambitious, go-getters, the nonprofit organization looks for employees to get along, to be part of a team. To this end, nonprofits’ employees may receive more hand-holding and more support than in other environments. Also, the workplace is likely to be more flexible and less formal with good benefits and time-off policies. This type of culture is suitable for those who want to be part of something bigger than themselves and value team processes and causes over personal ambitions.
More time to make decisions
Decisions, including major ones, are made in a team setting, built on consensus. Although there are a structure and managers, teamwork and team decisions are the norms. This means that many decisions take a long time to be made, after meetings and considerations. Compared to the for-profit model, the nonprofit is more democratic, but it comes with the price of things moving at a slower pace. This can be frustrating for those used to the for-profit world, but it can also give you the opportunity to be heard.
Nonprofits usually depend on donors and grantors to operate and any changes within these groups can affect the organization in unexpected and swift ways. Employees need to change priorities quickly and to adapt to a new situation regardless of what the boss said just a few days before. This can be disconcerting and stressful to many, so employees need to be flexible and calm. If you’re looking for work at nonprofits, inquire about funding and programs stability.
Variety of contacts
Employees at nonprofits have contacts with customers, government entities, and volunteers, making the people very versatile in dealing with different situations. In addition, many people are attracted to nonprofits because they are bright, passionate and committed to the organization. This combination can result in a very interesting workplace, albeit it can also get too dramatic. Since many employees have personal investments in the organization, disagreements and issues may become emotional. Understanding this situation can help in not taking things personally and not becoming part of the drama.
These are just a few pointers that are general in nature based on my experience. As you can tell, working at a nonprofit is not for everyone, but it can be very rewarding on a personal level to certain individuals. Salaries may not be as competitive as regular businesses, but perks like flex schedule, benefits and the ability to make a difference in a community are very attractive for many people.
Interested on CPE credits regarding nonprofits? Online Practical CPE Courses
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Despite how wonderful your organization is, many funders expect you to prove that your programs work. So, this begs the question of how to measure success, a challenge with people knowing that they made a difference, but not being able to show it with factual data. As a CPA, my take on this is for people to quantify with numbers the ‘before” and “after” scenario as much as possible.
Before and After
The key here is to quantify the “before” as much as possible and make it a baseline. For example, how many people attended an event before or now? How many calls were made to a center before or now? Set a baseline so that it can be compared and analyzed later on.
The other side is to show results over time and how the program is relevant, “the after.” For example, you could show that a certain drug rehab program started with 15 people and has grown over time with 25 people the following year and today has 100 clients. However, be sure that you’re measuring significant items. For example, maybe a better way to measure success in rehab would be how many people finish the program, not just number of clients at a certain point in time. A nonprofit may have more clients, but if fewer are finishing the program, this may indicate a problem.
To determine proper measurements, start with your program objectives. If your objective is to provide literacy services to adults, the number of students may provide a good measure. Or, maybe the number of students that pass a literacy test could make more sense.
A nonprofit that provides temporary housing for the homeless could consider success when the person moves on to permanent housing or when he/she gets treatment for addiction and gets a job. It all depends on the program final objective. The yardstick to gauge impact could be the number of people in the temporary housing, or the number of people leaving such housing for something more permanent, or maybe how many new rooms have been added to accommodate this population. It all depends on the nature of the program.
Education and awareness
To implement a measurement system, staff and managers must be aware of the situation, so that proper data can be identified and tabulated. Since this may be new to many, be sure to explain the reasons for this “extra work “so that the staff not only understands its purpose but also give good ideas about how to measure impact meaningfully.
Set up a structure for people to work so that information is not forgotten or lost. You could use checklists, ask certain questions or fill out forms– all to document “before and after” on a systematic basis, not just at random. The idea is to institutionalize ways to evaluate programs. Knowing that there is a system in place is sure to please any new donor.
Keep it in writing
Keep all docs in writing with logs, notes, pictures and any pertinent information handy to show funders that your organization is indeed making a difference. Document major processes. For instance, if you provide a child care hotline, every call should be written up on a log with information about who took the call, time, etc. Keep close contact with providers that can give you backup and numbers about how many placements were made because of the hotline, for instance.
Keep the documentation in paper or digital format, safe and organized, so that it can be found and compiled quickly. This information should be available to both program and fundraising/development. You don’t want people looking around for hours or days, trying to find a specific data that can help the organization grow and keep its funding.
Measuring program success can be a daunting task, but it’s usually doable, once the nonprofit defines what needs to be evaluated. Besides numbers, you can also use pictures to document baseline – “before and after”. This can be very effective when dealing with construction projects, for instance. Make sure to double check on the ways your programs are being evaluated. Sometimes, a program or focus changes, but instead of changing, the evaluation methods stay the same. Be nimble here.
Check out the book “Nonprofit Finance: A Practical Guide” –– Nominated for the 2016 McAdam Book Award
It may come as a shock that nonprofits may be tax-exempt, but they may need to file tax returns and even pay taxes on certain income, including those at local, state, and federal levels. If nonprofits fail to file the forms, they may lose their tax exemption, be liable for penalties and interest, making tax compliance a priority to many organizations. This article focuses on federal and California tax forms and requirements.
Below are some tax issues and forms nonprofits should mind:
States and local authorities may collect sales tax on fundraising efforts, including proceeds from auctioned items. Some states allow for exemptions if the nonprofit files an exemption form before the event.
In California, sales taxes are applied to certain auction items, and the nonprofit must remit the tax using the form BOE401a2. Depending on the case, you may need to file the taxes online and pay using a regular check, e-check or another method.
Nonprofit organizations must follow the law when it comes to payroll taxes, including withholdings and paying their share of Social Security tax unless the nonprofit has its own approved retirement plan.
Nonprofits file the same payroll forms, as for-profit business do, such as the form941, Employer’s Quarterly Federal Tax Return, and form 940- Employer’s Annual Federal Unemployment Tax Return. Also, a nonprofit distributes tax forms W-2 to employees in the beginning of the following year with summaries of salaries and withholding.
Note that states have their own payroll taxes that nonprofit must comply with and pay. California has the form DE1NP Registration Form for Nonprofit Employers and DE-9 Quarterly Contribution Return and Report of Wages.
Annual Information Tax Returns
Except for religious organizations and a few others, nonprofits are required to file a form within the 990 tax series a few months after their year-end. Small organizations may file online the e-card 990-N, giving the IRS basic information, such as name and address of the nonprofit. Larger organizations file the forms 990 Return of Organization Exempt from Income Tax, or the 990-EZ, which are more detailed, requiring specific numbers for revenues and expenses along with information on programs and board of directors. If the nonprofit doesn’t file taxes for 3 years, its tax-exemption may be revoked, including smaller organizations.
In addition, states like California have their own reporting and paying system. In California, for instance, requires annual reporting – FTB 199N of smaller organizations, with larger ones filing longer, more detailed form 199.
Unrelated Business Income Tax
There are instances where nonprofit may compete unfairly with for-profit businesses, such as a nonprofit opening a restaurant with no connection to its mission. Many exceptions apply, but if the organization is deemed to have unrelated business income, it must file form 990-T with the IRS and pay the proper tax, also known as UBIT.
Note that California requires that nonprofits with taxable income to fill out the form 109 Exempt Organizations Business Income Tax Return. Other states may have their own reporting and paying requirements.
>>Be sure to double check the requirements for these forms at least once a year, since things change often and you don’t want to be out of compliance. For instance, Obamacare has requirements for businesses, including nonprofits, to provide health insurance for employees if the organization has a certain number of employees. It also may be possible for smaller nonprofits to get the Small Employer Tax Credit. Since Obamacare may change in the future, keep an eye of this and other issues.
Check out the book “Nonprofit Finance: A Practical Guide- Second Edition” –– First edition Nominated for the 2016 McAdam Book Award
What you need to organize a nonprofit well – Article-Blog
If you’re around nonprofits, you know that many rely on volunteers for operations, special events, and programs. According to the U.S. Bureau of Statistics, “about 62.6 million people volunteered through or for an organization at least once between September 2014 and September 2015.”
Usually, these people are good-hearted and do very good jobs. However, we also have bad apples and those who misbehave or have incidents in the name of the organization. This creates a huge liability for the nonprofit that is counting all pennies to provide goods and services to the community. It doesn’t matter that volunteers are not paid, they can still do damage that the nonprofit may be held liable for.
Actually, “Good Samaritan” laws exist for volunteers in the case of personal liability, such as the Volunteer Protection Act of 1997. However, that doesn’t mean that the nonprofit is also covered under this act automatically. Better be safe than sorry.
Usually, when things go wrong, the issue of proper training and oversight of volunteers is often questioned. So, proper training and supervision is a must in any volunteer situation, including making sure they get an appropriate education and are placed in situations where they are qualified to be. For example, if you run a swimming class, make sure the lifeguards are properly certified and trained to identify problems and take care of them. Swimming instructors should also have minimum qualifications for the job. Just because it’s a volunteer situation doesn’t mean that standards can to be lowered.
Policies and procedures manual
Helping to maintain standards, many nonprofits use manuals to clarify policies and procedures, very similar to those created for employees. Be sure that such manuals include sections about prevention of sexual harassment, safety and proper behavior in the workplace. Also, consider policies and procedures about volunteer disciplinary actions when warranted.
One way to avoid unpleasant surprises is to do a background check on all volunteers, even if they cost a bit. It doesn’t mean that everybody should be perfect, but if someone has a riskier background with problems with the law, they may need to be more closely supervised and placed in jobs that don’t compromise the organization. Also, many insurance companies require such background checks when they cover volunteer activities.
Nonprofits must consider getting volunteer insurance policies to protect the organization from volunteers behaving badly or accidents. Beware that because volunteers are unpaid, they are NOT usually covered by worker’s compensation insurance, and if something happens to them, the nonprofit may be on the hook for it. So, consider adding a rider or a separate policy to include volunteer while they work for the organization.
Volunteers are often wonderful and many organizations wouldn’t be able to offer their programs if it was not for them. However, they also present a liability to nonprofits that must be addressed. Since protecting nonprofits against these risks can be expensive, be sure to include these costs when preparing budgets, grant proposals or gift requests so that you have the required funds to protect the organization against any losses.
Check out my book “Nonprofit Finance: A Practical Guide- Second Edition” –– First edition Nominated for the 2016 McAdam Book Award