for Winter 2013 Follow these dos and donâ€™ts to maintain your 501(c)(3) status Social impact bonds â€“ the newest funding wave? Getting a handle on the flow of cash Newsbits
Follow these dos and don’ts to maintain your 501(c)(3) status
our status with the IRS as a tax-exempt “public charity” gives you significant benefits — paying no federal, state or local income taxes is the most obvious advantage. And the good news doesn’t stop there.
The designation also enables you to receive donations, may qualify you for special grants and government funding, and can entitle you to special rates for services, such as mail delivery. In short, the status better enables your organization to apply its financial resources toward its mission and goals than if it were a for-profit entity. But keeping your 501(c)(3) status isn’t automatic. Here are some important dos and don’ts to follow if you want to retain the privilege: Do comply with reporting obligations. Your nonprofit is required to file some type of IRS Form 990 —
Form 990, Form 990-EZ or Form 990-N, depending on the amount of your total annual receipts and total assets — each year. If you fail to do so for three years in a row, your tax-exempt status will be revoked. If you’re required to file the full Form 990 or Form 990-EZ, be sure to annually complete Schedule A, Part I (“Reason for Public Charity Status”) to identify why you aren’t a private foundation. Check the box that coincides with the reason that you’re a public charity for the current tax year. You also must file all required payroll tax returns for your employees and 1099 forms for independent contractors, and answer related questions about these workers on your Form 990. Do maintain the required level of public support. As detailed on Schedule A to the 990, if your nonprofit is primarily supported by a government unit or the general public or is a community trust (Box 5, 7 or 8 on Schedule A, Part I), you’ll also need to pass the public support test on Part II of Schedule A. If your organization is exempt because it receives more than one-third of its support from contributions and activities related to its exempt function, as outlined in IRC Section 509(a)(2), you’ll need to pass the public support test on Part III of Schedule A each year. Do pay employment taxes and properly withhold from employees’ paychecks. Even though your organization doesn’t pay income taxes, you must still pay applicable employment taxes, such as the employer portion of each employee’s Social Security and Medicare taxes. And you must withhold from your employees’ paychecks the employee portion of employment taxes, as
well as federal, state and local income taxes where applicable — and remit the withheld amounts to the appropriate governmental agency. Do use a formal process to approve compensation. The salaries and benefits you pay your executive director and “key employees” are available to the public on your Form 990 and have been identified as a primary focus of exempt organizations’ audits by the IRS. Even more important than the compensation total is the process you use to determine that the compensation is reasonable and comparable to amounts paid by organizations of similar size and activity. The IRS sees this review and approval as a responsibility of your board of directors or one of its committees. Don’t operate for the benefit of private interests. No part of a 501(c)(3) organization’s earnings or equity can benefit individuals, such as the organization’s founders, executives or board members — or their family members. Your nonprofit was granted its taxexempt status to benefit the public, not private parties or interests.
Don’t pay more than market rates for goods and services. Ensure you’re using your organization’s resources wisely by getting at least three quotes before purchasing a significant asset or establishing a service contract or a standing order for supplies. If you ever decide to do business with related parties (board members, founders, executives or their businesses), the other quotes will support the “going rate” in your market and show you aren’t providing an excess benefit to the related party. Should the IRS determine that you’ve provided excess benefits, your organization and its leaders will be subject to penalties as well as the possibility of losing the nonprofit’s exempt status. Don’t engage in substantial lobbying or any political campaign activities. Two methods can determine whether lobbying activities are “substantial.” One considers the time spent by compensated employees and volunteers on lobbying activities. The other is the expenditure tests.
If you ever decide to do business with related parties, other quotes will support the “going rate” in your market and show you aren’t providing an excess benefit.
Don’t generate excessive unrelated business income (UBI). UBI is income from a trade or business activity that is regularly carried on and is unrelated to your exempt mission. Although the Internal Revenue Code is silent as to how much is too much, excessive UBI has been interpreted as spending a “significant” amount of time on the unrelated activity.
Your nonprofit can elect to use the latter option — called a 501(h) election — by filing Form 5768. (Churches are ineligible.) The 501(h) election sets a defined limit on the amount of resources an organization can use to influence legislation before losing its exempt status, based on a percentage of its total expenses.
For example, if an organization has more expenditures for the unrelated activity than program expenses, the IRS likely will consider terminating its exempt status. But courts have considered an organization spending even as little as 10% of its total efforts on a UBI activity to be too much.
Political campaign activities include making contributions to a political campaign fund or making public statements for or against a candidate (either written or verbal). Participating in any of these activities can result in the IRS either revoking your exempt status or imposing certain excise taxes on your organization. F
Social impact bonds – the newest funding wave?
lthough pioneered in the United Kingdom, social impact bonds have captured the attention of U.S. philanthropists, governments and investors as a new approach to funding social programs. Several American cities have started the ball rolling here by paying certain social service providers based on their success.
contracts with the nonprofit) only if the outcomes are achieved. Other considerations: These programs may incur higher costs for engaging a third party to evaluate results. And the investors (not the nonprofits) are subject to the risk, because they might not earn income or receive a return on their capital.
Nonprofits that contract with the government and others to provide services need to get up to speed on the basic concepts behind such programs.
Outside investors will receive
IN A NUTSHELL Social impact bonds require that the government agency pay the nonprofit (or an intermediary that
a share of the governmental payments made for successful outcome-based performance.
Traditionally, government agencies extend funding to nonprofit social service providers to pay for specific activities or delivery models. But what if the nonprofit lacks the upfront money to pursue the required outcomes? Few organizations have the deep pockets necessary to fully finance programs themselves. That’s where outside investors — including philanthropists and foundations — come in. They supply the necessary capital and operating funds by investing in “pay for performance” bonds issued by the nonprofit or its intermediary. In exchange, they’ll receive a share of the governmental payments made for successful outcomebased performance. THE ADVANTAGES Not surprisingly, government agencies are attracted to the idea of transferring risk from taxpayers to nonprofits and private investors. But social impact bonds may provide additional benefits to government bodies and taxpayers. For example, the bonds could help fund the type of preventive services (such as medical screenings that
facilitate early intervention) that could save more government funds down the road. Social impact bonds also will, hopefully, eliminate wasteful spending on programs that don’t work but have continued to receive funds because they undergo little evaluation. Another benefit: Traditional funding frequently comes with tight restrictions that stifle novel but
as-yet-unproven approaches. Social impact bonds are believed to foster creativity. ARE YOU A CANDIDATE? Social impact bonds won’t work for every social service nonprofit. They’re still novel and the extent of a capital market for social programs is uncertain. But if your service has measurable outcomes that are highly correlated with social net benefits that could save a governmental agency meaningful amounts of money, social impact bonds could be in your future. F
Getting a handle on the flow of cash
n a slow economy, many nonprofit leaders worry about having enough money to meet their organizations’ financial obligations each month. But those who effectively monitor their nonprofits’ cash flow can successfully predict when the money coming in will balance with the money going out, when they’ll have a surplus of cash, and when they’ll have a shortage. They can plan — and take actions — accordingly.
publish an annual membership directory then. In fact, costs can vary significantly from month to month for a variety of reasons — for example, as heating and cooling costs rise and fall or staffing needs change.
WHAT’S CASH FLOW MANAGEMENT?
WHERE DO YOU BEGIN?
Cash flow management involves analyzing cash inflows and outflows based on the timing of receipts and payments. It’s more than taking your annual budget figures and dividing by 12 to come up with a static, monthly amount — this won’t give you an accurate snapshot of your cash flow. Take an annual event. If it’s a holiday dinner, costs rise in November and December as you plan, and pay for, the event. Costs also may bump up noticeably in, say, January if you
To begin managing your notfor-profit’s cash flow, create a cash flow report using a simple grid. Along the top, list all 12 months and label them either “actual” or “projected.” Going down the page, create rows for the following information: Beginning balance. This line shows the amount of cash you had at the start of the month.
Cash coming in. Create line item entries for the largest income categories you’ll have for each specific month. Total all the individual entries to calculate the amount of incoming cash. Cash going out. Make line item entries for the largest categories of expenses, combining as necessary. Total all individual entries to calculate the amount of outgoing cash.
A cash flow report should be time-based, not simply an average of expenses and income over 12 months.
Net inflow/outflow. Subtract your cash going out from your cash coming in to determine your net inflow or outflow. Ending balance. Add the beginning balance to the net inflow/outflow number to get an idea of your cash position for each month. Use historical data in addition to what’s on your calendar for the year ahead to help create your projections. Remember, you’re creating a time-based report, not simply averaging expenses and income over 12 months.
Be realistic about when cash will actually come in. If your big fundraiser is cash-based, you’ll have the money in the month of the event. But if you’re executing a fundraising campaign, donations can come in months after your initial mailings. Reflect that in your projections. OTHER INFORMATION TO COLLECT? To complete your cash flow report, compile a total of your cash on hand and estimates of cash receipts and their due dates. You’ll also need to enter into the report payment amounts and schedules for personnel expenses (including salaries, wage increases, taxes and benefits). Other data you’ll need includes consulting and professional services fees, occupancy charges (including rent and insurance), and office charges (including telephone service, equipment rental, service contracts and supplies). Last, be sure to include financing costs and all other expense categories (including travel, postage and printing). GET HELP, IF NEEDED Your CPA can help you devise your cash flow report and review maiden entries. He or she also can walk you through the analysis process to help ensure that your reports are used to your nonprofit’s best advantage. Over time, the ability to successfully project and manage cash flows and positions — along with effectively managing the budget and having sufficient liquidity — will be key to your organization’s viability. F
USING YOUR CASH FLOW REPORT You’ve made the effort to collect information for your not-for-profit’s cash flow report. So, what’s next? With your projected cash flow for the year in front of you, you can now make better decisions about how and when to spend money, when new sources of cash are needed (for instance, from contributions or a temporary draw on a line of credit), and how much of the surplus you can invest and for what period of time. You must evaluate your organization’s excess revenue over expenses on an accrual basis vs. cash basis to determine if the costs of certain activities are justifiable. Cash is important but, before spending any “excess,” evaluate your nonprofit’s full financial picture.
Newsbits HOW TO REACH YOUNGER DONORS A survey of more than 6,500 young people, ages 20 to 35, suggests that one of the most important things you can do to reach them is to make your website easy to read on a mobile device. The Millennium Impact Report 2012, sponsored by the Case Foundation, found that more than three-quarters of respondents own a smartphone, and 79% of those respondents have used the device to connect with a nonprofit, including via Facebook, Twitter, e-mail and e-newsletters. According to the report, the prominence of smartphone use makes a mobile strategy more critical than ever — in particular, optimizing websites, e-newsletters and solicitations for mobile devices. About 65% of respondents said they liked to learn about a nonprofit through its website. Respondents also liked to learn about organizations through social media (55%), e-mail newsletters (47%), print (18%) and face-to-face conversations (17%). F
To revise data, nonprofits must provide Charity Navigator with Form 990 tax returns from past years adjusted to report the groups’ product donations under the new approach. A nonprofit’s audit committee must sign off on the revised financial information, and the nonprofit must post the information on its website. Some organizations are concerned that restating financial information reported in prior year IRS Form 990 and audited financial statements will raise concern about those filings. Changing valuations based on current conditions or new accounting standards may not be relevant to prior periods and may not result in valid reports. Therefore, some nonprofits are forgoing this option and merely noting information about such changes in their narratives. F
PRO BONO SERVICES NEEDED The national Pro Bono Readiness Survey, conducted by consultants LBG Associates, finds that 66% of U.S. nonprofits need pro bono services more than any other volunteer work. The survey revealed particular demand for marketing, technology, strategic planning, management, human resources and leadership development services. But respondents also said making good use of pro bono services is challenging. Hurdles include the inability to sustain project results over the long term without ongoing external support and the lack of strong project planning and time management tools. F
REVISING FINANCIAL DATA ON CHARITY NAVIGATOR If you’ve recently taken a more conservative approach to valuing your corporate product donations (also known as “gifts in kind”), Charity Navigator has established a way to reflect the impact of such changes. The website is allowing charities that adopt a more conservative approach to revise past financial data to be more comparative — avoiding the appearance of dramatic drops in revenues that would trigger concerns about ongoing operations and sustainability. This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. ©2012 PSNwi13
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ENHANCING THE VASQUEZ & COMPANY LLP TEAM Vasquez & Company LLP is pleased and excited to announce the addition of Roger Martinez as a Partner and a member of its senior management team. Roger brings over fifteen (15) years of public accounting and consulting experience acquired as a Partner with KMPG. Roger’s extensive technical capabilities and experience enhances our government and nonprofit practices having served as Lead Partner on some of the largest and most complex governmental and nonprofit audits in Southern California. He has served the Los Angeles Department of Water and Power, Pacific Gas and Electric Company, the City of Long Beach, The California Community Foundation, the J. Paul Getty Trust and the Los Angeles Regional Food Bank. A consummate professional, Roger is a Certified Public Accountant licensed to practice in the states of California and New York. He is a member of the American Institute of Certified Public Accountants, the California Society of Certified Public Accountants and has instructed on accounting, auditing and reporting issues in the public sector throughout the United States. As a member of our team, Roger’s extensive experience and technical expertise will expand the services, capabilities and resources we provide to our clients and enhance the reputation of our Firm. Roger and the rest of our esteemed partners and managers are available to discuss your business and financial reporting needs. To find out more about how we can assist your organization, please contact our Managing Partner, Mr. Gilbert R. Vasquez, CPA at (213) 873-1700 ext. 200 or e-mail at firstname.lastname@example.org. Also connect with us on facebook or visit our newly redesigned website (www.vasquezcpa.com) for more information.
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