Data analytics can drive success Avoiding UBIT
Follow the rules for corporate sponsorships Should you compensate board members? News for Nonprofits
NONPROFIT AGENDAS OCTOBER/NOVEMBER 2016
Sechler CPA, P.C. Carolyn Sechler
email@example.com 921 East Orange Drive, Phoenix, AZ 85014 Tel: 602.230.2700/Fax: 602.230.2705 www.azcpa.com
Data analytics can drive success
ata analytics has been the rage among for-profits for some time, and nonprofits are now starting to follow suit. With all eyes on performance outcomes these days, it’s only logical: Data analytics provides a welcome way to demonstrate achievement.
The data can come from both internal and external sources. Internal sources include an organization’s databases of detailed information on donors, beneficiaries or members. External data may be obtained from government databases, social media and other organizations, both nonprofit and for-profit. Organizations that serve the homeless, for instance, could gather government data on eviction, welfare benefits and the use of shelters to plan how to deploy their resources.
What’s to gain?
But it doesn’t stop there. Data analytics also can help an organization make better decisions and accomplish more in a variety of areas, including strategic planning, membership recruitment, programming, fundraising and constituent outreach.
What’s data analytics? Data analytics is the science of collecting and analyzing sets of data to develop useful insights, connections and patterns that can lead to more informed decision making. It produces metrics — for example, program efficacy, outcomes vs. efforts, and membership renewal — that can reflect past and current performance and, in turn, predict and guide future performance. The process incorporates statistics, computer programming and operations research.
The potential advantages of data analytics for not-for-profits, which often operate with limited resources, are numerous. Data analytics can help your organization validate trends, uncover root causes and take a holistic view of its performance. Done right, it can allow the management team to home in on your organization’s primary objectives and improve performance in a cost-efficient way. For example, data analytics can serve a doublebarreled purpose when it comes to fundraising. On the one hand, analysis of certain data may make it easier to target those individuals most likely to contribute. On the other, it may provide a way for not-for-profits to illustrate accomplishments to potential donors who demand evidence of program effectiveness. Initiatives to streamline operations or cut costs can stir up political or emotional waters, but data analytics facilitates fact-based discussions and planning. The ability to predict outcomes, for example, can support sensitive programming decisions by considering data on a wide range of factors, such as at-risk populations, funding restrictions, past
financial and operational performance, offerings available from other organizations and grant maker priorities.
Where to start? Excited about data analytics? If so, it’s important not to put the cart before the horse by purchasing costly data analytics software and then trying to decide how to use the information it produces. While new technology may be a good idea, your organization’s informational needs should dictate
Don’t overlook the human factor The term “data analytics” frequently brings to mind the technology involved, but the human element plays an equally important role. You can have the most cutting-edge software and comprehensive data resources, but, if your staff and leadership aren’t on board, data analytics can prove to be a pricey boondoggle. The introduction of data analytics often requires a shift in your organization’s existing culture, which you’ll need to manage carefully to achieve buy-in. Employees need to understand why their commitment to the organization’s mission should extend to a commitment to data analytics. In addition, you’ll need to hire or develop qualified staff to conduct data analytics and convert the results into actionable intelligence. Such intelligence requires knowledge of not just the nuts and bolts of data analytics but also the organization, its mission and values, and its capabilities — financial and otherwise. Without that insight, the organization could end up with irrelevant, and thus useless, information. And follow-through is essential. Even highly relevant information will be of little use if the board of directors and management don’t act on it.
what you buy. Thousands of potential performance metrics can be produced. That means you must take the time to determine which financial and operational metrics you want to track, now and down the road. Which of your nonprofit’s programs are the most important? Which metrics matter most to stakeholders and can truly drive decisions? How can you use the information? You also need to ensure that the technology solution you choose complies with any applicable privacy and security regulations, as well as your organization’s ethical standards. Security considerations are particularly important if you opt for a solution that resides in “the cloud,” rather than installed software.
It’s important not to put the cart before the horse by purchasing costly data analytics software and then trying to decide how to use the information it produces. You also should determine how well the technology solutions you’re considering can integrate with other applications and data. If software can’t access or process vital data, it will make a poor match for your needs.
Analyze this With today’s reduced costs for data storage, data analytics makes more sense than ever for nonprofits. But before you dip your toes in the water, take the time to strategize. The benefits are real, but, without proper planning, you could end up with a data analysis solution that’s no solution at all. n
Follow the rules for corporate sponsorships
any nonprofits dream of landing hefty corporate sponsorships to help pay for the costs of a conference, fundraiser or other costly event. Money from deep pockets is optimal, but you don’t want the IRS to consider the payments “paid advertising” and thus taxable as unrelated business income.
Defining the terms Generally, “qualified sponsorship payments” received by a nonprofit are an exception from unrelated (trade or) business income (UBI). A qualified sponsorship payment is a payment of money, transfer of property or performance of services with no expectation that the sponsor will receive any “substantial return benefit.” Benefits returned to the sponsor can include advertising; goods, facilities, services or other privileges; rights to use an intangible asset such as a trademark, logo or designation; or an exclusive provider arrangement. To be considered “substantial” by the IRS, the aggregate fair market value (FMV) of all benefits given to the sponsor during the year must exceed 2% of the amount of the sponsor’s payment to the nonprofit. If the total benefit exceeds 2% of the payment, the entire FMV of the benefits (not just the excess amount) is a substantial return benefit.
What’s allowed? The regulations specify for purposes of the exception that a not-for-profit’s “use or acknowledgment” (as opposed to promotion, marketing or endorsement) of a sponsor’s name, logo or product lines won’t constitute a substantial return benefit to the sponsor. Your organization’s use or acknowledgment can include: Sponsor information. The sponsor’s brand or trade names and product or service listings may be displayed. Listing the sponsor’s locations, telephone numbers or website address also is permissible. Logos and slogans. These pass the test as long as they contain no qualitative or comparative descriptions of the sponsor’s products, services, facilities or company such as “the best car insurance money can buy.” The product itself. You can include a sponsor’s product at the sponsored activity as long as there’s no agreement to provide the sponsor’s product exclusively. Mere display or distribution of a sponsor’s product at an event, whether for free or remuneration, isn’t considered an inducement to purchase, sell or use the product (that is, advertising). Value-neutral descriptions. These include displays or visual depictions of the sponsor’s product line or services. Note: Contingent payments aren’t qualified sponsorship payments. If a sponsor’s payment is dependent on event attendance, broadcast ratings or other measures of public exposure to the sponsored activity, the payment falls outside the exception.
Proportionately speaking When a sponsorship comes with a substantial return benefit, only the part of the sponsor’s payment that exceeds the substantial return benefit is considered a qualified sponsorship payment. The remainder is UBI. Consider, for instance, a not-for-profit that receives a large payment from a sponsor to help fund an event. The organization recognizes the support by using the sponsor’s name and logo in promotional materials. It also hosts a dinner for the sponsor’s executives, and the FMV of the dinner exceeds 2% of the sponsor’s payment. The use of the sponsor’s name and logo constitutes permissible acknowledgment of the sponsorship, but the dinner is a substantial return benefit. As a result, only that portion of the sponsorship payment that exceeds the dinner’s FMV is an exempt qualified sponsorship payment.
Understanding exclusivity The Internal Revenue Code provisions on UBI distinguish between “exclusive sponsor” and
“exclusive provider” arrangements. An arrangement that acknowledges a corporation as the exclusive sponsor of a not-for-profit’s activity generally doesn’t by itself result in a substantial return benefit that could incur the unrelated business income tax (UBIT) for a nonprofit. Similarly, an arrangement that acknowledges a company as the exclusive sponsor representing a particular trade, business or industry won’t constitute a substantial return benefit on its own. On the other hand, an arrangement with a sponsor that limits the sale, distribution, availability or use of competing products, services or facilities in connection with the nonprofit’s activity generally does result in a substantial return benefit. For instance, if the organization agrees in exchange for a payment to allow only the sponsor’s products to be sold in connection with an activity, the sponsor has received a substantial return benefit.
Accept carefully Accepting corporate sponsorship money can be lucrative but tricky. Your CPA can help you follow the rules to avoid paying UBIT in these situations. n
Should you compensate board members?
ontrary to popular belief, it’s usually perfectly legal to compensate nonprofit board members — and sometimes it might even be necessary. But is it right for your organization?
Pros and cons Board member compensation comes with several pros and cons your nonprofit should consider. Different organizations might assign different weight to each of the factors.
For example, some might find it worthwhile to offer board compensation to attract prominent individuals or those bringing highly specialized expertise. Compensation also could provide a valuable 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.
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), an independent governance or compensation committee or 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. In addition, providing compensation can create an obligation to perform on the board member’s part and promote professionalism. It may incentivize meeting attendance and accountability. Moreover, paying board members can help achieve greater diversity on your board; compensation might make it easier for individuals from different cultures, classes and ages to participate. Board compensation also comes with several drawbacks. In general, 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 legal and IRS implications. In some states volunteer board members are protected from legal liability, while compensated members may not be.
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 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 data relied on.
The bottom line
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 tax-exempt status.
Ultimately, the decision whether to pay your board members will come down to your organization’s culture, member and donor expectations and similar factors. If you decide to move forward with it, though, discuss the matter with your attorney. Make sure that any applicable legal restrictions are taken into account. n
NEWS FOR NONPROFITS Private foundations allowed more program-related investments
More nonprofits hiring — but without formal strategies
Final IRS regulations released this spring offer private foundations guidance on program-related investments, and narrow the definition of “jeopardizing investments” that may subject the foundation to an excise tax. Program-related investments (PRIs) are largely meant to accomplish a private foundation’s charitable aims vs. generating financial returns. Under the final regulations, though, if an investment produces significant income or capital appreciation, that alone wouldn’t disqualify the investment from being a PRI.
The ninth annual Nonprofit Employment Practices Survey conducted by human resources consultant Nonprofit HR found that about 57% of nonprofits anticipate making a new hire this year, a 7% increase from 2015. But most nonprofits still lack the formal recruitment strategies they need to secure top talent — 60% of organizations surveyed lack such a strategy, and 77% are without a formal recruitment budget.
The regulations add nine examples to the existing rules, updating the types of investments that qualify as PRIs. The existing regulations — in effect since 1972 — have nine examples that focus on domestic investments mainly involving economically disadvantaged individuals and deteriorated urban areas.
The Nonprofit Technology Network, a membership organization of technology professionals, has collaborated with several other organizations to produce the 2016 Digital Outlook Report on the digital strategy landscape in nonprofits. According to the report, only 61% of survey respondents have staff dedicated to online/digital strategy. And organizations will spend just 10%–20% of their overall fundraising budget on digital strategy next year.
The new examples demonstrate that PRIs can accomplish a variety of other exempt purposes, fund activities in foreign countries and earn a potentially high rate of return. They also show that such investments can include an equity position when a nonprofit is making a loan or provide credit enhancements (for example, by guaranteeing a bank loan to an exempt organization). And private foundations can now provide loans or capital to individuals or entities that aren’t tax-exempt themselves as long as the recipients are the instruments through which the foundation accomplishes its exempt activities. For more information on the new regulations, go to IRS.gov and search for “TD 9762.” n
Retention seems to receive even less attention. As many as 84% of not-for-profits reported they don’t have a retention strategy, despite the sector’s 19% turnover rate. n
Study examines digital tactics
Upcoming challenges include developing new and engaging content, providing sufficient training and proving return on investment to the board and other stakeholders. At nten.org, click on “Resources” and then “Research & Reports.” n
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. ©2016 NPAon16
The support you need. The service youâ€™re looking for. Succeeding in the not-for-profit sector today requires more than a strong commitment to your mission. It takes shrewd fiscal management, careful regulatory compliance, skillful use of technology and the assistance of advisors who know the issues nonprofit organizations face and how to address them. This is where Sechler CPA comes in. Our team of experienced professionals cherishes the opportunity to support nonprofit organizations, meet their management challenges and fulfill their missions. We offer a variety of specialized accounting, tax and consulting services including:
k Audit intermediary services
k Tax form preparation (990, etc.)
k Budget and policy design
k Strategic and management consulting
k Financial statement preparation
k Speaking on financial literacy and other topics
k Outsourced accounting/bookkeeping
k Technology and virtual system design
RESPONSIVE QUALITY We are committed to providing responsive, personalized service to the highest quality. We take time to truly understand your Organization so that we can customize our recommendations to your specific situation. Our goal is to make your processes easier, streamline your operations and ensure your success in reaching your goals. We welcome the opportunity to discuss your mission and vision so that we may assist you with our expertise. Please call us at 602-230-2700 or e-mail firstname.lastname@example.org and let us know how we may support you. Be sure to visit our website at www.azcpa.com for additional tools and information, as well as our archive of this newsletter.
Sechler CPA, P.C. 921 East Orange Drive Phoenix, AZ 85014 www.azcpa.com
Nonprofit news from Sechler CPA