Ready for a raffle?
Follow the rules and this fundraising tool could be a winner Credit card use
Having a policy can thwart misuse The latest on occupational fraud: Who the perps are News for Nonprofits
NONPROFIT AGENDAS FEBRUARY/MARCH 2017
Sechler CPA, P.C. Carolyn Sechler
firstname.lastname@example.org 921 East Orange Drive, Phoenix, AZ 85014 Tel: 602.230.2700/Fax: 602.230.2705 www.azcpa.com
Ready for a raffle? Follow the rules and this fundraising tool could be a winner
affles have long been a popular fundraiser for nonprofits. They’re easy to produce, affordable for participants and reliable revenue generators.
But they’re also subject to strict rules, particularly in the area of tax law. State laws on nonprofit-sponsored raffles can vary significantly, but every nonprofit that holds a raffle must comply with federal income tax requirements linked to unrelated business income, reporting and withholding.
Unrelated business income Nonprofits are required to pay income tax on unrelated business income (UBI). It’s defined as income from a trade or business, regularly carried on, that isn’t substantially related to the organization’s exempt purpose. The IRS considers raffles to be a form of gaming, which is a trade or business. If you routinely hold raffles, it’s possible they could be “regularly carried on,” and raffles likely aren’t related to your exempt purpose.
But, raffle income can be exempted from UBI tax, if the raffle is conducted with “substantially all” volunteer labor. The term “substantially all” hasn’t been formally defined, but the IRS’s “unofficial guideline” is that 85% or more of the labor should be volunteer. If relying on this exemption, make sure you keep records to demonstrate your level of volunteer support.
Reporting obligations Winnings must be reported when the amount is $600 or more and at least 300 times the amount of the winner’s wager (the raffle ticket price). You can deduct the amount of the wager when determining if the $600 threshold is met. For example, you sell $2 tickets, and your winner receives $1,000. Because the winnings ($998) are more than $600 and more than 300 times the amount of the $2 wager, you must report them to the IRS.
You may need to do “backup” withholding on raffle prizes Your organization might be required to withhold 28% of raffle prizes for federal income tax backup withholding. Specifically, backup withholding applies when: u The winner doesn’t furnish a correct Social Security number, u The regular income tax hasn’t been withheld, and u The winnings are at least $600 and at least 300 times the wager.
For example, you hold a raffle, selling tickets for $2 apiece. One of the participants wins $1,200 but refuses to provide you with his Social Security number. You’ll pay this winner $865 ($1,200 less $335, or 28% of $1,198), rather than the entire amount of winnings, since your organization must pay the IRS the $335. If you mistakenly pay out the entire amount to the winner, without any withholding, your organization still owes the IRS the backup withholding amount.
Form W-2G, “Certain Gambling Winnings,” must be filed with the IRS and provided to the winner to show reportable winnings along with the related income tax withheld. The winner should provide you with his or her name, address and Social Security number to include on the filing. If you report using a paper form, you must file copy “A” with the IRS by February 28 following the calendar year of the payment. If you file electronically, you have until March 31. The winner must receive copies “B” and “C” by January 31.
Withholding requirements Income tax must be withheld from the winnings if the proceeds (the difference between the amount of the winnings and the amount of the wager) are more than $5,000, and remitted to the IRS. If the winnings are in the form of a noncash payment (for example, an automobile or artwork), the proceeds are the difference between the fair market value of the item won and the wager amount. When the value of a noncash prize isn’t obvious, it’s wise to obtain a valuation before the drawing. You must withhold 28% (the third lowest tax rate for single individuals) in tax from the winnings. Note that the 28% rate applies to the total amount of the proceeds from the wager, not just the amount that exceeds $5,000. Say that you hold a raffle with $1 tickets. The winner nominally wins $6,000. But, because the proceeds ($5,999) exceed $5,000, you must withhold $1,680 ($5,999 × 28%). For a noncash prize with a fair market value (FMV) of more than $5,000 after deducting the wager, you have two options: 1. The winner reimburses you the amount of withholding tax that you must pay to the IRS.
2. You pay the withholding tax on behalf of the winner, calculated at 33.3% of the FMV less the wager. Taxes withheld from raffle winnings are nonpayroll withheld taxes and must be reported on Form 945, “Annual Return of Withheld Federal Income Tax.” The amounts you report must include the total amount of tax withheld that you reported on all the Forms W-2G filed for the year. The payments, if under $2,500 in total, are due with Form 945 by January 31 following the close of the tax reporting year or, if greater than $2,500, on a monthly or semiweekly basis.
Handle with care Raffles can pay off for nonprofit organizations of all kinds. But if you want to come out a true winner, you also need to satisfy the tax and filing requirements. n
Credit card use
Having a policy can thwart misuse
hen it comes to fraud in any organization, credit cards are frequently a fraudster’s tool. Because the use of credit cards is so commonplace today, there’s always the risk of improper charges to your account. Credit card misuse could hurt your organization financially and jeopardize its reputation in the community. But there are ways to protect your organization against credit card fraud. Developing a credit card use policy is an important first step.
Certain components make sense While each organization’s policy will vary according to its circumstances and priorities, certain components are both commonsense and essential. It’s important, for example, to address eligibility by setting restrictions on which employees may have or use your organization’s credit cards. You might, for example, want to limit cards to full-time employees who: u Travel regularly for their jobs, u Purchase large volumes of goods and services
for the organization’s use, or
u Otherwise incur regular business expenses of a
kind appropriately paid by credit card.
You also should require written approval from a supervisor prior to having a credit card issued to an employee. In addition, your policy should clearly identify prohibited uses for the cards, such as cash advances, bank checks, traveler’s checks and electronic cash transfers — and explicitly state that the credit cards may not be used for personal expenses. You also might bar using the card for purchases of alcohol or other items inconsistent with your organization’s mission and values. Additionally, you may want to prohibit capital purchases, which often need to go through a more layered approval process. Finally, your policy should specify that reimbursement for returns of goods or services must be credited directly to the card account. The employee should receive no cash or refunds directly.
Spending limits should be specified, preapproval required In addition to restricting the types of purchases, your policy should set a spending limit. Or you can rely on the specific limit set with the issuer for each card if that limit is in sync with the user’s needs. Many nonprofits require all employees to seek preapproval (usually in writing) prior to incurring any credit card charge as a proper internal control. Clearly state in your policy that unauthorized credit card purchases and charges without appropriate documentation are the responsibility of the employee, including any related late fees or interest.
Documentation and statement reconciliation are key Employees must provide documentation — usually the original itemized receipt — to support all charges. For meal purchases, require employees to provide the names of everyone in attendance and a description of the meal’s business purpose to comply with IRS regulations. Request that all original receipts be submitted to the accounting department in an organized manner, and provide users with a standardized format to expedite processing by requiring department coding and descriptions of each charge. Supervisors should indicate their review and approval of the charges by a signature and date on the receipt or on the required form. Your accounting department should reconcile monthly credit card statements, and the statements should be reviewed by an executive or board member.
Enforcement should be mentioned A policy without an enforcement mechanism is simply a piece of paper. Your policy should state that violations will result in disciplinary action, up to and including termination of employment and, where appropriate, criminal prosecution. Once you communicate your credit card policy, require the employee to sign an acknowledgment stating that he or she has read and understands the policy and procedures governing credit card use before receiving the card.
The right steps Credit card use is sometimes a convenient way to handle expenses, particularly for event planning and travel. So if your not-for-profit permits credit card use, make sure that you have controls in place to deter and guard against misuse. n
The latest on occupational fraud: Who the perps are
ccupational fraud is an unfortunate reality for just about every employer, nonprofit organization or otherwise. But you might be able to reduce the risk of costly losses if you understand some of the common traits of fraud perpetrators. The 2016 Report to the Nations on Occupational Fraud and Abuse from the Association of Certified Fraud Examiners (ACFE) provides some useful insights on these characteristics.
How old are the perpetrators? The ACFE found that 55% of the fraudsters in its study were between the ages of 31 and 45, and the
size of the losses generally rose with the age of the perpetrator. It identified a “line of demarcation” around the age of 40: In all age ranges at or below that age, the highest median loss was $100,000, while the median loss in the ranges above age 40 was $250,000 or higher. Fraud losses also tend to increase the longer a fraudster has worked for the victim organization. Those with six to 10 years’ tenure caused a median loss of $210,000, and those with more than 10 years’ tenure caused a median loss of $250,000. People who remain with an organization for a long
time often move up to higher levels of authority, the ACFE notes, and that gives them the opportunity to commit larger misdeeds.
Which gender are they? Fraud isn’t, of course, limited to one gender, but 69% of perpetrators in the ACFE study were male. This is consistent with gender distributions in previous studies.
and position of authority. The perpetrators with degrees were more likely to be managers or owner-executives. And higher-level fraudsters generally are better positioned to override or circumvent antifraud measures. So, their schemes are harder to detect, run longer and generate more losses.
What should you look for? Perpetrators tend to exhibit some red flags that may indicate fraud. In the study, of the 17 traits identified, the most common warning signs were: u Living beyond their means, u Financial difficulties, u Unusually close association with a vendor or
u Excessive control issues, u A general “wheeler-dealer” attitude involving
unscrupulous behavior, and
u Recent divorce or family problems.
Moreover, men generally cause larger losses. The median loss caused by a male perpetrator was $187,000, while the median loss caused by a female was $100,000. This disparity also is consistent with earlier studies.
What about educational level? Perpetrators with a college degree caused a median loss of $200,000, and those with postgraduate degrees rang up a median loss of $300,000. These losses were significantly higher than the losses caused by less educated fraudsters. The ACFE theorizes that the discrepancy may be heavily influenced by the perpetrator’s department
At least one of the six indicators listed above was displayed in 79% of the cases. It’s important to remember that the behaviors described above are merely signs of fraud — they aren’t conclusive. Further investigation is required before you take any action, particularly suspension or termination.
Stay alert The ACFE estimates that organizations lose 5% of their annual revenues to occupational fraud. That’s a significant chunk of change for budget-conscious nonprofits. If you suspect your not-for-profit might have fallen prey to a fraud perpetrator, or just want to do everything you can to help combat it, your CPA can help. n
NEWS FOR NONPROFITS Is your next board chair prepared to lead?
Larger audiences may lead to fewer contributions
Only half of board chairpersons are prepared for their leadership role when they take on the post, according to a recent survey by the Alliance for Nonprofit Management. The Voices of Board Chairs: A National Study on the Perspectives of Nonprofit Board Chairs surveyed 635 board chairs across the country. For those who considered themselves ready for the position, the chairs’ primary source of training was the observation of prior chairs, regardless of whether they were effective leaders. Less than half of the respondents received formal training; used the Internet for resources; or used books, magazines or libraries to help them learn how to be effective chairs. The results underscore the need for succession planning and board chairperson training. n
A study of arts and cultural nonprofits published in the journal Public Performance & Management Review finds that organizations that are more successful — in terms of attracting larger audiences to their programs — tend to receive fewer contributions. Despite a growing environment of performance measurement, the researchers say, the evidence doesn’t point to increased support from donors. They theorize that better performance results create the image of success, making organizations appear less needy. n
Jargon plagues some nonprofits
Marketing agency deploys clickbait to help nonprofits
Nonprofits are just like their for-profit counterparts when it comes to using sometimes head-scratching jargon. The Chronicle of Philanthropy recently compiled a list of some of the most bothersome jargon used in the nonprofit world, including sustainable, scalable, leverage, deep dive, capacity building, giving levels, ask amounts and outcome. Jargon can prove especially damaging in fundraising efforts and communicating the importance of your work, the Chronicle noted. It’s difficult for potential donors, volunteers and others to become invested when they feel they’re hearing the language of an exclusive group. n
A digital marketing agency is working to turn clickbait (sensational or provocative online content intended to drive traffic to a particular website) from a nuisance to a tool for good, according to a Wall Street Journal report. RXM Creative has set up a website (Clickbaitforgood.org) where people can get links to share on their social profiles. Those who click on them are steered to charities, including World Wildlife Fund; charity: water; Stop Hunger Now and others. The agency searches online daily for content by or about charities it believes advocate worthy causes and writes clickbait headlines associated with that content. Charities also can submit their content for consideration through the “Submit Charity” link on the website. 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 NPAfm17
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:
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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 email@example.com 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
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