Archive for Accounting

Year-end planning: What can non-profits do now to prepare for 2017?

shutterstock_228440362As a non-profit, you are likely in the middle of your annual appeal and evaluating how to raise funds for the coming year’s operational budget. While you’re closing the calendar year and finalizing the last of your annual contributions, make sure you are also keeping tax processes top of mind. In this article, I offer some tips and best practices to save you time and frustration during tax season.

1. Be prepared – don’t let tax season sneak up on you

Have you collected W-9s for service providers and/or vendors? You’ll be getting those 1099 forms out in January so now is the perfect time to make sure you have what you need.  Be aware of deadlines and avoid getting stuck with interest and penalties. Due dates for the IRS 990 Form vary based on the end of your fiscal year. The 990 is due 4 1/2 months after the close of your fiscal year. If your fiscal year follows the calendar year, they are due May 15.

2. Spend your grants

One of the quickest ways to lose out on getting the same grant the following year is to not use all the money you initially received. Make it a practice to have multiple people regularly review your grants and ensure your programs are running as promised.

3. Say thank you (and document it)

All donations – regardless of size – deserve a quick and heart-felt recognition of thanks. Nothing makes donors happier, and more likely to repeat a donation, than receiving a prompt thank you from a charity they just supported.

Sometimes, you’ll need to do more than offer thanks. Donors who make contributions more than $250 need a donor acknowledgement letter to claim the deduction on their individual tax returns. A donor acknowledgment letter can be a letter, an email, or a postcard – the IRS doesn’t have a required format.

However, there are specific details you need to include in the acknowledgement to ensure that the donor gets his/her deduction. You must include the name of your organization and non-profit status (e.g. 501(c)(3) and the details of the contribution (date, method of payment, or description of contribution).

Include a statement that no goods or services were provided by the organization in exchange for the contribution, if that was the case. If any goods or services were provided by the organization in exchange for the contribution, include a description and good faith estimate of the value of those goods or services (e.g. a fundraising dinner event where some of the funds received from the donor pays for the actual dinner, while the rest is a donation). Certain insubstantial goods or services like a sticker or coffee mug may be disregarded. Or, provide a statement that goods or services (if any) that the non-profit provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.

4. Come tax time, fill out the proper forms

Are you tax-exempt? According to the IRS, certain organizations and their affiliates that are: religiously based, a federal or state non-profit, or a disregarded entity of a larger charity, do not need to file an annual form.

If you don’t fall into any of the exemption categories, you’ll need to complete the 990 Form. However, there are several different versions of this form so make sure you are choosing the appropriate one. For example, if your organization’s gross receipts for the year total $50,000 or less, you must fill out Form 990-N. If your non-profit received more than $50,000 but less than $200,000 during the year and has less than $500,000 in assets, you can complete either Form 990-EZ or Form 990. On the other hand, if your group receives $200,000 or more annually, you’ll be obligated to complete Form 990. Private foundations must submit Form 990PF.

5. Consult tax professionals

Consulting professional tax help is always advised to make sure that you get the most out of your tax-exempt status, cover your bases, and protect your non-profit status. There are many tax professionals that offer pro bono help for non-profits and the benefits of properly filed taxes will only help the organization continue to fulfill its mission.

 

Shannon Crowley Massachusetts CPAShannon Crowley is an Accounting Manager at BlumShapiro. She can be reached at scrowley@blumshapiro.com. BlumShapiro, with more than 400 professionals and staff, offers a diversity of services, which include auditing, accounting, tax and business advisory services. In addition, BlumShapiro provides a variety of specialized consulting services such as succession and estate planning, business technology services, employee benefit plan audits, and litigation support and valuation. The firm serves a wide range of privately held companies, government and non-profit organizations, and provides non-audit services for publicly traded companies.

Implementation of ASU 2016-14 Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of Not-for-Profit Entities

iStock_000010827673_Small-300x199Now that the nonprofit reporting standard has been issued in its final form, it’s time to think about implementation.

Transition Guidance

The update is effective for annual financial statements for fiscal years beginning after December 15, 2017, which means calendar year 2018 and after. Earlier adoption is permitted. The provisions should be applied on a retrospective basis to all prior years presented. However, when presenting comparative financial statements for periods prior to adoption, the following may be omitted from the prior period financial statements presented:

  • Analysis of expenses by both natural and functional classification, unless previously required under the old standard for voluntary health and welfare organizations.
  • Disclosures about liquidity and availability of resources

In the period that the update is applied, the nonprofit should disclose the nature of any reclassifications or restatements and their effects, if any, on changes in the net asset classes for each period presented.

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Navigating The Crowded Non-Profit Sector

Nonprofit donors

How organizations can set themselves apart to secure—and retain—donors

By Shannon Crowley, CPA, MSA
Accounting Manager

Despite the Great Recession and the long process of economic recovery of the 2000s, the non-profit sector has become one of the country’s fastest-growing industries. According to the National Center for Charitable Statistics’ most recent research, the United States is home to more than 1.5 million registered non-profit organizations—marking a nearly 20 percent increase over the last 10 years, a time frame in which many businesses in the for-profit sector have struggled.

This rapid growth is certainly a sign of success, and—as non-profits employ nearly 11 million American workers and contribute roughly $887 billion to the national economy—it is difficult for anyone to argue against the economic value of a thriving non-profit sector.

However, the unprecedented rate at which new organizations are being created is also creating a challenge. The non-profit sector is more crowded than ever before, making it very difficult for organizations to secure—and retain—their donor bases.

On a local level, there are 33,000 non-profit organizations registered in Massachusetts—each competing with one another for precious dollars from a limited pool of individual donors, corporate foundations and other fundraising sources. In a recent cover story in The Boston Globe, many industry experts argue the field of non-profit organizations in Massachusetts is simply too large to sustain.

However, the organizations themselves, and the tens of thousands of Massachusetts residents employed by non-profits, are doing everything they can to prove those experts are wrong.

And that starts with donor retention.

The Association of Fundraising Professionals reports that, on average, donor retention rates across the non-profit sector are around 43%, meaning less than half of an organization’s 2016 donor base will contribute. In order to grow in a competitive non-profit environment, organizations have to find a way to land recurring donors. To do this, non-profits are employing several strategies. For the purposes of this article, we’ll focus on three:

Differentiating themselves from other, potentially similar organizations

Many potential donors or grant-awarding foundations would love to support every deserving cause that asks for and needs their help. Realistically, though, donors need to choose between hundreds, if not thousands, of similarly operating organizations to which they can lend their financial support. Non-profits, especially non-profits working to support similar demographics, are under enormous pressure to set themselves apart to attract new sources of funding. It’s never been more important for a non-profit to have a very clear, very specific mission.

Investing in “fundraising infrastructure”

Fundraising success is entirely beholden to the amount of time and resources organizations are willing to invest. In order to succeed in today’s hyper-competitive non-profit sector, organizations must invest in fundraising professionals, such as high-ranking development officers, and fundraising “infrastructure,” such as top-notch technology and donor databases.

The clear, specific vision makes an organization attractive to donors. Development professionals and in-depth donor databases help organizations find them.

Increase efficiency by streamlining their accounting functions

Back-office financial work is crucial to the long-term success of the organization. That said, it’s also very time-consuming. As many organizations are investing significantly more time to their fundraising operations, some non-profit leaders are finding ways to take complex financial paperwork off their desk so they can focus on the organization’s core competencies. This may entail creating new jobs for a full-time accounting team, or hiring a third-party financial organization to take on those responsibilities.

How BlumShapiro Can Help

BlumShapiro offers the accounting, tax and business consulting expertise non-profits need today. We are one of the largest non-profit accounting service providers in New England, our blend of accounting expertise and knowledge of non-profit organizations means we can offer you tremendous added value. We can assist you in complying with state and federal grant requirements, charitable giving rules, capital campaigns, endowment fund responsibilities and other specialized needs. Learn more >>

View Shannon’s Bio Here >>

Revenue Recognition Step 5: Recognize Revenue When (or as) the Entity Satisfied a Performance Obligation

As noted in our prior blog post, new revenue recognition standards were issued in 2014. The fifth and final step of the new revenue recognition standard is to recognize revenue when (or as) the entity satisfies a performance obligation. An organization satisfies a performance obligation by transferring control of a promised good or service to the customer. The transfer can occur over time or at a point in time. A performance obligation is satisfied at a point in time unless it meets one of the following criteria, in which case it is satisfied over time:

  • The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.
  • The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced.
  • The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.

Assessing whether each criterion is met will likely require significant judgment.

Read other articles in our “Revenue Recognition” Series:

Hatch, Michelle Michelle Hatch is a partner in our Non-Profit Services Group. She oversees audit and accounting engagements for non-profit organizations, including independent schools, trade associations, health and human service organizations and art, cultural and membership organizations. Michelle is also a member of the Employee Benefit Assurance Group and oversees audits for 401(k), 403(b) and defined benefit retirement plans.

Revenue Recognition Step 4: Allocate the Transaction Price to the Performance Obligations in the Contract

As noted in our prior blog post, new revenue recognition standards were issued in 2014. The fourth step of the new revenue recognition standard is to allocate the transaction price to the performance obligations in the contract. For a contract that has more than one performance obligation, an organization should allocate the transaction price to each separate performance obligation in the amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for satisfying each separate performance obligation.

To allocate an appropriate amount of consideration to each performance obligation, an entity should determine the standalone selling price at contract inception of the distinct goods or services underlying each performance obligation. Sometimes, the transaction price includes a discount or variable consideration that relates entirely to one of the performance obligations in a contract. The requirements specify when an entity should allocate the discount or variable consideration to one (or some) performance obligation(s) rather than to all performance obligations.

Any subsequent changes in the transaction price should be allocated on the same basis as at contract inception.

Read other articles in our “Revenue Recognition” Series:

Hatch, MichelleMichelle Hatch is a partner in our Non-Profit Services Group. She oversees audit and accounting engagements for non-profit organizations, including independent schools, trade associations, health and human service organizations and art, cultural and membership organizations. Michelle is also a member of the Employee Benefit Assurance Group and oversees audits for 401(k), 403(b) and defined benefit retirement plans.

Advertising vs. Qualified Sponsorship Payments

iStock_000001334173MediumAs a follow-up to our “What is Considered Unrelated Business Income?” blog post regarding unrelated business income tax (UBIT), written by Shannon Crowley, the following highlights some of the key factors used when determining whether or not advertising and sponsorship revenue are considered unrelated business income (UBI).

Generally, the IRS considers revenue derived from commercial advertising activities to be UBI; however, advertising revenue is not UBI if:

  • It is not regularly carried on;
  • It is substantially related to the organization’s exempt purpose;
  • Substantially all the advertising activity is conducted by volunteers;
  • The purchaser of the advertising does not expect more than a negligible commercial benefit by the advertisement; and
  • It is simply a listing of names of businesses with no advertising message or index to advertisers.

Advertising

Often, a non-profit will produce a periodical (e.q., newsletter, magazine, etc.) that is related to their exempt purpose and sell commercial advertising space within the publication. When the advertising is purchased for the purpose of inducing a reader to purchase the goods or services of that business, the revenue is likely UBI. Indications of advertising usually include messages that contain qualitative language, promotion of the business entity’s products, services or facilities, or statements of pricing or value.

Qualified Sponsorship Payments

Revenue derived from qualified sponsorship payments (QSP) are excluded as UBI. Typically, this is seen with fundraising or program events and acknowledgements of corporate sponsors in an event program. A QSP is a payment (cash, property or services) by a business entity to an exempt organization, without an arrangement or expectation that the sponsor will receive any substantial return benefit from the payment. A substantial return benefit generally does not include use of the business entity’s name, logo, slogans or contact information. If there is some element of advertising (as described above) provided to a sponsor in return for their payment, the amount exceeding the fair market value of the advertising purchased would be considered to be a QSP.

For more information, see IRS Publication 598.

Jeanne Pagnozzi Boston AccountantJeanne Pagnozzi is a manager in BlumShapiro’s Accounting and Auditing Department, based in Quincy, Massachusetts, Jeanne oversees attest and tax engagements and is responsible for engagement planning, staff supervision and coordination with client personnel to ensure successful completion of projects.

Four Thresholds Massachusetts Non-Profits Should Be Aware Of

Non-profits are subjected to several regulatory requirements. Below are four thresholds of which that managers of Massachusetts non-profits should be aware:

iStock_000003856109_ExtraSmall1. Review vs. Audit: The Massachusetts Attorney General’s Office requires any charitable non-profit organizations, with gross support and revenue between $200,000 and $500,000 in the fiscal year to have reviewed financial statements, and any revenue over $500,000 in the fiscal year to have audited financial statements. Both the reviewed and audited statements are required to be submitted with the annual Massachusetts Form PC filing.

2. Single Audit Threshold: For fiscal years beginning on or after January 1, 2015, the Office of Management and Budget (OMB) requires a single audit if there are expenditures using federal funds of $750,000 or more in a single fiscal year. This is an increase from the prior threshold of $500,000. Management should keep in mind that the threshold relates to expenses incurred, not revenues received or earned. Also, spending of federal monies does not just include those received directly from the federal government, but also includes any pass-through federal monies received from other non-profits, states, or agencies.

3. Massachusetts Uniform Financial Statements and Independent Auditors’ Report (UFR) Filing: The Operational Services Division (OSD) requires human and social service organizations that deliver services to consumers in Massachusetts using state contracts to file an annual UFR or a UFR cover page and Exceptions/Exemption documentation.

4. 403(b) Plan Audit: The Federal Department of Labor (DOL) requires an audit for 403(b) plans with participant counts greater than 120.   Participant counts should include the following: (a) eligible employees at the beginning of the plan year (whether they participate in the plan or not); and, (b) participants who terminated and still have account balances. For 403(b) plans you can exclude participants who terminated prior to January 1, 2009.

The above are brief descriptions of the requirements and are not all inclusive. If you have any questions or would like further information on any of the requirements above, please contact us.

Shannon Crowley Massachusetts CPAShannon Crowley is a manager in BlumShapiro’s Accounting and Auditing Department, based in Quincy, Massachusetts, Shannon oversees audit engagements and is responsible for engagement planning, staff supervision and coordination with client personnel to ensure successful completion of projects. Shannon has worked with clients in a variety of industries, including healthcare, higher education, non-profit, manufacturing and distribution.

Revenue Recognition Step 3: Determine the Transaction Price

137299508The third step of the new revenue recognition standard is to determine the transaction price,  which is the amount of consideration to which an entity expects to be entitled and includes:

  1. An estimate of any variable consideration (i.e. amounts that vary due to rebates or bonuses) using either a probability weighted expected value or the most likely amount, whichever better predicts the amount of consideration to which the entity will be entitled.
  2. The effect of the time value of money, if there is a financing component that is significant to the contract.
  3. The fair value of any non-cash consideration.
  4. The effect of any consideration payable to the customer, such as vouchers and coupons.

The transaction price is generally not adjusted for credit risk. However, the transaction price is constrained because of variable consideration. This means that the standard limits the amount of variable consideration to the amount for which it is probable that a subsequent change in estimated variable consideration will not result in a significant revenue reversal.

This is a change from current accounting for revenue, as accounting for variable consideration is inconsistent across industries. Under current guidance, an organization does not include variable amounts in the transaction until the variability is resolved. The new standards give a single model whereby variable consideration (e.g., rebates, discounts, bonuses, right of return) will be included in the transaction price to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. This inclusion of variable consideration may accelerate the recognition of revenue compared to current standards.

Read other articles in our “Revenue Recognition” Series:

Hatch, MichelleMichelle Hatch is a partner in our Non-Profit Services Group. She oversees audit and accounting engagements for non-profit organizations, including independent schools, trade associations, health and human service organizations and art, cultural and membership organizations. Michelle is also a member of the Employee Benefit Assurance Group and oversees audits for 401(k), 403(b) and defined benefit retirement plans.

Best Practices for Allocation of Functional Expenses

iStock_000002010966_ExtraSmallNon-profit organizations are required to report on expenses by functional classification. This can be presented within the statement of activities or within a related note to the financial statements. In addition, the functional expenses are also reported in the IRS Form 990.

The functional expense classifications are as follows:

  • Program Services – costs relating to providing program services that fulfill the organization’s mission.
  • Management and General – costs relating to the essential day-to-day administration and overall direction of the organization. Examples include oversight, general recordkeeping, financing, etc.
  • Fundraising – costs relating to obtaining financial support for the organization from potential donors.

Organizations typically have expenses that relate to more than one functional expense classification. The most accurate and preferred method of allocation is by directly identifying a specific expense to a function. However, in many cases, direct identification is not feasible, and, therefore, allocating expenses based on either financial or non-financial data is appropriate. Management should have a written policy in place for its cost allocation plan in order to ensure consistency. Please keep in mind that management should review the policy at least annually and consider the organization’s current year operations in order to make revisions as necessary.

Below are some examples of allocations of expenses:

  • Salaries and Wages – allocate based on percentage of time spent in each function by the individual employee/department
  • Employee benefits and payroll taxes –  allocate based on salaries and wages
  • Occupancy costs (utilities, janitorial, building maintenance, etc.) – allocate based on square footage of the organization by function or allocate based on salaries and wages

Shannon Crowley Massachusetts CPAShannon Crowley is a manager in BlumShapiro’s Accounting and Auditing Department, based in Quincy, Massachusetts, Shannon oversees audit engagements and is responsible for engagement planning, staff supervision and coordination with client personnel to ensure successful completion of projects. Shannon has worked with clients in a variety of industries, including healthcare, higher education, non-profit, manufacturing and distribution.

Lending to Non-Profits

Article written by, Yongmei Chen, Senior Vice President, Community Development Lending, Eastern Bank

Non-Profit LendingThere are well over a million non-profits in operation today in America, and they are the cornerstones of our communities. Since these organizations often operate in unique operating environments and also in various business models, they often need a financing partner that can appreciate their particular financial situations and provide solutions to meet their needs.

Lending to non-profit organizations presents unique challenges to banks. The traditional “Five Cs of Credit” (credit history, collateral, conditions, character, and capacity) due diligence process doesn’t always apply to the non-profit borrowers. So, what are some of the key factors, in addition to the Five Cs, that banks evaluate when lending to non-profits?

Management:

The management team of a non-profit is comprised of the board and the executive team.

The organization is stronger if board members include professionals and business people who can assist in decisions ranging from finance to real estate projects. The overall assessment of the board also includes member stability, background and general trends of past board membership versus the current membership.

It is also essential for a lender to learn the backgrounds of key employees—those responsible for fundraising, project management, financing and business execution. The stability of the executive team and their relationship/interaction with the board are often good indicators on the health of an organization.

Fundraising:

Most organizations rely on fundraising to support or supplement its operational expenses. A lender usually evaluates an organization’s fundraising ability by examining the composition of its donor base.

If an organization has a large and diversified donor pool, it is usually an indication that the organization has a well-executed development plan.

Board participation in fundraising serves as another indicator for the lender. A strong organization usually has an engaged board of directors behind it.

Liquidity/Working Capital:

Due to the unique nature of revenue and funding sources, most non-profit organizations experience fluctuating cash flow cycles throughout the year. An organization’s ability to plan and manage its cash flow and maintain the necessary liquidity level is a major area of evaluation for a lender. It is also expected that an organization should have a good handle on its restricted funds and the discipline to keep them out of the working capital funds.

Yongmei Chen has been in the banking industry for over 20 years and is currently a Senior Vice President of Community Development Lending Group at Eastern Bank. Her lending focus is in the areas of affordable housing, economic revitalization projects that involves tax credits, and general non-profit lending. Yongmei is also an active member of several boards of directors in the Greater Boston area. She can be reached at (617) 897-1048 or y.chen@easternbank.com.