Nuts and Bolts of Nonprofit Management

Nuts and Bolts of Nonprofit Management Laura Dupuy Utah Council for Citizen Diplomacy David L. Fish Internal Revenue Service Friday, February 16, 2007 NCIV National Meeting Accounting or Auditing?     What is Accounting? The recording, classifying, and summarizing of economic events in a logical manner for the purpose of providing financial information for decision making. What is Auditing? The accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria. Fundamental Qualities To be useful and helpful to users, financial statements must be: • Relevant • Reliable • Comparable • Consistent Assumptions     Economic Entity Assumption Going Concern Assumption Monetary Unit Assumption Periodic Reporting Assumption Principles     Historical cost principle Revenue recognition principle Matching principle Full disclosure principle Bookkeeping – the heart of the matter Audit Evidence  The documentation required for physical examination by an auditor to verify the reliability of the financial statements. Includes copies of checks written; copies of invoices; bank statements; etc. Financial Statements 1. 2. 3. 4. Statement of Financial Position (Balance Sheet) Statement of Activities (Income Statement) Statement of Cash Flows Other Financial Statement Issues a. Comparative Financial Information: to increase the usefulness of the financial information by placing the current year in historical context b. Related Parties Issues: e.g. purchases of goods or services from board members; office space donated or leased from a board member; personal assets guaranteed by board members Nonprofit Specific Accounting 1. Fund Accounting: A means of recording resources when the use of the resources are limited by law, donor, the organizations governing board, etc. 2. Contributions, Pledges and Noncash Contributions a. Contributions: Unrestricted contributions to be used for the general operating expenses of the organization versus restricted contributions which are to be used for a specific purpose or program. b. Pledges: If operating on accrual method pledges are classified as ―Pledges Receivable‖ with an accompanying ―Allowance for Uncollectible Pledges‖ c. Gifts-in-kind: Record at the amount the organization would normally have to pay for a similar item. If office space is donated, a value should be reflected for the facility use in the financial statements both as income and as expense. Other General Accounting Issues       Current Assets and Current Liabilities Long-Term Assets and Depreciation Intangible Assets Investments Contingencies Affiliated Organizations Record Keeping Requirements Fair Labor Standards Act • • • • • • • • • • • • • •  Employee's full name and social security number. Address, including zip code. Birth date, if younger than 19. Sex and occupation. Time and day of week when employee's workweek begins. Hours worked each day. Total hours worked each workweek. Basis on which employee's wages are paid (e.g., "$6 an hour", "$220 a week", "piecework") Regular hourly pay rate. Total daily or weekly straight-time earnings. Total overtime earnings for the workweek. All additions to or deductions from the employee's wages. Total wages paid each pay period. Date of payment and the pay period covered by the payment. Visit the Department of Labor website at www.dol.gov Employee or Independent Contractor?        What is the degree of control over work and who exercises that control? What is each party's level of loss in the relationship? Who has paid for materials, supplies and/or equipment? What type of skill is required for work? Is there a degree of permanence? Is the worker an integral part of the business? Courts also use the "right to control" test. When the hiring party controls the way work is carried out and a product is delivered, the relationship between the parties is employer/employee. If an employer does not have authority over how a party accomplishes his or her work but simply give requests an outline, the relationship between the parties is that of hiring party/independent contractor Employer Tax Liability    When a worker is an employee, employers must pay state and federal unemployment tax, social security tax and workers compensation/disability premiums to a State Insurance Fund. When a worker is an independent contractor, the hiring party is not required to make any of these payments. If you incorrectly define a worker as an independent contractor, you may be liable for past taxes including FICA and federal unemployment tax. Independent Contractor if:     Individual not relying on the business as the sole source of income Works at his or her pace as defined by an agreement Is ineligible for employer provided benefits Retains a degree of control and independence Payroll and Payroll Tax Issues      Form W-4 Employee’s Withhholding Allowance Certificate to determine total number of allowances the employee is claiming Federal Income Tax Withholdings – See IRS Circular E, Employer’s Tax Guide for Withholding amounts Social Security/FICA Taxes – Tax Rate 6.2%; Tax Base $68,400 Medicare Taxes – Tax Rate 1.45% Employer Match – Social Security/FICA Taxes and Medicare must be matched by the employer 6.2% + 1.45% = 7.65% Federal Tax Compliance Issues     501(c)(3) Tax Determination Letter 990 Annual Report due May 15 941 Payroll Tax Deposits: FICA and Federal Income Tax Withholding over $500 must be deposited either monthly or semimonthly. Amounts under $500 may be paid quarterly. 941 Schedule B – Federal Tax liability quarterly reports State Tax & Regulatory Issues Visit your state office website to learn about business requirements. Includes, but not limited to:  State Tax Determination Letter  Quarterly State Payroll Withholding Payments  Annual State Payroll Withholding Reconciliation  State Business License  State Property Tax Reporting and Assessment  Department of Commerce: Consumer Protection-Permit for Charitable Solicitations  Department of Workforce Services (Unemployment Insurance)  Workers Compensation Insurance  New Hire Registry  Sales Tax Exemption At Your Fingertips Keep the following on hand to submit with grant or license applications:  Application for Tax Exempt Status filed with the IRS  Articles of Incorporation  Current By-Laws  IRS Section 501(c)(3) tax exemption letter  State tax exemption letter  Most recent IRS Form 990  Most recent Financial Statements  Most current contracts with any professional fundraisers or consultants  List of Board of Trustees Policies Nonprofit best practices recommend written policies on the following:  Conflict of Interest  Internal Controls  Human Resources: hiring; firing; performance and wage reviews; holidays and vacation; insurance; retirement  Ethics – may be required for membership in state nonprofit associations (see list)  Minutes of Board Meetings – these are legal documents What to Keep and How Long?      Keep the current year’s records immediately accessible, and keep prior years records in a separate location. For an IRS audit, maintain records for four years. Personnel records should be kept for the entire time that the person is employed plus three years after the person leaves the company. Back-up your accounting programs on a regular (weekly or monthly scheduled depending of the volume of your accounting activity) Maintain an additional copy off-site. Do’s and Don’ts for 501(c)(3) Organizations Jeopardizing 501(c)(3) Status • Inurement and private benefit activities • Substantial lobbying activity • Political campaign activity • Unrelated Business activity Inurement/Private Benefit • Inurement to insiders such as board members, officers, key employees, etc., is absolutely prohibited. • Private benefit must be incidental to either insiders or outsiders. Inurement/Excise Tax on “excess benefit transactions    Unreasonable compensation Non-fair market value transactions between insiders and charity, e.g., sale by charity of property to insider at bargain price Fringe benefits not properly reported for tax purposes, e.g., personal use of automobile, spousal travel, expense reimbursements not properly accounted for Lobbying ... attempting to influence legislation.  Measurement methods: • “Substantial Part” test - violation results in excise tax and revocation of exemption, • “Expenditure” test - violation results in excise tax and/or revocation of exemption  Must make election on Form 5768 Political Activity  Direct and indirect candidate support: • Contributions • Participation in campaigns • Public statements for/against a particular candidate  Absolute Prohibition! PACI     Political Activity Compliance Initiative Started in 2004 election cycle Continued 2006 election cycle Procedures to ensure expeditious review and consistent, nonpartisan treatment PACI time Blues[1] [1] References to I, you, me, mine and son refer to the section 501(c)(3) organization, which is not quite onomatopoeia but some other literary device that escapes me at this point.  They won’t let me raise a fuss, They won’t let me raise a holler[2]  [2] The absolute prohibition on campaign intervention for 501(c)(3) organizations is in the statute, so ―they‖ would refer to Congress, although the same folks that say ―the IRS Code‖ also erroneously blame us for this one. About my boy, run for Congress they won’t let me spend a dollar[3]  [3] Although organizations can spend money on acts of campaign intervention (and incur tax under section 4955), the expenditure of funds is not required for prohibited campaign intervention. Also note that the prohibition is not limited to endorsements, but includes any activity Every time I want a speaker, my favorite candidate The Service says, "No dice, son, you can’t interventiate"[4]  [4] Sometimes you have to sacrifice to make it rhyme. And you can’t do indirectly what you can’t directly do[5]  [5] Tongue twister. The political campaign prohibition cannot be avoided by cutesy maneuvers (see below). In addition, a section 501(c)(3) organization cannot set up a section 527 organization nor can it fund political campaign activities of another section 501(c) organization that is not prohibited from political campaign intervention (such as a section 'Cause there ain't no cure for the PACI time blues You can’t be in the pews with biased voter’s guides on Sunday[6]  [6] An organization may engage in prohibited campaign intervention by passing out biased voter guides, even if it did not prepare the guides, as the statute expressly applies to distributing statements as well as publishing them. A section 501(c)(3) organization that encourages others to pass out biased voters’ guides on its property, or permits others to do so, may also be engaged in And you can’t be hyperlinkin’ to the DNC/RNC (choose one) on Monday[7]  [7] Hyperlinks on an organization’s website to candidate websites or other websites can constitute prohibited campaign intervention if the links show bias for one candidate or candidates over another. Fact Sheet 2006-17. An organization is responsible for what it publishes on its own web site as well as choosing to link to other sites. “I can’t tell you how to vote,” I thought that would do the trick "Well you still lose your exemption cause you’re trying to be too slick"[8]  [8] If an organization representative states ―I can’t tell you how to vote‖ before an endorsement, it does not stop the endorsement from otherwise being campaign intervention. One isolated instance would probably result in a written advisory rather than revocation. You can’t do indirectly what you can’t directly do 'Cause there ain't no cure for the PACI time blues I'm gonna go to Congress about the PACI prohibition To see about repeal of this 1st Amendment violation[9]  [9] A common misperception oft repeated by organizations and politicians is that the political campaign intervention prohibition violates the First Amendment. Not so—organizations can say anything they please, they just will not be tax- Well I went to my congressman and he said quote "I'd like to help you son, but you can’t tell people how to vote" You can’t do indirectly what you can’t directly do 'Cause there ain't no cure for the PACI time blues Unrelated Business Income  Trade or business activity • Regularly carried on • Unrelated to exempt purpose Unrelated Business Income Examples  Examples: • Advertising • Gaming activities • Sale of merchandise & publications • Parking lot for general public • Rental income, if  Debt-financed Unrelated Business Income Exceptions  Exceptions: • Substantially all work performed by volunteers • Activity conducted primarily for convenience of members • Trade or business involves sale of donated merchandise Annual Filing Requirements • Form 990-EZ or 990 required depending on gross receipts & assets • E-Postcard –gross receipts < $25,000 (tax year 2007) • Form 990-T: gross income from unrelated trade or business > $1,000 • Employment tax returns required for all employees Disclosure Requirements  Organization must make available if requested or provide copies: • Forms 990 for past three years • Application for recognition of tax-exempt status • Forms 990-T filed after 8/17/2006 (only 501(c)(3))  Do not have to provide copies if ―widely available‖ (but still must permit walk in inspection) Recordkeeping Requirements  Must maintain records that: • Justify right to exemption • Enable filing accurate tax and information returns  Includes: • organizing documents & bylaws, minute books, property records, general ledgers, member lists, offerings collected Contact Information  http://www.irs.gov/eo • for forms, publications or general information on exempt organizations.  EO Customer Service (toll-free): 1 (877) 829-5500 • for general questions or assistance with applications or exempt organizations forms. Publications      526 - Charitable Contributions 557 - Tax-Exempt Status for Your Organization 598 - Tax on Unrelated Business Income of Exempt Organizations 1771 - Charitable Contributions: Substantiation and Disclosure Requirements 583 – Starting a Business and Keeping Records