profitable solutions for nonprofits

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1 Winter 2013 profitable solutions for nonprofits The Financial Side of the Nonprofit Industry IN THIS ISSUE 2 Getting a Handle on the Flow of Cash 3 Maintaining the 501(c)(3) Status 6 Newsbits 8 KSM Not-for-Profit News Katz, Sapper & Miller, LLP Certified Public Accountants

2 profitable solutions for nonprofits Getting a Handle on the Flow of Cash By Pete Buck, CPA Director pbuck@ksmcpa.com In a slow economy, many nonprofit leaders worry about having enough money to meet their organization s financial obligations each month; but those who effectively monitor their nonprofit s cash flow can successfully predict when the money coming in will balance with the money going out, when there will be a surplus of cash, and when there will be a shortage. They can plan and take actions accordingly. What Is Cash Flow Management? Cash flow management involves analyzing cash inflows and outflows based on the timing of receipts and payments. It is more than taking annual budget figures and dividing by 12 to come up with a static, monthly amount this will not provide an accurate snapshot of cash flow. For example, consider an annual event. If it is a holiday dinner, costs will rise in November and December as the organization plans and pays for the event. Costs also may increase in January if an annual membership directory is published. 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. create rows for the following information: Beginning balance This line shows the amount of cash available at the start of the month. Cash coming in Create line item entries for the largest income categories 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. Net inflow/outflow Subtract the cash going out from the cash coming in to determine net inflow or outflow. Continued on page 4. See Cash Flow. Where to Begin? To begin managing 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, 2 Winter 2013

3 THE FINANCIAL SIDE OF THE NONPROFIT INDUSTRY Maintaining the 501(c)(3) Status By Casse Tate, CPA, MS Manager A nonprofit organization s status with the Internal Revenue Service (IRS) as a taxexempt public charity gives it significant benefits paying no federal, state or local income taxes is the most obvious advantage. The designation also enables nonprofits to receive donations, qualify for special grants and government funding, and receive special rates for services, such as mail delivery. In short, the status better enables an organization to apply its financial resources toward its mission and goals than if it were a for-profit entity. But keeping the 501(c)(3) status is not automatic. Here are some important do s and don ts to follow to retain the privilege: Do comply with reporting obligations. Each year a nonprofit is required to file an IRS Form 990 (i.e., Form 990, Form 990- EZ or Form 990-N), depending on the amount of its total annual receipts and total assets. If a nonprofit fails to do so for three years in a row, its tax-exempt status will be revoked. A nonprofit must also file all required payroll tax returns for its employees and 1099 forms for independent contractors, and answer related questions about these workers on the Form 990. Do maintain the required level of public support. As detailed on Schedule A of the 990, if a 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), it will also need to pass the public support test on Part II of Schedule A. If an 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 Internal Revenue Code (IRC) Section 509(a)(2), it will 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 an organization does not pay income taxes, it must still pay applicable employment taxes, such as the employer portion of each employee s Social Security and Medicare taxes. And it must withhold from 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 paid to an executive director and key employees are available to the public on an organization s 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 used 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 the organization s board of directors or one of its committees. Continued on page 5. See Public Charity. Katz, Sapper & Miller 3

4 profitable solutions for nonprofits Cash Flow (continued from page 2) Ending balance Add the beginning balance to the net inflow/outflow number to get an idea of the cash position for each month. Use historical data in addition to what is on the calendar for the year ahead to help create the projections. Remember, this is a time-based report, not simply an average of expenses and income over 12 months. Be realistic about when cash will actually come in. If a big fundraiser is cash-based, expect to have the money in the month of the event, but if a fundraising campaign is being executed, donations can come in months after initial mailings. This should be reflected in the projections. What Other Information to Collect? To complete the cash flow report, compile a total of cash on hand and estimates of cash receipts with their due dates. Also enter into the report payment amounts and schedules for personnel expenses (including salaries, wage increases, taxes and benefits). Other data needed 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). Request Help, If Needed A CPA or business advisor can help devise a cash flow report and review maiden entries. He or she can also help ensure that reports are used to the 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 an organization s viability. USING A CASH FLOW REPORT The effort has been made to collect information for the cash flow report. So, what s next? With projected cash flow for the year, an organization 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 can be invested and for what period of time. An organization s excess revenue over expenses must be evaluated 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 the nonprofit s full financial picture. 4 Winter 2013

5 THE FINANCIAL SIDE OF THE NONPROFIT INDUSTRY Public Charity (continued from page 3) 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. A nonprofit was granted its taxexempt status to benefit the public, not private parties or interests. 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 the 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 the organization ever decides to do business with related parties (e.g., board members, founders, executives or their businesses), the other quotes will support the going rate in the market and show the organization is not providing an excess benefit to the related party. Should the IRS determine that an organization provided excess benefits, the organization and its leaders will be subject to penalties as well as the possibility of losing the nonprofit s exempt status. The status better enables an organization to apply its financial resources toward its mission and goals than if it were a for-profit entity. organization s exempt mission. Although the IRC 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. For example, if an organization has more expenditures for the unrelated activity than program expenses, the IRS likely will consider terminating its exempt status. Courts have considered an organization spending even as little as 10 percent of its total efforts on a UBI activity to be too much. Don t pay more than market rates for goods and services. Use an organization s 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. A nonprofit can elect to use the latter option called a 501(h) election by filing Form (Churches are ineligible.) The 501(h) election sets a defined limit on the amount of resources an organization Continued on page 7. See Public Charity. Katz, Sapper & Miller 5

6 profitable solutions for nonprofits Newsbits Tax-Deductible Contributions to Single Member Limited Liability Companies The Internal Revenue Service (IRS), in Notice , clarifies that donors who make contributions to a domestic single member limited liability company (LLC) that is wholly owned by a charity will be treated as made to the charity for income tax deduction purposes. This notice is helpful where, for example, a donor wants to give real estate to the charity. For liability reasons, the charity may not want to take the title to the property directly. The charity can now use its wholly owned LLC to receive this property. The single member LLC does not file its own tax return, and its income and expenses are reported on the tax return for the charity. Prior to this notice, it was not clear that a donor would be entitled to a charitable income tax deduction under these circumstances. How to Reach Younger Donors A survey of more than 6,500 young people, ages 20 to 35, suggests that one of the best ways to reach them is to make websites easy to read on a mobile device. The Millennium Impact Report 2012, sponsored by the Case Foundation, found that more than threequarters of respondents own a smartphone, and 79 percent of those respondents have used the device to connect with a nonprofit, including via Facebook, Twitter, 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 percent of respondents said they liked to learn about a nonprofit through its website. Respondents also liked to learn about organizations through social media (55 percent), newsletters (47 percent), print (18 percent) and face-to-face conversations (17 percent). Pro Bono Services Needed The national Pro Bono Readiness Survey finds that 66 percent 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. Continued on page 7. See Newsbits. 6 Winter 2013

7 THE FINANCIAL SIDE OF THE NONPROFIT INDUSTRY Newsbits (continued from page 6) Revising Financial Data on Charity Navigator Recently, Charity Navigator established a way to reflect the impact of nonprofits that have taken a more conservative approach to valuing their corporate product donations (also known as gifts in kind ). The website is allowing these charities 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. 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 on the IRS Form 990 and audited financial statements from prior years will raise concerns 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. Public Charity (continued from page 5) can use to influence legislation before losing its exempt status, based on a percentage of its total expenses. 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. Although there are several IRS rules with which nonprofit organizations need to comply to maintain the 501(c)(3) status, the financial benefits given to these public charities can create opportunities for growth and greater awareness. Katz, Sapper & Miller 7

8 800 E. 96th Street Suite 500 Indianapolis, IN PRESORTED FIRST CLASS U.S. POSTAGE PAID INDIANAPOLIS, IN PERMIT NO Our People: Your Success KSM Not-for-Profit News KSM s Commitment to the Not-for-Profit Industry: Our staff is personally, not just professionally, committed to the notfor-profit industry. Many KSM partners and staff members serve on boards, supporting Indiana s not-for-profit organizations through their contributions of time and talent. Ashley Christie Named to the Philharmonic Orchestra of Indianapolis board of directors Steve Combs Named to board of directors of Tangram Matt Gard Reappointed as vice president of finance to the Central Indiana Chapter of The Association for Operations Management (APICS) board of directors Scott Grotjan Named to the Indianapolis Public Schools (IPS) Education Foundation board of directors Ron Lenz Appointed as president of the board of directors of VSA Indiana Josh Malarsky Named co-chair of the Young Leaders Group for the Indiana chapter of the Urban Land Institute Terry O Neil Elected to the Indiana Chamber of Commerce board of directors For more information about Katz, Sapper & Miller, please visit ksmcpa.com. Profitable Solutions for Nonprofits is a quarterly publication distributed to our clients and friends. Any tax advice or opinion herein contained is not intended to be used, and cannot be used, by anyone to avoid the imposition of any federal tax penalties. For more information on the articles featured in this edition of Profitable Solutions for Nonprofits, please contact the authors at KSM Business Services, Inc. Learn more about Katz, Sapper & Miller s affiliate companies: KSM Charitable Foundation Services ksmcfs.com KSM Consulting, LLC ksmconsulting.com KSM Transport Advisors, LLC ksmta.com TouchPoint Recruiting Group, LLC touchpointrecruiting.com