Windes Nonprofit Advisor

Transcription

1 Winter 2013 Windes Nonprofit Advisor The Windes Nonprofit Advisor is a periodic technical publication focusing on the tax, regulatory, and accounting issues that nonprofit organizations routinely confront. On the tax side, the Windes Nonprofit Group possesses experience in preparing and reviewing Forms 990, 990-T, 990-PF, and state tax-exempt forms, in addition to having experience in the preparation and filing of both federal and state tax exemption applications for public charities, private foundations, and other exempt organizations. Additionally, the Group can assist in providing valuable guidance (governance / reasonable compensation documentation / public support test / special events / lobbying / hospitals / transactions with related parties) to nonprofit organizations. On the audit side, the Windes Nonprofit Group prepares audited financial statements and ERISA audits for over 80 nonprofit organizations. For retirement plans, Windes & McClaughry has experts on staff for 403(b) plan administration and compliance, including plan document issues, Form 5500 preparation and filing, non-discrimination testing and government compliance programs. The Windes Nonprofit Group is composed of the following individuals who are dedicated to providing nonprofit organizations with high-level tax, regulatory and accounting consulting, tax compliance services, and financial statement preparation: Ron Kulek, CPA Lance Adams, CPA Tom Huey, CPA Ryan Choate, CPA, CFE Jeffrey Fisher, CPA Richard Green, CPC, APA Donita Joseph, CPA, MBT Amy Vaughn, JD, CPA, LLM Christopher Powers, CPA Nika Carter, CPA Cherie Romar Audit Partner Audit Partner Audit Senior Manager Audit Senior Manager Audit Manager Employee Benefit Services Partner Tax Partner Tax Senior Manager Tax Manager Tax Manager Tax Staff Please do not hesitate to contact any member of the Windes Nonprofit Group at (562) or via at nonprofit@windes.com.

2 Oh Pease! The Charitable Deduction is Alive and Well, at least for 2013! Does the Pease limitation, which was reinstated in the American Taxpayer Relief Act of 2012, limit charitable deductions for high-income taxpayers? There is a lot of misunderstanding about the effect of the Pease limitation on charitable contributions, which may result in smaller donations to charities. While the limitation will impact some itemized deductions, the increase in tax rates from 35% to 39.6% helps to offset the limitation. In short, charitable giving will continue to provide a tax benefit. The Pease limitation, which became effective for the 2013 tax year, will affect taxpayers with adjusted gross income (AGI) levels that exceed $300,000 for joint filers and $250,000 for individuals, indexed for inflation. The limitation is the lesser of 3% of the excess of AGI over the applicable amount or 80% of the amount of itemized deductions otherwise allowable for the taxable year. The Pease limitation does not apply to medical expenses, investment interest, casualty and theft losses, and gambling losses. Consider an example of a married couple whose income was $600,000. Calculate the amount over the threshold. ($600,000 - $300,000 = $300,000). The 3% limitation applies to the amount over the threshold, in this case $300,000, or a $9,000 limitation. Next, calculate the impact on the applicable itemized deductions on the taxpayers return. If the couple s applicable itemized deductions were $40,000, they would apply the 80% limitation to that amount and get $32,000. Since the rule is to use the lesser of the 3% or 80% calculation, the limitation for this married couple is a $9,000 reduction of applicable itemized deductions. The new rates for 2013 would put the married couple with a $600,000 AGI in the 39.6% tax bracket up from 35%. Since the Pease limitation limits itemized deductions, the impact on tax is a percentage of the total limitation. In other words, the impact of an itemized deduction limitation of $9,000 would increase this taxpayer s tax liability by 39.6% of $9,000, or $3,564. Let us go back to the married couple with the $600,000 AGI. They are in the 39.6% tax bracket. If their charitable contributions totaled $10,000, their remaining $30,000 of itemized deductions would most likely be interest and taxes nondiscretionary amounts that the taxpayer has to pay. The non-discretionary deductions of $30,000 would absorb the $9,000 haircut. Thus, when the taxpayer makes a $10,000 contribution, there is no Pease impact on the tax, making the tax savings on the contributions 39.6% or $3,960. 2

3 Oh Pease! The Charitable Deduction is Alive and Well, at least for 2013! (continued) Under the prior year rules, without the limitation but with a 35% tax bracket, if the taxpayer donated $10,000 they would get a tax benefit of $3,500. With this example, the taxpayer now gets an additional $460 of tax savings for the same amount of charitable contribution. However, do not take the charitable deduction for granted, as there is still talk in congress of limiting the charitable deduction in future years as a way to raise revenue without raising taxes. Do you have questions about the Pease limitations? Windes & McClaughry has extensive experience in individual, as well as nonprofit tax issues, and we are happy to help. Please contact any of the following people for more information or at (562) Donita Joseph, CPA, MBT Partner djoseph@windes.com Amy Vaughn, JD, CPA, LLM (Tax) Senior Manager avaughn@windes.com Nika Carter, CPA Manager ncarter@windes.com 3

4 IRS Opens the Voluntary Correction Program to 403(b) Plan Issues The Internal Revenue Service (IRS) has updated the Employee Plan Compliance Resolutions System (EPCRS), the program that allows plan sponsors to voluntarily correct plan errors to keep their plans qualified. Revenue Procedure made many changes to EPCRS, the most significant of which is the expansion of the correction programs to 403(b) arrangements for the first time. Since the 2009 regulations were issued governing 403(b) plans, they have been subject to the same rules as 401(k) plans, but were not eligible for the IRS correction programs to fix any errors, including the requirement to adopt a written plan document. Prior to this update to the EPCRS program, 403(b) plans were subject to maximum IRS sanctions for any errors discovered on audit, with no assurance that voluntary correction measures would be considered adequate. The Revenue Procedure generally allows 403(b) plans to apply the same correction methods and procedures that are available to 401(a) plans, including correction of pre-2009 errors. In most cases, plans must have an IRS approval letter to self-correct significant errors under EPCRS, but there is currently no such IRS approval program for 403(b) documents. This issue has been addressed by granting presumed qualified status when: The employer is eligible to establish a 403(b) program and adopted a written plan document intended to comply with the final regulations effective 1/1/09, or The employer failed to adopt such a document, but adopts a plan currently and submits an application for retroactive approval under the new EPCRS procedures. Submissions made prior to December 31, 2013 are eligible for a 50% fee reduction. The opening of the EPCRS program to 403(b) plans is an important step in leveling the playing field for tax-exempt employers. It is important to note, however, that the availability of the voluntary correction program has the likely consequence of hardening the IRS attitude for any errors discovered upon audit. Plan sponsors should undertake a thorough review of their plan compliance to ensure that take advantage of the EPCRS relief as soon as possible. For questions regarding your plan or for more information on 403(b) plans, please contact Richard Green at (562) or at rgreen@windes.com. Richard Green, CPC, APA Partner 4

5 ERISA Fiduciary Responsibilities: What You Don t Know Can Hurt You Are you a plan fiduciary? Are you involved in your company s plan governance, but do not know if you are a fiduciary? Just what is a plan fiduciary and what are the responsibilities of a plan fiduciary? Questions like these are not uncommon; however, ignorance is not bliss when it comes to fiduciary and governance responsibilities. Plan officials can be held personally liable and severely penalized for not meeting their responsibilities, whether they are aware of them or not. The United States Department of Labor defines a plan fiduciary based on the functions performed for the plan, not necessarily someone who holds that title. All plans must have at least one named fiduciary, in most cases it is a trustee, plan committee or board of directors. For certain functions as prescribed by the Employee Retirement Income Security Act of 1974 (ERISA) Section 405(c), an individual or group can be hired to act in such a capacity. One of the key defining aspects of a fiduciary s roles is the carrying out of decisions impacting the plan and acting on behalf of the plan. Detailed definitions and explanations are found in ERISA Section 3(21). So just what are the some of the liabilities a fiduciary can face and what can cause them? Under ERISA Section 409, a fiduciary is personally liable for a direct breach of responsibility. Some of the more common breaches include investment losses from imprudent policy, mismanagement and personal gain. Under ERISA Section 502(a)(2), plan participants can recover damages for breach of duty, whether the breach impacts an individual s account or the plan as a whole. The main routes through which action may be brought against fiduciaries is through civil action from a participant or beneficiary to recover benefits due under the terms of the plan, under ERISA Section 409 or through equitable relief. Through civil action, fiduciaries are typically liable for any loss caused by a breach of fiduciary duty and are responsible for making the plan and its participant s whole through the restoration of profits. There can also be an additional 20% penalty of the applicable recovery amount imposed for statutory penalties. There are criminal penalties for fraud or force to interfere with a participant or plan s rights or for willful violation of reporting requirements. Fiduciary s can obtain insurance specifically for breach of duty, but this coverage is not covered under other policies such as a fidelity or surety bond. This insurance is permitted to be purchased with plan assets. It s important to note that fiduciaries are also responsible for the actions of co-fiduciaries. Rather than going down the route of litigation, dealing with your insurance company and hoping you did not violate the terms of the policy, it s much easier to exercise proper oversight of your plan. Some of the best ways to ensure you are carrying out your duties include: 1. Hiring the right service provider - from your accountants to your attorneys, third-party administrators and investment providers, you should engage a firm with experience and knowledge of the regulations and that you can consult every step of the way; 5

6 ERISA Fiduciary Responsibilities: What you Don t Know Can Hurt You (continued) 2. Monitoring review your plan operation at least annually through the use of plan meetings (with minutes) and checklists. Also review your plan activity to ensure it is being carried out in accordance with your plan document and make sure the plan document is being updated for required amendments; 3. Training attend appropriate industry updates and basic trainings so you are not blind-sided with some simple plan requirements, you should also understand the nature of your plan s investments and fees as well as your plan s financial statements; 4. Documenting ensure your meetings have minutes, you have a documented investment policy and participants are receiving the accurate information; and 5. Correction of deficiencies have operational or design deficiencies been identified in your plan? If so, what is being done to correct them and to ensure they do not recur? Both the IRS and DOL have resources on their websites to help fiduciaries and employers with their responsibilities for operating qualified plans in compliance with the myriad of regulations. Fiduciaries are typically responsible for several other non-plan-related functions that are considered a high priority. Fiduciary duties are something to be taken seriously and although you may not see a lot of direct benefit for properly acting out your responsibilities, you are faced with serious penalties should you choose not to do so. If you are acting in the capacity of a fiduciary, we recommend that you spend appropriate time up front preventing issues from occurring rather than reacting to issues and then figuring out just how much exposure you have personally. If a deficiency is discovered, consult with the appropriate professional to help ensure the proper correction is made for continued qualification of the plan. For more information on this topic or to receive aids to assist in carrying out your fiduciary duties, please contact Jeff Fisher at (949) or jfisher@windes.com. Jeffrey E. Fisher, CPA Manager 6

7 Charitable Contribution Reporting: Substantiation and Disclosure Requirements The Internal Revenue Code applies substantiation requirements for donors and disclosure requirements for charitable organizations in connection with charitable contributions. Substantiation of Contributions A donor can deduct a charitable contribution of $250 or more only if the donor has a written acknowledgment from the charitable organization. The donor must get the acknowledgement by the earlier of: The date the donor files the original return for the year the contribution is made, or The due date, including extensions, for filing the return. The donor is responsible for requesting and obtaining the written acknowledgment from the donee. A donor cannot claim a deduction for any contribution of cash, a check, or other monetary gift made on or after January 1, 2007, unless the donor maintains a written record of the contribution. Written Acknowledgments The written acknowledgment required to substantiate a charitable contribution of $250 or more must contain the following information: Name of the organization; Amount of cash contribution; Description (but not value) of non-cash contribution; Statement that no goods or services were provided by the organization, if that is the case; Description and good faith estimate of the value of goods or services that the organization provided in return for the contribution; and Statement that goods or services that the organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case. 7

8 Charitable Contribution Reporting (continued) Written Record of Charitable Contribution A written record is either a bank record (such as a cancelled check) or a written communication from the charity (such as a receipt or a letter). Returns and Reports Required to Substantiate Charitable Contributions of Donated Property Charities that receive donated property may also have information reporting requirements. Requirements depend on the type of property donated, the claimed value of the donated property, and the use to which the charity puts the property. Depending on these factors, the following information reporting requirements may apply: Written acknowledgment: See above. Written disclosure statement: Required under Code section 6115 when a donor makes a quid pro quo contribution (a payment exceeding $75 partly as a contribution and partly for goods and services provided by the organization). The same document may serve as both the written acknowledgment and the written disclosure statement. The required written disclosure statement must: Inform the donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of any money (and the value of any property other than money) contributed by the donor over the fair market value of goods or services provided by the charity, and Provide the donor with a good faith estimate of the fair market value of the goods or services that the donor received. The charity must furnish the statement in connection with either the solicitation or the receipt of the quid pro quo contribution. If the disclosure statement is furnished in connection with a particular solicitation, it is not necessary for the organization to provide another statement when it actually receives the contribution. No disclosure statement is required if any of the following is true: The goods or services given to a donor have insubstantial value as described in Revenue Procedures and 92-49, There is no donative element involved in a particular transaction with a charity (for example, there is generally no donative element involved in a visitor's purchase from a museum gift shop). There is only an intangible religious benefit provided to the donor. The intangible religious benefit must be provided to the donor by an organization organized exclusively for religious purposes, and must be of a type that generally is not sold in a commercial transaction outside the donative context. For example, a donor who, for a payment, is granted admission to a religious ceremony for which there is no ~~~~~~ 8

9 Charitable Contribution Reporting (continued) admission charge is provided an intangible religious benefit. A donor is not provided intangible religious benefits for payments made for tuition for education leading to a recognized degree, travel services, or consumer goods. The donor makes a payment of $75 or less per year and receives only annual membership benefits that consist of: Any rights or privileges (other than the right to purchase tickets for college athletic events) that the taxpayer can exercise often during the membership period, such as free or discounted admissions or parking or preferred access to goods or services, or Admission to events that are open only to members and the cost per person of which is within the limits for low-cost articles described in Revenue Procedures and (as adjusted for inflation). Also see the discussion of insubstantial value above. Good Faith Estimate of Fair Market Value An organization may use any reasonable method to estimate the fair market value (FMV) of goods or services it provided to a donor, as long as it applies the method in good faith. The organization may estimate the FMV of goods or services that generally are not commercially available by using the FMV of similar or comparable goods or services. Goods or services may be similar or comparable even if they do not have the unique qualities of the goods or services being valued. Example 1. A charity provides a one-hour tennis lesson with a tennis professional for the first $500 payment it receives. The tennis professional provides one-hour lessons on a commercial basis for $100. A good faith estimate of the lesson's FMV is $100. Example 2. For a payment of $50,000, a museum allows a donor to hold a private event in a room of the museum. A good faith estimate of the FMV of the right to hold the event in the museum can be made by using the cost of renting a hotel ballroom with a capacity, amenities, and atmosphere comparable to the museum room, even though the hotel ballroom lacks the unique art displayed in the museum room. If the hotel ballroom rents for $2,500, a good faith estimate of the FMV of the right to hold the event in the museum is $2,500. Example 3. For a payment of $1,000, a charity provides an evening tour of a museum conducted by a well-known artist. The artist does not provide tours on a commercial basis. Tours of the museum normally are free to the public. A good faith estimate of the FMV of the evening museum tour is $0 even though the artist conducts it. 9

10 Charitable Contribution Reporting (continued) Vehicle Donations Additional reporting requirements may apply when a charity receives a donation of a vehicle. If you have a vehicle donation, see Publication 4302, A Charity's Guide to Vehicle Donations, for detailed information. Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes may need to be filed. A donee organization must file a separate Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, with the IRS for each contribution of a qualified vehicle that has a claimed value of more than $500. A qualified vehicle is any motor vehicle manufactured primarily for use on public streets, roads, and highways; a boat; or an airplane. However, property held by the donor primarily for sale to customers, such as inventory of a car dealer, is not a qualified vehicle. Form 8282 to be Completed Upon the Sale, Exchange or Other Disposition of Certain Donated Property Form 8282, Donee Information Return. Donee organizations must file Form 8282 if they sell, exchange, consume, or otherwise dispose of (with or without consideration) charitable deduction property (or any portion) within 3 years after the date the original donee received the property. There are two situations where Form 8282 does not have to be filed. The items are valued at $500 or less, or The items were consumed or distributed, without consideration, in fulfilling the purpose or function as a tax-exempt organization. For questions regarding this topic or for more information, please contact Donita Joseph at (562) or at djoseph@windes.com. Donita Joseph, CPA, MBT Partner 10

11 Program Efficiency Ratio: What is the Right Amount? It is a common misconception that the best outcome for a nonprofit organization is to have all costs go directly to program costs, allocating as little as possible to administrative and fundraising costs. Not only is achieving this goal impossible, it is not prudent and officers of nonprofit organizations likely would not be acting in a fiduciary manner if the organization were to achieve something near a 1:00 ratio. For your typical 501(c)(3) organization, in industries ranging from public and societal benefit, social action and advocacy, to philanthropy and voluntarism, program expenses average 80% of total expenses. Included in the remaining expenses are 13% of administrative and 7% of fundraising expenses.* There are definitely exceptions to this average based on the size, age, and operating requirements of each organization. There are also many nonprofit industries for which these percentages will be substantially different. Although the amount reported by nonprofit organizations is typically in accordance with U.S. Generally Accepted Accounting Principles (unless stated otherwise), organizations can have different policies about how they allocate costs among these categories. Other factors to be considered are multi-year trends and achievement of stated goals and objectives of the organization. Although it will not reach all donors, you can elaborate on the success of your organization s programs in the footnotes to your financial statements or on the Form 990. The administrative and fundraising costs, although not directly beneficial to the mission of the organization, can be just as crucial and, in some cases, more crucial to the overall mission of the organization. The Benefit of Fundraising Dollars Fundraising dollars may be used to inform a new donor about your organization and its mission. This new donor may turn out to be a lifelong supporter of your organization. Fundraising dollars also get to play an important role in community awareness and, in the case of special events, bring together key members of the organization s management and board with the community. The Benefit of Administrative Costs Those administrative costs that some desperately try to find ways to classify as program expenses are not all that bad. They are needed not only to support the organization in administering grants and other aspects of operations, but also are indicators of a healthy system of internal control. Internal control helps prevent fraud, which should be one of the top priorities of any nonprofit organization both to benefit your mission as much as possible and to stay away from bad publicity. 11

12 Program Efficiency Ratio: What is the Right Amount (continued) An organization would never be able to grow and expand services without an administrative team looking into the details and coordinating matters behind the scenes. It is the administrative team and board that have a 360-degree view of the organization and can see in which direction the organization needs to go, which programs to expand or be removed. Very few additional dollars from donors will be earned by reducing your administrative personnel to a skeleton crew and attempting to have everyone work on your organization s programs. This can result in an over-worked system with disgruntled employees, which can have its own slew of negative consequences. If donors want their dollars protected, they should understand that this is done with administrative dollars and is absolutely necessary to ensure the proper inner-workings of any nonprofit organization. Ultimately, a donor s decision on where to donate is typically based on relationships, mission, and location rather than which organization has the best program efficiency ratio. For questions regarding this topic or for more information, please contact Jeff Fisher at (949) or jfisher@windes.com. Jeffrey E. Fisher, CPA Manager * These numbers can change up to +/- 10% based on your source, whether it s a nonprofit watchdog or other industry data-gathering site. The amounts above are based on an average from several sources. 12

13 The Ins and Outs of Succession Planning For all organizations, succession planning is a sensitive issue and has become a hot button item now more than ever. Whether or not the executive director is ready to leave or is the last person in the room to know time is up, finding the proper balance and transition is a key issue facing many nonprofits and businesses today. The statistics can be staggering, with one survey showing 40% of new CEOs and executive directors stepping down after 18 months and 64% after just four years! From increased turnover rates in today s business environment, difficulty finding the right fit and an increasing number of baby boomers falling off the retirement cliff, this issue should be resolved by every organization sooner rather than later. When it comes time to make the transition, this is typically due to a request from the board, a request from the executive or from an emergency situation. A plan should be developed by the board of directors for each of these scenarios. Given the uniqueness of the situation and the need to get the process right, most organizations will hire the help of a third party to see them through the process. From using a search firm for the replacement, to finding the best way to ask the executive to leave, obtaining assistance from someone who has been down this path is crucial. Often (or frequently), these transition issues are discussed and resolved, at least on paper, in a retreat setting where all of the relevant parties can meet and focus on the issue at hand and developing a formal succession plan. Ultimately, this can be a long process and may take many conversations over the course of months. Those responsible for succession planning should be flexible and not enter the process with a fixed mind-set, as there will be many changes and egos to consider along the way. At least part of this process should come from within. Whether the plan is to transition the second in command into the leadership role or to use him or her in the interim while searching for the new face of your organization, having the skill-set already in place can ensure your organization runs as usual during this process. Organizations can start by farming employees for key roles through cross-training and identification of high-potential leaders. The board should also be called on and actively engaged, even requesting the knowledge and help of former board members, if necessary. This can be a very challenging time for your organization and you should be able to call on as many resources as possible who have the top-level governance perspective you need. No matter what size your organization is or what industry you re in, succession planning is not something you can avoid. There will come a time in every organization s life when there will be a turnover in the leadership role. How you respond to this can have a dramatic impact on all facets of your organization, from employee morale to donor confidence. A succession plan is something to take seriously, ensure you have in place, and review periodically. For questions regarding this topic or for more information, please contact any member of the Windes Nonprofit Group at (562) , (949) , or (213) or via at nonprofit@windes.com. 13

14 Windes & McClaughry is a recognized leader in the field of accounting, assurance, tax, and business consulting services. Our goal is to exceed your expectations by providing timely, high-quality, and personalized service that is directed at improving your bottom-line results. Quality and value-added solutions from your accounting firm are essential steps toward success in today s marketplace. You can depend on Windes & McClaughry to deliver exceptional client service in each engagement. For over eighty-five years, we have gone beyond traditional services to provide proactive solutions and the highest level of capabilities and experience. Windes & McClaughry s team approach allows you to benefit from a wealth of technical expertise and extensive resources. We service a broad range of clients, from high-net-worth individuals and nonprofit organizations to privately held businesses and publicly traded companies. We act as business advisors, working with you to set strategies, maximize efficiencies, minimize taxes, and take your business to the next level. Headquarters 111 West Ocean Boulevard Twenty-Second Floor Long Beach, CA Tel: (562) Orange County Office Von Karman Avenue Suite 1060 Irvine, CA Tel: (949) Los Angeles Office 601 South Figueroa Street Suite 4950 Los Angeles, CA Tel: (213) Visit us online at: , Windes & McClaughry Accountancy Corporation 14