990 Basics for Exempt Organizations: Creating Trust Through h Transparency and Accountability

Transcription

1 for Exempt Organizations: Creating Trust Through h Transparency and Accountability Denise P. Hill, CPA Senior Manager February 29, Elliott Davis, PLLC 2012 Elliott Davis, LLC

2 How do you know if an organization i is exempt? Request a copy of the IRS Determination Letter OR search the IRS Business Master File at Request a copy of their Form 1023 or Form 1024: Must File Form 1023 or 1024 to request Exempt Status from the IRS (Registration with the SC Secretary of State is just a part of the exempt process)

3 Sample IRS Determination Letter

4 IRS Business Master File:

5 Request a copy of their Form 1023 or Form 1024: Must File Form 1023 or 1024 to request Exempt Status from the IRS. (Registration with the SC Secretary of State is just a part of the exempt process)

6 South Carolina Secretary of State Articles of Incorporation 990 Basics

7

8 Annual Filing Requirements - Form 990-N / 990-EZ / SC Secretary of State Annual Filing - Donor Acknowledgement IRS Publication 1771 A donor is responsible for obtaining a written acknowledgment from a charity for any single contribution of $250 or more before the donor can claim a charitable contribution on his/her federal income tax return. A charitable organization is required to provide a written disclosure to a donor who receives goods or services in exchange for a single payment in excess of $75.

9 Filing Thresholds: Form Tax Year Gross Receipts Total Assets 990N 2010 less than $50, EZ 2010 >$50k and < $200k AND less than $500k > $200k OR > $500k

10 Form 990-N / The E-Postcard - Failure to file will result in revocation of your tax-exempt status if, as of the filing date of the third year, the filing requirement is not met for 3 consecutive years. - To file, go to: (a free website hosted by the Urban Institute)

11 What is Form 990? Form 990 is used by the IRS as the primary tax compliance tool for tax-exempt organizations and must be filed annually to maintain your exempt status. Because Form 990 is available to the public it is the key transparency tool the public, state charity regulators, media, researchers and policy makers rely on for information about the tax-exemptsector.

12 Redesigned d Form 990 In 2008, Form 990 was redesigned based on three guiding principles: - Enhance transparency to provide the IRS and the public with a realistic picture of the organization - Promote compliance by accurately reflecting the organization s operations so the IRS may efficiently i assess the risk of noncompliance - Minimize the burden on filing organizations

13

14

15 Checklist of Required Schedules A. Public Charity Status I. Grants B. Schedule of Contributorstors J. Compensation Detail C. Political and Lobbying K. Bonds D. Supplemental Financial L. Interested Persons / Transactions E. Schools M. Non-Cash Contributions F. Foreign Activity N. Major Dispositions G. Fundraising and Gaming O. Supplemental Information H. Hospitals R. Related Organizations Abbreviated Form 990 Review Guide Attached

16

17 The IRS will begin cross-checking compensation between their records and the SSA

18

19

20

21 The IRS does not impose compensation limits on the definition of officers, etc. for the Statement of Functional Expenses. An organization may use their own definitions to report income on this line.

22 Governance, Management, and Disclosure The IRS believes that the absence of appropriate policies and procedures may lead to opportunities for excess benefit transactions, ti inurement, operation for non-exempt purposes, or other activities inconsistent with exempt status.

23

24

25 IRS Focusing on Director Independence

26 Is there a presumption of wrong doing if not in place? Do not expect donors, grantors, newspaper reporters, etc. to read the Header to the Form 990 or the Instructions! ti

27 Sample Governance Documents Attached: - Document Retention Policy Exhibit A - Whistleblower Policy Exhibit B - Conflict of Interest Policy Exhibit C

28 What are Donors and Watchdog Groups Focused on? - Truthful and Accurate Appeals - Charity Website Disclosures - Donor Privacy - Respond Promptly to Complaints - Audit Report if Income more than $250,000 - Accountability / Efficiency by meeting certain ratios

29 Form 990 is one of the most visible means of communicating transparency and accountability to your donors.

30 Public Accessibility of Information: Who is looking at your numbers and what are the numbers saying about your organization?

31 BBB: BBB Wise Giving Alliance American Institute of Philanthropy Charity Navigator GuideStar Lists all Exempt Organizations Approved by IRS

32

33

34 What is GuideStar? - GuideStar was founded in 1994 as a clearinghouse of information on non-profit organizations. The IRS Form 990/990-PF, as well as other data collected by or provided to GuideStar, is published on the website. - Assume that donors and grant makers will look at GuideStar treat it as a marketing tool.

35

36

37

38

39 How are Charities Judged by Donors/Funders? Forbetterorworsenonprofit accountability hascometo mean relative spending on program versus supporting services Program service spending ratios goal is 65/35 ratio or better Fundraising Efficiency Ratio goal is no more than 25-50% of contributions earned should be spent on fundraising

40 Critical Role of Functional Reporting of Expenses by Nonprofits Nonprofit organizations are required to report information about the functional classification of expenses in the statement of activities (categories include program service, management and general, and fundraising). Primary reason is to help management, board members, donors, creditors, and others determine how effectively a nonprofit is fulfilling itsmission i and using its resources. Key watchdog groups, donors and other stakeholders are critically assessing how resources are being used and some are becoming more critical of how costs are being allocated. The perception has developed that organizations with low fundraising and operational expenses are more efficient and make better use of their assets.

41 Program Services: Program expenses are those costs generated in support of activities that directly advance your nonprofit mission. For example, if your mission is to provide clothing for needy families, money spent to buy those clothes is a Program Service expense. On the other hand, money spent to raise donations that will eventually go tobuy those clothes does not qualify as Program expenses. - Does the expense reach the users of our services? - Does the expense have a direct effect on program service delivery? If the answeris yes, youaredealing with a program expense.

42 Management and General: This includes expenses involved in general oversight, business management, record keeping, budgeting, finance and other management and administrative activities. Typical examples are all Board of Directors expenses, officer liability insurance, legal expenses, investment expenses and accounting or bookkeeping expenses.

43 Fundraising: Fundraising expenses are the costs you incur in bringing in revenue, typically y (but not only) through public donations. Fundraising expenses include: - Publicizing and conducting fundraising campaigns - Maintaining i i donor mailing lists - Conducting special fundraising events - Preparing and distributing fundraising manuals, instructions and other materials such as brochures on how to establish a donor advised fund or how to leave a bequest. Also includes grant writing costs. - Conducting other activities involved with soliciting contributions from individuals, foundations and government agencies

44 Allocation of Shared Expenses: Costs that can be identified with a particular function should be charged to that function. For example, copier, postage and telephone activity can be allocated directly to their specific uses (although doing so is often time consuming or impractical). Many expenses, however, are shared expenses which support program services, management and fundraising activities of the organization. Examples include rent, utilities, telecommunication charges, and wages. Shared expenses should be allocated using a method or strategy that is reasonable, justifiable and consistently applied.

45 Space Allocation Method: If the personnel performing the administrative functions for your organization take up20%of the total office space, you would allocate 20% of the shared expenses, such as rent, utilities, etc. to management and general. Simple method not time consuming but not as accurate.

46 Time Analysis: This method requires that all employees identify how much of their time is spent doing work in each of the three expense areas (administrative, fundraising, program service). Lengthy process that could span weeks or months of employee time analysis depending on the cyclical variety of your organization s work. More work but more accurate. Calculate the total time the organization spends in each area and use the resulting percentages to allocate shared costs.

47 What does the IRS have planned for FY 2012? Cross checks of compensation reporting. Now that time frame (calendar year versus organization fiscal year) for Form 990 reporting of compensation conforms with W-2 reporting, the Form 990 information can be compared to what a nonprofit employer reports to the Social Security Administration. The IRS will be looking to see if compensation is reported on Form 990 but not on Form W-2 or 941, orif there are other reporting discrepancies.

48 Confirmation of charitable purpose. Programs will continue to be scrutinized to see if they really have been established for a charitable purpose or if they are primarily self-serving. Supporting organizations, typically set up to benefit one charity, are also targeted for special review. Reporting of loans. Over the past several years, IRS investigations of loans to officers, directors, trustees, and key employers has resulted in tax assessments of over $5.5 million and over $480,000 in employment taxes. There were also many errors in reporting that needed adjustment. The IRS plans to continue its review of these loans.

49 Compliance checks (in which h the IRS asks about a specific item on a Form 990 or for more information on an organization s operations) are also being used extensively they require fewer resources and, as the report delicately puts its, enable the IRS to touch more organizations than by using an exclusively exam-based strategy. Audit Collaborations with the Social Security Administration and the States also allow the IRS to identify more effectively non-filers and noncompliant organizations so that the cases selected for exams were more likely to result in finding significant issues.

50 Prohibited political activity for charities. The IRS will continue to investigate allegations of prohibited political activity i by those exempt under IRC Section 501(c)(3). Based on the IRS s experience in the past few election cycles, they have developed better processes to identify prohibited political activities. Advocacy or Lobbying? Summary Memo Attached

51 Health Care Tax Credit for Small Employers: Providing health care coverage. A qualifying employer must cover at least 50 percent of the cost of health care coverageforsomeofitsworkersbasedonthesinglerate. Firm size. A qualifying employer must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible). Average annual wage. A qualifying employer must pay average annual wages below $50,000. Maximum Credit Amount. The credit is worth up to 35 percent of a small business' premium costs in 2010 (25% for tax-exempt employers). On Jan. 1, 2014, this rate increases to 50 percent (35 percent for tax-exempt employers). Phase-out. The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers. Small employers, whether businesses or tax-exempt organizations, will use new Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the small business health care tax credit. Tax-exempt organizations will include the amount of the credit on Line 44f of revised Form 990-T, Exempt Organization Business Income Tax Return. Form 990-T has been revised for the 2011 filing season to enable eligible ibl tax-exemptorganizations i eventhose that owe no tax on unrelated business income toclaim the small business health care tax credit.

52 990 Resources: For complete set of Form 990 and instructions, go to /h IRS Exempt Organization Newsletter: IRS Micro-Website for Exempt Organizations: SC Association of Nonprofit Organizations: GUIDESTAR: Clearing House for Nonprofit Information:

53 Bottom Line - Much more information will be available to the public about your organization - Your staff is going to spend more time gathering information - Board members will need to be more involved

54 Recommendations Take the time to develop policies that are a good fit for your organization; i explain anyonshdl Schedule O that are not in place at the end of the year such as: - Compensation Review - Conflict of Interest Policy - Whistleblower Policy - Document Retention & Destruction

55 Form a small group with appropriate members of management and the Board to review the new 990 in detail. Consider providing Form 990 to all directors before filing. Provide resources/support for your staff to handle the increased disclosures Consider that this new information will likely be used by your funding sources and donors

56 Questions? This material was used by Elliott Davis during an oral presentation; it is not a complete record of the discussion. This presentation is for informational purposes and does not contain or convey specific advice. It should not be used or relied upon in regard to any particular situation or circumstances without first consulting the appropriate advisor. No part of the presentation may be circulated, quoted, or reproduced for distribution without prior written approval from Elliott Davis Elliott Davis, PLLC 2012 Elliott Davis, LLC 56

57 Denise P. Hill, CA R. Scott McClelland Phone: Website: Elliott Davis, LLC/PLLC is one of the largest accounting, tax and consulting services firms in the Southeast and ranks among the top 50 CPA firms in the U.S. With offices in SC, NC, GA and VA, the firm provides clients across a wide range of industries with smart, customized solutions and its people p with rewarding opportunities. Founded in 1925, Elliott Davis is a member of The Leading Edge Alliance, an international professional association of independently owned accounting firms based in the U.S. and is strategically aligned with LEA Europe and LEA Asia Pacific, a worldwide network of more than 450 offices in 100 countries around the globe. For more information about Elliott Davis and its services, visit p// 2012 Elliott Davis, PLLC 2012 Elliott Davis, LLC 57