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If your tax-exempt nonprofit organization utilizes annual fundraising events to raise money, you’re not alone. Many nonprofits host dinner galas, golf tournaments, runs/walks, carnivals, concerts, etc. to raise awareness and funds for their cause. And for many small to mid-size nonprofits, these special events are major sources of revenue that support internal operations which deploy the organization’s mission. However, with these events comes additional recordkeeping and IRS reporting responsibilities that many organizations overlook. Here are a few ways to ensure your fundraising event is in compliance with the IRS:
Contributions received from fundraising events are different from ordinary charitable contributions received throughout the year. Ordinary contributions are made without any expected benefit in return and they are fully deductible on a donor’s income tax return.
On the other hand, event contributions are only partially deductible because attendees typically receive something in return for their donation (i.e. meal, golf greens fee, show attendance, etc.). Because of this “quid pro quo” contribution, only the portion over and above the benefit received is considered a charitable donation.
Here’s an example: Your nonprofit is hosting a gala. Tickets cost $150 per person and each attendee will receive dinner and live music. The fair market value of the dinner and music is deemed to be $50. Therefore, the attendee is purchasing a $50 meal (purchased good) and contributing $100 to your organization (charitable contribution).
Due to the infrequent nature and fundraising aspects of special events, the IRS requires them to be reported separately on the Form 990 tax return. The isolation of special events preserves the integrity of the financial information related to the organization’s program activities. This allows readers of the Form 990 to get a clear financial understanding of how the organization utilizes funds for their mission activities.
In order to facilitate this requirement, the organization needs to segregate and track all revenue and direct expenses associated with each fundraising event. In addition to segregating activities, the charitable portion of each attendee’s purchase must be determined. These contributions are then stripped from the fundraising event and shown elsewhere on the Form 990 return. Many times, this leads to the fundraising event reporting a loss on the face of their tax return.
Although uncomfortable to the organization, showing a loss from a fundraising event is a very common occurrence. When the contributions are combined with the net income from the fundraising event, it becomes clear that the events are normally very successful and raise thousands of dollars. But with that success comes added IRS compliance!
If an organization raises over $15,000 from fundraising events, there is an added responsibility of preparing Schedule G with Form 990. This schedule details the revenues and costs associated with each fundraising event.
However, tax return reporting isn’t the only compliance requirement for fundraising events. If the purchase price of a ticket for any fundraising event is greater than $75, the organization must include a statement with or on the face of the ticket stating the fair market value of the benefit received. In the case of our example, the ticket would read:
“Thank you for your cash contribution! You received goods and/or services valued at $50 with your contribution.”
This ensures the donor is aware that his or her deductible contribution is only $100 and ensures that your organization is complying with IRS rules.
If done correctly, fundraising events can be a powerful and exciting way to celebrate your nonprofit’s accomplishments or introduce your mission to new contributors. Fundraising events can also be seen as great networking opportunities or chances to give the casual donor an additional reason to support your cause.
If you would like to learn more about fundraising events or have any questions, please contact the nonprofit team at Cray, Kaiser. We can ensure your organization has the right resources in place to make your next fundraising event a success!
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“What do you mean we have to file a tax return? I thought we were tax exempt!” Barring any unrelated business income tax and other excise taxes, nonprofit organizations normally ARE exempt from taxation. But they are NOT exempt from filing an informational return. The Form 990, Return of Organization Exempt From Taxation, and its related schedules is actually one of the most complex returns the IRS requires U.S. organizations to prepare and file.
WHY Nonprofits Have to Complete a Form 990
Completing the Form 990 is time consuming and sometimes challenging, but the IRS has valid reasons for requiring it. With the benefit of zero taxation comes dishonest applications from organizations trying to defraud the system. This leaves a huge burden on the IRS and many state agencies to create methods and filing requirements to deter and identify these fake organizations. The Form 990 and other agency registration programs like GuideStar, Tax Exempt Organization Search, and various state databases help create a stable and reliable environment for informed donors to contribute nearly $500 billion annually.
This is why filling out the Form 990 timely and accurately is critical to all nonprofit organizations trying to comply with IRS requirements, validate their exempt purpose, and attract responsible donors. Errors in filling out the form can lead to misinterpretation of your organization or worse: an assumption that you may be one of the fake organizations.
HOW to Avoid Common Mistakes
Here are 11 common errors that many 501(c)(3) organizations can make that may have unintended consequences such as notices, audits, or revocation.
1) Failure to file: Failure to file for three consecutive years results in automatic revocation of your tax-exempt organization with the IRS. This will cause you to go through the entire application process for exemption all over again! And in some states, your status will be revoked within a much smaller time frame.
2) File the right return: The IRS understands the hardship it imposes on tax exempt organizations to file and has made varying levels of returns to help smaller organizations comply. The following are the income thresholds and guidelines for which return you should file:
-990-N (Postcard) – Most small organizations with less than $50,000 of revenue can satisfy their annual reporting requirements by simply submitting an online questionnaire and updating important contact information.
-990-EZ – This is the condensed version of the cumbersome Form 990. It applies to midsize organizations with revenues greater than $50,000, but less than $200,000 and assets less than $500,000. This is a consolidated four-page return that minimizes much of the complexity of the full Form 990. However, all required schedules must still be completed in full if they pertain to the organization.
-Form 990 – For larger organizations that surpass the thresholds for filing any of the other smaller returns, this complex 12-page return covers many different areas of the organization from the annual financial data to the qualitative information regarding internal controls, board members, governance, and management.
3) Hasty Mission Statement: Would you contribute to an organization that described their mission as “charitable activities”? Most donors wouldn’t since it’s lacking description and valuable information. You may not know it, but many informed donors use IRS resources, including your 990, to vet your organization before donating. GuideStar, the IRS database for nonprofit data, publishes every 990 filed under your organization. Pretend the IRS is your biggest donor and prepare your mission statement with them in mind. Your 990 may be reaching your biggest donors!
4) Combining program service accomplishments: Part III of the Form 990 asks for descriptions of your biggest program accomplishments. Don’t fall in the trap of consolidating everything you do into one all-inclusive program. For example, if you provide training services and also provide health services at a discount, these are two separate programs. Be sure to write about them separately and use as much detail as possible (see #3).
5) Understand the checklists: Part IV through Part VI are checklists, statements, and disclosures for your organization to fill out and provide understanding to the IRS. These sections identify the proper schedules you should be filling out, your activity compliance, and how you manage your organization. When completing these questionnaires, understand that a “yes” normally signifies a supplemental schedule to be filed. And in the compliance and governance sections a “no” response may mean you have no controls on your organization. Even if your accountant is preparing the return for you, they will need your input in properly responding to these sections.
6) Compensation: Part VII requires that you show all compensation paid to directors and officers. If you pay any one person more than $150,000, you must fill out Schedule J.
7) Revenue Classification: The average for-profit business entity normally has 10 lines or fewer to report income whereas nonprofit organizations have an entire page dedicated to revenue classification. Part VIII has over 15 lines, multiple subsets, and four different categories that revenue may apply to. Be sure you’re putting the right amounts on the right lines and categories.
-Revenue derived from the activities listed in your mission statement, contributions and program services, should be categorized as “Related or Exempt Function Revenue”
-Certain investment income should be categorized as “Revenue Excluded from Tax”
-If you have revenues that are neither investment income or pertaining to your mission, they are considered “Unrelated Business Revenue”
8) Unrelated Business Taxable Income (UBTI): UBTI are revenues derived NOT in the course of your exempt activity and are subject to taxation at corporate rates. Advertising in your monthly newsletter, a coffee shop in your lobby, or even an investment in publicly traded partnerships may be triggering UBTI. If you have these revenues you may need to file and pay tax on a Form 990-T. But BE CAREFUL, if you have more than 15% of your total revenues coming from these sources, you run the risk of being seen as a business entity and losing your tax-exempt status.
9) Expense Classification: If you thought the revenue reporting was complex, Part IX, the Statement of Functional Expenses, is widely considered the toughest part of Form 990. The IRS requires all 990 filers to breakout their expenses into three categories: Program, Management & General, and Fundraising.
-Program expenses are directly related to your tax-exempt purpose (program supplies)
-Management & General expenses are related to the proper running of your organization or assets and not specifically related to your programs (accounting or filing fees)
-Fundraising expenses are related to raising revenues (mailings and solicitations)
-You may think that everything you do is related to your exempt purpose, but it is not. The bigger your organization is, the more management is required. The purpose of this part is to show the IRS, and donors, where every dollar contributed is going.
Although it would be nice to throw everything in Programing and show 100% productivity, that is actually a sign that either the Form 990 was not prepared correctly or that someone is intentionally misrepresenting their activity. Depending on your organization’s industry standard, percentage application is around 80% Program, 15% Management, and 5% Fundraising. But don’t just multiply each expense by those percentages, that too is a red flag. For each indirect expense, determine the cost driver and apply a methodology for categorizing that expense.
10) Fundraising Activities: Gala dinners, golf outings, or even a bake sale are all considered fundraising activities. These should be broken out from your normal related tax-exempt activities. There’s a special location in Part VIII to report these revenues. Consider these subsets from your normal financial activity in that they should be handled independently from your other activities. The bright side is that you don’t have to include it on Part IX, Statement of Functional Expenses. Also make sure to segregate contributions raised from these events from the actual price of tickets sold for the event. Fundraising activities generating revenues greater than $15,000 require that you fill out Schedule G.
11) Matching: Several sections of the Form 990 or Schedules should match total lines reported elsewhere on the Form 990. Having these areas show different amounts looks sloppy. Make sure the following areas match:
-Part I is a summary of all amounts coming from different areas of the 990.
-Part III, line 4e, Total Program Service Expenses should match Part IX, line 25, Column B, Total Program Service Expenses.
-Part VII, Total Compensation (Column D) should match Part IX, line 5.
-Schedule D, Part VI, Land, Buildings, and Equipment should match Part X, Line 10 of Form 990.
The Form 990 isn’t just an annual filing requirement, it can be one of your biggest marketing tools. Not filing, improperly filing, or hastily filing the Form 990 can create many unintended consequences for your organization. Remember, it’s not just the IRS looking at your Form 990, so are your potential donors! Use the Form 990 as an opportunity to tell your nonprofit’s story.
Cray Kaiser is always here as a resource for you. Please contact us today if you have any questions about filing Form 990.
In our recent Understanding Nonprofit Audits blog series, we discussed the ins and outs of a nonprofit financial statement audit. Now that the end of the year is approaching, we wanted to inform you of several important changes regarding your financial statements as a nonprofit organization. Here’s what you’ll need to know to have a successful planning and reporting process in 2018 and beyond.
The forthcoming changes aim to reduce the complexity and increase transparency in nonprofit financial statements, especially for potential donors. The update, Accounting Standards Update (ASU) 2016-14, requires new disclosures for your financial statements and may require your organization to adopt additional accounting policies. There are several components to the new format, but the most important changes are:
The number of net asset classes will be reduced from three to two. Previously, net assets have been categorized as unrestricted, temporarily restricted, or permanently restricted. With ASU 2016-14, assets will be categorized as either “donor-restricted” or “without donor restrictions.” In other words, donations are either allocated for a specific purpose per the donor’s instructions or can be used as your nonprofit board chooses. Enhanced disclosures will be required on donor restrictions, requiring you to describe the composition of net assets with donor restrictions.
A nonprofit board may set aside funds for their purposes, such as developing a specific program. Since the board is not a donor, those funds will be categorized as “without donor restrictions.” In that case, you’ll need to make sure that you provide financial statement disclosures which describe how those funds are appropriated based upon the board’s policies.
Your expense reporting will now need to include both the nature and function of your expenditures in one location. For example, you’ll need to determine whether rent expense should be allocated as program, general/administrative, fundraising, or a combination of these functions. You can present that information in either a separate statement, in the statement of activities, or in the financial statement disclosures. Since most nonprofits are reporting this information either on the Form 990 or in the financial statements, chances are you already have a policy in place. However, it may need to be revised for the new reporting standards, so check with your accounting firm for details.
For your investments, ASU 2016-14 requires that you net any investment fees or expenses against your investment returns. For example, direct expenses such as brokerage fees or investment salaries may need to get allocated against the net investment returns. However, you’ll no longer be required to disclose the components of your investment expenses. This is a perfect opportunity for your organization to review your current investment policies for recording investment returns and expenses.
You’ll now need to provide information on the organization’s liquidity by including both qualitative and quantitative information (such as how funds are managed to provide for general expenditures and the availability of such funds). A presentation will need to be provided that identifies those accounts that are easily converted to cash (such as cash equivalents, receivables and other accounts). This new stipulation is intended to give potential donors more transparency into your nonprofit’s liquidity.
The updates to your statement of cash flows is really just an adjustment to how they’re reported. Your statement of cash flows can be reported using either the direct or indirect method. Currently, if you choose the direct reporting method, you have to attach the indirect method reconciliation. After ASU 2016-14 is implemented, you’ll no longer have to attach your indirect method reconciliation with your direct method reporting.
If your nonprofit follows a fiscal year, these changes will be implemented in 2019. If it follows a calendar year, you’ll implement these changes in 2018. Either way, since nonprofit financial statements are in comparative form (the current year’s report is provided alongside the previous year), we recommend planning for these changes as 2017 comes to a close. That way, you’ll have the support and policies in place once the requirements take effect.
Remember, your financial statements are an opportunity to tell your organization’s story to potential donors. The new policies enacted by ASU 2016-14 enable a way for your nonprofit to reveal vital information to donors in a clear, understandable way. We recommend having a conversation with your accounting firm so you have a thorough understanding of the impact of these changes. If you have any questions, please contact us. We’d be happy to help you get your policies and support in place for the new financial statement reporting rules.
Now that you have determined the need for a nonprofit financial statement audit, it is time to select an accounting firm and begin the process. This can be an overwhelming experience, but it doesn’t have to be. With the right team on your side and all the documentation you need prepared ahead of time, you’ll be ready to execute a successful audit.
As soon as the need is determined, you can start the process of selecting an accounting firm for your financial statement audit. In addition to selecting a firm that’s certified to perform audits in the state of Illinois, you’ll want to make sure that you choose a team that truly understands your operations and transactions. It’s critical that the firm has extensive nonprofit experience since the regulations differ significantly from those of for-profit businesses. It is highly recommended to ask all potential accounting firms to provide a copy of their most recent peer review certificate and report.
After your firm has been selected, you’ll start the organizational and preparation processes. Your audit team should clearly communicate what documentation you’ll need to have ready initially. You’ll also meet with your auditors to understand what metrics, such as key balances from your balance sheet, will be important to the process. The auditors will go over your risk assessment and internal controls to ensure that they’re working properly. In a perfect world, those meetings should take place throughout the year so that nothing is missed. Finally, the team will review your accounting and personnel policies to ensure everything is up to date. Based upon these discussions, your audit team will determine the procedures that will take place during the audit.
Once you’re ready to move forward, the most critical element of a successful audit is good communication between the auditors and your internal team. The audit team will relay which key documents will be necessary. Having all of your documentation and reporting ready in advance of any on-site visits will save you time and money. Since most firms bill by the hour, the less time that’s spent on the audit means more resources to devote towards fulfilling your mission.
As a final note, there are going to be updates to the financial statements themselves. There are new reporting standards that will take effect for 2018’s audits. These changes are going to require major revisions to the current accounting policies and reporting for nonprofits. It’s important to start implementing these changes prior to the end of this year so that you’re prepared for next year. Click here for more information.
An unqualified audit report from the audit firm will provide reasonable assurances to your governing bodies, lenders, and donors that you’re running your organization responsibly. It can help open doors for more funding so that you’ll be able to pursue your mission to the fullest. Contact us today if you have questions about whether you need an audit or to see how we can make the process as seamless as possible.
Managing a nonprofit organization is quite a balancing act, and the IRS doesn’t make it any easier. Nonprofit-specific tax laws can be even more complicated than those regulations for for-profit businesses. Are you up to date on recent changes in nonprofit tax law? Check out our nonprofit news and tips to ease your 2017 tax season.
Uniform Guidance
Don’t make the mistake of thinking that uniform guidance does not apply to your organization because you aren’t using federal money. Often money awarded through states originates with the federal government. Be sure to confirm the initiation point for all funding your organization accepts.
Uniform guidance, enacted at the end of 2015 for the 2016 tax year, regulates how nonprofits account for federal awards in excess of $750,000. Uniform guidance, which was previously covered by the OMB A-133 audit, is designed to ensure that money awarded by federal agencies is being used as intended. Many organizations hire consultants to prepare them for this annual audit. An outside accounting firm must complete your audit within nine months of the end of your organization’s fiscal year.
Net Asset Classifications
For years you’ve been classifying your net assets into three classes: unrestricted, temporary restricted and restricted. The temporary restricted class is being combined into the restricted class, leaving only the restricted and unrestricted classes. This change will impact how nonprofit organizations’ financial statements are presented and is intended to reduce errors.
Extension Changes
In the past, the extension process had two parts. The first extension due May 15th (calendar year filers) extended the deadline for three months until August 15th. Then, if additional time was needed, a second extension could be filed on August 15th, extending the deadline another three months until November 15th.
For tax years beginning in 2016, the original May 15th extension will now extend the 990 return for six months, thereby eliminating the need for the August 15th extension. The extended return will be due on November 15th, 11 ½ months after the close of the year.
TOP THREE TIPS
If you have any questions about changes in nonprofit tax law or how to implement our nonprofit tips, call us today. Our nonprofit experts are ready to help you with your balancing act.
Hearing marketing advice from your accountant may be surprising and unexpected, but if you are working on your IRS Tax Form 990—the return filed by non-profit organizations—it’s exactly what you should hear. At Cray Kaiser, we refer to Tax Form 990 as your “resume for big donors.”
Yes, your accountant checks over every detail to be sure that the IRS—the number one audience for Form 990—continues to consider the organization tax-exempt. But did you know that Form 990 is also available to and frequently read by the general public?
Imagine a potential donor who is planning to make a large donation and is choosing among three organizations, one of which is yours. The donor pulls up the three 990 forms to learn more. She reviews mission statements, achievements and financials. She considers how much money went to the mission versus how much was spent on advertising and overhead. She examines Board of Trustees and senior management lists, possibly researching more about those involved with the organization.
How does your Form 990 compare? Will she choose your organization over one with a Form 990 that effectively communicates the mission of the organization and persuades readers to support the cause?
It’s not often that your tax form serves as a marketing tool, but in this case, that’s exactly what it is. Use this opportunity to persuade that donor with money to bestow that your cause it the most deserving one. And while you may not turn to your accountant for advice on your new logo or advertising campaign, the advice to use your Form 990 as a marketing tool can make the difference between getting that big donation or having it pass you by.
If you have questions about Tax Form 990, please contact Cray Kaiser today. We’re here to help!
