Nuts and Bolts of Nonprofit Management

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Nuts and Bolts ofNonprofit Management
David L. Fish Internal Revenue Service
Laura Dupuy Utah Council for Citizen Diplomacy

• Friday, February 16, 2007
• NCIV National Meeting

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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.

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Fundamental Qualities

• To be useful and helpful to users, financial
  statements must be
• Relevant
• Reliable
• Comparable
• Consistent

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Assumptions

• Economic Entity Assumption
• Going Concern Assumption
• Monetary Unit Assumption
• Periodic Reporting Assumption

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Principles

• Historical cost principle
• Revenue recognition principle
• Matching principle
• Full disclosure principle

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Bookkeeping the heart of the matter

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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.

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Financial Statements

• 1. Statement of Financial Position (Balance
  Sheet)
• 2. Statement of Activities (Income Statement)
• 3. Statement of Cash Flows
• 4. 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

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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.

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Other General Accounting Issues

• Current Assets and Current Liabilities
• Long-Term Assets and Depreciation
• Intangible Assets
• Investments
• Contingencies
• Affiliated Organizations

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Record Keeping RequirementsFair 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

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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

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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.

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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

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Payroll and Payroll Tax Issues

• Form W-4 Employees Withhholding Allowance
  Certificate to determine total number of
  allowances the employee is claiming
• Federal Income Tax Withholdings See IRS
  Circular E, Employers 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

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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

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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

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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

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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

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What to Keep and How Long?

• Keep the current years 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.

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• Dos and Donts for 501(c)(3) Organizations

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Jeopardizing 501(c)(3) Status

• Inurement and private benefit activities
• Substantial lobbying activity
• Political campaign activity
• Unrelated Business activity

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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.

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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

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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

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Political Activity

• Direct and indirect candidate support
• Contributions
• Participation in campaigns
• Public statements for/against a particular
  candidate
• Absolute Prohibition!

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PACI

• Political Activity Compliance Initiative
• Started in 2004 election cycle
• Continued 2006 election cycle
• Procedures to ensure expeditious review and
  consistent, nonpartisan treatment

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PACI time Blues1

• 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.

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They wont let me raise a fuss,They wont let me
raise a holler2

• 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.

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About my boy, run for Congressthey wont let me
spend a dollar3

• 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 that supports or opposes candidates.

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Every time I want a speaker,my favorite
candidate
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The Service says, "No dice, son, you cant
interventiate"4

• 4 Sometimes you have to sacrifice to make it
  rhyme.

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And you cant do indirectlywhat you cant
directly do5

• 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 501(c)(4)
  organization).

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'Cause there ain't no cure for the PACI time
blues
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You cant be in the pews with biased voters
guides on Sunday6

• 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 prohibited political campaign intervention.

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And you cant be hyperlinkin to the DNC/RNC
(choose one) on Monday7

• 7 Hyperlinks on an organizations 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.

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I cant tell you how to vote, I thought that
would do the trick
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"Well you still lose your exemption cause youre
trying to be too slick"8

• 8 If an organization representative states I
  cant 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.

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You cant do indirectly what you cant directly
do'Cause there ain't no cure for the PACI time
blues
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I'm gonna go to Congress about the PACI
prohibition To see about repeal of this 1st
Amendment violation9

• 9 A common misperception oft repeated by
  organizations and politicians is that the
  political campaign intervention prohibition
  violates the First Amendment. Not
  soorganizations can say anything they please,
  they just will not be tax-exempt.

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Well I went to my congressman and he said quote
"I'd like to help you son, but you cant tell
people how to vote"
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You cant do indirectly what you cant directly
do'Cause there ain't no cure for the PACI time
blues
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Unrelated Business Income

• Trade or business activity
• Regularly carried on
• Unrelated to exempt purpose

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Unrelated Business Income -Examples

• Examples
• Advertising
• Gaming activities
• Sale of merchandise publications
• Parking lot for general public
• Rental income, if
• Debt-financed
• Personal property

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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

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Annual Filing Requirements

• Form 990-EZ or 990 required depending on gross
  receipts assets
• E-Postcard gross receipts 2007)
• Form 990-T gross income from unrelated trade or
  business 1,000
• Employment tax returns required for all employees

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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)

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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

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Contact Information

• http//www.irs.gov/eo
• for forms, publications or general information on
  exempt organizations.
• EO Customer Service (toll-free)
• 1 [phone]
• for general questions or assistance with
  applications or exempt organizations forms.

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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