The Belfint Nonprofit Ledger

Posted by Christina K. Bell

Christina at a recent March for Babies

I recently read an article published by the National Federation of Independent Business entitled 6 Ways Small Businesses Can Give Back to Their Community. It made me think about how the company I work for gives back to the community and how other companies can do the same.

I am very proud to work for a company who believes their commitment to provide exceptional services through exceptional people should extend beyond their physical walls and into their community. BLS’s commitment comes in various forms and includes volunteering time to nonprofit activities and events, providing education and advice, and sponsoring local organization and community events. Employees of BLS are also encouraged to give back to their communities and throughout the year employees are provided specific volunteer opportunities. Many BLS employees serve on local charitable boards and committees, coach youth activities, and volunteer in a variety of ways to nonprofits in which they share an emotional connection or have a personal interest.

People enjoy working for companies who genuinely care. Here at BLS the average employee tenure is 9.5 years as opposed to 4.6 years, which is the average employee tenure per the U.S. Bureau of Labor Statistics as of January 2012. I am a long-time employee of BLS and believe this is a direct result of BLS making social responsibility a core value. BLS’s demonstration of genuine care towards its clients, employees, and community has honestly sustained me in being a motivated and dedicated employee. So if you’re looking to motivate your employees and demonstrate the care you have towards your community, below are a few simple ways your company can give back:

1) Organize an Employee Volunteer Day – Organize an employee volunteer day, perhaps by building and repairing houses for those who don’t have the means to do so or have a company team in a walk or 5k. For the past two years BLS has participated in a local charity walk and has had excellent employee turnout and raised funds for the cause. We thoroughly enjoy spending the day together outside of the office participating in a great charitable event.

2) Host a Collection Day – On the last Friday of each month employees at BLS are allowed to wear jeans for a donation of $3. These funds are then donated to a local charity. Additionally, we have collected food for local food banks along with coats, shoes and toys for other local nonprofit charities.

3) Join a Nonprofit Board – Many of our employees serve on nonprofit boards, bringing with them their financial and accounting expertise. This is a great way to share your company’s expertise with the community.

4) Sponsor Events – Nonprofits often need gift certificates, merchandise and financial sponsorships for fundraising efforts. This is a great way to assist a nonprofit if your company has limited time.

One might say that throughout the year these activities add up to a lot of time that could be spent working in the office being productive. But in reality these employees are being productive – it’s just for another person’s gain.

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Posted by Christina K. Bell

On a daily basis nonprofit organizations, along with those they serve, face critical issues, financially and nonfinancially; however, due to common misconceptions about lobbying and 501(c)(3) organizations, many organizations fail to voice their concerns to their local legislators. As a result, when state budgets and policies are formed, an important voice is missing – the voice of that organization and its supporters.

It is a common misconception that lobbying is prohibited for nonprofit organizations. This is not true. However, it is extremely important for a nonprofit to monitor its lobbying activities. If a substantial part of the activities of a 501(c)(3) is considered lobbying by the Internal Revenue Service (IRS), an organization’s exempt status can be revoked or denied.

The IRS considers lobbying to consist of any activity that attempts to influence legislation and segregates lobbying expenses into two types:

1) Direct Lobbying – Attempting to influence legislation through communication with any member or employee of a legislative body or with any government official or employee who may participate in the formulation of legislation.

2)  Grass Roots Lobbying – Attempts made to influence legislation by attempting to affect the opinion of the general public or any segment thereof.

The IRS measures lobbying expenditures using two methods, the substantial part test and the expenditure test. Under the substantial part test, the IRS considers a variety of factors when determining whether lobbying activities are substantial, including the time devoted (by both compensated and volunteer workers) and the expenditures devoted by the organization to the lobbying activities. An organization that conducts excessive lobbying in any tax year may lose its tax exempt status, resulting in all of its income being subject to tax. In addition, section 501(c)(3) organizations that lose their tax exempt status due to excessive lobbying, other than churches and private foundations, are subject to an excise tax equal to five percent of their lobbying expenditures for the year in which they cease to qualify for exemption.

Organizations other than churches and private foundations may elect the expenditure test under section 501(h) as an alternative method for measuring lobbying activity. Organizations electing to use the expenditure test must file IRS Form 5768, Election/Revocation of Election by an Eligible IRC Section 501(c)(3) Organization to Make Expenditures to Influence Legislation, at any time during the tax year for which it is to be effective. The election remains in effect for succeeding years unless it is revoked by the Organization.

Under the expenditure test an organization will not jeopardize their tax exempt status under section 501(c)(3), as long as its lobbying expenditures are within the IRS specified limit.  This limit for any organization, for any tax year, is the lesser of $1 million dollars or as indicated in the table below:

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A wise philosopher once said, “If it looks like a duck, swims like a duck, and quacks like a duck, then it is probably a duck.” This keen form of inductive reasoning may have led to a not-so-widely known accounting standard update in 2012.

FASB has recently issued ASU 2012-05, Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows, to clarify the practice of classifying cash receipts originating from the sale of donated financial assets in the cash flow statement of not-for-profit entities. The need for this update arose from the differing views of financial statement preparers regarding these donated securities. Some preparers have viewed the sale of a donated financial asset to be consistent with any other investment transaction, and therefore would classify the receipt of sale as an investment activity on the cash flow statement. Others have found it more appropriate to classify these transactions in a manner consistent with the treatment of cash contributions (an operating activity), since the organization’s intent is usually to liquidate the donated security as soon as possible rather than holding it as an investment.

ASU 2012-05 amends topic 230, Statement of Cash Flows, in the FASB Codification and requires Not-For-Profit Entities to classify cash receipts from the sale of donated financial assets in a manner consistent with the reporting of cash donations. These cash receipts will be classified as an operating activity rather than as investing activity on the statement of cash flows if the donor did not impose any limitations for sale and if the donated securities were nearly immediately converted into cash. Although the phrase “nearly immediately” isn’t defined by ASU 2012-05, the background information explains that the time period should mean a period of days rather than months. If the donor restricted the use of the contributed securities to long-term purposes, the cash receipts should be classified as cash flows from financing activities.

This amendment affects any Not-For-Profit Entity that accepts donated financial assets and is effective prospectively for fiscal years beginning after June 15, 2013. However, early adoption of the fiscal year is permitted as well as retrospective application to prior periods presented upon the date of adoption. Early adoption for fiscal years beginning before October 22, 2012 is permitted only if the financial statements have not yet been made available for issuance.

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Posted by Scott Sipple, CPA

Calvin Coolidge, the 30th President of the United States, once said, “The business of America is business.”  He served as the country’s leader for two terms, which ended just a few months before the stock market crash of 1929. His political philosophy suited all the business interests that wanted to control their own destiny since the Post World War I economic conditions were favorable and prosperous.

Nowadays, the economy has exhibited some characteristics of the Great Depression. Many business leaders, especially those in the nonprofit industry, fret about having enough money to meet their organizations’ financial obligations each month. But those who effectively monitor cash flow can successfully predict when they’ll have a surplus or shortage. They can develop better expectations of future events to determine the current and long-term needs of the organization.

The most effective planning strategy for an organization to implement is cash flow management which involves analyzing cash inflows and outflows based on the timing of receipts and payments.  Most nonprofit organizations formulate and implement an annual financial budget. Cash flow management expands the scope of the budgeting process by identifying when sources of funds become available and uses of funds are necessary. For example, a nonprofit organization holds an annual fundraising event including dinner and a show in May. Attendees buy tickets for the event and goods and services are procured in April and May. The estimated receipts and disbursements should be recorded in April and May on the cash flow management matrix. Other activities can vary significantly from month to month for a variety of reasons.

To begin managing your nonprofit’s 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.” It is a time-based report; simply averaging expenses and income over 12 months would yield the least effective result. The grid compiles the following information into four categories:

Beginning Balance. Enter the amount of available cash at the start of the month, which should equal the ending balance per books on the operating and/or payroll bank account reconciliations.

Cash Receipts. Create line item entries for revenue, proceeds from sales of assets and/or debt instruments (such as loans or line of credit withdrawals) you’ll have for each specific month. Total all the individual entries to calculate the amount of cash inflow.

Cash Disbursements. Make line item entries for expenses, purchases of assets, and/or payments of debt instruments. Total all individual entries to calculate the amount of cash outflow.

Ending Balance. Add the beginning balance to the net inflow/outflow number to get an idea of your cash position for each month. Use historical data in addition to what’s on your calendar for the year ahead to help create your projections.

To complete your budgeted cash flow management report, compile a total of your cash on hand and estimates of cash receipts and their expected arrival dates. You’ll also need to enter into the report payment amounts and schedules for personnel expenses (including salaries, wage increases, taxes and benefits). Other data you’ll need includes consulting and professional services fees, occupancy charges (including rent, utilities, 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). It is important to be as realistic as possible when the organization expects to receive cash. If you’re executing a fundraising campaign, donations can come in months after your initial mailings. Reflect that in your projections.

As the Treasurer of a nonprofit organization, I have witnessed firsthand how a finance department uses this management tool to its fullest capability. Over time, the ability to successfully project and manage cash flows and positions — along with effectively managing the budget and having sufficient liquidity — is paramount to your organization’s viability.

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Posted by Christina K. Bell

Beginning January 5, 2013, changes to self-mailer postal regulations officially take effect. Self-mailers, as defined by the United States Postal Service (the USPS), are letter sized folded pieces that do not have a binding, such as staples, and are not mailed inside of an envelope. Many nonprofits create, print, and assemble self-mailers in-house to distribute fundraising material, event announcements, newsletters, and other information regarding their organization. In an effort to reduce the damage these mail pieces sometimes encounter during the mailing process, beginning January 15th the USPS will officially implement changes in the way these self-mailers must be assembled. Many organizations may have already implemented these changes during the USPS’s 2012 transition period; however, if you’ve been putting this transition off, it’s officially time to change. The most notable changes to the assembly of self-mailers are as follows:

• Final folds on the top will no longer be allowed
• Self-mailers will now require two tabs instead of the current one tab
• Quarter-fold self-mailers will need to be on #28 bond
• Tri-fold and quarter-fold flyers and newsletters will need two tabs instead of the current one tab
• Tabs placed on the bottom will no longer be allowed

These changes are important to note for a couple of reasons. If you’re a nonprofit that uses self-mailers as part of your marketing plan you may experience an increased cost during 2013 due to these changes and should plan your 2013 budget accordingly. Additionally, knowing of the changes now will help you assemble your organization’s first 2013 set of self-mailers correctly and eliminate any unnecessary headaches at the post office later.

The USPS has developed a quick reference guide which provides an overview of requirements with graphic illustrations. This can be found on RIBBS (ribbs.usps.gov) by looking up “Folded Self-Mailer” on the alphabetical or topic site indexes.

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Posted by Christina K. Bell

It’s the week of Thanksgiving and thanks to the U.S. Small Business Administration (Administration) Delaware nonprofits affected by recent super-storm Sandy may have something extra to be thankful for this year. This week the Administration announced that Delaware nonprofits who were impacted by Hurricane Sandy either physically, economically, or both, may be eligible for low interest loans to aid in their recovery. Eligible Delaware nonprofit include private nonprofits within the state that provide non-critical services to individuals. Examples include schools, shelters and food kitchens. Organizations physically impacted by the storm may apply for a disaster loan designed to assist an organization in repairing or replacing business property damaged or destroyed during the storm. Organizations which suffered no physical damage but did suffer an economic impact may qualify for an Economic Injury Disaster Loan designed to assist an organization in meeting normal operating expenses.

For more information on these loans and how to apply refer to the SBA Website: http://www.sba.gov/category/navigation-structure/loans-grants/small-business-loans/disaster-loans.

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Posted by Michael E. Mast, CPA

The Merriam Webster dictionary defines fraud as “intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right.” Historically, one of the more common types of fraud is theft and unfortunately, many organizations unknowingly allow opportunities for theft to occur in the course of operations. The good news is that organizations can attempt to find fraud risk by performing a risk assessment which, in its most basic form, is a review of an organization’s operations to find opportunities for fraud. Many organizations view a risk assessment as a meaningless administrative task, but in reality it can be used to better understand operations and recognize and improve inefficiencies that are not readily apparent to management.

A risk assessment starts by gaining a complete understanding of the way an organization operates. Once this is established, fraud risks, if any, are easier to see. For example, a payment process that allows the executive director to approve his or her own expense reports may be discovered. This self-review by executive director provides an opportunity for fraud because the payment of personal expenses using corporate funds could occur. While this is a very simple example, the concept can be applied to complex transactions as well.

Along with gaining an understanding of how the organization operates, it is important to consider employees’ overall attitude. In many situations, an individual will commit fraud to meet a personal need or “fairly” compensate him or herself. These rationalizations can be strong enough to enable an otherwise honest individual to commit theft or fraud. As management reviews the controls in place it is important to determine if any employee believes they are underpaid or have significant personal financial stress. These factors, combined with opportunity, could result in theft of an organization’s assets.

Many tools are available to facilitate the performance of a risk assessment. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) has provided a framework for the evaluation of internal controls. Additionally, the AICPA has published Managing the Business Risk of Fraud: A Practical Guide.

Performing risk assessment may sound like a pointless and time-consuming task, but it could provide the opportunity to prevent expensive fraud by finding risk in operations. Because of this, we find it to be powerful.

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Posted by Jonathan D. Moll, CPA

Q. 1 – True or False: It is a best practice for a nonprofit organization to change auditors every 3 years.

Q. 2 – True or False: A thorough understanding of a nonprofit organization’s accounting practices and activities based on years of experience as its auditor increases the quality of an auditors’ report.

The dilemma is evident in the questions above. I will start by stating that the paragraphs below are NOT answers.  They are opinions.  And while they are based on more than a decade of experience within the profession, they are bound to be challenged.  After all, that is how I came to write this post.  I challenged a simple statement that I have heard dozens of times over the years. I was being interviewed by a potential nonprofit organization client in response to an audit RFP when I asked why they were putting the work out for bid. The audit committee trustee stated, “It is our long running policy, and a best practice, to rotate auditors every 3 years.”  I asked the trustee why the committee believed in this policy and the answer I got:  Silence.

Chances are that if you ask an auditor for his opinion on auditor rotation, the answer would depend on whether or not you are an existing client or a prospective client. And I am not proud to admit it, [face red with embarrassment] that I have argued both sides over the years. However, it wasn’t until I joined the board of a nonprofit organization and was asked the question by a fellow trustee while wearing my “trustee hat” and not my “auditor hat” that I really evaluated it without bias.

The overarching “pro” to the discussion regarding auditor rotation is that it reduces the possibility that an audit firm will lose its impartiality and become too close to management. The accounting profession has argued that this risk is minimized by the natural attrition and reassignment of responsibilities that occur on an audit engagement team throughout time.  The risk can be further mitigated by requesting that an audit firm rotate audit engagement partners within the firm.

The “cons” to auditor rotation are numerous.  The learning curve required by a new audit firm can increase audit failure risk and require extra time from the nonprofit organization’s finance and accounting staff. The administrative responsibility for routinely evaluating new audit firms is time-consuming and costly for management and board members.  And most importantly, there is a loss of institutional knowledge capital when audit firms are changed.

Over the years there has been much written about the concept of mandatory auditor rotation.  However, it is important to realize that substantially all available literature on the topic has been from a public company (PCAOB/SEC) mindset. While many of the issues are still relevant, auditor rotation for nonprofit organizations raises some unique issues.  With a focus on maximizing program services, nonprofit organizations often do not have the resources available to build as deep or sophisticated accounting/business offices as their for-profit counterparts.  Also, turnover rates for nonprofit accounting/business office personnel are often high. As a result, the knowledge capital from audit firm continuity can be an invaluable asset and should be considered accordingly.

It is without doubt that nonprofit organizations should periodically evaluate the quality of services provided by their outside auditors. Situations, such as dissatisfaction with service, should lead a nonprofit to seek new auditors. However, audit firms that provide quality service, offer great responsiveness, possess a niche expertise within your industry, and work well with the nonprofit organization’s staff are valuable service providers and a source of institutional knowledge capital. Audit partner or audit manager rotation within a firm can be a solution to overcome the risk of losing impartiality for long-tenured clients while at the same time maintaining experience on staff. In my opinion, change for the sake of change is not necessarily a best practice.

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Posted by Larry Gentile

I remember as a kid having restrictions on everything I did. I can still hear my mom’s voice in my head saying “Don’t sit too close to the TV,” “No dessert until you eat all of your vegetables,” and the infamous “You can’t play outside until you finish your homework!” As kids, we never thought when we grew up that we would encounter restrictions on a daily basis. Nonprofits are no exception as they deal with restrictions all the time, especially when they receive contributions from donors.

“Charitable Contributions” is an everyday term that almost all nonprofits, as well as avid tax deduction seekers, familiarize themselves with. For many organizations, it is a primary source of revenue. Contributions can come in many forms, and with various stipulations. But what does it actually mean to receive a “restricted” contribution?

Contributions are classified as either restricted or unrestricted. Unrestricted contributions are donations received by an organization that may be used towards any purpose they see fit. Restricted contributions are donations received by an organization in which the donor restricts the use to a particular purpose. One of the most common mistakes made by nonprofit organizations is confusing unrestricted board-designated donations with donor restricted contributions. For example, unrestricted donations are sometimes received by nonprofit organizations and designated by management or the board for a particular purpose. When it comes time to account for these donations, organizations sometimes erroneously record them as restricted support to keep track of their designation. Let’s not forget that time can also be a restriction. Instead of limiting a donation’s use to a distinct purpose, a donor can require the funds be used after passage of time or during a particular time period.

Let’s see if these examples help.

Example 1: John Doe makes a $10,000 donation to an approved charitable organization. The check is accompanied with a letter stating that the donation is to be used for research. The donation is considered to be restricted for a purpose. If the restriction requirements are met during the same fiscal year, it is then considered to be unrestricted.

Example 2: John Doe makes a $10,000 donation to an approved charitable organization. The check is accompanied with a letter stating that the donation must be used for the following fiscal year. The donation is considered to have a time restriction.

Example 3: John Doe makes a $10,000 donation to an approved charitable organization. The check was not accompanied by a letter. Management has determined that the funds be used for a specific project. The donation is not considered to be restricted, but has a board designation.

Remember that sometimes donors are looking for a return in their investments, in the form of their contributions being used for a specific purpose. No matter the purpose, only the donor has the right to set a restriction on a contribution, not the nonprofit. This is an important point to consider because you don’t want to get in trouble for not following the rules which Jon Moll discussed in an earlier post The Risk of Not Honoring Donor Restrictions.

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Posted by Michael E. Mast, CPA

The IRS has released a new search tool called Exempt Organizations Select Check. This new tool allows users to search the following IRS nonprofit listings:

1. Organizations eligible to receive tax-deductible contributions (Pub. 78 data),
2. Organizations whose federal tax exemption was automatically revoked for not filing a Form 990-series return or notice for three consecutive years, or
3. Form 990-N (e-Postcard) filers and filings.

This new search feature merges three old search functions into a single user-friendly interface. Users can easily search these IRS listings for nonprofit organizations. These lists allow donors easy access to verify a nonprofit’s validity to receive tax-deductible contributions.

Nonprofits whose exempt status was automatically revoked will remain on the revoked listing even if their exempt status is reinstated. If a nonprofit’s status is reinstated, it will not be included in the list of eligible organizations listing for up to a month. This delay is because the IRS updates the related listings from their master file which occurs monthly. During this delay, organizations should provide donors a copy of their updated exemption letter or ask donors to confirm their tax-exempt status with the IRS directly at 1-877-829-5500. Organizations that believe they are incorrectly included on the auto-revocation list should contact the IRS immediately.

The IRS’ new search feature provides donors with valuable information to make their giving decisions.

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