The statement of cash flows is a requirement of financial statements prepared in accordance with generally accepted accounting principles.  This statement reports an organization’s cash generated and used during a specific period, classified into operating activities, investing activities and financing activities.

Since the statement of activities is prepared under the accrual basis of accounting, some of the revenues included may not have been collected yet and some of the expenses may not have been paid yet.  Basically the statement of cash flows reconciles the beginning cash balance of the period to the ending cash balance of the period by converting the change in net assets (“net income”) on the statement of activities from the accrual basis to the cash basis.

Cash flows from operating activities can be reported one of two ways, with the same result.  The direct method shows actual cash received and cash paid.  The indirect method, which is the more common method, starts with “net income” and makes adjustments for noncash items, such as depreciation, and then analyzes changes in operating assets and liabilities.

The result is the cash received (or paid out, if negative) for everyday operations.  A positive amount is desired because it shows that the everyday operations are producing cash for the organization to use to continue its existence.

Cash flows from investing activities include cash used from lending money to others, purchasing investments and fixed assets and cash received from collecting on loans, selling investments and selling fixed assets.  These transactions are not a part of everyday operations so they are not included in cash flows from operating activities.  The result is the amount of cash from (or used in, if negative) investing activities.

Cash flows from financing activities include cash received from borrowing money and cash used in repaying amounts borrowed.  Again, these transactions are not a part of everyday operations of the organization so they are not included in cash flows from operating activities.  The result is the amount of cash from (or used in, if negative) financing activities.

It is important for management to understand where cash is coming from and what it is being used for to better manage the organization.

Posted by: Carrie Minnich

Let’s start with the basics.  The operating reserve is a portion of unrestricted net assets that is set aside by the board for use in emergencies or unexpected situations.  This might be from an unexpected shortfall in revenue in which a major funding source ceases or significantly decreases its support of the organization.  It could also be from unexpected demands on the organization’s resources, an unanticipated opportunity that becomes available to the organization or when a project that everyone thought would succeed falls short.   The operating reserve should not be used for non-operating expenses such as purchasing a new building or establishing an endowment.

The reserve can be funded by the organization with any funds that are not temporarily or permanently restricted.  This could include contributions from individuals or corporations, fees for goods or services, investment income or surpluses resulting from annual operations.

In order for the operating reserve to work properly, there should be a written policy in place including the following details.
• Reason for establishing the reserve
• Desired dollar amount of the reserve and the timeline for achieving it
• How the reserve is going to be funded
• Circumstances of when the funds can be used
• Procedures for approving the use of the funds
• How the organization will react to continued shortfalls in the reserve

The amount of the reserve fund will vary by organization.  Each organization should set their own reserve goal based on its cash flows and expenses.  Organizations need to examine where their money is coming from and where it is going.  Those organizations that receive regularly scheduled payments from grants or contracts do not need as much in an operating reserve as those that rely on periodic grants or fund raisers as their main support.  Many nonprofits make it a goal to fund the reserve so it will cover three to six months of expenses.  Three to six months can be used as a guide but there is no one size fits all for all organizations in setting up a reserve.  At a minimum, the reserve should be enough to cover one payroll.   

By setting up an operating reserve, the organization is making sure that there are sufficient funds to manage the day to day operations, as well as planning for the long-term financial stability of the organization.

Posted by: Carrie Minnich

Any changes in an organization’s name, address, structure or operations must be reported to the IRS on its annual informational return (Form 990 or 990-EZ).  If the organization is not required to file an annual return, it must report these changes to the Exempt Organizations Determinations Office. 

If you are unsure as to the effect of the changes on your organization’s exempt status or public charity status, you may request a determination letter or private letter ruling.  Requests for determination letters and letter rulings require the submission of specific information and documentation, as well as a user fee.

In some instances there are additional requirements that the organization must take to report changes.  For example, a change in the organization’s name requires the organization to attach amendments to the articles of incorporation with proof of filing with the state of incorporation to the annual return.   A change in accounting period or a change in accounting method, require even more steps.
For a change in accounting period to take effect, you must timely file the organization’s applicable informational return with the appropriate Internal Revenue Service Center for the short period for which the return is required.  Form 990 should indicate a change of accounting period is being made.  The short period form is due the fifteenth day of the fifth month following the close of the short period.  If your organization has previously changed its annual accounting period at any time within the last ten calendar years ending with the calendar year the includes the beginning of the current short period, you must file Form 1128, Application for Change in Accounting Period.  It also must be filed by the fifteenth day of the fifth month following the close of the short period.  Organizations described in sections 526, 527, or 528 must file Form 1128.

To request a change in accounting method, you must file Form 3115, Application for Change in Accounting Method.  Form 3115 should be filed with your annual information return for the year of change.  In special situations Form 3115 must be filed during the tax year for which the change is requested.

If your organization undergoes any changes, make sure you properly report them to the IRS to ensure the organization’s tax-exempt status is not jeopardized.

Posted by: Carrie Minnich

The three main types of functional expenses are program, management and general, and fund raising.  Both management and general and fund raising are considered supporting services.

Program services expenses are those costs that are directly and indirectly related to providing program services.

Management and general expenses relate to the overall operations of the organization and are not identifiable with a specific program, fund raising activity or membership development activity.

Fund raising expenses are those costs related to inducing potential donors to contribute to the organization.

Some expenses relate directly to a single program or supporting service (direct expenses), while others relate to multiple activities (indirect expenses) and need to be allocated between various services.  Nonprofits should apply a reasonable and consistent method of allocating indirect expenses.  For example, salaries and related expenses are often allocated based on time studies detailing how much time each employee spends on each function.  Rent and utilities are often allocated based on square footage.  Whatever method is used to allocate expenses, the method should be evaluated periodically to verify the allocation is still appropriate.

The percentages by function vary by nonprofit, depending on the organization’s size, age and location, as well as mission and programs.  Although the percentages vary, there are some recommended standards that third parties use to evaluate expense allocations.  The Better Business Bureau looks for at least 65% of total expenses spent on program services and no more than 35% of related contributions spent on fund raising expenses.  CharityWatch (formerly the American Institute of Philanthropy) views 60% or greater spent on programs as reasonable for most charities.  The 60% program percentage indicates a satisfactory rating from CharityWatch, while most high efficient charities are able to spend 75% or more on programs according to CharityWatch.  Charity Navigator ranks highest the organizations that spend 15% or less on management and general and 10% or less on fund raising.  The United Way of Allen County recommends no more than 25% spent on supporting services.  The average functional expense percentages for DWD nonprofit clients are as follows.

Potential donors normally want to give their money to organizations where they know their money is being spent wisely - a majority of the resources used to further programs and provide services, a minimal amount of administrative expenses and some fund raising efforts.   The presentation of functional expenses is one of the tools used to determine if the nonprofit is using its resources efficiently.

Posted by: Carrie Minnich

1.       Determine mission and purpose. It is the board's responsibility to create and review a statement of mission and purpose that articulates the organization's goals, means, and primary constituents served.
2.       Select the chief executive. Boards must reach consensus on the chief executive's responsibilities and undertake a careful search to find the most qualified individual for the position.
3.       Support and evaluate the chief executive. The board should ensure that the chief executive has the moral and professional support he or she needs to further the goals of the organization.
4.       Ensure effective planning. Boards must actively participate in an overall planning process and assist in implementing and monitoring the plan's goals.
5.       Monitor and strengthen programs and services. The board's responsibility is to determine which programs are consistent with the organization's mission and monitor their effectiveness.
6.       Ensure adequate financial resources. One of the board's foremost responsibilities is to secure adequate resources for the organization to fulfill its mission.
7.       Protect assets and provide proper financial oversight. The board must assist in developing the annual budget and ensuring that proper financial controls are in place.
8.       Build a competent board. All boards have a responsibility to articulate prerequisites for candidates, orient new members, and periodically and comprehensively evaluate their own performance.
9.       Ensure legal and ethical integrity. The board is ultimately responsible for adherence to legal standards and ethical norms.
10.   Enhance the organization's public standing. The board should clearly articulate the organization's mission, accomplishments, and goals to the public and garner support from the community.

Posted by: Carrie Minnich

Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) provided temporary unlimited deposit insurance coverage for non interest bearing transaction accounts at FDIC (Federal Deposit Insurance Corporation) institutions from December 31, 2010 through December 31, 2012.  During this time period, checking and savings accounts that did not earn interest were fully insured, and those that did earn interest were insured up to $250,000 per bank.  Beginning January 1, 2013 this changed.  Now non interest and interest bearing accounts must be added together and are only insured up to $250,000 per depositor, per bank.

You should be aware of the risk of having cash in excess of the $250,000 FDIC limit.  If your bank fails, you may only be able to recover your cash up to the $250,000 insured amount.  In order to limit your risk, consider spreading your cash between multiple banks to avoid having more than $250,000 at one bank.

Posted by: Carrie Minnich

Budgets are usually divided between income that is earned, called revenue, and income that is contributed, called support.  Expenses are normally divided between those relating to personnel, overhead expenses, fund raising expenses and program specific expenses.   Budget line items should be matched with the organization’s chart of accounts to allow easier matching of actual income and expenses against budgeted amounts.  Noncash items such as depreciation and in-kind contributions should also be included in the budget; however, not all nonprofits include these.  Budgeting for depreciation allows the organization to provide cash needed to replace depleted assets.  Including in-kind contributions and offsetting expenses gives a more realistic picture of the total resources needed to operate the organization.

Often times the budget is created by looking at what has happened in the previous year and adjusting those balances for what is expected to happen in the future.  Are there any programs that will be cut in the coming year?  Are there new programs that the organization is going to take on?  Has the organization lost any of its funding sources or are there new funding sources?  How many individuals are expected to be served during the year?  Management needs to ask itself what will be different in the upcoming year from the previous year and adjust the budget accordingly for these changes.  In order to remember what assumptions were made during the budgeting process, any notes in regard to estimates should be kept by management for future reference.

Most organizations try to prepare a balanced budget where income equals expenses.  Sometimes a balanced budget is not appropriate.  Healthy organizations require cash reserves.  Sometimes an organization will need to increase its cash reserves or need additional cash to pay down debt.  In these instances, the organization may plan to generate more income than expenses, creating a surplus.  Other times, the organization may feel that its reserves are more than sufficient and decide to invest extra funding in new programming or give out one-time pay raises to employees.  In instances of a deficit budget, when expenses exceed income, it is important to make sure that the deficit was expected and not just an error in budgeting.

Once the budget is prepared, it should be approved by the board of directors prior to the start of the fiscal year.  When a board approves a budget, it is really approving the use of resources for specific purposes.  After the budget is approved, the board should continue to make use of the budget by comparing actual results to budgeted amounts on a regular basis to ensure spending is in line with the approved plan. 

A budget is much more than a list of income and expenses.  It’s a financial tool that should be utilized throughout the year as a guide for ensuring that an organization’s mission is accomplished.

Posted by: Carrie Minnich

So which federal return does your organization need to file?

Form 990-N, e-Postcard

Organizations with gross receipts that are normally less than or equal to $50,000 are required to file Form 990-N.  Gross receipts are considered to be $50,000 or less if the organization

a.       Has been in existence for 1 year or less and has $75,000 or less of gross receipts during the first tax year;

b.      Has been in existence 1 to 3 years and averaged $60,000 or less of gross receipts during each of the first 2 tax years;

c.       Has been in existence at least 3 years and averaged $50,000 or less of gross receipts for the immediately preceding 3 tax years (including the current year).

IRC section 527 (political) organizations and section 509(a)(3) supporting organizations are not eligible to file form 990-N.  These organizations must file either Form 990-EZ or 990, depending on their revenue and assets.

Form 990-N must be filed electronically.  The IRS provides a link to the Urban Institute’s website where Form 990-N can be filed - http://epostcard.form990.org/.  This is the simplest form that nonprofits can file, as it only asks for 8 pieces of basic information.

1.       Annual tax year

2.       Check the box for:

a.       Has your organization terminated or gone out of business?

b.      Are your gross receipts normally $50,000 or less?

3.       Name and d/b/a (if applicable)

4.       Address

5.       Employer identification number

6.       Website

7.       Name and address of principal officer

 Form 990-EZ, Short Form Return of Organization Exempt from Income Tax

Organization’s with gross receipts that are less than $200,000 and total assets that are less than $500,000 are required to file Form 990-EZ.  These organizations may choose to file Form 990; however, many chose to file Form 990-EZ as it is easier to file and less comprehensive than Form 990.

Form 990-EZ asks for information on the organization’s exempt and other activities, finances, compliance with certain federal tax filings and requirements, and compensation paid to certain persons.  Additional schedules are required to be completed depending on the organization’s activities.  The most common schedules required are Schedule A, Public Charity Status and Public Support and Schedule B, Schedule of Contributors.  Schedule A is used to determine the sources of the organization’s support and to determine if it meets the public charity requirements.  Schedule B provides a listing of the organization’s larger contributions.

Form 990, Return of Organization Exempt from Income Tax

Organizations with gross receipts that are greater than or equal to $200,000 or total assets that are greater than or equal to $500,000 must file Form 990.  Similar to Form 990-EZ, Form 990 requests information on the organization’s mission, programs and finances.  However, Form 990 also asks additional questions on the board’s activities, compliance and legal requirements and ethics.  When Form 990 was revised in 2008, the IRS wanted to enhance transparency and encourage compliance which resulted in additional questions on governance.

Form 990 consists of an 11 page core return and 16 potential schedules that may need completed depending on the organization’s activities.  As with Form 990-EZ, Schedule A and Schedule B are two of the most common schedules required with Form 990.  Schedule D, Supplemental Financial Statements, which provides additional detail on financial information and Schedule G, Supplemental Information Regarding Fundraising or Gaming Activities, which provides additional detail on special events are also commonly required by most nonprofit organizations.

Due Date

No matter which form your organization is required to file, it is due by the 15^th day of the 5^th month after your organization’s accounting period ends.  For example, if your organization follows the calendar year, the filing deadline is May 15^th.  You may request an automatic 90 day extension of time to file Form 990 and 990-EZ by filing Form 8868, Application for Extension of Time to File and Exempt Organization Return, by the filing deadline (i.e. May 15^th).   An additional 90 day extension may also be granted by the IRS for reasonable cause, extending a calendar year nonprofit’s due date to November 15^th. 

Failure to file the return by the required due date results in penalties of $20 per day, up to $10,000 or 5% of the organization’s gross receipts for the tax year.  If your annual gross receipts exceed $1 million, the penalty is $100 per day, up to $50,000 per return.

Posted by: Carrie Minnich

Starting Up Your Organization

Internal Revenue Service

Form SS-4, Application for Employer Identification Number

Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code

Indiana Secretary of State

Articles of Incorporation for a Nonprofit Corporation

Articles of Amendment to the Articles of Incorporation (Nonprofit)

Indiana Department of Revenue

BT-1, Business Tax Application

NP-20A, Nonprofit Application for Sales Tax Exemption

Form ST-105, General Sales Tax Exemption Certificate

Annual Filings

Internal Revenue Service

Form 990, Return of Organization Exempt from Income Tax

Form 990-EZ, Short Form Return of Organization Exempt from Income Tax

Form 990-PF, Return of Private Foundation

Form 990-N, Electronic Notice (e-Postcard) For Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ (must be filed online)

Form 990-T, Exempt Organization Business Income Tax Return

Form 8868, Extension of Time to File an Exempt Organization Return

Form 8282, Donee Information Return

Form 5768, Election/Revocation of Election by an Eligible Section 501(c)(3) Organization to Make Expenditures to Influence Legislation

Indiana Department of Revenue

Form NP-20, Indiana Nonprofit Organization’s Annual Report

Form IT-20NP, Indiana Nonprofit Organization Unrelated Business Income Tax Return

Indiana Secretary of State

Indiana Business Entity Report

Payroll and Related Forms

Internal Revenue Service

Form W-4, Employee’s Withholding Allowance Certificate

Form 941, Employer’s Quarterly Federal Tax Return

Form 944, Employer’s Annual Federal tax Return

Form W-2, Wage and Tax Statement

Form W-3, Transmittal of Wage and Tax Statements

Form 1099-MISC, Miscellaneous Income

Form 1096, Annual Summary and Transmittal of U.S. Information Returns

Indiana Department of Revenue

Form WH-4, Employee’s Withholding Exemption and County Status Certificate

Form WH-1, Indiana Withholding Tax Return (must be filed through INTax)

Form WH-3, Annual Withholding Tax Form

Form WH-18, Indiana Miscellaneous Withholding Tax Statements for Nonresidents

Indiana Department of Workforce Development

Form UC1-S, Quarterly Contribution Report

Form UC-5A, Quarterly Payroll Report

U.S. Citizenship and Immigration Services

Form I-9, Employment Eligibility Verification

 Posted by: Carrie Minnich

Part VI, Governance, Management and Disclosure

Section C. Disclosure - Line 18 regarding how the organization makes its forms available for public inspection has a new option of “Other” with an explanation required in Schedule O.

Part VII, Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors

Section A. Officers, Directors, Trustees, Key Employees, and Highest Compensated Employees – Line 1(a)(B) which asked for the average hours per week now also asks for average hours per week for related organizations.

Part IX, Statement of Functional Expenses

Line 11(g) fees for services of non-employees now requires line 11(g) expenses to be listed on Schedule O if the amount listed on the line exceeds 10% of total functional expenses (line 25, column (A)).

Part XI, Reconciliation of Net Assets

Additional lines have been added to the reconciliation of net assets to include net unrealized gains (losses) on investments, donated services and use of facilities, investment expenses, and prior period adjustments.

Posted by: Carrie Minnich

Straying from the Exempt Purpose

                To be tax exempt under section 501(c)(3), an organization must be organized and operated exclusively for the exempt purposes listed in section 501(c)(3) (charitable, religious, educational, etc.).  If the organization ceases to be operated exclusively for exempt purposes or if a substantial portion of its activities fail to meet its exempt purpose, the organization can lose its tax exempt status.

Political Activity

                501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition of) any candidate for elective public office.  Engaging in political activity could result in the loss of the organization’s tax exempt status.  For more information see Political Campaign Intervention.

Not Filing the Required Return

                Most tax-exempt organizations are required to file an annual information return (Form 990, 990-EZ or 990-N) with the IRS.  The IRS will assess penalties for filing late returns.  Failing to file the required form for three consecutive years will result in automatic revocation of the organization’s exemption.  It is important that the organization not only file the required Federal return but also the proper state return.  For more information see What If I Lose My Exempt Status.

Engaging in Excess Benefit Transactions

                One of the requirements of a 501(c)(3) organization is that it must not be operated for the benefit of private interests.  In addition to possible loss of exempt status, excise taxes are imposed on any individual who engages in excess benefit transactions and on any board member who knowingly approves such a transaction.  For more information see Private Inurement.

Paying Unreasonable Compensation

                If the IRS considers compensation paid to a nonprofit’s employees as excessive or unreasonable, it may impose excise taxes on both the individual receiving the salary and any board members who approved the compensation package.  Paying unreasonable compensation may also result in loss of exemption.  Reasonable compensation is defined by the IRS as “the value that would ordinarily be paid for like services by like enterprises under like circumstances.”  For more information see Private Inurement.

Unrelated Business Income

                Revenue generated from ongoing activities that do not further the organization’s exempt purpose is considered unrelated.  Organizations with unrelated business income are required to report the revenue and related expenses on Form 990-T and to pay any applicable corporate taxes on the net profit.  Unrelated business income is not prohibited for a nonprofit, but it is taxable and too much of it may cause the organization to lose its exempt status.

Make sure you are familiar with these activities to avoid penalties and protect your exempt status.

Posted by: Carrie Minnich

 DWD presented two organizations with holiday donations this year.  Our first stop was at Associated Churches.  This organization offers families food once a month at no charge through a network of 28 local food pantries in churches and other social agencies.  Associated Churches Neighborhood Food Network is considered an "emergency food bank." Their pantries provide a five-day supply of food to prepare balanced and nutritious meals.  

The second stop we made was at Community Harvest Food Bank.  Like Associated Churches, Community Harvest Food Bank (CHFB) was very grateful for our donation as well. CHFB works with a network of food donors, social service organizations and churches to provide food to hungry people in its nine county service area.  Do you know they provide over 11 million pounds of food annually to those in the northeast corner of Indiana?  That is a lot of food!

In addition to the donations from DWD, our staff internally raised nearly $1,200 and was able to adopt 3 families through Vincent Village.  This organization provides shelter and affordable housing to homeless families in addition to their care and supportive resources to help them become independent and self-sustaining.

Photo #1 Susan Berghoff, Rev. Roger Reece, Carrie Minnich, Amanda Gerber

Photo #2 Amanda Gerber, Tammy Klimek, Carrie Minnich, Susan Berghoff

Consequences

Once the organization loses its exempt status it becomes a taxable corporation.  As a result, it may be required to file Form 1120, U.S. Corporation Income Tax Return, with the IRS and Form IT-20, Indiana Corporate Adjusted Gross Income Tax Return, with the Indiana Department of Revenue and pay any applicable federal and state income taxes.  The IRS also publishes the organization’s name on the list of automatically revoked organizations, which serves as a notice to the public that the organization is no longer eligible to receive tax deductible contributions.  In addition, the organization loses its eligibility for most grants.    If the organization applies for reinstatement, as discussed below, it needs to file the correct Form 990 while the application is pending.  Contributions made to the organization while the application is pending are not guaranteed to be tax deductible.  If the IRS grants the organization reinstatement for the period in which the contribution is made, the contribution is considered tax deductible; however, if the reinstatement is not received, the contribution is not tax deductible.

Getting the Tax Exempt Status Back

The loss of tax exempt status cannot be reversed or appealed.  In order to regain its tax exempt status, the organization must apply for exemption by filing Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, or Form 1024, Application for Recognition of Exemption Under Section 501(a), and pay the applicable user fee.  The words “Automatically Revoked” should be written at the top of the application and the envelope to ensure the application is sent to the correct individual to handle the reinstatement.  In some instances, the organization may be granted retroactive reinstatement.  To request reinstatement back to the date of automatic revocation, the organization must attach a letter to the application explaining the reason for failing to file the required information returns for three consecutive years.  Only if the IRS determines that there was a reasonable cause for failing to file, will the retroactive reinstatement be granted.

Make sure your tax exempt status is not automatically revoked.  File your required annual returns.

                *Gross receipts normally less than or equal to $50,000                   File 990-N

                *Gross receipts less than $200,000, and total assets

                                less than $500,000                                                                   File 990-EZ or 990

                *Gross receipts greater than or equal to $200,000, or

                                total assets greater than or equal to $500,000                   File 990

Posted by: Carrie Minnich

56.5 cents per mile for business

24 cents per mile for medical or moving purposes

14 cents per mile for charitable purposes

The mileage rate for business and medical or moving purposes was each increased 1 cent from the previous rate.  The rate for charitable purposes was not changed.

Posted by: Carrie Minnich

Utilities (telephone, gas, electric, steam and water) used to further an organization’s exempt purpose are exempt from sales tax in Indiana.  An organization must apply to receive the exemption by completing Indiana Form ST-200, Utility Sales Tax Exemption Application.  A separate form must be completed for each utility account.  In addition to general information about the organization and utility company, the organization must also provide a copy of a utility bill with the application.  Nonprofits are also required to explain how the utility is used to further the exempt purpose of the organization.

To claim a refund for Indiana sales tax paid on previous utilities, a nonprofit must complete Form GA-110L, Claim for Refund.  The organization must provide an explanation as to why the refund is due along with documentary evidence to support the claim.  Documentary evidence usually consists of copies of bills or a “billing history” from the utility service.  The bill history must have a column showing the amount of sales tax paid for each period and must be presented on the letterhead, or the like, of the utility company. 

Refunds for Indiana sales tax paid on previous utilities may only be claimed for the current year and the three previous years.  For example, if an organization completes Form GA-110L and it is postmarked on or before December 31, 2012, it could claim a refund for sales taxes paid in all of 2009, 2010, 2011 and 2012.

Make sure your organization doesn’t miss this exemption.

Posted by: Carrie Minnich

·         The form can be obtained from the U.S. Citizenship and Immigration Services.  It is required to document that each new employee hired after November 6, 1986 is authorized to work in the United States.

·         There is no filing fee and the form is not filed with any government agency; however, it must be available for inspection by authorized U.S. Government officials.  In addition, the employer is required to retain the form for three years after the date of hire or one year after the date employment ends, whichever is later.  Photocopies of the completed Form I-9 are not acceptable.

·         Section 1 of the form, employee information, must be completed no later than the time of hire, which is the actual beginning of employment.

·         Section 2 of the form, employer verification, must be completed within three business days of the date employment begins.

·         Employers may photocopy documents presented for verification but it is not required.  If photocopies are made, they must be made for all hires and must be retained with Form I-9.

·         There are civil fines and criminal penalties for employers who violate immigration law during the hiring process.  Among other penalties, failing to comply with Form I-9 carries a fine of $110 to $1,100 per form.

The U.S. Citizenship and Immigration Services offers the following tips.

·         The information on the form should be legible.

·         The date entered in Section 2 on the form as the date the employee began work for pay should match the date in the payroll records.

·         Any copies of documents presented for verification should be readable.

·         All applicable sections of the form should be completed and signed.

·         Only abbreviations that are widely known should be used.

·         Only the current version of Form I-9 should be used.

Posted by: Carrie Minnich

Before a 501(c)(3) organization becomes a fiscal sponsor, it should make sure that the potential fiscal agent’s mission is consistent with the its own mission and does not jeopardize its tax exempt status.  Under a fiscal sponsorship relationship, the fiscal agent becomes an integrated part of the fiscal sponsor.  The fiscal sponsor receives tax deductible contributions on behalf of the fiscal agent, and the receipt and use of these funds is reported on the fiscal sponsor’s tax return to the IRS.  The fiscal sponsor is both fiscally and legally liable for the actions of the fiscal agent and thus, exercises control over its actions and funding to safeguard itself from losing its 501(c)(3) status.

The amount of services and support provided by the fiscal sponsor varies.  Usually the fiscal sponsor performs administrative functions for and collects contributions on behalf of the fiscal agent, and in exchange charges an administrative fee based on the fiscal agent’s revenues.  The responsibilities of each organization should be set out in a written agreement that includes the fiscal sponsor is responsible for all legal compliance relating to receiving, reporting and acknowledging charitable contributions.  The administrative fee to be charged should also be included in the written agreement.

Organizations that most benefit from fiscal sponsorships are:

Newly formed nonprofit organizations waiting to receive their tax exempt status.

New formed nonprofit organizations that want to test out the success of an idea before taking the leap to become their own organizations.

Small nonprofit organizations that find it beneficial to have the support of a well established nonprofit to provide administrative services, as well as legal and financial oversight.

Posted by: Carrie Minnich

First, there are three different types of political activities.

1.        Political campaign activity – any activities that favor or oppose a candidate for public office (attempts to influence public opinion about candidates)

-Endorsing candidates

-Contributing to candidates or political action committees (PACs)

-Public statements for or against a particular candidate

-Distributing materials (prepared by the organization or by others) that favor or oppose a candidate

2.       Lobbying – any attempts to influence specific pieces of legislation (attempts to influence public opinion about legislation)

-Contacting members of a legislative body for the purpose of supporting or opposing legislation

-Urging the public to contact members of a legislative body for the purpose of supporting or opposing legislation

-Advocating the adoption or rejection of legislation

3.       General advocacy – basically all other advocacy (attempts to influence public opinion on issues)

-Encouraging voter participation

-Get-out-the-vote drives

-Voter registration

Some of these activities are allowable for a nonprofit to engage in while others are not.  It just depends on what section of the Internal Revenue Code the nonprofit falls under.

501(c)(3) charitable, religious, educational and scientific organizations are absolutely prohibited from participating in any political campaign activity.  However, 501(c)(3) organizations may engage in lobbying activity so long as it does not constitute a substantial activity of the organization and may also take part in general advocacy as an educational activity.  A 501(c)(3) organization that has engaged in political campaign activity may be subject to tax on the amount of money it spent on the activity.  The management of the organization may also be taxed if they knew money was being spent and did not intervene.  The organization may also face losing its tax exempt status due to political campaign activity or substantial lobbying.

501(c)(4) social welfare organizations, 501(c)(5) labor, agricultural and horticultural organizations, and 501(c)(6) business league organizations are allowed to take part in political activity so long as it does not constitute the organization’s primary activity.  These organizations may also participate in an unlimited amount of lobbying and general advocacy in furtherance of the organization’s exempt purpose.  Like 501(c)(3) organizations, these types of nonprofits may also be subject to tax on excess political activity; however, unlike 501(c)(3) organizations, organizations under sections 501(c)(4), 501(c)(5) and 501(c)(6) do not risk losing their exempt status.

During this election year, be sure to make sure your organization understands what type of activities it can and cannot participate in so that you don’t risk losing your tax-exempt status.

Posted by: Carrie Minnich

The IRS specifically states that a section 501(c)(3) organization must not be organized or operated for the benefit of private interests.   No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual.

Private inurement occurs when an insider receives benefits from the nonprofit in excess of what he or she provides in return.  The IRS refers to insiders as “disqualified persons”.  These can be board members, trustees, officers, managers, highest paid employees, founders, major donors or family members of any of the above.   

The most common example of private inurement is excessive compensation paid to insiders.  Excessive compensation includes all forms of compensation including bonuses, fringe benefits, retirement, insurance, etc.  Other forms of private inurement include the sale or purchase of an asset to or from an insider, renting property to or from an insider, lending money to an insider or the use of the organization’s facilities to an insider.  The key to determining whether private inurement has occurred is whether the transaction is fair and reasonable under the circumstances.  For example, a $100,000 salary to the executive director of Organization A may not be reasonable while the same salary to the executive director of Organization B may be reasonable given the specific circumstances.  The executive director of Organization B may have more education and experience or Organization B may be more complex than Organization A.  In order to avoid the possibility of private inurement, Organization B needs to maintain documentation as to how the executive director’s salary was determined (i.e. comparable salaries paid by similar organizations), a description of the entire compensation package, the executive director’s responsibilities, and that the salary was approved by the board of directors.
Sometimes findings of private inurement do not warrant the revocation of the organization’s exempt status.  Instead, the IRS will impose intermediate sanctions where the insider is required to pay a tax equal to 25% of the excess benefit received.  In addition, the insider is required to make the organization whole again within a specified period of time.  If the insider fails to make the organization whole within the time frame, the IRS imposes an additional tax equal to 200% of the excess benefit.  The IRS also imposes a tax equal to 10% of the excess benefit on any board member who knowingly approves the excess benefit transaction. 

It is important to note that there is no de minimis restriction for private inurement.  In order to prevent your organization from losing its exempt status and avoid intermediate sanctions, make sure all transactions with insiders are reviewed to ensure the organization is serving public interests, not private interests.

Posted by: Carrie Minnich

Notice 2012-9 provides transitional relief which will postpone the reporting requirements for some employers and types of plans.  All employers that provide “applicable employer-sponsored coverage” under a group health plan are subject to the reporting requirement except for the following employers and types of plans which receive transition relief under Notice 2012-9.  The following will not be required to disclose health care costs on their 2012 W-2 forms (W-2 forms required for calendar year 2012 issued in 2013) or future calendar years until the IRS publishes guidance giving at least six months of advance notice of any change to the transitional relief.  However, these employers and types of plans may voluntarily report costs.

1.       Employers filing fewer than 250 W-2 forms for the previous calendar year (W-2  forms required for 2011 issued in 2012)

2.       Multi-employer plans

3.       Health Reimbursement Arrangements

4.       Dental and vision plans that either are not integrated into another group health plan or give participants a choice of declining the coverage or electing it and paying an additional premium

5.       Self-insured plans of employers not subject to COBRA continuation coverage or similar requirements

6.       Employee assistance programs, on-site medical clinics, or wellness programs for which the employer does not charge a premium under COBRA continuation coverage or similar requirements

7.       Employers furnishing W-2 forms to employees who terminate before the end of a calendar year and request a W-2 form before the end of the year

If your organization provides applicable employer- sponsored coverage under a group health plan and does not fall into one of the seven categories above, you are required to report certain health care costs on your W-2 forms required for 2012 issued in 2013.

Posted by: Carrie Minnich

The one tax position that all tax-exempt organizations has is the very fact that they are tax-exempt.  The organization is taking a position that it is in agreement with the purpose for which the organization received its exemption and is in compliance with all rules and regulations allowing the organization to continue to be tax-exempt.  Has the organization changed its purpose from when it was first granted exemption?  If it has, its original exemption may no longer apply to the new purpose.  Other items to consider that may cause an organization to lose its tax-exempt status are:

• Political activity
• Too much lobbying
• Private inurement
• Private benefit
• Illegal activity
• Excessive unrelated business income

The second most common area for uncertain tax positions for nonprofit organizations is unrelated business income.  Organizations may receive revenue from a source that the IRS could consider unrelated business income and, therefore, be taxable.  Depending on certain circumstances, the organization may consider the revenue as related or exempt from tax while the IRS does not.  Those areas that generate the most unrelated business income in nonprofits and are more likely to create issues for organizations are:

• Advertising
• Sale of merchandise that is not directly related to the exempt purpose
• Rental income from debt-financed property

Even if the organization and the IRS agree that a specific activity is unrelated business income, an additional uncertain tax position could exist for the allocation of expenses to offset unrelated business revenue (expenses that may not normally be thought to be directly related to an activity, allocating too much of a certain expense to the unrelated activity, or expenses that consistently generate losses).

One last item to note is that FIN 48 is not just applicable to federal tax positions.  FIN 48 applies to federal, state, local and international levels.

Posted by: Carrie Minnich

Many times a donor will promise or pledge to make a contribution to a nonprofit organization.  This usually happens during a capital campaign, when a donor completes a pledge card stating how much he is going to give to the organization.  As a result, the organization recognizes the amount pledged as revenue and as a receivable at the time the promise is made. 

Promises can be made either in writing or verbally, but there must be documentation to support the pledge.  In the instance above, the pledge card, which includes the donor’s name and address and amount to be given, serves as adequate documentation.  In the instance of a verbal pledge, documentation could be a recording or written evidence by the individual to whom the pledge was communicated to.  Written evidence should include the donor’s name, address and telephone number, as well as the amount of the promise, date of promise, date(s) the promise is due and the name of the individual to whom the promise was made.

What if a donor makes an intention to give to the organization as opposed to a promise? 

An intention is not the same as a promise to give.  The donor is intending or planning to give but hasn’t made the next step in making that promise.   A common example of an intention is when a donor notifies an organization that the organization has been named as a beneficiary in the donor’s will.  Unlike promises, intentions are not recorded in the organization’s revenue.  This communication is only an intention until the donor passes away and the will is declared valid.  Once the will is declared valid, the intention becomes a promise to give and is recorded in revenue. 

It is important for nonprofit organizations to be aware of the language used in raising funds to ensure revenue is properly recorded.

Posted by: Carrie Minnich

Congress reduced standard postage rates for nonprofits in 1951 for organizations meeting stated eligibility requirements.  The eight categories of eligible nonprofit organizations are religious, educational, scientific, philanthropic (charitable), agricultural, labor, veterans, and fraternal.  State, county, and municipal governmental organizations, as well as political organizations, service clubs and social clubs are specifically exempt from receiving the Nonprofit Standard Mail rates.  There are also eligibility requirements on the material that can be mailed under the discounted rates.  Bills, statements of account, handwritten materials or personal correspondence do not qualify under the Nonprofit Standard Mail rates.

In order to receive the Nonprofit Standard Mail rates, an organization needs to complete PS Form 3624, Application to Mail at Nonprofit Standard Mail Rates that can be obtained online or at any Post Office.  Beginning in September 2008, organizations can also apply electronically through PostalOne! Applying through PostalOne! provides one National Authorization Number valid at any USPS mailing location.  In addition to the application, the organization must also submit the following attachments.

1.       A copy of its IRS letter of exemption,

2.       Organizing documents that state the purpose for which the group is organized (articles of incorporation), and

3.       Documents showing how the organization actually operated during the previous 6 – 12 months, and how it will operate in the future (financial statements, newsletters, minutes, etc.).

The attachments can be submitted electronically or as hard copy when applying through PostalOne!

Other forms available at PostalOne! are PS Form 3623, Request for Confirmation of Authorization, which provides confirmation to mail at a non-PostalOne! office and PS Form 6015, Nonprofit Database Change Request, which allows for either a name change or contact information change of an organization.

While the application is pending, the organization must pay postage at regular rates.  A refund may be made to the organization for the difference between the regular rate paid and the discounted nonprofit rate while the application is pending.

The organization must make at least one mailing at the Nonprofit Standard Mail rate during a 2 year period or the authorization to mail at the nonprofit rate will be automatically revoked for nonuse.

As a nonprofit, reduced mailing rates are one benefit your organization does not want to miss out on.

Posted by: Carrie Minnich

After enjoying breakfast served by the American Red Cross at Headwaters Park, DWD headed out to its project site at Visiting Nurse & Hospice Home.  Visiting Nurse & Hospice Home is a nonprofit that provides compassionate medical care, and emotional and spiritual support to those entering the last stages of life and to their loved ones who go on living.

To find out more about Visiting Nurse & Hospice Home visit their website at www.vnhh.org or to find out how you can participate in the Day of Caring visit the United Way’s website at www.unitedwayallencounty.org.

Posted by: Carrie Minnich

What does this mean for your nonprofit?

The number of employees your organization has will determine what your organization is required to provide.

Less than 25 employees

Not required to provide health insurance.

If your organization does provide health insurance, you may be eligible for a tax credit to deduct 25% of the cost of health insurance from 2010-2013 and 35% in 2014.  For more information on the credit, check out our previous blog post, Don’t Forget About the Small Business Health Care Tax Credit.

Less than 50 employees

Not required to provide health insurance.

Employees that do not receive insurance from their employer (or Medicare and Medicaid) are required to purchase their own insurance (effective 2014).

More than 200 employees

Required to automatically enroll employees into health insurance plans offered by the employer.  Employees may opt out of coverage (effective 2014).

Also included in the act is the implementation of health insurance exchanges.  These allow individuals and employers to buy lower-cost health insurance as part of a purchasing pool.  Employers with less than 100 employees and individuals with income between 133% and 400% of the federal poverty level will be eligible to participate in the exchanges, which are expected to be operational by January 1, 2014.

Some organizations may find it beneficial to extend their current insurance coverage to all employees while others may find it actually saves money to discontinue insurance and simply pay the penalty.

Posted by: Carrie Minnich

Approximately 60,000 new applications for tax exemption are received each year.  Each application goes through a “technical screening” where each is sorted into one of four categories.

(1) Applications that can be approved immediately based on the completeness of the application and information submitted,
(2) Applications that need only minor additional required information in the file in order to approve the application,
(3) Applications that do not contain the information needed to be considered substantially complete, and
(4) Applications that require further development by an agent in order to determine whether the application meets the requirements for tax exempt status. 

Organizations whose applications fall into the fourth category are sent a letter informing them that the IRS needs more information.  This is where the additional waiting time is incurred.  Once a revenue agent with the proper level of experience has an opening, the agent notifies the organization that the case has been assigned, reviews the application and requests additional documentation necessary to determine whether the organization qualifies for tax exempt status.  Requested response dates are included on requests for additional information, but the organization can request additional time if needed.  The organization can also request additional time if it thinks it can answer questions differently than requested.   It is important that all information in this stage is submitted on paper so that documentation exists to go back to if there are ever any questions.  This process goes back and forth until the IRS determines if the organization qualifies for exempt status or is denied status.

If you have submitted your application and are waiting to hear back from the IRS, you can check on the IRS website to see what month’s applications are currently being assigned.  As of this post, the IRS is assigning applications received in November 2011.

Posted by: Carrie Minnich

One of the topics Ms. Lerner discussed in detail and warned against was including Social Security numbers on Form 990.  Do not include Social Security numbers anywhere on Form 990 or any of the schedules.  According to the Chronicle of Philanthropy, Social Security numbers have been listed for donors, trustees, employees, directors, scholarship winners and tax preparers.  The IRS does not ask for Social Security numbers on Form 990.  The IRS requires Form 990 to be public document; therefore, any Social Security numbers listed on the return are also made public.

She also discussed the importance of good governance practices within nonprofit organizations.  In recent years, the IRS has put a greater emphasis on good governance with the inclusion of several additional questions related to this area on the revised 990.  An initial analysis was done on 501(c)(3) organizations already selected for an IRS exam based on other non-governance criteria .  The analysis found that those organizations that had the following governance practices in place were more likely to be tax compliant.

- Had a written mission statement
- Always used comparability data when making compensation decisions
- Had procedures in place for the proper use of charitable assets
- The 990 was reviewed by the entire board of directors

With the recent automatic revocation of tax exempt status by the IRS, the IRS has become aware that some organizations filed the 990-N e-Postcard instead of the required Form 990 or 990-EZ that was required of the organization.  In addition, several thousand organizations filed both a 990-N and another series of Form 990 in the same year.  Of course, the IRS will be notifying these organizations for further explanation of the incorrect filing.

The preceding items are important to note so that your organization stays in compliance with IRS requirements and does not become one of the organizations that is contacted by the IRS.

Posted by: Carrie Minnich

The couple filed Schedule A on their 2007 joint income tax return and claimed a deduction of $25,171 for charitable contributions made by cash or check.  Most of the contributions were made to their church and all except for 5 checks were over $250.  The couple provided copies of canceled checks and a letter dated January 10, 2008 from their church acknowledging the contributions from 2007.  The Court did not accept the acknowledgement from the church; however, because it did not include a statement regarding whether any goods or services were provided in return for the contributions.  The couple then provided a letter from their church dated June 21, 2009 that included the same information as the first and also a statement that no goods or services were provided in return for the contributions.  The Court again denied the second letter from the church because it was not contemporaneous. 

A written acknowledgement is contemporaneous if it is obtained by the taxpayer on or before the earlier of (1) the date the taxpayer files the original return for the taxable year of the contribution or (2) the due date (including extensions) for filing the original return for the year.  In this case, both of these dates had passed.

To find out additional information on proper documentation for charitable contributions, check out our earlier blog, Contribution Substantiation.

Posted by: Carrie Minnich

Examples of property you may have are lost or forgotten checks.  There are many other examples which may not apply to your company such as insurance proceeds, utility refunds, and safe deposit box contents.
What is not unclaimed property?  Usually unclaimed items are not tangible unless the item will fit in a safe deposit box.  Therefore, real estate, vehicles, and furniture are not considered unclaimed property.

When is a company required to report unclaimed property?
The property must be considered legally unclaimed.  A company would make this determination based upon the type of asset and how long the holder has been unable to find the owner.
When the property has been deemed legally unclaimed, the holder is then required to report and turn over the property to the State of Indiana.
Here are a few items and the term when that item is considered dormant.
• Payroll, wages, and utilities are considered dormant after one year.
• Vendor checks, cashier checks, customer credit balances, and miscellaneous outstanding checks are just some of the items considered dormant after three years.
• Escrow funds, condemnation awards, and missing heirs funds are just some of the items considered dormant after five years.
• Money orders are considered dormant after seven years.
• Traveler’s checks are considered dormant after fifteen years.

The Indiana Unclaimed website has a more inclusive listing, www.IndianaUnclaimed.com

What must the holder do prior to remitting unclaimed property?
The holder must try to contact the owner of the property thought to be unclaimed.  The state suggests a due diligence letter be issued.  The due diligence letter notifies the owner of the potential unclaimed property that the holder has this property.  If the owner responds, the property is not unclaimed.  If the owner does not respond, the property is unclaimed and can be treated as such.  An example of the due diligence letter is attached for reference.  Due diligence must occur for property in excess of $50.  The letter must not be sent more than 120 days or less than 60 days before the annual report is filed.  For most holders, these letters should not be sent before July 4 or after September 1.

How does a company report unclaimed property?
Indiana requires the holder to register so any unclaimed property can be reported online.  The registration takes place at http://www.IndianaUnclaimed.com.  The state has a guide you can follow.
The report must be filed annually by November 1st for most companies.  However, life insurance companies must file annually by May 1st.

Can I file for an extension on reporting unclaimed property?
The state of Indiana does not have an automatic extension available.  If a holder does need an extension, the holder must request the extension in writing.  The request must be made no later than thirty days prior to the due date of the annual report.

What if you do not file unclaimed property but you should?
If the annual report is filed less than fifteen days late, the holder will be subject to a civil penalty of $100 per day until the annual report is filed.
After the annual report is fifteen days late, the holder will be subject to the greater of:
1) $100 each additional day, not to exceed $5,000 or
2) 10% of the value of the property identified, not to exceed $5,000
If the holder can show good cause for the failure to file, the Attorney General may waive the penalty in whole or in part.
A holder who willfully refuses, after written demand by the attorney general, to pay or deliver property to the Attorney General is subject to a Class B misdemeanor.

Where can I get additional information about unclaimed property?
www.IndianaUnclaimed.com
 

According to Indiana Code 6-1.1-10-16, “all or part of a building is exempt from property taxation if it is owned, occupied, and used by a person for educational, literary, scientific, religious, or charitable purposes.” If a nonprofit owns and occupies a building and leases a portion to for profit businesses, a split percentage is used in determining the amount of property taxes the nonprofit is liable for. For example, if a nonprofit leases 30% of its building to another company and uses 70% of the building for its exempt purpose, the nonprofit will most likely be liable for 30% of the property taxes on the building. The percentage used for the split is based on the square footage of the building. There may also be discounted rates that come into effect when leasing to other nonprofits. However, if a portion is leased to other nonprofit organizations, it may be possible to get exemption from property tax for that space also.

In order to receive an exemption from property taxes in Allen County, nonprofits are required to complete and file Form 136, Application for Property Tax Exemption. As part of this form, a predominant use calculation is required which details the amount of square footage of the building and what it is used for. If the property is purchased from another nonprofit that already has an exemption, a Notice of Change of Ownership of Exempt Property form is required instead of Form 136. In either case, the proper form should be completed and filed as soon as the real estate (land and building) is purchased.

Posted by: Carrie Minnich

There are three issues that must be considered in determining if the individual is an employee or an independent contractor.

1. Behavioral Control

• Does the organization have the right to control how the individual does the work?
• Are there specific instructions given on -
    How, when, or where to do the work?
    What tools and equipment to use?
    What assistants to hire to help with the work?
    Where to purchase supplies and services?
    What work must be performed by a specified individual?
    What sequence to follow?
• Does the organization provide training on the required procedures to perform the work?

If the answer to these questions is yes, then most likely an employee relationship exists because the organization controls the individual.

2. Financial Control

• Does the organization control the business aspects of the individual’s job?

Independent contractors have more independence (hence independent contractors) than employees. These individuals tend to seek out more than one business opportunity at a time and usually determine what types of tools used in providing their services. They are also more likely to have unreimbursed expenses than employees. Independent contractors are also often paid a flat fee per month or per project rather than a regular guaranteed hourly wage amount as an employee is.

3. Relationship

• What type of relationship exists between the organization and the individual?
• Does the individual receive benefits (retirement, insurance, etc.) from the organization?
• Is the expectation that the relationship will continue indefinitely or only for a specified project or period?
• Is there a written contract between the organization and the individual?

If the individual is treated similar to the employees of the organization then the individual is probably also an employee.

It is very important for an organization to classify workers correctly as an organization can be held liable for employment taxes, plus interest and penalties, if a worker is incorrectly classified as an independent contractor.

Posted by: Carrie Minnich

Compilations provide no assurance. The accountant takes the information from the client’s general ledger and presents it in the form of financial statements. Any obvious errors from generally accepted accounting principles are corrected. For example, if the organization had fixed assets but no depreciation has been recorded for the year, the accountant will make a journal entry to record depreciation. The accountant is required to have an understanding of the organization’s industry, obtain knowledge of the client and consider whether the financial statements are in an appropriate form and free from obvious material errors. Compilations involve the least amount of work which results in a lower fee compared to an audit or a review. The compilation report reads:

“We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or provide any assurance about whether the financial statements are in accordance with generally accepted accounting principles.”

Reviews are one step up from a compilation and provide limited assurance. Reviews include inquiries of management and staff as well as analytical procedures (looking at numbers to make sure they make sense) performed by the accountant. The review report reads:

“Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.”

Audits involve inquiry and analytical procedures, similar to reviews, but also require the auditor to gain an understanding of the organization’s internal controls and include confirmations of balances by outside sources. The goal of an audit is to provide reasonable but not absolute assurance that the financial statements are fairly presented in accordance with general accepted accounting principles. Audits require the most amount of work of the three and therefore cost the most. The audit report reads:

“In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nonprofit Organization as of June 30, 2011, and the changes in its net assets and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.”

It is up to each organization to determine which type of service will meet their needs. The level of service required by a nonprofit organization often depends on funding requirements. Many funders will require organizations to have an audit in order to obtain grants. Sometimes a review will satisfy a funder’s request but rarely will a compilation due to the level of assurance provided. If the organization is an Indiana entity that receives state and government assistance, the state of Indiana may require an audit. The organization should also review its bylaws to see if there is a requirement for a specified level service included in the organization’s governing documents.

Posted by: Carrie Minnich

The new Select Check combines previously available information in one easy to find location.  Users can now search and sort by the following criteria.

Search for:

• Organizations eligible to receive tax deductible contributions by employer identification number, name, doing business as, city, state, country or deductibility status.
• Organizations that have had their tax exempt status revoked by employer identification number, name, city, state, zip code, country, exemption type or revocation posting date.
• Organizations that have filed Form 990-N by employer identification number, name, city, state, zip code, country or tax year.
   

Both the organizations eligible to receive tax deductible charitable contributions and those that have had their tax exempt status automatically revoked will be updated monthly, while the list of organization that have filed Form 990-N will be updated weekly by the IRS.
 

To access Select Check go here.

Posted by: Carrie Minnich

Charitable contributions. For cash contributions (including checks and other monetary gifts), the donor must retain a bank record or a written acknowledgment from the charitable organization. A cash contribution of $250 or more must be substantiated with a contemporaneous written acknowledgment from the donee. "Contemporaneous" for this purpose is defined as obtaining an acknowledgment before you file your return. So save those letters from the charity, especially for your larger donations.

Tip records. A taxpayer receiving tips must keep an accurate and contemporaneous record of the tip income.  Employees receiving tips must also report the correct amount to their employers.  The necessary record can be in the form of a diary, log or worksheet and should be made at or near the time the income is received.

Wagering losses. Gamblers need to substantiate their losses. The IRS usually accepts a regularly maintained diary or similar record (such as summary records and loss schedules) as adequate substantiation, provided it is supplemented by verifiable documentation.  The diary should identify the gambling establishment and the date and type of wager, as well as amounts won and lost. Verifiable documentation can include wagering tickets, canceled checks, credit card records, and withdrawal slips from banks.

Vehicle mileage log. A taxpayer can deduct a standard mileage rate for business, charitable or medical use of a vehicle.  If the car is also used for personal purposes, the taxpayer should keep a contemporaneous mileage log, especially for business use.  If the taxpayer wants to deduct actual expenses for business use of a car also used for personal purposes, the taxpayer has to allocate costs between the business and personal use, based on miles driven for each.

Material participation in business activity.  Taxpayers that materially participate in a business generally can deduct business losses against other income. Otherwise, they can only deduct losses against passive income.  An individual's participation in an activity may be established by any reasonable means.  Contemporaneous time reports, logs, or similar documents are not required but can be particularly helpful to document material participation.  To identify services performed and the hours spent on the services, records may be established using appointment books, calendars, or narrative summaries.

Hobby loss. Taxpayers who do not engage conduct an activity with a sufficient profit motive may be considered to engage in a hobby and will not be able to deduct losses from the activity against other income.  Maintaining accurate books and records can itself be an indication of a profit motive.  Moreover, the time and activities devoted to a particular business can be essential to demonstrate that the business has a profit motive.  Contemporaneous records can be an important indicator.

Travel and entertainment. Expenses for travel and entertainment are subject to strict substantiation requirements. Taxpayers should maintain records of the amount spent, the time and place of the activity, its business purpose, and the business relationship of the person being entertained. Contemporaneous records are particularly helpful.

Is your organization prepared to handle the challenges faced with changing leadership?

A succession plan outlines the steps needed to make the transition from one leader to another as smooth as possible. Both the current executive director and the board of directors should be involved in succession planning. The board must start by determining goals for the future of the organization in order to select the appropriate individual to lead them there. It will also need to be decided if a new leader will be chosen from within the organization or from outside, how much overlap the current executive director will have with a new director and an exit strategy for the current executive director.

The plan, itself, should address the following issues:

The executive director’s responsibilities. Not just a formal job description (which should be reviewed and updated if necessary) but what the executive director does each day, week, and month.
Will an interim director be hired or will other individuals within the organization perform the director’s duties?
A timeline for filling the executive director’s position.
Who will be responsible for interviewing and hiring a new executive director?
An organizational calendar, detailing regular events occurring throughout the year (i.e. fund raising events, audits, grant deadlines, etc.).
An organizational chart noting lines of authority and any changes in the chart caused by the current executive director’s absence.
An inventory listing of key information (i.e. IRS determination letter, bylaws, mission statement, Form 990’s, audited financial statements, sales tax exemption, check stock, financial and donor records, computer passwords, etc.)
A listing of key organizational contacts (i.e. banks, investment company, lawyer, insurance agent, accountant, payroll provider, etc.)

The leadership of an organization is essential to its success. It is inevitable that over time your organization’s leadership will need to be replaced. To be ready for the transition, make sure your organization has a succession plan in place.

Posted by: Carrie Minnich

2. Use Classes. Generally accepted accounting principles require nonprofit organizations to report expenses by functions – program, management and general, and fund raising. Classes provide a way for organizations to track these expenses. Classes should be set up for each program, as well as management and general and fund raising. By using classes, the necessary reports your nonprofit will need can easily be created with a few mouse clicks.

3. Use Jobs. Using the jobs feature in QuickBooks allows you to track the revenue received and expenses paid from various grants. Each grant should be set up as a separate job. As you are recording receipts and paying checks, the respective job should be assigned to each transaction. You will then be able to easily run a profit and loss statement for each grant.

4. Budgets. By setting up a budget inside of QuickBooks with projected revenue and expenses at the beginning of the year, you can easily compare budget to actual at any time throughout the year to determine how your organization is performing.

5. Turn on the Audit Trail. The audit trail feature keeps track of all transactions entered and changes made, as well as who did it. Not only does it show what accounts were affected but it also shows the exact date and time the change was made. This feature provides an added control for your organization against fraudulent activity.

Posted by: Carrie Minnich

Below is a list of written policies and procedures that every nonprofit organization should have.

Accounting procedures
Documents the internal accounting procedures to ensure a proper segregation of duties, as well as, who is responsible.

Allocation policy
Describes the method for allocating shared expenses across programs and departments.

Board roles and responsibilities
Describes expectations and duties of board members.

Capitalization policy
Sets a dollar amount and useful life in number of years for purchases that will be capitalized as opposed to expensed when purchased.

Conflict of interest policy
Requires board members and management to disclose any potential conflicts of interest.

Disaster recovery plan
Describes a plan of action to continue to carry out the organization’s mission after a disaster.

Document retention and destruction policy
Describes how, where, and for how long the organization’s documents are kept, as well as, how and when documents are destroyed. It should also include a statement that all destruction will be suspended immediately upon any indication of an official investigation or when a lawsuit is filed or appears imminent.

Endowment policy (if have an endowment)
Describes the purpose of the endowment, how funds are to be invested, and the spending policy so that the funds are prudently managed.

Gift acceptance policy
Sets forth the organization’s policy on accepting noncash gifts.

Investment policy
Details how the organization’s assets will be invested, goals of the investment and the organization’s fiduciary responsibilities related to the investments.

IT and Internet security plan
Details specific security steps to prevent unauthorized access to the organization’s computer network, as well as, performing backups and employee email and internet usage.

Job descriptions
Describes roles and responsibilities for each employee.

Personnel policy manual
Sets guidelines for employees within the organization including but not limited to dress requirements, working hours, confidential information, vacation and benefits, holidays, sick leave, medical leave, discipline and employee evaluations.

Petty cash fund policy
Describes the purpose of the petty cash fund and the reimbursement procedures, as well as, how the fund is replenished.

Strategic plan
Describes future goals for the organization, how it is going to accomplish the goals and how it will determine if it has met the goals.

Whistleblower policy
Provides a procedure for reporting violations, as well as, prohibiting retaliation against the individual.

990 review procedures
Describes how the governing board reviews Form 990 prior to filing with the IRS.

Posted by: Carrie Minnich

There are a few things you can do to make sure your data is protected.

1. Backup. Make sure all data is backed up regularly and a copy of the backup is kept off site.

2. Restrict access. Not everyone within the organization needs to have access to all information. Restrict access so that only those individuals that need the information have access to it. The more people with access, the more chance of security breaches.

3. Keep only what you need. Set limits on the type of information the organization keeps. For example, you do not need to keep donor social security numbers and credit card numbers.

4. Physical security. Require unique computer and software passwords for all users that must be changed occasionally. Consider encrypting files. Make sure your server is kept in a locked area.

5. Online access. Install firewalls and anti-virus protection software to keep computers safe when connected to the Internet. Be sure to keep the anti-virus software updated to avoid new viruses. If you provide a wireless Internet, require users to log-in with a password.

6. Educate. Educate staff and volunteers about the importance of security. Make sure everyone is aware of the organization’s policies and consequences of not following them.

Posted by: Carrie Minnich

The executive director is so central to the organization that evaluating the executive director is basically like evaluating the organization. The executive director’s performance affects the performance of the entire organization. Often times the evaluation of the executive director is done in conjunction with the evaluation of the organization as a whole and its goal setting for the next year.

It is the board’s responsibility to annually evaluate the executive director’s performance. An annual evaluation provides an opportunity for the board to recognize accomplishments and to discuss any concerns it may have about the executive director’s performance. It is also a time for the board to clarify any expectations of the executive director’s role and responsibilities.

Most organizations have only their board members participate in the evaluation process; however, others include feedback from staff or even go outside of the organization to get feedback from funders, clients, volunteers, etc. In many cases, the executive director will also be asked to provide a self evaluation to assess his or her own performance over the year. The National Center for Nonprofit Board recommends the following areas of responsibility be evaluated.

• Vision, Mission and Strategies
• Accomplishment of Management Objectives
• Program Management
• Effectiveness in Fund Raising and Resource Development
• Fiscal Management
• Operations Management
• The Chief Executive/Board Partnership
• The Board/Staff Relationship
• External Liaison and Public Image
• Board Perceptions of the Organization

The executive director is like any other employee that should receive feedback all year long. He or she should receive acknowledgement for a job well done and immediate feedback if problems arise. The only difference between the director and other employees is that there is no supervisor that the director reports to. The board is the director’s boss.

Posted by: Carrie Minnich

The IRS (http://www.irs.gov/) has released a list of pointers to consider when selecting a tax preparer. In addition to someone who understands nonprofits, keep these items in mind when choosing a preparer.

• Check the person’s qualifications.
• Check the preparer’s history.
• Find out about their service fees.
• Ask if they offer electronic filing.
• Make sure the tax preparer is accessible.
• Provide all records and receipts needed to prepare your return.
• Never sign a blank return.
• Review the entire return before signing it.
• Make sure the preparer signs the form and includes his or her preparer tax identification number (PTIN).

Posted by: Carrie Minnich

To be eligible for the credit the employer must

• Pay at least 50% of the health insurance premiums for its employees (based on the single rate)
• Have less than 25 full-time equivalent employees
• Pay less than $50,000 in average annual wages

The maximum amount of the credit is 25% of the premium costs beginning in 2010 for tax-exempt employers and increases to 35% on January 1, 2014. The credit is phased out for organizations with average wages between $25,000 and $50,000 and with full-time equivalents between 10 and 25. For tax-exempt entities, the credit is also limited to the amount of the employer’s payroll taxes paid during the calendar year in which the tax-exempt entity’s tax year begins. Payroll taxes include the amount withheld from employee wages for income tax withholding and Medicare and the employer’s share of Medicare.

Form 8941, Credit for Small Employer Health Insurance Premiums must be filed to claim the credit. The amount of the credit from Form 8941 is then recorded on line 44(f) on Form 990-T, Exempt Organization Business Income Tax Return.

Are You Eligible?

1. Does your organization pay at least 50% of health insurance premiums for employees?
*If yes, continue to step 2.

2. Calculate the number of full-time equivalents.

Number of full-time employees (employees working at least 40 hours per week) _________
Number of full-time equivalents (total hours of part-time employees divided by 2,080 hours) _________
Total full-time equivalents _________
*If the total is less than 25 continue to step 3.

3. Calculate the average annual wages of employees.
Total annual wages paid to employees divided by the number of employees in step 1
*If the result is less than $50,000 then you may qualify for the tax credit.

After you have determined that you may qualify for the credit, use the information calculated above to complete Form 8941 or contact your tax advisor for assistance.

Posted by: Carrie Minnich

We will have to wait until the lawmakers return from their holiday recess to see if agreement can be reached to extend the payroll tax cut through the rest of 2012.

Posted by: Carrie Minnich

Below is chart showing the normal filing dates for the 990 series of forms. Organizations specifically affected by the extension are those with year ends of August and September. Those organizations with year ends of May or June may also be affected if they have filed extensions.

Posted by: Carrie Minnich

55.5 cents per mile for business

23 cents per mile for medical or moving purposes

14 cents per mile for charitable purposes

The mileage rate for business and charitable purposes was not changed from the last update that took place on July 1, 2011. The medical and moving rate decreased .5 cents.

Posted by: Carrie Minnich

It is the donor’s responsibility to obtain a contemporaneous written acknowledgement from the donee for single donations of $250 or more. Contemporaneous simply means the documentation must be obtained by the donor before the donor files his tax return for the year he is taking the deduction. In addition to the written documentation requirements noted above, the written acknowledgement must also state whether the donee organization provided any goods or services in return for the contribution.

If any goods or services were provided, a quid pro quo contribution exists. Under a quid pro quo contribution, the written documentation must include a good faith estimate of the value of the goods or services provided to the donor. The written acknowledgement requirement is also lowered to more than $75 instead of $250 for quid pro quo contributions. It is the donee organization’s responsibility to provide a written acknowledgement for quid pro quo contributions. A penalty of $10 per contribution (maximum of $5,000 per fund raising event or mailing) will be imposed on the donee organization for each quid pro quo contribution of more than $75 that it fails to make the required disclosure for.

It is good practice for nonprofit organizations to provide each donor making a contribution of $250 or more with a written acknowledgement to lessen the burden on their donors. Many nonprofits make it a practice to provide thank-you letters to donors which provide the necessary information for the donor.

Posted by: Carrie Minnich

St. Martin Community Center is committed to making Grant County a better place to live. By providing those in need with basic necessities, including food and clothing, St. Martin takes an important step towards the larger goal of decreasing the effects of poverty.

Volunteers at St. Martin’s Kay’s Kitchen serve lunch Monday through Saturday. All those who come to Kay’s Kitchen will receive a free hot meal regardless of ability to pay. No person will be turned away.

St. Martin’s also operates a Kid’s Café through a partnership with Second Harvest Food Bank and the Grant County Boys' and Girls' Club that provides free meals and snacks to low-income children during the school year. Kid’s Café also provides a safe place, where under the supervision of trustworthy staff, a child can be involved in educational, recreational and social activities.

“It was so kind of you to remember the poor in our community. Your gift will help feed many people a free hot meal at Kay’s Kitchen. We are now feeding over 5,000 people a month at Kay’s Kitchen and 1,400 children at the Boys’ and Girls’ Club each month.” - Teresa Campbell, Director of St. Martin Community Center.

Liz Gutierrez from Dulin, Ward & DeWald with Teresa Campbell, Director of St. Martin Community Center

Posted by: Carrie Minnich

Associated Churches Food Bank is an “emergency food bank” offering families food once a month at no charge through a network of 28 local food pantries in churches and social agencies. Pantries provide a five-day supply of food to prepare balanced and nutritious meals as recommended by the Department of Agriculture nutrition food chart. Clients must abide by the guidelines of the Food Bank Systems.

“As of the end of October we were serving 1,500 more families per month than we were in January. Meanwhile our largest food drive, Stamp Out Hunger, brought in 87,000 fewer pounds of food than 2010, government funding has been reallocated for harder hit areas and also for housing needs, grants continue to be received but often at a reduced amount, and food and fuel prices fail to go down to any marked degree. All these factors have resulted in incredibly challenging times for the Associated Churches Neighborhood Food Network and makes us appreciate every single gift we are blessed to receive. Many thanks to DWD for your recent donation! It will help us purchase food to ensure balanced meals for those who are hungry.” -Charlene Rorick, Communications Coordinator at Associated Churches

"When I think of your gift, and your intent to use your budgeted client gift funds to provide basic emergency food relief - I am deeply moved. These are "holy" funds that will give hope and encouragement into dark places. Please know that our gratitude runs deep, especially when you see the children's faces with the week supply of good food you provided. Thanks for being a blessing in our community. " - Roger Reece, Executive Pastor, Associated Churches

Dulin, Ward & DeWald staff Amanda Gerber, Carrie Minnich, and Susan Berghoff with Rev. Roger Reece (Executive Pastor of Associated Churches)

Posted by: Carrie Minnich

The First Step: Determine What is Most Important to Protect 

The first step in creating a disaster recovery plan is to determine what items in the organization are most important to protect; what applications are necessary in keeping the organization operating. Protecting people should be of foremost importance. Without its employees and volunteers, an organization’s mission cannot be carried out. After protecting people, other important assets are financial data, databases, contracts, insurance files, client files, and human resource files.

The Second Step: Documentation

The second step in disaster recovery planning is documentation. The current systems in place should be documented. Systems documentation should include: procedures for the accounting system and software; how data files are backed up; the schedule for data file back ups; and where the back up disks or tapes are stored. In addition, a listing for alternative resources should be maintained. These include safety and community services that might be needed; temporary alternative office sites; and any equipment and supplies that would be needed for recovery operations. Key contacts should also be documented. The key contact list should include contact information for employees, volunteers, board members, insurance companies, key vendors, and key agencies.

The Third Step: Distribute the Recovery Plan

Another important step of planning for disasters is to share non-confidential disaster recovery information with each employee that will help each one learn his or her responsibilities should a disaster strike. Copies of the fully documented plan should also be stored at an off site location.

The Final Step: Regularly Review and Update the Disaster Recovery Plan

Finally, all disaster recovery plans should be reviewed and updated on regular bases so that any necessary changes made. Over time, changes in personnel and procedures will occur. The disaster recovery plan should be updated with these types of changes.

Most disasters cannot be anticipated. However, preventative measures can be taken to guard against the effects of an unexpected disaster.

Posted by: Carrie Minnich

• Controlled, occasional employee use of photocopier

• Occasional snacks, coffee, doughnuts, etc.

• Occasional tickets for entertainment events

• Holiday gifts

• Occasional meal money or transportation expense for working overtime

• Group-term life insurance for employee spouse or dependent with face value not more than $2,000

• Flowers, fruit, books, etc., provided under special circumstances

• Cell phones provided for noncompensatory business reasons

A benefits frequency and its value should always be considered when determining whether a benefit is de minimis. A de minimis benefit is usually always given infrequently. It also must not be a form of disguised compensation.

Cash Benefits

Cash is generally intended as a wage, and usually provides no administrative burden to account for. Cash therefore cannot be a de minimis fringe benefit.

The one exception to this rule is giving an employee occasional meal or transportation money to enable him/her to work overtime. The benefit must be provided so that employee can work an unusual, extended schedule. The benefit is not excludable for any regular scheduled hours, even if they include overtime. The employee must actually work the overtime.

Meal money calculated on the basis of number of hours worked is not de minimis and is taxable wages.

Gift Certificates/Gift Cards

Cash or cash equivalent items provided to an employee by the employer are never excludable from income, except as noted above. Gift certificates that are redeemable for general merchandise or have a cash equivalent value are not de minimis benefits and are taxable as wages to the employee.

A gift certificate/gift card that allows an employee to receive a specific item of personal property that is minimal in value, provided infrequently, and impractical to account for, may be excludable as a de minimis benefit, depending on facts and circumstances.

Achievement Awards

Special rules apply to allow exclusion from employee wages of certain employee achievement awards of tangible personal property given for length of service or safety. These awards

• Cannot be disguised wages

• Must be awarded as part of a meaningful presentation

• Cannot be cash, cash equivalent, vacation, meals, lodging, theater or sports tickets, or securities.

In addition, there are other requirements specific to achievement and safety awards and there are dollar limitations that must be met. See the Taxable Fringe Benefits Guide or Publication 535 for more information.

How are de minimis fringe benefits reported?

If the benefits qualify for exclusion from wages, no reporting is necessary. If they are taxable wages, they should be included on Form W-2 and subject to income tax withholding. If the employees are covered for social security and Medicare, the value of the benefits is subject to withholding for these taxes also. You may optionally report any information in box 14 of Form W-2.

Keep these rules in mind when considering gifts or bonuses for your employees and volunteers.

Posted by: Susan Berghoff

Do you know which type of return you are required to file?

990-N

• Gross receipts normally $50,000 or less

• Must be filed electronically

990-EZ

• Gross receipts less than $200,000 and total assets less than $500,000

990

• Gross receipts $200,000 or more or total assets of $500,000 or more

990-PF

• Private foundations

Most section 509(a)(3) supporting organizations and section 527 (political) organizations are required to file Form 990 or Form 990-EZ. These organizations cannot file 990-N.

If you are required to file one of the above returns and are an Indiana nonprofit, you are most likely also required to file the Indiana state return NP-20, which is also due November 15. The Indiana Department of Revenue recognizes the IRS extension, Form 8868. To extend the state return, forward a copy of the federal extension to the Indiana Department of Revenue by the original due date.

Posted by: Carrie Minnich