Written Policies
Posted on Wednesday, January 18, 2023
ShareDoes your organization have the proper written policies in place?
An organization that has written policies is more likely to operate effectively and consistent with tax law requirements. Some policies are required by the IRS and other oversight bodies while other policies are strongly encouraged, and others are recommended as best practices. Although not an exhaustive list, below is a review of some of the policies your organization should have in place.
Policies Required for Tax-Exemption
When an organization applies for its tax-exempt status with the IRS, there are certain policies that it must have in place. If your organization has been in existence for a while, it should have these policies in place; however, when was the last time that they were reviewed?
Mission
Your mission is your reason for existence. While your mission is not necessarily a “policy”, it is a written statement that guides the organization in everything it does. This is why it is so important to regularly review your mission statement to ensure that it is still relevant. Does your mission statement need revised? Do some of your activities need to be cut because they do not align with the mission?
Indiana organizations must file articles of incorporation with the Indiana Secretary of State before applying for tax-exempt status with the IRS. There is required wording that needs to be included for 501(c)(3) organizations. Specifically, that the organization is organized for nonprofit purposes, that no part of the earnings will benefit private individuals, and that upon dissolution the assets will be distributed to another 501(c)(3) organization. An organization’s articles may need to be amended as changes occur within the organization.
Bylaws
Bylaws are an organization’s internal operating rules. There is not required wording that needs to be included in the bylaws, but common items include the official name, purpose, number of board members, list of officer responsibilities, board term limits, schedule of board meetings, description of committees, year-end, and rules for amendments. Make sure your bylaws do not get to detailed or else you will need to amend them more often.
Compensation
There is no mandated process for determining compensation, but the IRS specifically states that an organization may not pay more than reasonable compensation for services rendered. The organization needs to document how it determines the compensation of its executive director, key employees, and board members. This should include looking at comparability data of other similar nonprofits and having the compensation approved by persons with no conflict of interest.
Conflict of Interest Policy
A conflict of interest arises when a person in a position of authority may benefit financially from a decision made in that capacity. A written policy should include the definition of a conflict, individuals covered, the process to disclose any potential conflicts, and the procedures to manage the conflicts.
Nondiscriminatory Policy (Schools)
Schools must have a racially nondiscriminatory policy as to students and therefore does not discriminate against applicants and students on the basis of race, color, and national or ethnic origin.
Form 990 Policies
Form 990 has a specific section on policies in Section B. Policies under Part VI Governance, Management, and Disclosure. The IRS specifically states that the policies asked about in Section B are not required by the Internal Revenue Code. Although these are not required, since the IRS is asking about them, it is probably a good idea to have them in place. There are also other questions regarding policies and procedures in other sections of Form 990.
Mission
Your organization’s because. Required above be tax-exempt.
Contribution Substantiation
Form 990 does not specifically ask if the organization has a contribution substantiation policy in place, but it does ask whether the organization notified the donor of goods or services provided if it received a payment in excess of $75 made partly as a contribution and partly for goods and services. Since the IRS is asking if this is done, it is a good idea to have a policy in place to notify donors of their gifts to the organization. Make sure you include the required elements of the written documentation so that the donor can take a deduction on their 1040.
Minutes
Again, the IRS does not ask if there is a policy in place for minutes, but it asks if there are written minutes. To ensure your organization maintains written minutes, put a policy in place for taking minutes at both board and committee meetings and what should be included.
Policies Governing Chapters, Branches, or Affiliates
For organizations that have multiple branches or chapters, it is important to ensure that operations are consistent. A written policy makes sure the parent organization exercises oversight over the subordinate organizations.
Review of Form 990
The IRS asks if a copy of the Form 990 was provided to the voting members of the board prior to filing, as well as how Form 990 is reviewed. How does your organization review its annual return? Is it emailed to all board members for review? Is there a discussion at a board meeting? Does the finance or audit committee approve it? This policy is to ensure that board members are aware of the information reported on Form 990 to the IRS.
Conflict of Interest
A written conflict of interest policy is required for an organization to be tax-exempt as noted above. The IRS also asks on Form 990 how the policy is monitored and enforced.
Whistleblower
A whistleblower policy allows staff, volunteers, and others to report suspected wrongdoing within the organization. The policy should identify the person(s) to whom the information should be reported and wording to protect the individual reporting from retaliation. This is one of the two policies required by Sarbanes Oxley for nonprofit organizations.
Document Retention and Destruction
A document retention and destruction policy states what documents are kept, for how long, and how they are destroyed. Organizations can maintain documents either electronically or on paper but should include this in the policy. Certain documents must be maintained forever while other documents may be destroyed after a certain number of years. It is important that the organization understand any grant requirements for maintaining documents, especially those with government agencies. The policy should also include wording that all destruction should stop if a lawsuit appears eminent. This policy is also required by Sarbanes Oxley for nonprofits.
Compensation
As noted above, an organization must note how it will determine its compensation for the executive director, key employees, and board members when it applies for tax-exemption. Each year the IRS asks how that is done on Form 990.
Joint Ventures
Exempt organizations are increasingly investing in joint ventures. In order to protect the tax-exempt status and assets, a written policy should be put into place for any joint venture activities.
Gift Acceptance
If an organization receives certain in-kind contributions, it is required to complete Schedule M of Form 990. One of the questions on Schedule M is whether the organization has a gift acceptance policy in place. This policy is not only important because it is a question on the Form 990, but it also manages expectations of donors and serves as a guide for staff in what types of gifts the organization will accept. Sometimes it is not reasonable for an organization to receive a gift if it creates additional legal obligations, or the organization is not equipped to use the gift.
Policies Required by Accounting Standards
The following policies should be implemented to be in compliance with accounting standards.
Allocation Policy
All nonprofit organizations (no matter the accrual basis or cash basis) are required to report their expenses by natural classification (i.e., salaries, payroll taxes, supplies, rent, etc.) and function (i.e. program, management and general, and fundraising). These are reported not only on an organization’s audited or reviewed financial statements but also on Form 990 filed with the IRS. In order to properly allocate expenses, the organization should have a policy in place noting how this is done. Expenses only need to be allocated on a reasonable and consistent basis. Some common methods of allocation include time, square footage, full-time equivalents, or head count. Allocating expenses based on revenue is NOT a reasonable basis as it does not take into consideration the resources being used for each function. Also remember, that the allocation of expenses by function for accounting purposes is not the same as allocating expenses for grants.
Capitalization Policy
A capitalization policy states that purchases of certain items such as land, buildings, equipment, furniture, and vehicles that have a life longer than 1 year and cost over a certain dollar amount will be capitalized and depreciated over their useful life as opposed to expensed. The dollar amount varies by organization, but nonprofits commonly use $500 or $1,000. This policy provides for more consistent accounting.
Endowment Policy
If your organization has an endowment or is considering an endowment, make sure you have a policy in place that includes what types of gifts will be accepted, how the funds will be invested, how the earnings will be used, and rules to ensure the requirements of UPMIFA (Uniform Prudent Management of Institutional Funds Act) are met.
Policies Required for a Single Audit
If your organization spends $750,000 or more in government funds during a fiscal year, then you probably are required to have a Single Audit. A Single Audit includes both a financial audit and compliance audit. During the compliance portion audit, the auditor will test to determine whether the government funds received were spent in the manner they were supposed to be. If you receive government funding, make sure that you have policies in place to ensure that funds are used in accordance with the government contract.
Policies Considered Best Practices
The following policies are considered to be a best practice for all nonprofits to have in place.
Accounting Procedures
The internal accounting procedures to ensure a proper segregation of duties, as well as, who is responsible. It is important to segregate duties as much as possible between authorizing transactions, recording transactions, and maintaining custody of assets.
Board Roles and Responsibilities
While most board members serve in a volunteer capacity, they still have a significant responsibility for the oversight and direction of the organization. It is important to develop a written document outlining their roles and responsibilities so that it is clear on what is expected from them.
Credit Card Policy
A credit card policy outlines the accepted use of the organization’s credit card. Who has access/can use the card? What can it be used for? What are the requirements for documentation of purchases?
Disaster Recovery Plan
Now more than ever it is important for organizations to have a disaster recovery plan in place. Disasters can take many forms, from natural disasters, to cyber attacks and the pandemic. This plan of action allows your organization to continue to carry out its mission after a disaster.
Investment Policy
An investment policy defines objectives for investing and identifies the nonprofit’s risk tolerance. An organization’s investment portfolio can be managed by an investment committee of the board or by an outside professional fund manager.
IT and Internet Security Policy
An IT policy 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. With the increased number of individuals working remotely and cyber threats, it is important for all organizations to have this policy in place.
Job Descriptions
Job descriptions detail the responsibilities of and qualifications of each role. It also helps set expectations for incoming staff members and monitors performance of current staff.
Personnel Policy Manual
A personnel policy manual sets expectations for employees and defines important work guidelines. Make sure all of your employees are provided a copy when they are hired and also given any updates as they occur.
Petty Cash Fund Policy
A petty cash fund describes the purpose of the petty cash fund and the reimbursement procedures, as well as, how the fund is replenished. It is important to have this policy in place if you use a petty cash fund due to the additional risks associated with handling cash.
Strategic Plan
A strategic plan identifies strategies that will best enable the organization to advance its mission. What are the organization’s goals? What are the specific activities to meet those goals? What resources are needed? What performance measures will be reviewed to ensure progress is being made? Organization’s used to have 3-5 year strategic plans but should consider shortening these due to the constant change in the world today.
Succession Plan
Organization’s need to plan for succession to ensure organizational sustainability. This should include not only the Executive Director but also other key employees and board members. A succession plan plays a key role in maintaining relationships and uninterrupted service of the organization during a time of transition.
Contributed by: Carrie Minnich, MAcct, CPA | Partner | DWD CPAs & Advisors
Posted in Mission Minded Nonprofits
Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.