In order to address cash flow problems, many not-for-profit organizations seek additional revenue streams in order to continue to carry out their missions. But not-for-profit organizations should be aware of whether or not their activities are related to their organization’s exempt purpose. When activities are considered unrelated to the organization’s exempt purpose, the revenue earned from these activities may be considered unrelated business income (UBI) by the IRS, and will be taxable. The organization will need to report unrelated business income as taxable to the IRS on the form 990-T.
A “facts and circumstances” test is used by the IRS in order to determine the treatment of income, judging activities upon whether or not they substantially further the exempt purpose of the organization.
The IRS gives us a three part test for unrelated business income:
- The income must be from a trade or business, which generally refers to activities that produce income (usually from the sale of goods or services).
- The trade or business must be regularly carried on. This means that the business operates continuously or frequently. An infrequent activity such as an annual fundraiser is not considered regularly carried on.
- The trade or business is not substantially related to the organization’s exempt purpose. This means that the activity does not contribute in a significant way to the organization’s exempt purpose.
There are some exceptions to unrelated business income which will be non-taxable. These include situations such as activities conducted by uncompensated volunteers or the sale of merchandise donated to the organization.
If an activity results in UBI and may result in taxes payable to the IRS, this does not necessarily mean that the organization needs to discontinue the activity – unrelated activities will generally only put an organization’s tax-exempt status at risk when they are significant in comparison to all of the exempt activities conducted by the organization. Organizations should give careful consideration to their activities however, as it is important to be aware of what activities may be considered UBI and can result in a tax liability. Otherwise, an organization may come to the end of the year and realize that they have unintentionally conducted unrelated taxable activities and have accumulated a tax liability for which they are unprepared.
The IRS provides guidance and requirements regarding UBI for not-for-profit organizations via their website at www.irs.gov/Charities-&-Non-Profits/ as well as providing additional resources regarding obtaining and maintaining tax-exempt status at www.stayexempt.irs.gov.
By Paul Biggs
Henry & Horne, LLP had 11 volunteers who each spent three hours on February 15th sorting through donations at Helen’s Hope Chest in Mesa.
Volunteers helped go through donations dropped off that day and got them ready to be washed. They also sorted donations by size and season and hung them up to be put out on the floor for the families the organization serves.
Helen’s Hope Chest fulfills the dreams of hundreds of foster children from throughout the Valley and beyond by providing them with quality clothing, school supplies, books, gift cards, toys, games and more at no cost to their foster parents.
When the Giving USA Foundation released the annual Giving USA Report, they included some information regarding the sources of charitable contributions that may come as a surprise to many. Below is a summary of the sources of the $316.23 billion in charitable giving disclosed in the 2013 report:
(Numbers in billions of dollars and rounded)
- $228.93 (72%) Individuals
- $45.74 (15%) Foundations
- $23.41 (7%) Bequests $18.15
- (6%) Corporations
What is most interesting to note here is the fact that 72% of donations come from individual donors. In fact, over 86% of total donations were from individuals and family foundations. While corporations generally may be thought to be the most useful target to focus fundraising efforts, they accounted for only 6% of donations, nearly half of which was in-kind giving that is significantly composed of donations of pharmaceutical supplies outside the United States. The takeaway from this information is that in order to grow fundraising as much as possible, efforts should not overlook individuals as the greatest source of contributions.
In addition to the breakdown of contribution sources, the Giving USA Report also highlighted some other useful information for nonprofits:
- Maintain relationships with current and past donors. A donor who makes recurring, albeit small contributions may become a significant donor in the future or leave a large bequest. This applies to board members as well. A former board member may prove to be either a valuable resource or a continuing donor if you continue the relationship.
- Charitable giving has increased for the third consecutive year. The number of nonprofit organizations is increasing again as well, so nonprofits should make a strong effort to distinguish their organization to donors in order to secure contributions.
More information regarding the Giving Institute and the Giving USA report can be found at http://givinginstitute.org/giving-usa/.
By Paul BiggsPosted on February 11 2014 by admin
A recent piece in the Chronicle of Philanthropy highlights a surge of giving from the country’s most generous philanthropists last year. You can access the site here, and it allows you to sort the information in various ways – by state, wealth source, age, years on list, etc. The list is compiled based on gifts and pledges of cash and stock to nonprofit organizations. At the top of the list? Facebook founder Mark Zuckerberg and his wife, Priscilla Chan.
Because promises to give are recorded as income when they are pledged, some of the largest charitable donors don’t appear on this list despite the fact that they are still giving large amounts of money to nonprofit organizations. Prior year promises to give are not included in this 2013 listing. This is why you won’t see Bill and Melinda Gates or Ted Turner on the list.
Jessica Puckett, CPA, CFEPosted on February 4 2014 by admin
Those involved in governance of private foundations need to be careful about certain types of transactions, or they can find themselves facing substantial excise taxes that are required to be paid directly by the individuals involved.
The IRS defines certain types of transactions as “self-dealing” when they are carried out between the foundation and “disqualified persons”. Disqualified persons include substantial contributors, foundation managers (includes board members), and an owner of a company where the company is a substantial contributor. Disqualified persons also include family members of these individuals and companies that are owned (>35%) by any of these individuals, as well as any controlled/related foundations.
Following are some examples that may be self-dealing transactions that a private foundation should avoid:
(1) A board member leases office space to a foundation (even if it’s at fair value).
(2) A company that is 50% owned by a board member sells land to a foundation at the appraised value.
(3) A company that is 40% owned by an officer of the foundation sells construction materials to the foundation.
(4) A substantial contributor transfers a building to a foundation at no charge, but the foundation assumes the existing mortgage on the building.
(5) A board member leases office space to a foundation at no charge, but the foundation pays for leasehold improvements that increase the value of the property.
(6) A substantial contributor provides a loan to the foundation at the going interest rate.
Following are some examples that are generally not self-dealing transactions:
(1) A board member leases office space to a foundation at no charge and utilities and maintenance fees are paid by the foundation directly to third parties.
(2) A company that is 20% owned by a foundation manager sells office supplies to the foundation.
(3) A board member who is an attorney provides legal services to the foundation and charges rates at fair market value.
(4) A foundation manager provides an interest-free loan to the foundation.
The above examples are by no means all inclusive. It’s very important for private foundations and their officers to have an awareness of the general types of transactions that could be self-dealing, and to consult with an advisor before entering into these types of transactions.
By Colette Kamps, CPAPosted on January 28 2014 by admin
I recently ran across a pair of articles in the Chronicle of Philanthropy that I want to share. They include some great advice for nonprofit organizations as we make our way through the first month of 2014. You can read both articles here and here, but I want to share the highlights below.
DO keep your eye on the numbers and review key performance data with each department.
DO think about the second gift and focus energy on retaining existing donors just as much (or MORE) than on winning new ones.
DO experiment with raising money from the crowd, which is especially appealing with younger donors.
DO set up efforts to show impact. Donors want to see exactly how their contribution will make a difference.
DO think multigenerational because some donors want to involve their children and grandchildren in their philanthropic efforts.
DO take visuals seriously, and be thoughtful in the impression your materials, website and photos make to the public.
DON’T ignore people who make medium-size gifts, and ask yourself if your donors contributing $500 – $10,000 are falling through the cracks.
DON’T use social media indiscriminately. Focus your efforts on the platforms that would be most meaningful to your cause.
DON’T hoard information and make your donors wait until your annual report is published to reveal how their gifts made a difference to your organization.
DON’T use generic language. The article points out that “We educate” is not the same thing as “We help fifth graders learn to read.” Be clear.
DON’T fear mobile technology. You need to adapt to the best ways to connect with your donor base.
DON’T shy away from risks. Be willing to take chances and have a backup plan if things don’t work out.
Jessica Puckett, CPA, CFEPosted on January 10 2014 by admin
Last year, the National Council of Nonprofits (NCON) (www.councilofnonprofits.org) issued an online “Nonprofit Audit Guide”. This is not a guide for the auditors, but is instead a guide for the nonprofits. The guide includes information about what an audit is (versus a review or compilation), considerations in determining if you need an audit, and various state and federal law audit requirements. Did you know that 26 states have laws requiring charitable nonprofits to have an audit done under certain circumstances? The requirement in these states is usually dependent on meeting a certain threshold for either total revenue or total contribution revenue. The NCON’s guide includes an interactive map of the U.S. You can click on any state to see what the law requires (or doesn’t require) for submitting annual audited financial statements to that state. For example, Arizona, Missouri, and Ohio do not require audited financials. In California, you must file audited financials if you have annual revenue of $2M or more (if you’re already required to file with the attorney general). Other states have thresholds of $300,000 or $500,000.
The NCON’s online audit guide also discusses the role of the board of directors and audit committee in the audit process, the auditor selection process, and the myth that audits uncover fraud. You can even access a sample “request for proposal” and a tool for understanding audited financial statements.
Overall, this is a very worthwhile and informative resource for nonprofit organizations to use, especially for someone who is new to the audit process or for an organization that has not had an audit before, but is considering it.
By Colette Kamps, CPAPosted on December 31 2013 by admin
Many non-profit organizations accept gifts-in-kind or contributions of tangible and intangible personal property. In most cases, to properly record the receipt of these items or services, the entity would record a debit to the applicable asset account or gifts-in-kind expense and a credit to gifts-in-kind revenue/contributions.
However, there are cases the entity should not record the receipt. For example, if the donor requests the materials or services to be passed from one organization to another, the first organization may not be allowed to record the income or expense of gifts-in-kind. The deciding factor in this case is whether or not the nonprofit organization has the discretion to choose which entity becomes the final beneficiary.
If the nonprofit organization is acting as an agent or intermediary whereas it does not control the final destination of the goods or services, the entity has two accounting policies it can choose from to properly record the transaction. It may either report the receipt of the goods or services as an asset and concurrent liability to the beneficiary or not report the transaction at all. In this circumstance, the entity must apply the accounting policy consistently from period to period and must disclose the policy in the notes to the financial statements. Agency transactions such as this can also occur with cash transactions.
On the other hand, if the nonprofit organization has the control or variance power to choose which organization will receive the gifts-in-kind, the entity will record the gifts-in-kind when received and distributed. When the gifts-in-kind are received, the entity would record a debit to assets and credit to gifts in-kind revenue. In turn, when the gifts-in-kind are distributed, the nonprofit would recognize a debit to distributions expense and credit to the applicable asset account.
As each situation is unique, please contact us for information on how to properly record noncash contributions for your nonprofit organization.
Samantha MahlenPosted on December 17 2013 by admin
We are in the thick of it now with the holiday season in full swing, and the end of the year quickly approaching. I cannot tell you the number of times a nonprofit asks about (or I discover after the fact that they already have) giving gift cards to employees or volunteers. It’s a good opportunity to remind our readers that the IRS has some very specific guidance on this and the bottom line is:
Cash or cash equivalents (i.e. gift cards) are considered taxable wages.
This means that giving a gift card to a volunteer for their services makes them an employee, or the very least, an independent contractor. And if you give your employees a holiday gift card, technically that should be reported on their W-2. For more details check out these previous blog posts:
Katie L. Thomas, CPAPosted on December 10 2013 by admin
After surviving Black Friday and Cyber Monday, many people still remembered to give to the causes nearest to their hearts. It looks like donations collected on last week’s December 3rd Giving Tuesday far surpassed the 2012 efforts of the movement aimed to be a day of national giving. Preliminary estimates revealed that online donations totaled more than $27 million, which was $15 million more than what was collected in the inaugural 2012 year.
The NonProfit Times recently provided some other interesting statistics related to Giving Tuesday:
• More than three times as many organizations participated in 2013 compared to 2012.
• Blackbaud reported the average donation collected on the site was up about 40% this year – from $102 to $142.
• Not only did the amount of dollars contributed increase, but the number of donors did, too. Network for Good reported an increase of 89% in the number of donations made.
• The busiest time of day for Network for Good clients was between noon and 4 p.m. when 31% of donations were collected, followed by 8 a.m. to noon when 25% of donations were collected.
According to the article, nonprofits seeking to leverage off of their Giving Tuesday momentum should make sure to follow up with new donors to continue the relationship and make sure they thank all donors properly. IRS rules require nonprofits to send a written acknowledgement for any donations greater than $250, but it’s a good practice to send one for all donations.
Jessica Puckett, CPA-- Older Entries »
Our Not-For-Profit niche is a strong team of experienced professionals who focus their work in the not-for-profit industry. Henry & Horne has been a stable local firm in Arizona for 55 years, and the Not-For-Profit niche has a long history of working with charitable organizations and other tax exempt organizations of all kinds. Our focus is exceptional client service and building relationships with our clients to promote communication throughout the year, not just at the time of the annual audit. We highly value and are very proud to be helping those who help others.
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- Determining Unrelated Business Income
- Team Members Volunteer at Helen’s Hope Chest
- Giving USA Report – Where Are Contributions Coming From?
- The Most Generous Donors of 2013
- Self Dealing in Private Foundations
- What Nonprofits Should (and Should Not) Do in 2014
- Audit Guide for Nonprofit Organizations
- Properly Recording Gifts-in-Kind
- Holiday/Year-end Bonuses
- Giving Tuesday Considered a Success