How to Report a Name Change to the IRS

Posted on March 24 2015 by admin

If your nonprofit has changed its name, the name change needs to be reported to the IRS. This can be done on your next Form 990. Here are the requirements for reporting this properly:

  • File your next Form 990 by paper (as opposed to electronically).
  • On page 1 of the Form 990, check the box at the top for “name change”.
  • Attach your amended Articles of Incorporation (amended for the name change) to the Form 990.
  • Also attach a certified copy of proof of filing the amended Articles with the State.

By Colette Kamps, CPA

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Filing Form 990-N for New Nonprofits

Posted on March 17 2015 by admin

Is your nonprofit organization in its first few years of existence?

Not sure of the Form 990-N filing thresholds?

Organizations that have gross receipts that are normally $50,000 or less are required to file a Form 990-N (e-Postcard). Now, you’re probably wondering, what does “normally” $50,000 or less mean. Per the Form 990-EZ instructions, Appendix B an organization may file a Form 990-N if it meets one of the following tests:

  1. The organization is up to a year old and has received in receipts or pledges $75,000 or less during its first tax year.
  2. The organization is between 1-3 years old and has averaged $60,000 or less in gross receipts during each of its first 2 tax years.
  3. The organization is 3 years or older and averaged $50,000 or less in gross receipts for the immediately preceding 3 tax years.

The Form 990-N is due every year by the 15th day of the 5th month after the organization’s tax year end and requires only basic information to complete.

By Kristin Cullen, CPA

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Common Errors with Net Assets

Posted on March 10 2015 by admin

When auditing an organization, what we often find is that clients are not tracking their restricted net assets. Or if they are tracking it, it is not correct. Some common errors we find include:

  • Board designated amounts are classified as restricted – Board designated amounts, including board designated endowments, should be categorized as unrestricted as they are voluntary. Some incorrectly figure that if management is “restricting” or setting aside funds, then it should be classified as restricted net assets. One thing to keep in mind is that restricted funds can only be restricted by the donor. Management setting aside or designating net assets can be changed and reversed at any time; therefore, they are not really “restricted”. Any un-designations should be noted in board minutes.
  • Temporarily restricted amounts are not being released – If an expense is incurred for which both restricted and unrestricted funds are available, restricted funds must be used first. What we sometimes see are clients not releasing funds because they are applying unrestricted funds first to a program or an expense for which there are restricted funds available. This is incorrect. Restricted funds should be used/applied before unrestricted funds.
  • Unspent endowment earnings are classified as unrestricted – Typically the earnings on endowment funds are either restricted for a specific purpose or unrestricted (to be used in general operations). Under the Uniform Prudent Management of Institutional Funds Act (UPMIFA) investment earnings on endowments are classified as temporarily restricted until it has been appropriated for expenditure. This applies even to those funds where the donor has not restricted the use of investment earnings. Naturally, most assume that since the donor has not restricted the earnings on the investments, then it should be classified as unrestricted. However, with endowments, we are also bound by UPMIFA laws. Endowment funds are tricky, so I get how errors with accounting for these funds can happen.

Tracking net assets can be confusing. If you ever have questions with tracking net assets or with classifying certain transactions, please reach out to your accounting professional. It is always easier to track these properly from the beginning than to have to reconcile these on the back end.

By Sharlynn Garza, CPA

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Henry & Horne, LLP Employees Volunteer at Literacy Fair

Posted on March 5 2015 by admin

On Saturday February 28, 14 Henry & Horne, LLP employees and their family members volunteered at a literacy fair sponsored by the Valley of the Sun United Way. The fair was open to the public and held at the Martin Luther King Early Learning Center. Attendees were encouraged to participate in numerous literacy games, dexterity exercises and other reading and cognitive related activities. Volunteers helped and encouraged the children as they participated. Some volunteers read to the children while others helped all those in attendance pick out 3 books to take home and read. While attendance was not quite what was hoped for, the smiles were still flowing from both those attending and those volunteering.

Group

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Are retail sales made by nonprofits exempt from Arizona transaction privilege tax?

Posted on March 3 2015 by admin

Arizona Transaction Privilege Tax (TPT) and Use Tax are taxes the vendor is required to pay for the privilege of doing business in Arizona; otherwise known as a ‘sales tax.’ As a nonprofit organization, should you have to pay TPT and Use Tax on purchases made? What about collect and pay TPT Use Tax on sales you make to the public?

Purchases: Most nonprofits in Arizona are not exempt from paying TPT and Use Tax on purchases. There are some exceptions. Generally, most 501(c)3 organizations that are qualifying hospitals, community health centers, rehabilitation programs for mentally and/or physically handicapped persons, and health care organizations can apply annually to receive an exemption letter for paying TPT and Use Tax on purchases. (See the Arizona Department of Revenue publication 500 for more information on qualifying organizations and applying for an exemption letter.)

Sales: However, a nonprofit charitable 501(c)3 organization that is recognized by the Internal Revenue Service as a tax exempt organization is not required to collect and pay TPT on retail sales earned as long as it is related to the mission of the organization. The rules may apply differently to each organization depending on your organization’s specific circumstances. For more information on exemptions of TPT and Use Tax for nonprofit organizations, please visit www.azdor.gov and see publication 501.

By Michelle Housman

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Private Foundations Need IRS Approval for Grants

Posted on February 24 2015 by admin

Private foundations are often set up with the purpose of giving out scholarships or grants to individuals. Before starting this program, the IRS requires a private foundation to request “approval” from them. There are certain criteria that must be met with the scholarship/grant program. So, when a private foundation submits a request for approval of their program, they must demonstrate that:

  • Grants or scholarships will be awarded on an objective and non-discriminatory basis. The criteria used in selecting grant recipients should be related to the purpose of the grant. For example, if the foundation is awarding scholarships, consideration should be given to the student’s past academic performance, teacher recommendations, etc.
  • There is a process to reasonably ensure that the amounts given to recipients will have the intended result, which is the activity the grant is intended to finance.
  • The foundation must show that it will have a monitoring and oversight process after the grant is given and after the funds are used, to ensure that funding was used for the intended purpose.

Form 8940 (Request for Miscellaneous Determination) can be filed with the IRS to request this determination. A newly formed private foundation can also complete Schedule H of Form 1023 (application for tax exempt status) to request this advance approval.

By Colette Kamps, CPA

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Non-Profits and Political Activities

Posted on February 17 2015 by admin

All section 501(c)(3) organizations are strictly prohibited from being directly or indirectly involved in campaigning activities for, on behalf of, or against a candidate running for public office, making contributions to political campaign funds, and making a public statement of position on behalf of the organization. However, did you know that 501 (c)(3) organizations are able to participate in certain non-partisan election activities?

These activities include:

  • Voter Education
  • Voter Registration
  • Get-Out-The- Vote Drives

These activities must be conducted in a non-partisan manner or the organization would be at risk of losing its exempt status.

By Kristin Cullen, CPA

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Functional Expense Allocation

Posted on February 11 2015 by admin

It’s important as a not-for-profit organization to accurately allocate expenses among your program(s), management and general, and fundraising. Many donors restrict grants and contributions specifically for the entity’s programs. Therefore, it’s vital to only allocate expenses that are related (either directly or indirectly) to the purpose or mission of the not-for-profit to the program functional category, and properly allocate expenses for administrative and support or fundraising to management and general and fundraising functional categories.

There are specific expenses that are clearly stated as supporting activities that you should not allocate to program. Some of these types of expenses are:

  1. Oversight-type expenses
  2. Business management expenses
  3. General recordkeeping expenses
  4. Expenses relating to budgeting and financing
  5. Soliciting funds associated with advertising that promotes the sales of goods or services
  6. Soliciting funds for government, foundation, and other requests for proposals for customer-sponsored contracts for goods and services
  7. Producing and distributing the annual report

The above list is not all-inclusive, but it does include the most common types of supporting services expenses.

Many costs are directly allocated to each area, as they are clearly either program, management and general or fundraising expenses. However, there are several areas of expenses with every not-for-profit that are shared costs (indirect costs). For example, occupancy, salary and related costs, depreciation, communication and other expenses may be shared among the functions. Therefore, it is important to determine a clear, reasonable allocation method that accurately reflects what function the expenses should be allocated to.

It is important to keep the aforementioned list in mind when determining allocation methods as well. If your not-for-profit is conducting a time study to determine the allocation percentage of each staff person’s time among the functions, your staff should be aware of what activities are considered management and general versus program or fundraising. If your program coordinator is assisting with preparing your annual budget, his or her salary for the time spent in budget preparation should be allocated to management and general. All time spent on oversight and management of the entity’s employees and business functions are management and general costs as well. Therefore, to conduct a time study that accurately reflects what your staff is spending their time on, you should educate them prior to the time study of what activities fall within each function.

Under GAAP, all not-for-profit organizations are required to report expenses by functional classification. This also allows financial statement users the ability to evaluate where the organization is spending its resources. Therefore, it is vital as a not-for-profit to understand what expenses should be classified to each function and to properly allocate the expenses based on the day to day activities of the entity.

By Samantha E. Mahlen, CPA

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How to Clean Up Old, Uncleared Checks in QuickBooks

Posted on February 3 2015 by admin

There are a number of reasons why you may have old, uncleared checks on your books. Whatever the reason, it is important to clean any checks that should be cleared off your books in order to make sure you are not overstating your cash balance.

First, you need to determine if the money is still owed to the customer/client/donor. Try contacting them to see if they have received the check. If the “customer” does not have the check, you will need to re-write the check and send it to them. Then you will need to void the old check and note in the memo line the check number you are replacing it with. If you determine the uncleared check is still owed, and you are unable to find or reach them, you must turn the money over to the unclaimed property division of the State of Arizona. For Arizona companies, you can visit http://www.azunclaimed.gov/ for more information on how to submit unclaimed funds.

If you determine that the uncleared check is not owed, then you can make a journal entry to clean the old uncleared items out of your outstanding checks listing. To do this, you would debit cash and credit the expense the check originally was expensed to. I would recommend noting the journal entry number of the entry you make to offset the uncleared check in the memo line of the check. Then on the next reconciliation you perform, you can clear the old uncleared checks and the journal entry that offsets the checks (for a zero net effect). QuickBooks bank reconciliations can really get cluttered up with these old items. It’s important to monitor, follow up on, and clean up any of these older items.

By Michelle Housman

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Public Charity to a Private Foundation

Posted on January 14 2015 by admin

The process of changing anything relating to an organization’s tax exempt status can be very confusing. A public charity can be automatically converted to a private foundation by the IRS if they don’t meet the minimum public support percentage requirement. Public charity status is generally the more desirable status, but there may be a situation where a public charity actually voluntarily wishes to convert to a private foundation. In this case, the process of converting is fairly simple as follows:

  • Download IRS Form 8940 (Request for Miscellaneous Determination) from IRS.gov.
  • Fill out Part I of the form 8940, Identification of Organization.
  • For Box 7 of Part I, follow the instructions at the top of the form. A user fee is required.
  • Check Box 8g in Part II, Reclassification of Foundation Status, including a voluntary request from a public charity for private foundation status.
  • Sign and date IRS Form 8940 and print signer’s name and title.
  • Attach a request indicating your current public charity classification and the public charity classification to which you are requesting reclassification. Also, provide a statement describing any adverse impact if you do not receive the requested status.
  • Send IRS Form 8940, attached request, and check to:

Internal Revenue Service
P.O. Box 12192
Convington, KY 41012-0192

Once the IRS receives the Form 8940, formal change request, and user fee, they will either approve or deny the request. If approved, the organization will receive a letter that formally approves the organization’s reclassification from a public charity to a private foundation. The organization should also begin filing the Form 990-PF (rather than Form 990) annually.

It is important to note that there are many “rules” to be aware of as a private foundation and appropriate consideration should go into changing from public to private.

By David Woods

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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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