If you are recording income from grants as an exchange transaction (i.e., the funds are received in exchange for a service provided), then the costs that go into managing that grant would be properly classified as management/general and should not be classified as program or fundraising expenses.  Grant management costs in this case could include the expenses relating to preparing the grant application, monitoring and reporting.

Another example is when a museum or performing arts organization advertises to solicit ticket sales or admissions.  Advertising expenses in this case would also be classified as management/general.

On the flip side, if an organization is spending money to advertise a program they offer and the program fee charged is less than fair market value, then advertising expense may be properly classified as a program activity.  An example of this is when an organization whose mission is to help people quit smoking advertises to a population of smokers to ask them to be the beneficiaries of their program.  If the organization charges a small fee for the purpose of getting the participants to stay committed to the program, then the advertising that was expensed to solicit these types of program fees can be properly classified as program.

It may seem to go against logic in some cases when advertising has to be classified as management/general, but choosing to allocate those expenses to program would not be in accordance with generally accepted accounting principles.

Colette Kamps, CPA

Joint Costs – costs related to an activity that includes a fund-raising appeal.

For the most part these are costs that are related to such things as your newsletter that includes a solicitation for donations. Or your website where you are providing information about your organization but also requesting donations. In terms of allocating such costs, the presumption is that the expense is a fundraising expense. That means 100% of the costs for that newsletter or website or activity would be a fundraising expense. Unless you meet three very specific criteria:

Purpose
Audience
Content

Note that all three must be met in order to be permitted to allocate the cost between fundraising and program (or management & general).

Purpose – the main purpose is to accomplish the organization’s mission. This is very subjective, however there is guidance: is a similar activity conducted without a fundraising component? Or the activity does not have any fundraising measurement (you are not measuring the success of the activity based upon the amount of money received)? 

Audience – if it is sent to all your former donors or a list of “potential donors” it is likely not going to qualify for this test. You need to be able to demonstrate that the audience was selected to fulfill the organization’s mission rather than to fulfill the organization’s need for funds to fulfill the mission.

Content – the content must support the program or the organization’s mission.

Accounting Standards are very specific in their requirements, and while the above provides a good overview, if you are still unsure you should contact your accountant and review the standards.

Katie Thomas, CPA

But then an organization is denied a grant that was applied for because the grantor has a rule that program expenses must be at least 75% of total expenses and the organization’s Statement of Functional Expenses that was submitted with the audited financial statements show that program expenses were only 62%.

Or a grantor doesn’t want to give an organization funds for their job training program because job training is not included as a program on the Statement of Functional Expenses and the grantor thinks that the organization doesn’t have a focus in this area.

And what about Accounting Standards?  Are nonprofit organizations aware that cost allocations are required by generally accepted accounting principles and that there is specific guidance about how you are allowed to allocate those expenses and which types of expenses should be allocated where?  You could actually receive a material weakness from your auditor for not allocating costs properly or for not having a cost allocation plan or methodology for how you allocate costs.

The most common errors in allocating costs include the following:
• Not properly allocating management/general expenses.  Management/general relates to the overall direction of the organization which would include expenses such as salaries for the accounting function, human resources, expenses relating to budgeting, and board of directors meetings. 
• Reporting no fundraising expenses when the organization has substantial contribution income (it didn’t cost anything to raise that money?).
• Not reporting all of the major programs separately or reporting a grantor as a program (the funding source would not be a program activity).
• Not allocating insurance, occupancy and depreciation.

Colette Kamps, CPA

What really got me about this was that for years I watched my roommates and colleagues spend their time on these amazing projects that put them in direct contact with the people they were helping. Whether it was the roommate who was a Big Sister through Big Brothers/Big Sisters of America or my buddy who would spend hours tutoring underprivileged middle school students in math, I just couldn’t get excited about any of those projects. I could have done them, and I would have done as good a job as I could have. And I wanted to. That is what everyone seems to think of when they think of volunteering – the direct-impact front-line program. They ‘hero-ize’ these positions, but they neglect to include in their picture all the “behind the scenes” work – the administrative side of these programs. And in doing so, they are almost able to relegate those positions to subpar, insignificant, or menial. But without someone filling these roles, those front-line volunteers would not have a program to work for.

I appreciated that she acknowledged that it is great that people want to participate in these programs and can fill these much needed roles, but that for others their way of giving back is to give their time and talents in planning or serving on the board or a committee. Regardless of what position you fall into – “front line” or “behind the scenes” or somewhere in between – Thank You!

Katie Thomas, CPA

For those of you who have annual receipts of $25,000 or less, don’t forget you can file the 990-N. This simple form should take you all of 10 minutes. 2009 forms also fall under the revised 990-EZ qualifications – organizations making between $25,000 and $500,000 with total assets less than $1.25M (this will increase again in 2010).

And for those of you who are not calendar year-end organizations, now is still a good time to think about your 990. There are a number of required disclosures relating to compensation on a TAX YEAR basis so, as you are preparing your W-2’s, keep in mind some of the information you will need to prepare your 990 later this year (such things as bonuses paid in 2009, health/dental/life insurance premiums paid for officers, and W-2 wages).

Katie Thomas, CPA

1. Does the employee never call in sick regardless of how physically ill they appear?
2. Has the employee stopped taking full weeks of vacation in which someone else performs their duties?
3. Is the employee working odd hours when no one else is there?
4. Have there been excessive complaints rendered upon one employee?
5. Has an employee’s lifestyle suddenly greatly improved with no explanation?
6. Are all accounting matters handled by one individual with no system of checks and balances?
7. Are there strange adjustments noted in bank reconciliations?
8. Are records or documents suddenly missing and untraceable?
9. Are there excessive credit memos?
10. Are certain customer/donor/member names frequently showing up as having received  refunds?
11. Is the general ledger out of balance?
12. Are duplicate payments found in the ledger?
13. Are adjustments to receivables or payables frequently found in your ledgers?
14. Are there excessive cash transactions found in expense accounts?
15. Is the organization experiencing inventory shortages above normal shrinkage?
16. Are there alterations on employee time sheets after supervisors have signed them?
17. Are there frequent shipments to PO Boxes?
18. Are shipping destinations anywhere other than the business address?
19. Are unreasonably large quantities of supplies ordered?
20. Are weekend or holiday delivery dates shown on the invoices?
21. Do delivery dates appear that do not conform to vendors usual pattern of delivery?
22. Are goods delivered by a vendor other than the one from whom the merchandise was ordered?
23. Are some vendors paid on a preferential basis?
24. Are invoices not properly canceled to avoid duplicate payments?
25. Are there unusual markings on invoices?
26. Are invoices appearing which are copies and not the original?
27. Are handwritten invoices being paid?
28. Do some invoices appear to lack the proper letterhead?
29. Are invoice totals round dollar amounts?

Any of the above should grab your attention and warrants additional investigation into the issues causing them.  Do not ignore a red flag!  Of course, sometimes an error is just an error – meaning there is no fraudulent intent – but it’s still important that management properly address the issues.

Jessica Puckett, CPA, CFE

Contributions –The 2010 contribution limit is $16,500, which is the same as it was in 2009.  Participants over the age of 50 can make additional contributions of up to $5,500, which are known as catch-up contributions.  Employers can make matching or other employer contributions, as well.  It should be noted that total contributions (employee and employer combined) cannot exceed the lesser of $49,000 or 100% of total employee compensation.

The “15 years of service provision” is something unique to 403(b) plans.  Participants with at least 15 years of service to their employer can increase their 403(b) contribution based on certain criteria.  The 15-Year Rule allows a participant to electively defer as much as $19,500 in 2010.

Employers are required to remit the participants’ contributions within an administratively feasible time period – which is considered to be at least 15 days following the month in which the amounts would have otherwise been paid to the participant as wages.  However, just as is the case with 401(k) plans, it’s usually a much quicker process than that.

Early Withdrawals – A 10% penalty tax will be imposed on withdrawals from 403(b) plans prior to the age of 59½.  This is in addition to normal tax consequences unless certain criteria are met (i.e., hardship, disability, death, made due to an IRS levy upon the participant account, etc.)

Loans – Like 401(k) plans, there are provisions for participants to take out loans against their 403(b) plan account balances.  The loan cannot exceed $50,000 or half of the account balance.  Principal and interest must be paid at least quarterly, and the loan must be repaid within 5 years unless the proceeds were used to acquire a primary residence.

Hardship-403(b) plans allow for hardship withdrawals for expenses including unreimbursed medical bills, tuition payments, or in the event of a foreclosure on a primary residence.

Terminated Employees – If a participant leaves his or her employer, there are several options available for the plan account balances.  Assets can be transferred into a new employer’s plan (if permitted), assets can be rolled into a Rollover IRA, assets can be left in the plan, or the employee can take a lump sum distribution.  In the case of the distribution option, keep in mind there are tax consequences and penalties to consider.

Retirement – At the time of retirement (age 59½), withdrawals will be taxed as ordinary income.  Required minimum distributions must occur by April 1st of the year following the calendar year in which the participant turns 70½ years old.

Jessica Puckett, CPA, CFE

The skeptical auditor in me immediately thought of all of the potential charity scams that will unfortunately pop up at a time like this.  We’ve seen it too many times in the past – with 9/11 or Hurricane Katrina, for instance.  Sure enough, I got back to my office, turned on my computer, and had this online article in the Phoenix Business Journal practically jump in my lap.

It’s a shame that peoples’ concern and generosity would be taken advantage of, but it’s something to keep in mind when making a donation.  This article, with information provided by the Better Business Bureau, gives some great pointers on how to avoid being defrauded.  The most important thing you can do is KNOW where your donation is going.  Charities created overnight in response to a crisis concern me, as do some online donation forums.  That’s not to say you shouldn’t go to redcross.org to donate, but it should be initiated by you directly (not by clicking on a link from an email or a blog.)

By using caution when donating to a relief cause, your money has a much better chance of making its way to the people who need it most.

Jessica Puckett, CPA, CFE

You rock!

- KT

It is probably one of the coolest schedules on the 990, and yet, because it is, in essence, a blank piece of paper, it gets so overlooked. The Schedule O is required to be used to explain such things as how your board reviews the 990 (or to note that the board does not and then explain how it is reviewed). However, this is also a great place to explain some of the other questions being asked. If you are like some organizations that don’t have a whistleblower policy yet, but your board is working on implementing one, you should definitely note this on Schedule O. Or if you think any of the other yes/no questions merit further explanation, this is the place to do it. I love the instructions on the form: “Attach to Form 990. To be completed by organizations to provide additional information for responses to specific questions for the Form 990 or to provide any additional information.” The rest of the form is just lines, open for the taking.

One final thought, don’t forget that the Schedule O is not only for explaining points from the core form, but also from other schedules that you may be required to file.

Katie Thomas, CPA

Held on the second Thursday of each month at the Henry & Horne Scottsdale office, we’re going to tackle one topic affecting the nonprofit community at a time and discuss it over lunch.  Throughout the year, attendees can expect to learn more about expense allocation, the Form 990, board member roles and responsibilities, and segregation of duties – all things important to nonprofit organization.

The first topic on the agenda is one I write about a lot: FRAUD.  So please join us on January 14th for the first Lunch N’ Learn of 2010.  You can reserve your space at any luncheon by emailing Terri Reed at TerriR@hhcpa.com.

Finally, we’d like to thank you for reading our blog during 2009.  It has been so encouraging to see the interest in the blog grow each month by the increase in the number of readers!  We all really enjoy contributing to the Nonprofit GPS, and appreciate the time you take to read about the topics that are important to the nonprofit community.

Jessica Puckett, CPA, CFE