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IRS

IRS Info and Some Questions and Answers

Jun 25th, 2009
by Alan.
4 comments

Questions and AnswersIRS, Governance and the Form 990

I’ll lead off with some exiting news.  Well, it’s exiting to me at least.   Last week I learned that the Urban Institute’s efile.form.990 site should start being able to process the latest version of the form 990 by the end of July (not June).  Their system allows you to electronically prepare and file your organization form 990, 990 EZ and extensions to file.  There is a small fee, but I encourage anyone who prepares your organizations forms by hand to look into their system.

Sarah Hall Ingram, the IRS Commissioner for Tax Exempt and Government Entities, made a presentation at Georgetown Law Center this week on nonprofit governance issues and what the IRS sees as its role relating to that.

While both state regulation and sector self-regulation are important, and I welcome and respect them, they do not get the IRS off the hook. Congress gave us a job to do, and we cannot delegate to others our obligation to enforce the conditions of federal tax exemption.

If you would like to read her remarks they are available as a PDF here.

Collaboration Resources

Need some tips on online collaboration tools? Gayle C. Thorsen at IMPACTMAX has a good rundown on some resources that should help you.

Questions and Answers: Revenue Recognition

Each year we have several matching gifts that come in after the fiscal year end of June 30.  Should these receipts be counted toward the past fiscal year or the current year?  For donor recognition purposes we count these gifts in the year they were pledged.  For accounting purposes, how should we be dealing with this?

You should count them the same way you do for recognition. Nonprofit accounting rules for donations take into account the donors intent, and if the check was written in before the end of your fiscal year, or the pledge was made before then end of your fiscal year, it should be counted as that fiscal years money.

Questions and Answers: Employee or Independent Contractor?

I’m a bookkeeper trying to help a recently started, all volunteer nonprofit. The one concern I have is the administrative costs for the person who runs it. If the nonprofit were to reimburse that person for a missed day at work, would they be considered an employee of the nonprofit?

You can’t reimburse somebody for a missed day of work, that is not a “real” expense. That would be considered compensation. This could be a 1099 / independent contractor relationship OR an employee relationship. I would look carefully at the duties tests between the two and make your judgment. The IRS is pretty serious about making sure employers classify folks correctly.  You can check out their resource pages here.

Question and Answers: Hiring Costs

We are a small nonprofit that had a change in our Executive Director. The costs to recruit, interview and move a new Executive Director to our state was extremely expensive. These costs are a one-time charge that are impacting our net assets. Is there a way that I can capitalize them to spread out the impact?

Not in this case. Capitalizing an expense is done for physical assets that have a long useful life so that the expense of the item is spread out over its time of use.  Employees can’t get treated the same way.

Just make sure to clearly explain and footnote the situation on all of your reports and financials so people will not think there is something wrong with the organization and you should be OK.

Do you have a question?  Click here to ask it

A Nonprofit News Round-Up

Jun 10th, 2009
by Alan.
1 comment

roundupToday I just have a short round up of interesting items from the last few weeks.  But I first want to say thanks to the Nonprofit Congress Blog for mentioning this blog in the Nonprofit Blog Carnival it recently hosted.

This piece is from mid May but it is worth another mention.  The article is on administration costs and charity ratings from the Good Intentions Are Not Enough blog.  The premise is that the focus on administrative costs can do harm than good, and I agree with the author’s arguments.

This article from the Nonprofit Professionals Advisory Group is a nice wrap up of the President’s Stimulus plan and its possible effects for the nonprofit sector.  From helping organizations stay afloat to expanding others, there is a lot to know about the plan.

Our sector is not immune to questionable ethical decisions.  This article from the Stanford Social Innovation Review highlights some of the issues specific to the nonprofit sector and ways to promote ethical behavior in charitable organizations.

When groups talk about saving money all options should be on the table.  But eliminating Directors and Officers liability insurance is a risky option.  This article gives some good reasons why you shouldn’t cut it and some tips about judging your own coverage or shopping for other coverage.  Here is a good resource for D&O insurance and other organizational coverages.

Nonprofit Resources – Three helpful items

Have a question about a nonprofit issue?

BoardSource has a really nice Question and Answer section.  Some of the items are member only but there is plenty of free information available.  This site also has a bunch of Q&A’s here.

How does a nonprofit go out of business?

While there may be some state specific rules you’ll need to look up, the IRS recently published this piece on how to terminate an organization.

Private Inurement, Excess Compensation, Intermediate Sanctions, and Rebuttable Presumption

This free publication from GuideStar outlines what the IRS expects of charities and how we can comply with the rules that govern 501(c)(3) organizations.

Employee Classification

Jun 1st, 2009
by Alan.
No comments yet

Answers HereA little of this, and a little of that today; employee classification issues and two Q&A’s: payroll and capitalization issues.

Exempt vs. Nonexempt, Independent Contractor vs. Employee

I came across what I think is an interesting piece, The workplace violations feds will be investigating this year.  Not surprisingly there is an increase in funding for the Wage and Hour Division, specifically to look and exempt vs. non-exempt employee classification.  Another popular item to look at is the misclassification of employees vs. independent contractors.

Why are these areas of interest to look at?  Two reasons I can think of off hand, with the first being to protect workers.  Exempt vs. non-exempt, independent contractor vs. employee, all of those are very specific designations with differing employer responsibilities.  Putting someone in the wrong bucket may violate an individual’s rights.  The second reason is that the IRS wants to make sure it is getting all that it is due from the employer or individual in the form of payroll and income tax.  Even part 5 of the updated form 990 asks more questions about payroll and withholding amounts.

Misclassification of employees has always been a big compliance problem for nonprofits and forprofits alike.  I have heard more than once someone tell me, “No one would sue us, we’re a nonprofit.”  If that was ever true, it is true no longer.  Any employee, no matter what the sector, who feels unfairly treated may sue their employer.  To help mitigate lawsuits, as well as unwanted attention from state and federal regulators I encourage all nonprofit employers to make sure the folks they are paying are classified correctly.  For starter the IRS has a nice pdf on Independent Contrator issues, and other resources here.  A good primer on exempt and nonexempt issues can be found here.

Questions and Answers: Payroll

I just started doing bookkeeping for a non profit. I have to set up payroll and payroll takes but I’m not sure where to start. Do I have to notify the IRS?  How about my state taxes?

Are you using a payroll company? I would strongly recommend you do. There are plenty of companies out there. They usually handle all the forms and take all the responsibility in case anything goes wrong. Payroll is one of the few things I have intentionally avoided learning about as it is so cheap to outsource it, it is pretty much a commodity at this point.  I recommend comparing the price and services they offer.  Do they offer a time tracking system?  Do they integrate with your accounting software?  Do you have the option of doing it all on-line?

Questions and Answers: Capitalization

We received $30,000 to be used to replace part of our building. The cost to do this was $40,000. What amount should be capitalized – the entire $40,000 or the  $10,000 that we had to come up with?

The entire cost of the repair should be capitalized. Regardless of how it was paid for the cost was $40,000.00.

Nonprofit Administrative Costs

May 20th, 2009
by Alan.
1 comment

Two questions recently got me thinking about administrative and overhead expenses.  Below are the questions and the answers I sent:

Question #1: Should a depreciation expense be included in the calculation when looking at the percentage of administration expenses to total operating expenses with a nonprofit?

Answer: It is a good idea to allocate and include depreciation expense in program(s), admin and fundraising. This helps show the cost of doing the work, as at some point equipment will have to be replaced and it is good to know which program is “using” it the most. If your organization does an audit it will show depreciation as a part of your total expenses and allocate it across all your functional areas.

Question #2: We have two independent contractors doing work for our nonprofit. Is the money paid to these people “administrative costs” straight across, or can we separate it out by program? Doesn’t this all come under administrative costs?

Answer: How you code the transactions will depend on the type of work you paid for. If the consultants worked on administrative tasks, their fees would be an administrative cost, if they worked in program areas it would be program costs. Just because the expense is for an independent contractor does not mean it is automatically an administrative cost.

I’ve linked to this topic in my Q&A section and below is what the IRS says about administrative costs in the updated Form 990 instructions on page 33:

990-page-33

Click on the image for a larger / clearer view

A nonprofit’s expenses are classified by what they were used for within the three broad categories / functional areas of administration, program and fundraising.  Program costs are considered direct expenses, expenses that have a direct effect on fulfilling the mission of the nonprofit organization.  Administrative costs are indirect expenses, they affect the mission of the organization indirectly.  The organization can’t get by without those expenses but, according to the IRS and others, they have no direct effect on the mission.

This point, of course, can be argued and I think it is where much of the confusion resides when talking about classifying nonprofit expenses.  But this is the world we operate in and those are the rules, so it is best to make sure we understand the rules so we can present our numbers in the most honest fashion to show what it costs to do the work we do.

Another nice breakdown of what administrative / overhead costs are comes from this post from the Nonprofits Assistance Fund.  It links to this pdf of overhead cost definitions which is very handy.  That post also brings up the specter nonprofits face of spending too much on overhead expenses and the focus on the financial ratio of administrative expenses to program expenses.  While that may be a useful figure, I think we need to always keep in mind just what expenses are admin and what are program so we know just what is being measured.  Then we need to make sure that as a sector we are all labeling our expenses the same way.

And while we are looking at those ratios we need to look at the nonprofit’s ability to deliver its mission.  One financial ratio used in isolation is no true measure of any organization.  Only by looking at both the numbers and the program outcomes can we judge whether an organization is effective or not.

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