By Marc Berger, CPA, JD, LLM
The recently issued proposed regulations interpreting Internal Revenue Code (IRC) Section 512(a)(6) provide additional guidance and builds on Internal Revenue Service (IRS) Notice 2018-67.
On April 24, 2020, the U.S. Treasury Department and IRS published proposed regulations under IRC Section 512(a)(6) in the Federal Register, which was added to the tax law as part of the 2017 Tax Cuts and Jobs Act (TCJA). The provision requires tax-exempt organizations with more than one unrelated trade or business to calculate unrelated business taxable income (UBTI) separately with respect to each unrelated trade or business. The underlying purpose of the provision is to prevent a net loss from one activity from reducing the net income from a profitable activity. As a result of having to treat each unrelated activity separately, Section 512(a)(6) has become known as the “Silo” provision. The provision has been effective for tax years beginning on Jan. 1, 2018 and thereafter.
The IRS released Notice 2018-67 in August 2018 to provide organizations and their tax advisors some guidance on how to interpret Section 512(a)(6). The proposed regulations generally follow the guidance in the notice, although they make several modifications in response to comments received from the tax-exempt organization community.
The principal issue for organizations seeking to comply with Section 512(a)(6) is determining how many unrelated trade or business activities they have. Congress did not provide explicit criteria for determining whether an exempt organization has “more than one unrelated trade or business” or how to identify “separate” unrelated trades or businesses for purposes of computing UBTI in accordance with Section 512(a)(6). The proposed regulations seek to clarify these issues by establishing a method for determining whether an organization has more than one unrelated trade or business and by identifying separate unrelated trades or businesses. Most business activities will use the North American Industry Classification System (NAICS) business codes, and separate guidance is provided for investment activities. In each of these instances the proposed regulations start with the approach utilized in Notice 2018-67 but make some additional changes to this guidance based on the comments received.
Business Activities Other Than Investment Activities
The proposed regulations would classify most unrelated business activities pursuant to 2-digit NAICS codes, which differ from the more specific 6-digit NAICS codes proposed in Notice 2018-67. The 6-digit codes are described as follows: the first two digits designate the sector, each of which represents a general category of economic sector, e.g., real estate and rental and leasing (53), health care and social assistance (62), accommodation and food services (72); the third digit designates the subsector; the fourth digit designates the industry group; and the fifth digit designates the NAICS industry. When applicable, the sixth digit is used to designate the national industry, to reflect differences between the countries. A zero as the sixth digit generally indicates that the NAICS industry and the U.S. industry are the same.
After considering the comments received from its issuing Notice 2018-67, the Treasury Department and the IRS continue to view an identification method based on NAICS codes as administrable for exempt organizations and the IRS. However, in updating the guidance recommended in the notice, the proposed regulations provide that an exempt organization generally will identify its separate unrelated trades or businesses using the first two digits of the NAICS codes, i.e., by economic sector. While there are more than 1,000 NAICS 6-digit codes, the NAICS divides the economy into only 20 economic sectors. Using the 2-digit codes is expected to result in broader, less subjective identification of trades or businesses that would naturally permit the aggregation of similar activities. In addition, it was noted that the 2-digit codes are less likely to change over time because the codes are revised through notice and comment rulemaking (and OMB has historically not revised the codes at the 2-digit level).
Administratively, the proposed regulations provide that an exempt organization will report each NAICS 2-digit code only once. For example, a hospital organization may operate several hospital facilities in a geographic area (or multiple geographic areas), all of which include pharmacies that sell goods to the general public. Pharmacies are described under the NAICS 2-digit code for retail trade (44). Although each pharmacy potentially could be considered a “separate” trade or business under Section 512(a)(6), particularly if separate books and records exist for each pharmacy, the hospital organization would report all the pharmacies using the 2-digit code for retail trade (44), along with any other retail trades or businesses described by this code, on Form 990-T as one unrelated trade or business.
Finally, the proposed regulations provide that once an exempt organization has identified a separate unrelated trade or business using a particular 2-digit code, the organization may not change the 2-digit code describing that trade or business unless the organization can show that the 2-digit code chosen was due to unintentional error and that another 2-digit code more accurately describes the trade or business. This limitation will apply to codes reported on the first Form 990-T filed after final regulations under Section 512(a)(6) are published in the Federal Register. It is anticipated that the instructions to Form 990-T will be revised to describe how an exempt organization provides notification of such an error. In addition, the Treasury Department and the IRS are requesting comments regarding whether there are other circumstances in which an exempt organization should be permitted to change the selected 2-digit codes.
The proposed regulations provide that NAICS 2-digit codes are used to identify separate unrelated trades or businesses except to the extent provided in other paragraphs of the proposed regulations. An exempt organization’s investment activities fall under this exception as their rules are provided in other paragraphs of the proposed regulations.
The proposed regulations provide that exempt organizations may aggregate certain investment activities and treat them as one unrelated trade or business for purposes of Section 512(a)(6). For most exempt organizations those activities are limited to: (i) qualifying partnership interests (QPIs); (ii) debt-financed properties; and (iii) qualifying S corporation interests.
For partnership interests, Notice 2018-67 states that the category of “investment activities” should include only partnership interests in which the exempt organization does not significantly participate in any partnership trade or business. As in the notice, the proposed regulations define QPIs as partnership interests that meet one of two tests:
- A de minimis test, which the exempt organization satisfies if it holds directly no more than 2% of the profits interest and no more than 2% of the capital interest of the partnership; or,
- A control test, which the exempt organization satisfies if it directly holds no more than 20% of the capital interest and does not control the partnership, taking into account all facts and circumstances.
In response to comments received on the notice, the percentage interests held by disqualified persons (e.g., directors) do not need to be taken into account under the proposed regulations in applying the percentage thresholds of the de minimis and control tests. In addition, interests held by controlled entities and supporting organizations no longer need to be taken into account for the de minimis test (but do need to be combined for the control test).
With respect to the control test, the notice looked to whether the exempt organization had “control or influence” over the partnership, while the proposed regulations only look to “control.” The proposed regulations provide that control is shown if the exempt organization “by itself” has the ability to require the partnership to perform, or may prevent the partnership from performing, any act that significantly affects the operation of the partnership, or if it has the power to appoint or remove any of the partnership’s officers or employees or a majority of its directors. Like the notice, the proposed regulations also provide that control is shown if any of the exempt organization’s officers, directors, trustees or employees have rights to participate in the management of the partnership or conduct the partnership’s business at any time.
The proposed regulations allow exempt organizations to rely on the information in the annual Schedule K-1s provided to it for purposes of the de minimis and control tests. In addition, once an organization designates a partnership interest as a QPI, it cannot use the NAICS codes to subsequently identify trades or businesses of the partnership unless and until the partnership no longer qualifies as a QPI (in which case it would be required to use the NAICS codes).
Additionally, the proposed regulations temporarily maintain the “transition rule” that was provided in the notice, under which a partnership interest acquired prior to Aug. 21, 2018 may be treated as comprising a single trade or business under Section 512(a)(6). However, the proposed regulations state that an organization’s ability to rely on the transition rule ends at the beginning of the first day of its first taxable year beginning after the final regulations under Section 512(a)(6) are published in the Federal Register.
The proposed regulations provide that income from debt-financed properties includible in unrelated business income (UBI) under Section 512(b)(4) should be included in an organization’s trade or business from ‘investment activities’ for purposes of Section 512(a)(6). This treatment supports the IRS belief that debt-financed properties are generally held for investment purposes. In addition, an S corporation interest that meets either the de mininis or control test for QPIs is considered a “qualified S corporation interest” and would also be included as part of an organization’s ‘investment activities’ unrelated trade or business. An S corporation interest that is not a qualified S corporation interest would be treated as an interest in a separate unrelated trade or business.
The proposed regulations provide that all “specified payments” (i.e., interest, rents, royalties and annuities) received from controlled entities and includible in UBI under Section 512(b)(13) would be treated as a separate trade or business. Moreover, if a controlling organization receives these payments from two different controlled entities, the payment from each controlled entity would be treated as a separate unrelated trade or business.
The proposed regulations also provide that amounts received from controlled foreign corporations which are includible in UBI under Section 512(b)(17) would be treated as income from a separate unrelated trade or business. Finally, the proposed regulations clarify that inclusions of Subpart F income and global intangible low-taxed income (GILTI) are treated in the same manner as dividends for UBI purposes.
Net Operating Loss Deductions (NOLs)
As enacted, Section 512(a)(6) requires organizations with more than one unrelated trade or business to determine any NOL deduction separately for each trade or business. By limiting the reportable unrelated business taxable income from a separate trade or business to zero, the statute supports the underlying purpose of the provision to prevent a loss incurred from one trade or business to offset income generated from another trade or business. To preserve NOLs from tax years prior to the effective date of the TCJA, Congress created a special transition rule for NOLs arising in a taxable year beginning before Jan. 1, 2018 (pre-2018 NOLs). Section 13702(b)(2) of the TCJA provides that Section 512(a)(6)(A) does not apply to pre-2018 NOLs, i.e., that they may be used without regard to the Section 512(a)(6) limitation. For organizations with pre-2018 NOLs, and NOLs arising from years beginning after Dec. 31, 2017 (post-2017 NOLs), a question arose regarding the order in which such losses should be taken. Notice 2018-67 did not affirmatively answer that question, however the proposed regulations do.
The proposed regulations provide that an exempt organization with both pre-2018 NOLs and post-2017 NOLs will deduct its pre-2018 NOLs from its total UBTI before deducting any post-2017 NOLs with regard to a separate unrelated trade or business’s UBTI. Moreover, the proposed regulations state that pre-2018 NOLs are deducted from total UBTI in the manner that results in maximum utilization of the pre-2018 NOLs in a taxable year. This result is organization-friendly in that it allows for the maximum use of these NOLs before their expiration (pre-2018 NOLs expire after 20 years; post-2017 NOLs do not expire).
Charitable Contributions Deduction
For tax-exempt organizations that are corporations, Section 512(b)(10) limits the organization’s charitable contributions deduction to 10% of UBTI. The proposed regulations clarify that Section 512(b)(10)’s reference to ‘UBTI’ refers to UBTI after the application of 512(a)(6). This result is also organization-friendly in that activities with net losses will not lower UBTI for purposes of determining the 10% deduction limit since those loss activities will be limited to zero for purposes of Section 512(a)(6).
Allocation of Expenses
Regarding the issue of allocating expenses between separate unrelated trades or businesses, Notice 2018-67 stated that the Treasury and IRS were considering modifying the “reasonable allocation method” described in Treas. Reg. Sec. 1.512(a)-1(c) and providing specific standards for allocating expenses under Section 512(a)(6). The preamble to the proposed regulations state that Treasury and IRS are still considering the issue and intend to publish separate proposed regulations providing further guidance on this issue. Until these proposed regulations are issued organizations are instructed to allocate deductions in accordance with any reasonable allocation method. Per the IRS, utilizing gross revenues as a method of allocation is not reasonable as it overstates the deduction(s) in determining UBTI.
Proposed Applicability Dates and Approaches
The proposed regulations apply to taxable years beginning on or after the date they are published in the Federal Register as final regulations. For taxable years beginning before that effective date, exempt organizations may (1) rely on the proposed regulations in their entirety; (2) rely on the methods of aggregating or identifying separate trades or businesses provided in Notice 2018-67; or, (3) rely on a reasonable, good-faith interpretation of Sections 511 through 514, considering all of the facts and circumstances, when identifying separate unrelated trades or businesses under Section 512(a)(6).
While some important questions remain unanswered (e.g., allocation of expenses among various UBI silos), the proposed regulations should provide organizations some comfort in the potential aggregation of activities, which may help the determination of how many unrelated trades or businesses they have. However, this may not ease the inevitable result of increasing their unrelated business income tax liability exposure from a provision that tilts the proverbial “level playing field” towards their taxable entity competitors.
By Michael Conover
The novel coronavirus (COVID-19) crisis has affected all sizes and types of organizations including the nonprofit sector. Regardless of the type of nonprofit, they have been impacted by: forced office closures, dramatic swings (upward or downward) in demand for their services, actual or threatened loss of revenue, budgetary and staff cuts, etc. As the crisis has unfolded, each organization has struggled to respond as new information and guidelines for moving forward have changed. And there is no certainty as to when or how things will begin to change for the better.
Because compensation is generally the largest expense for most nonprofit organizations, it should come as no surprise that many have been forced to reduce or eliminate salaries, and discontinue any bonus and incentive plans. Over time, additional compensation reductions may become necessary if revenues fail to recover to needed levels.
With the struggles to manage day-to-day operational issues a full-time affair, a discussion of compensation would seem to be a pretty low priority in most organizations … particularly since there is likely no good news to report. Like most difficult topics, however, this does need to be raised.
While we cannot make many specific predictions about the future as far as compensation is concerned, I believe there are a few things we can expect as things move forward:
- Staff and salary reductions in response to the crisis will likely result in no or negligible wage growth for the year with possible negative growth in some cases.
- Interest normally devoted to surveys about salary increases for the coming year will likely be focused instead on surveys of trends for addressing the ”no growth” situation which can include plans for restoration of salary cuts, use of one-time bonuses/spot awards, “premium”/ hazard pay for essential personnel, etc.
- Boards will wrestle with decisions about compensation for the executive team managing the organization through the crisis period—pondering a basis for evaluation of performance and an appropriate means for rewarding steps taken for the organization’s survival versus a celebration of growth and profitability.
Under the best of circumstances, good advice for addressing an organization’s compensation needs is based on an understanding of the facts and circumstances associated with that organization. These uncertain times underscore the need for specific information, but very little is available. With little or no information about when or how things will begin to emerge from the crisis, it might be best to offer some general guidelines for managing compensation in the new normal. A few that come to mind follow:
- Prior to implementing changes in any compensation practices (if not already made), organizations must check with state regulations about required periods of notice before changes can be made. Similarly, plans for eliminating, delaying or changing the terms of payment under any formal plans or employment agreements should be thoroughly researched to avoid any adverse compliance issues.
- Communication about compensation is always important and often not done well. In difficult situations it is more important and must be done better. Information must be shared and provided in advance of change (when possible) by board and management to staff.
- Periodic updates on compensation, particularly in cases where salaries have been reduced, is important. Ideally, plans for restoration can be shared. Until that can occur, communication of assurances that the subject has not been dropped and a plan will be announced as soon as one can be developed should be made. While employees may be reluctant to raise the topic, it is a top-of-mind issue on the home front.
- While board members are likely absorbed in many other issues, the annual compensation discussion may be delayed, but its return to the agenda is a certainty. Management has the same interest in and need for information about compensation as staff members.
- The typical review of actuals in relation to budget, personal objectives met and/or missed, etc. will likely be moot at this point. Similarly, efforts to reset bonus or incentive plans will likely be a pointless effort under current circumstances.
- Rather than delay consideration of management compensation decisions until several days beforehand, board members might do well to devote some time to identifying and discussing some new and/or revised criteria for assessing management’s stewardship of the organization in the crisis. For example:
- How well were employees treated?
- How well were the organization’s clients/service recipients treated?
- How well were the organization’s vendors treated?
- How did the organization respond to the needs of the community?
- Explore some ideas and/or options for alternative compensation such as non-monetary alternatives for recognition, reward payments (e.g. one-time bonus / spot award, extra paid time off, etc.).
- As circumstances improve and plans for recovery begin to become clearer, communications with all parties about plans for compensation must be a priority. People should not be left in a position to wonder what will happen or be forced to ask. Proactive communication is the best approach.
We expect that in the weeks and months to come, there will be more information to share about trends that will impact compensation later in this year and into next. We will provide updates as they become available.
by Dick Larkin, CPA, MBA
This article is aimed at helping nonprofit organizations plan to cope with the new challenges imposed by the coronavirus pandemic. The first part of the article focuses on matters external to the organization, while the second part focuses on internal matters. The article is intended to raise questions and get people thinking, not to provide pat answers; such would require a book. These challenges are in some ways pervasive among all organizations; in others there will be different effects on different types of organizations, e.g., educational institutions, the performing arts, membership organizations, religious organizations, charitable organizations, healthcare, etc.
The coronavirus has changed our world in ways unimaginable a year ago. The events of Sept. 11, 2001 resulted in permanent changes to air travel. The coronavirus has resulted and will result in permanent changes to a much wider variety of aspects of our personal and business lives. Some of these changes affect both businesses and governments, as well as nonprofits. These articles will focus on those aspects unique to, or that will have a disproportionate effect on, nonprofits.
The most recent events of comparable nature, magnitude, and pervasiveness were the influenza pandemic of 1918-19, which killed tens of millions of people, and the Great Depression of the early 1930s. But, you are thinking: what about 9-11? World War II? 9-11 was over in a few hours; it directly affected only a small number of places and a limited number of people, and was unlikely to happen again. World War II, for most Americans—except those actually in battle and their close families—was not here; it was almost entirely “over there.” Yes there was rationing, and unavailability of some consumer products like new automobiles, but the daily impact of those was relatively small, and not dangerous for most people.
Coronavirus is here, it directly affects everybody everywhere, it is dangerous, and there is as yet no way to predict how long even its direct effects—much less the indirect effects—will last. Even if a preventive vaccine—and a cure for those already sick—were to be discovered tomorrow and made widely available next week, many of these changes still will not ever be completely reversed.
Effect on organizations’ revenue and financial health
Except for healthcare organizations (which of course are working overtime), the nonprofit sector is largely shut down. Educational institutions have closed their facilities and many are conducting classes online, but bookstore sales have largely ceased and athletic department income has completely dried up. Performing arts organizations are silent. Museums are closed, which reduces both admissions income and gift shop sales (some gift shops continue to sell online). Many houses of worship are conducting services online, which has resulted in a drop in “plate” collections. Membership organizations still have their dues income, for now, but meetings are canceled or postponed. Many charitable organizations are seeing increased need for their services, but trying to increase revenue to cover those added costs is challenging because many donors are themselves in financial distress. Many individuals have lost their jobs or seen a reduction in pay. The 2017 income tax act had already reduced the incentive for some to make charitable contributions by doubling the standard deduction for individuals. Now Congress has eliminated the year 2020 required minimum distribution from deferred compensation plans (IRAs and the like), so seniors over age 70½ will have less incentive to make direct charitable rollovers from those plans. On the more incentive side, there is now a $300 charitable deduction available to donors who do not itemize. Foundations have seen their investment portfolios lose value, so they have less available to make grants. State and local governments are seeing declines in sales, gasoline and income tax revenue, so they have less to distribute as support. Only the federal government is pumping money into the economy, some of which is flowing to nonprofits, but this cannot possibly make up for all the other revenue losses.
There are some offsets. It is well known that many performing arts organizations lose money on every performance they put on, so by cancelling performances, they may save more in expenses than they lose in revenue. The real losers there (besides the audiences) are the performers: actors, singers, orchestra musicians, etc., and the supporting staff: stagehands, technicians, ushers, etc. Those organizations that can afford to are doing what they can to keep some of these people on the payroll (there is a limited federal grant program expressly for that purpose), but that does not make everyone whole, and cannot go on indefinitely. Residential educational institutions have lost room and board revenue, but do not have to pay for food and kitchen staff (again a hardship for that staff), or pay for most dormitory current operating costs.
These are short-term effects. But what about the longer term? Will an orchestra or chorus or theater that has had to cancel the rest of its current season be able to attract its audience back when things are able to reopen? Will the performers still be available? (What will a choral concert sound like if all the singers are wearing face masks?) If half of this concert season has been canceled, will donors continue the same level of annual support next season? Will college students re-enroll next semester? Will individuals and companies that have had to cut back on expenditures due to lost income return to their previous levels of charitable giving? Will association members renew their memberships? Will people be willing to resume participating in and attending events in spaces with large numbers of other people, for example, classes, concerts, conferences?
Planning for how to survive these effects is made even more difficult by the current uncertainty about when things will return to anywhere close to normal, if ever. Mounting a museum exhibit or a theater production, or getting all the pieces of a college curriculum in place, or organizing the annual convention of a trade or professional association cannot be done in a week, but at this point no one can be certain when, for example, colleges will be able to fully reopen: This summer session? The coming fall semester? Next year? None of the above? The answer will likely vary by locality. And what if there is a resurgence of the virus during the flu season next fall, as some healthcare experts are predicting is possible?
Internal Effects on Nonprofits
Given the external effects discussed above, how will they affect the internal operations of nonprofits? The governing board and the CEO will take the lead here by first thoroughly understanding the organization’s current situation, then communicating that to the staff (including volunteers), donors, clients (members, students, etc.) and the community. For example, how many months of anticipated expenditures do we now have available in liquid assets?
Some things are obvious. With less income and greater uncertainty, organizations must manage their expenditures even more carefully than they normally do. Expense budgets must be pared; revenue, expense and cash flow budgets must be closely monitored on a timely basis. Difficult choices may have to be planned for and made:
Do we continue this program (academic department, publication, concert series, location) or that one? We no longer may be able to count on the availability of resources to do both.
Should we consider pursuing a merger with [other nearby organization whose programs are similar to ours]?
Do we have access to a line of credit? (If not, why did we not arrange for one before this crisis?)
Would [Major Donor X] be willing to convert a previous restricted gift into an unrestricted gift, or to allow re-purposing of the gift to what is now a more important program?
We are ok for the moment, but what are our Plans B, C, and D if next year’s revenue falls by 20%? 30%? 50%?
Donor and customer relations take on greater importance. Timely and clear communication is vital. Organizations must make every effort to keep the ones they have, motivate donors to increase their giving level, and to attract new donors to make up for the inevitable lost ones. Ditto for educational institutions (students), associations and houses of worship (members), museums (visitors), performing arts organizations (audiences), etc.
Management should become aware of all available governmental resources and take advantage of the ones that may pertain to the organization, such as the Paycheck Protection Program or the SBA Loan Program. Find out what insurance coverage is in place for things like cancelation of events. Would coverage be different depending on whether the cancelation was due to governmental quarantine regulations or the closure of a rented venue versus proactive action by management? Are there foundations which might be willing to help?
Many smaller nonprofits with few staff have always found it challenging to maintain adequate internal controls over their accounting and operational functions. With many staff now working off-site, this challenge is even greater. But the need for these controls is greater, not less. And remember, the responsibility for designing, implementing and monitoring these controls lies squarely with management, not with the auditors. Auditors will (and must under their own professional standards) continue to ask questions of management such as: “How do you satisfy yourself that (for example):
All revenue intended for the organization—especially contributions—has been collected and properly recorded?
All expenditures are for appropriate purposes, consistent with any applicable donor restrictions, in proper amounts, have been properly recorded, and that commensurate benefit has been (will be) received?
All assets that properly belong to the organization are adequately secured, managed, and properly valued and recorded?
All liabilities, and only true liabilities, of the organization are properly recorded and paid?
The organization is in compliance with applicable laws, regulations and funder (private or governmental) restrictions?
All of the organization’s activities are being conducted in an ethical manner? Another way to phrase this is, “Is there anything about the organization, its personnel, or its operations that would cause embarrassment if reported on the front page of tomorrow’s local newspaper?”
Auditors, in turn, are subject to various constraints in performing audit work. They may not have normal access to the client’s personnel, office or other facilities, and thus may be unable to examine hard copies of documents or observe inventory of gift shops or bookstores. Examination of documents and interviews with client staff may have to be conducted electronically, and extra steps taken to verify the authenticity of documents and the proper functioning of internal control procedures.
With the greater risk that staff (including volunteers) may become infected and unable to work at all, and/or infect others, organizations should be sure that every function is backed up by at least one other person or that outsourcing arrangements are in place if needed. Government healthcare privacy regulations probably forbid explanation to the rest of the staff as to why “Mary” is not going to be at work for the next month. But if a virus case is identified in the organization, quarantine regulations may require that that fact (alone—no names) be disclosed to those who may have had contact with the infected person. Legal advice may be needed here.
Some operational areas that may be affected include anything involving travel—especially international, such as students studying abroad, bringing visiting performing artists in from other cities, travel by athletic teams to away games, out-of-town speakers at conferences, members traveling to attend conventions, etc. Technology is already being used in some of these areas, and such use will likely increase. (Ok, technology will not work for team sports: football, soccer, basketball, hockey or racquet sports such as tennis; but maybe it could if golf or a racing-type event such as track and field, swimming or skiing could be contested simultaneously in both home facilities, so the race is effectively against the clock.)
Organizations such as homeless shelters and soup kitchens will need to rearrange their spaces to allow for more social distancing by their clients. Even after the immediate threat of infection has largely passed, would-be users of such facilities may want to feel comfortable that they are adequately separated from their neighbors. An extreme example would be a charity dental clinic, which will have to take extraordinary steps to keep both its patients and staff feeling safe. These and similar organizations should also be certain they have adequate insurance coverage to protect from claims by someone who has accidentally been exposed while in their facility.
Houses of worship have some special challenges: how do they handle group events (apart from regular services) that often involve close personal contact, such as weddings, funerals, baptisms, confirmations, bar/bat mitzvahs, etc.? Even when in-person group services can be safely resumed, should the communion ritual be altered? Should congregants still pass the peace during the service? (There should be an understanding so there will not be embarrassment if one person wants to shake hands or hug a neighbor, but the neighbor does not.)
Some facilities may need to be re-purposed. Convention centers and sports arenas are being used to help meet medical needs of cities. Now-empty college dormitories and dining facilities could be used for helping people in need due to job loss or homelessness.
Now is definitely the time to be thoughtful and creative.
By Barbara Finke, CPA
Most organizations have an established budgeting process. Whether the entity uses a robust performance management tool or a spreadsheet, there is likely a thoughtful process to predict the next year’s revenues and expenses. The budget is usually approved by the board of directors and/or other committee and memorialized in the meeting minutes. Once the budget is final, how an organization utilizes this tool varies. Most organizations utilize the budget as a tool for comparing actuals on a periodic basis while some revisit the budget and make changes based on certain events, and a rare few actually revisit the budget on a rolling schedule and update forecasts routinely.
Based on a survey conducted by KPMG in 2016 with the Economic Intelligence Unit (consisting of 544 global companies) only two-thirds of organizations surveyed incorporated rolling budgets. Although experts often say reforecasting or rolling budgets are important, many organizations continue to operate with a static budget, citing time or computer system limitations. A static or fixed budget occurs when the organization prepares an annual budget, which remains untouched for the fiscal year. The organization compares actual performance to the budget at periodic reporting intervals. This common type of budgeting is a good tool for keeping spending within a predetermined threshold. A static budget remains useful when spending is generally predictable and consistent. However, it can become cumbersome and unhelpful when the organization sees major changes, and the variances, while explainable, render the static budget meaningless.
Consider the current reality of our unprecedented economic and social times. On Jan. 30, 2020, the World Health Organization (WHO) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (COVID-19), and the risks to the international community as the virus spread globally. In March 2020, the WHO classified COVID-19 as a pandemic, based on the rapid increase in global exposure. The world is still determining the ultimate impact of the global pandemic. In the United States, shelter-in-place orders seem to change daily and differ not only by state, but by county or even potentially by neighborhood. Economic stimulus packages were enacted on March 27, 2020, under the Coronavirus Aid, Relief and Economic Security Act, with new grant opportunities, tax changes, and ever evolving lending programs. In addition, we have seen historic stock market changes based on seemingly every announcement from the Centers for Disease Control and Prevention (CDC), the president and/or major corporations. Now, more than ever, organizations need to understand how to reforecast static budgets so that the executive teams can make real-time informed decisions.
Per an article from Kshitjil Dayal, Workday, “…from March 23 to 27, our [Workday] cloud planning platform processed up to 30 times more forecasts and build-out scenarios than in a typical week. Since the emergence of the COVID-19 pandemic, we’ve [Workday] seen an overall average increase of 15 times the amount of modeling and recalibrating as organizations everywhere attempt to make sense of the ripple effects.” Based on that evidence, organizations seem to be aware of the need to reforecast budgets for fiscal year 2020 and beyond. Was your organization ready?
Historically, the most common reason noted for using reforecasting or a rolling budget was the constantly changing nature of the business environment, whether it be technology innovations, stock market fluctuations or management changes, and the belief that a static budget would not provide organizations with a useful tool when making key decisions. In the past, your organization may have concluded your environment was not constantly changing, or that the headache of the reforecasting process was larger than the benefits. Now every organization is in a state of constant change, and reforecasting is critical.
Budgeting is a bit like road trip directions. In the past, you pulled out the road atlas, plotted your course and headed out. It was a surprise when you hit a major traffic jam or detour, and you were forced to wait patiently. Now, you put the destination into your favorite mapping app and start your route. As you drive, the app periodically notifies you of a shorter available route, or a major road blockage ahead that requires rerouting. Your mapping app provides all of the information you need to quickly make the decision to take a new course or stay on the original one. A budget that can be reforecast quickly gives your organization the same ability. If you want this capability for your organization, the next step is to decide whether you will use a reforecast or a rolling budget.
What is reforecasting?
Reforecasting means updating the entire budget based on new facts and circumstances, taking a holistic look at your original budget and updating any elements as necessary. In the end there is a separate, fully revised budget, not an adjustment to just a line or two. The reforecast allows the operational group to understand the new route to follow and what will be ahead on the new path. It provides a more relevant decision tool than the static budget.
When should an organization reforecast?
As noted above, a reforecast should happen whenever there is a large or unexpected trigger event, such as the COVID-19 pandemic. However, it doesn’t have to be that big of a trigger. It could be a large or unexpected change in one of the organization’s major revenue streams or cost drivers, such as winning (or losing) a major contract. When the main driver of your budget is expected to change as a result of the event, a reforecast should be completed.
Organizations should also consider reforecasting when trends show that the original budget was not accurate, and you start to see recurring, significant variances in line items between actual and budgeted amounts.
The key message is that a reforecast is needed when the main driver of your budget suffers a significant enough impact that it is necessary to consider a holistic change in your original static budget.
How should an organization reforecast?
Before you determine the next steps in reforecasting, consider the budget process in your organization. Do you have a zero-based budget? In a zero-based budget, the organization builds the budget from scratch, considering each expense driving the budget from the expense side and attempting to grow profit by reducing expenses, rather than increasing price per unit or units sold. Or, does the organization look at historical trends and adjust revenues and expenses according to expected growth or shrinkage? Either way, break down the assumptions to the original drivers, whether it is variable costs or variable revenue sources that drive the bottom-line budget. This may require more thought if your organization has not done a zero-based budget recently. If you are struggling to identify your organization’s drivers, consider what key performance indicators you report to the board of directors or what benchmarks you are tracking. These are likely the drivers to consider when you are reforecasting.
Once you have determined which costs or revenues are variable, then reforecast what impact the event will have on your variable drivers. If you budget based on costs, think about what costs are variable, such as operational payroll or supplies. Will these costs increase or decrease? If your costs increase, what will the organization need to do to increase revenues? Another approach is to start with the variable revenue drivers (such as patients served, units sold or students enrolled). Will the visit/unit sales rate increase or decrease? If the unit sales increase or decrease, what is the impact on costs? Will prices need to change? If prices change, what must the organization do in response? Remember as you change the cost driver, consider the impact on revenue, or vice versa.
Next, consider fixed costs and if there are any changes to these based on the trigger event. Typically, fixed costs would not be subject to change; however, in response to an event such as the COVID-19 pandemic, organizations may be renegotiating administrative payroll or rent expenses and, therefore, those fixed costs should be reforecast as well. Perhaps the original fixed-cost assumptions were not accurate in the first place. It is worth looking at all significant line items to ensure the accuracy of the forecast. Take this time to be critical of all original assumptions. Review future debt payments, rental agreements or other recurring charges to ensure that the terms of those contracts have not substantially changed since the budget was originally prepared.
The main drivers of the budget are always program/operational related. Therefore, it is critical that you speak with the managers of each division to understand what their projections entail. Accounting and finance personnel must understand if a change to the budget is realistic and if operations can function with the parameters that have been assigned. For example, if you cut expenses to balance the budget from anticipated revenue losses, make sure operational/program managers agree that there are enough expenses to produce whatever is needed to meet anticipated demands. Finance teams have noted that siloed operations or lack of integrations are main reasons for preparing only a static budget and finding a lack of value in other models.
While working on reforecasting, time is of the essence. The sooner the data is reforecast, the sooner the organization can use it as a tool for their decision making. It may be difficult the first time the organization works through a reforecast. Take notes on lessons learned and consider how you can set up the next period’s budget in a format that may be easier to reforecast in the future.
How do I predict the unpredictable?
Reforecasting for a trigger event, such as a new contract, is relatively straightforward. Program managers will understand how drivers will be impacted and what considerations should be made. However, what should organizations do with something like the COVID-19 pandemic? How can the future be predicted?
Financial analysts have made a living out of creating models that consider scenarios such as these. Those scenarios are then stress tested to see what happens if certain assumptions change. Using the same thought process can help you “predict” the future.
One way to create a model is to understand your organization’s cash burn. Most CFOs are acutely aware of cash trends. Look back at historical cash flows and calculate what your average spend rate is compared to your average collection rate. With this knowledge you could model a few scenarios.
Consider the worst case scenario first. If the organization is unable to collect cash from any revenue for an entire quarter what reforecast is needed on the budget? What happens if cash from revenue is only reduced a certain percentage over that same quarter? Essentially using this theory, you can start to build steps to respond to a prediction and implement those steps as necessary.
As an example, Organization Y has noted that the current cash position is $1 million, and that fixed costs requiring cash for the next quarter are $200,000. This leaves $800,000 of potential spending. If the organization’s variable expenses are $900,000 a quarter, what steps would need to be taken to cover the shortfall of $100,000 ($1.1 million of variable and fixed costs for the quarter less cash on hand of $1 million)? With a predicted shortfall number, the organization can decide if that means taking on new debt, curbing capital expenses or potentially cutting salaries.
The worst case scenario may not be the most likely. But rather if Organization Y forecasts that instead of the typical cash from revenue of $1 million a quarter, they anticipate $500,000 in cash from revenue this quarter. Now the organization has $1.5 million ($1 million of cash on hand plus the $500,000) to spend over the quarter. If the cash needs are $1.1 million, they know going into the next quarter that they have $400,000 of cash available.
It is easy to establish the worst case scenario. It is harder to picture a realistic scenario, especially during situations like the COVID-19 pandemic. To assist your organization in determining the most realistic scenarios when reforecasting, look at what is happening in your industry in particular. If you are a member of a trade organization, it is likely that they are polling members and publicizing what member organizations are experiencing. You can also look to other sources of benchmarking, such as public companies, to see what the quarterly earnings or filings look like.
Economic sources like IBISworld, Moody’s Analytics, Morgan Stanley Economic Outlook, Morningstar Economic Outlook, or Placer.ai on Retail Foot Traffic provide data and information on economic trends experts are seeing. Organizations often forget to look at external sources to help predict the course of the budget drivers, which can be detrimental when creating an accurate forecast. When preparing any kind of budget, looking at external data sources is critical.
Even if your organization struggles with defining the most realistic scenario, the reforecast is still a helpful tool as it starts to put parameters (Organization Y has somewhere between a shortfall of $100,000 or a surplus of $400,000 to consider) that management can work with to make informed decisions about the best next direction rather than driving blind.
What is a rolling budget?
A rolling budget is similar to a reforecast, except a rolling budget was never intended to remain static and has a set time of when it should be adjusted (rather than waiting for trigger events). A common example of a rolling budget is where an organization would budget four quarters ahead. Each quarter the organization updates the next three quarters and adds a new fourth. Meanwhile monthly comparisons would be made to the monthly budget planned in the rolling budget. The organization would set a time period at which point the budget will be reviewed and updated using the same techniques as noted above for reforecasting. The rolling period could always be adjusted if a trigger event occurred outside of the normal update period. The rolling budget is always anticipating change, so an organization is set up to continuously monitor the trends and update either revenue or cost predictions, or both, to stay nimble.
Which one is better?
The best budget method depends entirely on the attributes of your organization and the industry it operates in.
A static budget is likely the best option for a small organization with relatively small fluctuations year over year. It may also be helpful in organizations that are grant driven where the grant budgets will not change once adopted. While the budgeting process can be long, it only occurs once a year in this environment, which makes it easier for a small staff and limited software capabilities. If your organization utilizes a static budget, to ensure that the budget stays relevant, the organization should routinely compare actual results to budget.
Reforecasting is not always necessary, especially if there is no trigger event and no major variances from the static budget. However, because events like the COVID-19 pandemic are rarely foreseen, the ability to reforecast a static budget is beneficial for any organization. Right now, every organization should prepare a reforecast budget using the steps outlined above based on the impacts of the COVID-19 pandemic. While working on the reforecast, use this time to set up a process and policy of how and when to reforecast your budget in the future. For example, as a policy, an organization could define a trigger event. Try to use thresholds such as an event that would likely change the main budget driver by 20% . When a “roadblock” like the COVID -19 pandemic comes up, the organization needs the tools to create a new fiscal road map. It will likely also lead the organization to identify areas to improve in the static budget process.
If your organization is in a more volatile industry where the drivers are constantly changing and strategy is ever evolving, then the rolling budget is most likely the best method for your organization. Another benefit of a rolling budget is that it inherently pushes the organization to a forward-looking approach, as governance discussions center around how the budget was adjusted and why, versus the historical approach of comparing the static budget to actual and repeating oftentimes the same variances each time. To be successful, a rolling budget requires an ongoing assessment with quick changes to ensure that the periodic budget to actual reporting can be maintained. Reforecasting with a rolling budget also needs to be fairly quick since it is continuous.
If the organization adopts a rolling budget or a reforecasting model moving forward, it is important to make sure careful thought goes into preparing the original budget. Drivers should be clearly identified, and formulas used to show how the variable revenues and costs build from the drivers.
Does my Organization Need Budgeting Software?
A budget could be a simple spreadsheet or prepared using budgeting software. The team should consider how complex the organization’s drivers are when considering whether to utilize a spreadsheet or software. Organizations with multiple streams of revenue with different corresponding variable costs, may find it necessary to utilize software. Software often allows for more complex planning and reforecasting, allowing the organization to create various scenarios to see what an impact such as changing the price of a unit by 5% versus 7% would be. Software can aid collaboration amongst different teams or units, while using a spreadsheet could make maintaining version integrity when sharing with multiple users problematic.
Consider what the likely trend in budgeting will be for your organization to select a tool. In a study done by the Chartered Institute of Management Accountants in 2016, The Reforecasting Report, the authors note that “buying an increasingly complex software platform without full cooperation and negotiation may fail to reduce ‘noise’ in the planning and budgeting process.” In addition, bad data in, bad data out, no matter what the tool, so an organization should first make sure the budget basics are in place and reliable data can be easily obtained to ensure a software or spreadsheet’s ability to create a proper forecast is enhanced.
 Kothari, S.P et al. (2007, September) Forecasting With Confidence: Insights from Leading Finance Functions. Retrieved from https://home.kpmg/content/dam/kpmg/pdf/2016/07/forecasting-with-confidence.pdf
 Dayal, Kshitij (2020, April 15) How to Gain Business Agility in Uncertain Times. Retrieved from: https://blog.workday.com/en-us/2020/how-to-gain-business-agility-in-uncertain-times.html
 Jelly, Robert (2007, May 1). The Reforecasting Report, 2006 Survey of Current Practices in the UK. Retrieved from https://www.cimaglobal.com/Documents/ImportedDocuments/The_Reforecasting_Survey.pdf
Dayal, Kshitij (2020, April 15) How to Gain Business Agility in Uncertain Times. Retrieved from: https://blog.workday.com/en-us/2020/how-to-gain-business-agility-in-uncertain-times.html
 Jelly, Robert (2007, May 1). The Reforecasting Report, 2006 Survey of Current Practices in the UK. Retrieved from https://www.cimaglobal.com/Documents/ImportedDocuments/The_Reforecasting_Survey.pdf
By Tammy Ricciardella, CPA
Many nonprofit organizations receive a variety of gifts-in-kind (GIK) that provide them with resources to supplement their programming.
GIK represent a wide variety of non-cash items donated to nonprofits. Nonprofits must follow Accounting Standards Codification (ASC) Topic 820, Fair Value Measurement, to account for the GIK. This means that GIK must be recorded at fair value which is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This creates difficulties for many entities since they receive the goods as a contribution and not a market participant. This creates the question of how to value the items received. The entity must assess what market they would use if they were to sell the donated goods. This assessment must be performed in the process of determining the fair value even though the entity has no plans to actually sell the donated goods. Would the goods be sold in an exit market as a retailer, wholesaler or manufacturer, or in some other market? Once the market is determined, there can still be complications if the entity doesn’t have access to the valuation inputs in that market. The entity may have to use the inputs available to them to assess the fair value and then make an adjustment to the market they chose.
These are all complications faced by entities who receive GIK as they may not have prior transactions or the market experience to use as a resource for the fair value inputs. Under the ASC, entities must distinguish between the principal market and the distribution market. The principal market is defined as “the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability.” Based on this definition, the actual location in which the donated goods may be distributed at no cost is not necessarily the principal market.
Determination of the fair value also has to take into consideration if there are any legal restrictions either on the entity or the donated assets. Asset restrictions may limit the legal sale of GIK to certain markets which would affect the determination of the principal market. Since these legal restrictions on the asset restrictions would be considered by a potential buyer, the entity has to take this into account in the fair value assessment.
It is important to note that the value assigned by the donor of the goods may not relate to the principal exit market of the nonprofit. In addition, the donor’s tax values are not equivalent to the fair value under accounting principles generally accepted in the United States. In many cases, the nonprofit will not have access to the same market as the donor. The nonprofit must value the GIK based on the principal exit market from their perspective.
To assist in addressing these complications, entities should have a documented policy on accepting GIK and a policy on how the fair value assessments will be performed. The determination of fair value for each type of GIK received should be clearly documented, including management’s assessments and factors considered and the final conclusion reached.
For more information, contact Tammy Ricciardella, Director, at firstname.lastname@example.org.
For more information from Blackman & Sloop, please contact Deetra B. Watson.
By Laurie De Armond, CPA, and Adam B. Cole, CPA
All nonprofits want to do good. Helping their constituents and driving impactful, positive change in communities is what propels their mission forward. Whether they’re on a quest to combat social injustice, poverty or climate change, nonprofits play a vital role in keeping our society moving forward. And yet, noble intentions are not enough for nonprofits to effectively fulfill their intended goals.
So, how can nonprofits successfully maximize good?
The answer can be borrowed from a classic adage: “Charity begins at home.” Just as a doctor cannot take care of others if he himself is ill, organizations cannot help their constituents if they’re unable to manage their own operations effectively and sustainably. As mentioned in our insight, “The Business of Impact,” nonprofits must balance good intentions with a business mindset.
This begins with learning how to balance external and internal needs. Too often, nonprofits, in a quest to save the world, fail to save themselves.
By taking these steps, nonprofits are poised to maximize their impact.
STEP 1: BALANCE PROGRAMMATIC & OPERATIONAL INVESTMENTS
Donor pressure may dictate high programmatic spending, but nonprofits must realize that underfunding overhead costs is dangerous and, ultimately, unsustainable. There are critical areas all nonprofits should keep in mind when making strategic spending choices, including:
Talent Management: Nonprofits need to support the people behind their mission and invest in recruiting and retention. Our Nonprofit Standards benchmarking survey found that keeping employees satisfied is a challenging task, with most respondents citing issues like compensation, technology, and training and development. By regularly reassessing the processes, programs and structures in place, nonprofits can understand what motivates—or demotivates—their employees.
Governance and Compliance: Nonprofits should think of good governance as an imperative, not simply a nice-to-have. Even with limited resources, they must take a proactive approach to regulatory compliance and risk mitigation. Earmarking funds to cover compliance costs may be painful initially, but the costs of noncompliance are even greater.
Technology, Equipment and Supplies: In addition to jeopardizing employee satisfaction, having outdated IT and equipment can drain already-limited resources by reinforcing operational inefficiencies, weakening impact reporting (58 percent of Nonprofit Standards survey participants cite inadequate technology as a barrier to impact reporting), increasing cyber and data privacy vulnerabilities and more. Nonprofits should invest in technology that can help them advance a larger goal—whether it’s empowering their employees to accomplish more, making their programs more accessible or amplifying their current fundraising efforts.
Cybersecurity and Data Privacy: Nonprofits must safeguard the data they possess, regardless of where it originated. Unfortunately, many fail to invest in cyber or data privacy programs, due to the assumption that they’re too small to be a viable target. However, this often makes them even more appealing and vulnerable to cyber attackers. Security needs to remain a key priority, even amid multiple projects.
Fundraising: Many investments in this category fall into similar buckets as those outlined above, especially people and technology. Whether it’s spending money to hire and train a fundraising team or purchasing new fundraising tools that can expand an organization’s reach, putting aside funds to improve visibility will pay off in the long run.
Balancing programmatic and operational spending isn’t easy and requires organizations to assess their operations with a critical business mindset. Altruism without an efficient infrastructure to support it won’t go far.
STEP 2: EMPHASIZE FINANCIAL DUE DILIGENCE
Financial due diligence for nonprofits extends beyond having enough liquidity to function effectively and investing with self-care in mind—it’s also managing finances with the same level of dedication as a for-profit business.
Maintain Sufficient Operating Reserves
When organizations encounter funding disruptions or lose a major donor, a healthy supply of operating reserves (liquid, unrestricted net assets) is a critical fiscal safety net to keep programs up and running.
The “right” amount of operating reserves varies according to organization size, sector and scope. However, establishing at least six months of operating reserves is a prudent target for the sector overall. More than half (51 percent) of organizations in Nonprofit Standards fall short of that goal.
Nonprofits should consider adopting a “reserve policy” (if they don’t already have one) based on a comprehensive risk analysis. This policy should provide guidance on how (and how much) money they should put into their reserves, under what circumstances the reserves should be used, as well any other restrictions or limitations that ought to be considered. Having a few months’ worth of operating funds can at least help nonprofits continue their programs if they’re facing revenue interruptions.
Stay Abreast of Regulatory, Tax & Financial Accounting Changes
Not only are legislative financial changes required, they also affect how nonprofits document their donations and financial statements to their stakeholders—including their board, donors, constituents and the general public. This, consequently, affects how the latter will assess an organization’s financial health.
When undergoing the compliance process, nonprofit leaders should be prepared to address any questions about how these changes affected their financial statements. Maximizing good requires organizations to not only mitigate compliance risk, but also to be able to clearly explain all facets of their financial situation.
STEP 3: INSPIRE & MAINTAIN TRUST
Donor and stakeholder needs and expectations are ever-evolving. Clear, frequent and open communication, on their terms, is essential to getting the support you need to accomplish your mission.
This is especially true now that the profile of the average donor is changing. Millennials currently make up the largest portion of the overall population and have begun to take on a key role in philanthropy worldwide. These donors differ significantly from their predecessors: They not only place a huge emphasis on trust, but also expect faster reporting times, thanks to social media and other technologies.
With such close scrutiny upon them, nonprofits need to get better at not only measuring impact, but reporting it. According to Nonprofit Standards, many are under increased pressure to demonstrate results and provide further transparency: 61 percent say that some portion of their funders have required more information than was previously required.
Nonprofits will need to go beyond traditional reporting tactics to meet donors on their turf and on their real-time timeline.
When impact reporting is effective, it really pays off—not only in donations, but in a currency much more valuable long term: loyalty and trust.
Adapted from article in the Nonprofit Standard blog.
For more information, contact Laurie De Armond, Partner, at email@example.com or Adam Cole, Partner at firstname.lastname@example.org.
For more information from Blackman & Sloop, please contact Deetra B. Watson.
By Marc Berger, CPA, JD, LLM and Katherine Gauntt
It’s been more than a year since the Supreme Court announced the landmark decision in the South Dakota v. Wayfair case, opening the door for states to require organizations to collect and remit sales tax even if the organization has no in-state physical presence. The impact of the decision has proven to be far-reaching.
Since that time, organizations selling goods and services across state lines, including nonprofits, have had to navigate the fallout. While we covered this decision in depth earlier this year, it’s important as we mark the one-year anniversary of Wayfair, to take a look at what’s changed and what challenges may still be on the horizon for nonprofits.
The Wayfair Domino Effect
Prior to the Wayfair decision, most nonprofits selling goods and services didn’t have a physical presence in states beyond their home states and, thus, did not collect sales tax.
But the Wayfair decision had a domino effect: States began adding or revising statutory language to accommodate an economic nexus standard for remote sellers. Several states already had laws on the books that automatically went into effect following the decision. As of this article’s publication, all but three states (Florida, Kansas and Missouri) have enacted economic nexus rules. Organizations selling things like promotional items, event tickets or other goods or services are likely affected in some way.
Each state has differing economic thresholds that require organizations to collect sales taxes, and the deadlines for compliance vary state-by-state as well. Even if no tax is collected, the requirement to file a return remains. This patchwork of regulations and deadlines may leave many nonprofits struggling to understand where their obligations lie, and how quickly they need to address them.
Complicating matters, the state thresholds vary in terms of dollar amount and number of transactions required to trigger economic nexus and the deadlines to comply also vary. For nonprofits, knowing where and when they’re required to administer sales tax is often half the battle.
For up-to-date information on state thresholds and effective dates, check out our interactive Wayfair map.
Automation Offers a Potential Solution
One possible option for monitoring the thousands of shifting tax rates that may apply in a post-Wayfair world is the use of automated software that monitors these changes in real time. Automated software solutions offer several benefits, including:
- Tracking tens of thousands of tax rates in real time
- Access to taxability information to determine how products and services are taxed in various jurisdictions
- A history of transaction data that can be used to compile tax returns and provide a single source of information in the event of a sales tax audit
- Assistance with managing exemption certificates for tax-exempt sales
For nonprofits, which typically have fewer resources than for-profit companies, a full-service automated solution might seem out of reach. However, there are many simple products that offer basic services—such as tax rate tracking—at a lower cost. Ultimately, while there are costs associated with these services, they may be eclipsed by the administrative and resource burden that comes with keeping pace with constant change without them.
For more information about how automation can assist with Wayfair compliance, read our recent Insight.
Marketplace Facilitator Laws, The Next Frontier
While Wayfair had obvious effects on the e-commerce sector, its impact also extends to the middlemen of retail sales transactions. New sales tax laws are now requiring marketplace facilitators—third-party entities that facilitate sales, such as Amazon—to collect and remit sales and use taxes on behalf of retailers. These laws help to substantially reduce the number of remote sellers that state tax authorities may seek to audit. We expect nearly all states will enact marketplace facilitator tax laws soon.
By nature, marketplace facilitators don’t have intimate knowledge of the goods or services being sold as the retailers themselves do. This lack of familiarity could result in a fair amount of under-collected sales tax if these sales are not properly accounted for or mapped to the correct taxability classification. This under-collecting is compounded by the fact that there is a lack of regulatory clarity around who should ultimately be responsible for the correct amount of sales taxes collected and reported to the taxing agencies, whether it’s the retailer or the company facilitating the sale.
While nonprofits might not seem like marketplace facilitators, there is still a lot of confusion about what constitutes a dealer or seller under these laws. It is possible that nonprofits that maintain online marketplaces or facilitate online auctions could be considered facilitators. With so much up in the air regarding these laws, it’s critical that organizations keep a close eye on the latest developments in any state where they do business.
Don’t Forget Purchasing Exemptions
While much of the commentary around Wayfair has focused on selling, it highlights the importance of purchasing considerations, as well. As sellers begin to increasingly collect sales tax on purchases, nonprofits should be sure to understand and maximize any exemptions they qualify for due to their nonprofit status.
While the details vary, many states exempt nonprofits from paying sales tax on purchases if they are made exclusively for charitable purposes. According to the National Council of Nonprofits, more than half of U.S. states give broad sales tax exemptions for purchases by nonprofits, and an additional 15 states allow limited exemptions by certain types of nonprofits or specific organizations.
For nonprofits to take advantage of these exemptions, they need to keep track of where they exist, and work with their vendors to ensure they either do not pay sales tax on purchases or receive sales tax credits on applicable purchases. Ideally, every time an organization begins to work with a new vendor, they should determine if the purchase is exempt from sales tax and provide the vendor with applicable exemption certificates. It’s also important to note that some types of nonprofit organizations, like associations, generally don’t qualify for these exemptions.
When Wayfair was first decided, many nonprofits assumed they wouldn’t be affected, but in the year since have had to come to the realization they may be responsible for collecting and remitting sales taxes in states where they have economic nexus. While this has created concerns about the administrative burden nonprofits might face to stay Wayfair-compliant, it’s important to remember that sales tax is ultimately a cost to the buyer, not the nonprofit seller. That is, of course, provided the nonprofit is compliant. If they fail to collect and remit the sales tax, there could be an actual liability in the form of an audit assessment to the organization.
As the impact of Wayfair continues to unfold, it’s crucial that nonprofits stay up to date on the latest developments and take proactive steps to get—and stay—compliant.
Adapted from article in the Nonprofit Standard blog.
For more information, contact Marc Berger, National Director, Nonprofit Tax Services, at email@example.com or Katherine Gauntt, Senior Manager, Specialized Tax Services – SALT Southeast Region, at firstname.lastname@example.org.
For more information from Blackman & Sloop, please contact Deetra B. Watson.
By Tammy Ricciardella, CPA
On Aug. 15, 2019, the Financial Accounting Standards Board (FASB) issued an exposure draft that would grant private companies and nonprofit organizations additional time to implement FASB standards. Comments on the exposure draft are due by Sept. 16, 2019.
The exposure draft describes a new FASB philosophy that extends and simplifies how effective dates for major standards would be staggered using a two-bucket approach. Bucket one would be only Securities and Exchange Commission (SEC) filers. Bucket two would encompass all other entities, including all nonprofit organizations, as well as nonprofit entities that have issued, or are conduit bond obligors for, securities that are traded, listed or quoted on an exchange or an over-the-counter market.
Under the proposed philosophy, a major standard would be effective for larger public companies first. For all other entities, FASB would establish an effective date that would be staggered at least two years later. Early adoption would still be permitted for all entities.
FASB is proposing that the two-bucket approach be applied to the effective dates of the following Accounting Standards Updates (ASU) if they have not yet been adopted by entities:
- ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (Credit Losses)
- ASU 2016-02, Leases (Topic 842) (Leases)
Under the proposal, the effective dates of the aforementioned standards would be as follows for entities with calendar year ends:
- Fiscal years beginning after Dec. 15, 2022 for all nonprofit entities.
- Fiscal years beginning after Dec. 15, 2018 for nonprofit entities that have issued, or are conduit bond obligors for, securities that are traded, listed or quoted on an exchange or an over-the-counter market. These nonprofits are still in bucket one because the Leases standard as currently written is effective for these types of entities.
- For all other nonprofit entities, Leases will be effective for fiscal years beginning after Dec. 15, 2020.
The effective dates for entities with fiscal year ends would be the first year that begins after the dates noted above.
The FASB believes that the proposed change in establishing effective dates for standards will permit smaller stakeholders to have additional time to implement major standards.
For more information, contact Tammy Ricciardella, Director, at email@example.com.
For more information from Blackman & Sloop, please contact Deetra B. Watson.
By Laurie De Armond, CPA
What is the audit committee self-assessment?
This is a tool designed to assist the audit committee in evaluating how well the audit committee is executing their responsibilities. Please refer to BDO’s Effective Audit Committees for Nonprofit Organizations audit committee self-assessment section to ensure that governance responsibilities are adequately aligned with the charter and are being fulfilled appropriately.
Why should audit committees perform a self‑assessment?
As there is always room for improving quality and performance, we recommend that this document be used in conjunction with your organization’s Audit Committee Charter (or similar document) to ensure that governance responsibilities are adequately aligned with the charter and are being fulfilled appropriately. You may choose to customize this self-assessment further to reflect specific attributes of your organization and develop specific action steps and estimated completion dates to enhance your audit committee’s performance.
Who should use this self-assessment?
This Audit Committee Self-Assessment may be used by those charged with governance (in particular, audit committees) in performing an annual self-assessment. The audit committee chair would generally compile the results, which may be obtained from individual committee members on a confidential basis, but should also contemplate feedback from other key stakeholders such as the board, internal and external audit, and management.
When should the audit committee use this self‑assessment?
The audit committee should perform a self-assessment at least annually with areas identified for improvement to be assessed throughout the year.
How should the audit committee use this self-assessment?
This self-assessment tool is to be used as a guide and in correlation with the responsibilities laid out within the audit committee charter approved by the full board. Thus, organizations may feel the need to tailor the self-assessment to their specific needs. At the discretion of the audit committee chair and members, an additional free-form commentary box could be included to allow for specific recommendations or observations to be captured for further consideration.
Areas of assessment
- Composition and Character
- Continuing Education
- Setting Tone at the Top
- Oversight of Internal Control Over Financial Reporting
- Evaluation of and Communication with Management
- Evaluation of and Communication with Internal Audit, if applicable
- Evaluation of and Communication with External Auditors
- Financial Statements and Other Information
- Ethics and Code of Conduct
- Authority and Funding
- Overall Assessment
Please see the full Effective Audit Committees for Nonprofit Organizations guide here.
For more information from Blackman & Sloop, please contact Deetra B. Watson.
By Tammy Ricciardella, CPA
As calendar-year-end nonprofits have worked through the implementation of Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, we have seen quite a bit of diversity in the preparation of the liquidity and availability disclosure required by the ASU.
To improve the ability of financial statement users to assess a nonprofit entity’s available financial resources and the methods by which it manages liquidity and liquidity risk, the ASU requires specific disclosures including:
- Qualitative information that communicates how a nonprofit entity manages its liquid available resources to meet cash needs for general expenditures within one year of the statement of financial position (balance sheet) date
- Quantitative information that communicates the availability of a nonprofit’s financial assets to meet cash needs for general expenditures within one year of the statement of financial position date. Items that should be taken into consideration in this analysis are whether the availability of a financial asset is affected by its (1) nature, (2) external limits imposed by grantors, donors, laws and contracts with others, and (3) internal limits imposed by governing board decisions
The following information can be displayed either on the face of the statement of financial position, or in the notes to the financial statements, unless otherwise required to be on the face of the statement of financial position:
- Relevant information about the nature and amount of limitations on the use of cash and cash equivalents (such as cash held on deposit as a compensating balance)
- Contractual limitations on the use of particular assets. These include, for example, restricted cash or other assets set aside under debt agreements, assets set aside under collateral arrangements or assets set aside to satisfy reserve requirements that states may impose under charitable gift annuity arrangements
- Quantitative information and additional qualitative information in the notes, as necessary, about the availability of a nonprofit’s financial assets at the statement of financial position date
An entity can provide additional information about liquidity in any of the following ways:
- Sequencing assets according to their nearness of conversion to cash and sequencing liabilities according to the nearness of their maturity and resulting use of cash
- Classifying assets and liabilities as current and noncurrent
- Disclosing in the notes to financial statements any additional relevant information about the liquidity or maturity of assets or liabilities, including restrictions on the use of particular assets
Liquidity is defined in the Accounting Standards Codification (ASC) Master Glossary as “an asset’s or liability’s nearness to cash. Donor-imposed restrictions may influence the liquidity or cash flow patterns of certain assets. For example, a donor stipulation that donated cash be used to acquire land and buildings limits an entity’s ability to take effective actions to respond to unexpected opportunities or needs, such as emergency disaster relief. On the other hand, some donor-imposed restrictions have little or no influence on cash flow patterns or an entity’s financial flexibility. For example, a gift of cash with a donor stipulation that it be used for emergency-relief efforts has a negligible impact on an entity if emergency relief is one of its major programs.”
Based on this definition, an entity will have to carefully look at its assets and consider any donor-imposed restrictions that may exist when determining the presentation of liquidity.
A simple measure of liquidity per the ASU is the availability of resources to meet cash needs for general expenditures within one year of the date of the statement of financial position. The ASU does not define general expenditures but does provide some suggestions regarding limitations that would preclude financial assets from being available for general expenditures. Some of these items noted in the ASU include:
- Donor restrictions on the use of assets for particular programs or activities
- Donor restrictions on the time period in which assets are used
- Board designations that commit certain assets to a particular purpose
- Loan covenants that require certain reserves or collateralized assets to be kept on hand
- Compensating deposit balances required by financial institutions
To provide the liquidity and availability disclosure, entities should likely consider combining both a narrative description of their method for managing revenue with donor restrictions and a table that lists the dollar amounts expected to be released from various sources. Entities should develop a liquidity management program that allows them to determine what portions of donor restricted funds will be released from restriction and available for both direct program costs as well as shared expenses that support those programs.
In addition, entities should have a program in place to assess what resources are available. These should only include the portion of funding commitments that are expected to be received in the next year. To assist in this determination, as well as the overall liquidity management, entities should consider utilizing a rolling cash flow projection that covers at least a 12-month period.
Entities should also provide, in the qualitative component of the disclosure, information about other methods they use to manage liquidity and maintain financial flexibility. Examples of these could include:
- The use of lines of credit
- Established operating reserve policies
- Cash management process
It is important to develop this disclosure to present an accurate picture of the liquidity and availability of resources utilizing both financial information and supporting narrative to fully explain the financial health of the organization.
For more information from Blackman & Sloop, please contact Deetra B. Watson.
By Laurie De Armond, CPA, and Adam Cole, CPA
The world needs nonprofits to continue striving for meaningful impact on a wide range of social, economic and human rights issues, and it needs them to remain financially healthy. To do so, organizations need to balance a nonprofit heart with a business mindset.
Your mission is the heartbeat of your nonprofit. Just as the human heart sustains a body, your mission is the driving force of your organization’s work. But the heart can’t do it on its own. One clogged artery puts stress on another element of the system—and while it may go undetected for some time, eventually that stress starts to show. A healthy heart and a strong organization rely on fully functioning support systems.
Like the four chambers of the heart, following are four critical elements for sustainability that can take your mission from idea to impact:
1. People: From the Governing Board to the C-suite team to employees and volunteers, supporting the people behind the nonprofit is vital. While the typical nonprofit professional is highly motivated and engaged, it’s critical for the organization’s leadership team to ensure the skills of its people align with the present and future needs of the organization. If you don’t have the right people or maintain proper engagement and focus on the organization’s mission—or don’t treat your people well—it could ultimately harm your ability to fulfill your mission.
- Retention: Nonprofits who take a business mindset to their recruitment and retention policies will work with their best assets—highly impactful and rewarding work—to promote internally and externally the holistic value of a nonprofit career.
- Succession Planning: Successful organizations have strong leaders at the helm, but they also plan ahead for the inevitable day when a change in leadership must occur. Unfortunately, leadership succession planning can be neglected in the nonprofit world, where devoted leaders often stay for long tenures and can be hesitant to pass the reins to a new leader.
- CFO/Financial Leaders: While the CEO and executive director are critical leaders who set the tone and mission of the organization, nonprofits cannot overlook the importance of their financial leadership.
2. Operational & Financial Management: Nonprofits must look at their operations with a more critical business mindset to find the appropriate balance between programmatic spending and the investments (both capital and programmatic) required for continued growth and stability. Prioritizing programmatic spending is a given, but nonprofits that place equal focus on long-term scalability and sustainability will maximize their impact.
- Tackling the Overhead Myth: Charity rating sites have put additional pressure on organizations to minimize their overhead spending. The unfortunate consequence is that many donors now assume, incorrectly, that low overhead costs are a good measure of a nonprofit’s performance—what is commonly referred to as the “overhead myth.” Low overhead may serve as a nice, short-term talking point for donors, but it’s an unsustainable strategy.
- Avoid the Starvation Cycle: In reality, high ratios of programmatic spending could mean the organization is underfunding critical areas necessary for long-term growth—a phenomenon known as the “starvation cycle,” which creates an unhealthy environment for the organization. Failing to invest in infrastructure, such as new technology, security, employee training and fundraising capabilities, can be detrimental to organizational growth.
3. Transparency & Communication: Prospective donors are increasingly thinking like discerning shoppers—researching organizations as they would a major purchase. They are seeking convenience, and fewer clicks to donate. Meeting these demands requires new skill sets, enhanced training and education, and creates opportunities for automation to improve and streamline processes.
- Digitizing Donor Relations: It’s not enough to create an annual report and share it online, or to send regular email and mail communications on impact and outcomes. Donors expect near real-time reporting, with frequent updates. A large number of nonprofits already use social media to communicate with external stakeholders and that is only likely to increase.
- Communicating Clearly & Often: It’s no secret that budgets have been constrained by economic and donor and funding shifts. To mitigate surprises down the line, start the budgeting process early and make projections to give a realistic picture of how the organization’s financial situation could shake out. By planning ahead and communicating early and often, stakeholders will be better prepared to advise and respond.
4. Governance & Compliance: Lack of compliance with a regulation or insufficient board oversight on a key risk like cybersecurity can erase great mission-driven outcomes, sever trust with stakeholders and put the entire organization in jeopardy. The professionals in and outside of a nonprofit organization who proactively plan for risk, digest and implement new regulations, and prepare for compliance changes are unsung heroes who do behind-the-scenes, labor-intensive work to ensure the broader organization can focus on its mission without the worry of hitting costly roadblocks.
- Staying Cyber Secure: Nonprofits can’t maximize their impact if they are constantly responding to data privacy breaches or cyberattacks. A hack can take down a great organization by erasing trust and diverting resources from the mission. Nonprofits should think of these efforts as their secret weapon, not a financial anchor weighing them down. Even with limited resources, nonprofits must take a proactive approach to regulatory compliance and risk mitigation because the alternative could mean betraying donor and public trust and resulting in financial ruin.
- Managing Your Data Plan: Consider a holistic data privacy strategy as part of your data governance program. A Privacy Operational Life Cycle that helps keep employees apprised of new privacy requirements, embraces recordkeeping and sound data protection practices, and offers enhanced data privacy for stakeholders is crucial with the General Data Protection Regulation in effect and other state and national laws in motion.
- Tax-Exempt, not Tax-Blind: Nonprofits also know that tax-exempt doesn’t mean they can ignore taxes. Tax reform provided another significant shift in rules for nonprofits to address. Major changes to unrelated business income, executive compensation, endowment taxes for higher education institutions and changes to charitable giving deductions, among other items, impacted nonprofits and created significant compliance work for internal and external teams. Assessing guidance and understanding total tax liability is critical to strategic tax planning and maintaining operations. With changes to the tax code still a possibility in the future (including the release of additional guidance), this may be a moving target of sorts for nonprofit leaders, but it’s one that can’t be ignored.
When each of these elements, like the four chambers of the heart, are considered and given priority in setting and executing strategy, nonprofits are poised for greater success and long-term impact.
For more on how to balance a nonprofit heart with a business mindset for optimal, sustainable outcomes, read the first insight in our Nonprofit Heart, Business Mindset series: The Business of Impact.
By Amy Guerra, CPA
Historically there has been diversity in practice among nonprofits with regard to presentation of restricted cash and cash equivalents in the statement of cash flows.
To address this diversity, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016‑18, Statement of Cash Flows (Topic 230): Restricted Cash. As a result of this ASU, a nonprofit will be required to present the total change in cash, cash equivalents, restricted cash and restricted cash equivalents for the period covered by the statement of cash flows. Thus, cash flows that directly affect restricted cash will be presented in the body of the statement of cash flows regardless of how they are classified in the statement of financial position and the timing of the establishment and release of the restrictions.
The ASU does not define restricted cash and restricted cash equivalents, so how a nonprofit defines these will not be impacted. What will be impacted is how these amounts are presented in the statement of cash flows. Oftentimes, a nonprofit will have these items presented in separate lines throughout its statement of financial position and may not even have them labeled as restricted cash or restricted cash equivalents.
Under the ASU, a nonprofit will show the net cash provided by or used in the operating, investing and financing activities of the nonprofit and the total increase or decrease as a result of these activities on the total of cash, cash equivalents and amounts considered restricted cash and restricted cash equivalents.
Internal transfers between cash and cash equivalents and amounts considered restricted cash and restricted cash equivalents are not deemed to be operating, investing or financing activities and thus the details of any transfers would not be presented in the statement of cash flows.
If a nonprofit identifies cash, cash equivalents, restricted cash and restricted cash equivalents in separate lines in the statement of financial position, these amounts should reconcile to the statement of cash flows. The nonprofit needs to present a reconciliation of the various cash and cash equivalents line items presented in the statement of financial position that shows the total that is presented in the statement of cash flows for each year presented. This reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements. The disclosure may be either in narrative or tabular format. The requirement to provide this reconciliation will allow users of the financial statements to identify where the restricted cash and restricted cash equivalents are included in the statement of financial position and how much is included in these line items.
In addition, a nonprofit must disclose information about the nature of the restrictions on its cash and cash equivalents.
For those nonprofits considered public business entities because they have issued or are a conduit bond obligor for securities that are traded, listed or quoted on an exchange or an over-the-counter market, the ASU is effective for fiscal years beginning after Dec. 15, 2017, and interim periods within those fiscal years. For all other entities, the ASU is effective for financial statements issued for fiscal years beginning after Dec. 15, 2018, and interim periods within fiscal years beginning after Dec. 15, 2019. The adoption of the ASU should be done on a retrospective basis. A nonprofit may opt to adopt the provisions of the ASU early.
For more information from Blackman & Sloop, please contact Deetra Watson.
Amy Guerra is an Assurance Senior Manager in BDO’s Rosemont office and is the Central Region Audit Quality Director for the Nonprofit practice. With more than 15 years in public accounting, she has extensive nonprofit experience in performing financial statement audits of human service organizations, trade associations, private and operating foundations, and other 501(c)(3) entities. She has extensive experience with Single Audits. Amy is experienced in addressing issues unique to nonprofits, ranging from tax-exempt status to endowments, pledge campaigns, and reserve levels. She understands the reporting and compliance requirements of Form 990 and its related complexities having prepared the Form 990 for several years. She has assisted clients with resolving issues related to board governance and fiduciary responsibility as well as the reconciliation of Form 990 to the audited financial statements. Amy approaches each engagement collaboratively with the client’s accounting department and BDO’s assurance and tax teams. Her responsibilities at BDO include planning, supervising and coordinating audit engagements as well as presenting audit reports and management letters to boards of directors and Finance and Audit Committees. Amy is a CPA in Illinois and a member of the AICPA. She is also a member of Association Forum of Chicagoland. Amy has a B.S. in Accounting from the University of Illinois at Urbana-Champaign.
By Laurie De Armond, CPA and Adam Cole, CPA
The nonprofit industry is anything but static. Many outside factors impact their daily operations. Following is a list of what we see as the top 10 trends that are currently impacting nonprofit organizations.
Protecting Nonprofit Nonpartisanship
The current political environment has created a lot of uncertainty. This impacts everything from legislation, such as tax reform, federal funding and government shutdown that in turn impact nonprofits. This is a struggle that nonprofits are trying to navigate. Nonprofits are focused on providing their services and focusing on their missions and are hopeful that the current political environment does not impact their missions.
Budget Cuts – Federal, State and Local Governments
Over the course of several years many nonprofit organizations have been faced with budget cuts that impact their programs at all levels of government. These budget cuts have put many organizations in financial hardship, particularly in the social services subsegment. The uncertainty of future budget cuts makes it difficult to prepare budgets and cash flow projections for the future. Many organizations are faced with more demand for their services and increased cash requirements for infrastructure while facing uncertainty in their funding sources from government entities. As a result, many are looking to expand their revenue streams to rely less on government funding.
Mergers, Partnerships and Joint Ventures
Many organizations are looking at the potential for a merger, or establishing a partnership or joint venture to accomplish their missions. Many organizations have historically tried to conduct all of the programs on their own. This has caused them to expand their operations into areas that are not their core strengths. Demographic and technology shifts have made it more expensive and more difficult to be successful. As a result many are looking to form partnerships or joint ventures to continue this work successfully. Other organizations are finding that mergers with either another nonprofit or a for-profit may be the best way to continue to serve their constituents.
Technology – Augmented Reality, Automation, Crowdfunding
There is a large push to increase technology used by organizations. The use of these technologies can save the organization money and resources in the long run but do require investment up front. Organizations are trying to implement these technologies but are faced with balancing this with potential decreases in funding.
This is a continued focus for all organizations – both large and small. The increasing complexity in the world of cybersecurity and the increased sophistication of cybersecurity breaches challenges many entities. The need to protect data, especially for health and human services organizations who maintain large amounts of personal data is critical.
It’s All About Engagement
How nonprofits engage their constituents and donors is more important than ever. Changes in technology and the way in which individuals absorb information are requiring nonprofits to be creative in the way that they use social media. Many organizations struggle to develop a constant stream of content to engage constituents and donors. With the proliferation of crowdfunding, engaging constituents on a regular basis and creating a sense of community are critical.
Changes in Charitable Giving Paradigm
With so many worthy nonprofits and the proliferation of crowdfunding platforms there are a lot of demands for donor dollars. As the charitable giving paradigm continues to evolve, nonprofits must monitor how their core donor base is changing and how they might be affected by these shifts. The good news for now is that the change in the tax law did not seem to have a large impact in 2018 as some had predicted, but some believe the major impact may occur in the coming year once people see the impact of the tax law changes on their tax situation and the charitable contributions they made.
Employee Engagement – As Retention Tool
Nonprofits find that employees are very interested in making an impact in the world. They have joined the organization to specifically make an impact. Employees who don’t see this coming to fruition are likely to leave. Organizations who regularly link employee performance to mission impact may well be more successful at employee retention.
Board Members as Advocates/Developers
An age long debate – should your board members be fundraisers? The Board should be comprised of various members who bring different skill sets to the Board. If board members are only selected because they can provide funds or act as fundraisers this can cause issues. However, it is important for many organizations that Board members be contributors and assist with fundraising efforts.
Not-for-profit Sustainability in the Social Services Space
Demand for services provided by social service organizations continues to increase. In addition, the evolution and sophistication of services is greater such as the ability to see a health care provider electronically. These evolutions in how services are provided are demanding more resources, making organizations look closely at how they can fund these changes to keep pace with these changes.
By Donna Bernardi Paul, SPHR, SHRM-SCP
Are differences in work and communication style in the workplace among the different generations the cause of leadership/supervisory challenges or is it something else?
There have been a plethora of articles, seminars, webinars and discussions around millennials in the workplace and the challenges of managing and working with them due to their different work style.
When we talk about the importance of differences in the workplace, sometimes we forget about one of the most prominent dimensions—age. There are three main generations in our workforce currently, and we are on the brink of adding a fourth. Understanding how to relate to each is critical to successfully keeping them motivated and engaged in their work.
The Baby Boomers: Born between the end of World War II and the early 1960s. Also known as the “Me Generation.” They grew up with television. Mothers were typically home waiting for their children to come home from school, and children were allowed outside of their homes unsupervised. Their relationships with their parents, teachers and others in authority were somewhat contentious.
Boomers came into the workforce in droves. They were the first “workaholics.” Their frame of reference at work was to spend as much time as possible working, sacrificing time with families, so that good things would come to them. Motivating them at work is typically done via the “carrot and stick” approach.
Generation “X”: Born between the early 1960s and the early 1980s. Also known as the “Latchkey Kids” or the “Sandwich Generation” because they are sandwiched between the huge baby boomer and millennial groups. They grew up in an era when more mothers entered the workforce and children came home from school to an empty home. They fended for themselves. They were instructed not to answer the door to anyone they didn’t know. As a result, they became independent and skeptical. They entered the workforce with the frame of reference they needed to have multiple careers so that they didn’t put all their eggs in one basket. They didn’t want to experience the disappointments of prior generations. They tend to be entrepreneurial and individualistic. Managing them at work became more complicated due to their supercilious attitude and resentment towards the boomers and millennials.
Many feel that they do not have career paths because the boomers aren’t leaving and the millennials are leapfrogging over them.
Generation “Y” (millennials): Born between the early 1980s and the early 2000s. Also known as “Echo Boomers.” They represent the largest generation in the workforce and its members generally have high levels of self-esteem. They are highly educated and technologically savvy. Their preferred communication style is text messaging. Their relationships with their parents tend to be that of friends or peers because their parents typically have moved away from the authoritarian style in which they were raised. As a result, they have grown up in an era where their lives are programmed and organized from birth, which doesn’t prepare them to cope with disappointment or help them to make decisions on their own. For example, their nurseries were monitored via the baby monitor. Their parents organized their social activities via “play dates” vs. allowing them to go outside unsupervised. Moreover, parents of millennials have instilled within their children entitlement attitudes vis-à-vis “everyone is right” and “everyone gets a trophy.” Many parents become advocates for their children with schools, their friends and even their workplaces. As a result, this generation has expectations that may not be realistic. They’ve entered the workplace with the expectation that they can work whenever and however works best for them. Managers from prior generations tend to have trouble supervising this group, even though they were probably the same parents who raised them, because this generation’s virtual style of working is very different from what older generations are used to.
Generation “Z”: Born between early 2000s to the present. This generation is extremely technologically savvy. Many had iPads as toddlers. They are now in high school and college.
Perhaps the upshot to all of this is that it doesn’t matter to which generation a person belongs since all workers tend to want the same things:
- Good bosses
- Career paths
If you think back on all the jobs you’ve ever had and all the bosses you’ve ever had, which boss would you choose as your favorite and why? Now, give yourself a rating against your favorite boss in order to determine where you would like to develop your supervisory skills. After all, how do people become bosses? Do they go to school to learn how to be a great boss? Not usually. Typically, they do something well from a technical perspective and then they are promoted out of what they do well and placed into a job (managing others) that they may not be familiar with, and for which they get no training. With proper training of its managers and supervisors, organizations have a better chance to have skilled employees who care and are productive regardless of which generation they fall in because people join companies—they quit bosses.
By Marc R. Berger, CPA, JD, LLM
The IRS Tax Exempt and Government Entities (TE/GE) division released its Fiscal Year 2019 Program Letter on Oct. 3, 2018. The Program Letter outlines its projects and priorities for fiscal year 2019 for tax-exempt organizations, employee plans, Indian tribal governments, and tax-exempt bonds. This article focuses on those projects and priorities relating to tax‑exempt organizations.
The TE/GE division will continue to refine its compliance strategy approach, which is designed to ensure that its examination programs are focused on the highest priority compliance areas to promote efficient tax administration. In this regard, TE/GE collaborates with its IRS business partners and various other groups and agencies, including the Advisory Committee on Tax Exempt and Government Entities, the U.S. Department of Labor, the Municipal Securities Rulemaking Board, and the Securities and Exchange Commission. TE/GE will continue to use advance data and data analytics to drive decisions about identifying and addressing high-risk areas of noncompliance.
The Tax Cuts and Jobs Act (TCJA) will remain a priority in fiscal year 2019. TE/GE has completed numerous form revisions, as well as guidance and training, and it anticipates more developments in these areas going forward. It plans on initiating additional education efforts in FY 2019 along with TCJA-related compliance strategies.
For the first time this decade, TE/GE is onboarding a significant number of new hires, and is cross-training employees to allow flexibility in directing resources to shifting needs. The increase in employees signals a potential increase in examination and enforcement action.
The bulk of the Program Letter focuses on six areas of its compliance program in an effort to become more effective and efficient. These six areas are:
Compliance strategies are issues approved by TE/GE’s Compliance Governance Board (Board) to identify, prioritize and allocate resources within the TE/GE taxpayer base. Using a web-based portal, TE/GE employees submit suggestions for consideration by the Board. Once approved, these issues are considered priority work. Strategies approved to date include:
- Tax-exempt social clubs under Internal Revenue Code (IRC) Section 501(c)(7) – The focus will be on investment income, non-member income, and non-filers of Form 990-T, Exempt Organization Business Income Tax Return.
- Non-Exempt Charitable Trusts under IRC Section
4947(a)(1) – The focus will be on organizations under-reporting income and over-reporting charitable contributions.
- Tax-exempt organizations that were previously for-profit – The focus will be on organizations formerly operated as for-profit entities prior to their conversion to IRC Section 501(c)(3) organizations.
- Self-dealing by private foundations – The focus will be on organizations with loans to disqualified persons.
- Early retirement incentive plans – Determining whether federal, state or local governmental entities that provide cash (and other) options to employees as an incentive for early retirement have applied proper tax treatment to these benefits.
- Forms W-2/1099 matches – Comparing payments reported on Form 1099-Misc., Miscellaneous Income, with wages reported on Form W-2.
- Notice CP 2100 (backup withholding) – Determining whether mismatched and/or missing taxpayer identification numbers on Form 1099 indicate a failure to comply with backup withholding requirements.
- Worker classification – Determining whether misclassified workers result in incorrectly treating employees as independent contractors.
Data-driven approaches use data, models and queries to select work based on quantitative criteria, which allows TE/GE to allocate resources that focus on issues that have the greatest impact. TE/GE integrates data into its processes and procedures, using return data and historical information to identify the highest risk areas of noncompliance.
With respect to models, this includes continuing to improve compliance models based on Forms 990, 990-EZ, and 990-PF, as well as testing the newly developed model for Form 5227 (Split Interest Trust Information return). In addition, identifying returns containing the highest risk of employment tax noncompliance will be a priority.
Referrals, Claims and Other Casework
Referrals allege noncompliance by a TE/GE entity and are received from internal and external sources. The public can submit a specialized exempt organization referral on Form 13909 (Tax-Exempt Organization Complaint). With respect to referrals, TE/GE will continue to pursue referrals received from all sources alleging noncompliance.
Claims are requests for refunds or credits of overpayments of amounts already assessed and paid, and can include tax, penalties and interest. TE/GE will continue to address claims requests, including high-dollar complex employment tax claims filed by federal, state and local governments.
Other casework includes examining entities that filed and received exemption using Form 1023-EZ, focusing on (1) filers who are ineligible to file Form 1023-EZ, (2) filers who donate to (or pay expenses for) individuals, and (3) filers operating bingo and other gaming activities.
Compliance units are employed to address potential noncompliance, primarily using correspondence contacts known as “compliance checks” and “soft letters”.
A compliance check is correspondence with organizations to inquire about an item on a filed return; to determine if specific reporting requirements have been met; or to determine whether an organization’s activities are consistent with its stated tax-exempt purpose. A compliance check is not an examination.
A soft letter is correspondence with organizations that provides notification of changes in tax-exempt law or compliance issues. A response to these letters is generally not expected.
TE/GE will continue to inform taxpayers via compliance checks and soft letters, in particular in the area of adhering to recordkeeping and information reporting requirements, including:
- Combined Annual Wage Reporting – Focusing on tax-exempt employers that had discrepancies between Form W-2 and either Form 941 or Form 944.
- Financial Assistance Policy – Whether tax-exempt hospitals are complying with IRC Section 501(r)(4).
- Form 990-T Non-filers – Looking for IRC Section 501(c)(7) organizations that reported investment income on Form 990 but did not file Form 990-T.
- Supporting Organizations – Entities that state that they are supporting organizations but have filed Form 990-N, which is not allowed.
TE/GE expects a continued increase in determination applications and will concentrate on identifying new strategies for reducing a filing burden and case processing time. The exempt organizations group expects to hire 40 new revenue agents to process determination applications to help offset application increases and workforce attrition.
Voluntary Compliance and Other Technical Programs
This area is focused primarily in the employee plans group of TE/GE, and enables a plan sponsor, at any time before audit, to pay a fee and receive IRS approval for correction of plan failures.
Management of exempt organizations should evaluate the potential implications of the areas identified in the Program Letter on their organizations and consult with their tax advisors.
By Katherine Gauntt
Sales tax is imposed upon retail sales of tangible personal property and taxable services in 45 states and the District of Columbia. Each state determines the circumstances under which a sales tax is imposed on the purchaser.
Purchases by nonprofit organizations are exempt in most of the states, if the tangible personal property or taxable services are used or consumed exclusively for the purposes for which the organization was established. The states usually require each legal entity to register as a nonprofit entity with the state to receive state tax-exempt status. Upon state authorization, the entity can provide a state-approved exemption certificate to its vendors in order to purchase goods and services without paying sales tax.
While nonprofit organizations can make purchases free of sales tax, their sales of goods and taxable services are usually taxable. One could argue that these sales ultimately benefit the organizations’ nonprofit activities but most states do not extend the nonprofit exemption. Many organizations selling promotional goods on their websites are registered in their home state but rarely are registered in multiple states to collect sales tax. Usually they have no “physical presence” in states beyond their home state and did not have to collect the sales tax. However, everything changed on June 21, 2018 when the U.S. Supreme Court held in South Dakota v. Wayfair that states can require a retailer to collect and remit sales tax even if the retailer lacks an in-state physical presence.
History of the Wayfair Case
Effective May 1, 2016, South Dakota passed a law requiring remote sellers to remit sales tax on all taxable sales if the seller’s gross revenue from the sale of products or taxable services delivered into South Dakota exceeded $100,000 or 200 or more separate transactions. Wayfair, Inc., Overstock.com, Inc. and Newegg Inc. refused to comply on the basis that they had no physical presence in South Dakota and, therefore, were not obligated to collect the sales tax. South Dakota filed a declaratory judgment action in state court. The case was fast-tracked through the South Dakota lower courts. Ultimately, the South Dakota Supreme Court, compelled by the 1992 U.S. Supreme Court decision in Quill, found in favor of the Wayfair, Inc. et al. The U.S. Supreme Court in Quill affirmed that “substantial nexus” under the U.S. Constitution’s Commerce Clause required a business to have a physical presence within a state before the state could impose tax or a tax collection obligation.
Nonetheless, the ultimate goal was a U.S. Supreme Court challenge to overturn Quill. On Jan. 12, 2018, the U.S. Supreme Court granted South Dakota’s petition for a Writ of Certiorari with respect to the Wayfair case. Oral argument was heard on April 17, 2018. And on June 21, 2018 the U.S. Supreme Court overruled Quill and the physical presence standard. The Court then ruled that South Dakota’s sales tax economic nexus statute was constitutional and “substantial nexus” under the Commerce Clause. In anticipation of the ruling, many states already had laws on the books which were designed to go into effect if the ruling was favorable. As of Oct. 15, 2018, 35 states have passed some form of economic nexus standard for sales tax purposes.
Wayfair Impact and Action Items for Nonprofits
All industries are likely to see an impact from the Wayfair decision, but industries selling goods and taxable services remotely over the internet at retail have the greatest exposure. Nonprofits carry the same burdens as for-profit e-commerce sellers for taxable goods and services, if their sales reach the economic thresholds established by the states. (For the latest information on thresholds by state go to: https://www.bdo.com/wayfair.) When it comes to Wayfair, it’s also important to keep in mind that all states aren’t equal. The following are areas that nonprofit organizations should review to mitigate their risk of overpaying or under-collecting the sales tax.
Most states require nonprofits to register with the state departments of revenue if they are eligible for a sales tax exemption on purchases. In addition, once the economic thresholds are reached, the nonprofit must register as a vendor with the state since its sales will likely be treated the same as for-profit vendors. Again, each state is different regarding its nonprofit tax registration requirements.
As a result of Wayfair, more sellers will be required to collect sales tax. Many of these sellers either “assume” everything they sell to nonprofits is exempt from tax or default all sales to taxable without consideration for nonprofit status. Either way, nonprofits must be proactive in informing their vendors when to charge them sales tax or they could end up overpaying sales tax on purchases or underpaying and creating a use tax assessment if they are audited. Each vendor’s sales should be reviewed to ensure that, if no sales tax is charged, the sale qualifies for the nonprofit exemption (i.e., the purchase benefits the organization’s nonprofit activities). It is important to establish an exemption certificate policy to ensure that only those vendors selling qualified goods and services are given an exemption certificate. Providing an exemption certificate to a vendor shifts the liability for the tax to the nonprofit even if it is provided in error. Areas where sales to nonprofits are generally taxable include sales of food, lodging, certain types of software and supplies such as uniforms, furniture and fixtures or any other type of sale unrelated to the purpose for which nonprofit status was granted by the state.
Nonprofits should examine their sales volumes in each state and compare it to the economic nexus thresholds established by each state. In general, measurement should be done at a legal entity level if there is more than one legal entity doing business in the state (although some states may combine sales of affiliated legal entities.) For tangible products, the state where sales occur is determined by the delivery address. However certain nonprofits, especially in healthcare, sell tangible goods, digital products (e.g., e-books) and services. In addition, some are part of an organization of affiliated companies consisting of nonprofit and for-profit entities. Nonprofits should consider the following when developing an action plan for determining nexus and potentially charging sales tax:
- Where are the tangible goods, digital products and services sold?
- Do the sales reach the threshold for economic nexus?
- If yes, what are the necessary actions needed for complying?
- Registration – Nonprofits should register as a vendor in each tax jurisdiction.
- Taxability of Products Sold – A determination of the tax status of each product sold should be made.
- Exemption Certificate Procedures – If products are sold to other nonprofits, a process to collect exemption certificates should be established.
- Billing Sales Tax – A process must be established to charge the correct sales tax on an invoice. To do so, the nonprofit must utilize the most current sales tax rates to charge its customers.
- Reporting – Depending on volumes, sales tax reporting can be in-house or outsourced through third parties. Most states have portals where tax returns can be filed by keying in the data manually if the nonprofit has established economic nexus in only a few states.
- In addition, nonprofits should consider their internal operational capabilities:
- Accounting – Do you have Sales Tax Liability Accounts set up that can undergo reconciliation and audits?
- Technology – Do you have the functionality in your billing system to charge the correct tax on taxable sales?
- Resources – Do you have enough resources in-house to administer exemption certificates and tax reporting?
- Document Retention – Most states require retention of all invoices, work papers, tax returns and other supporting documentation to support the taxes reported.
Wayfair has impacted every organization in the country in one form or another. Not all nonprofits sell goods and services, but they may see an uptick in the costs of the things they buy as a result. Those that do sell, must perform their own due diligence and incur the costs of compliance just like any other company dealing with the complexities of 46 different state tax jurisdictions with 46 different sets of rules. The rules are still evolving but one thing is certain: Unless Congress acts to change the economic nexus standards established by the Wayfair case, every entity, including nonprofit entities, that buys or sells will incur extra costs in its attempt to comply with current law.
 South Dakota v. Wayfair, Inc. 585 U.S.__(2018)
 Quill Corp. v. North Dakota, 504 U.S. 298 (1992)
 In addition to Quill, National Bellas Hess v. Department of Revenue, 386 U.S. 753, 87 S.Ct. 1389 (1967), was also overruled.
By Laurie De Armond, CPA, and Adam Cole, CPA
Nonprofit organizations are uniquely shaped by their mission, history, size, program goals and community.
But leaders of these organizations—whether a CFO at a global health services charity, a CIO of an education endowment or the executive director at a museum—share a common goal of advancing their organization’s mission. To drive forward progress, it’s essential that leaders understand where their organization sits in relation to its peers on objective measures of performance.
The BDO Institute for Nonprofit Excellence’s 2018 benchmarking survey, Nonprofit Standards, surveyed leaders at midrange organizations (those with less than $25 million in annual revenue), upper-midrange organizations ($25-$75 million in annual revenue), and large nonprofits (above $75 million in revenue) to reveal insights nonprofits can leverage to strengthen their organization. Across the spectrum, the report finds that upper-midrange organizations face more significant challenges than their smaller and larger peers.
Funding Challenges Amid Rising Costs
While 56 percent of upper-midrange nonprofits saw their revenues grow over the past year, this was dwarfed by the 69 percent of large nonprofits and 70 percent of midrange nonprofits that also saw some revenue growth. At the same time, nearly half (49 percent) say declining revenue and funding is at least a moderate challenge, compared to 45 percent of midrange and large organizations. Perhaps as a result of this challenge, 49 percent of organizations at this scale maintain six months or less of operating reserves, and one third cite maintaining adequate liquidity as a moderate or significant challenge—indicating a potential gap in the fiscal safety net for these organizations.
Some of the funding challenges upper-midrange nonprofits face may be attributable to the types of funding sources these organizations rely upon, including individual contributions (15 percent), government grants (12.6 percent), fundraising/special events (11.4 percent), and corporate contributions (7.8 percent)—all of which can be either cyclical in nature or impacted by regulatory changes, such as tax reform.
Nevertheless, amid these challenges in securing funding, upper-midrange nonprofits face the same challenges as all other organization sizes in addressing rising overhead costs: 58 percent of upper-midrange nonprofits and nonprofits overall say rising costs is at least a moderate challenge.
Program Growth Emphasizes Importance of Communicating Impact
Despite challenges in securing funding, upper-midrange nonprofits are working to expand their program offerings and deliver on their core mission. Organizations in the upper-midrange devote 80 percent of their total expenditures to program-related activities—compared to 78 percent for large nonprofits and 68 percent for midrange nonprofits. Forty-two percent of upper-midrange nonprofits also say the inability to meet demand for their services is a high or moderate challenge, and 58 percent are responding by planning to introduce new programs in the next year without eliminating others.
This program expansion makes demonstrating impact to stakeholders more important than ever. When it comes to making an impact, nearly all nonprofits surveyed (93 percent) communicate their impact outside of the organization; meanwhile, 72 percent of upper-midrange nonprofits say some portion of their donors have demanded more information about outcomes and impact than before.
But as nonprofit leaders know all too well, reporting impact to donors and other stakeholders is no easy task. Organizations in the upper-midrange are more likely than midrange or large nonprofits to say they face moderate or significant challenges in reporting impact, including having no consistent framework for measuring and reporting (66 percent vs. 56 and 53 percent, respectively), lacking clear program objectives and/or key performance indicators (55 percent vs. 43 and 41 percent, respectively), and inadequate financial resources devoted to reporting (55 percent vs. 31 and 33 percent, respectively).
Recruitment and Retention Challenge Upper-Midrange Organizations
Nonprofits derive their strength from dedicated and driven employees, yet recruitment and retention remain a high or moderate challenge for 6 in 10 nonprofit leaders. Upper-midrange nonprofits are the most concerned, with 70 percent citing recruitment and retention as a high or moderate challenge, compared to 61 percent of large organizations and only 35 percent of midrange organizations.
Key factors in keeping employees engaged and growing employee satisfaction levels for all organizations include having competitive compensation levels (59 percent), up-to-date technology (58 percent), internal communications (54 percent), and management-employee relations (51 percent). These challenges were all most pronounced among upper-midsized organizations. While 7 in 10 midrange nonprofits were able to provide at least a 3 percent increase in employee compensation levels within the last year, only 44 percent of upper-midrange and large nonprofits were able to do the same.
Overcoming Key Challenges: Planning Ahead
Do the data show that upper-midrange nonprofits are doomed? Not at all. Instead, this year’s Nonprofit Standards highlights the success of many nonprofits that were able to overcome these classic scaling challenges to grow successfully and expand their programs.
While not comprehensive, below are some best practices for organizations looking to overcome these challenges.
Fundraising Effectiveness: Nonprofits looking to increase their fundraising effectiveness should:
- Match their donor behavior. Nonprofits should consider what influences their donors to donate in general—and to their organization specifically—and tailor their messaging accordingly.
- Reduce their giving barriers. It’s critical that organizations regularly update and modernize their donation channels (including online and mobile giving platforms) to keep pace with changing consumer behavior.
- Leverage data analytics. Nonprofits should dig into their own data to understand the demographics of their core contributors and to identify new prospects. (See the article on page 10 entitled, How Predictive Analytics is Transforming NPO Fundraising.)
Donor Communications & Impact Reporting: To ensure smoother donor communications and reporting, nonprofits should:
- Start with the end in mind. Organizations should identify the story they want to tell their stakeholders and paint a vision of what the world could look like if their mission were achieved.
- Make reporting an ongoing process. Nonprofits should gather and report data on a quarterly or monthly basis to keep stakeholders in the loop and make year-end reports less daunting.
- Remain transparent. Nonprofit reports offer an unparalleled opportunity to contextualize an organization’s metrics and finances.
- Share their report widely. Organizations should distribute their report via multiple channels so both existing and prospective donors have a chance to see it.
Staffing and Recruiting: To maintain and attract top talent, nonprofits should:
- Stay competitive in their local market. Nonprofits should ensure their policies make their organization an attractive place for potential employees.
- Capitalize on flexible work options. Remote work arrangements can be both beneficial to employees and cost-effective for organizations.
- Remain proactive about succession planning. With 4 million baby boomers retiring each year, the need for a succession plan is a “when” rather than an “if” scenario.
The more upper-midrange nonprofits—and those of all sizes—can learn from benchmarking against their peers, the better prepared they will be to advance their mission and support continued growth. Gaining intelligence is vital to staying afloat.
Adapted from article originally published in NC State University’s Philanthropy Journal News.
By Michael Conover
I have previously discussed the inevitable transition of numerous baby boomers holding leadership posts in nonprofit organizations. The topic has been well-covered in a variety of publications for nearly a decade.
However, I believe the seismic shift that some have predicted has failed to materialize on a scale that was predicted. I attribute this to a variety of factors, including: delayed retirements out of financial need or resistance to change; belief that age 75 is the new 65; or just procrastination.
The slowdown in the rate of change will not soften its impact. It may intensify it. The delay on the part of these baby boomer executives and the boards to whom they report could increase the likelihood of an unexpected and disruptive leadership crisis. The problems can range from a noticeable decline in performance to an abrupt departure caused by sickness or death. Leadership changes under the best of circumstances are not 100 percent successful; thus, in crisis mode, the odds of success are much slimmer.
The other obstacle I allude to in my title is executive retirement arrangements (or lack of same). As organizations finally confront the departure of a long-tenured and critically important executive, the details of the retirement arrangements come to the forefront. This is the point at which many organizations and executives discover the price that will be paid for failing to address this important issue well in advance. Proper advance planning can not only minimize financial uncertainties for the executive and the organization that may interfere with retirement planning, but can prevent other potential and very expensive obstacles as well.
Many compensation committees have failed to proactively raise the subject of retirement plans and acknowledge the impact that they will have on an orderly retirement / leadership transition. There are a variety of reasons including: financial costs; reluctance to broach the subject of leadership change; mistaken assumptions that arrangements made many years ago will address the needs; embarrassment that arrangements are inadequate or have not been made; etc. Committee members must realize that time is not on their side for addressing retirement-related arrangements. Delaying can create many negative impacts for both the executive and the organization.
I would like to describe a few different scenarios that illustrate the types of situations we have discovered in “11th hour” reviews of retirement arrangements:
Plan Document Failures: Plan documents (e.g., employment contracts, deferred compensation arrangements, life insurance plans, etc.) developed many years ago and / or those that have been drafted without the benefit of needed expertise to ensure compliance with current requirements pose potential problems to the unwary.
The inclusion of what appear to be ordinary terms in the arrangements, or the failure to include critical details, can prove disastrous in terms of potential tax liability and penalties for the executive as well as the employer. Language included to ensure that retirement resources are secure may produce inadvertent vesting of a benefit and tax liability long before it is actually available. Similarly, incorrectly structuring payments can result in an unforeseen tax liability and punitive excise tax penalties.
If these issues are identified proactively or within a time period that corrective actions can be taken, the problems can be minimized. There is, however, a point at which it is simply too late.
Plan Administration Failures: In some instances, well-drafted plan documents are not adhered to from an administrative standpoint. Contributions, excess contributions, payment amounts and / or payment terms are made that fail to follow plan requirements. The failure to ensure compliance may result in adverse tax consequences to the executive and the organization.
Failure to properly recognize and report details of retirement arrangements are also common. The executive’s W-2 form, personal tax return and the organization’s Form 990 may all need to include information related to the plan arrangements as well as timely recognition of income when vesting occurs. Discovering these issues after the fact can necessitate amending prior year returns and also involve adverse tax consequences to the executive and the organization.
Improbable Catch Up: A compensation committee’s failure to establish a specific position on retirement benefits for the executive, as well as a specific objective for the level of benefits to be provided well in advance of the probable retirement event, drastically diminishes the likelihood of providing any level of benefit beyond that provided to all employees. Waiting until just a year or two prior to retirement will likely place an unreasonable financial burden on the organization to fund a benefit that might have been spread over many years of employment. Similarly, large contributions / payments toward the very end of employment may trigger an excess benefit situation, or the appearance of same, that may create adverse consequences for the executive and the organization.
The Wake-Up Call
Most compensation committees spend most of their time on decisions about current cash compensation (i.e., salary, bonus and incentive) matters for executives. Clearly, these are important matters and ones that require the committee’s attention in light of the disclosure of this information to external stakeholders and the public. I am not suggesting the committee members spend any less time on them.
I am however suggesting that compensation committees incorporate an immediate and recurring review of the organization’s retirement program to ensure that all documentation, administration and funding are in accordance with the organization’s policy, on track to meet stated objectives and fully compliant with pertinent regulatory and reporting requirements. Regular checkups may also be beneficial in helping the organization to be more attentive and proactive on succession / transition needs. As we have pointed out, delay on these matters is the enemy of effective solutions.
Executive management also has a role to play in this wake up call. Steps should be taken to ensure that the compensation committee has access to all internal and external information and advice that will assist them in their efforts to ensure that all steps have been taken to ensure that the retirement arrangements pose no obstacles to the inevitable retirement and leadership succession that every organization faces.
By Lee Klumpp, CPA, CGMA and Laura Kalick, JD, LLM in Taxation
The Financial Accounting Standards Board (FASB) recently posted a Q&A stating the FASB staff would not object to nonprofits applying guidance from the Securities and Exchange Commission (SEC) on the application of Topic 740, Income Taxes, in the reporting period that includes the date on which the new tax law was signed.
The SEC staff issues statements expressing a view on applying topics in the FASB Accounting Standards Codification (ASC) and/or disclosure requirements through staff accounting bulletins (SABs). These statements represent the practices and interpretations followed by the SEC staff. Historically even though the SEC staff’s views and interpretations aren’t directly applicable, nonprofits have chosen to apply the guidance in the SABs.
When the new tax law was signed, the SEC staff released SAB 118 for applying Topic 740, Income Taxes, as it relates to tax reform. SAB 118 outlines the approach entities may take if they determine that the necessary information is not available (in reasonable detail) to evaluate, compute and prepare accounting entries to recognize the effect(s) of the new tax law by the time the financial statements are required to be filed. Entities may use this approach when the timely determination of some or all of the income tax effect(s) from the tax law is incomplete by the due date of the financial statements. SAB 118 also prescribes disclosures that reporting entities must provide in these circumstances.
MAIN PROVISIONS OF THE FASB Q&A
The FASB staff would not object to nonprofits applying SAB 118, which the staff believes complies with generally accepted accounting principles (GAAP). This view is based upon the historical application of SABs by nonprofits.
The FASB staff also believes that a nonprofit opting to apply SAB 118 would need to do so in its entirety, including the disclosure requirements. Such reporting entity should also disclose its accounting policy of applying SAB 118, required by ASC paragraphs 235-10-50-1 through 50-3.3
For more information on nonprofit financial reporting, contact a Blackman & Sloop nonprofit advisor.
Article reprinted from the BDO Nonprofit Standard blog.
This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com.
By Ken Eye and Andrea Wilson
The internal audit (IA) function is vital to the health of any nonprofit, regardless of mission or scope. The audit committee and its individual members are crucial partners in safeguarding the integrity, purpose and, ultimately, the success of organizations.
But, they often face challenges navigating a strained regulatory environment, all while trying to do more with less. Adjusting to these new realities means that proper management is more important than ever. This article outlines the top 10 challenges keeping internal auditors up at night, and providing remedies to help them continue their critical work.
1. CHANGES TO OPERATIONS OR STRATEGY
For most nonprofit organizations, change is inevitable. As the needs of communities, internal dynamics, priorities and leadership transform, nonprofits adjust their mission and strategies. While this dynamism is essential for organizations to further their work, change can create strain for internal auditors. Whether its expanding operations to a new location, working with new donors or rolling out a new organizational structure, internal auditors are often left scrambling to ensure compliance.
THE REMEDY: Change is unavoidable, but compliance headaches don’t have to be. Nonprofits should be proactive about integrating internal audit into large scale organizational changes. This means allocating IA resources to evaluate emerging compliance and legal requirements, incorporating IA into the strategic decision-making process at the outset, revising policies and procedures with the new compliance environment, and developing succession plans to facilitate smooth personnel changes. And, IA should not just be involved in the change process—organizations should allow internal auditors to conduct post-implementation assessments to ensure ongoing compliance.
2. ORGANIZATIONAL CULTURE
The organizational culture of nonprofit organizations usually centers on a mission that employees are passionate about. This passion attracts staff personally motivated to help the overall organization succeed, but can come at the cost of internal controls. For nonprofits, “the cause” can often be promoted at any cost. Mid-level management professionals can be highly skilled in technical areas, but may lack knowledge in compliance, financial accountability and oversight. A lack of interactive communication between key administrative and program units within the organization can result in insufficient internal controls.
THE REMEDY: To balance maintaining organizational culture with proper operational management, communication is essential. Nonprofits should develop a sound communication strategy that brings the internal audit and compliance functions in regular contact with the rest of the staff. During these interactions, IA professionals should be sure to communicate how risk management practices align with overall organizational strategy and mission objectives. Bringing people together in this way helps make IA an integral part of an organization, rather than an afterthought.
Even when strong communications are in place, breakdowns are sometimes inevitable. Organizations should conduct regular assessments of business processes to determine where breakdowns in communication between business units occur. These assessments should help identify gaps that could pose significant risks to the organization.
Based on the results of these assessments, organizations should design and implement remediation plans, including scheduling necessary trainings for all employees and rolling out new process flows and accountability points to close any gaps.
3. NEW TECHNOLOGY
Technological advances help organizations store and share data, but new technology is often implemented without the knowledge or involvement of the internal audit function, to potentially disastrous and costly results. Ideally, internal auditors should assess new technology well before it’s utilized to review issues like control over sensitive data, continuity of the technologies between offices, and adherence to compliance and regulatory requirements. Without this review, nonprofits leave themselves open to a number of risky consequences, as well as operational inefficiencies.
THE REMEDY: Technology can be a huge boon to nonprofit organizations, but only when it’s used wisely. IA should
work with nonprofit leaders to first assess technology currently being used organization-wide, and then identify what the organization still needs to address. Internal auditors can assist with researching and proposing approved technologies for organization-wide usage, to facilitate cohesion and compliance and to help management improve system efficiencies.
Organizations also need to implement proper internal controls to ensure they’re mitigating technology risk as much as possible. IA can conduct a risk assessment of each technology used and implement policies to restrict or prevent the use of high-risk programs or devices. Organizations should also require similar checks and risk assessments for all new technology prior to usage.
With new technologies exploding in popularity, cybersecurity risks abound. Nonprofit organizations often mistakenly believe they aren’t of interest to cyber criminals, but the amount of personal data they store from donors and employees, and the tendency to underinvest in cybersecurity measures, make them an ideal target. It can be difficult for nonprofits to maintain up-to-date technology and hardware, keep pace with technological changes and navigate the shifting regulatory landscape with their limited funding. Nonprofits also frequently partner with technology suppliers and other contractors that leave them open to third-party cyber risks.
THE REMEDY: The first step to mitigating cyber risk is to conduct an organization-wide cybersecurity risk assessment that includes partner, contractor and technology supplier cybersecurity as part of the due diligence process. This assessment should shed light on where internal and external gaps exist. Following the assessment, organizations should implement additional controls by updating policies, procedures and internal controls to address identified gaps.
A startling number of cyber incidents arise from employees unknowingly exposing the organization to bad actors. Training staff to recognize these exposures is fundamental to their prevention. Nonprofits need to regularly communicate risks to employees and vendors to ensure everyone is adhering to established policies.
Monitoring cyber risk needs to be an ongoing effort. Nonprofits should develop a risk assessment schedule to examine internal partner, contractor and technology supplier cybersecurity on a quarterly or annual basis. Internal audit can assist with implementing these assessments.
5. COMPLIANCE WITH FUNDER REQUIREMENTS
Nonprofit organizations often have the unique challenge of negotiating compliance requirements across multiple funding sources including government entities, individuals, private foundations or other organizations. This challenge is only growing as budget cuts force organizations to focus on diversifying revenue streams and expanding donor pools, and with a recent increase in donor audits of specific grant activity at the materiality level. Further complicating the matter is a growing emphasis on international accounting standards (as opposed to relying on U.S. generally accepted accounting principles).
THE REMEDY: To clarify exactly what funding requirements an organization faces, it should conduct a compliance assessment, comparing requirements across all donor agreements to determine areas of overlap and areas of discontinuity. These agreements should then be compared against written policies and current practices to identify gaps.
Remediation plans can amend policies and procedures, and staff trainings should be conducted to ensure all levels and functions understand their role in maintaining compliance with funding requirements.
Staying current is critical. Nonprofits should develop a compliance assessment schedule, and IA and compliance departments need to stay on top of new funding streams and emerging trends so they can pivot when necessary.
6. FINANCIAL CONTROLS
Even though nonprofits are motivated by making an impact rather than money, organizations still face a host of hurdles when it comes to financial management. Many international nonprofits operate in countries with cash-based economies, making it tough to maintain adequate control of funds and sufficient supporting documentation. And new payment technologies, while enabling new and widespread operational tools, are often accompanied by verification and other control challenges. Nonprofits also face resource constraints and may have a limited number of finance staff to oversee financial management processes, which can be manual and prone to human error. For organizations with
several offices, branches often operate with little to no centralized oversight over their accounting and cash management procedures.
THE REMEDY: Nonprofits should review cash management procedures and evaluate typical expenditure cycles to identify potential risk areas across the entirety of an organization. Internal audit is central in assisting management in testing cash management controls.
- Organizations can then implement additional controls in keeping with best practices, like limiting cash handling or volume of cash transactions where possible. Nonprofit managers should consider investing in technologies and resources that limit high risk processes.
Standardizing procedures will help cut down on variance of practices between offices. All branches should centralize accounting and reporting procedures. At a minimum, each location should maintain copies of supporting documentation of all expenditures and financial reporting and should regularly review them with staff.
7. RELIANCE ON THIRD PARTIES
Vendor actions can create extremely adverse consequences for nonprofit organizations. Concerns range from reputation damage to the vendor’s illegal acts being attributed to the nonprofit organization. This risk applies to all types of organizational relationships with vendors and nonprofits, especially those administering federal grant programs given increased subrecipient monitoring and due diligence requirements.
Despite the risks, most nonprofits rely on partners or contractors for critical program functions. This makes it difficult to conduct due diligence reviews and monitoring activities, particularly when the partners/contractors are numerous, geographically dispersed or operating overseas. Partners are normally tasked with self-reporting, meaning frauds like ghost employee payments are easily hidden. Contractors also usually have access to organizational networks and information, creating an additional layer of risk.
THE REMEDY: Organizations should review current policies and procedures to ensure robust due diligence and monitoring processes are in place for all third-party relationships. This should include an assessment of partner/contractor access to project data, systems and networks, and the limitation of access where possible.
- Nonprofits need to implement additional monitoring and verification processes, including:
- Conducting regular spot reviews or investigations of reported data
- Requiring partners and contractors to certify financial and programmatic assertions
- Verifying number of partner/contractor staff and salary payment amounts
- Conducting unannounced site visits
- Considering third-party verification systems
These processes should be re-evaluated on a regular basis to ensure their effectiveness.
8. PROCUREMENT PROCEDURES
Nonprofit organizations rely heavily on non-competitive procurement processes due to several reasons. Often, procurement procedures, selection criteria and selection decisions are inadequately documented, leaving organizations unable to show that there was no bias in the selection process. Preferred vendor lists are rarely updated, and control of vendor solicitation, selection and site visits is often left with just a few individuals.
THE REMEDY: IA should review current procurement procedures against industry standards and donor requirements. They should also be transparent about their procurement policies including:
- Publicly announcing tenders as much as possible
- Updating vendor lists through open competition as frequently as possible
- Verifying vendors and prices through in-person or third-party checks
- Comparing bids against market prices
- Documenting criteria and selection procedures to bid samples with procurement files
- Ensuring procurement/selection committees are rotated on a regular basis
9. TRANSPORTATION AND DISTRIBUTION
For organizations that distribute goods, inventory management and oversight can prove to be major sources of stress for internal auditors. Often, nonprofits have difficulties verifying receipt of goods or services by their intended beneficiary, and confirming the goods provided are in the same quality and quantity as what was purchased. Diversion, theft and product substitution are especially difficult to identify. Despite resource and capacity issues, recent increased scrutiny of internal controls and supply chain management means that organizations need to address these issues sooner rather than later.
THE REMEDY: To help combat issues in the distribution chain, organizations need to shore up monitoring procedures by:
- Establishing monitoring teams for critical points along the supply chain
- Implementing two-step or three-step verification procedures at each critical stage
- Hiring a third party to conduct site visits and monitor transportation and distribution
- Using technology to assist in tracking and monitoring, including unique identifiers on products for inventory and tracking purposes and requiring distributors to take time-stamped photos/videos of deliveries
- Another effective risk mitigation strategy is to communicate directly with beneficiaries. Organizations can hold pre-distribution meetings with communities to review any past issues or concerns. Detailed packing lists and/or photographs of parcel contents should be inside packages. Nonprofits can include in the contract clauses with distributors to withhold payments to distributors until delivery is confirmed. This further ensures the distributor is holding up its end of the agreement.
10. FRAUD AND CORRUPTION
It’s the job of the internal audit function to uncover fraud, waste and abuse in nonprofit organizations, but often they are set up for failure. Due to a lack of communication between functional and program units within organizations, increased used of third parties, outdated systems, increased regulations (and the list goes on…), the opportunity to exploit a nonprofit’s controls is growing at a time when IA resources are shrinking and reputational risk for organizations is at an all-time high.
THE REMEDY: Preventing fraud starts within an organization itself. Stakeholders should evaluate current fraud prevention, detection and investigation measures against regulatory requirements and develop a plan to remediate any identified gaps. They should also be sure to provide accessible fraud reporting mechanisms for all employees, partners, grantees/beneficiaries and stakeholders.
- Despite resource constraints, organizations need to ensure IA has the appropriate level of resources to detect and investigate potential cases of fraud. Funds should also be set aside for visits to third parties and office locations and the establishment of a fraud hotline. Put a process in place to notify any impacted funders in a timely manner and in line with donor requirements to prevent exacerbating the impact when fraud does occur.
It’s also key to establish a fraud prevention and detection assessment schedule so practices can stay up-to-date and make sure nothing falls through the cracks.
Internal auditors at nonprofits have a tough, but essential job that’s key to keeping the organization focused on mission fulfillment. By assessing current practices, developing action plans and regularly monitoring activities, organizations can mitigate risk and serve their beneficiaries more effectively.
Article reprinted from the BDO Nonprofit Standard blog.
This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com.
By Lewis Sharpstone, CPA
The quality and completeness of the audit committee charters that I have seen typically range from very good to great. This is why there is no mention in this article, other than here, of core audit committee responsibilities such as auditor appointment, audit review, monitoring of whistleblowing incidents, or conflicts of interest reporting. However, here are my top five suggestions that should be considered for strengthening even a great audit committee charter.
- INCORPORATE ALL YOUR STATE AUDIT COMMITTEE REQUIREMENTS INTO THE CHARTER
For example, under California law there are stated guidelines as to who can and cannot serve on the audit committee. The most well-known California rule is that no more than 50 percent of the audit committee can comprise finance committee members. Most California audit committee charters I see cover this rule. But many California audit committee charters I see don’t include the lesser known but equally important rules. For example, in California the chair of the audit committee is also prohibited from serving on the finance committee. Make sure you know your state audit committee requirements, if any, and ensure that they are embedded into your charter.
- MINUTES OF MEETINGS
Part VI, Section A, question 8 of IRS Form 990 reminds us that as a best practice, organizations should memorialize all board meetings with documented minutes. This also applies to all meetings of subcommittees of the board. The audit committee is a subcommittee of the board, so documented minutes should be produced for each meeting. Accordingly, this should be stated in the charter.
- EXECUTIVE SESSIONS
Most audit committees build into their charter the notion that they can hold executive sessions with specific parties. In almost all cases it is either written or implied that executive session means organization staff members are excused from the meeting and the audit committee meets alone with the external auditors or other parties. However, executive sessions can be much broader than this and should probably be defined as such. For example, since the responsibility of audit committees includes a broad understanding of risk, and since a significant risk facing any organization today is cybersecurity, it is probably appropriate for the audit committee to want to meet in executive session with the chief information officer.
- THE AUTHORITY TO INDEPENDENTLY CONSULT WITH AND RETAIN OUTSIDE LEGAL COUNSEL
The audit committee should be collaborative most of the time but function objectively all the time. The authority of the audit committee to retain outside legal counsel, if needed, is recommended to be included in the charter. If the need arises, having this documented within the charter will be important to the audit committee in exercising its responsibilities. Conversely, it might prove almost impossible in certain circumstances for the audit committee to exercise its duties without this authority.
Self-review is a powerful and useful process if performed correctly and periodically. It provides an appropriate time and forum for members of a committee to voice suggestions to improve the effectiveness of the committee on which they serve. Certainly, the absence of an appropriate time and forum to voice these suggestions for improvement can lead to problems down the road. This is why embedding a periodic audit committee effectiveness self-review requirement and process into the charter is highly recommended. The audit committee charter should also be self-reviewed periodically.
This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com.
By Laura Kalick, JD, LLM in Taxation
Does your tax-exempt organization provide transportation and parking benefits to employees? If so, you may have another commuter headache: a new tax. Under the Tax Cut and Jobs Act of 2017 (the Act), a provision was added to the Internal Revenue Code that is likely to require many tax-exempt organizations to pay unrelated business income tax (UBIT). Certain costs of qualified transportation, including transit passes, qualified parking and more, will now be taxed as unrelated business income at 21 percent.
The Act added the following provision to the Internal Revenue Code: Internal Revenue Code (IRC) Section 512(a)(7): Increase in unrelated business taxable income by disallowed fringe.
This provision was an attempt to put exempt organizations on the same footing as taxable organizations that will no longer be able to deduct these costs. The provision is effective for amounts paid or incurred after Dec. 31, 2017.
Under this provision, certain qualified transportation fringe benefits, including those relating to parking garages, must be reported as unrelated business income (UBI). All tax-exempt organizations (and a college or university owned and operated by a state or other governmental unit) will have to include as unrelated business taxable income any amounts paid or incurred for any qualified transportation fringe benefit, including the following:
- A ride in a commuter highway vehicle between the employee’s home and workplace.
- A transit pass.
- Qualified parking.
Qualified parking is parking you provide to your employees on or near your business premises. It includes parking on or near the location from which your employees commute to work using mass transit, commuter highway vehicles, or carpools. If an organization has its own garage that is used for parking that is already reported as UBI (e.g., parking for the general public), then the percentage of those costs attributable to the amount already included in its UBI does not have to be included in the amount treated as UBI under the new provision.
The UBIT on these employer costs is 21 percent at the federal level and state taxes may apply as well. Organizations should consider making estimated tax payments on these taxes.
These employee fringe benefits are still excluded from an employee’s income. Employers can generally exclude the value of transportation benefits provided to an employee during 2018 from the employee’s wages up to the following limits:
- $260 per month for combined commuter highway vehicle transportation and transit passes.
- $260 per month for qualified parking.
See IRS Publication 15-b for more information.
Even if the benefit is provided under a compensation reduction agreement, the payment will still result in UBIT for the organization. The only way the organization can avoid counting these benefits as UBI is to have the employee pay for the benefits with after-tax dollars.
COMPENSATION REDUCTION AGREEMENT EXAMPLE:
For 2018, the monthly limit on the amount that may be excluded from an employee’s income for qualified parking benefits is $260. Commuter employees can receive both the transit and parking benefits up to $520 per month tax-free.
On a per employee basis, for commuter and transit passes only, $260 monthly is $3,120 annually, and the UBI tax on this amount at 21 percent is $655 plus state taxes, if applicable. With 100 employees, the federal tax alone would be $655 per employee and approximately $65,500 in total. To the extent your organization provides a commuter benefit of up to $520 per month, the UBI tax can be much more.
- Organizations should determine whether they provide these transportation and parking benefits, and if so, to how many employees, what kind and how much?
- Calculate the estimated tax payments for Federal UBI and the state, if applicable.
- If your organization has not filed Form 990-T in the past, enroll the organization in the Electronic Federal Tax Payment System in order to remit the taxes.
By Karen Schuler, CFE, IGP, IGP and Taryn Crane, PMP
Notwithstanding the EU General Data Protection Regulation (GDPR)—the most sweeping change to data privacy in 20-plus years, with extraterritorial scope that went into effect on May 25, 2018—there are numerous privacy laws that are often overlooked.
Earlier this year companies like Facebook have come under fire for privacy violations while Congress is looking for ways to protect the privacy of American citizens. These movements are just the beginning of widespread change that we expect for privacy laws over the next several years.
As discussed in the Spring 2018 issue of the Nonprofit Standard in an article entitled “The Integration of Data Privacy into a Data Governance Program,” nonprofits can’t afford to ignore regulations like GDPR as many organizations are impacted due to their global reach. But now that May 25, 2018 has passed and GDPR officially went into effect, it’s time to think about your holistic privacy program—or implementing a Privacy Operational Life Cycle that helps your organization keep employees apprised of new privacy requirements, embraces recordkeeping and sound data protection practices while offering enhanced data privacy for your donors, employees, and constituents.
Think about these areas to develop a sound Privacy Operational Life Cycle:
- Develop an organizational privacy vision and mission, and document the program’s objectives.
- Identify legal and regulatory compliance challenges that are relevant to your organization.
- Locate and document where personal information resides throughout your organization or across third parties (e.g., hosting vendors, outsourced applications).
- Develop a privacy strategy that identifies stakeholders, leverages key functions throughout the organization, creates a process for interfacing within the organization, and outlines a data governance strategy.
- Conduct a privacy awareness workshop to highlight to the entire organization the goals of the program.
- And, finally, develop a structure for your privacy team with a governance model that is clear and consistent for the size of your organization.
The above-mentioned items are a starting point, but there is more to do after you develop your initial structure and communicate the purpose of the program. Below is a guide to developing the Privacy Operational Life Cycle.
DEVELOP AND IMPLEMENT A FRAMEWORK
The framework should provide you with an implementation road map that outlines your privacy procedures and processes. Developing a framework helps you identify high risk areas, reduce data loss, and provide a measurement against compliance to laws, regulations, and standards. Frameworks that provide initial guidance include the AICPA and CICA Privacy Framework, ISO 17779/BD7799, or OECD Privacy Guidelines.
DEVELOP PRIVACY POLICIES
Once you have selected an overall framework to govern your privacy program, look at your existing policies, procedures, and guidelines. During this phase you should evaluate the goals of the privacy program and determine what business initiatives are the baseline of the privacy program. Just remember, as you look to update policies, procedures and guidelines for the organization, ensure that there is a mechanism to enforce these policies. And don’t forget to review the current website privacy notice. This has become a critical target of privacy watchdogs to ensure that you can fulfill the commitment of the statements in that notice.
DEVELOP MECHANISMS TO MEASURE PERFORMANCE
Within your privacy life cycle, it will be important to develop the ability to measure performance of the program. To implement metrics, consider your audience—will it be the board, external parties, regulatory agencies, or the staff?
Determine how you will report on these metrics that you have identified. Decide what measurements you are interested in sharing with your audience and how this could impact funding positively or negatively. Next, determine how you will measure progress toward the organization’s business goals and objectives. Do your best to limit improper metrics that do not support the organization’s mission. And finally, determine the best methods to collect the data you need. Your goal is to demonstrate compliance while establishing the privacy program’s return on investment (ROI).
DEVELOP THE PRIVACY OPERATIONAL LIFE CYCLE
The Privacy Operational Life Cycle should consider measurement, improvements, and the ability to sustain and support the program. To effectively do this, develop an operational life cycle that considers the assessment, protection, governance, and response phases. Some tips to consider for each aspect of the life cycle:
- Assess – embed Privacy by Design (PbD) into the design of technology, business practices, and physical design of new programs. In addition to PbD, regularly evaluate third-party compliance, as well as internal program compliance.
- Protect – ensure that information life cycle management (ILM) is built into your data protection strategy. While it is important to ensure that your data protection strategies mitigate the risk of a data breach, you need to consider sound ILM practices to promote the organization’s data protection strategies. Remember, the less you have, the less you have to protect.
- Govern – while it’s important to be able to evaluate and protect information, you also need to monitor, audit, and communicate the privacy framework. Develop a strategy and operational procedures that allow your organization to maintain a transparent and visibly sound program. And don’t forget to monitor regulatory changes that impact your organization. Develop ongoing processes that allow you to measure the privacy program’s effectiveness.
- Respond – traditionally privacy and security teams viewed their ability to respond as responding to a security event. Today that has changed – it’s much broader and requires the ability to respond to complaints, requests for information, corrections of inaccurate data, clarifications of privacy matters and access requests. When developing your response capabilities, take into consideration these items in addition to your ability to respond to a security event.
Holistic privacy program development is the wave of the future, especially in a competitive world where data is at the core of every business or organization. Establish a program that fits your organization to ensure that you remain ahead of the curve and out of the sight of regulators.
PAY DATA FOR ‘SIMILARLY QUALIFIED PERSONS IN COMPARABLE POSITIONS AT SIMILARLY SITUATED ORGANIZATIONS’
By Michael Conover
Valid information on competitive pay levels and practices for “… similarly qualified persons in comparable positions at similarly situated organizations” has long been the basis for responsible management, and Internal Revenue Service (IRS) enforcement, of appropriate pay practices among all tax-exempt organizations.
When the IRS Intermediate Sanctions (Internal Revenue Code 4958) were enacted, the importance of good comparative data was underscored by its inclusion as one of the three elements of the protection offered in the Rebuttable Presumption of Reasonableness. The data provides a critical context for determining how much and how to pay a nonprofit’s executives.
Regardless of its importance, however, many organizations fail to devote the attention to this important element of their compensation program that it deserves. We regularly work with organizations that have difficulty describing or producing the data used as the basis for executive pay decisions. References are made to “a report done a while ago,” “a survey we had,” or “some Form 990s from organizations like us.” Examining the Form 990s and Schedule Js of these same organizations, we find they have checked all the appropriate boxes related to these data sources and yet there is little or nothing to be found.
Another group of organizations we find has a different competitive data issue. They have competitive data to offer as the basis of compensation decisions, but there are serious issues about the quality and comparability of the data being used. The data may be drawn from organizations that are not at all comparable, positions that are marginally similar or based on such a small sample that the data’s validity is very questionable. In these situations, this poor data may be as bad, or possibly worse, than having no data at all because it may lead to problematic pay decisions.
Obtaining and properly using good data for compensation purposes requires some thoughtful examination of your organization, its positions, and the requirements for individuals holding those positions. Only after accurately understanding your own circumstances can a search begin for the sources of valid data needed. Areas that need to be explored include:
- Details of your organization: This information includes the type of service(s) your organization performs as well as the broad organizational metrics that reflect its size and scope (e.g., revenue, operating budget, total assets, number of employees, etc.). These are usually among the factors most readily used for identifying similar organizations.
- Primary role(s) of your position(s): Competitive data sources (surveys, Form 990s, etc.) usually offer only brief descriptions of positions and generic titles for job-matching purposes so the focus here is on the central focus and impact of your position in terms of overall impact on the organization. The chief/principal executive officer and chief/principal financial officer positions tend to be very similar from one organization to another and are Disqualified Individuals from an Intermediate Sanctions perspective. Therefore, they are routinely included in competitive data needs. Ensure you note any significant difference in the role played by your position vs. the typical benchmark. The presence of an additional role not associated with the typical benchmark for the position (or the absence of some portion of the role commonly associated with it must be taken into account to ensure appropriate comparisons will be made.
- Position requirements: The emphasis on position requirements is intentional. The purpose is to focus on the essential education, expertise, and experience required to perform the role, not what the current incumbent happens to have or acquired in the role. For example, the fact that the current receptionist has five years of experience at the front desk does not mean that five years is a requirement for a qualified incumbent. On the other hand, your position may require a type of professional certification, education, or experience that is unique
and essential for successfully performing the role. For example, an individual holding the position of executive director in an association of athletic coaches and involved with external organizations regulating the conduct of the sport must have credible experience in the sport.
Armed with an accurate understanding of your own organization and the positions that will be examined in the competitive compensation assessment, attention now is focused on the identification of the data that will be sought for use in the analysis. The process follows the same criteria referenced above in the descriptors of your organization and positions, as follows:
- Organizations selected for inclusion in the analysis: Typically, these are organizations offering the same types of services that your organization provides. In some instances, there are other types of organizations, perhaps even for-profit ones that employ and compete for executive resources that are very similar to your specific organization. These can also be included in the search for competitive data. Compensation surveys are conducted among many different types of nonprofit organizations (e.g., higher education, social service organizations, professional/trade organizations, philanthropic foundations, etc.). In addition, Form 990 filings from other organizations like yours are also a source of competitive data. If necessary, a custom survey and/or consultant may be required to obtain data for specialized/hard-to-find sources of data.
The size and scope of organizations included in the analysis must be comparable to your organization. Revenue and budget levels for a group of organizations ranging from 50 percent to 200 percent of your size are typically viewed as reasonable for inclusion. Of course, care must be taken to avoid “skewing” the data in the direction of organizations much larger than your own.
I often explain the objective for identification of comparable organizations as comparing “apples to apples” but doesn’t necessarily need to be as specific as comparing McIntosh to Fuji.
- Selection of benchmark positions: Positions selected for comparisons should closely resemble the role described in your organization. Titles alone may not fully describe a position’s role or they may be misleading. A controller may be the chief/principal financial officer or a subordinate, depending on the data source in question. In those cases where a significant difference has been identified between your position and the external benchmark, it may be advisable to make adjustments (upward or downward) to competitive data to appropriately compare them.
- Special position requirements: Bona fide requirements for your organization’s position that are not typically associated with the benchmark position may also require an adjustment to competitive data in order to produce an appropriate comparison.
Collecting this information about your organization and the external benchmarks planned for use prior to an analysis of competitive compensation is not the end of this process. Two critical steps remain. First, it is important to engage the organization’s governing body (e.g., board, compensation committee) and involve them in a review of this information and affirmation/modification of it for use in the analysis. Involving the independent members of the organization in the process performs a very helpful educational role about compensation and the importance of good competitive data. It also enlists individuals with a critical oversight role in the governance of pay in an independent validation of the plan to secure the data before it is collected. A sound rationale has been prepared and ratified for the analysis of competitive data which board and management should view as valid for this purpose.
Second, this description of your organization and positions, as well as the external benchmark criteria or the comparative framework, should be documented. It will become part of the other important documents maintained to support the compensation program (e.g., board minutes, compensation strategy/guiding principles, etc.). The framework should be reviewed periodically and updated as needed to ensure its continued relevance to your organization as well as the external marketplace(s) in which you compete for executive resources.
By Joe Sremack, CFE
Robotic process automation is helping both for-profit and nonprofit organizations do more with less. Robotic Process Automation (RPA) is transforming the way organizations across different industries do business. It allows organizations to automate certain types of work processes to reduce the time spent on costly manual tasks and increase efforts to deliver mission-critical work. RPA is helping organizations do more with less, helping them automatically process and store data without having to perform manual data entry, generate financial status reports without spending considerable amounts of time in Excel, and execute outreach campaigns without spending hours in a customer relationship manager (CRM) program. These types of optimizations have been made a reality through RPA, with organizations just beginning to scratch the surface of the possibilities.
RPA is the use of software that automates manual tasks. It eliminates the need for employees to perform repetitive tasks by integrating software that performs the same set of steps the employee does. The software is designed to perform routine tasks across multiple applications and systems within an existing workflow. It performs specific tasks to automate the transfer, editing, reporting and/or saving of data.
At least some portion of white collar employees’ time is spent on repetitive computer tasks. That includes the CEO’s time–about 25 percent of the CEO’s tasks could be automated and RPA can help achieve this. Repetitive work typically involves the collection of data from one or more sources, performing a data manipulation—such as applying data formulas in Excel—and then exporting or saving the information to a readily available location. These are just some of the kinds of work that RPA automates.
One of the main differentiators of RPA from other solutions is that it performs tasks that do not require deep cognitive capabilities. RPA is the automation of a process, but the software is not improved or changed based on the inputs or its results. This is different from machine learning or artificial intelligence (AI) software, which can learn and improve based on the continuous evaluation of its inputs and results. Instead, RPA software simply repetitively performs the same task(s) based on business requirements.
RPA provides several major benefits. The most immediate impact from RPA is that routine tasks are performed in an error-free, consistent manner. RPA also provides an audit trail of work performed, which can be valuable in regulated industries or when the output of a process produces an unexpected result. In addition, RPA solutions can be configured to identify anomalies or red flags that may not be identifiable to an employee.
The long-term benefits are also valuable. Perhaps the most important benefit is increased job satisfaction. When employees are asked which parts of their jobs they dislike the most, the tasks they list usually involve a type of manual work that is a good candidate for an RPA solution. 1 This increased job satisfaction results in a better work environment and more productive employees. Moreover, the results of the formerly manual processes become better and the cost savings can be recognized.
APPLICATIONS OF RPA
The list of potential uses for RPA is robust. Most manual computer-based tasks performed by employees can be automated with RPA. RPA is often used for back office functions but can extend to customer relationship management, data analysis, and other key areas that involve manual work.
The best way to understand RPA is to learn about the kinds of problems RPA can solve. For example, an RPA program–called a “bot”–can be used to manage customer email inquiries. The bot monitors a sales inquiry email account and automatically imports the information into the CRM, sends alerts to the sales team, sends an automated message to the customer, and imports the information into other systems that are used to track employee availability and sales campaign successes. This works well when timely responses to customers are required.
An example of a nonprofit-specific use of an RPA solution is the management of fundraising campaigns. In many organizations, this process involves pulling past donor information, generating marketing materials, contacting past and new donors, collecting donor payment information, and entering it into an accounting software, updating financial information, and updating a donor database. Most of these steps are performed manually, slowing down the process and introducing the risk of error. With an RPA solution, most of this process can be automated, allowing the organization to spend more time interfacing with donors and working on other mission-critical tasks.
The following is a chart that lists several types of tasks that can be automated by department in most organizations:
While the list above appears to be limited to single-department tasks, many of these are cross-department tasks in nature. Consider a process where the finance department needs to work with IT and sales to request multiple data sets, get input, and share the results. Rather than emailing those departments to pull the same data set every quarter to develop an Excel-based report, an RPA solution automatically performs the data pull and generates the entire Excel report. This not only saves time and effort across the various departments, it also enables the finance team to spend more time doing meaningful analysis of the reports and develop projections and deeper insights.
RPA AND NONPROFITS
RPA is well-suited for solving problems encountered by nonprofits since they face many of the same challenges associated with reducing the time employees spend on manual tasks as for-profit organizations. Whether the work involves manually entering accounts receivable and accounts payable data in accounting software, generating compliance reports, or performing outreach campaigns, time is being spent by employees on less valuable work. Employees would agree that they would rather work on mission-specific tasks rather than repetitive tasks.2
Several examples of the types of nonprofit processes an RPA solution works well with are:
- Pledge campaigns.
- Recurring donation management.
- Digital and print marketing campaigns.
- Outreach campaigns.
- Government and regulatory issue tracking.
- Volunteer management.
Service providers and software developers have begun offering solutions geared toward nonprofits. Several major RPA software developers have recently launched commercial software solutions specifically designed for nonprofits, and service providers who understand the nonprofit sector are able to implement tailored RPA solutions.
RPA solutions can be implemented in several ways. The most common method for organizations is to implement individual bots. These are single programs that perform tasks automatically. The bot can be accessed through a desktop or web-based application. The second method is to implement a server that controls a set of bots within a department or across the organization. The server-based approach is a more robust system that is typically employed when there are a larger number of bots utilized throughout an organization that need to be managed centrally, whereas the individual bot method is appropriate when only several bots are used.
The cost of an RPA solution, a common concern for any organization, depends on these factors:
- Number of bots.
- Time to develop and implement.
- Level of customization.
An enterprise-wide RPA solution of hundreds of bots can be expensive. A smaller implementation with only ten 10 bots or less, however, can be implemented relatively inexpensively and within a short period of time. Companies who sell RPA solutions often have a suite of pre-built bots that can be quickly customized and implemented without requiring a new bot to be developed. As the RPA market matures, the cost will continue to decline.
The key steps for determining whether an RPA solution is appropriate are to:
- Identify where most time and effort is being expended on manual tasks.
- Identify bottlenecks of key processes—specifically identifying manual tasks.
- Implement a pilot program to tackle a high-value discrete task that can have immediate value.
RPA is an exciting new way for organizations to improve their operations while also improving employee job satisfaction. RPA solutions have become a widely adopted strategy for enhancing various parts of organizations’ operations by allowing employees to focus their time and efforts on more high-value and meaningful work. It has helped organizations do significantly more with less while reducing errors, increasing workforce job satisfaction, and better ensuring that deadlines are met. These benefits have been possible with relatively small capital investments and IT resources. While RPA is not applicable to all types of work, it is a good option for reducing hours spent on routine, manual tasks.
BENEFITS OF RPA
- Error-free, consistent results
- Employees can be utilized for higher-value work
- Increased job satisfaction (not spending time doing repetitive, low-value work)
- Faster, more predictable delivery timing
- Documented trail of work performed
- Identify anomalies or other red flags