By: Tanya Dunkle, CPA

The IRS recently released its Exempt Organizations 2012 Work Plan.   This document provides insight into the areas in which the IRS will focus their efforts during 2012 and addresses issues that are important to nonprofit organizations.   Some of the key items of interest are highlighted below.

Automatic Revocation of Tax Exempt Status

Almost all tax-exempt organizations are required to file an annual return or e-postcard with the IRS annually.  Failure to file for three consecutive years results in automatic revocation of an organization’s tax exempt status.  Beginning in January 2012, the IRS has incorporated the listing of revoked organizations into an online application, Select Check, which anyone can use to find out the following about an organization:

• Whether the organization is eligible to receive tax deductible charitable contributions
• Whether the organization has had it tax exempt status automatically revoked, and
• Whether the organization has filed a Form 990-N annual electronic notice

Compliance Risk Models

The Form 990 was redesigned in 2008 to promote transparency.  This redesigned form has provided the IRS with a great deal of information on exempt organizations.  During 2012, the IRS will use this information to develop risk models to more effectively assess the likelihood of noncompliance in areas such as political activity, unrelated business taxable income, and governance.    Political activity will be subject to increased examination since we are in an election year.

International

During 2012 the IRS will continue to scrutinize tax exempt organizations that operate outside of the United States.  The focus of these examinations is to make sure that assets of exempt organizations are not being used for non-charitable purposes overseas.  In addition, the IRS seeks to ensure that the overseas activities of tax exempt organizations are consistent with their charitable purposes.

501(c)(4), (5) and (6) Organizations

The IRS will begin allowing social welfare organizations, labor and agriculture groups, and business leagues to declare themselves tax exempt without obtaining an IRS determination letter.  The IRS will review the classification of the organization to verify that they are correctly classified.  In addition, the IRS will seek additional information from these organizations based on their Form 990 filings in order to verify compliance with all applicable rules.

For more information on the 2012 Work Plan, please visit www.IRS.gov.

By: Maria Liossis, CPA

The best leaders of all, the people know not they exist. They turn to each other and say, We did it ourselves.
- Zen Proverb

Serving as a board member brings great responsibility as the board acts as the primary governing body of the organization.

A strong board is imperative for a successful organization. Thus, the board needs to be actively involved in ensuring that the organization is fulfilling its responsibilities to the various stakeholders (i.e., community, donors, employees, etc).

As roles transition, new faces appear throughout the board room. For some individuals, this may be their first position on a board; there are various seminars and written materials that can serve as guidance to help the new member understand what is expected from them.

The board’s job consists of numerous responsibilities and duties. Some of the key items for the board include:

• Critically reviewing and assessing the organization’s mission to ensure it is still relevant.
• Monitoring the organization’s mission to make sure it is being fulfilled.
• Thinking strategically and planning what direction the organization head in the future.
• Determining what challenges the organization will face and planning how to overcome these.
• Creating a viable business plan for the organization to ensure proper utilization of their resources.
• Succession planning – both for the key leaders of the organization and for the board itself.
• Asking the difficult questions without meddling in the day-to-day operations.
• Understanding the risks the organization faces and determining how to adequately mitigate these risks.
• Overseeing the financial operations of the organization (ex: monthly statements, budget, external audit, adherence to internal policies).

In the next five years, more nonprofit organizations will be transitioning leadership roles than ever before, this includes the passing down of the torch for many nonprofit executives.

May 16^th is our next nonprofit leaders forum!

Theresa Proenza, Regional Vice President of BVU: The Center for Nonprofit Excellence and Brian Broadbent, President and CEO of BVU: The Center for Nonprofit Excellence will be our featured speakers. They will be talking about ‘Succession Planning – Ensuring the Success and Sustainability of Your Organization.’

I truly hope you will be able to join us and gain knowledge from Theresa and Brian about succession planning and how to prepare your organization for the future.

Registration can be found at: http://npforummay.eventbrite.com/

Please feel free to pass this along to any other peers in the nonprofit industry that would benefit from this forum.

Look forward to seeing you there,

Pam Wright

Nonprofit Practice Group Leader

Contact Pam with Questions

By: Corey Centofanti

The Work Opportunity Tax Credit under the ‘VOW to Hire Heroes Act’ is now available for qualified non-profits and other tax exempt entities.

Employers can claim the credit on qualified veterans provided they begin working between 11/22/2011 and 1/1/2013.

Who is eligible?

Section 501(c) organizations and those exempt under IRC Section 501(a).

Who is a Qualified Veteran?

• Veterans that have either served on active duty for greater than 180 days,

OR have been discharged/released from active duty for service-related disabilities,

AND have not served on active duty for more than 90 days within the 60 days prior to hire date are considered qualified.

Classifications

Once qualified, the veteran must also be classified into one of the following categories, in order to determine the credit amount (see chart below):

• Veterans who are a member of a family receiving assistance through Supplemental Nutrition Assistance Program for a minimum of three months during the year prior to date of hire.

• Veterans that have been unemployed for a total of at least six months within the last year leading up to hire date.

• Veterans that are entitled to compensation for service related disabilities and were hired within one year of being discharged.

• Veterans entitled to compensation for service related disabilities and have been unemployed for a total of six months within the year leading up to the hire date.

Qualified veterans must also work a minimum of 120 hours prior to filing the credit.

How to file the credit:

First, the IRS requires certification that the veteran is eligible.

In order to receive certification, file form 8850 Pre-screening Notice and Certification Request with the State Workforce Agency, NOT the IRS.

The Form 8850 must be filed within 28 days of the veteran’s start date, UNLESS the employee was hired between 11/22/11 and 5/21/12. If hired within that timeframe, under IRS Notice 2012-13, form 8850 can be filed until 6/19/12. If hired after 5/21/12, the Form 8850 must be filed within 28 days.

Once Form 8850 is accepted and the veteran is certified by a State Workforce Agency and the employee has worked a minimum of 120 hours, the employer must file the employment tax return for the period in which the credit is to be claimed.  The next step is to separately file form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans. The credit will be applied against the employer’s portion of social security tax.

Information needed to file 8854-C:

• Date of hire for qualified veteran (use date on Form 8850).
• The criteria that qualifies you for the credit (take from Form 8850).
• The number of hours the veteran has worked (must be at least 120 at time of filing).
• The veteran’s wages for the 12 month period following date of hire.
• The employment tax return for the period related to the credit.
• Any previously filed Forms 5884-C.

How much can I receive from this credit?

The credit is limited to the employer’s portion of social security tax, up to a maximum of $6,240. See chart below for possible credit calculations.

QUALIFIED TAX-EXEMPT ORGANIZATIONS: Max Credit Amounts Only – See respective forms for calculation instructions

For further details see www.irs.gov >  Charities & Non-profits, or contact a BCG&Co. tax advisor with questions.

By: Tanya Dunkle, CPA

Given the current state of the economic climate and the increasing competition for donations within the philanthropic marketplace, transparency and accountability have become critical for charities.

Providing donors with the information that they are seeking and making sure that governance policies reflect the organization’s commitment to integrity and accountability are vital to their future.

There are a variety of organizations that assist donors in evaluating the quality of individual charities.  Various measurement standards are utilized, including expectations for ethical conduct and accountability, transparency and donor relationships. 

So how do you know if your organization is doing everything it can to be viewed as accountable and transparent?

Charity Navigator, America’s largest charity evaluator in the philanthropic marketplace, defines the two terms:

Accountability is “an obligation or willingness by a charity to explain its actions to its stakeholders, including government, donors, beneficiaries, and the public at large.”

Transparency is defined as “an obligation or willingness by a charity to publish and make available critical data about the organization, such as its finances, governance and effectiveness.”

In order to be viewed as accountable and transparent, an organization must be able to demonstrate that they follow ethical best practices and make important information about the organization readily available to donors and potential donors.

Maintain Visibility through Your Website and Form 990

Two of the best sources of information for donors are often the charity’s website and the charity’s IRS Form 990.

One way that a charity can demonstrate transparency and accountability is to include the following information on their website:

• A listing of all current board members
• Key employees along with their contact information
• The most recent audited financial statements
• The most current Form 990, or a link to the Form 990 on an external site
• A copy of the organization’s donor privacy policy

Although there is no single standard for governance and policy best practices, the Form 990 provides insight into the policies and practices that the IRS has deemed to be important.  By adopting the policies and procedures included in the Form 990, and providing accurate and complete responses to all governance and policy questions, a charity can use the Form 990 as a tool for communicating their accountability to donors and potential donors.

Some Form 990 items of particular interest to donors include:

• Board composition
• Related party relationships
• Material diversion of assets
• Documentation of board meetings
• The existence of conflict of interest, whistleblower, and documentation retention policies
• Methods used to determine compensation of top management officials
• Financial statements prepared by an independent accountant
• The existence of oversight by an audit committee

It is certain that as a nonprofit organization, you are facing more scrutiny than ever before, so putting your best efforts into making your information visible for review is crucial for your organization’s future.

Feel free to contact a BCG&Co. advisor with any questions regarding your IRS Form 990.

By: Tanya Dunkle, CPA

In an effort to enhance transparency and accountability within the charitable sector, the Ohio Attorney General’s Office has implemented an online registration system which will eliminate the current paper-based system.    Ohio will require all organizations to use the online system instead of filing hard copy forms.  In addition, filing fees and/or registration fees can now be paid online with a credit card or electronic check using the new system.

All 501(c)(3) and 501(c)(4) organizations that are required to register with the Ohio Attorney General’s Office and file annual financial reports must use the online system beginning with fiscal years ending on or after November 30, 2011.

The online system will automatically determine the information that each organization needs to provide in order be in compliance with Ohio registration requirements.  For annual financial reports, the online registration will take the place of the “Verification of Filing with the Internal Revenue Service” form which was previously required.  Under the new system, reporting is expanded to make state filing more consistent with IRS filing requirements and also to make information about charitable organizations more accessible to the public.  Some of the information required for the new annual filing can be obtained from the Organization’s IRS Form 990.

Once an online account is set up, charitable organization representatives will begin receiving e-mail notifications of filing deadlines, invoices for fees due, and confirmations of filings.

For more information about the new filing requirements, please go to  www.ohioattorneygeneral.gov.

By:  Janice Stephenson, CPA, Supervisor, Assurance Services

With many non-profit organizations facing budget crises, they are being forced to look at other resources to sustain their future. A strategic alliance, or merger, is often considered.

Is this a viable option for your organization?

Marriage is often compared to mergers – because while the simplified comparison is the union of two unique entities – it is most often the intricate complexities of the day-to-day union where you witness the striking similarities.

The unfortunate statistic is that mergers actually fail more often than marriages (70% of mergers fail to increase value).

And the irony of it all – is that a marital divorce most often results from financial strain, whereas the failure of a merger stems mostly from the strain on people.  The planning and culture integration by both organizations entering into a merger is most often the predictor of success versus failure.  But like marriage, if you proceed with both eyes open and carefully test the waters – slowly and methodically – you diminish your risk considerably.

Think You’re Ready to Commit?

Deciding to form an alliance can feel a lot like entering into a marriage.  You may want to start out by ‘dating’ each other to determine whether a bond can be formed.

One option may be to form a strategic alliance with another non-profit to reduce costs and further the mission.  Strategic alliances can range from an affiliation with another organization, a collaborative project, a partnership or a merger or consolidation between two or more organizations.

In considering a strategic alliance there are many options to consider.

• Who will be involved in the process and who will lead the alliance?
• What are the needs of the organizations involved?
• How financially stable are the organizations and what funding components are involved?
• Are the missions similar?
• Can back office and leadership functions be shared?
• Will an alliance result in expanding current service offerings to a new market or expanded services in an existing market?

Serious Dating

This initial affiliation of the organizations may start with some sharing of services and information while still maintaining separate organizational leadership and reporting.  Office functions may be combined to cut costs and share expertise.  Service areas could be expanded by utilizing the resources and connections of the newly affiliated organizations.

In deciding to form any type of alliance the organization must consider how much time they have, what level of expertise they have in house or would need to outsource, and what level of financial investment they are willing and able to put into the alliance.

Official Union

Once an alliance is formed and is proven to be successful, the organizations may decide to further their ‘relationship’ or commitment to each other and ‘marry’.  A merger or consolidation would involve dissolution of one of more organizations into the surviving organization.  A newly formed leadership group would guide the surviving organization which will now report as a single entity.

While any alliance will require the performance of due diligence procedures and formalized contracts, a merger or consolidation may require considerably more time and money along the process as one or more organizations will cease to exist at the conclusion.

In performing due diligence and formalizing a merger or consolidation consider the following:

• What level of confidentiality will be maintained during the process?
• Will funding continue if the recipient mergers into another entity?
• Are there any required regulatory or legal approvals?
• Are there any contractual arrangements, leases or banking relationships that terminate in the event of a merger?
• What is the current financial position, including liabilities, cost of benefit plans, and restricted assets that will be assumed by the surviving entity?
• Are there any issues with tax exempt status?

If you determine that your organization may benefit from a strategic alliance with one or more organizations in order to reduce costs and grow your mission, take your time throughout the process.  Identify the best partnership for you, perform the appropriate due diligence, maybe even date for a while before you commit to a marriage.  This process may be time-consuming and expensive, but divorces can be worse.

For further information regarding merger processes and planning, please contact a BCG&Co. representative.

How well are you positioned for an executive director’s exit?

In 2011,

• Seven percent of the executive directors have given notice of retirement and 67% anticipate leaving the organization in 5 years.

• Of that 67%, a large number are actively considering leaving but have not given notice.

• Of those surveyed, 1 in 6 executive directors are age 60 or older.

• Only 17% of organizations have a documented succession plan.

[According to the Compass Point’s Daring to Lead: A National Study of Nonprofit Executive Leadership, 2011.]

By: Maria K. Liossis, CPA

While the value of succession planning is not new, the mandate for it has never been stronger.   A common misconception is that a nonprofit does not need succession planning.

While the organization plans how to accomplish their mission and the impact they have in the community, the board needs to address the question of ‘who will get us there’ …not just now but in the future.

Ensuring the Viability of an Agency

Succession planning gives an organization future direction by preparing it for uncertainty and providing a guideline of how it will achieve its future goals. Succession plans focus on the future leadership of the organization and how the organization will find these leaders. A succession plan prepares the organization for unexpected turnover in a senior position; helps identify future leaders; finds the right person for the senior position; trains the new leader before they begin their new role; brings skill gaps to light in current staffing; identifies potential risks and problems that the organization may face in the future; and provides a map to show where the current staff fit into the organization.

Effective Planning

Succession planning should be a formal documented process developed by the organization to plan for the retirement, termination, or exiting of a key position. It should also create a short-term plan of action in the event of illness, injury, or other such absence of a key position. In essence, the plan should create direction for the future and specify how to handle an emergency or unexpected situation as related to key employees.

Initiating a Succession Plan

To begin, the board identifies the key positions of the organization and determines an accurate description and required skills of each role. Next, the board determines the potential risks of each position such as retirement, leaving the organization, etc. These risks will be specific to the organization and its current staffing. The risks identified play key roles in developing the plan – outlining strategic leader development, emergency succession, and departure-defined succession planning.

Now that the above have been identified, a plan will be created to mitigate these risks and provide the organization with a guide to obtain the leadership the organization needs in the future. Lastly, this plan should be updated as facts and circumstances change; or in the absence of changes, the plan should be reviewed annually and revised as necessary.

Remember the old adage, “don’t put off for tomorrow things you can do today.” The time to begin succession planning is now; why wait?  Contact a BCG&Co. succession planning strategist for more information.

By: Corey Centofanti

In an age of full disclosure and constant connectivity, many nonprofit organizations find themselves facing the question, is social media right for us?

When used as an appropriate tool, social media can bring many opportunities to nonprofit organizations. While there are many great reasons to implement social media sites, the single largest reason social media has become so popular is due to an easy and effective way to spread an organization’s name and mission. Sites such as Facebook and Twitter offer a means of full disclosure, allowing nonprofit organizations to tell their entire story.  This is a simple method for followers to obtain information, possibly about smaller organizations on the follower’s end.

But, are nonprofits viewing social media as opportunities or as additional costs?  Current surveys report   that about “three out of five nonprofit organizations doubt that using social media will give them a return on investment; plus, they worry about the time it takes to put social-media efforts in place” (Raymund Flandez, The Chronicle).

What Do You Stand to Lose?

Yes, integrating social media in your organization is an investment that runs a risk of not offering significant returns, especially in the short run.  Also, just like implementing any new process, social media integration can take substantial effort and time. However, Facebook, Twitter and LinkedIn are free of charge and take little time to set up profiles which can be easily searched or followed. By putting forth even a minimal investment of time, the organization may still enjoy newfound attention and support as a result.

During the early implementation phase, without dedicating much more than small increments of time, an organization can make occasional updates to their sites. This simple maneuver keeps followers informed of important upcoming activities and events, or even the organization’s needs, which otherwise isn’t easily obtainable information by other methods.

Increasing Your Audience Base

While social media not only creates new – but improves – existing lines of communication for not-for-profits, it is not exactly the most efficient means of asking for funds. But its strength lies more within its ability to match your organization with others that share your cause. It is very effective at introducing organizations to new opportunities, whether they come in the form of new employees, more volunteers, or other organizations looking to further your cause. All of these opportunities can allow a nonprofit organization to spread their reach and deepen their donor pools.

Customizing Social Media to Fit Your Needs

So when deciding whether social media is right for your organization, you will need to consider the following:

First, entering this new territory is an investment. Like any investment there is always the potential risk of failure, but also a potential for success. Know how much you’re willing to invest before beginning.

Second, start social networking with a purpose. Whether your purpose is to find out what other nonprofits are up to, or to hire a new employee, or even just to find out what the population knows about your organization, give yourself a goal and then use the social sites as a means to achieve it.

Lastly, use social media sites to grow. These sites are a great way to get feedback about what the population likes and dislikes, use that feedback to learn from the past mistakes of your organization and others like you.

By: Tanya Dunkle, CPA

Unrelated business income can be a confusing topic for many nonprofit leaders.  It can also be costly – there are tax filing and payment requirements for unrelated business income as well as the potential for loss of exempt status if not properly handled.

According to the IRS, “Unrelated business income is the income from a trade or business that is regularly carried on by an exempt organization and that is not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity.”  The following are key points in this definition that warrant further discussion:

• A trade or business includes any activity carried on for the production of income from selling goods or services.
• A business activity of an exempt organization is considered to be regularly carried on if it shows a frequency and continuity, and is pursued in a manner similar to comparable commercial activities of for-profit organizations.
• A business activity is considered not substantially related to an organization’s exempt purpose if it does not contribute importantly to the accomplishment of that purpose.  An exempt organization’s need for income, or ultimate use of these funds to accomplish its exempt purpose, does not impact this determination.

The Internal Revenue Code specifically excludes the following activities from the definition of unrelated trade or business:

• Volunteer labor:  Any trade or business in which substantially all the work is performed for the organization without compensation is not considered an unrelated trade or business.
• Convenience of members:  Any trade or business that is carried on primarily for the convenience of its members, students, patients, officers, or employees is not considered an unrelated trade or business.
• Selling donated merchandise:  Any trade or business that consists of selling merchandise, substantially all of which has been received as gifts or contributions, is not considered an unrelated trade or business.
• Bingo:  Certain bingo games are not considered an unrelated trade or business.

When an exempt organization generates unrelated business income, this income must be accounted for and reported separately.   If gross income from unrelated businesses is $1,000 or more, the organization is required to file Form 990-T and pay applicable taxes.  Taxes are due even if all of the proceeds from the unrelated business activities are used to fund tax-exempt activities.

The obligation to file Form 990-T is in addition to the obligation to file the annual information return, Form 990, 990-EZ or 990-PF.    And an organization exempt under IRC section 501(c)(3) is also required to make its Form 990-T available for public inspection.