Newsletter

CARES Act Introduces Forgivable Loans for Nonprofits With Paycheck Protection Program

On March 27, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. While the sweeping legislation introduces a multitude of significant measures, the Paycheck Protection Program is a lifeline for nonprofits, injecting capital when they need it most. However, the hallmark of the program is that the loans can be partially or fully forgivable, provided certain criteria are satisfied.

What Is the Paycheck Protection Program?

  • The Paycheck Protection Program, which was allocated nearly $350 billion through the CARES Act, is an extension of the existing U.S. Small Business Administration (SBA) 7(a) Program.
  • Loan applicants may be granted up to $10 million with an interest rate not to exceed 4%.
  • The loans are nonrecourse, and collateral is not required to secure the loan.
  • The loan is forgivable if the employer maintains certain levels of full-time equivalents (FTEs) and payroll. The amount forgiven is based on a sliding scale through a compliance period.
  • Loan forgiveness under this program is non-taxable.
  • The new program waives the SBA’s “credit elsewhere” requirement, which determines whether the borrower has the ability to obtain some or all of the requested loan funds from alternative sources without causing undue hardship.

Is My Nonprofit Eligible?

  • Applies to certain nonprofits including 501(c)(3) organizations with fewer than 500 employees.

What Are the Borrower Requirements?

Borrowers must make a good faith certification to the following:

  • Uncertainty of economic circumstances makes the loan request necessary to support ongoing operations.
  • Funds will be used to retain workers and maintain payroll or to make mortgage, rent, and utility payments.

What Is the Maximum Loan Amount I Could Receive?

  • The maximum loan amount for any recipient is $10 million.
  • Loans will be formula-driven: the average monthly payroll costs over the prior 12 months multiplied by 2.5.
    • In this calculation, payroll costs are categorized as follows:
Included
Excluded
Salary, wages, and commission Compensation for an employee that exceeds $100,000 (prorated over the covered period from Feb. 15, 2020, to June 30, 2020)
Cash tips or equivalents Compensation to an employee with a principal residence outside the U.S.
Vacation or other leave Qualified sick wages or family leave wages paid under Families First Coronavirus Response Act for which the payroll credit is permitted
Allowance for dismissal or separation Federal employment taxes including employees and employers share of FICA (Federal Insurance Contributions Act)
Payments for group health (insurance premiums)
Retirement benefits
Payment of state or local tax assessed on compensation

 

How Can I Use the Loan Proceeds?

The loan proceeds can be used for the following:

  • Payroll (at least 75% of the forgiven loan amount must be used for payroll)
  • Continuation of group healthcare benefits during periods of paid sick, medical, or family leave
  • Employee salaries, commissions, or similar compensation
  • Interest on mortgage obligations (but not mortgage prepayments or principal payments)
  • Rent
  • Utilities
  • Interest on other debt obligations that were incurred before Feb. 15, 2020

How Much of My Loan Will Be Forgiven?

Maximum Forgiveness Amount

  • Borrowers are entitled to loan forgiveness equal to the sum of the following expenses paid during the eight-week period, which begins on the loan origination date:
    • Payroll costs
    • Covered utility payments, including electric, gas, water, transportation, telephone, and internet access for which service began before Feb. 15, 2020
    • Covered rent obligation, including rent obligated under a leasing arrangement in force before Feb. 15, 2020
    • Covered mortgage interest obligation, including a mortgage on real or personal property incurred prior to Feb. 15, 2020
  • The loan forgiveness amount will not exceed the amount of the loan.

Reduction of Forgiveness Amount

  • The loan forgiveness amount will be reduced if there is a reduction in the number of FTEs. This reduction percentage is calculated at the election of the borrower by either of the following:
    • Average number of FTEs per month (over the eight-week period)
      Average number of FTEs between Feb. 15, 2019, and June 30, 2019
    • Average number of FTEs per month (over the eight-week period)
      Average number of FTEs between Jan. 1, 2020, and Feb. 29, 2020
  • The loan forgiveness amount will be reduced by any reduction in total salary or wages of any employee that is in excess of 25%. This applies only to employees that received a 2019 annualized salary of less than $100,000.
  • There is a special rule for a reduction in seasonal employees.
  • Employers can mitigate – or eliminate these reductions – if they restore the number of FTEs and total salary by June 30, 2020.

Any balance remaining after the loan forgiveness would have a maturity of 2 years. The interest rate will be one percent for loans not more than $350,000; .50 percent for loans of more than $350,000 and less than $2,000,000; and .25 percent for loans of at least 2 million.  You will not have to make any payments for six months following the date of disbursement of the loan.

Loan Forgiveness Application

Documentation is critical for loan forgiveness. Here is a list of documentation that would need to be submitted to your lender:

  • Verification of FTEs and pay rates
  • Payroll tax filings
  • State income, payroll, and unemployment insurance filings
  • Documentation that covered mortgage, rent, and utility obligations were made
  • A certified statement that the amount of forgiveness was required to retain employees or meet the covered obligations

Lenders will have 60 days to render a forgiveness determination.

Need Help Getting Started?

We can work with you and your lender to see if you qualify.

Sustainability to Survivability: 5 Nonprofit Finance Must-Do’s in the Time of COVID

In the nonprofit sector, the fragility of life is always very present. Likewise, for nonprofit leaders, the fragility of our organizations is also always present. Fears of an impending recession and the decline in the percentages of individuals donating to nonprofits have made the sustainability of organizations a top concern for executive directors for quite some time. But none of us expected the sudden disruption of our lives and society brought on by a pandemic.

As nonprofit professionals scramble to devise new operating plans designed to serve as many as possible while protecting and caring for employees, the thought of sustainability seems almost quaint. All revenue streams, from foundations to individuals and even fees for service, are under extreme pressure. Indeed, for many executives, thoughts today are not on sustainability but survivability—and, as always, it is at these times our constituents need us most.

The initial steps to respond to the pandemic have varied by type of organization with the focus, rightly so, being on humanity—serving our clients—as well as safety and protection. Arts and culture organizations, educational institutions, and other community organizations have closed their doors for extended periods while several social service organizations continue to operate, balancing constituent service with social distancing. One constant across the sector has been the cancelling of spring fundraising events and the upheaval of development plans. As organizations struggle to maintain operations, payrolls, or both while revenue is decreasing, there are steps they can take to increase likelihood of success:

  • Understand your cash position.
  • Assess damage to revenue streams.
  • Look at the dual bottom line.
  • Include everyone in the discussion.
  • Communicate consistently.
Understand Your Cash Position

Cash is king. With expenses continuing and revenue on hold, knowing your cash position serves as a foundation for action. Certain common ratios like the quick ratio or current ratio calculate whether the organization has enough cash to pay its bills today, but they don’t provide guidance on how long it can weather this disruption. The best ratios for that help with understanding your liquid reserves:

This ratio calculates how many months of savings the organization has if it operates at its current rate and receives no additional income. The numerator subtracts restricted cash and receivables, assuming the organization will not be able to perform the work necessary to release those revenues. The denominator is simply the annual budgeted expenses divided by 12 months.

This is the purest form of a reserve. It allows leadership to understand how much time they have to stabilize the organization. For many organizations, this is somewhere between two weeks and four months.

For organizations that have ceased operations but are committed to maintain payroll as long as possible, a separate calculation that only includes essential expenses such as payroll, health insurance and occupancy-related costs in the denominator may be useful:

This formula lets leadership see how long their current position allows them to maintain these basic expenses. In this ratio we have excluded receivables, but they can be included if the organization believes there is a high likelihood of collecting them.

These formulas are the simplest way of calculating and monitoring the organization’s savings. A more strategic approach would be to prepare or update the organization’s cash flow projections for the next six months showing expected inflows and outflows of cash. With the ratios as a foundation and the cash flow projection as a tool, leadership can work with the board to build out scenarios if they have time. At the very least, leadership can monitor the urgency of the situation and make informed decisions about how to continue.

Assess Revenue Streams and Damage

The formulas above focus on the organization’s expense side, assuming no additional income. Attention should also be paid to revenue. Many foundations are attempting to continue grantmaking, and many local government agencies are seeking to fund expanded social service activities for vulnerable populations with emergency dollars. Therefore, revenue projections based on the updated development plans and budget, which take into consideration our new reality, can be inputted into the cash flow projection for a more realistic picture. While it is conservative to assume your organization will not receive any new income, acting on a worst-case scenario does not necessarily lead to strategic or beneficial decision-making.

Revisiting revenue streams also allows leadership the opportunity to discuss revised plans and to focus on those efforts where the organization has the strongest relationships and greatest likelihood of securing funds. For example, some special events have already moved online, with operas livestreaming performances and social service agencies holding online auctions and sending recorded messages to supporters. While less revenue has been raised, there may have also been fewer expenses. This is also the time to identify areas where board members might have relationships and could meaningfully engage in sharing the fundraising workload.

Look at the Dual Bottom Line

When cash gets tight, the financial bottom line becomes readily apparent. But in stressful times, it is important to consider both bottom lines: impact and financial. Especially if challenging decisions need to be made about where to focus, consider the impact of each program and fund the highest impact programs first. This is often a difficult discussion. Everything an organization does has value, but given the current situation in which we find ourselves, which aspect of the organization has the most value today? Are there longer-term programs or projects that could be put on hold? Could unrestricted resources and staff be transferred to those efforts with the highest impact, such as direct services? Could reducing expenditures on lower impact programs allow the organization to build cash reserves?

This is especially helpful if cuts need to be made. One common response to crisis is to implement a straight percentage cut across all activities; however, this is not the most strategic decision. Yes, it avoids conflict, but focusing on those programs where there is an intersection of organizational strength and pressing constituent need is essential. Not only does this allow the organization to most effectively have impact and accomplish its mission given the resources it has available, but it also helps make the case for increased support to funders.

The matrix map visual is a helpful way of highlighting both the impact and profitability of an organization’s programs and looking holistically at how each program of an organization contributes to its impact and financial viability. While the process of completing a detailed map can take some time, a rapid version can be created in an afternoon. Remember, the map is a representation of the business model used to inform decision-making, not a 100-percent-accurate picture. In some cases, some information is better than complete information, especially when the goal is to bring others along in the discussion and make decisions. This is one of those cases.

Include Everyone in the Discussion

Speaking of bringing others along, there are no “right” answers to these challenging questions, and ideas for sustaining the organization know no positional boundaries. Engaging everyone in these candid conversations can often surface new approaches or meaningful strategies. That said, programmatic staff may be overwhelmed and overworked responding to the crisis, and leadership will need to decide whether it is appropriate to add to their workload by bringing them into the conversation. However, our default position is that nonprofits are community organizations responding to a community challenge and they benefit from the input of close community members during these difficult times. Our desire is for everyone to have a voice.

Determining the organization’s cash position, described above, will inform how much time leadership has to meaningfully engage a broad group of people in discussion. At a minimum, however, board and senior leadership should be involved in surfacing potential solutions. Ideally these positions will be informed by staff and constituents. Especially for social service organizations, it is important that the needs of those being served are well known and represented in the discussions.

Again, the easy solution in these times is for a small group at the top of an organization’s leadership to come together and make decisions, but this group may not be as well informed about constituent needs as others. By opening the discussion, unexpected opportunities might surface. Additionally, by sharing the complexity of the decision to be made and the options to consider, leadership helps to build community and buy-in for implementation.

Communicate Consistently

Our last point may be the most important. Often, in times of crisis when leadership is busy trying to serve constituents and make informed decisions to save their organization, communication can lapse. Leaders may feel they have “nothing new” to say or they might not yet have a “path forward” or solution for the organization and therefore don’t communicate to key stakeholders. Unfortunately, while understandable, this is the wrong course of action.

Nonprofit organizations are expressions of our humanity—people coming together to build stronger, more enriching and more equitable communities. By expressing the hardship that our organizations are experiencing and the difficult choices that must be made, we invite others to participate in the process. We are all joined together in this time, living through a pandemic the likes of which none of us have ever seen.

This is especially true of donors. Helping donors understand firsthand what your constituents and the organization face allows them to support you in the most effective manner. We cannot only talk with stakeholders when things are going well. Helping everyone understand that the organization is maximizing impact and leading with its values—with the needs of our constituents and staff front-of-mind—strengthens the connection and relationship donors feel with the mission. This connection will be necessary for organizations to survive this shock and ultimately be able to thrive once again.

Time is of the Essence

None of the steps here are easy—especially in a time of crisis. Given this rapidly evolving pandemic, it is tempting to put off decision making to see how the situation progresses. One lesson from the Great Recession, however, was that those organizations that assessed their situation earlier were able to make strategic decisions which resulted in less severe measures later. Nonprofit leaders face competing demands and priorities as they deliver on their missions. By inviting others in, communicating clearly, looking at the organization holistically, and understanding where we’re starting from financially, leadership can attempt to spread the workload, build commitment, surface strategies and implement solutions to help their organizations—and our communities—survive and, once again, eventually thrive.

FTM Firm Response to Coronavirus (COVID-19)

It has been a very challenging few weeks for all our clients and our communities over the last several weeks.    It seems like the only communication I have received over the last two weeks has been about the pandemic.   We just wanted to let you know that we have worked with nonprofits in crisis over the last twenty years so we are here to help when and where you need us.    Fortunately, we have been a remote CPA firm since 2017 and have capacity to help host and access your accounting software like MIP Fund Accounting and QuickBooks.   We can provide outsourced staffing to complement your existing staff or to provide staffing while a staff person is unable to work.   We can provide access to our client portal as well and have remote meeting capabilities to allow the communication to continue.  Let us work with you to ensure your essential accounting and financial services remain operable and your accounting continues.  We can  help  determine the financial impact and proper course of action going forward.  Thank you for what you do to serve our communities especially during this health crisis that has impacted everyone.  Let’s do what we can to do to help each other out during this pandemic.

 

NonProfits Guide to Fraud Prevention

According to the most recent Fraud study conducted by the Association of Certified Fraud Examiners (ACFE), nonprofits account for 9% of all frauds and reported a median loss of $75,000 (ACFE 2018 RTTN) along with an even greater potential cost for reputational damage.  It maybe surprising, but the external audit is only likely to detect fraud 4% of the time.  The top detection methods include tips-40%; internal audit-15%; management review-13%; accident-7%; account reconciliation-5%; and document examination-4%.  With lack of board and management involvement in finance for nonprofits, it seems like we are relying too heavily tips and accidents to detect fraud.

6 FRAUD RISKS SPECIFIC TO NON-PROFITS
We’ve all heard the myths when it comes to fraud in not-for-profit organizations: “It can’t happen here. All of our volunteers and staff members are honest and committed to our mission, and besides they’ve been with us for years. If someone was stealing from us, we would have found it by now.” But the fact is that not-for-profits account for 10.1% of all frauds (ACFE 2016 RTTN) and face specific risks that make them particularly susceptible.
1. Inadequate resources for financial oversight

Of the roughly 1 million public charities in the United States, about three-quarters have annual expenses of less than $500,000.  Small not-for-profits often lack the resources for strong internal controls such as segregation of duties.
2. Excessive control in one person

Especially in small not-for-profits, the founder or executive director may be responsible for almost everything – from writing checks to approving vendors. This lack of segregation of duties creates a seedbed for fraudulent behavior. Tenure and level of authority also positively correlate with the magnitude of the fraud. Executives commit frauds with a median loss almost 10 times those caused by employees, and employees with more than 10 years of tenure are responsible for median losses 2½ times those caused by employees with less than five years of experience, according to ACFE’s 2016 Report to the Nations.
3. All-volunteer boards with little or no financial oversight

The risk of too much control concentrated in the hands of the executive director indicates a need for objective oversight from a financially literate board of directors. To meet their fiduciary duty of care, all board members need to understand how to read financial statements and be alert to warning signs of errors, fraud, or abuse. However, unlike many for-profit corporations and larger not-for-profits, smaller NFPs tend not to recruit board members with experience running organizations and overseeing financial responsibilities.
4. Volunteers privy to confidential information

In addition to the board members, volunteers perform many financial functions in not-for-profits, including collecting donations, rental fees, and other payments. In many cases, these volunteers have not been vetted thoroughly, opening the door to a potential fraudster.
5. Nonreciprocal transactions

A donor typically does not receive anything of value in exchange for the contribution except for a letter acknowledging the transaction. In many cases, that contribution is in cash. Both of these facts make it all too-easy to divert those funds.
6. Susceptible to negative publicity

In the 2016 ACFE study, more than 40% of fraud cases were not reported to the police, and the most commonly cited reason was fear of negative publicity. For many not-for-profits, negative publicity and the subsequent hit to donations could sink the organization. That knowledge exerts pressure on many executive directors to keep the fraud quiet, and the very fact that so many of these cases go unreported is an incentive to fraudsters. Because there is no record of their malfeasance, subsequent employers are none the wiser. Of the repeat offenders who perpetrated major embezzlements in the last five years, about one in six stole from not-for-profits or religious organizations.

REDUCING THE RISK OF FRAUD-IDENTIFY THE TYPES OF FRAUD
Due to these unique risks, if your not-for-profit organization hasn’t already suffered an instance of fraud, then there is a decent chance that you will discover one soon. And, if so, it likely has been going on for months or even years.

But you can change the ending of this story. According to the ACFE, 29.3% of fraud cases are due to a complete lack of internal controls. Choose your own adventure by instilling a strong anti-fraud culture and a set of controls that are targeted to your organization’s unique risks.
Start by identifying the types of fraud that could be perpetrated by your employees, board members, or volunteers. Some of the typical types of fraud experienced by not-for-profits include:
• Billing fraud, including credit card abuse, charge personal items to organization, creation of fictitious vendors, or billing for personal items or marking up goods or services excessively. Frequency: 40% of all fraud cases, according to ACFE.

• Skimming, in which funds are diverted before they are ever recorded on the books. This fraud is most likely to happen when the funds are in the form of cash. Frequency: 17% of fraud cases.

• Expense reimbursement fraud, in which an employee claims reimbursement for fictitious or inflated business expenses to include mischaracterized expenses, fictitious expenses, and multiple reimbursements. Frequency: 29%.

• Check tampering, a scheme in which an employee intercepts, forges or alters a check. Frequency: 19% of fraud cases.

• Payroll manipulation, which includes fraudulent timekeeping, fictitious employees, and continued payment of terminated employees. Frequency: 22%.

• Corruption, in which an employee abuses his or her influence in a business transaction including bribery, kickbacks, illegal gratuities, economic extortion, and collusion. This situation includes board members or executives with conflicts of interest, as well as bribing. Frequency: 34% of fraud cases.

FRAUD RISK ASSESSMENT KEY QUESTIONS TO DETERMINE YOUR RISK

Armed with an understanding of potential types of fraud and the demographics of fraud perpetrators, executive directors and board members should ask and answer some key questions that can illuminate gaps in internal controls. This process is also known as a fraud risk assessment.

The overall question a nonprofit should be asking is:

What are the business processes and controls around functions where money is coming in and going out of the organization?
Specific questions include:

• What is the tone at the top with respect to ethical behavior?

• How often is management reviewing financial transactions?

• Do we have a written conflict of interest policy? Are officers, directors, and key employees required to annually disclose interests that could give rise to conflicts?

• Do we have a written whistleblower policy?

• Do we have a written accounting policy handbook that identifies each significant accounting position and describes job responsibilities?

• Does the accounting policy describe processes and internal controls related to each major transaction cycle? Does it spell out who should have corporate credit cards and who can write and sign checks?

• Do we regularly monitor and enforce compliance with each of the above policies?

IMPLEMENT CONTROLS FOR FRAUD PREVENTION, FRAUD DETECTION, AND FRAUD CORRECTION TO MITIGATE RISKS
With an understanding of areas where fraud is likely to occur, any organization can implement simple controls to mitigate those risks by implementing internal controls that fall in the three primary areas of prevention, detection, and correction.
Fraud Prevention

The first line of defense includes measures that prevent perpetrators from committing an act of fraud.

For example:

Segregation and/or rotation of financial duties. The person who initiates a transaction shouldn’t approve that transaction, and the person who approves the transaction should be different from the person who records it.

Credit card policies. Credit card accounts are akin to cash and should only be assigned to employees who have a clear need to use them, such as purchasing managers. Bookkeepers, with no need to make purchases, should not have credit cards. When individual cards are required, consider credit purchase contracts for employees outlining utilization responsibilities and rules, and restrict accounts with spending limits and merchant accounting codes.

Dual signatories. Requiring two signatures on checks above a certain amount (both of which are from individuals who did not write the check) reduces the likelihood of check fraud.

Access controls, such as strong passwords for accounting systems, restrict access and also increase traceability of actions.
Background checks. In addition to prospective and current employees, also scrutinize vendors and volunteers who are involved with financial transactions.

Fraud Detection

Due to their limited resources, many small organizations can’t afford to implement robust preventive controls. Ongoing oversight through detective controls can provide the safety net such organizations need. These controls include:

Hotline policy. This control is consistently the most common method of initial detection among frauds reported to ACFE. As shown in our symphony example, more than 47% of frauds reported in the 2016 ACFE report were detected initially through a tip from a whistleblower.

Internal audits of financial statements (comparing actual to budget and investigating any variances), as well as credit card charges, expense reports, payroll records, and petty cash. Internal audits were the second most common method of initial detection (18.4%), according to ACFE.

Management review of bank statements, credit card statements, canceled checks, and invoices. Management review was the third most common method of initial detection (12.1%)

External audits of financial statements, as well as of internal controls over financial reporting. These audits may not be cost-effective for many smaller organizations. While an external financial statements audit was the most common anti-fraud control reported by ACFE respondents, only 1.8% of frauds were detected by an external audit. The reason is that financial statement audits are not designed to detect misappropriation of assets, although auditors do assess fraud risks and procedures set-up to mitigate these risks.

Fraud Correction

Sometimes the best defense is a good offense. If would-be fraudsters know that they will be prosecuted to the full extent of the law, then they will likely think twice about targeting your organization. An effective fraud policy should include the following components:

Internal investigation. A forensic accounting investigation may be necessary to quantify the loss, determine how it was perpetrated, and track the money. This analysis may be necessary to support a prosecution or insurance claim(s).

Interviews. In addition to interviewing the suspect, other employees, board members, and volunteers may need to be interviewed.

External investigation. Pursuing prosecution creates a permanent record that can be discovered by other organizations where the perpetrator may seek employment or volunteer positions in the future.

Be sure to seek legal counsel in establishing any policies, as well as in executing those policies in the case of an actual fraud.

PUTTING POLICY INTO ACTION
We’ve outlined a number of policies that you can use to rewrite your organization’s story.
Here is an action plan that any size organization can use to putting these policies into action:

1. Set the right tone. In addition to creating written conflict-of-interest, whistleblower, code of conduct and accounting policies, distribute hard copies of those policies at least annually. Most importantly, talk about the importance of ethical behavior and the consequences of not living up to the organization’s code of conduct and other policies.  Put policies in writing and have all employees sign documents saying they understand and will follow the rules.   You should discourage a “win at all costs” attitude so the employees and volunteers aren’t encouraged to bend rules, falsify records, or commit fraud in order to meet expectations.

2. Know your team and hire the right people. Unfortunately, perpetrators of fraud often go on to commit schemes at other organizations, disproportionately at nonprofit and religious organizations. Conduct background checks of all prospective employees and volunteers who will be handling financial transactions to put job applicants on notice that the organization values integrity.  Also conduct periodic background checks of current employees and volunteers.  A great deal can be learned from a candidate’s references, work history, credentials, pre-employment drug testing, and criminal background checks.

3. Recruit at least one financially savvy board member who is capable of overseeing your organization’s fraud risk. Educate that person regarding risks specific to your organization.

4. Train board members, employees, and volunteers to be aware of and watch for signs of fraud.  Pay attention to rumors of changes in an employee’s behavior or lifestyle. Red flags include living beyond one’s means, gambling problems and other evidence of financial difficulties, an unusually close relationship with a vendor, and control issues.  You need to educate employees and volunteers to know what to look for to identify fraud and how to report it and provide training as needed.

5. Become involved in the financials, with a focus on anomalies. Frauds discovered by management review and other proactive controls showed the greatest percent reduction in median fraud losses.

6. Create an easy and comfortable method for reporting suspicions. Keep in mind that, while employees are the primary source of tips about fraudulent activity, they may also come from outside sources – such as vendors, customers, competitors, and anonymous sources. Create a mechanism, such as an anonymous hotline, that is accessible by any of these sources.  Cost and fear of notoriety keep some organizations from exposing fraud and taking legal action, but lax attitudes make it easier for the next person to commit fraud with the fear of reprisal.

7. Perform a fraud assessment. Consider a review of your fraud risks every three years, or more frequently if your organization does not perform regular internal audits.  You need to make sure you have internal controls in place that are preventive and detective for fraud.  Mandatory vacations and job rotation make it difficult for an employee to continue to conceal a crime.  You need to have appropriate personnel policies and procedures and make sure policies are applied fairly and equally.   An employee assistance program can help prevent fraud by providing professional help with personal problems such as alcoholism, drug abuse, marital problems, or gambling.

If you’re looking for help identifying fraud risks and implementing cost-effective internal controls to mitigate those risks, contact us for our free assessment about your current situation and how we can help. But most importantly, don’t wait until a fraudster strikes your organization.  We can help you ask the right questions and determine the red flags for fraud.  Please contact us to discuss our certified fraud examination services for fraud prevention and forensic accounting which are available as a CFO service.

Beyond Financial Oversight: Expanding the Board’s Role in the Pursuit of Sustainability

This article is reprinted from NPQ’s spring 2011 edition, “Governing amid the Tremors.” It was first published online on April 26, 2011.

Throughout the ten years prior to the recession, it seemed that whenever anyone talked about boards and finances in the same sentence they were making a point about accountability. They were warning us that our Form 990s were now on GuideStar, so we’d better make sure that our boards were reading them. They were telling us to have an audit committee and a “Conflict of Interest” policy. They were telling us that we should study Sarbanes-Oxley and apply whatever we could to our own boards. They were making constant reference to a handful of nonprofit fraud cases, suggesting that this was what awaited us if our boards did not get very serious about oversight and accountability.

Now, as community-based organizations continue to weather the severe, and in many cases permanent, shifts in their operating environments caused by the recession, those accountability concerns seem downright quaint. The truth is that one of the roles that most decently functioning boards play quite well is providing financial oversight. Compared to other board functions, financial oversight is relatively clear: there is a dedicated officer role, the treasurer; nearly all boards have a finance committee; and there are tangible products such as an annual budget to approve, financial statements to distribute, and an auditor to select.

The problem is none of those tangible products in and of themselves has anything to do with nonprofit sustainability. And it is sustainability that is keeping executive directors up at night, not financial oversight. In a new book I coauthored, Nonprofit Sustainability: Making Strategic Decisions for Financial Viability, my colleagues and I define sustainability as being both programmatic and financial:1

Sustainability encompasses both financial sustainability (the ability to generate resources to meet the needs of the present without compromising the future) and programmatic sustainability (the ability to develop, mature, and cycle out programs to be responsive to constituencies over time).

In other words, board finance committees can look at annual budgets, financial statements, and audits forever, but if some group of board members is not considering those financial results in light of the organization’s programming mix and its results, then their efforts are very unlikely to contribute to sustainability.

Our boards, not unlike many of our staffs, are artificially siloed into groups that consider financial results, groups that consider programmatic results, and groups that consider fundraising results. Yet, for those of us without an endowment or many wealthy annual donors, program results in large part drive financial results. It is how many clients we case-manage that yields a particular contract reimbursement. It is how many units of housing we build that yields a particular developer’s fee. It is how popular our new play turns out to be that yields a particular box office revenue. And just as critically, it is how many people respond to our direct mail campaign and to our special event invitation that determines how much subsidy we can raise for programs that don’t cover their own costs. Put another way, if the board finance committee doesn’t like the financial results it is seeing as it provides oversight, what is it going to do about it? It has to look to the programs and the fundraising activities of the organization to yield different financial results; that’s the only way to make the financial statements say anything better.

So while financial oversight is absolutely critical, it is hardly sufficient. Boards of directors charged as stewards of an organization have to be fundamentally knowledgeable about and actively engaged in the business models of the organizations they govern. And nonprofit business models are typically the antithesis of siloed; they are instead a very interdependent mix of programs and fundraising activities that work together to achieve a set of impacts and financial results. How engaged are most boards in that interdependence? And if they are not engaged, how can they meaningfully assist with the dogged pursuit of sustainability in which so many of their executives find themselves?

The complex challenges facing community-based nonprofits require that we shift our mental model from boards being primarily about financial oversight and accountability, to boards being concerned in an ongoing way with the financial sustainability of their organizations.

Is Your Board Sustainability-Focused?
If you are considering making the pivot from an oversight orientation to a sustainability orientation, consider using these discussion questions to start off the conversation at your next board meeting:

  1. How financially literate are we as a group? If we have knowledge gaps, how will we work together to close them, and by when?
  2. Is our finance committee engaging in the key business-model questions facing our organization, or is it focused primarily on monitoring budget variance and preparing for the audit?
  3. What major sustainability decisions are before us as an organization, and how will we structure our board and committee-meeting agendas over the next three to four months to ensure we make those decisions effectively?
  4. Overall, how healthy is our organization financially? Is it healthier today than it was three years ago? Why or why not? When our board terms end, where do we want to leave the organization financially?
  5. How strong is our partnership with staff leadership around issues of sustainability? Are we sharing information and ideas across staff and board in a way that truly leverages our individual and collective strengths and networks as board members in the sustainability pursuit?

When pivoting a board of directors from a strictly oversight orientation to a sustainability orientation, there are a number of things to consider. For instance, a board with a sustainability orientation requires board members who are financially literate. By this I mean that everyone has, or is actively developing, an understanding of the financial statements they receive. They have the fluency, for instance, to ask how a core program is performing both financially and programmatically. If only two or three people on the board can read the financial data, the board is unlikely to have holistic conversations that take both mission impact and financial return into account. With a sustainability orientation, financial statements become a useful tool in the ongoing discussion of where the organization should go next rather than merely reports that the treasurer assures everyone she has reviewed on their behalf.

Practically, this means that board chairs and executives need to team up in creating a board culture that expects and supports financial literacy from all members. During the recruitment and orientation of new board members, thorough and transparent discussion of the organization’s business model and its current financial challenges and opportunities should be central. A board with a strong sustainability orientation will most likely pass on the potential recruit who uses stale language such as, “I am not a numbers person. I leave that stuff to the treasurer.” The response should be, “Our board is focused holistically on the sustainability of this organization, so everyone engages with our financial results. We will train you and support your development as a financial leader, but you have to be committed to our stance on this point to be successful on this board.” In addition to this kind of strategic recruitment and orientation, board chairs and executives should prioritize financial training opportunities and consider mentoring among board members to support members who are in active development of their financial literacy. Once a year, all board members should receive a one-hour refresher on how to read and interpret the organization’s particular set of monthly financial statements.

To signal and reinforce this sustainability stance, chairs and executives should consider renaming their finance committees and adding nontraditional members—folks who are financially literate but who have program or fundraising as their primary orientations, for instance. A board committee called “Finance and Sustainability” that is composed of both finance experts and programmatic folks actively engaging with the business model’s concerns will support the pivot to a “beyond oversight” board. When a diverse group of members is reviewing and discussing the numbers, not only can it go beyond merely reporting to the full board how close to its budget the organization is or is not, it can also frame for the board the questions of “why?” and “what might we do about it?” With this approach, the treasurer role evolves from that of a CPA, who is among the only people able and willing to review financials, to a full leadership role that supports the full board’s meaningful focus on the complex questions and difficult decision making of the sustainability pursuit.

Another key shift required for a sustainability orientation is the normalizing of profit. Profit, like program impact, is fundamental to sustainability. A board of directors that is uncomfortable budgeting for surplus and unwilling to face the brutal facts about the prospects for profitability of core activities is not operating with a sustainability orientation. It is important not to conflate profitability with earned income, however. Many community-based nonprofits achieve profitability—that is, consistent annual surpluses—through a mix of earned and donated income. A special event can be just as profitable as a fee-based service to the community. The key is for boards to be looking for profit wherever it can be generated in the model, and to be ensuring that, as a set, the organization’s activities yield more than they consume.

Through the recession, many leaders have had to face the reality that they can no longer subsidize core activities that do not cover their own costs. The fact that an activity is core to an organization’s mission and very needed by its constituency does not necessarily mean that the organization can afford to keep it in its business model. So many executives I talk to now lament not having faced those realities sooner. I attribute this reticence to act on unsustainable deficits in part to boards of directors not deeply engaging in why and how their organizations were incurring deficits. That is, they didn’t deeply understand which activities in their business models were losing money, and how much; instead, they talked in macro terms about the organization’s overall “not hitting budget.” Part of pursuing sustainability is determining the desired profitability of every core activity—programmatic and fundraising. While most community-based organizations will elect to subsidize a handful of money-losers—allow the profits from an annual event to offset the losses in the government-funded job training program, for instance—the board should be very clear on these decisions and ensure that those subsidy decisions do not result in deficits for the organization overall.

The nature of financial plans and reports shifts too with a sustainability orientation. Ironically, the classic tools of annual budget, monthly financial statements, and an audit can actually keep a board focused on oversight rather than business model sustainability. When boards focus too much on annual budget variance, for example, I find that they are often not sufficiently engaging in projection. Rather than focusing all of their analytical energy on how close the organization is to numbers it predicted six or eight months ago, members of the Finance and Sustainability Committee want to be anticipating the next several quarters’ results, too. We spend too much time providing oversight on things that already happened, and not enough time considering the financial road ahead. For-profits engage in rolling projection, and I believe that nonprofits should do this as well.

Rolling projection moves the board of directors away from the silly obsession with “hitting the year-end budget” and toward the capacity to make earlier and better decisions given the economic forces happening in real time. Fiscal years are artificial time frames. All major decisions will have economic impact far beyond the current fiscal year. Put another way, it is just as important to have a good July as it is to have a good June. When boards focus only on predicting the coming twelve months (annual budget), monitoring variance from that increasingly outdated prediction (monthly financial statements with budget variance), and reviewing the past year’s statements (audit), they risk not actually engaging in the pressing and emerging business issues facing their organizations right now. Again, financial oversight is critical but insufficient for sustainability.

A board that is focused on sustainability will be working a handful of key business-model issues all the time. In this economic climate, very few community-based organizations do not have to rethink some aspect of their business models. The Finance and Sustainability Committee members will partner with staff leadership to articulate those issues and find meaningful ways for the full board to understand them and, where possible, contribute to their resolution. For instance, the committee may come to the realization that the organization needs to close or transfer its drop-in program for teen dads because, while valued by the community, it has lost money for three years in a row, and its government contract is unlikely to survive the next round of county budget cuts. A committee member can partner with the executive director to craft a presentation to the full board, laying out the data and framing the key questions for board decision making: Are we prepared to end this program, and if so, by what date? Are there elements of this program that we can transfer to a collaborator or competitor? Are there financial implications of closing this program that we need to understand (for example, laying off staff, alienating a key funder, or losing the contract’s modest contribution to defraying overhead costs)? One board member can be engaged in reaching out to another community organization about the potential for program transfer; another board member can join the executive director in breaking the news to the government funder; and so on. In this fashion, the full board is actively engaged in decision making and execution on a business-model issue essential to the organization’s sustainability.

For too long, too much of our boards’ finance focus has been on reviewing the past. For many nonprofits, this meant decision making was too slow in the face of the mounting recession. Modest reserves were depleted, and organizations were left exceedingly vulnerable during a time of great community need. The lesson of the recession is that boards must engage not only in financial oversight but also in the pursuit of sustainability. To do this well, boards have to be composed of financially literate members who engage in real-time analysis and focus on answering the complex business-model questions their organizations face today.

Notes

  1. Jeanne Bell, Jan Masaoka, and Steve Zimmerman, Nonprofit Sustainability: Making Strategic Decisions for Financial Viability. San Francisco: Jossey-Bass, 2010.

Nonprofit Tax Alert: Parking Tax REPEALED

As part of a bipartisan year-end spending and tax package agreed to this week, Congress repealed IRC Section 512(a)(7) that required tax-exempt organizations to pay a 21% unrelated business income tax (UBIT) on qualified transportation benefits provided to employees (the “Parking Tax”).

President Trump is expected to sign this legislation today to avoid a partial government shutdown at midnight December 20. Once signed, the repeal of the “Parking Tax” is retroactive to the original date of enactment. Taxpayers should be able to file amended Form 990-T to claim a refund for any UBIT paid related to providing qualified transportation benefits to their employees after December 31, 2017.

The legislation also amends IRC Section 4940 private foundation excise tax on net investment income to a single rate of 1.39%. The 1% or 2% tax rates have been eliminated. This single rate rate of 1.39% will be effective for tax years beginning after the legislation’s date of enactment.  The new rate is effective for tax years beginning after December 20, 2019.

For additional details, refer to the law (H.R. 1865, Division Q, AKA the Taxpayer Certainty and Disaster Tax Relief Act of 2019, SECs. 207 and 302) or visit irs.gov/charities-and-nonprofits.

As always, let us know if you have any questions.

IRS issues 2020 standard mileage rates

The optional standard mileage rates for business use of a vehicle will decrease slightly in 2020 after increasing significantly in 2019, the IRS announced on Tuesday (Notice 2020-05). For business use of a car, van, pickup truck, or panel truck, the rate for 2020 will be 57.5 cents per mile in 2020, down from 58 cents per mile last year after increasing from 54.5 cents per mile in 2018. Taxpayers can use the optional standard mileage rates to calculate the deductible costs of operating an automobile.

Because the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, suspended the miscellaneous itemized deduction under Sec. 67 for unreimbursed employee business expenses from 2018 to 2025, the notice explains that the standard mileage rate cannot be used to claim a deduction for those expenses during that period.

However, self-employed taxpayers can deduct automobile expenses if they qualify as ordinary and necessary business expenses. And an exception to the disallowance of a deduction for unreimbursed employee business expenses applies to members of a reserve component of the U.S. armed forces, state or local government officials paid on a fee basis, and certain performing artists. They are permitted to deduct mileage expenses on line 11 of Schedule 1 of Form 1040, U.S. Individual Income Tax Return, (an above-the-line deduction) and may continue to use the 57.5 cents-per-mile business standard mileage rate.

The standard mileage rate also can be used under Rev. Proc. 2019-46 as the maximum amount an employer can reimburse an employee for operating an automobile for business purposes without substantiating the actual expense incurred.

Under Notice 2020-05, driving for medical care or for certain limited moving expense purposes for members of the armed forces may be deducted at 17 cents per mile, which is 3 cents lower than for 2019.

The TCJA repealed the moving expense deduction for individual taxpayers from 2018 to 2025, except for U.S. armed forces members on active duty who move pursuant to a military order and incident to a permanent change of station to whom Sec. 217(g) applies.

The rate for service to a charitable organization is unchanged, set by statute at 14 cents per mile (Sec. 170(i)).

The portion of the business standard mileage rate that is treated as depreciation will be 27 cents per mile for 2020, 1 cent more than 2019, one of the few amounts that is increasing.

To compute the allowance under a fixed-and-variable-rate (FAVR) plan, the maximum standard automobile cost is $50,400 for 2020 for all automobiles (including trucks and vans), the same as in 2019. The FAVR amounts were recalculated in 2018 after the TCJA retroactively amended the bonus depreciation rules. Under a FAVR plan, a standard amount is deemed substantiated for an employer’s reimbursement to employees for expenses they incur in driving their vehicle in performing services as an employee for the employer.

As always, please contact us should you have any questions.

Should Your Nonprofit Build an Endowment?

Wait a minute—the first question should be, “What’s an endowment?” Unless you work under a rock, you probably have a common-sense understanding of the term, but if you are going to bandy it about with accountants or regulators, you need to understand that the word has a technical meaning that doesn’t always square up with common usage.

In everyday use, people talk about an endowment as money in the bank that earns interest and dividends they can use for operations. But technically, the term refers only to that portion of your investment pot that is “permanently restricted” because the donors said that they do not want you to spend the money, or because you collected it with the understanding that it was a permanent investment reserve. Management or a board of directors can set aside additional reserves for the purpose of investment, but technically this money is not endowment—accountants sometimes call this “quasi-endowment.” Now, this distinction often doesn’t matter, especially if you’re just interested in how interest and dividends help your cash flow. But it does matter when you’re doing your accounting, and it also matters when a cash-strapped organization starts thinking about paying for operations from those cash reserves.

Should you build an endowment? Well, there is little debate that you should set aside money for a rainy day—a cash reserve that can help to smooth out the ups and downs in your operations. Just as investment advisors recommend that individuals have six months of emergency funds tucked away in a savings account, nonprofits should also strive to have cash on hand to hedge against uncertainty. This isn’t endowment, or even quasi- endowment—it’s just operating slack that you might need when, say, your donations take a hit one year, or you have an unexpected expense.

An endowment is established when you and your donors consciously build a reserve for the purpose of creating a financial bedrock for the organization. You can’t spend the principal unless the donor or a court says so, but the income from that principal is usually fair game. This investment income is golden, because you don’t have to earn or solicit it. Some gift agreements specify how interest income should be spent, but it typically comes with no strings attached. There is no magic figure at which your pot is large enough to call it an endowment, but it isn’t a serious asset unless it is roughly twice as large as a typical year’s operating expenses.

Organizations that are in the endowment game, however, reap the benefits of solidity and unrestricted income. An endowment can also be a very positive symbol that shows the community and potential donors that your organization is not a fly-by-night operation. It signals that yours is a flush organization that plans to be around for a very long time—this alone can bring in large donations.

So, then, why do donors give to endowments? We know that many donors cringe at the idea that their donations are going to anything besides delivery of services, so why would somebody give money that purposely is not going to be spent? Well, we should not overlook the generic “power of the ask”—endowment campaigns are visible community events that give donors a new reason to contribute to an organization that seems to be serious about planning for the future. But there are two other reasons about “the future” that motivate some donors to contribute to endowment.

The first is the idea of perpetuity. This is the same motivation that causes some patrons to create private foundations. In addition to whatever philanthropic motivations drive them, many people who spend a lifetime building an empire and a reputation for beneficence want that empire and reputation to live forever. The impulse for some part of us to live on forever isn’t a negative one—some say it is the same deeply seated psychological impulse that drives humans to have children. When we give contributions to operations, we get a warm glow from knowing that the money is going to be used soon to further a charitable mission. When we give contributions to endowment, we experience the glow of perpetuity. Our money will undergird a community institution long after we’re gone. That’s a powerful motivator, and one that has generated billions of dollars in investable assets in the nonprofit  sector.

The second motivator is similar, and that’s the drive for elites to control community institutions.  This doesn’t apply to the average donor, but there are a few people in every city who both have money and are prominent movers in the community. Transferring money and property across generations is one thing, but transferring standing in the community is another. Making big contributions to endowments of elite institutions (like museums or private schools) is one way families seek to transfer status to their children. Heirs can gain standing in community institutions based on the contributions their family has made to these institutions. If you are one of these institutions, this is another motivation you can tap into to generate endowment.

So, endowments are built through the union of an organizational commitment to building an investment reserve and a relationship with donors who believe that this is a good investment in the future, for their community, and for themselves. When the union is a healthy one, the result can be an endowment large enough to generate investment income that can be used for a variety of organizational and community purposes. Who wouldn’t want to be sitting on a big pot of money?

Before you run out and start cultivating your endowment, though, you should know that there’s a flip side. Endowments are not good for all organizations, and not everyone loves them. The biggest argument against endowments—and the one that comes up in almost every deliberation about whether to start one—is that having to do with addressing current needs, and the other having to do with the declining value of money.

Current needs is the one that at least one of your board members will bring up, and is very possibly the reason why your board will vote not to have an endowment. “Why should we put a million dollars in a bank account when we can use that to serve a million more lunches?” Or buy a hundred thousand more books. Or facilitate a thousand more adoptions. Or renovate the façade of the theater. Many nonprofits are in dire need of more money, and most can at least think of an immediate way to use more. Therefore, it isn’t surprising that some people will value the use of contributions to meet current needs rather than build an endowment. And it isn’t just your board members who might feel this way—it might well also be your patrons, clients, elected officials, and local newspaper. Some people go so far as to say it’s not ethical to lock money in the bank when there are so many necessary ways to spend it now. Before you know it, you have bad press and declining donations—and you wish you’d never thought of raising an endowment.

The issue of the declining value of money has to do with the growth of the economy over time. When a charity spends my $100 contribution now, it gets $100 worth of good out of my money, whether that’s in operations, administration, or future fundraising. But just like $100 was worth more in 1960 than it is today, that $100 in 50 years (or even next year) will be worth less than it is today. Contributions to an endowment have less and less real dollar value over time. Endowments might keep up with inflation if they reinvest some of their earnings, but most nonprofits value their endowments because they get to spend those earnings. Consequently, nonprofit endowments face a never-ending battle against time.

There are a few other issues to consider, too. Endowment building is a strategic decision that requires management attention and a relationship with donors. As such, organizations need to be prepared to commit resources for managing both money and people. Organizations with the largest endowments (private universities, usually) have staff members whose only job is to manage the endowment and maximize its investment potential. Large endowments also open the potential for more sophisticated investment strategies and greater diversification, both of which tend to help large endowments perform better than small ones. You can stick your endowment in a money market account, but you’ll do better when you actively manage your money, or pay a professional to do it. That takes time, money, and commitment that nonprofits without endowments don’t have to worry about. Management and fundraising expenses can be huge.

Another concern to consider when you’re thinking about building an endowment goes back to that technical definition we started with. “Permanently restricted” is a phrase that should trouble managers who understand the value of staying flexible in an ever-changing environment. “Permanently” means forever beholden to the wishes of the donor. The donor cannot exert direct control over the money (or you), but you promise not to raid that money—even if you can no longer make budget. That’s the “restricted” part. An endowment-rich organization can be cash poor, with big assets and not enough additional money to run its programs. Just as too many suburban homeowners have hefty mortgage payments that leave them short on their food and clothing budget at the end of the month, too many nonprofits have hefty endowments that throw off money to keep on the lights but don’t relieve the need to raise funds to run programs at full speed. “Permanently restricted” can be a noose around the neck.

Without putting too fine a point on it, nonprofits with and without endowments are different animals. A big endowment can open up your financial options, but it might also limit your ability to change with the times. Some have suggested that privation feeds the nonprofit soul—organizations without endowments are more frugal, more innovative, and more responsive to their communities.

That brings us to the flip side of the endowment serving as a symbol of solidity and permanence in your community. While this reputation can inspire some donors to dedicate their contributions to your permanent future, it can cause others to shy away. When the local museum solicits my $100 for renovations, I might be inclined to think, “Why do they need my money? They have $50 million sitting in the bank that they aren’t using.” It’s hard for a well-endowed nonprofit to make the case to average donors that the organization still needs regular donations to maintain operations. If endowment income can’t keep pace with a decline in donations, it might end up being a drag on your operations rather than the cure-all you expected.

There are good reasons to have an endowment, and good reasons to not have one. The only way for a nonprofit to decide whether to pursue an endowment strategy is to fully educate your board of directors and have them hash it out. There is no obviously correct decision. Best wishes in making the one that is right for you.

Author:  Mark A Hager, Associate Professor of Philanthropic Studies in the School of Community Resources & Development, Arizona State University

Forms 1099, W-2, and W-3 Due by January 31, 2020

Employers and other businesses must file wage statements and independent contractor forms by Jan. 31, 2020.

Before the Protecting Americans from Tax Hikes (PATH) Act, employers generally had a longer period of time to file these forms. But the 2015 law made a permanent requirement for employers to file their copies of Form W-2, Wage and Tax Statement, and Form W-3, Transmittal of Wage and Tax Statements, with the Social Security Administration by Jan. 31.

Certain Forms 1099-MISC, Miscellaneous Income, filed with the IRS to report non-employee compensation to independent contractors are also due at this time. Such payments are reported in box 7 of this form.

The early filing date means that the IRS can more easily detect refund fraud by verifying income that individuals report on their tax returns. Employers can avoid penalties by filing the forms on time and without errors. The IRS recommends e-file as the quickest, most accurate and convenient way to file these forms.

Get a jump on the due date

Employers should verify employees’ information. This includes names, addresses, and Social Security or individual taxpayer identification numbers. They should also ensure their company’s account information is current and active with the Social Security Administration before January. If paper Forms W-2 are needed, they should be ordered early.

Hopefully, you collected your W-9 forms from independent contractors to whom you paid $600 or more this year.  The information on W-9’s can help you compile the information you need to send 1099-MISC to recipients and file them with IRS.  Here is a link to the Form W-9 that you would need to request your contractors and vendors to complete.

Your organization should send Copy B (recipient) of the 1099-MISC to those whom you pay nonemployee compensation, as well as file Copy A with the IRS.  Form 1099-MISC should be provided to each non-corporate service provider who was paid at least $600 for services during 2019.   Generally, reimbursed expenses using a accountability plan (receipts are provided) can be excluded from amounts reported on box 7.  Reimbursed expenses reported on box 7 can be deducted by the contractor or vendor.   It is usually best for the organization to not have an accountability plan for independent contractors and the leave the responsibility for finding and keeping receipts up to your independent contractors.

1099-MISC forms generally don’t have to be provided to corporate services providers, although there are exceptions.   Corporate service providers would include C or S Corporation including a limited liability corporation (LLC).  There are no longer any extensions for filing for Form 1099-MISC late and there are penalties for late filers.  Starting in 2020, the IRS will be requiring 1099-NEC to end confusion and complications to taxpayers.  This new form will be used to report 2020 non-employee compensation for by February 1, 2021.

Enter amounts of $600 or more for all type of rents, such as rental paid for office space should be reported on box 1.   However, you do not have to report these payments on Form 1099-MISC if you paid them to a real estate agent or property manager as they should report the rent paid to the property owner.  Public housing agencies must report in box 1 rental assistance payments made to owners of housing projects.  See Rev. Rul. 88-53, 1988-1 C.B. 384.

Automatic extensions of time to file Forms W-2 and 1099-MISC  must meet extreme criteria to request an extension. The IRS will only grant extensions for very specific reasons. Details can be found on the instructions for Form 8809, Application for Time to File Information Returns.

For more information, read the instructions for 1099-MISC,  Forms W-2 & W-3 and the Information Return Penalties page at IRS.gov.

Please contact us if you have any questions or if we can help you with performing these reporting requirements.

Best Practices for Financial Policies and Procedures

It is important that Nonprofit Organizations have a financial policies and procedures manual.

If you have not updated your financial policies in a while or don’t have a financial policies and procedures manual, our firm can help you develop or update your financial policies and procedures. An organization with good financial policies and procedures benefits from operating efficiencies, clear expectations, financial accountability, and training.

A financial policies and procedures manual is important for the following reasons:

  • Improving your operation
  • Document bookkeeping
  • Document control environment
  • Document control procedures
  • Document accounting system.
  • Lay out clear expectations
  • Grant compliance
  • Staff training

The financial policies and procedures manual should improve your operation by documenting policies, processes, and procedures to encourage timely and accurate information. A manual can minimize resource drain and fraud areas by improving and automating systems and processes.  The manual can serve as a checklist for major financial activities that need to occur within the finance function. The manual can serve as communication and training for finance staff and others within the organization. The manual should be updated to reflect your accounting system and software and how it supports the organization.

The manual should document your bookkeeping. The bookkeeping should document what is required source documentation to support the required accounting. The bookkeeping should document how the accounting system and software is to be used and maintained. The bookkeeping needs to discuss and implement an effective filing system.

The manual should document your control environment. Your control environment includes the following:

  • Organization Structure
  • Philosophy and Operating Style-Tone from the Top
  • Personnel Policies and Procedures
  • External Influences
  • Board, Finance, and Audit Committee Oversight
  • Authority Defined
  • Performance Monitoring and Follow Up-Monitoring Controls

The manual should document your accounting system. Your accounting system should do the following:

  • Record Transactions
  • Record Timely and Accurate Information
  • Proper Period Reporting
  • Disclose Accounting Events
  • Involve Program Staff
  • Maintain Audit Trail

The manual should lay out clear expectations, ensure grant compliance, and provide staff and program training. The policies need to document board and staff responsibility and accountability, segregation of duties, safeguarding assets, personnel integrity and competence, and inherent limitations.

We need to ask the following key questions for control procedures: what errors or irregularities could occur? What procedures would prevent or detect such errors or irregularities? Are controls procedures in place and effective? We would suggest you review each of the major finance areas to include cash receipts, cash disbursements, and payroll.

We would like to suggest the following areas are essential policies.

  • Cash Receipts and Revenues
  • Billing, Accounts Receivable, and Grants Management
  • Cash Disbursements and Expenditures
  • Purchasing, Accounts Payable, Travel, Credit Cards, and Debit Cards
  • Payroll and Human Resources
  • Audit
  • Budget
  • Financial Reports
  • Record Retention and Destruction

We would suggest the following areas as optional policies

  • Board, Finance, and Audit Committees
  • Governance Policies including Conflicts of Interest, Whistleblower, Gift Acceptance, and Code of Conduct.
  • Other policies would include a chart of accounts, general ledger, and technology

It is important that you take the time to document your financial policies and procedures. The purpose of this knowledge article is to develop or improve your current manual with these best practices for financial policies and procedures.

You can download a FREE Sample Nonprofit Organization Financial Policies and Procedures Manual from our resource documents page.