Detail –

IRS Notice 2018-99 provides guidance for determining the nondeductible amount of parking expense, if your organization is a for-profit company, as well as the amount that would increase Unrelated Business Taxable Income (UBTI), if your organization if a non-profit. The appropriate method depends on whether the organization pays a third party for employee parking or if the organization owns or leases a parking facility where its employees park. If an organization pays a third party for employee parking in the third party’s parking lot or garage, the Section 274(a)(4) disallowance (foregone tax deduction for a for-profit company or amount required to be
added to Form 990T as UBTI for a non-profit) generally is calculated as the organization’s total annual cost of the employee parking paid to the third party up to $265 ($260 for 2018) per month per employee. If parking expenses amount to more than $265 per month per employee ($260 for 2018), the excess needs to be included in the employees’ income and would deductible as wages if a for-profit organization. If an organization is a nonprofit organization, then excess would be added to employees’ wages but would not be added to Form 990-T as UBTI. If an organization owns or leases all or a portion of a parking facility for its employees, IRS Notice 2018- 99 proposes a four-step method to determine the amount of UBTI. This may be used as a safe harbor until final guidance is issued.

There have been so far unsuccessful efforts to repeal this. We are following the IRS updates very closely and will keep you posted with more information as it becomes available. Please reach out to us with any questions you may have.

As you may know, the accounting profession has adopted new standards for audits that have materially increased the cost of all audits for years ending after December 15, 2007. These new audit standards are mandatory and have caused the cost of audits to increase 15% – 20% – 30% or more because of the additional work auditors are forced to do. Moreover, the cost to the client is increased beyond the audit fee because of the additional time it takes your staff to help our staff through the audit under the new standards. Some smaller nonprofits that do not have competent accounting staff on board are now required to hire outside help to prepare the work papers and make the year-end adjustments that we, as auditors routinely prepared/made as part of our audit work, but can no longer do under the new standards.

Audits under the new standards are expensive. Do you really need to have one? An audit is always a good idea if you can afford one. It gives a level of comfort to your board and to funding sources. Nonprofit governance experts always recommend an audit as part of a board’s fiduciary responsibility. Does your board and staff actually use or even review the audit? Is it just filed away? Can some of the money you annually spend on the audit be better spent on improving the services you provide to the community?

There are some alternatives to the audit I will present to you. Before that, you need to ask the question: Am I required to have an audit? By-laws of many nonprofits require an annual audit. By-laws can be amended. If you are a Massachusetts nonprofit required to register with the Commonwealth’s attorney general (Form PC), you have to have an audit if your gross receipts are more than $500,000 for the reporting year. For Rhode Island nonprofits, the Department of Business Regulation requires you to have an audit if you have gross receipts of more than $500,000, you are seeking to raise $25,000 or more from the general public (defined as small businesses and individuals) and you are not a school, church or some other excepted organization. Most funding sources dispensing federal funds to you will make you adhere to the OMB Circular A-133 audit requirements which mandate an audit under A-133 and GAO “yellow-book” standards if your federal source funds are more than $500,000 in your fiscal year. In addition, some governmental funding sources mandate an audit and many foundations request that you send them a copy of your latest audit report with your funding proposal.

Our experience is that you have to adhere to the Mass PC, RI Department of Business Regulation and OMB audit standards, but you may get a state or city funding source to waive the audit requirement or accept a much cheaper “agreed upon procedures” audit of their contract instead of a full agency audit. We are not aware of any foundation that has denied funding to any of our clients because they did not submit an audit report with their funding proposal. Foundations will accept compiled or reviewed financials or even an internally prepared financial statement or an IRS Form 990 in lieu of an audit, but you should confirm this with the specific foundation before you make your decision.

What are your alternatives? There are three (3) levels of financial statements that we as CPAs prepare for our clients; audited financials, reviewed financials and compiled financials. The financial statements themselves can be the same in all three (3) reporting alternatives; what is different is the accountant’s letter.

• In audited financial statements, the CPA report says that it has audited the financial statements under generally accepted auditing standards and that the financial statements present fairly the financial position and performance of the entity in conformance with generally accepted accounting principles. That is the CPA firm expresses an opinion on the financial statements after applying a set of auditing techniques and obtaining evidentiary data from you. Notice that the letter will say presents fairly, not exactly. That’s because accounting is an art not a science. Give two (2) similarly qualified CPAs the same minimally complicated organizations to audit; the odds are very good that they will produce two (2) different sets of financial statements. If you are looking for total verification of an organization’s financial statements, the financial statement audit does not accomplish it. Total verification involves a forensic audit which is always very, very expensive.
• A step down from audited financials is reviewed financials. In a review, the CPA report says that the firm has reviewed your financial statements under professional standards. The report further says that we express no opinion on the financials except nothing came to our attention when performing the review that would lead us to believe that they are materially misstated. Reviews cost typically around 40-60% of the cost of an audit.
• The third level of financial statement presentation is compiled financials. In a compilation engagement, the CPA takes your financial data and puts it into proper nonprofit financial statement format. No work may be done analyzing the figures unless something unusual about your information comes to our attention when we look at your data to prepare the financials. Our CPA report states that we have compiled the statements under professional standards but we express no opinion or other form of assurance on them. In other words, the statements could be compiled from financial information completely made up by you!!! Compiled financials typically cost 50% or less than the cost of a review.

In audit and review engagements we issue a management letter on areas we discovered during our work where the nonprofit can improve upon its financial or general management procedures. We do not issue management letters under compilation engagements.

“Agreed upon procedures” engagements are engagements where the CPA firm and the client agree on specific procedures you want us to perform on a limited set of financial data. We will then perform these procedures and issue a report to you typically in letter form which summarizes our results in performing the work. This kind of work is becoming more common with government contracts where the contract specifies an annual audit but after petition from you, the funding source agrees to waive the annual audit in favor of an agreed upon procedures review of its specific contract. The cost of this work varies greatly depending on what we are asked to do but it combined with a review or compiled set of financials will still be far less costly than an annual financial statement audit.

I hope you have found this helpful. Please share it with your Board of Directors. If you have questions, we would be pleased if you would call on us.

As advisors to nonprofit organizations ALSD often encourages them to strengthen their boards by adding qualified businesspeople.  But for the businesspeople themselves – what to expect? Author Gayle Gifford has been helping our clients for years.  For Gayle, “nonprofits are a commitment to our society to create a more just and peaceful world of hope, beauty, and equal opportunity for all.”

Congratulations! You’ve just joined the board of directors of a charitable nonprofit. If this is a new experience for you, you are in good company. More businesses today seem to encourage (even push) their staff to get involved with nonprofit service.

The people who serve on nonprofit boards come from all walks of life — from other nonprofits, from government, consumers, community members and the business world.
Most likely, you’ll learn this craft through “on-the-job” training. If you are one of the fortunate few, you joined a high-performing board with great role models. With luck, your board will bring in a trainer now and then to work with you on board governance. (And, you can visit another boards to see how it works or even read one of the many great books designed to help you be a better board member).
While you might feel a little unsure of yourself, remember that most nonprofits relish the thought of businesspeople on their boards. They are eager to benefit from the business savvy, strategic thinking, technical skills, connections, and from the many other resources that business may have that nonprofits find harder to afford.
To help get you started, I wanted to share a few insights about nonprofits and then a few tips to get you started.
First the insights.
The world of businesses and nonprofits are both different and the same.
How is that for stating the obvious! But it’s true.
As a businessperson serving on a nonprofit board, you may experience a little culture shock at first. Decisions seem to take longer to make. Lots of people need to be consulted. Change may occur more slowly than you anticipated.
Many of these cultural differences flow from the very nature of charitable nonprofits. Because a nonprofit is accountable to the community for doing good, building constituent support and goodwill is essential to continued success. Stakeholders expect to have some say in the outcomes.
The problems and needs that nonprofits address are multi-faceted, involving complex and constantly changing systems of clients, funders, supporters and opponents. The “product” is not always easy to define and measuring impact can be extremely difficult.
Small organizations take on these big issues. In the USA, over 85% of public charities have annual revenues less than $250,000, which makes them more comparable to a “micro-business.” In Canada, half report revenues under $50,000. For many of these small nonprofits, their staff may have limited experience in management and resource development — if they have any or many staff at all. Funds for training and professional development are often scare.
Decisions and actions both big and small often rely on volunteers. The biggest decisions of all are made by volunteers — you, the board. Volunteers have all levels of expertise, knowledge and experience. Volunteer priorities usually follow the needs of family and work. Managing volunteers requires all of the skills and tools you would use with your staff, lacking one small but highly motivating reward — money.
Despite the differences, there are many ways that nonprofits and businesses are similar. Both enterprises need to be responsive to their marketplace. They need business acumen and attention to the business to be successful. Both require good research and quality information for good decision-making. Both demand high commitment to ethical behavior. And both need the structures, systems, people, skills, strategy and accountability that make any enterprise successful.
So, in the nonprofit world, how can you best put your business experience to work?
Here are a few tips to get you started.
Focus on the bottom line — the mission.
In business, profit is the bottom line. In a nonprofit, it’s the mission. Think of the mission as a contract that you’ve entered into with your community — a contract designed to make the world a better place by filling an unmet need, solving an important problem, creating new knowledge, or by increasing the level of joy or beauty for the people who live here. Everything your nonprofit does should be measured against how well it is fulfilling that mission.
Don’t undercapitalize.
Successful nonprofits also have the financial and other resources to get the job done. So while you focus on the mission, don’t forget to ensure that your organization has a well-developed capacity to obtain the resources it needs to keep moving forward. The fewer staff you have, the more likely that you will play a critical role in obtaining those resources.
Do your market research.
You wouldn’t think of starting a new company or making a major business decision without quality research to inform your decision. Yet, many nonprofit board members are tempted to make decisions based on their personal feelings or individual experiences. Do your research. Don’t conjecture. Seek out best practices and benchmarks. Keep up-to-date on issues affecting both nonprofits and your charitable mission. Ask for time at board meetings for education as well as action.
Share what you know.
There is a lament in the nonprofit world that we seek out board members who have extraordinary talents, but when they serve on our boards they seem to have left those talents back at the office. Just like your business, your nonprofit needs your knowledge as an entrepreneur, a resource-getter, a strategic thinker, a people-motivator, or an organization builder. That’s what they recruited you for. Apply those talents to your work on the Board.
Ask board leadership for your job plan and annual performance measures.
Just as you provide your employees with job descriptions and clear expectations for performance, you should expect the same for your role on the board. What is it that you have committed to? What will you achieve during your term of office? What are your priorities? What resources do you have to work with? What relationships are critical? What are the limits of your position? How will you be evaluated?
Be serious about legal matters.
It’s tempting for volunteers, especially in small organizations, to think — “those rules don’t apply to our little local organization.” Whether you are a $100,000 or $100 million nonprofit, the same rules and regulations apply. Do you know what your legal responsibilities are as a board? As a board member? Be knowledgeable about federal, state and local regulations governing your nonprofit. Be vigilant to ensure that your staff and board comply with those regulations. You may be liable for personal penalties if your nonprofit violates those rules.
Hold core values of stewardship and ethical behavior.
The nonprofit sector depends on the trust and confidence of the public for its existence. When a nonprofit violates that trust, it places the whole sector in danger of losing the unique privileges afforded to tax-exempt organizations. Nonprofits survive because they have promised the public that they will use their resources wisely for the community good and not for personal gain — the essence of stewardship. It’s easier to be ethical when you’re committed to wise stewardship.
Combine an entrepreneurial attitude with patience.
In their study of high performing boards, the international consulting firm of McKinsey & Company report that nonprofit leaders tell us that “when boards… devote time to providing expertise, helping managers get access to people and resources, and building managerial capacity, their organizations benefit the most.”At the same time, McKinsey and Company stated in a report on nonprofit capacity building that “almost everything about building capacity in nonprofits (and in for-profit companies) takes longer and is more complicated that one would expect.” Entrepreneurship and patience are important virtues.
Last, but definitely not least, be courageous.
It is not easy to be a good board member. It’s hard to rock the boat or risk offending business colleagues by asking questions that everyone else seems to be dodging, or by insisting on right but difficult courses of action. Even setting goals takes tremendous courage. But nonprofits need, no, they require the courage of board members. As Dr. Martin Luther King Jr. said, “the time is always right to do what is right.” It’s just not always easy.
Good luck. Enjoy your board service. It’s a good thing to do.
If you’d like to share the lessons you’ve learned as a business person serving on a nonprofit board, I’d like to learn from you. Just drop me a line at the email address in my bio. I’d be pleased to share your experiences in a future newsletter.

Gayle L. Gifford is  President of Cause & Effect Inc, and one is one of just over a hundred individuals who have earned the ACFRE, the advanced fundraising credential from the Association of Fundraising Professionals. She is an author of two books and contributing author to four books on nonprofit boards, fundraising and management. Check her blog, www.ceffect.com/butterfly-effect, or e-mail her at gayle@ceffect.com

Any views, opinions, and statements are those of Gayle Gifford exclusively and may not represent the views, opinions, and/or statement of Aaronson Lavoie Streitfeld Diaz & Co, PC or its officers or owners. Nor has Aaronson Lavoie Streitfeld Diaz & Co reviewed or authorized the information Gayle Gifford has presented and it expresses no warranty on them.

Q: I file the IRS 990 information return for my non-profit.  Why does it ask me if my organization offers indoor tanning services?
–Sunshine on my Mind, Anchorage

A: It’s Obamacare, silly.  Section 10907 of the Affordable Care Act imposes a 10% penalty on indoor tanning services offered by for-profits or non-profits. (You didn’t notice all the tanned bodies exiting the Salvation Army?)

Q: Did Rhode Island just raise or lower my taxes?
–Poor in Pawtucket

A: Yes it did.  If your household earns less than $30,000 annually and you are accustomed to the $300 “property-tax relief” check (also available to renters), fugget about it — unless you are 65 years old and/or disabled.  What? You didn’t read about it in the news? Maybe it’s cause it wasn’t there. If you are a client and want to know if this applies to you, e-mail me.

If you are a “C” corporation your tax rate has been cut from 9% to 7% effective January 1, 2015.  If your benefactor can wait until next year to die, the estate tax threshold has gone up from $921,655 to $1,500,000.

Q: What’s an F-BAR? Is there a happy hour?
–Pat, ex-Pat

A: You mean the “Foreign Bank Account Report” and it will not make you happy. If you or your business have foreign bank holdings, the aggregate of which exceeded $10,000 at any point during the year you are required to disclose such assets by June 30 of the subsequent year or face a levy of up to 50% of the account’s value. Foreign includes Canada, and even if you are nothing but a signer on the account you must file. My firm can help.

Q: I hear the IRS has made it easier to apply to become a non-profit. Is this good or bad?
–Back of the line do-gooder

A: Yes. The IRS recently unveiled the 1023 EZ, a streamlined on-line application for organizations with under $50,000 in annual revenue. Typical applications have been taking upwards of a year to process. There is considerable concern, however that the EZ will open the door to fraudulent applications, flood foundations with illegitimate organizations requesting funds, and eliminate the important education function that applying for non-profit status has traditionally involved.

Q: How can we prevent the brain-drain of young, educated college graduates leaving Rhode Island?
–I’m outta here, Brown

A: I don’t rightly know but I read a fascinating op-ed in the Providence Journal that had some innovative ideas, like paying the student loans for college grads who live in the state for five years post-graduation. The article by Ruarri Miller is entitled “Tear Up the Book of Rules Holding Rhode Island Back.”

Q: What is the “Underground Economy and Employee Misclassification Task Force?”
–Ten Nine-Nine

A: Rhode Island is cracking down on employers who “treat full-time employees as contractors, paying them under the table or other improper methods of saving on benefits.” Fortunately I know of no such businesses.

Q: What’s your favorite avocation, other than concocting Dispatches and thinking up new ways to market yourself?
–I am Curious, Fellow

A: I love speaking to professionals about tax and finance. I’ve presented to associations of lawyers, therapists, non-profits, social entrepreneurs and artists. You guessed it — e-mail me.

I love non-profits: the missions, dedication and eagerness to be of service.  Now you didn’t sign up as Executive Director to practice your accounting or legal skills, but without basic structure and controls the fruits of your labor can be washed away quickly.  The names and details have been changed in these examples:

Years ago I was on the board of an established non-profit, Narcissism for All. We ended up being sued by a real estate company for protesting development planned adjacent to our property.  They scoured our corporate records, and discovered we had not properly recorded the election of our officers in all years, if at all. This little error cost us dearly.  It called into question who could speak for us, and contributed to a lengthy and expensive case. ( That, and initially trying to defend ourselves on the cheap.  Take note.)

Flip N’ Stretch teaches yoga to dolphins.  Sarah has left the bookkeeping to Roger without paying much attention. Within every stack of checks he gave her to sign were one or two seemingly innocuous payments to a new vendor for “program supplies.”  By the time Sarah turned the problem over to us, $20,000 had walked out the door to shell companies owned by Roger.

( I am also a Certified Fraud Examiner and uncovered embezzlement in my first audit. My company has been helping non-profits for three decades, conducts forensic audits and can help you implement strong internal controls.)

I know, Florence Nightingale, I know — you are busy saving lives, who has time to reconcile bank statements or take minutes, let alone have meetings?  The least you should do:

-Use a bookkeeping system that simplifies the task, or hire a qualified bookkeeper. It seems basic but Luddites LLC has one employee and he won’t even use a spreadsheet. 

-Even with that, insure that a board member reviews the bank statements and/or the reconciliations (Reconcile! Look it up, or ask me what this means!).  If there is no board member willing to do so either your board is too small or not sufficiently engaged. The board has a fiduciary responsibility for the charity’s assets and board members must be expected to contribute something of their time beyond attending meetings.

-Establish a physical minutes book that records all decisions made by the board. Consider paying a lawyer to maintain this book and remind you when your annual meeting, state annual report and federal information returns come due.  If Alan Dershowitz serves on your board and would not charge you, that’s great. But board members change, so consider paying someone. You can lose your legal charter or tax-exempt status, or incur enormous IRS fines if you are not careful.

–Do not let bookkeepers sign checks, and have an internal policy that requires two signatures or authorizations on large, non-routine disbursements (e.g. not payroll). Limit access and establish controls for on-line investment transfers.

-Talk to your insurance agent about “fidelity bond” insurance that, for a modest fee, can protect you against losses from embezzlement, forgery and the like.

-Above all, lead by example. If the E.D. does not submit credit card receipts then others will conclude there is a double standard or lax controls, or both. Instead, encourage a culture of accountability for all employees.

You are a busy dentist and your bookkeeper signs the checks.

You are president of a non-profit; the treasurer is supposed to co-sign large checks with the ED. But the treasurer  is out of town, and you trust the ED.

Your Quickbooks password hasn’t been changed in seven years (Oh, you don’t have one.)

The cash part of the business? It’s just too complicated to keep track of.

Years ago I was engaged in my first audit, of a large mental health facility with a walk-in clinic.  We wondered why the income had decreased so much in the current year.  I spot-checked a few weeks of cash receipts and discovered there were several days when no cash had been recorded or deposited; this was highly unusual for such a high-volume facility.

Eventually the State Police were called in and the bookkeeper confessed. She had been there twenty years; the “little old lady” whom everyone trusted had taken over $30,000within a couple of years.

(My company, ALSD, makes recommendations on how to strengthen internal control when it conducts audits.)

Years ago (again!), I was studying to be a Certified Fraud Examiner and traveling overseas. I asked a carpenter friend to house sit; I was also hiring Molly to renovate my attic.  I gave her some cash upfront to buy supplies.  I came back ready to  take my CFE Exam ( Molly knew about this),  and discovered that very little had been accomplished on the attic.  She handed me a receipt for $100 even, with only the word “paint” on it and no sales tax; the receipt number was “001“.  Not a very crafty embezzler but you get the point — embezzlement (as opposed to robbery) by definition is an inside job — stealing bysomeone you trust.

To make matters worse, Molly had left cooked sweet potatoes in the oven for over a week.  But I passed the exam, and remain a CFE  (the yams had no such luck.).  In future posts I will talk more about how you can prevent fraud in your business and personal affairs.

Don’t leave money on the table.  Lost in the hubbub about the error-plagued website roll-out:  There have been lucrative tax credits available to very small businesses and non-profits since 2010.  And they are about to get more lucrative.

How lucrative?  For 2013, up to 35% of the premiums you paid for your employees.  For 2014, up to 50%. Really! No muss, no fuss, no caveats? No way! Here’s the skinny (no trans-fats allowed in healthcare discussions.):

• The maximum credit is available for companies with 10 or fewer employees who earned an average wage of $20,000 or less. The credit is unavailable if your firm employs 25 or more “full-time equivalent” employees or if the staff’s average wage (excluding the owners) exceeds $50,000. In between there is a sliding scale.
• You must pay at least 50% of your employees’ premiums.
• Starting in 2014 you must purchase the insurance through Obamacare’s “SHOP exchange”, which will require a broker until November, 2014, when it is scheduled to (finally) be available online.
• Your savings may be less than a dollar for dollar credit, for reasons that are beyond the scope of this article and the author’s ability to explain them lucidly in a brief newsletter! It depends on the tax situation of the company or owner who is claiming the credit.
• Non-profits with employees may also claim the credit even if they do not normally file taxes; their maximum credit or refund is 25% (35% in 2014).

Crying Uncle yet?  It IS complicated and you MAY need an ACCOUNTANT (who may need a Tylenol). But your small business or organization may still end up saving thousands of dollars in healthcare costs.

NOTE: Every situation is different and federal and state tax laws are subject to change.  This article is presented exclusively for informational purposes and is not intended to substitute for obtaining tax or financial advice from a tax or other business professional.

Can You Share Control?

 501 (c) (3) organizations require a board of directors that oversees their operations.  You can handpick them in the beginning and be a member of that board.  But members and agendas change and you could find yourself disillusioned or eventually even fired.  Maintaining a board aligned with your vision and yet strong enough to be effective can be a tricky task.

 Do You Have a Business Model?

Yes – it is a great idea for helping others. But you are also planning to start a business.

Revenues can come from programs, donations, grants and even unrelated business ventures (subject to tax).  Going the grant route?  Do you know/can you employ someone who knows the grant-writing landscape? Government funds are shrinking and foundations are overwhelmed with applications.  There ARE opportunities AND it will  take time and resources to access them.

Is your business model an existing for-profit enterprise that you want to take the tax-exempt route? Be careful.  If you are already paying income taxes on a healthy business, the IRS will be skeptical that all of a sudden you have a charitable purpose.  Establishing a non-profit foundation funded by the for-profit may be a better alternative.

Can You Afford It? (Application)

 The IRS application fee ranges from $400 to $850, depending on the proposed scale of your organization.  You may need to engage an attorney or accountant to prepare the application, and that could easily be at least $1,000; it is not an automatic process and the IRS may well reply to your application with questions, which extends the process and your professional expenses.  Sadly I have seen clients plow halfway through the process and then delay or even abandon the process for lack of funds.

Can You Afford It? (Approval)

 Is this where you are expecting to earn your livelihood? It usually takes time to ramp up, so you may well need to exist off savings or other income for a while.  Even when times are good, you are entitled to a reasonable salary and not a direct share of any increased “profit”.  And your salary if you are in charge is public record, via Guidestar, which publishes the IRS Form 990.

Have You Explored Other Options?

You do not have to be tax-exempt to do good work.  And there are new hybrid models out there, like the L3C, which is a for-profit model that allows non-profit investment and a double bottom line.  (The L3C is effective in Rhode Island as of July 1, 2012).  Or you might wait to apply– incorporate as a non-profit in your state, but find an existing 501 (c) (3) to receive tax deductible donations on your behalf while you establish yourself. It may be a small price to pay a fiduciary while you find out if you really have a viable idea worth such a major investment of time and money.

If I have not scared you off yet – great! Stay tuned for Part II – the application, Form 1023.