Nonprofit Accounting and Form 990 Overview

Nonprofit Finance Overview

Serenity AccountingA Different Approach to Nonprofit

Financewww.serenityaccounting.com

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Jacob Millington, CPAFounder and CEO - Serenity Accounting

[email protected]

Why Does Accounting Matter?

Language of business – a way to communicate. A way to fully cost programs. A way to evaluate impact – partly. Qualitative evaluations are

important too. Does the grant cover ALL of the costs of the program? Are donations correctly tracked? Is donor intent being followed? Does the nonprofit have enough cash for payroll? For rent? For

programs? Is the nonprofit satisfying regulatory requirements? IRS exempt

status? Allows organizations to create donor reports – Foundation Reporting. Serenity Accounting

A Different Approach to Nonprofit Finance

www.serenityaccounting.com703-371-3310

Types of Accounting Reports:

Financial Statements Program or Grant Reporting Program Budgets Donor Reporting Board of Director Metrics IRS Form 990 – Annual Tax Filing IRS Form 990-T – UBIT Tax Filing IRS Form 1023 – 501(c)(3) IRS Application IRS Form 1024 – 501(c)(x) IRS Application



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Who Uses Nonprofit Accounting:

Executive Director Program Managers Donors, Foundations, and Grantors Board of Directors Charity Navigator and other “Watchdog Organizations” Congress, Governmental Agencies, State Attorney Generals Future Donors Google, Urban Institute, and other Online Sites



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Items to Consider:

If one promises to contribute to a nonprofit at a later date, the nonprofit needs to record the promise at the date of promise, not the date of cash receipt.

If a nonprofit pays money today, for a future event, it is not an expense today.

If a nonprofit’s Employee Handbook provides employees a vacation pay-out at date of separation, the pay-out is earned while the employee is employed.

Leases are often included on the Statement of Financial Position.

Net Assets (equity) is split between different categories.

Statement of Activities:



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When donor restrictions are satisfied, the income needs to be reclassified.

The percentage of overhead cost is often closely evaluated.



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Natural Expenses versus Functional Expenses.

What Questions to Raise During Review:



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Potential Questions from Previous Slide:



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Program Budget Considerations:

Controllable versus uncontrollable costs. For example, the program manger can control the food budget at a soap kitchen. But….the rent, depreciation, executive compensation, etc. that gets allocated to the program are not controllable by the program manager.

When deciding if a nonprofit should accept a Foundation Grant, be sure that accounting report preparation salary time, executive salary time, rent, depreciation, etc. are covered by the Grant. Or at least budget for these items to ensure that other money is available to cover these costs.

Consider adding salary time and other costs into program budgets for evaluation and learning. At the end of the program, what did we do well? What could we change for next time? Did we reach as many people as possible, given the dollars invested? Serenity Accounting



Members and Revenue Recognition:

Generally membership periods cover multiple accounting periods. Revenue should be spread across accounting periods – Deferred

Membership Liability. Imagine subscribing to an annual magazine subscription, gym

membership, etc. Imagine paying a lawn care company in April to cut grass all summer.

Ensure that the nonprofit maintains enough cash to cover membership benefits over the whole membership period.

Ensure that membership benefits are justified and that all membership costs are covered by dues rate. If all membership costs are not covered by the dues rate, consider changing organization structure to make membership more valuable to membership base. Serenity Accounting



What Does the IRS Require:

Annual filing requirement. If a nonprofit does not file for 3 consecutive years, the nonprofit will automatically lose its IRS tax-exempt status.

Organizations with annual income of less than $50,000 can file Form 990-N.

Organizations with annual income between $50,000 and $200,000 can file Form 990-EZ. Total organization assets must also be less than $500,000.

Organizations with annual income greater than $200,000 file Form 990.

Private Foundations file Form 990-PF. Nonprofits with Unrelated Business Income (UBIT) file Form 990-T. UBIT often requires a state filing too. Form D-20 in Washington DC.

Form 500 in Maryland and Virginia.Serenity Accounting



What Information is on Form 990:

Financial information – how did the nonprofit earn its income? Did the organization spend money on its mission or on administrative

and fundraising activities? What did the nonprofit accomplish during the year? Did the organization engage in political or legislative activity? What type of policies are in place to prevent fraud and other

inappropriate activity? Compensation of all board members and officers. Compensation of

highly paid employees. Intermediate Sanctions.



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Who Reads Form 990:

Potential donors may review Form 990 to determine if a particular nonprofit is “good”.

Charity Navigator and other “watch-dog” groups use Form 990 to evaluate if a nonprofit is “good”.

GuideStar includes Form 990 information on its website – for the public.

Urban Institute uses Form 990 for a variety of research and data aggregation projects.

Google and other search engines may pull Form 990 information for certain search results.

Journalists often review Form 990 when writing stories on a nonprofit. State Attorney Generals and other enforcement groups review Form

990.Serenity Accounting



Form 990 Areas of Particular Interest: Part 1 Organization Mission – consider making this longer than a few words

and include action words or what success might look like. May be the first information a donor learns about the nonprofit.

Part 3 Program Descriptions – consider detailing successes of the past year, rather than including broad, one or two sentence program descriptions.

Policy Questions – it is pretty easy to get a Conflict of Interest Policy, a Whistleblower Policy, a Document Retention Policy, etc. Consider adopting such policies so the nonprofit does not disclose that it does not have these.

Board and Officer Compensation – consider the “perception factor” when preparing compensation arrangements with officers and board members.

Expense Allocations – ensure that a supportable policy / approach exists in terms of how expenses are split between programs, admin, and fundraising.



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Form 990 Technical Considerations:

Schedule A – ensure that “excess contributions” are removed for the public support test. 2% of total contributions over the last 5 years.

Schedule B – keep in mind that this schedule of contributors is NOT required to be made available to the public. If your nonprofit publishes its 990 on its website or other medium, remove Schedule B from the publication.

Schedule C – did the nonprofit file Form 5768 (Section H Election) with respect to lobbying!?! If yes, lobbying expenditures are limited to 20% of total expenditures, each year.

Schedule O – keep in mind that when elaborating on certain responses / information within Form 990, the response is publically available. Use succinct and clear language. No need to over-disclose.



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Form 990 Potential Perception Concerns: Part IX, Expense Allocations. When allocating expenses between

Programs, Administrative, and Fundraising Costs, be sure that Fundraising Expense does not show zero dollars.

Be sure that the expense allocation is not overly aggressive. For example, allocating accounting and legal costs strictly to Program Expense. This might cause a reader to think “what else have they aggressively allocated?”

Part VIII, Revenue. When entering Investment Income, Royalties, Sub-Leased Rented Office Space Income, etc., be sure to record this in column D (exempt under special rules). Do not record this in mission or programmatic related income.

If the nonprofit is incorporated in or has activity in a state that requires a copy of Form 990, be sure to list these states on the Form 990 in Part VI.



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Unrelated Business Income (UBIT):

Unrelated Business Income is when a nonprofit earns revenue that is from a source unrelated to the nonprofit’s mission. However, there are several exceptions that are specifically exempt from tax.

Common transactions that generally cause UBIT are Advertising, Merchandise Sales, Partnership Ownership and other Alternative Investments, and Debt-Financed Rental Income.

Common exceptions include Sponsorships, “Normal” Investment Income, Royalties (giving an entity permission to use the nonprofit logo), and Sub-Leased Property with No Debt.

If a nonprofit has more than $1,000 in UBI in a given year, it must file a Form 990-T and generally a state tax return too. UBIT is only owed on the unrelated income; not all the nonprofit’s income.



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Advertising Versus Sponsorship:

An advertisement has: A call to action.

A sales price. Incentive to use the product or service. Language such as “call us for specials”. Language such as “stop by to find out how we can help”.

A qualitative or comparative statement. We are the best _____. The most effective _____ in the industry. The most experienced _____ in the area.



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Compensation - Intermediate Sanctions: Nonprofit employee compensation must be “reasonable” as

compared to similarly situated employees at other organizations. Total compensation package should be evaluated – not just salary. IRS has the authority to assess penalties and additional tax

obligations on both the nonprofit organization and the “overly” compensated employee.

What is too high? Many nonprofit university and hospital executives earn millions of dollars per year. Is this too much?

Some fundraiser employees have million dollar compensation agreements.

Consider compensation analyses and third party surveys when determining employee compensation. Serenity Accounting



Serenity Accounting’s Newsletter:

Serenity Accounting publishes a monthly (or every other month) newsletter. The newsletter includes fundraising, regulatory, accounting, and fun resource information. If you are interested in receiving this free publication, please email: jacob@serenityaccounting When emailing Jacob, please include:

Your Name. Your Email Address. The organization with which you work.

Prior Serenity Accounting newsletters may be found at this link: http://www.serenityaccounting.com/Not-for-Profit-CPA-Firm-Newsletter



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Additional Resources:

Stanford Social Innovation Review: http://www.ssireview.org Nonprofit Quarterly: https://nonprofitquarterly.org Chronicle of Philanthropy: http://philanthropy.com Nonprofit Accounting Basics:

http://www.nonprofitaccountingbasics.org AICPA Resource Center:

http://www.aicpa.org/INTERESTAREAS/BUSINESSINDUSTRYANDGOVERNMENT/RESOURCES/NOTFORPROFITRESOURCECENTER/Pages/default.aspx

Inspiration, Steve Jobs: https://www.youtube.com/watch?v=UF8uR6Z6KLc

Ethics, Michael Sandel: https://www.youtube.com/watch?v=kBdfcR-8hEY

Remember to Smile: http://youtu.be/ZJKwGc6Wdx0



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Have Questions? Answers are Free!

Thank you for providing me with the privilege to present today! I am happy to answer any future questions you may have regarding

accounting, taxes, regulations, fundraising, etc. Answers to simple questions are always free.

Feel free to email me anytime: [email protected] Feel free to call me anytime: 703-371-3310 Serenity Accounting’s website: http://www.serenityaccounting.com Don’t forget to sign-up for Serenity Accounting’s free newsletter!



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Government & Nonprofit

Nonprofit Accounting and Form 990 Overview