As the heart of today’s society, nonprofits continue to grow in number and social impact. However, they also remain at the forefront of regulation and oversight. The pace of new guidelines, expectations, compliance requirements, nonprofit laws and ongoing oversight audits exceeds the speed at which many individuals and nonprofits can digest them. As such, there remains a lag between what each oversight entity (such as FASB, Government, oversight agencies, watchdogs, etc.) develops as part of their expectations and what a nonprofit can actually handle. Some organizations have hired full time positions to administer and handle the ongoing audits from DOL, workers, comp, IRS, state agencies, government funding agencies and program/field audits. At times this position may include the compliance officer. The results sometimes compromise the nonprofit’s actual mission – accomplishments are curbed and impact ultimately suffers.
Our goal is to ease the burden of these regulatory changes by drawing attention to several important items for your review and perhaps implementation.
Nonprofit Revitalization Act
Thankfully, the government has embraced the notion of ‘tailoring to get it right’ and understands that the initial law was in need of refinement. This led to several updates since the initiation of the new laws, including the following:
- Independent Audit Firm – The definition of “independent director” was expanded. Independence is compromised if a director has a relative who is a current owner or is a director, officer or employee of the firm that conducts the corporation’s annual audit currently or in the past three (3) years.
One way this affects firms and nonprofits is the need to include in the audit proposal process a question regarding the independence of the firm with a 3 year lookback.
- Related Party – The state has adopted an expanded approach similar to the IRS’ definition of “Key Employee.” For state purposes, a related party has traditionally been primarily family and affiliates. This was modified to add “any other person who exercises the powers of directors, officers or key employees over the affairs of the corporation or any affiliate.” This includes individuals that are not family related or affiliated entities. This places the onus of disclosure on each person of influence. As an example, if the executive director has another entity provides benefit to the organization or the Board member has a profession that provides benefit to the organization, such as legal advice, this has to be treated as any related party transaction would be.
Interestingly, a Board Director is allowed to participate in voting on compensation for their compensation in the capacity as a Board Director, so long as the same compensation is similarly reasonably set for all Board members.
Adopting New Processes
There are processes involved in adopting any new policy or procedure, including designing the policy to be suitable for the size and complexity of the organization, then implementing and monitoring that policy. Within each phase, documentation is the key component that will prove to an auditor or any interested third party that the process has been incorporated appropriately.
Several examples of practical ‘Next Steps’ include:
Board and Audit Committees:
- Developing an Audit Strategy within the organization for the Audit Committee to efficiently oversee the audit, the Audit Committee’s responsibility to annually consider the independence of the auditors, the Audit Committee’s responsibility to annually retain or renew the auditors, and Renewing the Audit Committee’s Charter.
- Determine the appropriate number of Board meetings and Audit Committee meetings with auditors; face to face Board meetings are often more effective than phone meetings.
- How will finance and the Board/Audit Committee communicate, and to what degree, such as budget to actuals, analyticals, reconciliations etc. Departments other than finance communicating critical areas to the Board (HR, Development, IT, Compliance etc.).
- Related parties and independence analysis (NPRA’s version) – between employees and Board members, vendors and Board members, employees and vendors, and for Board members themselves.
- Board training on their new responsibilities: what is legally a breach of the Boards fiduciary duties, the need for the Board to be involved in targeted operational issues such as opening the bank and credit card statements, reviewing various reconciliations, etc. It is also important to verify that there is adequate Directors and Officers insurance in place.
- Revisiting the by-laws to ensure compliance with the new law.
Boards and management should also focus on crisis management, which includes cybersecurity, emergency protocols and operational continuance. Nonprofits need to act in advance to avoid general data breaches such as corporate hacking, breach of confidential information relating to its consumers, credit card information, social security numbers and medical information. The time to encrypt and secure is before issues arise. It is never too early to identify these risks and carefully design a crisis management plan.
The time, energy and effort it costs to support the programs of the organization are significant, as the complex web of compliance, reporting, documenting and filing amplifies and becomes more burdensome. It is therefore important to make sure we have secured controls in order to see the fruits of our labor. It is worth brainstorming to understand where we may not be getting all of the money we should be getting. Examples of vulnerable areas include text donations, PayPal accounts, website donations or any method that requires an administrator, whereby an individual can gain access and divert funds.
Minimum Wage – The Budget Crises
As we enter into the next phase of minimum wage hikes, finance leaders and Board members are being challenged with concerns around affordability. The ripple effect of increasing the rate of pay, not only for minimum wage employees, but at a matching level for their supervisors and others has the potential to threaten an organization’s financial stability. Careful planning and a clear understanding of the laws can help to mitigate the effects of these regulations.
Nonprofits who have not calculated their hourly wages to test for minimum wage are urged to do so. The DOL is focusing on the wages being paid to employees.
The details regarding these laws are not as simple as they may seem and each employer needs to proceed with caution in reviewing their salaries. Large versus small employers, locations/regions and other factors all make a difference in the respective salary requirements.
Understanding the Big Picture – Going Concern
Having to deal with so many risks, may present a struggle for the organization, and at times they can put the organization into a deficit position or bring about a going concern issue. It is therefore a reasonable next step for management to assess their ability to continue as a viable entity. This has been formalized into an actual requirement through ASU 2014-15, which places a responsibility on management to assess the ability to continue as a going concern.
This requires us to incorporate future periods into the current year audit from management’s standpoint as well as the auditor’s. A strategy is necessary to identify issues, understand their effects on the future of the organization, depict a plan of action to counter the risks and to actually demonstrate how the plan is being carried out.
Selective Grant Acceptance Policies
In reaction to events during the past decade, government granting agencies have tightened their policies and increased their expectations for recipient organizations in many ways. In part, they have reduced funding or rates of reimbursement, in other areas they have frozen typical rate increases, and more often, they have enacted additional compliance requirements. Government agencies do not want to have to face improprieties down the road and, as such, they have enacted rigorous rules as a condition for funding approval.
The added regulations are new to both the government agencies and the nonprofits, with both sides of the table learning as they go. Nonprofits need to be very aware of their requirements and seek to take the lead in complying. Often, nonprofits are now required to document the reasoning for their judgements, estimates, and decisions made. This document of justification should detail supporting information for the choices made and be retained for potential future need, upon audit.
However, since compliance can take considerable resources, there needs to be a vetting process and thorough understanding about whether it is worth taking a particular grant. If the employee time and energy needed is generating an actual loss (when factoring in the employees time allocation plus their taxes and benefits) then sometimes it is worth declining a grant offer. Seeing the actual funding as just one component of the scenario and incorporating the logistics and office staff time to administer the grant are all critical items to be mindful of.
Nonprofit Reporting Requirements
It’s not just talk anymore, they are here to stay…
Transitioning from 3 categories of net assets, namely, Unrestricted, Temporarily Restricted, and Permanently Restricted to 2 categories consisting of With Donor Restrictions and Without Donor Restrictions, may not necessarily be a major change, since it is affecting reporting and we will still have the same legal guidelines for those contributions. Additionally, we can still break out the ‘with donor restrictions’ category into temporarily restricted and permanently restricted, in terms of time restrictions, purpose restrictions and those restricted in perpetuity, if we so prefer. In fact, until form 990 gets updated by the IRS, we will have to report net assets using the current descriptions.
Fiscal departments will have an easier time differentiating between donor restricted net assets versus internally restricted net assets as the term ‘donor’ is now a topic that is front and center. Fundraising departments should also be brought into the loop with this change and should understand that the new law is emphasizing the fact that there generally should be a donor restriction in order to be considered legally restricted.
Liquidity disclosures are going to be fairly new and likely more revealing than desired by management. The liquidity disclosure would show how much of the assets are available for use. The components of this disclosure can vary from entity to entity, since some have restricted assets, long term assets that are not liquid, investments (of which parts are available for use and others restricted), government grants needed for funding the payment of costs, etc., and therefore, although the core disclosure may be similar, the nuances particular to each organization will have to be tailored.
Leases – The Attack on the Balance Sheet
Bringing in the cumulative value of the full term of a lease as a single figure on the balance sheet is a huge change to incorporate from one year to the next. The good news is that this is being done by almost all entities, not just nonprofits. However, this will require planning, as the organization needs to understand which arrangements are included in this guideline. Larger organizations may have difficulty identifying all of their leases and taking inventory of them, especially those where the documents are no longer around or not legible. What used to be considered fine print may now become very important. Some areas that will need to be considered are what components make up the lease, such as service contracts or insurance or tax payments, whether it is going to be extended/renewed and effectively used by the lessee for the life of the asset.
Trump Tax Bill for Exempt Organizations
Unrelated business taxable income. Under the Act, tax-exempt entities would be taxed on the values of providing their employees with transportation fringe benefits, and on-premises gyms and other athletic facilities, by treating the funds used to pay for such benefits as unrelated business taxable income (UBTI), and so subjecting the values of those employee benefits to a tax equal to the corporate tax rate (Act Sec. 3308).
Charitable contributions – The bill (i) increases the AGI limitation on cash contributions from 50% to 60% and would retain the 5-year carryover, (ii) repeal the current 80% deduction for contributions made for university athletic seating rights, (iii) provide that the standard mileage rate for charitable use of an automobile would take into account the variable cost of operating an automobile rather than the current 14 cents per mile, and (iv) repeal the exception to the contemporaneous written acknowledgment requirement for contributions of $250 or more when the donee organization files the required return. The changes would apply to contributions made in tax years beginning after 2017.
The bill would impose a 20% excise tax on compensation in excess of $1 million paid to any of its five highest paid employees. The tax would apply to all remuneration (including non-cash benefits) except for payment to tax-qualified retirement plans and amounts that are excludible from the executive’s gross income. This provision would also apply to parachute payments made to such individuals. The changes would apply to tax years beginning after 2017.
In conclusion, these notes should be helpful as a resourceful reminder and we encourage you to pursue these and other pertinent items timely so that you can rest assured that your nonprofit is smoothly operating in compliance with the law and public expectations.