We at O’Donnell, Ficenec, Wills & Ferdig are proud to support the nonprofits that employ one in 11 people, generate $12.2 billion in total revenue, and pay $263.8 million in payroll taxes annually in our headquarters state alone, according to a 2015 study commissioned by the Omaha, Nebraska-based Nonprofit Association of the Midlands (NAM). Our nonprofit friends support those in our communities who need the assistance and help most. So, we consider it a privilege to partner with them.
We also appreciate that nonprofits are a different “animal” in terms of accounting. Notably, nonprofits’ missions are not to make profits for shareholders; they “serve” stakeholders in a multitude of different and mission-critical ways. Much of the differences in accounting stem from this basic fundamental – that as “non” (not) (for) profits, there are no profits or losses to account for, and there are important and unique distinctions in management, terminology, and concepts that arise when partnering with our valued nonprofit clients.
These notables include:
As the nonprofits have singularity (no owners or investors), the revenue cycle differs from for-profits and often involves charitable contributions and grants.
Fundamentally, nonprofits work within the confines of the “assets less liabilities” realm (net assets), rather than demonstrating owner’s equity or retained earnings on financial statements. These assets are categorized as: unrestricted (for daily ops), temporarily restricted (funds allocated for specified programming), and permanently restricted (endowments and other funds maintained in perpetuity, of which only income can from the net asset can be used – not principal). Accounts are accordingly closed in each of the three types of assets.
Grants represent another defining characteristic and, often, an outsized lifeline for the nonprofit. Usually, these funds for specific programming are accounted for as “temporarily restricted net assets.” Within the language of the grant contracts, usually indirect expenses (such as to pay for insurance, electricity and other utilities) are allowed, and fall under unique nonprofit considerations.
Financial reporting-wise, a nonprofit’s “statement of position” is its “standard” report, and is akin to balance sheets for for-profits. Within this report resides the “statement of activities,” which summarizes each project and can include details similar to regular income statements. These reports are peppered with net asset types and changes, rather than P&L due to the nature of the nonprofit. A statement to account for “functional expenses” may be relevant, and details expenses in classifications such as programs and fundraising.
Nonprofits are still subject to filing tax returns, or a “990.” There are myriad variants of the 990 form, variances that depend on the nonprofit’s size and its income. If the organization competes with for-profits, the 990-T is filed. Items not related to its mission are further taxed; for instance, such a situation applies to a nonprofit that runs a café, coffeeshop or food service operation that competes with other caterers or restaurants.
We’ve provided further detail on these forms as follows:
Most organizations exempt from income tax as dictated under section 501(a), as well as some specified political organizations and nonexempt charitable trusts, are required to file Form 990 with the Internal Revenue Service. Exempt types range in classification from charities, churches and private foundations, to political operations tasked with accepting contributions and/or making expenditures, and miscellany nonprofits such as civic leagues, labor groups, and social and business clubs.
Another “twist” on the 990 series is presented by 990-PF, which applies partly to exempt and taxable private foundations.
Form 990-T is submitted for those exempt organizations to report business income that is not related to the non-profit, and to calculate income tax liabilities, as well as to request credits from specific federal excise taxes that are paid, or premiums paid on small employer health insurances.
It should be noted that the IRS tracks common errors, and reinforces that organizations who do not file or file late may be subject to penalties. The stakes are even higher; if the applicable nonprofit does not file when it is required to do so, and fails to file as required for three years in a row, the organization loses its tax exemption. Common missteps, which trigger the return of a form within the 990 series, include returns that are not materially complete, or those returns that are not relevant to the particular organization that is filing.
Additionally, those whose returns have been rejected must specify a “reasonable cause” to explain away why the correct or complete information wasn’t submitted from the outset. Proper explanation as to why the nonprofit failed to comply and, in part, the actions that the organization is taking to prevent such noncompliance from arising again will be requested. If addressed sufficiently, 990-related penalties may be avoided!
The all-important audit
We at OFWF are also proud to provide guidance on the independent audit (as required of some nonprofit organizations by law) and to serve as partners on this front. Also, circumstances may arise whereby audits are “triggered”; for instance, funders may request an examination of financial records and transactions or audited financial statements. While there are no substitutes for the independent audit, in some cases, organizations whose funders request an audit may opt instead for reviews or compilations.
Some charitable organizations are also subject to state laws governing the nature of information that is collected, organized, and submitted by the nonprofit. To emphasize, these state regulations differ from the federal stipulations. For instance, nonprofits that use in excess of $750K in federal funds each year, are in turn required to follow the provisions for audits set forth at the federal levels.
Audits for nonprofits are largely akin to audits for for-profit businesses, with a notable exception: the charity’s Board of Directors is responsible for oversight, whereas some private businesses do not have such a BoD tasked with oversight responsibility as related to audit functions. Those functions include assuring that information is being provided in a timely fashion to complete the audit, and evaluation and recommendation of policies and procedural changes, designed to enhance compliance with accounting requirements.
The National Council of Nonprofits has provided a handy guide for the uninitiated here. We also encourage you to contact us directly with any questions. After all, we are your source for extensive, experienced financial counsel. And our team has had the good fortune of supporting many nonprofits’ performance, efficiency, sustainability, and overall ability to serve the most vulnerable in our communities, and to support our neighbors’ health and wellbeing.
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