How important are a few words? Ask the taxpayer whose charitable contribution deduction was denied by the IRS. The IRS requires organization to contemporaneously document whether any goods or services were provided in consideration for a contribution. Now is a good time to read through your organization’s gift acknowledgement to see that required wording is included. Aronson LLC is available to assist as needed. For more details of the IRS court case see ECFA.
In 2005, Johns Hopkins University was the recipient of a bequest of 138 acres of farmland worth $54 million. The bequest had restrictions on it allowing for development of modest, low-rise academic campus facilities, however, the family (and heirs) of the estate believes that the university’s amended plans, which include a high-rise science facility of over 4.7 million square feet, constitute a violation of the donor’s intent. The family filed suit against the university in Montgomery County Circuit Court last November. Earlier this month during a scheduled hearing, the judge announced a November 13, 2012 trial date.
It will be interesting to see how the courts interpret the donor intent and whether the actions of the university violate the contract that transferred ownership of the property. Stay tuned for updates!
(Source: The Nonprofit Times)
Nonprofits with physical presence in DC are subject to collecting sales tax and remitting them to the DC government for any tangible personal property items sold.
If you find that your organization may not be in compliance with this law, Henry can help by doing a “voluntary disclosure” to come clean with the DC government and mitigate the dollar amount of damage this could cause if the District finds it first.
On May 23, the Financial Accounting Foundation (FAF) voted to create the Private Company Council (PCC), whose main purpose will be to define differences and exceptions in U.S. GAAP for private companies. This new council will differ considerably from the previously proposed council in October. Several reductions of FASB’s part in the PCC’s decision making process have been made: FASB’s role in the decision making process has been switched from “ratification” to “endorsement;” The PCC chair will no longer be a FASB member; FASB will be given 60 days to approve a PCC decision or must give a public, written notice of why it failed to endorse the decision; and the PCC is able to decide, by a two-thirds vote and discussion with FASB and stakeholders, which components of GAAP are eligible to be exceptions or modifications.
The PCC, with around nine to 12 members chosen by FAF, will hold a minimum of five meetings every year during its first three years. Several of the deliberative meetings will welcome the public and FASB members, while other administrative and educational meetings will exclude FASB members. A FAF committee will supervise the PCC and FASB as they respond to the requests of the private companies. The Private Company Financial Reporting Committee, which had previously worked with FASB about private company matters, will no longer exist in the near future.
Suggested variances in U.S. GAAP for private companies will be brought up by the public and discussed further by the PCC, who will send the approved modifications or exceptions to FASB for final endorsement. These endorsed modifications or exceptions will then be integrated into U.S. GAAP. FASB is in the process of creating a Private Company Decision-Making Framework, which will be the standard set of rules to determine if and when an adjustment to U.S. GAAP is necessary for private companies. FASB is also working on establishing a clear understanding of how a nonpublic entity is to be defined. The AICPA has shown its support for the PCC and has proclaimed its plans to found an “other comprehensive basis of accounting” (OCBOA) framework for private companies that are small enough to be excluded from the requirement to file U.S. GAAP financial statements. The AICPA hopes that OCBOA will be a “less comprehensive, less costly alternative” for these small and medium-size companies and believes that steps have been made in the right direction to change U.S. GAAP for all private companies.
Source: Journal of Accountancy, July 2012, FAF Creates Private Company Council by Ken Tysiac
Charitable giving suffered a steep decline in China, according to the Ministry of Civil Affairs’ annual report released last week. The reasoning? “No major disasters happened in 2011,” according to the head information office of the China Charity and Donation Information Center, oh and some recent scandals and maybe some lack of transparency had some impact as well seems to be mumbled as an aside. “In China, people’s willingness to give is disaster driven”, a Beijing-based university professor speculated to the state-run news outlet, China Daily.
It’s an interesting statement considering the year included the tsunami in Japan, horrible droughts in East Africa and floods in Thailand. Even just in mainland China, the Ministry reported over 2 million people were evacuated in the first half of the year due to earthquakes, droughts, floods, and snow. I’m thinking the scandals and lack of transparency may have a bit more to do with that drop in charitable giving.
To be fair, while the state may be encouraging the ‘no disaster’ explanation, it was government auditors that first exposed problems at the state-run China Red Cross, the country’s largest nonprofit, resulting in scandal, metaphorical heads rolling, and accusations of overspending and corruption.
Frequently nonprofit organizations receive services from a parent or affiliate’s employees or there may be shared administrative support for which the recipient organization doesn’t pay or incur costs. But what do you do to capture the value of the work provided? What is fair value in this case and what qualifies as a “specialized skill” (sidenote: unrelated donated services must qualify as a specialized skill or one that creates or enhances non-financial assets)?
The Emerging issues Task Force (EITF)’s job is to hash out those insidious little details that are left in grey territory by the FASB. They began discussing this topic in March which I helpfully translated into dramatic narrative here. Or, you can read all about it in their own words here. They go through possible scenarios and discuss if changes should be retrospective. At their June meeting, EITF reached what is referred to as “consensuses-for exposure” which is to say they agreed on an approach and now the FASB needs to chime in.
What was agreed upon was this: The recipient organization should record donated service revenue and expense for all work done on their behalf by an affiliate’s employees at cost. Retrospective application is optional. Early adoption is permitted.
Sign up for a phone forum conducted by the specialists at the IRS on tax exempt organizations, to be held on July 18, 2012, at 2:00 p.m. EST, titled “Exempt Organizations and Gaming”. Here is the link to register: http://www.irs.gov/charities/article/0,,id=258086,00.html
Topics to be covered:
- Impact of gaming on tax-exempt status
- Internal controls and record keeping
- Form 990 filing requirements
- Unrelated Business Income Tax
- Filing requirements for Payments made to individuals
- Wagering/excise taxes
Deferred rent affects the majority of organizations. If you have a lease that includes any of the following: escalation clauses, rent abatement, or tenant allowances then most likely your lease is subject to deferred rent. Deferred rent is the process of straight-lining rental expenses evenly over the term of the lease. This may seem benign enough but if you haven’t accounted for it properly, it can really add up quickly and result in a significant deficiency comment or worse.
To calculate deferred rent:
- Calculate total rent per year and then sum together to find total rent for the term of the lease.
- Divide the total rent for the term of the lease by the total number of months in the lease term. This gives you your monthly straight line rent.
- For each fiscal year of the lease, multiply the number of months the lease is in effect by the straight line rent.
- The difference between actual rent paid and the calculated straight-line is the change in deferred rent.
- Each year add the new change to the cumulative change from the prior year. By the end of the lease the liability should be back to zero.
A sample deferred rent calculation schedule is shown below:
|Lease Term||Monthly Rent||2012||2013||2014||2015||2016||2017||Totals|
|Straight Line Rent||101.18||607.09||1,214.18||1,214.18||1,214.18||1,214.18||607.09||6,070.92|
This table is set up for a 5 year lease with annual escalations of 3% and rent abatement for the first 3 months of the lease. For ease of use the table is set up assuming the organization has a 12/31 year end. Each entry will hit deferred rent liability and rent expense. The debit and credit will be determined based on where you are in the cycle. In the example above the liability will be credited for the first year and debited for the last remaining years.
Please contact your accountant if any of this seems intimidating or you have questions. No two cases are exactly alike and we are here to help you if something doesn’t seem right.
The Disabled Veterans National Foundation (DVNF) is currently being investigated by the Senate Finance Committee based on allegations of improper spending and charges that not much of the funding raised actually went to veteran aid. The investigation began after reports by Charity Watch and CNN that the charity received almost $56mil in donations from 2008 through 2010 but “little if any direct cash” went to veteran support.
For the record, the DVNF’s official defense is that $16.1mil of cash and donated goods went to veterans and that having only started in 2007, they need to focus on building their donor base. That’s defending that only 28% of contributions are actually going to their intended purposes. Some veteran groups reported receiving cough drops and 11,000 bags of coconut M&Ms. Others reported receiving chef’s coats, hats and aprons that the DVNF claimed as donated goods worth $800K.
Form 990s are publicly available as a way of forcing transparency in organizations that solicit funds from individuals. Individuals are encouraged to look but not that many may be able to interpret quickly what they are seeing. Taking a look at DVNFs 990 filing for 2010 shows over $24.7mil in contributions received and over $10.7mil spent on fundraising. That’s 43.5% of every dollar raised going to raise the next dollar.
Generally people want to give their money to charities they know will actually put that money towards the program mission. This is why groups like United Way and Combined Federal Campaign require that organizations registered and receiving funds through them met certain ratios of program to fundraising.
This is also why your auditor will look at your functional expense ratios and look for any signs of fundraising expenses that have been inappropriately allocated to program in an effort to make the organization look more effective. I have had clients that struggled with ways to efficiently fundraise and asked me how to keep their ratios better. Ways of reaching your target audience fall outside of the scope of my expertise, but I can tell you that the ratio won’t get better without spending less on fundraising and more on programs. If you are spending too much on fundraising – you need to assess how effective your organization really is.
Donors need to learn to look at ratios to decipher where their funding stands the best chance of being used for programs. It’s important, however, to recognize that all organizations require funding to operate and overhead is inevitable and necessary so make a distinction between management vs. fundraising when making this assessment.
All organizations that get involved with direct-mail campaigns should educated themselves about joint costs as making mistakes with those can put your fundraising ratios at risk.
The Tax Court recently denied a taxpayer’s large charitable contribution deduction for donated real estate valued at $18.5 Million. The Court denied the deduction because the taxpayer did not have the proper substantiation of the value under the tax code rules. The Court acknowledged the taxpayer did make the donation and also stated that the property’s value was probably greater than the amount the taxpayer was claiming. (TC Memo 2012-152)
In order to take charitable deductions of more than $5,000 worth of noncash property, there are very strict substantiation rules that must be followed. Among the rules is the requirement for the taxpayer to obtain a qualified appraisal for any noncash single item or grouping of items donated and valued by the taxpayer at over $5,000.
If you are a nonprofit 501(c)(3) receiving noncash donations, or a taxpayer who wishes to donate such items and take the charitable deduction applicable, we strongly advise you talk to your nonprofit tax specialist early in the process to make sure the taxpayer meets all the substantiation requirements so the desired tax deduction can be taken.
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