How to convince donors to remove “restricted” from their gifts

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Restricted gifts — or donations with conditions attached — can be difficult for not-for-profits to manage. Unlike unrestricted gifts, these donations can’t be poured into your general operating fund and be used where they’re most needed. Instead, restricted gifts generally are designated to fund a specific program or initiative, such as a building or scholarship fund.

It’s not only unethical, but dangerous, not to comply with a donor’s restrictions. If donors learn you’ve ignored their wishes, they can demand the money back and sue your organization. And your reputation will almost certainly take a hit. Rather than take that risk, try to encourage your donors to give with no strings attached.

Personal touch

Some donors simply don’t realize how restricted gifts can prevent their favorite charity from achieving its objectives. So when speaking with potential donors about their giving plans, praise the benefits of unrestricted gifts. Explain how donations are used at your organization, offering hard numbers and examples where needed. Be as upfront as possible and give them as much information as you can about your organization.

To make unrestricted giving as easy as possible, give donors (and their advisors) sample bequest clauses that refer to the general mission and purpose of your organization. Also encourage them to include wording that shows “suggestions” or “preferences” for their donations, as opposed to binding restrictions. Prepare documents that give wording samples for these cases.

Words of intent

Unless you’re holding a fundraiser to benefit a specific program, include general giving statements in your fundraising materials. For example, you might say: “All gifts will be used to further the organization’s general charitable purposes,” or “Your donations to this year’s fundraiser will be used toward the continued goal of fulfilling our organization’s mission.”

Reinforce this message in your donor thank-you letters. They should state your nonprofit’s understanding of how the gift is intended to be used. For example, if a donor stipulated no restrictions, explain that the money will be used for general operating purposes.

Gentle persuasion

Obviously, you’ll need to be respectful if a donor is determined to attach strings to a gift. (Before accepting it, just make certain you’ll be able to carry out the donor’s wishes.) But if you can persuade contributors that their gifts will be used in a responsible and mission-enhancing way, many are likely to remove restrictions.

Contact us for more information on using restricted and unrestricted funds.

© 2019

Is your nonprofit ready for a raffle?

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Raffles are popular fundraisers for not-for-profits. But they’re subject to strict tax rules. State laws on nonprofit-sponsored raffles can vary significantly, but nonprofits must comply with federal income tax requirements linked to unrelated business income, reporting and withholding.

Unrelated business income tax

Nonprofits are required to pay income tax on unrelated business income (UBI), and funds raised by raffles often qualify as such. This is particularly true if you routinely hold raffles and they aren’t related to your exempt purpose.

But raffle income can be exempted from UBI tax if the raffle is conducted with “substantially all” volunteer labor. The IRS’s unofficial guideline is that 85% or more of the labor should be volunteer. If relying on this exemption, make sure you keep records to demonstrate your level of volunteer support.

Reporting obligations

Raffle winnings must be reported when the amount is $600 or more and at least 300 times the raffle ticket price. You can deduct the amount of the ticket when determining if the $600 threshold is met. For example, you sell $2 tickets, and your winner receives $1,000. Because the winnings ($998) are more than $600 and more than 300 times $2, you’re required to report them to the IRS.

File Form W-2G, “Certain Gambling Winnings,” with the IRS and provide it to the winner to show reportable winnings along with the related income tax withheld, if any. The winner should provide you with his or her name, address and Social Security number to include on the filing.

Withholding requirements

You should withhold income tax from the winnings if the proceeds (the difference between the amount of the winnings and the amount of the wager) are more than $5,000. If the winnings are in the form of a noncash payment (for example, an automobile or artwork), proceeds are the difference between the fair market value of the item won and the wager amount. When the value of a noncash prize isn’t obvious, obtain a valuation before the drawing.

For a noncash prize with a fair market value of more than $5,000 after deducting the wager, you have two options: The winner could reimburse you for the amount of withholding tax or you could pay the withholding tax on behalf of the winner.

Handle with care

Raffles can pay off for nonprofits — as long as your organization satisfies the tax and filing requirements. Contact us for more information and assistance.

© 2019

Assessing the Effectiveness of Internal Controls

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Strong internal controls can help prevent and detect fraud. That’s why Section 404(a) of the Sarbanes-Oxley Act (SOX) requires a public company’s management to annually assess the effectiveness of internal controls over financial reporting. And Sec. 404(b) requires the company’s independent auditors to provide an attestation report on management’s assessment of internal controls. Some smaller entities may be exempt from the latter requirement — but not the former one.

Burdensome for smaller entities

When the SEC published the regulations, smaller public companies told the SEC that the costs of complying with Sec. 404(b) would outweigh the benefits for investors. While the SEC explored ways to ease the compliance burden, the compliance deadline for Sec. 404(b) was repeatedly delayed for nonaccelerated filers — companies with a public float of less than $75 million on the last business day of their most recent second fiscal quarter.

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act instructed the SEC to permanently exempt nonaccelerated filers from SOX Sec. 404(b). Absent this exemption, nonaccelerated filers would have been required to comply with Sec. 404(b) beginning with fiscal years ending on or after June 15, 2010.

New definition provides no new Sec. 404(b) relief 

Earlier this year, the SEC expanded its definition of “smaller reporting companies” from companies with a public float of less than $75 million to those with a public float of less than $250 million. This change will allow nearly 1,000 more companies to qualify for a lighter set of disclosure rules available to smaller reporting companies. However, the SEC did not raise the public float thresholds for when a company qualifies as an accelerated filer. This means the $75 million threshold still applies in relation to the Sec. 404(b) exemption.

SEC Commissioners Michael Piwowar and Hester Peirce favored raising the accelerated filer threshold to $250 million to expand the number of companies that would be exempt from Sec. 404(b). But, based on feedback from auditors and investor advocate groups, SEC Chairman Jay Clayton decided to keep the current threshold at $75 million — at least for now.

It’s also important to note that not all companies with a public float of less than $75 million are considered nonaccelerated filers. If a company’s public float drops below $75 million, it continues to be an accelerated filer until it drops below $50 million, and thereby “exits” accelerated status.

Still on the hook

Even if your company is exempt from Sec.404(b), you’re still responsible for assessing the effectiveness of internal controls over financial reporting pursuant to Sec. 404(a). Contact us for any questions about complying with the SOX rules or for information regarding best practices in internal controls.

© 2018

Why your Nonprofit’s Internal and Year-End Financial Statements May Differ

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Do you prepare internal financial statements for your board of directors on a monthly, quarterly or other periodic basis? Later, at year end, do your auditors always propose adjustments? What’s going on? Most likely, the differences are due to cash basis vs. accrual basis financial statements, as well as reasonable estimates proposed by your auditors during the year-end audit.

Simplicity of cash

Under cash basis accounting, you recognize income when you receive payments and you recognize expenses when you pay them. The cash “ins” and “outs” are totaled by your accounting software to produce the internal financial statements and trial balance you use to prepare periodic statements. Cash basis financial statements are useful because they’re quick and easy to prepare and they can alert you to any immediate cash flow problems.

The simplicity of this accounting method comes at a price, however: Accounts receivable (income you’re owed but haven’t yet received, such as pledges) and accounts payable and accrued expenses (expenses you’ve incurred but haven’t yet paid) don’t exist.

Value of accruals

With accrual accounting, accounts receivable, accounts payable and other accrued expenses are recognized, allowing your financial statements to be a truer picture of your organization at any point in time. If a donor pledges money to you this fiscal year, you recognize it when it is pledged rather than waiting until you receive the money.

Generally Accepted Accounting Principles (GAAP) require the use of accrual accounting and recognition of contributions as income when promised. Often, year-end audited financial statements are prepared on the GAAP basis.

Need for estimates

Internal and year-end statements also may differ because your auditors proposed adjusting certain entries for reasonable estimates. This could include a reserve for accounts receivable that may be ultimately uncollectible.

Another common estimate is for litigation settlement. Your organization may be the party or counterparty to a lawsuit for which there is a reasonable estimate of the amount to be received or paid.

Minimizing differences

Ultimately, you want to try to minimize the differences between internal and year-end audited financial statements. We can help you do this by, for example, maximizing your accounting software’s capabilities and improving the accuracy of estimates.

© 2018

When Should You Reconsider a Special Event?

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Not-for-profits use special events to raise large amounts in a short period of time. Most often, the donor receives a direct benefit from the event — such as dinner or participation in a gaming activity. But special events don’t always meet their fundraising goals. In fact, organizations can lose money on them. Following these steps can help boost your event’s potential and enable you to decide whether to hold it again in the future.

Step 1: Make a budget

Planning and holding a successful event is a process that should start with a budget. Estimate what you anticipate revenue to be. If costs are likely to be greater than revenue, consider forgoing the event. Of course, you can also come up with a less costly event or look for sponsors to help defray expenses.

Step 2: Develop a marketing plan

Determine the target audience for your event and the best way to reach that audience. For example, bingo nights are often popular with seniors. And they may be more likely to read about the event in the local newspaper than on your nonprofit’s blog.

Step 3: Account for everything

Track all of your event’s costs to arrive at an accurate net profit amount. For example, a gala’s costs could include:

• Amounts paid to market the event, such as printed invitations and paid advertisements,
• Amounts paid related to the direct benefit that the participant receives, such as food, drinks and giveaways, and
• Other actual event costs, such as rental space and wait staff.

Step 4: Evaluate the event

After the event, review a detailed statement of its revenue and expenses, and compare them to what was budgeted. Take a look at ticket sales: Did you bring in the amount you had anticipated? Was the attendance worth the amount of planning and organizing that went into the event? Next, evaluate money raised at the event itself. How much did your silent auction or raffle raise? Did you make more than the fair market value of the items donated?

Also review unexpected expenses. Were these “one-time” or “special” costs that aren’t likely to occur yearly, or are they recurring? The answers to these questions can help you determine if the event was a true success.

Crunching the numbers

Consider these results — along with changes in your organization and evolving economic conditions that could affect profitability — when determining whether your event is likely to be successful in the future. If you’re unsure, contact us. We can help you crunch the numbers.

© 2018

Nonprofits Should be Prepared for a Sudden Outpouring of Support

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Americans gave unprecedented sums to charity in response to the devastating hurricanes last year. Large organizations, such as the American Red Cross, were equipped to handle the huge influxes of donations. However, some smaller charities were overwhelmed. Although it may seem like an unlikely problem, your not-for-profit needs a plan to handle a potential outpouring of support.

Know what’s normal

Perhaps the biggest lesson to learn from recent disasters is to always have an expansion plan in place. When the influx of online giving reached critical mass, many organizations found that their websites overloaded and went offline. Their sites had to be moved to more powerful servers to handle the increased traffic.

Keep track of “normal” website hits, as well as the numbers of calls and email inquiries received, so you won’t be caught off guard when you start to surpass that amount. Also, know your systems’ ultimate capacity so you can enact a contingency plan should you approach critical mass.

Mobilize your troops

Having an “early warning system” is only one part of being prepared. You also need to be able to mobilize your troops in a hurry. Do you know how to reach all of your board members at any time? Can you efficiently organize volunteers when you need extra hands quickly? Be sure you have:

• An up-to-date contact list of board members that includes home, office and mobile phone numbers,
• A process, such as a phone tree, so you can communicate with the board quickly and efficiently, and
• One or more emergency volunteer coordinators who can call and quickly train people when you need them.

Also conduct a mock emergency with staff and volunteers to learn where you’re prepared to ramp up and where you’re not.

Build relationships

A surge in donor interest may mean a surge in media attention. While it might be tempting to say, “not now, we’re busy,” don’t pass up the opportunity to publicize your organization’s mission and the work that’s garnering all the attention.

In most cases, the immediate surge of interest eventually wanes. Before that happens, start to build lasting relationships with new donors and media contacts. Inform them about the work your organization does under “normal” circumstances and suggest ways to get them involved.

© 2018

Auditing the Use of Estimates and Specialists

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Complex accounting estimates — such as allowances for doubtful accounts, impairments of long-lived assets, and valuations of financial and nonfinancial assets — have been blamed for many high-profile accounting scams and financial restatements. Estimates generally involve some level of measurement uncertainty, and some may even require the use of outside specialists, such as appraisers or engineers.

As a result, examining estimates is a critical part of an audit. Companies that understand the audit process are better equipped to facilitate audit fieldwork and can communicate more effectively with their auditors. Here’s what you need to know about auditing the use of estimates as we head into next audit season.

Audit techniques

Some estimates may be easily determinable, but many are inherently complex. Auditing standards generally provide the following three approaches for substantively testing accounting estimates and fair value measurements:

1. Testing management’s process. Auditors evaluate the reasonableness and consistency of management’s assumptions, as well as test whether the underlying data is complete, accurate and relevant.
2. Developing an independent estimate. Using management’s assumptions (or alternate assumptions), auditors come up with an estimate to compare to what’s reported on the internally prepared financial statements.
3. Reviewing subsequent events or transactions. The reasonableness of estimates can be gauged by looking at events or transactions that happen after the balance sheet date but before the date of the auditor’s report.

When performing an audit, all three approaches might not necessarily be appropriate for every estimate. For each estimate, the auditor typically selects one or a combination of these approaches.

Regulatory oversight

Accounting estimates have been on the agenda of the Public Company Accounting Oversight Board (PCAOB) since it was established by Congress under the Sarbanes-Oxley Act of 2002. Although the leadership of PCAOB changed hands in early 2018, proposals to enhance the auditing standards for the use of accounting estimates and the work of specialists remain top priorities.

Earlier this summer, Chairman William Duhnke told the PCAOB’s Standard Advisory Group (SAG) that he hopes to complete these projects in the coming months. The updated auditing standards would help reduce diversity in practice, provide more-specific direction and be better aligned with the risk assessment standards.

Prepare for next audit season

Improvements on the audit standards for the use of estimates and the work of specialists could be coming soon. As companies plan for next year’s audit, they should contact their audit partners for the latest developments on the standards for auditing the use of estimates and specialists to determine what (if anything) has changed.

We can help you understand how estimates and specialists are used in the preparation of your company’s financial statements and minimize the risk of financial misstatement.

© 2018

Transitioning to Remote Audits

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Are you comfortable communicating electronically with your auditors? If so, a logical next step might be to transition from on-site audit procedures to a more “remote” approach. Remote audits can help reduce the time and cost of preparing audited financial statements.

21st century audits

Traditionally, audit fieldwork has involved a team of auditors camping out for weeks (or even months) in one of the conference rooms at the headquarters of the company being audited. Now, thanks to technological advances — including cloud storage, smart devices and secure data-sharing platforms — many audit firms are testing the feasibility of remote auditing as a replacement for sending auditors on-site.

In addition to saving time and audit fees, allowing auditors to work remotely improves the work-life balance for auditors and in-house accounting personnel. Your employees won’t need to stay glued to their desks for the duration of the audit, because they can respond to the auditor’s inquiries and document requests remotely.

Best practices

Changing the format of an audit requires flexibility, including a willingness to embrace the technology needed to facilitate the exchange, review and analysis of relevant documents. You can facilitate the transition process by:

Being responsive to electronic requests. Auditors who are out of sight shouldn’t be out of mind. Answer all remote requests from your auditors in a timely manner. If a key employee will be on vacation or out of the office for an extended period, give the audit team the contact information for the key person’s backup.

Giving employees access to the requisite software. Sharing documents with remote auditors may require you to install specific software on employees’ computers. But your company’s policies may prohibit employees from downloading software without approval from the IT department.

Before remote auditors start “fieldwork,” ask for a list of software and platforms that will be used to interact with in-house personnel. Give the appropriate employees access and authorization to share audit-related data from your company’s systems. Work with IT specialists to address any security concerns they may have with sharing data with the remote auditors.

Tracking audit progress. With less face-to-face time with your auditors, you have fewer opportunities to receive updates on the team’s progress. Ask the engagement partner to explain how they’ll track the performance of their remote auditors, and how they plan to communicate the team’s progress to in-house accounting personnel.

Wave of the future

Like remote working arrangements with employees and contractors, remote audits are a growing trend that could potentially reduce the costs of preparing financial statements. But not every audit firm or business is ready to embrace remote auditing. Contact us to discuss ways to make next year’s audit more efficient and cost-effective.

© 2018

3 ideas for recruiting nonprofit volunteers

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Most charitable not-for-profits have a never-ending need for volunteers. But finding new ones can be time-consuming — and volunteer searches aren’t always successful. Here are three recruitment ideas that can help.

1. Look nearby

Is your nonprofit familiar to businesses, residents and schools in the surrounding community? People often are drawn to volunteer because they learn of a worthwhile organization that’s located close to where they live or work.

Start to get to know your neighbors by performing an inventory of the surrounding area. Perhaps there’s a large apartment building you’ve never paid much attention to. Consider the people who live there to be potential volunteers. Likewise, if there’s an office building nearby, learn about the businesses that occupy it. Their employees might have skills, such as website design or bookkeeping experience, that perfectly match your volunteer opportunities.

Once you’ve identified some good outreach targets, mail or hand-deliver literature introducing your nonprofit as a neighbor and describing your needs. Consider inviting your neighbors to a celebration or informational open house at your offices.

2. Fine-tune your pitch

By making your pitches as informative and compelling as possible, you’re more likely to inspire potential volunteers to action. Specifically, explain the:

• Types of volunteer jobs currently available, • Skills most in demand, • Times when volunteers are needed, and • Rewards and challenges your volunteers might experience.

When possible, incorporate photographs of volunteers at work — along with their testimonials. And make it easy for people to take the next step by including your contact information or directing them to your website for an application.

3. Reach out to your network

Develop a system for keeping those closest to your organization — major donors, board members and active volunteers — informed of your volunteer needs. These individuals often are influential in their communities, so a request from them is more likely to get people’s attention. They may even frame a request for assistance in the form of a challenge, with the solicitor being the first to volunteer their time or funds, of course.

Remain in pursuit

No matter how precise or thorough your initial recruiting efforts, remember that one-time or sporadic efforts are insufficient to attract a steady supply of volunteers. To get the resources you need, make volunteer recruitment a continuous process that draws on several strategies.

© 2018