In recent years watchdog groups, the media and others have increased their scrutiny of how much not-for-profits spend on programs vs. administration and fundraising. Your organization likely feels pressure to prove that it dedicates most of its resources to programming. However, accounting rules require that you record the full cost of any activity with a fundraising component as a fundraising expense.
How then can you maintain an appealing fundraising ratio? That’s where allocating joint costs comes in.
Nonprofits are allowed to combine program and fundraising activities to achieve efficiencies. For example, a literacy nonprofit uses a mailing to recruit volunteer tutors and ask for donations. The organization prefers to assign most of the cost to program expense, reasoning that the fundraising part of the mailing is relatively minor. But charity watchdogs may allege this overstates the program component, skewing the nonprofit’s fundraising ratio.
Allocating costs between fundraising and other functions can solve the problem, but only if three criteria are met:
1. Purpose. You can satisfy this condition if the activity is intended to accomplish a program or management purpose. A program purpose requires a specific call to action — other than “donate money” — for the recipient to help further your mission. In the mailing example, this means encouraging recipients to become volunteers in a literacy program.
2. Audience. Meeting this criterion can be challenging if your activity’s primary audience is prior donors or individuals selected for their ability or likelihood to donate. But you can strengthen your position by showing that you selected the audience for its potential to respond to your nonfundraising call to action.
3. Content. This criterion is satisfied if the activity supports program or management functions. If that’s not obvious, explain the benefits of the action that’s called for. Note that the “purpose” criterion focuses on intention, while the “content” criterion considers execution.
You should allocate costs using a consistent and systematic methodology that results in a reasonable allocation. The most common method is based on physical units, with costs proportionally allocated to the number of units of output. Other approaches include the relative direct cost and stand-alone joint cost allocation methods. The former uses the direct costs that relate to each component of activity to allocate indirect costs. The latter determines proportions based on how much each component would cost if conducted independently.
Don’t forget disclosure
You must disclose the methods you use for joint cost allocation in your nonprofit’s financial statements, including whether joint activities comply with the three criteria. Also include a disclosure on your Form 990. If you have any questions about allocating joint costs, contact us. © 2019
Recent changes to federal tax law and accounting rules could affect whether you decide to lease or buy equipment or other fixed assets. Although there’s no universal “right” choice, many businesses that formerly leased assets are now deciding to buy them.
Pros and cons of leasing
From a cash flow perspective, leasing can be more attractive than buying. And leasing does provide some tax benefits: Lease payments generally are tax deductible as “ordinary and necessary” business expenses. (Annual deduction limits may apply.)
Leasing used to be advantageous from a financial reporting standpoint. But new accounting rules that bring leases to the lessee’s balance sheet go into effect in 2020 for calendar-year private companies. So, lease obligations will show up as liabilities, similar to purchased assets that are financed with traditional bank loans.
Leasing also has some potential drawbacks. Over the long run, leasing an asset may cost you more than buying it, and leasing doesn’t provide any buildup of equity. What’s more, you’re generally locked in for the entire lease term. So, you’re obligated to keep making lease payments even if you stop using the equipment. If the lease allows you to opt out before the term expires, you may have to pay an early-termination fee.
Pros and cons of buying
Historically, the primary advantage of buying over leasing has been that you’re free to use the assets as you see fit. But an advantage that has now come to the forefront is that Section 179 expensing and first-year bonus depreciation can provide big tax savings in the first year an asset is placed in service.
These two tax breaks were dramatically enhanced by the Tax Cuts and Jobs Act (TCJA) — enough so that you may be convinced to buy assets that your business might have leased in the past. Many businesses will be able to write off the full cost of most equipment in the year it’s purchased. Any remainder is eligible for regular depreciation deductions over IRS-prescribed schedules.
The primary downside of buying fixed assets is that you’re generally required to pay the full cost upfront or in installments, although the Sec. 179 and bonus depreciation tax benefits are still available for property that’s financed. If you finance a purchase through a bank, a down payment of at least 20% of the cost is usually required. This could tie up funds and affect your credit rating. If you decide to finance fixed asset purchases, be aware that the TCJA limits interest expense deductions (for businesses with more than $25 million in average annual gross receipts) to 30% of adjusted taxable income.
When deciding whether to lease or buy a fixed asset, there are a multitude of factors to consider, including tax implications. We can help you determine the approach that best suits your circumstances. © 2019
Whistleblower policies protect individuals who risk their careers — or take other kinds of risks — to report illegal or unethical practices. Although no federal law specifically requires nonprofits to have such policies in place, several state laws do. Moreover, IRS Form 990 asks nonprofits to state whether they have adopted a whistleblower policy.
Adopting a whistleblower policy increases the odds that you’ll learn about activities before the media, law enforcement or regulators do. Encouraging stakeholders to speak up also sends a message about your commitment to good governance and ethical behavior.
Your policy should be tailored to your organization’s unique circumstances, but most policies should spell out who’s covered. In addition to employees, volunteers and board members, you might want to include clients and third parties who conduct business with your organization, such as vendors and independent contractors.
Also specify covered misdeeds. Financial malfeasance often gets the most attention, but you might also include violations of organizational client protection policies, conflicts of interest, discrimination and unsafe work conditions.
And how should whistleblowers report their concerns? Must they notify a compliance officer or can they report anonymously? Is a confidential hotline available? Whom can whistleblowers turn to if the designated individual is suspected of wrongdoing?
Covered individuals and other stakeholders need to know how you’ll handle reports once they’re submitted. Your policy should state that every concern will be promptly and thoroughly investigated and that designated investigators will have adequate independence to conduct an objective query. Also describe what will happen after the investigation is complete. For example, will the reporting individual receive feedback? Will the individual responsible for the illegal or unethical behavior be punished? If your organization opts not to take corrective action, document your reasoning.
Don’t forget to stress confidentiality. Explain in your policy that it may not be possible to guarantee a whistleblower’s identity if he or she needs to become a witness in criminal or civil proceedings. But promise you’ll protect confidentiality to the extent possible. Finally, be sure to have your attorney review your whistleblower policy. © 2019