An endowment investment can be a great benefit to any charity or non-profit. These are set up using funds from generous donors that want to see their money supporting the mission many years into the future, and possibly in perpetuity. Generally, an endowment investment account is set up with funds for which the donor restricts so that only the interest and earnings can be used. This means that the original endowment amount or “corpus” must always stay intact.

When the endowments are earning interest and capital gains during the year, this is relatively easy. The corpus stays intact as permanently restricted and the earnings are recognized as increases to unrestricted net assets. However, during adverse economic times, such as now, it’s very possible that investments lose value during a fiscal year. In this case the original amount of the endowment, or corpus, must remain intact. Any losses must be recognized as unrestricted net asset changes and the permanently restricted corpus should remain whole on the financial statements.

Unfortunately, this is a grim reality in the current economic conditions and widespread investment losses. The amount of the donor’s original endowment must remain whole and any changes in value, good or bad, will affect unrestricted net assets.

Is your organization experiencing difficulties in allocating investment losses between unrestricted and restricted net assets? Post a comment.

According to John C. Maxwell, “competence” is a character trait all leaders should possess as described in his book titled “The 21 Indispensable Qualities of a Leader.”
Competence doesn’t just happen, it must be cultivated:

An exempt organization that regularly carries on a trade or business not substantially related to its exempt purpose has unrelated business income. The concept of “unrelated” is defined by the business activity and not how the funds are used by the organization. Just because an exempt organization needs funding does not allow the activity to be “exempt” from taxation.

Under the Internal Revenue Code, 1.513-1(a) describe three criteria that must be met for an activity to be considered “unrelated” and thus taxable:
• The activity must be a “trade or business”
• The trade or business must be regularly carried on; and
• The trade or business is not substantially related to the organization’s exempt purpose.

If an organization has more than $1,000 in gross receipts (total sales less cost of goods sold, plus any income from investments and from incidental or outside operations or sources) from unrelated business income, Form 990-T should be filed. The tax form is due on the 15th of the fifth month following year-end and should be filed with the Department of the Treasury, Internal Revenue Service Center, Ogden, UT 84201.

Certain employees’ trusts defined under section 401(a), and IRA (SEPs and SIMPLEs), a Roth IRA, an Educational IRA and an MSA may have unrelated business income and must file the form by the 15th of the fourth month following year-end.

Need help in understanding unrelated income? Contact us.

Private foundations (PFs) are required to annually distribute a portion of their assets for charitable purposes. Qualifying distributions can take the form of distributions to public charities or can be expenditures made by the foundation to carry out its own charitable purpose.
The required distribution for a given year is 4.925% of the fair market value of the PF’s assets, net of any debt used to acquire the assets.
The required distribution for a given year must be made by the end of the following year to avoid a 30% penalty (a calendar year PF must make its required 2009 distribution by December 31, 2010). The additional year is allowed so that the PF can compute the required amount as part of its Form 990-PF tax filing which is not completed until the year following the tax year in question.
For questions about the penalties, see IRS Form 4720 and its instructions (see Schedule B on page 6).
Additional questions? – contact me.

Even donors to nonprofit organizations are looking for a return on their investments. The return is in the form of the contribution being used for a specified purpose within the organization’s scope of activities. A donor may require that the contribution not be used until a project has reached a predetermined goal or threshold. These donor restrictions require nonprofits to segregate these contributions as temporarily restricted assets until the specified conditions have been met. When the restrictions are met in the same year as the donation, the revenue is recorded as unrestricted support. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions.

If material, the components of temporarily restricted net assets and the amounts released are disclosed in the footnotes of the financial statements.

Authored by Tishia Jordan