Effective July 1, 2011, the IRS has changed the optional standard mileage rate to 55.5 cents per mile. According to the IRS, this optional rate can be used to compute the deductible transportation costs paid or incurred for business purposes. Many non-profit organizations use this rate as a guide to reimburse employees who use their personal vehicle to conduct the organization’s business. Although 55.5 cents doesn’t sound like much, it is something that can add up quickly. Unfortunately, in tougher economic times, this could be a way that staff increase their paychecks if they think no one is watching.

Whether you use the IRS rate as your reimbursable amount or some other rate, here are some suggestions to manage these reimbursements:

1. Review the policies at least annually.
2. Ask staff how they interpret these policies, and address any ambiguities.
3. Usually organizations only reimburse employees for mileage in excess of the miles that would be driven to the place of employment. For example, a case worker drives directly to a client’s house, which is 10 miles from the employee’s house. Your office is 6 miles from the employee’s house. Typically, you would only reimburse the employee for 4 miles of travel.
4. As part of the hiring process, inform new staff of the organization’s policies and give examples of what is allowed and what is not.
5. Periodically review these policies at staff meetings.
6. Employees should keep a written log of the mileage, which should include at a minimum for each trip:  Date of travel, destination, purpose of trip, and miles driven.  If you receive federal or state grants, the granting agency may require you to keep more detailed records, such as odometer readings, address of the destination, or attach maps showing mileage.
7. Prior to reimbursement, the mileage logs should be approved by the employees’ supervisors who are knowledgeable of their activities. The logs should also be periodically reviewed for inconsistencies, errors, redundant trips, and abuse.

     Does your organization receive federal grants? If so, did you know that you are required to establish and maintain internal controls to ensure that you are following the provisions of the grant? Most of the time organizations are concerned with having proper internal controls over their routine accounting related functions, but having internal controls over compliance requirements of federal grants can be just as important.

     What are you required to do? According to OMB Circular A-133 (which governs the administration of federal awards), organizations are required to:
“Maintain internal control over Federal programs that provides reasonable assurance that the auditee is managing Federal awards in compliance with laws, regulations, and the provisions of contracts or grant agreements that could have a material effect on each of its Federal programs.”
       To ensure that you have the proper controls in place, it is a good idea to perform an assessment of each of the compliance requirements that affect your federal grants. Here are a few questions you can ask yourself and others involved with the administration of the grant:
     “How do we know that case managers who are carrying out the program are fully informed of the provisions of the grant?”
     “What process do we have that would prevent an unallowable cost from being charged to the grant?
     “How do we know that participants in the program are eligible to receive services? Does anyone verify eligibility after the initial assessment?”
     “How do we make certain that we have paid for allowable costs before we request reimbursement from the grantor?”
     “How do we communicate changes involving the grant to those personnel who need to know?”
     “Do we routinely check the “Excluded Parties Listing System” to ensure that we are not doing business with any vendors that have been suspended or debarred?”
     “What process do we have in place to make sure that all reports were filed accurately and timely?”

     After doing this assessment, you may find that your internal controls need to be strengthened. If you need assistance with this, please give us a call.

Starting in 2009, exempt organizations must adopt Fin 48 – Accounting for Uncertainty in Income Taxes. According to FASB, adopting FIN 48 is supposed to enhance the transparency of the exempt organization’s activities, much like the IRS’s intentions with the new Form 990. Implementing FIN 48 means exempt organizations are expected to analyze various areas of their operations and disclose any potential tax that may be assessed on uncertain tax positions. FIN 48 analyses may be necessary in many different areas such as state taxation and asset transactions, but a few target areas for all organizations are the purpose and activities, generation of unrelated business income, and excessive compensation arrangements.

FIN 48 will force a closer look at the source of the organization’s funds and the organization’s tax exempt purpose. Analysis in this area is necessary because if the organization strays from its exempt purpose, the income generated could become taxable. FIN 48 implementation requires that the risk of this happening be analyzed and any potential taxes be disclosed. 

This goes along with the second target area, classification of unrelated business income and management’s devotion of time to raising funds unrelated to the exempt purpose. Income unrelated to the exempt purpose of the organization should be taxable and whether or not income is classified as “unrelated” is a tax position. The potential tax liability arising from classifying income as unrelated business income requires a FIN 48 disclosure. 

The last generally applicable target area for exempt organizations is excessive compensation arrangements. If a compensation arrangement is found to be excessive it can result in excise taxes or jeopardize the tax exempt status of the organization. Compensation policies and practices will require analysis and possibly a FIN 48 disclosure of potential tax liability. 

Posted by Jamye Shaffer
RCO – Tax Senior

FIN 48 is an accounting standard that publicly traded companies have been complying with since 2007. Due to many comments and concerns about the standard, the implementation was delayed for nonpublic entities. FIN48 is an interpretation that clarifies accounting for uncertainties in income taxes, but more importantly, it changes the way that resulting liabilities are recognized, measured, presented and disclosed in the financial statements. When a tax return is completed, every answer or number is really a tax position. FIN48 asks the theoretical question, “would that tax position (either taken on a return or expected to be taken on a future return) stand up to examination by the IRS if they have full knowledge of the facts?”. 

Ok that is a bunch of tax talk. How can this standard affect tax-exempt organizations? The Financial Accounting Standards Board actually addressed that issue specifically, in a staff position paper issued last year. There are several FIN48 issues that can affect tax exempt agencies, but the most common are (1) performing services that are not consistent with the organization’s tax exempt purpose and (2) unrelated business income.

The first assessment of any tax position is whether or not the position is more likely than not to be upheld during an IRS examination. If the position would be upheld, then it is NOT an uncertain tax position and there is NO liability.  If the position cannot be upheld, then FIN48 requires a liability to be recorded and disclosed. The calculation of the liability is prescribed but allows some judgement. The recorded liability is the difference between the benefit recorded (full amount) and the amount that would be 50% or more likely to be allowed after the examination. The disclosure will identify this as an uncertain tax position, and will raise red flags for an IRS audit. As reported in the Journal of Accountancy, the IRS is currently proposing companies with more than $10 million of assets to disclose uncertain tax positions on their annual returns. 

Need help in determining what is considered an “uncertain tax position”? See our next post.

Purpose of Schedule D
Schedule D is designed to provide additional information regarding information presented in the financial statements of Form 990.

Information You Will Need to Prepare Schedule D
You will need to gather or prepare the following information:

• Details regarding your donor advised funds, (Part I).
• Details regarding your conservation easements, (Part II).
• Details regarding your collections of art, historical treasures, and similar assets, (Part III).
• Details regarding your trust, escrow, and custodial arrangements, (Part IV).
• Details regarding your endowment funds, (Part V).
• Details regarding your assets, investments, and liabilities, (Part VI, VII, VIII, IX, and X).
• Your audited financial statements, (Part XI, XII, and XIII).
• View the IRS Website for additional instructions for preparation of Schedule D.

How to Prepare Schedule D

Part I, Organizations Maintaining Donor Advised Funds or Other Similar Funds or Accounts

A donor advised funds allow donors to maintain advisory privileges regarding the distribution or investment of their donated funds. Generally a donor advised fund is a fund or account:

1. That is separately identified by reference to contributions of the donor;
2. That is owned and controlled by your organization; and
3. For which the donor or donor advisor has or reasonably expects to have advisory privileges in the distribution or investment of amounts held in the donor advised funds of accounts because of the donor’s status as a donor.

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In my previous post we discussed external financial statement audits. Now we will discuss the audit process.

To begin the audit, the accountant (or equivalent) will present the auditor with a listing of all accounts and the related balances that are used to compile the financial statements. Basically, the accountant is saying this is what I believe to be the balances of these accounts. Then the auditor goes through various steps, such as confirming information with third parties, reviewing invoices, contracts, receipts, bank statements, and analytical procedures to prove that the balances are not “materially misstated” and that the statements conform to generally accepted accounting principles.

An audit does not look at every transaction that occurred during the year. Normally this would be cost prohibitive. So the auditor will look at various accounts and take a sample of transactions from those accounts. Because we “test” the account balances and not review 100%, our report is not saying that the financial statements are necessarily 100% accurate, but our report tells the users of the financial statements that we believe there is not a material misstatement that would cause you to alter a decision.

For example, your organization may report to us that they have a balance of accounts receivable of $2 million. Through various means of testing this balance, we have reviewed $1.9 million of this balance and believe it to be accurate. But we have not audited the remaining $100,000. We believe that the users of the financial statements would make the same decision if the actual balance were $2 million or $1.9 million. When errors are found during the audit, the auditors will discuss the issues with management and propose adjustments to the financial statements.

Understanding what an audit of financial statements entails helps management, Board of Directors and others to know what they are paying for and that the statements fairly represent the financial status of the organization. If the accountant uses the same generally accepted accounting principles to compile the monthly financial statements, this will help management and the Board of Directors make consistent, well-informed decisions.

One of the most critical tasks in monitoring and managing operations is to establish an annual budget. Whether you are responsible for one line item, one program, one department, or an entire organization, you will want to participate in this workshop held in the Fort Worth area, and sponsored by the Funding Information Center.

Participants will learn:

• The importance of sound budgeting
• The basic principles of budgeting
• How the budget is used as a planning and management tool
• Steps in the budgeting process
• How to develop various types of budgets, including programs and special events

Speaker: Christi Stinson, Executive Director, Funding Information Center
Fee: $20 for FIC members; $40 for nonmembers

Date: Tuesday February 16th, 2010

Time:  9:00 a.m. to 11:00 a.m.

Location: Funding Information Center
329 S. Henderson, Fort Worth, TX 76104
817-334-0228
To register, follow this link.

Let’s be really honest – year-end giving wasn’t exactly what we hoped for. In a recent study conducted by the Barna Group, 57% of pastors surveyed said the economy had negatively impacted their church compared to last year. The good news is that only 8% of church leaders said the economic impact was “very negative,” and 9% actually described last year as financially positive. Even if your not one of the 57%, you’re probably not as comfortable going into 2010 as you’d like to be.

So what can churches do to weather this environment? Here’s a few suggestions: Read the rest of this entry »

President Obama recently signed into law H.R. 4462 which allows taxpayers to claim a charitable deduction in the 2009 tax year for donations made after January 11, 2010 and before March 1, 2010 for the relief of victims in areas affected by the recent earthquake in Haiti. This new law applies only to contributions of cash (not property) and the contribution must otherwise meet the requirements for a charitable contribution. Cash contributions would include contributions made by text message, check, credit card, or debit card. 

Federal law requires the taxpayer keep a record of any deductible contributions made. For donations by text message, a copy of the telephone or wireless account bill must show the name of the donee organization, the date of the contribution, and the dollar amount. For other cash contributions, be sure to keep a bank record, such as a cancelled check, or a receipt from the charity showing the name of the charity and the date and amount of the contribution.

For additional information regarding Haiti donations, see this IRS release.

What are the specific requireqments for a charitable contribution? See this IRS publication for additional information.

Purpose of Schedule A, Parts II & III
The purpose of Part II is to determine whether your organization meets the public support test.

Special Issues
Financial information in Parts II and III are now reported on the same basis as the remainder of the return, (in the past, Schedule A was presented on a cash basis even if the rest of the return was on an accrual basis.) This means that all four prior years that are shown (2004 through 2007) must be revised to the accrual basis if your organization reports on an accrual basis. Additionally, you must convert the list of supporters that is reported on line 5 to accrual basis for all prior years (2004 through 2007).

Information You Will Need to Prepare Schedule A, Part II or III
You will need to gather the following information:

• Contribution lists for 2004 – 2008. After 2008, you will only need your current year list since prior years will already have been converted to the accrual basis.
• Tax returns for 2004 – 2008. After 2008, you will only need your current year return since prior years will already have been converted to the accrual basis.
• View the IRS Form 990 Filing Tips: Schedule A (Public Support and Public Charity Classification) for additional help.

How to Prepare Schedule A, Part II
Complete Part II if you selected line 7 in Schedule A, Part I. There are two ways to meet the public support requirements: at least 33 and 1/3% of your support is from contributions and grants or 10% of your support is from contributions and grants and you meet the facts and circumstances test listed in Regulations section 1.170A-9T(f)(3). If you met the support test in the prior year but don’t meet it this year, you will have a grace period for one year, (see lines 16b and 17b in Schedule A). This article will only address the lines that often cause confusion.

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