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.

     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.

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

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.

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.

A donor advised fund does not include any fund or accounts:

1. That only makes distributions to a single organization or governmental unit;
2. In which the donor only provides advice regarding the distribution of grants to individuals on an objective basis for travel, study, or other similar purposes as the member of a committee which is not controlled by the donor.

Line 1 – 6: complete the information for your donor advised funds in column (a) and for you funds that are similar to donor advised funds in column (b).

Part II, Conservation Easements
Line 1: Conservation easements restrict the use of or modifications to real property. They must be granted to a qualified organization in perpetuity exclusively for conservation, such as protection of a habitat, preservation of open space, or the preservation of property for educational, historical, or recreational purposes. To qualify as a certified historic structure, the building must be listed in National Register of Historic Places or be certified as being of historic significance to a registered historic district.

Line 2a – 2d: These numbers should be exact, not estimates, using decimals where necessary, such as for acreage.

Line 3: Because conservations easements are supposed to be granted in perpetuity, the IRS wants to know about any changes. An easement is modified if the terms of the easement are modified, such as increasing or decreasing the amount of land included in the easement. An easement is terminated if it is condemned, extinguished by court order, transferred, or rendered void or unenforceable. If the easement was modified, transferred, or terminated during the year, provide an explanation in Part XIV.

Line 5: Briefly summarize in Part XIV any written policies regarding monitoring, inspection, and enforcement. Monitoring occurs when you investigate the condition or use of the restricted property to verify that the owner is adhering to the terms of the easement. Inspection refers to an onsite visit to the property, while enforcement is an action taken by your organization when a violation of the easement stipulations occurs. This may include communicating with the property owner regarding their obligations under the easement, arbitration, or litigation.

Line 8: In order to comply with IRC Sections 170(h)(4)(B)(i) and 170(h)(4)(B)(ii), the easements must meet the following requirements:

1. Restrictions that preserve the entire exterior of a building, (including the space above it) and prohibit any changes to the exterior that are inconsistent with the historical character.
2. Donor and donee agree in writing under penalties of perjury that the donee’s exempt purpose is environmental protection, land conservation, open space preservation, or historic preservation and the donee has the resources and commitment to enforce the restrictions.
3. There is a qualified appraisal, photographs of the entire building exterior, and a description of all development restrictions relating to it, (such as zoning laws, restrictive covenants, etc.)

Part V, Endowment Funds
Section V is a snap shot of the components of your net assets. Quasi-endowments, (board designated) are established by the board to function as endowments. They must retain their purpose and intent as specified by the donor or source of the original funds. Permanent endowments provide a permanent source of income. The principal must be invested and kept intact in perpetuity. The income can be used by your organization. Term endowments provide a source of income for a specific period of time or until a specific event occurs.

Line 1a: Enter the total sum of your quasi, permanent, and term endowments.

Line 1b: Enter the current year contributions to the endowments. Include gifts, grants, and contributions. Also include additional funds established by your board to function like an endowment, but that may be expended at any time at the discretion of the board.

Line 1c: Enter realized and unrealized gains and losses. If earnings are reported net of transaction costs, enter the net on this line. If earnings are reported gross, enter the transaction costs on line 1f.

Line 1e: Enter distributions for facilities and programs, including amounts withdrawn from quasi-endowments. Do not include scholarships on this line. Instead enter them on line 1d.

For more information, view the IRS instructions at http://www.irs.gov/pub/irs-pdf/i990sd.pdf.

Coming Soon
Schedule G coming March, 2010.

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.

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.

So what can churches do to weather this environment? Here’s a few suggestions:

1. Don’t abandon your mission, and certainly don’t abandon your message. Despite this economy, I believe (and have seen) that people still want to give generously to causes they are passionate about. The problem caused by the economy is that more nonprofit organizations are providing more services to more people in need with less available funding. That’s why it’s so important to trumpet a compelling vision to your contributors. There are simply more options for donors to consider, and with limited resources, they give to causes they are the most passionate about.
2. Communicate, communicate, communicate. Churches (and lots of other organizations) make the mistake of not wanting to communicate negative financial trends and results. But if you don’t communicate, how will your contributors know there’s a need? Many churches also make the mistake of talking about money only when the numbers are down. Generosity is ultimately a spiritual issue not a financial one, and that message is lost if you only talk about money in a bad economy.
3. Rethink budgets. Churches are generally very slow to make difficult decisions about (i.e. cutting) budgets, minstries, and staff. The line between faith and stewardship is often very faint, but in a giving environment like we’re experiencing now, churches must consider the efficiency of their ministries. When giving is up year after year after year, churches often add a little more “flair” to ministries than is really needed and let certain ministries linger on a little longer than they should. Spend some time thinking strategically about your ministries in light of your mission and your investment in those ministries, and you might be surprised what you find.

The economy we’ve been dealt presents its share of challenges for churches and ministries, but there are opportunities to impact the quality and direction of your ministries. And who knows – you might even find youself in the 9% next year.

If we can be of any help or answer any questions as you wrestle through these issues, please don’t hesitate to call me.

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.

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.

Line 1
Enter your contributions, grants, and membership fees to the extent the fees are in excess of payments to purchase related activity products or services. You will find these numbers on Form 990 page 9 line 1. For 2004 – 2007, this number would come from Page 1 line 1. Remove unusual grants from this amount. Unusual grants are grants that are contributions and bequests from disinterested persons that meet the following criteria:

• Attracted because of the organization’s publicly supported nature,
• Unusual and unexpected because of the amount, and
• Large enough to endanger the organization’s status as normally meeting the 33% percent public support test or the 10% facts and circumstances test.

Line 5
Enter the portion of contributions by each individual , trust, or corporation included on line 1 that exceeds 2% of the total reported in line 1(f). This is for the current year plus the four previous years. For example, If your total in line 1(f) is $1,000,000, and you have one individual who contributed $21,000 during years 2004 – 2008, a private foundation who contributed $100,000 during years 2004 – 2008, a corporation that contributed $50,000 during the years 2004 -2008, and 50 individuals who each contributed a total of less than $20,000 during 2004 – 2008, you would report $171,000, (21000 + 50,000 + 100,000) on line 5. The $171,000 would be considered as coming from excess contributors and will be removed from your public support percentage calculations. Do not include support from governmental units or publicly supported organizations in line 5. Remember to convert 2004 – 2007 to accrual basis if your organization is on an accrual basis.

Line 12
Enter the total amount of gross receipts for the current year plus the previous four years from admissions, sales of merchandise, performance of services, or furnishing of facilities in any activity which is not an unrelated trade or business. Include membership fees to the extent that they are payments to purchase any of the related activities.

Line 17a
If lines 14 and 15 are less than 33 1/3% you will need to determine if you qualify under the facts and circumstances test. If 10% of your support is from contributions and grants and you meet the facts and circumstances shown below, select the box on line 17a and provide details of how you meet the following facts and circumstances requirements of Regulations section 1.170A-9T(f)(3) in Schedule A, Part IV):

• The program maintains a continuous and bona fide program for solicitation of funds from the general public, community, membership group involved, governmental units or other public charities.
• All other facts and circumstances, including the sources of support, whether the organization has a governing board which represents the broad interests of the public, and whether the organization generally provides facilities or services directly for the benefit of the general public on a continuing basis.
• If the organization is a membership organization, whether the solicitation for dues-paying members is designed to enroll a substantial number of persons from the community, whether dues for individual members have been fixed at rates designed to make membership available to a broad cross-section of the public and whether the activities of the organization will be likely to appeal to persons having some broad common interest or purpose.

Schedule A Part III
Complete Part III if you selected line 9 in Schedule A, Part I. The public support for test Part III is met if the organization meets the following criteria:

• The organization receives at least one-third of its support from contributions, membership fees, and gross receipts from activities related to its exempt functions or from amounts which are not related trades or business, not including unusual grants, (see above for a definition),
• No more than one-third of its support comes from gross investment income and net unrelated business income from businesses acquired after June 30, 1975.

If this criteria is not met, the organization will fail the public support test and will be considered a private foundation instead. Contributions from disqualified persons, contributions that exceed 1% of the total contributions for the year, and contributions that exceed $5,000 are removed from the public support calculation.

For more information, view the IRS instructions at http://www.irs.gov/pub/irs-pdf/i990sa.pdf.

Coming Soon
Schedule D coming February, 2010