Transportation Fringe Benefits Are Now Ubi—Effective Jan. 1, 2018

By Laura Kalick, JD, LLM in Taxation

Does your tax-exempt organization provide transportation and parking benefits to employees? If so, you may have another commuter headache: a new tax. Under the Tax Cut and Jobs Act of 2017 (the Act), a provision was added to the Internal Revenue Code that is likely to require many tax-exempt organizations to pay unrelated business income tax (UBIT). Certain costs of qualified transportation, including transit passes, qualified parking and more, will now be taxed as unrelated business income at 21 percent.

The Act added the following provision to the Internal Revenue Code: Internal Revenue Code (IRC) Section 512(a)(7): Increase in unrelated business taxable income by disallowed fringe.

This provision was an attempt to put exempt organizations on the same footing as taxable organizations that will no longer be able to deduct these costs. The provision is effective for amounts paid or incurred after Dec. 31, 2017.

Under this provision, certain qualified transportation fringe benefits, including those relating to parking garages, must be reported as unrelated business income (UBI). All tax-exempt organizations (and a college or university owned and operated by a state or other governmental unit) will have to include as unrelated business taxable income any amounts paid or incurred for any qualified transportation fringe benefit, including the following:

• A ride in a commuter highway vehicle between the employee’s home and workplace.
• A transit pass.
• Qualified parking.

Qualified parking is parking you provide to your employees on or near your business premises. It includes parking on or near the location from which your employees commute to work using mass transit, commuter highway vehicles, or carpools. If an organization has its own garage that is used for parking that is already reported as UBI (e.g., parking for the general public), then the percentage of those costs attributable to the amount already included in its UBI does not have to be included in the amount treated as UBI under the new provision.

The UBIT on these employer costs is 21 percent at the federal level and state taxes may apply as well. Organizations should consider making estimated tax payments on these taxes.

These employee fringe benefits are still excluded from an employee’s income. Employers can generally exclude the value of transportation benefits provided to an employee during 2018 from the employee’s wages up to the following limits:

• $260 per month for combined commuter highway vehicle transportation and transit passes.
• $260 per month for qualified parking.

See IRS Publication 15-b for more information.

Even if the benefit is provided under a compensation reduction agreement, the payment will still result in UBIT for the organization. The only way the organization can avoid counting these benefits as UBI is to have the employee pay for the benefits with after-tax dollars.

COMPENSATION REDUCTION AGREEMENT EXAMPLE:

For 2018, the monthly limit on the amount that may be excluded from an employee’s income for qualified parking benefits is $260. Commuter employees can receive both the transit and parking benefits up to $520 per month tax-free.

On a per employee basis, for commuter and transit passes only, $260 monthly is $3,120 annually, and the UBI tax on this amount at 21 percent is $655 plus state taxes, if applicable. With 100 employees, the federal tax alone would be $655 per employee and approximately $65,500 in total. To the extent your organization provides a commuter benefit of up to $520 per month, the UBI tax can be much more.

Next Steps:

• Organizations should determine whether they provide these transportation and parking benefits, and if so, to how many employees, what kind and how much?
• Calculate the estimated tax payments for Federal UBI and the state, if applicable.
• If your organization has not filed Form 990-T in the past, enroll the organization in the Electronic Federal Tax Payment System in order to remit the taxes.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com

Privacy Is a Must‑Have These Days– Guide to Implementing a Holistic Privacy Program

By Karen Schuler, CFE, IGP, IGP and Taryn Crane, PMP

Notwithstanding the EU General Data Protection Regulation (GDPR)—the most sweeping change to data privacy in 20-plus years, with extraterritorial scope that went into effect on May 25, 2018—there are numerous privacy laws that are often  overlooked.

Earlier this year companies like Facebook have come under fire for privacy violations while Congress is looking for ways to protect the privacy of American citizens. These movements are just the beginning of widespread change that we expect for privacy laws over the next several years.

As discussed in the Spring 2018 issue of the Nonprofit Standard in an article entitled “The Integration of Data Privacy into a Data Governance Program,” nonprofits can’t afford to ignore regulations like GDPR as many organizations are impacted due to their global reach. But now that May 25, 2018 has passed and GDPR officially went into effect, it’s time to think about your holistic privacy program—or implementing a Privacy Operational Life Cycle that helps your organization keep employees apprised of new privacy requirements, embraces recordkeeping and sound data protection practices while offering enhanced data privacy for your donors, employees, and constituents.

Think about these areas to develop a sound Privacy Operational Life Cycle:

  • Develop an organizational privacy vision and mission, and document the program’s objectives.
  • Identify legal and regulatory compliance challenges that are relevant to your organization.
  • Locate and document where personal information resides throughout your organization or across third parties (e.g., hosting vendors, outsourced applications).
  • Develop a privacy strategy that identifies stakeholders, leverages key functions throughout the organization, creates a process for interfacing within the organization, and outlines a data governance strategy.
  • Conduct a privacy awareness workshop to highlight to the entire organization the goals of the program.
  • And, finally, develop a structure for your privacy team with a governance model that is clear and consistent for the size of your organization.

The above-mentioned items are a starting point, but there is more to do after you develop your initial structure and communicate the purpose of the program. Below is a guide to developing the Privacy Operational Life Cycle.

Develop and Implement a Framework

The framework should provide you with an implementation road map that outlines your privacy procedures and processes. Developing a framework helps you identify high risk areas, reduce data loss, and provide a measurement against compliance to laws, regulations, and standards. Frameworks that provide initial guidance include the AICPA and CICA Privacy Framework, ISO 17779/BD7799, or OECD Privacy Guidelines.

Develop Privacy Policies

Once you have selected an overall framework to govern your privacy program, look at your existing policies, procedures, and guidelines. During this phase you should evaluate the goals of the privacy program and determine what business initiatives are the baseline of the privacy program. Just remember, as you look to update policies, procedures and guidelines for the organization, ensure that there is a mechanism to enforce these policies. And don’t forget to review the current website privacy notice. This has become a critical target of privacy watchdogs to ensure that you can fulfill the commitment of the statements in that notice.

Develop Mechanisms to Measure Performance

Within your privacy life cycle, it will be important to develop the ability to measure performance of the program. To implement metrics, consider your audience—will it be the board, external parties, regulatory agencies, or the staff? Determine how you will report on these metrics that you have identified. Decide what measurements you are interested in sharing with your audience and how this could impact funding positively or negatively. Next, determine how you will measure progress toward the organization’s business goals and objectives. Do your best to limit improper metrics that do not support the organization’s mission. And finally, determine the best methods to collect the data you need. Your goal is to demonstrate compliance while establishing the privacy program’s return on investment (ROI).

Develop the Privacy Operational Life Cycle

The Privacy Operational Life Cycle should consider measurement, improvements, and the ability to sustain and support the program. To effectively do this, develop an operational life cycle that considers the assessment, protection, governance, and response phases. Some tips to consider for each aspect of the life cycle:

  • Assess – embed Privacy by Design (PbD) into the design of technology, business practices, and physical design of new programs. In addition to PbD, regularly evaluate third-party compliance, as well as internal program compliance.
  • Protect – ensure that information life cycle management (ILM) is built into your data protection strategy. While it is important to ensure that your data protection strategies mitigate the risk of a data breach, you need to consider sound ILM practices to promote the organization’s data protection strategies. Remember, the less you have, the less you have to protect.
  • Govern – while it’s important to be able to evaluate and protect information, you also need to monitor, audit, and communicate the privacy framework. Develop a strategy and operational procedures that allow your organization to maintain a transparent and visibly sound program. And don’t forget to monitor regulatory changes that impact your organization. Develop ongoing processes that allow you to measure the privacy program’s effectiveness.
  • Respond – traditionally privacy and security teams viewed their ability to respond as responding to a security event. Today that has changed – it’s much broader and requires the ability to respond to complaints, requests for information, corrections of inaccurate data, clarifications of privacy matters and access requests. When developing your response capabilities, take into consideration these items in addition to your ability to respond to a security event.

Holistic privacy program development is the wave of the future, especially in a competitive world where data is at the core of every business or organization. Establish a program that fits your organization to ensure that you remain ahead of the curve and out of the sight of regulators.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com

Pay Data for ‘Similarly Qualified Persons in Comparable Positions at Similarly Situated Organizations’ — We’ve got that… don’t we?

By Michael Conover

Valid information on competitive pay levels and practices for “… similarly qualified persons in comparable positions at similarly situated organizations” has long been the basis for responsible management, and Internal Revenue Service (IRS) enforcement, of appropriate pay practices among all tax-exempt organizations.

When the IRS Intermediate Sanctions (Internal Revenue Code 4958) were enacted, the importance of good comparative data was underscored by its inclusion as one of the three elements of the protection offered in the Rebuttable Presumption of Reasonableness. The data provides a critical context for determining how much and how to pay a nonprofit’s executives.

Regardless of its importance, however, many organizations fail to devote the attention to this important element of their compensation program that it deserves. We regularly work with organizations that have difficulty describing or producing the data used as the basis for executive pay decisions. References are made to “a report done a while ago,” “a survey we had,” or “some Form 990s from organizations like us.” Examining the Form 990s and Schedule Js of these same organizations, we find they have checked all the appropriate boxes related to these data sources and yet there is little or nothing to be found.

Another group of organizations we find has a different competitive data issue. They have competitive data to offer as the basis of compensation decisions, but there are serious issues about the quality and comparability of the data being used. The data may be drawn from organizations that are not at all comparable, positions that are marginally similar or based on such a small sample that the data’s validity is very questionable. In these situations, this poor data may be as bad, or possibly worse, than having no data at all because it may lead to problematic pay decisions.

Obtaining and properly using good data for compensation purposes requires some thoughtful examination of your organization, its positions, and the requirements for individuals holding those positions. Only after accurately understanding your own circumstances can a search begin for the sources of valid data needed. Areas that need to be explored include:

  • Details of your organization: This information includes the type of service(s) your organization performs as well as the broad organizational metrics that reflect its size and scope (e.g., revenue, operating budget, total assets, number of employees, etc.). These are usually among the factors most readily used for identifying similar organizations.
  • Primary role(s) of your position(s): Competitive data sources (surveys, Form 990s, etc.) usually offer only brief descriptions of positions and generic titles for job-matching purposes so the focus here is on the central focus and impact of your position in terms of overall impact on the organization. The chief/principal executive officer and chief/principal financial officer positions tend to be very similar from one organization to another and are Disqualified Individuals from an Intermediate Sanctions perspective. Therefore, they are routinely included in competitive data needs. Ensure you note any significant difference in the role played by your position vs. the typical benchmark. The presence of an additional role not associated with the typical benchmark for the position (or the absence of some portion of the role commonly associated with it must be taken into account to ensure appropriate comparisons will be made.
  • Position requirements: The emphasis on position requirements is intentional. The purpose is to focus on the essential education, expertise, and experience required to perform the role, not what the current incumbent happens to have or acquired in the role. For example, the fact that the current receptionist has five years of experience at the front desk does not mean that five years is a requirement for a qualified incumbent. On the other hand, your position may require a type of professional certification, education, or experience that is unique and essential for successfully performing the role. For example, an individual holding the position of executive director in an association of athletic coaches and involved with external organizations regulating the conduct of the sport must have credible experience in the sport.

Armed with an accurate understanding of your own organization and the positions that will be examined in the competitive compensation assessment, attention now is focused on the identification of the data that will be sought for use in the analysis. The process follows the same criteria referenced above in the descriptors of your organization and positions, as follows:

  • Organizations selected for inclusion in the analysis: Typically, these are organizations offering the same types of services that your organization provides. In some instances, there are other types of organizations, perhaps even for-profit ones that employ and compete for executive resources that are very similar to your specific organization. These can also be included in the search for competitive data. Compensation surveys are conducted among many different types of nonprofit organizations (e.g., higher education, social service organizations, professional/trade organizations, philanthropic foundations, etc.). In addition, Form 990 filings from other organizations like yours are also a source of competitive data. If necessary, a custom survey and/or consultant may be required to obtain data for specialized/hard-to-find sources of data.

The size and scope of organizations included in the analysis must be comparable to your organization. Revenue and budget levels for a group of organizations ranging from 50 percent to 200 percent of your size are typically viewed as reasonable for inclusion. Of course, care must be taken to avoid “skewing” the data in the direction of organizations much larger than your own.

I often explain the objective for identification of comparable organizations as comparing “apples to apples” but doesn’t necessarily need to be as specific as comparing McIntosh to Fuji.

  • Selection of benchmark positions: Positions selected for comparisons should closely resemble the role described in your organization. Titles alone may not fully describe a position’s role or they may be misleading. A controller may be the chief/principal financial officer or a subordinate, depending on the data source in question. In those cases where a significant difference has been identified between your position and the external benchmark, it may be advisable to make adjustments (upward or downward) to competitive data to appropriately compare them.
  • Special position requirements: Bona fide requirements for your organization’s position that are not typically associated with the benchmark position may also require an adjustment to competitive data in order to produce an appropriate comparison.

Collecting this information about your organization and the external benchmarks planned for use prior to an analysis of competitive compensation is not the end of this process. Two critical steps remain. First, it is important to engage the organization’s governing body (e.g., board, compensation committee) and involve them in a review of this information and affirmation/modification of it for use in the analysis. Involving the independent members of the organization in the process performs a very helpful educational role about compensation and the importance of good competitive data. It also enlists individuals with a critical oversight role in the governance of pay in an independent validation of the plan to secure the data before it is collected. A sound rationale has been prepared and ratified for the analysis of competitive data which board and management should view as valid for this purpose.

Second, this description of your organization and positions, as well as the external benchmark criteria or the comparative framework, should be documented. It will become part of the other important documents maintained to support the compensation program (e.g., board minutes, compensation strategy/guiding principles, etc.). The framework should be reviewed periodically and updated as needed to ensure its continued relevance to your organization as well as the external marketplace(s) in which you compete for executive resources.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com

An Introduction to Robotic Process Automation for Nonprofits

By Joe Sremack, CFE

Robotic process automation is helping both for-profit and nonprofit organizations do more with less. Robotic Process Automation (RPA) is transforming the way organizations across different industries do business. It allows organizations to automate certain types of work processes to reduce the time spent on costly manual tasks and increase efforts to deliver mission-critical work. RPA is helping organizations do more with less, helping them automatically process and store data without having to perform manual data entry, generate financial status reports without spending considerable amounts of time in Excel, and execute outreach campaigns without spending hours in a customer relationship manager (CRM) program. These types of optimizations have been made a reality through RPA, with organizations just beginning to scratch the surface of the possibilities.

RPA Defined

RPA is the use of software that automates manual tasks. It eliminates the need for employees to perform repetitive tasks by integrating software that performs the same set of steps the employee does. The software is designed to perform routine tasks across multiple applications and systems within an existing workflow. It performs specific tasks to automate the transfer, editing, reporting and/or saving of data.

At least some portion of white collar employees’ time is spent on repetitive computer tasks. That includes the CEO’s time–about 25 percent of the CEO’s tasks could be automated  and RPA can help achieve this. Repetitive work typically involves the collection of data from one or more sources, performing a data manipulation—such as applying data formulas in Excel—and then exporting or saving the information to a readily available location. These are just some of the kinds of work that RPA automates.

One of the main differentiators of RPA from other solutions is that it performs tasks that do not require deep cognitive capabilities. RPA is the automation of a process, but the software is not improved or changed based on the inputs or its results. This is different from machine learning or artificial intelligence (AI) software, which can learn and improve based on the continuous evaluation of its inputs and results. Instead, RPA software simply repetitively performs the same task(s) based on business requirements.

RPA provides several major benefits. The most immediate impact from RPA is that routine tasks are performed in an error-free, consistent manner. RPA also provides an audit trail of work performed, which can be valuable in regulated industries or when the output of a process produces an unexpected result. In addition, RPA solutions can be configured to identify anomalies or red flags that may not be identifiable to an employee.

The long-term benefits are also valuable. Perhaps the most important benefit is increased job satisfaction. When employees are asked which parts of their jobs they dislike the most, the tasks they list usually involve a type of manual work that is a good candidate for an RPA solution. [1] This increased job satisfaction results in a better work environment and more productive employees. Moreover, the results of the formerly manual processes become better and the cost savings can be recognized.

Applications of RPA

The list of potential uses for RPA is robust. Most manual computer-based tasks performed by employees can be automated with RPA. RPA is often used for back office functions but can extend to customer relationship management, data analysis, and other key areas that involve manual work.

The best way to understand RPA is to learn about the kinds of problems RPA can solve. For example, an RPA program–called a “bot”–can be used to manage customer email inquiries. The bot monitors a sales inquiry email account and automatically imports the information into the CRM, sends alerts to the sales team, sends an automated message to the customer, and imports the information into other systems that are used to track employee availability and sales campaign successes. This works well when timely responses to customers are required.

An example of a nonprofit-specific use of an RPA solution is the management of fundraising campaigns. In many organizations, this process involves pulling past donor information, generating marketing materials, contacting past and new donors, collecting donor payment information, and entering it into an accounting software, updating financial information, and updating a donor database. Most of these steps are performed manually, slowing down the process and introducing the risk of error. With an RPA solution, most of this process can be automated, allowing the organization to spend more time interfacing with donors and working on other mission-critical tasks.

The following is a chart that lists several types of tasks that can be automated by department in most organizations:
HR New employee forms Employee termination documentation Employee benefits
Finance / Accounting AR/AP tracking Financial reporting Vendor management
IT New user setup Employee termination Inventory tracking
Sales / Marketing Email sales campaign management Outreach campaigns CRM automation
Others Executive analysis reports Regulatory compliance documentation Inventory management

 

While the list above appears to be limited to single-department tasks, many of these are cross-department tasks in nature. Consider a process where the finance department needs to work with IT and sales to request multiple data sets, get input, and share the results. Rather than emailing those departments to pull the same data set every quarter to develop an Excel-based report, an RPA solution automatically performs the data pull and generates the entire Excel report. This not only saves time and effort across the various departments, it also enables the finance team to spend more time doing meaningful analysis of the reports and develop projections and deeper insights.

RPA and Nonprofits

RPA is well-suited for solving problems encountered by nonprofits since they face many of the same challenges associated with reducing the time employees spend on manual tasks as for-profit organizations. Whether the work involves manually entering accounts receivable and accounts payable data in accounting software, generating compliance reports, or performing outreach campaigns, time is being spent by employees on less valuable work. Employees would agree that they would rather work on mission-specific tasks rather than repetitive tasks.[2]

  • Several examples of the types of nonprofit processes an RPA solution works well with are:
  • Pledge campaigns.
  • Recurring donation management.
  • Digital and print marketing campaigns.
  • Outreach campaigns.
  • Government and regulatory issue tracking.
  • Volunteer management.

Service providers and software developers have begun offering solutions geared toward nonprofits. Several major RPA software developers have recently launched commercial software solutions specifically designed for nonprofits, and service providers who understand the nonprofit sector are able to implement tailored RPA solutions.

Implementing RPA

RPA solutions can be implemented in several ways. The most common method for organizations is to implement individual bots. These are single programs that perform tasks automatically. The bot can be accessed through a desktop or web-based application. The second method is to implement a server that controls a set of bots within a department or across the organization. The server-based approach is a more robust system that is typically employed when there are a larger number of bots utilized throughout an organization that need to be managed centrally, whereas the individual bot method is appropriate when only several bots are used.

The cost of an RPA solution, a common concern for any organization, depends on these factors:

  • Complexity
  • Number of bots.
  • Time to develop and implement.
  • Level of customization.

An enterprise-wide RPA solution of hundreds of bots can be expensive. A smaller implementation with only ten 10 bots or less, however, can be implemented relatively inexpensively and within a short period of time. Companies who sell RPA solutions often have a suite of pre-built bots that can be quickly customized and implemented without requiring a new bot to be developed. As the RPA market matures, the cost will continue to decline.

The key steps for determining whether an RPA solution is appropriate are to:

  • Identify where most time and effort is being expended on manual tasks.
  • Identify bottlenecks of key processes—specifically identifying manual tasks.
  • Implement a pilot program to tackle a high-value discrete task that can have immediate value.

RPA is an exciting new way for organizations to improve their operations while also improving employee job satisfaction. RPA solutions have become a widely adopted strategy for enhancing various parts of organizations’ operations by allowing employees to focus their time and efforts on more high-value and meaningful work. It has helped organizations do significantly more with less while reducing errors, increasing workforce job satisfaction, and better ensuring that deadlines are met. These benefits have been possible with relatively small capital investments and IT resources. While RPA is not applicable to all types of work, it is a good option for reducing hours spent on routine, manual tasks.

BENEFITS OF RPA

  • Error-free, consistent results
  • Employees can be utilized for higher‑value work
  • Increased job satisfaction (not spending time doing repetitive, low‑value work)
  • Faster, more predictable delivery timing
  • Documented trail of work performed
  • Identify anomalies or other red flags

 

[1]    Gartner Research, “Role of Machine Learning in Accelerating Automation,” 2016.

 

[2]    L. Willocks and M. Lacity, Service Automation: Robots and the Future of Work 2016, 2016.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com

The Great Act – Transforming How the Government Uses Grant Reporting Data

By Lee Klumpp, CPA, CGMA

The 115th Congress has been busy with tax reform but has managed to introduce a proposed bill H.R. 4887 (“Grant Reporting Efficiency and Agreements Transparency Act of 2018” or “GREAT Act” or the “Act”) on Jan. 29, 2018, by Representatives Foxx (R-N.C.), Gomez (D-Calif.), Issa (R-Calif.), Quigley (D-Ill.), and Kilmer (D-Wash.). Three other members have signed on to the bill since it was introduced. The bill is currently before the House Committee on Oversight and Government Reform.

The sole objective of the Act is to modernize federal grant reporting by standardizing the information recipients submit to agencies. It is believed by its sponsors that the GREAT Act will transform federal grant reporting from disconnected documents into open data by directing the executive branch to adopt a standardized data structure for the information grantees must report to agencies. By replacing outdated documents with open data, the GREAT Act is intended to deliver transparency for grant-making agencies and the public and allow grantees to automate their reporting processes, thereby reducing compliance costs.

The GREAT Act would require the creation of a comprehensive and standardized data structure, or “taxonomy,” covering all data elements reported by recipients of federal awards, including both grant and cooperative agreements.

The sponsors of the Act believe that it can achieve and accomplish the following:

  • Modernize reporting by recipients of federal grants and cooperative agreements by creating and imposing data standards for the information that grants and cooperative agreement recipients must report to the federal government.
  • Implement the recommendation by the Director of the Office of Management and Budget, under Section 5(b)(6) of the Federal Funding Accountability and Transparency Act of 2006 (31 U.S.C. 6101 note), which includes the development of a “comprehensive taxonomy of standard definitions for core data elements required for managing federal financial assistance awards”.
  • Reduce burden and compliance costs of recipients of federal grants and cooperative agreements by enabling technology solutions, existing or yet to be developed, by both the public and private sectors, to better manage data recipients already provide to the federal government.
  • Strengthen oversight and management of federal grants and cooperative agreements by agencies through consolidated collection and display of and access to open data that has been standardized and, where appropriate, transparency to the public.

The proposed legislation tasks the Director of the Office of Management and Budget (OMB) and a leading grant agency, that will be designated when the bill has passed, with implementation. The implementation goals are as follows:

  • Within one year: Establish government-wide data standards for information related to federal awards reported by recipients of federal awards.
  • Within two years: Issue guidance to grant-making agencies on how to leverage new technologies and implement the new data standards into existing reporting practices with minimum disruption.

The bill directs OMB and a leading grant agency to publish grant reporting information, once transformed into open data, on a government-wide website, such as the existing grants.gov portal. It provides exceptions and restrictions, including:

  • No personally identifiable or otherwise sensitive information will be published.
  • Information not subject to disclosure under the Freedom of Information Act (Title 5, Section 552) will not be publicly disclosed.
  • The OMB Director to permit exceptions on a case-by-case basis.

The Act would require each grant-making agency to begin collecting grant reports using the new data standards within three years.

Benefits

The sponsors of the GREAT Act believe that the federal government, the funding agencies, recipients and the public will all benefit from the Act’s implementation in the following ways:

  • Reduce recipient compliance costs by automating the compilation and submission of reports to federal agencies.
  • Create a single consolidated data set of post-award reports for federal grant recipient information applicable to all grant-making agencies and programs.
  • Foster increased federal and public oversight and transparency into the distribution of federal funding.
  • Facilitate the adoption of modern technologies for grant reporting.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com

Shaking Off the Stigma of Indirect Costs

By Andrea Wilson

The “burden” of indirect costs remains one of the top concerns for both nonprofit organizations and their donors. Faced with limitations on indirect cost recovery from private foundations, shrinking federal dollars, and the increasing costs of program oversight, organizations grapple with a number of serious and conflicting concerns in this area. How do organizations adapt to the changing regulatory and market environment in which they operate? While indirect costs are necessary expenses toward the management and viability of the organization, many donors view such costs as a “tax” to their sponsored programs, and most organizations struggle to overcome that preconception.

What are indirect costs and why is there so much discomfort and stigma around cost recovery?

One significant challenge in getting key stakeholders to understand the indirect cost paradigm is that there is no specific list of costs that are required to be indirect. This means that the organization itself defines which costs are designated as direct and indirect, based on its business structure, programs and other factors. While we generally see expenses such as executive wages, home office facilities and general accounting in the indirect cost category, there is no single method of defining which expenses should be included. Further complicating the discussion is multiple pools of costs, such as overhead and general and administrative (G&A) that organizations use to accumulate and allocate costs. The term “overhead” is generally used to describe the costs associated with maintaining the organization while G&A costs are typically those associated with operating and managing the programs. Collectively these make up indirect costs to the organization.

Direct expenses, on the other hand, are all those that can be connected to an ultimate cost objective, i.e., programs. Organizations can count direct and indirect costs differently even if they provide relatively similar services and are of relatively similar size. For example, some organizations treat the costs associated with procurement management as a direct expense while others include such costs as an indirect cost in their general and administrative rate, and some even have a separate “subcontractor and materials handling rate.”

This very simple, yet real, example can have significant consequences on the underlying indirect cost rate of the organization. In the first instance, where procurement is a direct charge to the program, the indirect cost rate goes down, but the total direct charges increase. In scenario two, the reverse is true, direct expenses go down and indirect expenses increase. Yet in the third scenario, when procurement is treated as a separate pool, the overall overhead rate goes down with the inclusion of a marginal subcontractor and material handling rate. These examples illustrate that the same exact cost, in absolute terms, can be treated at least three different ways, each with differing impact to the indirect cost rates of the organization.

There is no doubt that the complexity and diversity in methodologies contributes greatly to the stigma surrounding indirect costs. In budget preparation and presentations to donors inclusive of federal agencies, indirect costs are typically presented as a rate, i.e., percentage of cost. From a donor’s perspective, there is a great deal of scrutiny involved in analyzing the direct expenses of an award, and yet at the end of the budget, there is a percent of cost, sometimes substantial, that has very little to do with the intent of the award. Hence, many donors truly believe that indirect costs are a “tax” to programs.

In the U.S. federal context, many organizations have a cognizant oversight agency that reviews the organization’s indirect cost rate annually. However, the group that manages this rate is different from those that review and award grants and contracts. Organizations with complex federal and non-federal donor mixes are tied to their federal indirect cost rates for the entirety of the organization, thus making oversight by their private donors nearly impossible. Further, very few private foundations have a verification process of indirect cost rates. Worse yet, many donors put caps on indirect cost recovery, or negotiate a rate less than the true indirect recovery rate of the organization, thereby creating a starvation cycle for organizations. If the organization is federally funded, this could also result in a non-compliant application of their indirect cost methodology.

How do organizations overcome the stigma?

  • Implement cost-cutting measures to reduce indirect costs serves the immediate purpose of lower indirect cost rates, often making organizations more competitive on programs.
  • Reconsider your structure. Many sophisticated organizations have several segments with varying rates, or multiple consolidating entities enabling them to have multiple rates to comply with the varying programs’ needs and donor requirements.
  • Consider adding in service center allocations that move costs from your indirect costs to your direct expenses. For example, if an organization adds an IT service center which is allocated based on headcount, the cost of IT is moved out of the indirect costs and is moved to the direct expenses of the programs. The impact reduces the overall indirect cost rate.
  • Look for different methodologies with which to allocate your costs. Some organizations have varying methods for more equitable distribution of indirect expenses, which serves to help donors evaluate indirect costs. For example, instead of allocating indirect expenses based on program expenses, look for a more appropriate driver based on your programs, such as direct beneficiaries, etc.
  • Add additional notes to your budgets and requests for funding. While several donors have ceilings on indirect expenses, many do not. Do not simply apply your rate, but rather explain its composition and application. Let donors know these are real expenses and explain why they are necessary to the organization.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com

Updates to FASB Proposed Guidance For Contributions

By Lee Klumpp, CPA, CGMA

The Financial Accounting Standards Board (FASB) met in February 2018 to re-deliberate on the proposed Accounting Standards Update (ASU), Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, which relates to revenue recognition of grants and contracts by not-for-profit (NFP) entities.

The FASB issued an exposure draft on Aug. 3, 2017, with an invitation for comment ending Nov. 11, 2017, receiving 56 comment letters. The proposed ASU clarifies the guidance on how nonprofits determine whether a transfer of assets is a contribution or an exchange transaction and how they distinguish between conditional and unconditional contributions. See the article entitled, “FASB Issues Exposure Draft on Accounting for Contributions Received and Contributions Made,” that outlines the proposed ASU in the Fall 2017 issue of the Nonprofit Standard.

The purpose of the proposed ASU is to address feedback that the FASB received from stakeholders related to the diversity in practice and the difficulties in determining whether grants and similar contracts are exchange transactions or contributions. That distinction is important because it determines whether an entity should follow the guidance for contributions received in Accounting Standards Codification (ASC) 958-605, Not-for-Profit Entities-Revenue.

Additionally, the proposed ASU would help organizations evaluate whether a contribution is conditional or unconditional, which affects the timing of revenue recognition. An unconditional contribution is recognized when received, while a conditional contribution is recognized when the barriers to entitlement are met.

Although the accounting for contributions primarily affects NFP entities, the proposed ASU would apply to all entities (including business entities) that receive or make contributions, including promises to give that are accounted for under ASC 958-605 and contributions made that are accounted for under ASC 720-25, Other Expenses-Contributions Made. The proposal would clarify that all entities should consider the guidance in ASC 958-605 when determining whether a transaction is a contribution or a transaction in the scope of ASC 606, Revenue From Contracts With Customers. However, the proposal would not apply to a business entity’s accounting for transfers of assets from government entities.

In its recent meeting, the FASB made the following decisions:

Conditional Contributions—Indicators to Describe a Barrier

The Board decided to clarify and refine the indicators to describe a barrier, including removing the additional actions indicator in the proposed Update.

Contributions Made by a Resource Provider

The Board affirmed that the guidance for distinguishing between conditional contributions and unconditional contributions should be similar for both a recipient and a resource provider.

Recurring Disclosures by Recipients about Conditional Promises to Give

The Board affirmed the existing disclosure requirements about conditional promises to give.

Simultaneous Release of a Condition and a Restriction

The Board decided that the simultaneous release accounting option for restricted contributions could be elected for conditional restricted contributions separately from unconditional restricted contributions.

Transition

The Board affirmed that the final amendments should be applied on a modified prospective basis following the effective date to agreements that are either (1) incomplete as of the effective date or (2) entered into after the effective date.

Effective Date

The Board affirmed that for recipients, the effective date of the amendments will align with Topic 606, Revenue from Contracts with Customers. The Board decided that for resource providers, the effective date will be delayed by one year.

Early Adoption

The Board affirmed that early adoption will be permitted.

Stay tuned for the final issuance of the ASU which is projected to be in the second quarter of 2018.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com

How Do You Read and Understand Nonprofit Financial Statements?

By Lee Klumpp, CPA, CGMA

The answer to the question is a complex one, but each individual statement is equally important especially when used in conjunction with the footnotes. However; before we jump into explaining why each statement is important we must first understand why nonprofit (NFP) organizations are different from their for-profit brethren. NFPs are not owned by shareholders nor do they intend to earn profit to distribute back to shareholders. Instead, NFPs seek to earn revenue to support their program activities which are related to their mission. The mission is the key driver for NFPs, not a return of profit to its shareholders. (See the article entitled “Mission Matters” on page 14.) Financial statements are key components in revealing the financial health of an organization whether NFP or for-profit. An NFP’s financial information can get quite complicated, but if you understand the basics, you can glean vital information from the financial statements and related disclosures.

Nonprofits use four main financial reporting statements: statement of financial position (balance sheet), statement of activities (income statement), statement of cash flows and statement of functional expenses. Three of these statements are similar to for-profit company statements, with the exception that the statement of functional expenses is unique to NFPs because it is an analysis of expenses by both nature and function. Understanding the elements of these statements and how they relate to one another can help you understand an NFP’s financial position and what resources it has available and how the NFP deploys its resources.

Statement of Financial Position

The nonprofit balance sheet is also commonly referred to as a statement of financial position or statement of financial condition. This statement is based on the accounting formula, assets equal liabilities plus net assets. This equation is mirrored on a for-profit balance sheet; however, net assets are replaced with owners’ equity. The balance sheet offers the best overall perspective on the nonprofit’s financial health and stability. In particular, readers evaluate the relationship of assets to liabilities. One of the issues that blur NFPs’ financial statements versus for-profit entities’ is the ability to determine liquidity (working capital) because of donor restrictions on net assets.

The assets on a statement of financial position are classified as either current or non-current if the NFP has chosen to present a classified statement of financial position. Current assets are the most liquid, meaning they can easily be converted to cash in a relatively short period. Fixed assets are non-current since the assets are expected to be available for a term longer than 12 months form the measurement date (year-end). Similar to assets, liabilities are also classified as current or long-term based on the closeness to maturity. Current liabilities include money owed to creditors in less than a year. Long-term liabilities are due in one year or later. Net assets (equity) is the total amount of residual assets remaining in the NFP.

Statement of Activities

Often referred to as the income statement since the term is more commonly associated with for-profit companies and earnings, the nonprofit statement of activities follows the basic formula: revenues less expenses equals the change in net assets. In a for-profit this is referred to as earnings. The nonprofit statement of activities shows the funds coming into the organization less the costs of operating the organization.

An NFP’s revenues, gains, expenses and losses are listed on its statement of activities. Revenue is money earned from an NFP’s normal business operations. The expenses on the statement of activities are the costs associated with earning the revenue. When an NFP sells one of its assets, it can experience a capital gain or loss because this activity is not part of its central and ongoing business activity. Revenues less expenses, plus gains less losses, equals the overall change in net assets. The dollar amount of the change in net assets listed on the statement of activities is also found on the cash flow statement under the operating activities section.

Statement of Functional Expenses

The statement of functional expenses is only used by nonprofit organizations based on the importance of monitoring expenditures. In general, this statement breaks down organizational expenses into common categories. This breakdown helps an NFP track how it spends its money. The statement also shows the breakdown of expenses between program services and support services. One of the reasons nonprofits track expenses is to report on the percentage of funds that go toward programs compared to funds spent on administration costs, such as employee salaries and fundraising.

Statement of Cash Flows

The statement of cash flows is similar to the one used by for-profit entities. The statement of cash flows presents operating, investing and financing activities to show the sources and uses of cash.

The cash flow statement can be presented using the direct method (the preferred method) or the indirect method, which is the one that is most commonly used. The direct method shows in the operating activities section the inflows and outflows related to cash flows provided by and used in operating activities. The indirect method starts with the change in net assets, followed by additions to or subtractions related to changes in the statement of financial positon to adjust the change in net assets to a cash basis. The statement of cash flows is divided into four sections. The first section of the cash flow statement is cash provided by or used in operating activities, which shows the cash flows in and out of the NFP in relation to its mission-related operation. The second section, cash flows from investing activities, shows cash the NFP received from or spent on its capital investments. The third section, financing activities, shows the inflows and outflows of cash related to the NFP’s borrowing activities, which is also listed on the statement of financial position. The final and last section is the supplemental information which presents cash paid for income taxes and interest and the non-cash transactions.

Footnotes

The footnotes or disclosures are just as important as the individual statements. The information in the footnotes allows the reader to obtain more information so they can truly understand the numbers in the various statements. The footnotes provide the accounting policies utilized in preparing the financial statements as well as information about the components of the numbers presented in the financial statements. The footnotes are critical to understanding the statements and should be read in detail.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com

Survival Tips for the New Era of Fundraising

By Andrea Wilson

For nonprofits looking to stand out in an increasingly crowded giving landscape, experimenting with new giving models and integrating new technology into your current campaigns could help you stand out from the crowd.If the bulk of your fundraising budget is still directed toward age-old direct mailing campaigns, consider diversifying and exploring a few of the following emerging trends.

Match Donor Behavior

What influences someone to donate to an organization? While many Americans make regular contributions to priority causes, successfully converting new donors takes a combination of two elements: (1) A compelling case for why your organization’s work matters, and (2) a clearly articulated value proposition, or the impact of their individual donation.

But a poignant campaign is only half the battle. If your organization relies solely on wire transfers or other slow processes to accept donations, you’re unlikely to see money pouring in. Nonprofits that limit the barriers to giving and update their donation channels to keep pace with consumer behavior are less likely to lose prospective donors midstream. Increasingly, that means optimizing online and mobile giving platforms.

According to Nonprofit Source, nearly half of millennials (47 percent) gave through an organization’s website in 2016. To facilitate painless giving, an omnichannel approach—so donors can give via their preferred means—is often the best solution.

Get Your Nonprofit Front-and-Center When It Matters Most.

A new fundraising tool, Action Button, goes a step further to align with consumer behavior. The interactive technology pairs news stories directly with causes to help nonprofits reach potential donors when they are engaged in an everyday activity—reading the news—at a moment they might be organically inspired to give. A breaking news story on a hurricane’s landfall, for example, could have ‘action buttons’ integrated directly in the article itself that allow readers to donate to a natural disaster relief organization or take a quiz to test their knowledge on the impact of that nonprofit’s humanitarian work.

Tap Into Your Analytics.

Understanding the analytics behind fundraising could be an important differentiator for organizations. A good place to get started is digging into your own data. Are your campaigns driving more giving from women? Baby Boomers? High-net-worth (HNW) philanthropists? Familiarizing yourself with your core contributors can be valuable to identify who your current campaigns resonate with, and perhaps even more valuable, help you determine whether you’re overlooking a potential donor pool.

One step further than analyzing internal data, nonprofits should also explore leveraging publicly available data—posted to Facebook, LinkedIn, Twitter and other social media platforms—to more intentionally target potential donors with specific characteristics. This can be as broad as targeting donors of a certain age or educational background, or as specific as targeting individuals that “liked” or demonstrated support for similar causes or organizations on their personal platforms.

Successful organizations also use social media data to understand what’s going on with real people and forge connections. For example, a cure-based organization might send targeted messages to people that celebrate anniversaries of being cancer-free on social media. When deciding where to make charitable contributions, people often give money to organizations and causes that have personally impacted them or their loved ones.

As you consider how to integrate technology into your nonprofit’s fundraising activities, ask yourself:

  • Who are your target donors?
  • Are you overlooking a potential donor pool like Millennials?
  • Have you considered broadening your target demographic?
  • Do your giving platforms align with your donors’ behaviors and allow for seamless integration into their routines?
  • Are you leveraging publicly available data to forge or strengthen connections with people close to your cause?

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com

Mission Matters

By Paul Jan Zdunek, MBA, PROSCI® Change Management Certified

A mission statement is more than mere words plastered on a website or at the top of an annual report – it represents everything an organization stands for and all that it can accomplish. It drives the organization and its work.

There is a cyclical ad infinitum relationship between a nonprofit organization’s mission, its impact, and its fundraising efforts.

Developing a powerful mission statement is critical to clarifying:

  • the core purpose for why the organization exists and its goals
  • what makes the organization different than the other 1.5 million nonprofits operating in the U.S., and
  • directional focus, serving as a guidepost for decision-making to keep actions on-point and avoid mission creep

While a powerful mission is critical to a nonprofit’s success, mission alone won’t bring funding to your door.

Prove Your Worth

How is your organization delivering on its mission? With fewer donors giving to fewer organizations today and donor retention declining, it’s more important than ever to showcase the impact of fundraising contributions. Donors are closely examining ROI— Return on (their) Investment—when deciding where to give. In this new Impact Era 2.0:

  • Successful nonprofits are using rigorous, data-driven evaluation to measure impact
  • Foundations are funding based on a nonprofit’s impact and also providing the tools to measure it
  • Overhead is finally being recognized as critical to an organization’s ability to achieve maximum impact
  • Board governance and executive leadership are being scrutinized for both effectiveness and efficiency
  • Performance-based bonuses are becoming an influential part of the new nonprofit workplace culture

Bake Impact into Mission Statements

A strong mission statement is more than a description of the organization or a plethora of cleverly constructed words and sentences that sound important. It must have impact and communicate impact. An effective mission statement:

  • Gets to the Point: be clear, clean and crisp about the unique mission and actions of your organization
  • Addresses What the World Needs: if your organization did not exist, would it matter?
  • States the Differentiator: compared to similar organizations in your space
  • Serves as a Guidepost: ensure mission creep, chasing money, never happens
  • Inspires: speak to the heart of your potential investors; where will their dollars go and why are their donations important?
  • Sticks: like an elephant in a tutu, your mission should be hard for stakeholders to forget

One Organization Getting it Right

charity: water is a force to envy in the nonprofit world. Their mission, work and impact are highly transparent, simple and powerful.

Let’s do a quick analysis of charity: water’s mission statement – it’s raison d’être: bringing clean and safe drinking water to people in developing countries:

  • Gets to the Point: 11 carefully-chosen words articulate the organization’s focus without getting mired in details
  • Addresses a Need: giving people access to a fundamental human need
  • Differentiates: “developing countries” indicates the work is in high-need areas that have limited resources
  • Inspires: this gets above politics, infrastructure challenges, and other problems with a simple message that stresses water is a basic human right
  • Sticks: both the name of the organization and its mission are simple and clear

How does this translate to charity: water’s influence and impact? The transparency and clarity used in the mission statement shines through in their website, communications and annual reports. They make it very easy to track how dollars are being put to use. It’s also clear that charity: water isn’t just “talking the talk.” Nearly every dollar donated goes directly to their projects, and founder Scott Harrison even has a separate fundraising initiative to cover organizational overhead.

The result? Donations have continuously increased since 2007.

Getting the mission right and articulating a powerful impact can help organizations elevate their voice above the noise—but will it lead to donations? How you ask for dollars can have a major influence on how many donations come through the door. (See Andrea Wilson’s article entitled, “Survival Tips for the New Era of Fundraising” on page 16.)

If your organization finds itself with a need to create or re-write its mission statement, remember the words of the great Martin Luther, “If you want to change the world, pick up your pen and write.”

So, pick up your pen and write an impactful mission statement that will change the world.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com