Tax-Exempt Bond Compliance

By Marc Berger, CPA, JD, LLM

One of the benefits of tax exemption under Internal Revenue Code (IRC) Section 501(c)(3) is the ability to use tax-exempt financing. Tax-exempt bonds generally carry a lower interest rate than taxable bonds and the interest received by the bondholders is excludable from income for federal income tax purposes.

Because of these advantages, tax-exempt bonds are subject to strict federal tax requirements both at the time of issue and for as long as the bonds remain outstanding. The Internal Revenue Service (IRS) recognizes that all requirements are closely monitored and complied with at the time bonds are issued. Bond counsels for the organization, the issuing authority and the underwriter are all keenly focused on closing a clean transaction. However, problems can arise after closing, when all of the outside professionals have moved on to the next transaction.

In order to keep their tax-exempt bonds in compliance, organizations must actively monitor the use of proceeds and bond-financed property throughout the entire period that bonds remain outstanding. The IRS encourages organizations to adopt written procedures which go beyond reliance on the tax certificates included in bond documents. Written procedures should contain certain key characteristics, including:

  • Due diligence review at regular intervals;
  • Identifying the official or employee responsible for review;
  • Training of the responsible official/employee;
  • Retention of adequate records to substantiate compliance (e.g., records relating to expenditure of proceeds and use of facilities);
  • Procedures reasonably expected to identify noncompliance in a timely manner; and
  • Procedures ensuring that the issuer will take steps to correct noncompliance in a timely manner.

The goal of establishing and following written procedures is to identify and resolve noncompliance on a timely basis in order to preserve the preferential status of the bonds.

Ownership and Use of Property

All property financed with 501(c)(3) bonds must be owned by a 501(c)(3) organization or a governmental entity. For this purpose, a “governmental entity” includes a state or local governmental entity, but not a federal entity. In addition, use of bond-financed property in an unrelated trade or business or use by parties other than 501(c)(3) organizations is limited. This type of nonqualified use is known as private business use, or private use. In order to maintain its tax-exempt status, a 501(c)(3) bond issue may not have more than 5 percent private use over its lifetime. The 5 percent limit applies to a bond issue as a whole as opposed to each underlying project being financed. Additionally, the costs associated with a bond issue (e.g., counsel fees, underwriters’ discounts, financial advisory fees, accounting fees, rating agency fees) count toward the 5 percent private use limit. Depending on the size of a bond issue, costs of issuance may range from .5 to 2 percent of the bond issue. As a result, tracking private use becomes very important. The situations that can generate private use fall into the following categories:

  • Property sold or leased;
  • Property subject to management and service contracts;
  • Property involved in research activities; and
  • Property used in unrelated business activities.

While each of these situations results in private use, there is some potential relief from private use treatment. Bond-financed property that is sold to a non-501(c)(3) organization or governmental entity can be “remediated.” For example, if an organization’s sales proceeds are used to make qualifying capital expenditures, private use treatment can be avoided. In addition, there are safe harbors for certain management and services contracts as well as for certain research activities. If these safe harbors are met, then no private use will result. Proper planning in each of these situations can avoid exceeding the private use limit.

Section 501(c)(3) organizations with tax-exempt bonds should be tracking private use at regular intervals. This may involve working with an organization’s legal, facilities, contracting, real estate and finance departments. Schedule K of the Form 990, which must be completed by organizations with outstanding tax-exempt bonds, asks whether the organization has established written procedures to track compliance with all of the tax requirements – a question to which all organizations should be answering “yes.” The ability to issue tax-exempt bonds is a benefit that should not be taken for granted, and consistent post-issuance compliance will allow an organization to realize this benefit over many years.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2015). Copyright © 2015 BDO USA, LLP. All rights reserved. www.bdo.com

2015 Outlook: Nonprofit Healthcare Organizations

By Adam Cole, CPA, Cortney Marcin, and Patrick Pilch, CPA, MBA

Pressures to perform and transform, merge, acquire or consolidate, and protect are building and converging on nonprofit healthcare organizations. As such, 2015 promises to be a seminal year for these organizations and the communities they serve.

According to the American Hospital Association’s 2013 Hospital Statistics, there are about 5,686 hospitals in the U.S., 2,904 of which are nongovernment nonprofit community hospitals and 1,010 are tax-exempt state and local government community hospitals.The pressure to perform and transform is informed by numerous data points that are combining to make the current operating model structure unsustainable:

  • The Medicare Payment Advisory Commission’s 2014 Data Book shows a demonstrable decline in Medicare inpatient and outpatient margins from 2002 to 2012. For that period, the overall hospital Medicare margin decreased from 2.2 percent to a negative 5.4 percent
  • Modern Healthcare analyzed earnings for approximately 200 hospitals and health systems and included a mix of nonprofit and investor-owned through 2013. The study revealed a shrinking of margins for all hospitals to 3.1 percent in 2013.
  • A Moody’s report on operating margins of nonprofit hospitals and health systems for 2013 showed overall operating margin deterioration to 2.2 percent.
  • Moreover, the typical hospital’s payer mix is 40 percent Medicare. This year, 8 percent of Medicare payments to hospitals will be value- or risk-based. Moreover, in February, Health and Human Services (HHS) announced a goal of tying 30 percent of existing fee-for-service Medicare payments to value-based payment models such as Accountable Care Organizations (ACOs) or bundled payment models by the end of 2016, and ultimately 90 percent of all traditional Medicare payments by 2018.

The trend is accelerating, and makes the current operating model structure unsustainable. The credit rating agencies know this. For the third consecutive year, the three major credit rating agencies all forecast a negative outlook for the nonprofit healthcare and hospital sector. They pointed to declining cash flows from operations because of lower revenues associated with the shift to risk-based reimbursement from volume-driven fee-for-service reimbursement, coupled with the rising costs of operations. The agencies also anticipate further rating downgrades due to the continuing challenges associated with the implementation of the Affordable Care Act (ACA).

The shift away from traditional fee-for-service to value-based payments has been underway for some time through various innovation models, and has accelerated under the ACA. The acceleration has been the result of a greater emphasis being placed on overall population health, preventative care, reductions in hospital admissions and readmissions, and providing services in lower cost of care settings to reduce overall costs.

Adding to the uncertainty is the upcoming U.S. Supreme Court decision in the King vs. Burwell case, which may overturn the ACA’s provision for insurance coverage purchased through federally operated state exchanges.

One might ask, “have similar dynamics occurred in other industries?” The resultant tipping point faced by the healthcare industry is similar to that faced by another capital-intensive industry in the late 20th century: U.S. steel. In that emblematic case study, new, more nimble competitors eroded the country’s global market advantage by introducing more modern methods and technologies. A flurry of capital restructuring and operational redesign followed, and the industry ultimately shifted to more efficient mini-mills structures. By the 1980s, the rush of competition not only forced the shutdown of aging mills, but also began to threaten some of the more thinly capitalized new entrants.

We posit that 2015’s outlook for nonprofit healthcare organizations will reflect a similar dynamic; nonprofit hospitals will need to access the right capital aligned with the new—and different—operating and delivery models, and they must monitor and adapt to outside factors that will impact access to this capital, as well as their operations and reimbursements. New regulations and stressed government budgets threaten access to grants and tax-exempt bonds, and even tax-exempt status itself. Compliance will be critical in the face of these evolving requirements and new scrutiny.

Typically, for nonprofit healthcare organizations, capital is provided through tax-exempt bond financing, charitable contributions through foundation development and, occasionally, government or private grants. Tax-exempt bond financing represents the primary source of capital. Rates for these borrowings are lower than their taxable comparables, but easy access to such financing is challenging given both a negative outlook for reimbursement and the sector, as well as and the need for more efficient capital and scale to redesign nonprofit healthcare organizations. The need for capital has accelerated mergers and acquisitions and consolidation activity. For the last several years, this activity has been robust among nonprofit hospitals and within the social service sector. In addition to traditional M&A activity, nonprofit healthcare organizations have been pursuing risk sharing arrangements through ACOs, bundled payment arrangements and managed care contracts. Other capital arrangements through joint ventures with Real Estate Investment Trusts (REITs) also create access to new sources of capital. We expect these activities to continue, and even accelerate.

Potential regulatory changes may place nonprofit healthcare organizations’ tax exempt status at risk in two important ways.

First, in return for tax-exempt status, federal law requires nonprofit health systems to provide services to the poor and uninsured/underinsured, as well as to provide community benefits to the general public. The ACA contains a provision that requires hospitals to make “reasonable efforts” to assess whether patients qualify for financial assistance before taking an aggressive step like filing a lawsuit. This provision has bipartisan support in Congress. Recent news reports suggest that the government intends to enforce this provision in the form of significant penalties to those organizations that appear to cross the line. While a loss of tax exempt status has not yet happened under this provision, it remains highly possible this provision will impact the tax exempt status of organizations that do not comply.

Secondly, billions of dollars in tax exemptions granted to nonprofit hospitals are being challenged by regulators and politicians as federal, state and municipal budgets have been strained significantly since the recession. Nonprofit healthcare organizations need to ensure that they are in compliance with the new provisions of the ACA, as well as state and local regulations, in order to protect their nonprofit status.

There are myriad additional regulatory and compliance requirements taking effect in 2015, including notable changes impacting federal funding as affected by the Office of Management and Budget’s (OMB) new Uniform Guidance. The guidance is the most comprehensive set of changes to occur to the OMB regulations in decades, and will impose more consistent guidelines on both grant recipients and organizations issuing grants to sub-recipients, which is more common with certain healthcare funding arrangements. Compliance will be critical in the face of these evolving requirements and new scrutiny.

So, what should nonprofit healthcare organizations consider for 2015 and beyond?

1.   Understand your cost of care and cost of operations.
This is often easier said than done. Care delivery is complex, and fragmented outcomes are disassociated from financial and market analytics. There is much market opportunity to reposition nonprofit healthcare organizations for the future sustainability.

2.   Understand your investment thesis.
Nonprofit healthcare CFOs can take a page from global corporations whose CFOs must evaluate their enterprises from a portfolio perspective. In the same way that steel industry CFOs redeployed capital into new mini-mill models, so too can healthcare providers examine their assets in terms of ROI. Reduce or moderate investment in lower ROI assets in favor of aligning investments with higher-ROI businesses in emerging or growing markets or assets. Think care design and new risk-based models.

3. Understand your market and your “customer.”
Nonprofit healthcare leaders need to understand the implications of the risk shifts from payer to provider to consumer, as well as the opportunities for investing in a customer-focused relationship. Understanding the market need through visual analytics will serve nonprofit healthcare organizations well in redesigning their models around the population they serve. Tapping into best practices from consumer focused industries will be helpful.

4. Understand who you are and what your organization means.
Do you have the vision, leadership, appropriate resources, ideas, capital and partners to mitigate the risks and take advantage of the opportunity for your organization? Each CFO must ask himself or herself: “Where are the gaps? Can we execute the change?”

5. Understand what your future state could look like—the art of the possible.
Look to the future and assess what will be the successful models in five or 10 years, taking into account the first four recommendations.

The next step is to get started!
This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2015). Copyright © 2015 BDO USA, LLP. All rights reserved. www.bdo.com

Nonprofit Organizations and the Tangible Property Regulations

By Nathan Clark, CPA

What are the tangible property regulations?

These regulations were issued by the Internal Revenue Service (IRS) to provide guidance for the acquisition, production or improvement of tangible property—buildings, furniture, fixtures and equipment assets, typically—which must be capitalized and depreciated, deducted in the future or deducted immediately. On a more granular level, these rules dictate how to establish a basic capitalization policy (“de minimis expenses”), identify repair and maintenance costs, account for materials and supplies, determine which costs must be capitalized for the improvement or acquisition of buildings and equipment, and when disposed property may be written off.

These regulations apply equally to all businesses subject to U.S. tax law, regardless of for-profit or exempt status, organization size, legal entity, or industry. They apply to taxable years beginning on or after January 1, 2014. However, in certain situations, the regulations could affect capitalization of costs incurred in years prior to 2014, regardless of a tax return’s normal statute period.

Prior to this new guidance, the previous regulations governing tangible property were a subject of constant disagreement between taxpayers and the IRS, which led to a patchwork of court cases, rulings and other guidance that was not always consistent, nor easily applicable across industries. The IRS, with much feedback and input from taxpayers, rewrote these regulations, which included proposed and temporary regulations, before finalizing the regulations. The prior guidance applied to nonprofits just as the new regulations do. Many for-profit and nonprofit organizations are addressing these regulations now because of the broad application and complexity over the old guidance.

But My Organization is Tax-Exempt!

The primary impact of the tangible property regulations is the capitalization of tangible property on the statement of financial position (balance sheet) and the computation of taxable income. Expenditures could be capitalized as improvements to existing buildings, leasehold improvements or equipment assets and deducted over time through depreciation, or conversely, deducted as a repair and maintenance expense, de minimis property, or as materials and supplies.

Nonprofits that pay unrelated business income tax, have taxable subsidiaries, or lose their tax exempt status will need to consider the impact of these regulations and determine if there is a change to current methods of calculating taxable income. Amounts may be re-characterized as capital improvements that were historically deducted, or vice versa.

For example, consider a nonprofit university that operates a convention center and hotel, resulting in unrelated business income tax for the nonprofit university. In 2012, the hotel underwent a renovation to repaint guest rooms, replace broken lighting and plumbing fixtures, and replace the roof, among other miscellaneous expenditures. The university in this example must compare the facts and circumstances of the expenditures to the regulations to determine if the expenditures were improvements that must be capitalized and depreciated, or repair costs that were deductible when incurred. Depending on the scope of the work performed, these amounts could have been capital improvements or deductible repairs. The regulations introduce the concept of “Unit(s) of Property”, which is how the regulations identify the asset that is being repaired or improved. Historically, an entire building was the unit of property. However, now the regulations subdivide building property into nine different “building systems”. When evaluating an expenditure to determine if it is a repair or an improvement, the expenditure must be compared to the relevant “building system” as opposed to the entire building. This change in how we define the asset that is being repaired or improved can result in characterization of expenditures as capital or deductible that is different from the historical characterization.

Optional Elections

Elections are a formalized manner of adopting tax return positions provided by the Internal Revenue Code and regulations. There are three new elections in the regulations that each nonprofit should consider making. All of the elections described below require a statement to be attached to the organization’s timely filed federal income tax return, including extensions. Further, these are annual elections that will need to be considered for 2014 and every subsequent tax year.

De Minimis Expensing Safe Harbor
Most organizations have historically had a capitalization policy or practice where amounts beneath a specified amount were not capitalized as fixed assets. Prior to these regulations, there was no guidance on establishing such a practice. The regulations introduce the De Minimis Safe Harbor to establish a basic capitalization policy. The key requirements are as follows:

  1. The organization must have a capitalization policy in place at the beginning of the year specifying that amounts incurred for the purchase of tangible property beneath a fixed dollar amount will not be capitalized for financial accounting or tax purposes;
  2. The capitalization threshold cannot exceed $5,000 if the organization’s financial statements are audited by external auditors, or $500 if the organization’s financial statements are not audited; and
  3. The policy must be in writing if the organization has an audited financial statement.

If an organization follows the above practices—and most importantly follows the practice equally for financial accounting and tax purposes—then the IRS will not question the expensing of amounts beneath the threshold. The capitalization threshold may change (but not exceed the safe harbor limits above) as necessary to meet the changing business practices and needs of the organization.

Small Taxpayer Safe Harbor
The regulations provide an election for a simplified repair versus improvement analysis for small taxpayers. A small taxpayer, for purposes of this safe harbor, is an organization with average annual revenue for the prior three years of not more than $10 million. Small taxpayers meeting the revenue threshold may expense costs to repair, improve or maintain building property(s) if those expenditures in aggregate, per building, do not exceed the lesser of $10,000 or two-percent of the original building cost. This simplified analysis may be applied to each building a small taxpayer owns that has an original cost (or total amount of rent payments expected to be paid by the lessee under the term of the lease, including renewal periods) of not more than $1 million.

Conformity to Book Capitalization of Repair and Maintenance
It is a common occurrence that an amount may be capitalized for financial accounting purposes but deductible under the regulations for taxable income purposes, or vice versa. Another means of simplifying the adoption of the regulations is an election that allows a taxpayer to capitalize amounts that are deductible for taxable income purposes, if those amounts are capitalized for financial accounting purposes. This election allows a taxpayer to capitalize for taxable income purposes amounts already capitalized for financial accounting purposes.

In addition to the formal elections discussed above, the regulations contain numerous other elections, not discussed herein, that are made simply by taking a position on the organization’s tax return.

Manner of Adoption

The regulations, as stated above, are adopted through elections where indicated and by filing Form(s) 3115, Application for Change in Accounting Method, as indicated by the IRS in separate guidance. Consideration should be given to the taxable situation and nature of each nonprofit’s activities to determine whether filing of Form 3115 is necessary. A Form 3115 is generally, but not always, filed with a retroactive catch up adjustment that is the difference between the deductions claimed to date under the old method and the deductions that should have been claimed to date under the new method. This adjustment will factor in all amounts from prior years unless otherwise specified by IRS guidance. However, adjustments for certain accounting method changes are required to be calculated on a prospective basis. Filing a Form 3115 provides protection against IRS audit penalties where the old method of accounting could have resulted in unfavorable IRS audit adjustments.

The IRS recently provided relief to simplify the procedures for small businesses making accounting method changes. A small business, for this purpose, is defined as a trade or business with average total revenues for the prior three years of not more than $10 million or total assets not more than $10 million. If either test is met, then a nonprofit may adopt the regulations through these simplified procedures. The new procedures allow small businesses to change a method of accounting on a prospective basis without filing Form 3115 or calculating retroactive adjustments. No formal election or statement is required to be filed to request a change in accounting method under these simplified procedures. Eligible small businesses following the simplified adoption procedures will compute taxable income starting with the 2014 tax returns according to the regulations without having to file a Form 3115. However, taxpayers will still be subject to additional taxes, penalties and interest if, upon IRS exam, amounts were deducted in pre-2014 years that should have been capitalized and deducted in a later year or depreciated over time.

Plan for the Future

Organizations should consider how they are affected by these regulations currently, as well as potential future implications. An organization that currently does not have unrelated business taxable income may feel little impact from the regulations from an income tax perspective. There will be little incentive for the IRS to enforce the regulations for many nonprofits where income tax is not paid. However, where a nonprofit pays unrelated business income tax, has taxable subsidiaries, or loses its tax exempt status, it should absolutely address these regulations currently. A nonprofit should anticipate filing Form 3115 in future years subject to unrelated business income tax, even if not currently subject to income tax. It is generally recommended that an organization make the de minimis safe harbor election regardless of whether it currently pays unrelated business income tax.

Consideration should also be given to determine whether these regulations could change the way overhead percentages are calculated for benchmarking purposes, statement of financial position (balance sheet) implications to assets or activities potentially eligible for a future sale, spin-off or other separation resulting in tax concerns upon separation, or taxable income implications for activities that cycle in and out of taxable activities. The tangible property regulations may also result in changes to the capitalization practices for financial accounting purposes.

The regulations provide broad ranging guidance on what must be capitalized as tangible property. However, they do not change any depreciation rules. For amounts required to be capitalized under these regulations, nonprofits will need to continue to apply the appropriate tax depreciation rules to elect appropriate tax depreciation methods.

Although these regulations affect many issues related to tangible property, they offer flexibility and options for determining the best course of action. Nonprofits, although not affected in the same manner as for-profit entities, are nevertheless subject to these regulations, and should discuss with their tax adviser the potential implications in order to plan for and mitigate unexpected and potentially adverse consequences.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2015). Copyright © 2015 BDO USA, LLP. All rights reserved. www.bdo.com

Effectively Communicating Your Mission and Accomplishments: Form 990 and Beyond

By Joyce Underwood, CPA

The Form 990 plays an important part in communicating your nonprofit organization’s mission and accomplishments to the world, and is also a key means for promoting your organization. Filing the Form 990 satisfies your tax compliance requirements, but it is also a public document distributed widely and manipulated by third parties on an ever-increasing basis. Ensuring information in your Form 990 is accurate and conforms to your other communications about your organization is important.

You want to ensure the messaging agrees to your website and social media communications, and conforms to your intended public image. You can describe your organization in a way to attract a certain type of supporter, or speak to an intended generation of donor. You will also want to describe your accomplishments showing effective outcomes, and consider if you want to focus your message on the giver or on the receiver of your resources. These days, more and more donors seek to support organizations with which they find a personal connection, and demonstrating outcomes is one of the most effective ways of showing the progress and impact your organization is making, which helps to create those connections.

The first page of the Form 990 (Part I, line 1) is intended to highlight the organization’s mission or most significant activities in condensed form. You should be direct but brief here, providing succinct wording to describe the organization. Page two, the Statement of Program Service Accomplishments (Part III), is where you can shine. Part III requires more detailed information about the mission and activities, and provides an opportunity to further promote the organization and capture interest. The mission described here should reflect the language in the approved mission adopted by the governing body, either initially or through amendment.

It is important to communicate to the Internal Revenue Service (IRS) any discontinued, changed or new activities, as your tax exemption is dependent upon your approved mission and activities. Should your mission or activities evolve over time from their original intent and not be communicated—or remain appropriate for your status—you could have tax exemption issues.

Organizations are also required to describe the top three program activities, as measured by expenses, and list any other programs carried on. You can describe all program activities, if you prefer. Even if you’re not a public charity or public welfare organization, which are required to include the revenue and expenses attributable to the programs, you are required to describe your activities. The IRS requests that you describe program service accomplishments through specific measurements such as clients served, days of care provided, number of sessions or events held, and/or publications issued; describe the activity’s objective, both for this time period and the longer-term goal, if the output is intangible, such as in a research activity; and give reasonable estimates for any statistical information if exact figures are not readily available. Indicate that this information is estimated. As long as you satisfy these requirements, you are free to word your descriptions to describe your organization in its best light or to satisfy another audience.

Generational Issues

An organization should consider its target audiences in addition to the IRS. Have you considered whether you are you targeting Baby Boomers, Gen-Xers or Millennials? There has been a lot of discussion in recent years regarding the different behaviors and preferences of individuals based upon their age and experience. Focusing on these characteristics in your communication style can have an impact on attracting donors and program participants. In designing your communication, be sure to ask yourself the following questions:

  • Do the people you want to attract respond better to certain types of communications?
  • Does your mission seem meaningful and engaging? Does it address issues that a specific generation is attracted to or has concerns about?
  • Do your descriptions help a donor feel like they can be an active participant in your mission?
  • Do you provide validation to donors in your description of accomplishments that helps them see the outcomes of their support?
  • Will referencing support of a “member” or “partner” help a donor feel they can become involved?
  • Are you using the right language to attract donors that may have an interest in giving through a will or living trust?
  • Would it be effective to describe and provide links to more far-reaching digital tools, such as social media campaigns, to attract a large number of small donations?
  • Do you effectively utilize a blog, Twitter or other social networking sites?
  • Do you know how to speak to and attract a long-term donor?
  • Do you know how to send a message that will get noticed, catch on and spread the word?

Giving your readers information about what you do with their generational needs and concerns in mind can be helpful in connecting with them as you describe your mission and activities in your Form 990.

Measuring Impact

Many donors and charity evaluators have been very focused on outcomes in recent years. Since the information from Form 990 is more readily available and increasingly in a readable format, many industry partners are jumping on the bandwagon, either for philanthropic or commercial purposes. Data about organizations is now gathered, analyzed and compared to describe and compare your nonprofit to other organizations. At the same time, others are compiling and analyzing data and demanding more concrete information about performance. It is often now expected that an organization devote resources to measuring and communicating how they have used funding to effectively produce outcomes, as well as justify that the outcomes are appropriate. It can be a balancing act between serving your mission and satisfying the new performance-oriented donor or member. An organization that does not focus on and effectively communicate its results may be at a disadvantage when seeking grants, contributions, dues and other resources.

Share your Story

Storytelling can be an effective communication tool. Stories influence a reader and help people remember facts and circumstances. As such, they provide nonprofits an opportunity to better connect with donors, which can prompt them to be more generous. Stories can also instill a sense of urgency or need, as they have the power to paint a picture. Be sure to state what you stand for and connect them with an image or activity readers will remember. To accomplish this, you may want to include other members’ perspectives of your organization in the Form 990 preparation process. Many organizations now have a final review by their development department or the social media team to help provide this collaborative overview. Above all, whatever you use to describe your organization for Form 990 purposes, you should always consider your larger audience. Although you may want to be brief and quickly scratch off the Form 990 preparation from your to-do list, targeting your readers and telling your story can provide a significant advantage to nonprofits. But remember, you’re also talking to the IRS.
This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2015). Copyright © 2015 BDO USA, LLP. All rights reserved. www.bdo.com

Tax Proposals for Exempt Organizations to Watch in 2015

By Laura Kalick, JD, LLM in Tax
At this point, we are just about through the first quarter, and 2015 has already seen a slew of legislative proposals that could considerably impact exempt organizations. From the President’s FY 2016 budget proposal, to last year’s Tax Reform Act of 2014 (TRA 2014), to a new proposal requiring that the Internal Revenue Service (IRS) give exempt organizations notice before their exempt status is revoked for non-filing, nonprofits are in the midst of a legislative landscape potentially poised for reform. As we look to the weeks and months ahead, here are a few major pieces of legislation that nonprofits should be monitoring:
Reduction of the excise tax on the investment income of private foundations:
A private foundation is generally subject to a two percent excise tax on its net investment income, and this rate is reduced to one percent in any year in which a foundation exceeds the average historical level of its charitable distributions. TRA 2014 had a provision to reduce the excise tax on the investment income of private foundations from two percent to one percent. This provision found its way into the America Gives More Act of 2014, as well as other tax provisions that were passed by the House of Representatives, but ultimately did not become law last year.Meanwhile, the President’s budget contains a proposal to reduce the two percent tax to 1.35 percent across the board. Many in the nonprofit community are opposed to the President’s proposal because it could actually result in a tax increase for organizations that are able to reduce the tax to one percent under the current tax law formula.
Make the IRA rollover to charity and enhanced deductions for conservation and food inventory permanent:
These provisions aren’t permanent, but they keep getting renewed every year. Legislation in 2014 would have made permanent the tax-free distributions from individual retirement accounts (IRAs) for charitable purposes, an enhanced deduction for contributions of food inventory and also the tax deduction for charitable contributions by individuals and corporations of real property interests for conservation purposes. The America Gives More Act of 2015 that makes these provisions permanent was passed by the U.S. House of Representatives on February 12, 2015. In order to become law, the Senate will also have to pass the provisions and the legislation will require final signoff by the President.
Charitable contribution extensions and simplified rules:
TRA 2014 had a number of provisions that would have impacted charitable giving, including one that would allow taxpayers to treat charitable contributions made up until April 15 as deductible in the previous year’s taxes. Although this provision surfaced again in 2014, we have not seen it yet this year.Meanwhile, the President’s proposals aim to simplify the rules regarding limitations on the maximum amount of charitable contribution deductions for a single year, regardless of whether contributions are made to public charities or private foundations, whether they are cash or property, and whether they are for the use of the organization. The proposal would also increase the carryforward period for an unused charitable deduction that is in excess of the limits from five years to fifteen years.
College and professional sports under scrutiny:
Both TRA 2014 and the President’s FY 2016 budget proposals have placed sports on the radar in a number of capacities. Under present law, those who donate to colleges and universities and receive in exchange the right to purchase tickets for seating at an athletic event may deduct 80 percent of their contribution. This is in contrast to the usual rule that only the contribution in excess of the fair market value received in return can be deducted. Both TRA 2014 and the President’s budget proposals aim to eliminate this deduction.There are also two other tax proposals aimed at sporting events. TRA 2014 would have eliminated the ability of professional sports organizations such as the NFL, NHL and others to be exempt under Internal Revenue Code (IRC) 501(c)(6). Additionally, although the President’s proposals would expand the use of tax-exempt financing for infrastructure and research, they would repeal exempt financing of professional sports facilities on the basis that it transfers the benefits of exempt financing to private professional sports teams, rather than the general public.

New tax bills introduced in the Senate:
Three new tax bills were also recently introduced in the Senate, were vetted in a hearing of the Senate Finance Committee and were approved by voice vote in Executive Session. They include a bill to require the IRS to give an exempt organization 65 days’ notice before it has its exempt status revoked for failing to file information returns (Form 990 series); a bill to make certain agricultural research organizations public charities; and a bill to provide an exception to the private foundation excess business holding rules for certain philanthropic business holdings.

TRA 2014:
The Tax Reform Act of 2014 contained many legislative proposals for tax exempt organizations including: disallowing losses from one unrelated business income (UBI) activity to offset the income from another UBI activity; changes to the corporate sponsorship and royalty rules; expansion of the reach of intermediate sanctions to 501(c)(5) and (6) organizations; and the imposition of a 25 percent excise tax on compensation paid to a nonprofit organization’s top five executives in excess of $1 million. It is possible that some of these proposals could resurface again in the year ahead.

Gifts to 501(c)(4), (5) and (6) organizations:
Finally, we know that gifts to organizations other than 501(c)(3) organizations do not qualify for charitable deductions. However, whether gifts over $14,000 are subject to the gift tax if made to other nonprofit organizations has never been clear, and there have been times when the IRS has threatened to apply the tax when a gift was made to a 501(c)(4), (5) or (6) organization. To remedy the situation, Ways and Means Oversight Subcommittee Chairman Peter Roskam just introduced H.R. 1104, the Fair Treatment for All Donations Act, which would permanently ensure that donations to 501(c)(4), (5) and (6) organizations are not subject to the gift tax.

Stay tuned to the Nonprofit Standard blog and future newsletters in the weeks and months ahead, as we’ll be keeping a close eye on these proposals as they progress through the legislative process, and will keep you updated.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2015). Copyright © 2014 BDO USA, LLP. All rights reserved. www.bdo.com

What goes in must come out

Does Your Financial Reporting Support Your Strategic Plan?

By Michale G. Hogan, CPA, CGMA

Strategic planning is the foundation for success in any organization. But the decision-making that flows from that planning is only as good as the information upon which it is based. Managers work hard to develop systems for accounting and financial reporting that are compared to the key performance indicators of their organizations. For entities in the for-profit realm, it may be simple: Are the resources used to make the items adding up to the number of items produced? For entities in the nonprofit sector, this consideration may not be quite as black-and-white: Are our efforts contributing toward our mission? However, regardless of the sector your entity occupies, the goal is the same: you want to utilize information to help management make better decisions.

Accounting systems are notorious for being able to generate… accounting data. After all, that’s what they’re designed to do. When inputs and outputs can be condensed down to quantifiable units, be they raw materials, labor hours, or something else, costs can be assessed and compared against industry and/or historical benchmarks to determine if operations are being conducted in as efficient or effective manner as planned. But when the output of your organization is an intangible, like better research, higher literacy or a cleaner environment, how do to gauge your effectiveness with the financial statements? At first blush, my answer is YOU DON’T.

That’s not to say that the product generated by your accounting department is for naught; it simply needs to be utilized in a somewhat different manner. As noted, accounting systems generate accounting data. This is of great benefit to accountants. But there are legions of managers out there who need something other than accounting data; they need management information.

Accounting data and management information are not that disparate in their composition. The two largely stem from
the same source, the results of operations as recorded in the general ledger of the organization. The difference results in their application. Keep the debits and credits to themselves and (hopefully) they will behave quite nicely in your books of record. Take the data away from the summarizations that are inherent in the financial statements – the totals used in the statement of financial position (balance sheet) may not be what you need. Strip the data down to its component pieces, choose the appropriate items to couple with your performance indicators or business drivers, and then you can see their utility to the management process.

While there may be no direct correlation to the intangibles inherent in your mission, there are doubtless steps that your entity has taken in heading toward your goal. Comparison of the details in your payroll postings to the results of your membership drives may reveal inefficiencies in your association’s outreach initiative. Tracking sponsorship costs by a particular demographic may highlight disparities in your efforts. Identifying those steps and determining which financial parameter is the appropriate monitor is often a joint effort between managers and the accounting professional – either inside your organization or from a qualified external consultant. That accounting professional can then work within the confines of your systems to generate a management reporting structure to augment the accounting reports and provide decision makers with the information needed to plan, assess, and evaluate the forward momentum of your nonprofit.

For more information contact a Templeton Advisor.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Winter 2014). Copyright © 2014 BDO USA, LLP. All rights reserved. www.bdo.com

Awkward Board Conversations about Pay – Can we talk?

By Mike Conover

I’m not sure if you ever asked this question growing up, but I have a very vivid recollection of the time I floated it. Sitting around the supper table one evening, I guess the subject of pay had come up in a conversation between Mom and Dad. I boldly joined the conversation with the question, “How much do you get paid, Dad?”

All conversation came to an abrupt halt, eating stopped, and for what seemed like an eternity and all I could hear were crickets. All I could see was the stern glare of my parents and a warning, “Don’t you ever ask anyone how much they get paid!”

The meal was completed in near silence with more than a couple of follow-up glares. Mission accomplished, life lesson learned: pay is not a polite subject of conversation, not even among family members.

After spending more than half of my adult life advising all sorts of organizations on matters related to pay, I’ve concluded that nearly everyone has had similar parental or societal ‘guidance’ on the subject of pay. It’s right up there, perhaps even more sacrosanct, than the discussion of religion or politics. It is just not discussed. Employees squirm before those periodic ‘pay discussions’ with their supervisors. Frankly, many supervisors squirm more than the employees with whom they are having these discussions. Even Chief Executive Officers (CEO) and board members will confide that this ‘pay discussion’ is always a bit different than any other that will arise in the course of business.

Given this general attitude about discussing pay, it is somewhat easier to understand some of the struggles that take place in the boardroom when the topic is on the agenda. Whether in conference rooms, large or small, the faceless conference call or a hastily-called gathering at some other event for the organization, directors are often uncomfortable with pay discussions. Board briefing materials, consultant reports and presentations can ‘set the table’ by forestalling the topic, but eventually it must be discussed and a decision made.

Working with boards over the years, I’ve observed several different patterns of avoidance behavior in the boardroom as these pay discussions arise. Of course, the importance of these discussions and the decisions produced in them require effective communication. This reticence to discuss the topic poses a threat to good decision making.

It might be helpful to describe some of the more common avoidance behaviors in order to better understand the dynamics (or lack thereof) of pay discussions, and to offer some suggestions that might engage directors and make pay discussions more effective.

My list of classic ‘avoidance’ strategies used for boardroom discussions of pay includes the following:

“What are we doing for everyone else?”

This question is often asked after a prolonged pause in the discussion when the subject of a pay recommendation for the CEO or other senior staff members is raised. To break the uncomfortable silence, some brave soul asks this question. It is certainly ‘safe.’ The rationale implied is if it is okay for the staff, it should be fine for the top executive(s). It also requires no additional research specific to the executive(s) in question. It might also require no further discussion than “All those in favor…?”

“Let (fill in board member name) handle it”

In this situation, the entire matter is delegated to a single member of the governing body. That person is believed to be more knowledgeable on the subject or is the individual who historically has been tasked with this chore or the poor soul now ‘taking his/her turn’ with this duty. Whether the individual is formally or informally charged with the responsibility and authority to address this matter with the CEO, the other board members may have no further involvement in the process other than hearing the percentage or dollar amount of the change made in pay.

“Ask the consultant”

At a loss for an answer or a volunteer, the board turns to the consultant to break the silence. The board seeks ‘expert’ advice and feels absolved of any disappointment or problems that might arise from the answer provided. “What should we do?” the consultant is asked. After offering whatever information the consultant can provide, with a unanimous vote, the issue is considered closed.

“The CEO will tell us what to do…”

In some cases, the CEO will be willingly obliged or bold enough to provide the information to substantiate a specific
recommendation to the board or simply answer the board’s “What should we do?” question. Having received the CEO’s
information, the board is then strangely left to simply approve it or awkwardly question or change it, if they dare.

It is not my intention to portray all boards or compensation committees as dysfunctional when addressing this important duty assigned to the governing body. However, it is not unusual for some of the behaviors described above to appear in the course of board discussions and decision making regarding pay. Often these behaviors appear in some otherwise very effective boards. A lack of familiarity with the nonprofit executive compensation matters coupled with the previously mentioned ‘sensitivity’ of this topic periodically interferes with the best of boards.

The critical success factor for effective governance/oversight of executive pay is engagement of the board in the process. One of the best signs of engagement is the level and extent of dialog among board members as the process is carried out. Quite simply, the subject of executive pay is a subject for discussion among the board members, not simply a well-orchestrated chorus of “I move the motions,” “seconds” and “ayes.”

In order for engagement to occur, there are a number of necessary conditions:

  • Board members/compensation committee members must understand the role/responsibility they are expected to play in the process. Clear statements of decision making authority (e.g. input, recommend/propose, approve) for each step in the process need to be defined. Some organizations prepare charters for the committees engaged in compensation decisions similar to ones used by other committees (e.g. audit, finance, etc.).
  • A specific process should be defined for use in the governance and administration of executive compensation. Organizations sometimes prepare a calendar describing two or three meetings per year that are
    devoted to executive compensation. The calendar lays out a schedule for the year as well as the activities, objectives and decisions associated with each meeting. Establishing a calendar is particularly effective for engaging board members. It provides clarity on the purpose of each meeting and will focus directors on the matter(s) at hand.
  • Organizations often establish formal pay policies/guiding principles that articulate the organization’s beliefs about pay and the particular factors that will be considered when pay decisions are made. Developing these points of view on a formal basis rather than on a case-by-case basis goes a long way toward establishing a sound business rationale for pay and promoting consistency from one decision to another. A formal policy can also support consistency from the standpoint of turnover on the board, committee assignments and management. The arrival of a new individual involved in the process will not necessitate development of a ‘new’ policy, if one has not been developed. New members can also review documentation pertaining to the compensation program and quickly begin to participate in the process without the need for lengthy ‘oral histories’ to prepare them to engage.

With these necessary conditions satisfied, board members are well-positioned to substantively engage in the governance/ administration of executive compensation. With the benefit of clarity on key aspects of the process, questions for more information and comments offered on various topics should come more freely and more often.
Those questions and comments are exactly what engagement implies. When engaged, all parties involved in the process, especially board members, demonstrate that they are involved in the issue and not simply performing the ‘review and concur’ role so often associated with board membership. Good questions and thoughtful opinions are essential for effective management of executive pay.

The key point I’m making is that in the boardroom, pay is a topic of conversation and a very important one. The behavior we are seeking is characterized by thorough discussions, participation by all parties and broad ‘ownership’ of decisions made.

A final thought – it is still unadvisable to ask anyone at the dinner table how much they get paid!

For more information contact a Templeton Advisor.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Winter 2014). Copyright © 2014 BDO USA, LLP. All rights reserved. www.bdo.com

Got Compensation Program Risk?

Sharing actual experiences arising in our compensation consulting work provides some of the most valuable information for our readers. The questions we are asked and the types of work being requested by clients generally serve as a good source for timely topics. Without divulging any confidential information, I believe some of our recent experiences in the past few months offer a topic that warrants a closer look by many organizations.

We have encountered a number of instances this year where we have been asked to review several years of documentation supporting an organization’s governance of executive compensation. In some cases, our work involved a search for confirmation of detail to support a past pay action. In others there were specific requests to examine the quality of existing documents supporting the pay program. Both approaches allowed us a firsthand opportunity to see what clients had in their possession, or thought they had, regardless of the fact that the applicable questions on the Form 990 were checked with a “Yes.”

It is worth mentioning that the criteria we use to evaluate the materials follow the Internal Revenue Service (IRS) Intermediate Sanctions’ guidance for the Presumption of Reasonableness. We generally focus on determining:

  • The participants/role of independent directors in compensation decision making
  • The quality of competitive compensation data from “comparable” sources used in decision making
  • The quality of contemporaneous documentation (i.e., minutes) kept to record the discussions and decisions related to executive pay

These criteria can be met by satisfying some rather broad requirements outlined in the provisions of the Intermediate Sanctions. The precise manner of doing so is generally left up to the organization in question. Our reviews express our opinion as to how well organizations could substantiate their satisfaction of the requirements for the Presumption of Reasonableness.

In our reviews, we examined: board and compensation committee members; the schedule of their meetings; staff positions for which the board has direct compensation decision making authority; records of board meetings and resources used by board members engaged in compensation decision making. Additional materials such a formal compensation strategy/ policy statements, and board/compensation committee charters, for example, were also reviewed in those instances where organizations were using them.

In many cases, we discovered that despite the fact that the boxes were checked affirmatively on the Form 990s and the certainty of compliance expressed by individuals directly involved in the compensation process, there were opportunities to strengthen or initiate critical practices needed to secure the Presumption of Reasonableness. The balance of this article will highlight the types of issues we have encountered and provide steps that should be taken to avoid problems.

OVERSIGHT BY INDEPENDENT BOARD MEMBERS/COMMITTEE

This requirement was the one most generally satisfied by the organizations reviewed. All independent members of the organization’s board or a committee of independent board members were usually involved in oversight of executive compensation matter. To the degree that opportunities for improvement were noted, they included:

  • Expanding the scope of board authority over staff pay to include all “Disqualified Individuals,” not just the Executive Director/CEO. In most cases, the organization’s CFO/principal financial officer should also be included in the scope of board- level authority. In fact, it might be highly desirable to have final authority for compensation of all positions reporting directly to the Executive Director/CEO rest with the board.
  • Board members should be especially cognizant of any role that the Executive Director/CEO might play in the determination of his/her own pay. While it may be perfectly appropriate for the executive to present a “self-appraisal” of performance or make recommendations for direct subordinates, the Executive Director/CEO should not solely be relied upon to provide competitive compensation information or a recommendation for his/ her own compensation. Furthermore, the CEO/Executive Director should be formally excused from the meeting as board members discuss and decide his/her compensation actions.
  • Formalize board/compensation responsibilities for compensation with a formal charter or statement of responsibilities and authority. All parties involved in the administration of the compensation must be fully aware of their respective roles.

COMPETITIVE COMPENSATION DATA FOR COMPARABLE ORGANIZATIONS/POSITIONS

Our reviews indicate that many organizations need to do a significantly better job to satisfy this requirement. In several instances, competitive data could not be produced despite earlier reports it was used nor could the actual data sources or specific Form 990s that were used be recalled. More often, we observed the following:

  • It was difficult or impossible to demonstrate that data from comparable organizations were being presented for board consideration.

– In some cases, pay data was reported from similar types of organizations, but no information about  the size / scope of the organizations included in the pay data sample was available. Accordingly, it was not possible to determine if pay levels represented much larger/ more complex organizations and / or locations with markedly different employment cost

– Form 990s were collected from organizations totally unrelated to the organization in question (different type(s) of entities and/or radically different size/scope of operation) with no rationale for their inclusion in the information shared with the board.

  • In some cases, even if organizations were generally comparable, it was not apparent that positions cited in the competitive analysis were comparable to the client organization.

– Jobs were “matched” strictly on the basis of generic office titles (e.g., Executive Vice President, Associate Director, etc.)

– No information was presented that ensured unique or unusual characteristics in the client’s position (or an external benchmark position) had been identified and addressed in the competitive analysis.

  • Competitive data of questionable quality was used in the compensation analyses.

– Surveys published or pay analyses performed three or more years ago were used as the basis for current decision making- Consultant reports failed to provide sufficient documentation to establish comparability in competitive analyses and/or relied upon poor quality data

– Consultant reports failed to provide sufficient documentation to establish comparability in competitive analyses and / or relied upon poor quality data.

– Only direct pay/cash compensation data was included in the competitive analysis without any consideration of benefits, perquisites and deferral/retirement income arrangements to assess total remuneration.

DOCUMENTATION (i.e., MINUTES)

In most cases, we find this the area to be the one in need of the most improvement. Many organizations could not produce minutes of meetings that specifically address details of decisions surrounding compensation. Perhaps; out of concerns about confidentiality or confusion about the responsibility for taking the minutes, the minutes simply were never taker. other common areas we cited for improvement included:

  • Provide more detail in the meeting minutes to ensure that an accurate record of information, discussions and decisions about compensation were recorded.

– Noting members in attendance or participating by phone and mentioning staff or outside professionals participating in the discussion.

– Carefully noting that staff members or any conflicted parties were excused from meetings when compensation is being discussed or decided.

– Noting and including copies of any reports, surveys or other information used in the meeting.

– Recording the actual vote/affirmation made by the board or committee for the pay action in question.

  • Ensure that meeting minutes are drafted reviewed with participants and approved by the earlier of the next meeting or within 60 days. Initial drafts of meeting minutes can be circulated to meeting participants electronically with a request for comments, changes and / or approval. It is then quite easy to produce and circulate the final in order to obtain approval. It is important to verify and date the approval of the minutes by participants as part of the final document.
  • Organize and retain all documentation concerning the compensation program in a central location. Ensure it is a resource available for reference to board members in the future or outside authorities that may request to review it.
  • Finally, organizations might find it helpful to prepare a formal document which describes the overall compensation program as well as the  general principles which guide it. This type of document is helpful for a number of reasons.

It provides a means for discussing, arriving at a consensus and finally documenting the principles, policies and practices that will govern the organization’s approach to all forms of compensation by:

– Providing identification of pertinent “competitor” – similar service offering, employing/ competing for similar executive resources, etc., used to establish a marketplace for determination of competitive pay practices

– Defining the desired position of overall compensation in relation to the competitive marketplace (i.e, at, above, below the market) as well as the rationale for support of this desired position

– Identifying the components that will be used in the compensation program (i.e., salary, bonuses, retirement plan, benefits, perquisites) and the role that each will play to achieve he desired position described above

  • Encourages stability / consistency in pay policy and practices. Rotation of board member assignments, turnover in board members and / or the executive team sometimes produce changes in pay practices. Without a formal position on pay policy, pay practices can change based on personal points of view.
  • Finally, this document, along with the other forms of documentation discussed above, becomes an impressive component of an overall description of the compensation program that can be sued for new board member orientation / education or to explain it to any outside official that might have a need to review it.

Our experience suggests that many organizations have some, but not all, of the information needed to be reasonably certain of their entitlement to the Intermediate Sanction’ Presumption of Reasonableness. Incorrect, incomplete or non-existent records in any of the broad areas discussed here will seriously erode the likelihood of success. In all probability, the discovery of a few issues generally leads to additional requests for more information and more extensive examination.

No matter how carefully and well-intentioned the administration of the compensation program has been, the absence of appropriate documentation to support past practices and decisions will raise questions.

Outside board members and senior staff members would be well-advised to critically examine or arrange for an outside examination of the current state of their compensation program’s recordkeeping and documentation. Organizations should ask themselves the following question:

“Would an outsider reviewing these documents understand and accept this as evidence of good management of our pay?”

Waiting to discover problems until the organization is embroiled in a pay-related controversy or under review by government official invites needless worry and embarrassment.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2014). Copyright © 2014 BDO USA, LLP. All rights reserved. www.bdo.com

Do you want $1 to go to charity?

Understanding Payments to Agents of Charitable Organizations

By Rebekuh Eley, CPA, MST

Many times local retail chains or restaurants ask customers to donate to a local charity with the payment of their restaurant bill or store purchase. Are these donations considered tax deductible contributions? The donation is not going directly to a charity. The donation is going to a business entity that will pay the donation to the charity on the customer’s behalf.

Payments to these businesses, or agents, in lieu of a direct contribution to a qualified Internal Revenue Code (IRC) 501(c)(3) organization, are considered tax deductible donations when paid to an agent of the organization. A valid agent of the charity may also provide the contemporaneous written acknowledgement to the donor as required to take a charitable contribution deduction. An entity that enters into this type of arrangement should comply with guidelines so a true agency relationship exists with the charity to avoid income treatment of the donations received on behalf of the charity and, to allow a charitable contribution tax deduction to the donor. These agency arrangements can also be mutually beneficial to both the charity and the business entity.

The Internal Revenue Service (IRS) has issued guidelines for entities to follow to assist with obtaining an agency relationship. According to Revenue Ruling 2002-67, the agency arrangement between a charitable organization and a person or entity acting on behalf of the charitable organization should first be established through a written agreement that is valid under the applicable state law. Not all contractual relationships will necessarily result in an agency relationship.

It is important to confirm that the state law recognizes the relationship established in the agreement as a valid agency relationship. The IRS further analyzed the terms and facts and circumstances of a written agreement to establish an agency relationship in PLR 200230005. The IRS noted the following characteristics that supported a valid agency relationship between a charity and a for-profit company receiving car donations on behalf of the charity.

  • The written agreement between the charity and the company clearly established an agency relationship pursuant to certain state agency laws.
  • The company was to act on the charity’s behalf and was subject to the charity’s control in the general performance of certain activities such as solicitation, acceptance, processing and the sale of donated property.
  • The company could exercise some discretion but this was not in conflict with state law.
  • The charity remained the equitable owners of the donated property until an authorized sale occurred.
  • The charity bore the risk of accidental loss, damage or destruction of the donated property until the donated property was sold.
  • The charity had the requisite degree of control and supervision.
  • The company agreed to provide monthly accounting reports and weekly advertising reports to the charity.
  • The charity reserved the right to inspect the company’s property donation program financial statements.

Under the written agreement, the company would pay certain costs and expenses, such as advertising and insurance. This fact did not preclude a determination that there is a valid agency relationship. Also, the fact that a related person to the company could purchase any vehicle at fair market value did not preclude the agency relationship provided the company acted in accordance with its fiduciary responsibility.

After an entity has established an agency relationship to receive contributions on behalf of a charity, the entity needs to evaluate if it is considered a charitable or professional fundraiser under state law. Many states impose additional registration and annual filing requirements on entities that are considered charitable or professional fundraisers.

After reviewing the requirements set forth by the Internal Revenue Service and various states, an entity may question the decision to establish an agency relationship. However, the agent will achieve a sense of community and purpose in helping the good cause of a charity while providing additional goodwill for its own business endeavors.

Please contact your Templeton advisor, John Templeton, with any questions you may have regarding nonprofits, john@templetonco.com or 561-798-9988.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2014). Copyright © 2014 BDO USA, LLP. All rights reserved. www.bdo.com

Health care

Health care continues to be one of the more contemptuous issues our country faces. And no wonder, in 2011 alone, the U.S. spent $8,400 per person compared to the next highest-spending country, Norway at $5,352.

Since 2002, family premiums for employer-sponsored health care have increased by a whopping 97 percent placing the cost burdens on employers and workers.

The drivers of these cost increases include an aging Baby Boomer generation that is creating more patients and more treatments, a need for long term care for chronic illnesses, more sophisticated treatments and technology, and increasing inefficiencies, malpractice and administrative costs.

On March 23, 2010 President Obama signed the Patient Protection and Affordable Care Act (otherwise known as ObamaCare) into law. This law, while intending to offer more affordable health care to individuals and families, requires much employer compliance and action.

Overall the Act requires most U.S. citizens and legal residents to have health insurance by creating state-based American Health Benefit Exchanges through which individuals can purchase coverage, with premium and cost-sharing credits. These credits are available to individuals and families with income between 133-400 percent of the federal poverty level.

Separate Exchanges will also be created that will allow small businesses to purchase coverage. Employers will be required to pay for penalties for employees who receive tax credits for health insurance through an Exchange, with exceptions for small employers. New regulations on the health plans in these Exchanges will also be imposed in the individual and small group markets. Medicaid will also be expanded to 133 percent of the federal poverty level.

As this law moves into action and even if it is repealed, one thing is certain – change. It’s clear that quality, price and service are often sacrificed in the current health care model. So the change will have to come from employers, providers, physicians, payers and insurers. This is how:

• Employer driven change – 60 percent of the under 65 population have insurance through their employers and all are negatively impacted by escalating costs and inadequate quality. As a result, educating those employees is a must as well as focusing more on wellness and prevention.

• Provider/Physician change – Health care providers will go from a fee-based model to a newer value-based model and focus on being more accountable in their care. There will be consolidation and newer business models that require increased use of data analytics and clinical intelligence.

• Payer/Insurer change – By moving the focus away from claims processing to more collaboration in an effort to improve care and manage costs. There will also be a shift from administrator to supplier of data analytics/clinical intelligence.

So the question becomes for employers – are you going to pay or play ObamaCare?

Play means employers offer minimum essential coverage to all of your full-time employees.

Pay is an excise tax if you do not offer minimum essential coverage (or any coverage) and at least one of your full-time employees is certified as having enrolled in coverage through a state health exchange for which he or she received a premium tax credit or cost sharing reduction. This tax is applicable to employers with 50 or more full-time employees on average per business day. The monthly penalty (non deductible) is $166.67 (1/12 of $2,000) times the total number of full-time employees for the month minus 30.

What to do?

Look at your workforce Employers need to evaluate their workforce and look at their employees (both full-time and part-time) and see if any could be reclassified as employees for purposes of the mandate.

Business structure Employers also need to understand if their current business structure or model could cause the company to be subject to the employer mandate – and see if there are circumstances under which they could restructure to avoid the mandate.

Learn about Health Insurance Exchanges Examine the relationship between the employer mandate and the individual mandate and how the health insurance Exchanges that will be put in place in 2014 will provide opportunities for some employers and many individuals to acquire such coverage.

Florida recently returned $1 million planning grant to the federal government and has set up a non-ACA compliant health care initiative. However, if the state doesn’t set up an ACA compliant exchange, the federal government will.

Employers need to act now and consider an overall benefit redesign with an emphasis on better employee health. They should also set up and access information systems and reporting for compliance and start discussions with payers and providers that consider risk sharing.

Though overturning ObamaCare would mean relief from this compliance burden and potential penalties, it doesn’t necessarily change the need for an employer’s strategic evaluation of their workforce, business structure, overall plan design and employee communications.

This work upfront can save you a lot of heartache and expense down the road.

 For more information, please e-mail info@templetonco.com.