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3 Things Not-for-Profits Need to Understand about their Finances

Father and Son pictureThere are roughly 1.5 million nonprofit organizations in the United States. Many of them are grassroots organizations run by well-meaning volunteers who are committed to the group’s mission, but who may not have knowledge of the numerous complicated rules governing not-for-profits. I learned of these complexities when I joined the board of an all-volunteer sports league in my community. I'm sure many practitioners can relate: because I am a CPA, of course, I was elected treasurer. In this role I gained a deeper understanding of not-for-profit finances. As a result, I've learned three things not-for-profits need to understand about their finances in order to run a more effective organization.

1)     Understand the implications of hiring a professional fundraiser.

Fundraising can be time consuming and often best accomplished by people with a certain personality. Although it may be tempting to hire a professional fundraiser, keep in mind that not-for-profits that hire one may be required to have a solicitation license in some states including North Carolina, the home of my sports league. When we finally applied for one, we faced thousands of dollars in possible penalties for past failure to file.

2)     Be aware of “unrelated business income” rules.

My baseball team runs a concession stand at games. It’s usually staffed by volunteers, but since it can be hard to get someone to sign up for every game, board members have suggested that we hire a high school student to work at the stand during the summer. That sounds like a reasonable idea, until you find out that, because the stand will not be staffed by volunteers, the organization may have to pay income tax on the concession stand profits, which are considered unrelated business income. “Unrelated business income” refers to the proceeds of a trade or business that is regularly conducted by an exempt organization and that is not substantially related to organization’s performance of its exempt purpose or function—such as our concession stand. That’s true even if that income is used to achieve the organization’s mission. What’s important to the Internal Revenue Service here is how the income is generated, not how it is used.

3)     Reporting on grants are more complicated than you might realize.

Grants from foundations or other sources are the financial lifeblood of many not-for-profit organizations, but this is another area that may include a surprising array of compliance and reporting issues. Grant recipients may, for example, be required to provide their accounting records for several years and may even need to have a financial statement audit.

In these situations, it’s important to recognize the many potential costs and complications associated with seemingly appealing ideas or policies.

In your role as a trusted adviser to not-for-profit clients, your knowledge of the complexities of the financial challenges they face is key to helping them run an efficient and effective organization. One place where you can find the information you need to assist not-for-profits is the new AICPA Not-for-Profit Section. The Section provides CPAs serving not-for-profits, as well as not-for-profits themselves, with an array of resources that help shed a brighter light on the finance-related issues that organizations need to be more aware of—such as the implications of hiring a professional fundraiser, unrelated business income rules and reporting grants. Three such resources include a document outlining charitable contribution compliance, an informative paper on unrelated business income tax and a primer on the life cycle of a grant. Learn more at aicpa.org/NFP.

Christopher Cole, CPA, CFF, CGMA, Senior Technical Manager- Not-for-Profit Content Development, American Institute of CPAs. Chris is the staff liaison to the AICPA Not-for-Profit Expert Panel and AICPA Not-for-Profit Advisory Council at the AICPA.

Father and son playing baseball via Shutterstock

 

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