All posts by Mike Sperling

How to differentiate corporate sponsorships from taxable advertising

Fall 2026

Corporate sponsorships can help cover costs for your nonprofit’s events, programs and other initiatives. But before accepting sponsorship dollars, you should understand the tax implications. Although many sponsorships qualify for an exception from unrelated business income tax (UBIT), if any part of the payment is for advertising, that can trigger UBIT.

Defining terms

Generally, qualified sponsorship payments your organization receives aren’t considered income from an unrelated trade or business. A qualified sponsorship payment is cash support, a property transfer or a performance of services with no expectation that the sponsor will receive substantial “return benefit.” Return benefits can include advertising, goods, facilities, services and exclusive provider arrangements.

The aggregate fair market value (FMV) of all benefits provided to a sponsor during the year may be disregarded if it’s less than 2% of the amount of the sponsor’s payment to the nonprofit. If the total benefit exceeds 2% of the payment, the entire FMV of the benefits is a substantial return benefit.

Avoiding promotional activity

Avoid UBIT risk by using a corporate sponsor’s name for acknowledgment purposes only. Promotion, marketing or endorsement of the sponsor, on the other hand, constitutes a substantial return benefit.

In addition to supporters’ names, you can use their logos and slogans as long as they contain no qualitative or comparative descriptions. In general, value-neutral descriptions are usually acceptable. You can also list sponsors’ physical and online locations and phone numbers, and their brand or trade names and product or service listings. At the sponsored event, you may include a sponsor’s product as long as there’s no agreement to provide it exclusively.

Allocation of sponsor payments

When a sponsorship includes a substantial return benefit, only the part of the sponsor’s payment that exceeds the substantial return benefit is considered a qualified sponsorship payment. The remainder is unrelated business income.

Say, for example, you receive a large sponsorship payment and recognize the support by using the sponsor’s name in promotional materials. You also host a dinner for the sponsor’s executives, and the FMV of the dinner exceeds 2% of the sponsor’s payment. The use of the sponsor’s name constitutes a permissible acknowledgment. However, the dinner is a substantial return benefit. Only the portion of the sponsorship payment that exceeds the dinner’s FMV is exempt from UBIT.

Reducing risk

In some situations, the difference between qualified sponsorship payments and advertising isn’t as clear. Contact us for help reducing UBIT risk.

Prevent fraud losses by educating your nonprofit’s staffers

Fall 2026

Occupational (employee) fraud remains a persistent threat to nonprofits of every size and mission. It’s capable of quietly draining funds your organization needs to support programs and services. So for nonprofit leaders, investing in antifraud training is one of the most practical and cost-effective ways to reduce both the likelihood and impact of fraud.

Statistical support for concern

According to the Association of Certified Fraud Examiners’ (ACFE’s) Occupational Fraud 2026: A Report to the Nations, both for-profit and nonprofit organizations lose an estimated 5% of annual revenue to fraud. Nonprofits experience lower median losses per fraud scheme than other types of organizations ($69,000 vs. $120,000 for private businesses). Even so, few charities can afford to lose as much as $69,000!

Fortunately, the ACFE’s report shows a strong connection between fraud awareness training and lower fraud losses. Organizations that provide antifraud education to both staff-level employees and management generally experience lower fraud losses. Training also increases the likelihood that fraud will be detected early, which is important because the longer fraud schemes run, the more costly they tend to be. For example, the ACFE has found that frauds detected within six months cause a median loss of $40,000, while schemes that persist for more than five years result in median losses exceeding $1.1 million.

In addition, employees who receive fraud awareness training are more than twice as likely to report observations or suspicions (generally using an anonymous reporting mechanism such as an email address or web portal). This is critical because whistleblowing is the most effective occupational fraud detection method. It uncovers fraud in 43% of cases.

Best strategies for effective training

Fraud awareness training should go beyond providing a brief presentation once a year. The most effective programs help staffers recognize risks and understand reporting procedures. They also need to be confident in speaking up when something seems wrong.

Your organization can strengthen its antifraud training efforts by:

  • Using real-world nonprofit fraud scenarios,
  • Teaching staffers to recognize common red flags, such as unusually friendly vendor relationships, missing documentation and requests to bypass established procedures,
  • Clearly explaining how to report concerns via phone, email or web-based tools, or by directly reporting to supervisors, HR staffers or designated ethics contacts, and
  • Training managers on how to respond appropriately if they receive fraud or ethics complaints.

Provide an initial antifraud session when onboarding new staffers. Then refresh the memories of all workers throughout the year with short reminders, team discussions and staff newsletter or Intranet content.

Promoting a culture of vigilance

The ACFE’s report found that all antifraud controls are associated with lower losses and faster detection. In particular, management review, proactive data monitoring and surprise audits have been shown to yield measurable results.

Nonprofit board members can help ensure that fraud prevention remains a governance priority by including funds for internal controls and antifraud training in operations budgets. Executives can reinforce a strong culture of accountability by communicating a zero-tolerance approach to fraud and demonstrating that concerns will be taken seriously and investigated promptly. This can mean that anyone caught committing fraud or theft is terminated from employment and referred to law enforcement.

Equipping staffers with knowledge

Nonprofit organizations can significantly reduce their exposure to fraud by equipping staffers with the knowledge to recognize suspicious activity. Antifraud training not only improves detection but also helps limit losses if misconduct occurs. That investment can protect both your organization’s financial assets and your reputation. Contact us with your questions and for help with internal controls.

Board governance policies — Building a culture of transparency

Fall 2026

How does your community view your nonprofit? Your organization’s governance likely plays a big role in its public perception. Strong governance, supported by a well-crafted board governance policy, is essential to every nonprofit’s accountability and reputation. By outlining fiduciary duties, ethical expectations and oversight responsibilities, a governance policy helps boards operate effectively while reducing the risk of conflicts and compliance issues. Here’s what your governance policy should include.

Purpose and people

The beginning of your board governance policy should explain your organization’s purpose. You might state your mission and explain that board members are responsible for making decisions that support that mission. Also state that directors are committed to the highest ethical standards and are aware of their fiduciary duties under state law and obligations related to your nonprofit’s federal tax exemption.

The next section in your policy should describe board member responsibilities and obligations, emphasizing that the board has the authority to oversee all organizational operations. This is a fitting place to differentiate between board and staff responsibilities. For instance, you might say that the board doesn’t directly manage your nonprofit’s day-to-day operations. However, it’s responsible for exercising reasonable and prudent oversight of executives, staffers and others who carry out daily operations.

The policy should also advise board members that they may rely on executive- and staffer-provided information and reports they believe to be accurate. The same holds true for board members’ reliance on professional advisors, such as attorneys and CPAs.

2 core duties

The heart of your governance policy should explain board members’ core fiduciary duties, starting with the duty of care. This relates to board members exercising reasonable care in all decision-making. They should avoid excessive risk and act in good faith when performing their duties.

Duty of care implies reasonable inquiry. Your board must ask questions and demand information that allows them to make informed decisions. For example, not every board member must be a financial expert. But every board member should understand basic financial terminology, be able to read financial statements and recognize red flags of financial distress.

The other major duty is duty of loyalty. Board members, as stewards of public trust, must always act for the good of your organization. In other words, board members are required to exert their powers, not in their own interests or that of another person or entity, but in the best interests of your nonprofit and its charitable mission.

The duty-of-loyalty section of your policy should state that board members must fully comply with your organization’s code of ethics and conflict-of-interest policy. And it should require that board members refrain from taking advantage of business or personal opportunities that become known because of their position as directors of your organization.

Separate committee

Some organizations have governance committees. Such committees can, according to nonprofit BoardSource, be considered the “conscience of the board.” Their responsibilities usually include:

  • The review and updating of governance policies,
  • Oversight of board compliance with such policies as your nonprofit’s bylaws, conflict-of-interest rules and code of ethics,
  • Recruitment of new board members, and
  • Engagement of current board members.

A governance committee can operate effectively without a formal policy as long as it’s able to coordinate the board’s manner of governing.

Ethical leadership

With a strong governance policy, you can build a culture of transparency and ethical leadership that’s apparent to stakeholders inside and outside your organization. Clearly outline fiduciary duties and standards of conduct — and hold all board members accountable to them. Whether governance responsibilities are handled by your full board or a dedicated governance committee, be sure to review and update policies to accommodate the rapidly evolving regulatory and financial environment of nonprofits. Consult legal and accounting experts for the latest information.

Scenario budget planning can help your nonprofit navigate uncertainty

Fall 2026

Budgeting for nonprofits is never a simple exercise. Uncertainty about government funding, rising costs, and other economic factors beyond your control only complicate matters. But organizations that use scenario planning as part of their regular budgeting process can increase their odds of making the right decisions — and promptly responding if conditions later shift. Here’s what you need to know to include scenario planning in this year’s budget decisions.

What is it?

Scenario planning is a type of financial modeling that provides nonprofit leaders with valuable guidance during evolving circumstances. It simulates how various assumptions are likely to play out. Nonprofit leaders make the ultimate budget decisions, yet scenario planning gives other stakeholders input.

Members of your board finance committee, your executive director and finance and accounting staff are obvious participants. You’d be wise, too, to include some staff members who are in the daily trenches working with clients and donors. They may notice impending issues that will affect finances long before those higher up in the org chart will.

How do you construct scenarios?

Participants construct budgets for multiple operational scenarios to ensure your nonprofit can cover projected expenses. There’s no rule of thumb for the number of scenarios you should consider. But many organizations use three: best-case, worst-case and most likely scenarios. The variables that change among the scenarios should reflect a handful of factors most likely to affect your revenues and expenses (such as a significant drop in funding levels or a jump in demand for services).

A best-case scenario, for example, might assume a highly successful fundraising campaign, favorable replies to all grant applications and a large gift from a major donor. A worst-case scenario might assume loss of all government funding, a substantial economic downturn and the departure of your long-time development director. The most likely scenario or “base case,” is essentially a regular annual budget based on historical trends, confirmed grants and similar factors.

For each scenario, you’ll determine the impact on the underlying budgetary assumptions. You can also identify indicators that trouble might be brewing and metrics that suggest it’s time to re-evaluate and adjust (for instance, a 5% increase in operating expenses or a 10% drop in corporate giving).

What do you do with the results?

From there, you can begin to brainstorm the types of measures you might implement in response — such as increasing annual dues or delaying a planned technological upgrade. You’ll also want to test these assumptions for viability and effectiveness. The last thing you want is to discover in the middle of your budgetary period that your plan is inadequate.

Once you’ve determined the optimal response to a particular scenario, you can develop an appropriate budget for it. This gives the ultimate decision-makers a wealth of information from which to develop the budget’s final figures.

Why use modeling?

Scenario planning may seem like an added layer of budgeting burden for resource-strapped nonprofits. However, it facilitates more informed decision-making and long-term strategic planning. Rather than risk being driven by overblown fears or misplaced optimism, your decisions will be grounded in reality.

Moreover, scenario planning can be persuasive when making your case to those who hold the purse strings, reassuring stakeholders that you’re keeping your eye on the horizon and preparing action plans for different developments. For example, if rising costs or loss of a major donor threaten operations, you’ll be able to respond with greater agility.

Your nonprofit likely has an operating reserve fund. So you might think you’re already prepared to handle financial emergencies. Scenario planning, however, is different. It positions you to act from a solid, thought-out foundation rather than react haphazardly.

Getting started

If you’re just beginning to explore scenario planning, you don’t need to go it alone. We can help you, your executives, and your board identify appropriate scenarios, develop and validate response plans, and craft budgets that will support them.

ASU 2025-05 — New guidance to help ease credit loss accounting

Summer 2026

Recently, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2025-05, which addresses the measurement of credit losses for short-term receivables and contract assets. This update is important for nonprofits because it simplifies how organizations apply the current expected credit loss (CECL) model. Here’s a brief summary of the ASU.

Scaling back complexity

ASU 2025-05 builds on ASU 2016-13 (Topic 326), which introduced the CECL model. Although the original version of that model improved reporting accuracy by requiring nonprofits to estimate credit losses over the life of an asset, it also added complexity for organizations responsible for making those calculations. For instance, under ASC 326, nonprofits were required to include historical loss experience, current conditions and reasonable forecasts of future economic conditions in their credit loss estimations.

ASU 2025-05 allows nonprofits to adopt a “practical expedient” when measuring credit losses. Basically, this election permits you to exclude collections received after the balance sheet date in your estimation of expected credit losses. You’ll still need to account for historical loss experience and current conditions, but you won’t have to project economic scenarios.

If you use the practical expedient, you’re also allowed to make an accounting policy election. Actual cash collections received after the end of the year (or after the balance sheet date, but before financial statements are available) can be excluded. Your nonprofit doesn’t need to record an allowance for receivables that are outstanding at the end of the year if they’re collected shortly thereafter.

Key features

Here’s an example of how ASU 2025-05 updates the CECL model: A community charity provides services on credit to low-income individuals. In the past, it might have had to calculate the potential credit loss for each invoice that goes unpaid. But under ASU 2025-05, the nonprofit can instead:

  • Group similar accounts receivable based on shared characteristics such as payment history, and
  • Apply a simpler, pooled approach to estimating losses.

The organization will need to disclose that it applied the expedient and accounting policy election, as well as the cutoff date for evaluating subsequent cash flows.

Notable shift

ASU 2025-05 marks a notable shift in how nonprofits account for credit losses. Be sure to update your written accounting policies to help ensure the provisions of the ASU are consistently applied. This ASU is effective for annual reporting periods beginning after December 15, 2025. Contact us with any questions or for help measuring your nonprofit’s credit losses.

Lost your tax-exempt status? Here’s how to get it back

Summer 2026

Over the past year, federal government officials have threatened to revoke the tax-exempt status of various nonprofits, including universities and charities, claiming they’re politically biased. But as the American Bar Association asserts, it’s not that easy to revoke an organization’s exempt status: “With a few exceptions, IRS procedures require individual, case-by-case IRS audits of each [tax-exempt] organization, with ample opportunity for the entity to defend itself and multiple routes of appeal.”

And, in fact, most nonprofits that lose their exempt status do so not because they violate political activity or similar rules, but because they fail to file Form 990s for three consecutive years. Such automatic revocations are common, particularly with newer nonprofits. Fortunately, it’s possible to regain your status.

Regular and retroactive reinstatement

If your organization is a 501(c)(3) charity and you lose your exempt status due to an automatic revocation, you’ll need to complete Form 1023, “Application for Recognition of Exemption Under Section 501(c)(3)” to regain it. Smaller nonprofits (typically organizations with $50,000 or less in annual gross receipts and $250,000 or less in assets) can use the streamlined Form 1023-EZ.

Note that unless you apply for retroactive reinstatement, your organization’s activities between the revocation and reinstatement dates will be considered taxable activities. Thus, any contributions given during that period won’t be deductible by their donors — and all income to your organization will be taxable. For this reason, you probably will want to apply for retroactive reinstatement, effective on the date of the automatic revocation. Just file the applicable form within 15 months of the date of the IRS revocation letter or the date the IRS posted your organization’s name on its website, whichever is later.

Statements and fees

When you file one of the longer forms, your organization will be required to attach a detailed statement that provides a reasonable cause for failing to file Form 990s in each of the three consecutive years. For example, perhaps your organization’s activities are substantially performed by an all-volunteer staff that isn’t knowledgeable about IRS compliance.

The statement should also describe:

  • The facts that led to each individual failure,
  • The facts that led to continuous failures,
  • How the failures were discovered, and
  • Any steps you’ve taken to avoid or mitigate them.

In addition, attach to your form: a statement that describes the safeguards and procedures put in place to avoid future failures; properly completed and executed paper tax returns for all taxable years during and after the consecutive three-year period your organization failed to file; and an original declaration dated and signed under penalties of perjury by an authorized person such as one of your nonprofit’s officers or directors. You’ll need to provide evidence to support all material aspects of the claims you make in your statements.

All organizations seeking reinstatement must pay a specified application fee. For Form 1023, it’s $600, and for Form 1023-EZ, it’s $275.

How long?

Most nonprofits that lose their tax-exempt status are anxious to restore it as soon as possible to avoid negative effects on their eligibility for donations and grants. In general, reinstatements take between three and six months when submitting Form 1023 and one to three months when using Form 1023-EZ. However, recent IRS staffing cuts and temporary government shutdowns may increase application processing times. If the IRS asks you for additional documentation, it could further delay your reinstatement date. Contact us if you’re having trouble regaining your tax-exempt status.

When what looks like an EBT isn’t necessarily off-limits

Summer 2026

How much do you know about excess benefit transactions (EBTs)? You probably understand that if your nonprofit provides financial benefits to certain people, it can result in IRS scrutiny and severe excise taxes. So you also probably have policies in place to curb or prohibit financial transactions with “disqualified persons.”

But the truth is, not every transaction between a disqualified person and a nonprofit is necessarily prohibited. If the IRS questions one of your organization’s transactions, you may be able to fight back using a rebuttable presumption.

Defining terms

EBTs are generally defined as transactions in which a nonprofit (other than a private foundation) provides a benefit to a disqualified person that exceeds the value of the consideration received in exchange for the benefit. Let’s unpack some of these terms.

In general, disqualified persons are:

  • In a position to exercise substantial influence over the organization’s affairs over the past five years, such as voting board members and top management,
  • Certain individuals who belong to a disqualified person’s family,
  • Disqualified persons of the nonprofit’s supporting organization,
  • Donors or donor advisors involved in the organization’s transaction with their donor-advised fund (DAF),
  • Investment advisors to a DAF sponsoring organization, or
  • Entities of which a disqualified person has a 35% or greater stake doing business with the nonprofit.

A disqualified person who engages in an EBT is liable for an excise tax equal to 25% of the excess benefit. If the transaction isn’t promptly corrected after the tax is imposed, an additional excise tax of 200% of the excess benefit is imposed. An organization manager who knowingly participates in an EBT could incur an excise tax equal to 10% of the excess benefit, up to $20,000.

Consideration received by a disqualified person might include money, property or the performance of services. Although EBTs often involve unreasonable employment compensation, other transactions may also be off-limits.

EBT transactions can range from a nonprofit paying a disqualified person’s personal expenses to agreeing to let the person use its property for personal reasons to making a loan to (or accepting a loan from) the person. Other transactions that the IRS might flag are revenue-sharing arrangements, payments to for-profit corporations owned by disqualified individuals and the transfer of assets to or from an entity controlled by a disqualified person, including loans.

Rebutting presumptions

If the IRS accuses your organization of a prohibited transaction, you may be able to establish a “rebuttable presumption” that the transaction isn’t an illegal EBT. A rebuttable presumption is a legal principle that assumes something to be true unless proven otherwise.

EBT regulations presume fair market value in arrangements involving employment compensation, property transfers and property use rights. For a transaction to qualify, your organization’s authorized body (for example, its board of directors) must be composed entirely of individuals without a conflict of interest. The authorized body needs to do three things:

  1. Approve the transaction and its terms,
  2. Obtain and rely on appropriate comparable data (such as an independent compensation survey) before making its determination,
  3. Adequately and concurrently document the basis for its determination (including the terms and approval date).

Comparability data is particularly important. If you satisfy the above requirements, the IRS must produce significant contrary evidence about the data’s relevance to rebut the presumption. Be sure to consult your attorney about your legal position and any litigation strategies.

Obtaining adequate data

If you run a smaller nonprofit, you may worry you wouldn’t be able to obtain adequate comparability data. However, IRS regulations provide some relief to nonprofits with annual gross receipts of less than $1 million. If you qualify, your authorized body will be considered to have appropriate data if it details compensation paid for similar services by three similar organizations in your community or in communities like yours. Contact us for help with obtaining such data and for more information about avoiding potential EBTs.

5 critical KPIs for nonprofits in uncertain times

Summer 2026

Reduced government funding, stubbornly high inflation and other macroeconomic factors have left a sizable number of nonprofits feeling financially vulnerable. It’s true that some forces are beyond your control. But thoughtful planning and tracking can provide a measure of stability. If you don’t already, consider monitoring key performance indicators (KPIs).

Why they matter

Financial decisions and planning can seem especially fraught right now. Will a misstep put your organization and its programs at risk? KPIs help establish a solid, data-driven foundation for evaluating financial options and making decisions. They provide a more up-to-date, granular and actionable snapshot than you typically can obtain from your financial statements.

Moreover, diligent KPI monitoring provides you with the flexibility to respond promptly to threats and opportunities. For example, one or more KPI can open up a clear view into your operational efficiency (or lack thereof) and tell you whether you’re well-positioned to withstand financial challenges.

And don’t forget about nonprofit watchdogs, such as Charity Navigator and Charity Watch. They incorporate KPIs and financial metrics in their ratings. So staying on top of your KPIs might sustain or improve your reviews. You can similarly use KPIs to assure stakeholders that your nonprofit is meeting their financial expectations.

Metrics to monitor

Nonprofits can choose from hundreds of potential KPIs, but some are more relevant than others. Consider tracking some or all of the following ratios:

1. Fundraising return on investment (ROI) (funds raised / fundraising expenses).

Fundraising is the lifeblood of most nonprofits. ROI shows the average dollar amount raised for each dollar spent on fundraising and can help you determine which fundraising campaigns or marketing channels are worth continuing.

Those with a ratio of at least 1.0 are generally considered cost-effective. This means you might want to discontinue fundraising strategies with lower ratios. With ROIs in hand, you can persuade your board to eliminate even cherished campaigns that might have been successful in the past but are no longer making the grade.

2. Operating reserve (unrestricted net assets / annual operating expenses).

Do you have sufficient unrestricted funds on hand to continue operating without incoming revenue? The operating reserve ratio indicates the period of time your organization could continue to pay operating expenses using reserve funds. A ratio of 0.5 says you could cover six months of expenses with your reserve. A ratio of 1.0 suggests you could go a year on reserve funding alone.

3. Current (current assets / current liabilities).

The current ratio reflects an organization’s liquidity. It measures your ability to pay short-term debt obligations (those due within the next year) with cash on hand and other current assets. A ratio of 1.0 or greater generally should be your goal.

4. Overhead (overhead expenses / total expenses).

Many donors prefer to contribute to charitable organizations that keep overhead low — the lower, the better. Executives may believe this attitude oversimplifies things (try, for example, to run a nonprofit without overhead!). Even so, it’s worth keeping an eye on overhead, particularly as individual and corporate donations become more critical to nonprofit funding.

There’s no universal target for this metric because individual organizational factors strongly influence overhead ratios. But a ratio greater than 35% could be a red flag and warrants further investigation.

5. Program expense (program expenses / total expenses).

Another donor preference is high program expense ratios. This preference is founded on the belief that higher ratios mean more dollars go directly to fulfilling an organization’s mission.

You likely want most expenses to be attributed to your nonprofit’s programs, too. But even Charity Navigator says there’s scant evidence that a program expense ratio greater than 70% leads to greater impact. Still, bear in mind that certain donors may seek out organizations with program expense ratios of at least 70%. In some circles, 85% or higher is considered prime.

Valuable insight

Financial statements will continue to play an important role in your leadership’s decision-making. But every organization can also benefit from tracking carefully selected KPIs. They provide valuable insight into what’s driving your nonprofit’s financial numbers and make it easier to identify noteworthy trends — and act on them.

Should your nonprofit adopt AI?

Winter 2025

AI ImageArtificial intelligence (AI) is rapidly transforming everyday life. But what can it do for nonprofit organizations? And do the potential benefits outweigh risks and costs? This short article looks at the issues.

Possible advantages

AI software is now used for a wide variety of purposes — including machine learning, large language processing and predictive analytics. Nonprofits have integrated AI into their operations to, for example, create personalized email campaigns based on past donor behavior and build predictive models identifying future community needs.

The primary advantages of using AI generally fall under the following categories:

Streamlining repetitive tasks. Nonprofits often are run by a lean staff. AI can help reduce your staff’s workload and free up time for mission-critical activities by automating administrative duties. These include scheduling, data entry, expense tracking and email follow-ups. Chatbots may be able to handle routine donor inquiries, and AI-powered grant management systems can sift through eligibility criteria — often more efficiently than humans.

Reducing costs. By automating manual processes, AI may significantly reduce your operational costs. Predictive analytics can optimize staff scheduling, thus reducing overtime and improving retention rates. AI can also analyze donor databases to identify patterns that would otherwise require hiring expensive consultants. Over time, such efficiencies can deliver substantial savings while improving outcomes.

Engaging Donors. AI excels at personalization — critical for engaging donors. With the right tools, you can segment supporters, predict giving patterns and deliver tailored messages. AI-driven platforms can suggest the most effective timing and channels for outreach, increasing the likelihood of repeat donations.

Potential drawbacks

AI adoption carries risks. AI algorithms have been known to perpetuate bias unintentionally, leading to inequitable service delivery and donor targeting. So transparency is essential. You’ll need to inform stakeholders when you use AI for decision-making and communications.

Keep in mind that reliance on automation could raise questions among your staff about job displacement. Data privacy and security are also pressing concerns, especially when handling sensitive donor information. If you adopt AI tools, increase data security protections.

Then there’s the cost. You’ll need to budget for software subscriptions, training and integration with existing systems. Pilot programs may be the best option because they enable you to test tools on a small scale before making a larger investment.

Values and fiscal limitations

By reducing repetitive tasks, cutting costs and deepening donor engagement, AI can strengthen your organization. But be sure to manage AI risks thoughtfully. Ensure the technology you choose aligns with your organization’s values and fiscal limitations.

When outsourcing accounting might make sense

Winter 2025

AI ImageIf your nonprofit is paring back its budget and even laying off staffers, you might want to think about outsourcing some functions. Start with accounting and financial tasks. It can be less expensive to outsource them than to pay employees to perform them. Also, work associated with such functions often benefits from the oversight of experienced outside professionals.

Reasons to consider it

Nonprofits may outsource accounting work, such as payroll processing, because they lack the staff resources to perform such time-intensive tasks or because the work poses a fraud risk if undertaken in-house. Many nonprofits also outsource obligations such as financial statement preparation and tax compliance because they lack an internal CFO or the expertise to execute high-level financial work.

Most outsourcing solutions are scalable, allowing you to outsource all or only some functions as your staff, financial and technological resources change. Options might include outsourcing payables, receivables and cash transaction processing; account reconciliation; financial statement, budget and forecast preparation; tax and grant reporting compliance; and communication of financial matters to your board.

Finding a service provider

To find an outsourcing partner, ask for recommendations from other nonprofits in your community and professional advisors, such as your attorney and banker. Higher-level work may call for hiring a CPA firm, while an outsource partner could handle routine tasks. For example, consider using a payroll service. Look for providers with extensive nonprofit experience, ask for references and follow up on contacting them.

When vetting potential service providers, make sure you talk with the manager or partner who’ll oversee the work you intend to outsource — even if that person won’t actually perform the job. This can help provide continuity of service and be a valuable resource to your nonprofit’s senior management and board.

Also, discuss cost. This can vary widely depending on your needs and factors such as your geographic location and niche. Services might equal or even exceed what you’d pay an experienced accountant internally — or might cost less. Keep in mind, however, that with an outside firm, you pay only for the amount and level of services you require. Accounting employees, on the other hand, could spend time doing work that someone at a lower pay level could perform. Outsourcing also saves your nonprofit the expenses associated with a regular employee, such as payroll taxes and health insurance.

Make a smooth transition

Once you’ve settled on a provider, discuss how financial data will flow. For example, will your nonprofit send information to the company, or will the company’s personnel perform the work in your office? If a vendor’s unfamiliar with your accounting software, it may need to perform some tasks onsite, at least initially.

Be prepared for other possible transition issues. Generally, there’s a learning curve as a service provider familiarizes itself with a client’s policies, procedures and systems. You can help smooth the way by assigning the vendor or firm to a single point of contact within your organization.

The buck stops with you

Keep in mind that even if you engage a full-service CPA firm, financial governance remains the responsibility of your nonprofit’s board of directors. External service providers can provide financial and accounting advice, but the buck ultimately stops at your board and executives.