All posts by Mike Sperling

Add “tax reporting” to your special event’s to-do list

Fall 2025

Special events, such as galas, conventions and sports tournaments, require an enormous amount of planning. So you’d be forgiven if you pushed “tax compliance” to the bottom of your to-do list. However, tax reporting for nonprofit events may differ from and be more complex than what you’re accustomed to with other activities. So the sooner you start thinking about it, the better.

Reporting requirements

If your organization adheres to Generally Accepted Accounting Principles (GAAP), you typically report revenue and expenses related to special events on your financial statements as net special event revenue. For tax purposes, though, your organization may need to report some of the event ticket revenue as contributions on your IRS Form 990. For example, if attendees pay more for a ticket to a dinner than the dinner’s fair market value (FMV), the excess would be a contribution.

You also must report other special event data on Form 990 if you have more than $15,000 in fundraising event gross income and contributions. Complete Schedule G, “Supplemental Information Regarding Fundraising or Gaming Activities.” It requires your organization to report amounts for individual events that grossed over $5,000. Besides revenue amounts, you’ll need to report these expenses:

  • Cash prizes,
  • Noncash prizes,
  • Facilities rental,
  • Food and beverages,
  • Entertainment, and
  • All other direct costs.

If your event includes gaming, you’ll need to answer a series of multipart questions. You’ll also need to allocate income and expenses between the gaming and fundraising events.

Goods and in-kind donations

Nonprofits often rely on donated services or facilities, as well as the work of volunteers. Although GAAP generally requires nonprofits to record these types of in-kind contributions and, in some cases, the value of volunteer time, the IRS doesn’t include them in contributions or expenses.

Say a local hayride vendor donates $2,000 of his time and use of his truck to your autumn harvest festival. You must report a donation of $2,000 in services on your financial statement, with a corresponding in-kind expense. But you won’t report the amount in contributions or expenditures for tax purposes.

Goods donated for an event, on the other hand, receive similar treatment on financial statements and tax returns. They’re reported as contribution revenue and, when the donations are used, as expenses. For example, if a vendor donates balls and gloves for a softball tournament, the donation is a contribution. When the items are used at the event, they’re an expense.

Role of FMV

Donors may not be aware of tax rules for participating in a special event, particularly if they’re accustomed to deducting the full amount of cash donations. Help them understand that deductible contributions are reduced by the FMV of the benefit they receive (for example, the meal, entertainment, round of golf or souvenir t-shirt).

You should provide donors with a written statement listing their payment amount and the FMV of goods and services received. If their payments are more than $75, tell them to deduct only the excess of their payment over the FMV. Note that it’s the initial payment amount that triggers the obligation, not the amount of the deductible portion. Also recognize that failure to make this disclosure can result in a penalty of $10 per contribution, up to a maximum of $5,000 per fundraising event.

Careful recordkeeping

As with other kinds of financial reporting, good recordkeeping is essential to accurately reporting special events. Track revenues, expenses and related documentation throughout the planning stage, and ensure that data is easily accessible in one place after your big event. Contact us about special circumstances, such as the additional reporting implications of gaming activities or if you think your event has potentially produced taxable unrelated business income.

Not all audits are the same — A rundown of what your nonprofit might need

Fall 2025

Nonprofit leaders and staff often regard the word “audit” with dread. After all, audits can be disruptive and cumbersome processes that eat up time and resources. But different types of audits come with other obligations and benefits. Here’s what you need to know before you engage a financial professional to conduct an audit.

Independent financial engagements

An independent — or external — financial audit is probably what comes to mind when most people think of audits. In this type, an independent auditor reviews financial statements, transactions, accounts, records, internal controls, and accounting and financial processes and procedures.

Following such examinations, auditors issue an opinion on whether financial statements:

  • Fairly present the organization’s financial position as of the year-end date,
  • Fairly present the organization’s changes in net assets and its cash flows for the year under audit, and
  • Comply with U.S. generally accepted accounting principles.

Auditors may also provide recommendations and a letter to the nonprofit’s audit committee, discussing the audit process and results. (See sidebar, “The case for audit committees.”)

Internal reviews

Internal audits, on the other hand, are performed by members of the nonprofit’s staff. At a minimum, your team should scrutinize the adequacy of your internal controls and the accuracy of your records and reports, and their findings should be reported to your board of directors. They may go further by verifying proper authorization of activities and expenditures and confirming the physical existence of assets.

An internal audit can help you prepare for an independent audit. If you unearth and remedy shortcomings before the independent auditors arrive, you can streamline the overall process and potentially reduce audit-related costs. Even if you don’t find any issues during an internal audit, you’ll have much of the information auditors require already collected and readily available.

Forensic examinations

A forensic audit of an organization’s financial operations is typically triggered by some type of lapse (for example, a data breach) or suspicion of employee wrongdoing. These audits can focus on specific transactions or areas where concerns about fraud have arisen.

Forensic audits should be conducted by an independent forensic auditor or certified fraud examiner who’s capable of thoroughly investigating red flags. The auditor you engage will approach the process with an eye toward collecting evidence that could be used in court (if necessary) and by quantifying any losses.

Focus on operations

As for operational audits, they can help your organization improve its processes and controls. This type of review evaluates systems, productivity, and efficiency (or lack thereof), and auditors may decide to observe and interview staff members to gather information. An operational audit report provides a comprehensive overview of how your organization operates on a daily basis.

The audit’s focus can be narrow — for example, homing in on HR or IT — or it can be broad. Either way, such audits can help your organization refine or significantly improve its practices. Although it may seem like a drain on limited resources during a time of financial uncertainty, an operational audit can help you achieve more with what you have.

Cybersecurity assessments

Increasingly, nonprofits keep vast amounts of data about donors, clients, staffers and others. Your organization may also be subject to data privacy laws, such as the European Union’s General Data Protection Requirements or various state statutes. It’s essential to determine whether your safeguards are sufficient in protecting such data.

A cybersecurity audit can help determine the risks confronting your organization. These could range from employees using weak passwords or falling victim to phishing schemes to outsiders gaining unauthorized access to personally identifiable information. In addition to determining the effectiveness of your safeguards, these audits propose solutions to address any weaknesses.

Keep in mind that cyber risks are constantly evolving. So cybersecurity audits must be conducted periodically — ideally, at least once a year.

Doing your part

Regardless of the type of audit conducted, you and your staff can ease the process for audit professionals. For example, if you maintain accurate records and everyone in your organization closely adheres to internal controls, you can reduce the time and burden of audits.

The case for audit committees

Among other things, your nonprofit’s board of directors is charged with fiduciary oversight. One of the most effective ways of fulfilling this duty is to delegate it to an audit committee. A proactive audit committee can both enhance the benefits of an independent financial audit and reduce fraud.

Audit committees are separate from finance committees (which primarily monitor budgets, investments and financial statements). Your audit committee should oversee the conduct and integrity of your organization’s financial practices and reporting, including risk management, internal controls and, of course, the audit function.

The committee must work closely with external auditors, meeting with them before the audit to discuss the work plan. The committee should also review the auditors’ findings before they’re presented to the board and ensure the board responds appropriately to any recommendations. Finally, this committee plays a critical role in combating fraud. It’s responsible for reviewing whistleblower and antifraud policies, overseeing procedures for uncovering errors or illegal acts, and conducting fraud risk assessments.

Handling controversial contributions

Summer 2025

Handling controversial contributionsIn economically fraught times, it’s hard to envision a scenario in which your nonprofit would turn down a donation. But suppose that donation has the potential to put your organization in the hot seat because the donor is involved in illegal, unethical or controversial activities. In that case, it may be in your organization’s best interest to refuse the financial support.

Point, counterpoint

The risk of reputational damage is a compelling reason to decline controversial contributions. You might find that some of your current supporters are among the most vociferously opposed to these donations. Disagreements also divert attention from your ethical standards and positive accomplishments, not to mention alienating future donors.

However, arguments can be made to hold on to controversial donations. Not every donor is an angel or operating from purely altruistic motives. Insisting otherwise could drastically reduce revenue. The argument goes that money given to a nonprofit generally benefits society as a whole, particularly when the recipient engages in social welfare work. And, if you turn away funds, you could have to cut programs, dip into your endowment or sell other assets.

Put research front and center

A simple policy that helps prevent later embarrassment and regret is to research all prospective donors who promise gifts over a certain amount. Most nonprofits can’t afford a full-time staff dedicated to donation due diligence. But you might ask a board member or other volunteer to perform some basic searches. At the very least, search the donor’s name online using terms such as allegation, bankruptcy, bribe, controversy, court, fraud, human rights, investigation, prosecution, unethical and scandal.

Web searches can uncover vital information, including the source of a donor’s wealth, possible legal entanglements, support for other nonprofits and the historical business practices of any companies they own or control. Pay particular attention to the person’s public statements, such as those posted on social media, as well as stories from reputable news outlets. If such investigations seem outside your nonprofit’s wheelhouse, you may want to pay a professional background search service to look into more prominent donors.

Gift acceptance policy

Include a research requirement in any formal gift acceptance policy. A policy can help guide you when you need to make an important decision under pressure. If you have to refuse a gift, for instance, you can simply point the donor to your policy.

The policy should explicitly state which donations you’ll accept and which you won’t. Most organizations refuse donations of stolen funds or those clearly generated illegally. But what about “clean” donations that you suspect are given to support a dicey donor’s public relations efforts? What about anonymous gifts? Some nonprofits find anonymous donations risky by nature, but you may decide you can safely accept them.

If you accept donations from controversial donors, you’ll likely need to explain that decision at some point. So, include communications guidelines in your gift acceptance policy. Determine who will speak for your organization, which channels you’ll use and how much information you’ll share.

Surprise!

Also establish a process for handling gifts from donors that become controversial only after you’ve received them. It may help to consider this real-life example where the donor’s business actions directly affected the interests of a charity’s clients.

A pharmaceutical company’s new owner made headlines for dramatically increasing the cost of critical medications. At that point, some of his charitable contributions became public. One nonprofit that supports homeless people, some of whom depend on the drugs of the donor’s company, returned his gift. But the donor’s alma mater didn’t. The educational institution apparently decided that the owner’s business decisions didn’t undermine its academic mission.

Stick to your values

Regardless of where you stand on common gift acceptance scenarios, ensure your policy is clear and explicit. Generally, if a donation appears suspicious or inconsistent with your mission, it’s prudent to decline it. In such cases, be sure to obtain board feedback and ensure that all decision-makers are in agreement.

Tax and legal liability — Ease the minds of your volunteers

Summer 2025

Tax and legal liabilityThe number of Americans volunteering for charity dropped dramatically during COVID-19 lockdowns. However, numbers have since rebounded to near pre-pandemic levels, according to the U.S. Census Bureau and AmeriCorps. If your nonprofit is still struggling to find enough volunteers, consider making unfilled positions more appealing to prospective volunteers. How? Start with tax and legal liability. No volunteer wants unpaid work to open the door to extra tax obligations or unanticipated lawsuits.

Answering to the IRS

It may not have occurred to you that federal or state taxing authorities would come after charitable volunteers. But it can happen. Your organization could inadvertently create taxable income for volunteers if you provide them with benefits, services or compensation beyond reimbursements. Reimbursements that exceed actual expenses are taxable. So you should only reimburse actual out-of-pocket expenses incurred while performing volunteer services.

If volunteers occasionally need to cover costs with their own money (for example, purchasing decorations for an event or refreshments for a meeting), inform them in advance that they must provide you with records and receipts of their expenditures. Explain this policy both verbally and in writing.

See you in court

Volunteers also face a risk of being sued for their actions (or inactions) while performing services for your nonprofit. The threat is particularly significant with nonprofits that provide medical services or that work with vulnerable populations such as children or disabled people. However, even simple tasks, such as driving, can result in litigation.

The Federal Volunteer Protection Act of 1997 provides a partial shield for volunteers acting within the scope of their responsibilities. Many states have similar laws to protect volunteers. But the limitations on liability can vary significantly from state to state, with different limits, conditions and exceptions. Consult with your legal counsel to determine if state or local laws might impact your volunteers.

Insurance reduces risk

Keep in mind that volunteer protection laws don’t preempt the need for appropriate insurance coverage. Some state laws explicitly require nonprofits to carry insurance to limit volunteer liability. To minimize risk, carry comprehensive general liability insurance that specifically covers volunteers, as well as Directors and Officers liability insurance. If volunteers will operate your nonprofit’s vehicles, check whether your auto policy covers them and, if necessary, add them as insureds. Larger organizations might consider amending their bylaws to include a broad indemnification clause for volunteers if claims against them exceed insurance limits.

Additionally, consider implementing processes and procedures to mitigate the risks of harm or injury caused by volunteers. For example, devote time upfront to screen and train volunteers appropriately and restrict certain client-facing activities to employees. If you work with at-risk populations, it’s a good idea to perform background checks on volunteers and provide close staff supervision when volunteers are working with clients.

Other ideas

Tax and legal liability may not be top-of-mind for all volunteers, but it’s something you should consider when recruiting them. Other ways to attract people include writing detailed job descriptions or asking potential volunteers how they’d like to contribute to your organization — and then creating positions to meet their needs.

ASU 2023-08 — New accounting rules for crypto donations go into effect

Summer 2025

PSNsu25Nonprofits increasingly receive donations in the form of cryptocurrencies such as Bitcoin and Ethereum. As digital assets have become more common, so has the need for clear and consistent accounting standards. The Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2023-08 to help tax-exempt organizations recognize and report crypto donations. This new guidance took effect for fiscal years beginning after December 15, 2024, and nonprofits are permitted to adopt it early. If you haven’t already, get up to speed on the rules.

What does it change?

In the past, cryptocurrency holdings were recorded as indefinite-lived intangible assets under ASC 350, similar to the treatment of any trademarks or copyrights. ASC 350 required organizations to report crypto at the lowest value it reached since acquisition (referred to as “impairment”), even if the asset later regained or exceeded its original value. Such reporting can lead to distorted financial statements.

ASU 2023-08 introduces a significant change: Cryptocurrencies must now be measured at fair value, and any shifts in value must be recognized in the statement of activities. This enables you to:

  • Report the current market value of crypto assets on financial statements,
  • Recognize both gains and losses as they occur, and
  • Reduce the need for complex impairment testing.

Note: These new rules apply to crypto assets that are intangible and fungible and that don’t provide enforceable rights to goods or services.

Implications for nonprofits

For charitable organizations, ASU 2023-08 has several important implications. First, nonprofit financial statements are likely to reflect the real-time value of crypto donations more accurately, thereby aiding your decision-making. Also, these rules replace a burdensome impairment model with a more straightforward fair value approach, saving you time and reducing audit complexities.

However, understand that fair value accounting will introduce more visible swings in the value of crypto donations, especially if you hold them for extended periods. Ensure you have access to reliable market data for valuing crypto assets. You may also need to review your organization’s internal controls regarding crypto custody and valuation.

Take action now

ASU 2023-08 uses a fair value model to align cryptocurrency accounting with reporting for other market-traded investments such as stocks. To prepare for the change, your nonprofit should review its crypto-related policies and consult with your board’s audit or finance committee to help ensure smooth implementation. Accounting for crypto remains a complex endeavor, so reach out to us.

What now? — Filling funding gaps made by government cuts

Summer 2025

What Now? Filling Funding GapsIf your nonprofit depends on government grants — particularly federal government grants — you’re probably dealing with a lot of uncertainty right now. But even if funding for the next year (or longer) is in doubt, your organization has options. Several avenues may be available to replace lost revenue. Let’s take a look.

Big piece of the pie

According to the Urban Institute, government funding accounts for approximately one-third of the revenue flowing into the nonprofit sector. This includes state and local government grants that often are funded indirectly by the federal government.

In every state, 60% to 80% of nonprofits that receive government grants would be at risk of financial shortfall without this funding. A reduction or elimination of federal funding can easily threaten an organization’s survival.

Proactive steps

Taking specific steps can help mitigate the financial consequences associated with funding cuts. Management should, for example:

1. Assess the risk. Don’t wait until you receive notice of a funding cut. Assess potential damage now to plan appropriately. If you suffered funding cuts or delays in early 2025, you may already know how further cuts would affect your budget and ability to pursue your nonprofit’s mission.

For a better handle on the situation, review upcoming expenses and liquid assets on hand to determine how many months of operating expenses you’d likely be able to cover. The shorter the period, the sooner you should act to line up other revenue sources or reduce spending (see “Cost cutting: The other side of the coin” below).

2. Reach out to donors. As many did during the COVID-19 pandemic and the 2008 recession, some major donors may be willing to waive or at least relax restrictions on their gifts, allowing you to use the funds for operations and programming. To encourage the support of other donors, illustrate the outcomes made possible because of previous gifts and explain in concrete terms the impact of lost federal funding. For instance, show how many people will go without meals, job training or health care. Also, highlight the tax benefits of donating through a donor-advised fund or IRA charitable distribution.

3. Pursue major gifts. For some organizations, the threshold for a major gift might be $1 million, but for many small nonprofits, $1,000 could be a sizable contribution. You can identify possible major gift sources by listing your top 50 to 100 active funders. Research them to determine if they have the wealth and philanthropic inclinations to make more significant gifts. Then, develop a compelling message that conveys the urgent need for substantial donations to your organization.

Ensure that appeals to these supporters are delivered personally, not via mail or email. Your executive director and board members might call or arrange to meet with those on your list. Even if individuals or grant makers don’t give immediately, nurturing such relationships can pay off down the road when they’re inclined to provide financial support.

4. Encourage planned giving. It may seem like a luxury to devote limited resources to planned giving when facing near-term budget holes. However, 2025 is prime time to discuss the topic with Baby Boomers. The so-called Great Wealth Transfer, during which Boomers are expected to leave about $84 trillion by 2045, is already on.

If you secure planned giving agreements, you aren’t only boosting future financial support. Research published in the University of California Davis Law Review suggests that annual giving naturally increases when individuals incorporate a charitable component into their estate planning. It shouldn’t necessarily reduce current support, particularly if you have longtime donors with an emotional stake in your organization.

Time to get creative

Over the next several years, your nonprofit may need to become more creative to ensure it has sufficient financial resources. We can help you assess your current financial situation and suggest revenue-generating ideas.

Cost-cutting: The other side of the coin

If you lose a critical piece of your nonprofit’s funding, you might need to look for ways to offset the decline on the other side of the ledger — by reducing expenses. Possibilities include:

Staffing. Reducing staff expenses doesn’t necessarily mean layoffs. You could, for example, increase remote work, which might allow you to reduce facilities costs. You could also trim hours or employee benefits.

Facilities. For most nonprofits, rent or mortgage payments take a significant bite from their budgets. If you have multiple sites, consider consolidating them into a single location. Or ask your landlord or mortgage lender if they’re willing to negotiate lower monthly payments. And if you own your facilities, think about renting out unused space.

Collaborations. Many other nonprofits are in the same situation. Consider finding one willing to share space or other resources. Or you could combine purchase orders with those of one or more other organizations to obtain lower prices or discounts from vendors.

Endowment management 101

Winter 2024

If your nonprofit has an endowment, you understand that it’s a major responsibility. For example, organizations must adhere to certain regulations, including when it comes to spending from investment income. For this reason, many nonprofits opt to have a financial professional manage their endowment investments. But even if you have professional guidance, it’s important for both your staff and board members to know the basics of endowment management.

Making prudent decisions

First, it’s important to distinguish endowments from operating reserves. Endowments generally are designed to provide steady income while their core investments grow untouched. That steady income can be a financial safeguard in times of crisis.

A significant portion of most nonprofit endowment assets are restricted funds. Organizations generally must conform to provisions of the Uniform Prudent Management of Institutional Funds Act (UPMIFA). Among other things, UPMIFA allows nonprofits to include appreciation of invested funds as part of what’s “spendable” in addition to realized gains, interest and dividends.

UPMIFA also provides guidance for “prudent” decisions. It suggests that spending more than 7% of an endowment in any one year generally isn’t fiscally responsible; however, not all states have enacted this provision. And UPMIFA specifies procedures for nonprofits to change an endowment’s purpose — useful for those that may be dedicated to obsolete or impractical purposes.

Creating a spending policy

Your spending policy should define how much of your endowment fund’s income can be spent on operations each year. Often, this is defined as a percentage of between 4% and 7% of a rolling average of endowment investments. A rolling average helps even out the ups and downs of market returns and prevents the endowment’s contribution to any one budget year from being significantly lower than contributions to other years.

However, this approach doesn’t address whether your endowment fund will be able to maintain a similar level of funding for future operations. Also, because investment returns usually don’t correspond to the inflation rates that affect your operating budget, your spending policy should be based on more than just recent returns. To factor inflation into your spending policy, you might start with a relatively conservative, inflation-free investment rate of return. Then, adjust it for inflation to arrive at a spending rate you can apply on an annual basis.

Keeping it current

If you haven’t done so recently, now’s the time to review your organization’s endowment spending policy. Economic realities or developments within your nonprofit may have changed since your policy’s inception. Check with your CPA or investment professional to discuss changes to your policy to meet your needs.

Understanding board-designated net assets

Winter 2024

Sometimes donors put restrictions on their donated funds, and in other instances, nonprofit boards place limits on certain assets. Board-designated net assets can prove critical to the survival of programs, projects — or even your organization itself. Let’s take a closer look.

What they are

The term “board-designated net assets” generally refers to funds that haven’t been restricted by donors but are subject to self-imposed limits on their use. They’re typically intended to ensure that funding is available when needed. Board-designated funds also can play a role in fundraising by demonstrating your organization’s commitment to a specific plan or program.

They may be designated for a special, one-off purpose or set aside on an as-needed basis for a specified period of time (for example, covering contingent liabilities that may or may not arise). Unlike net assets with donor restrictions, where only the original donor may remove the restrictions, designated funds can be undesignated at the discretion of your board of directors and therefore are considered to be unrestricted.

In most cases, funds are designated by a board, but, in some organizations, a board assigns this responsibility to management. Ideally, it’s assigned to specific positions (such as chief financial officer) that possess the requisite knowledge and judgment, rather than to specific individuals. In such circumstances, be sure to formally document these delegations. In addition, have your board regularly review actual designations made by management. And, of course, properly document every net asset designation.

When to disclose them

There are benefits to taking the time to properly document board designations. For example, the practice will make it easier to comply with financial reporting requirements in Financial Accounting Standards Board Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. ASU 2016-14 requires nonprofits that follow U.S. Generally Accepted Accounting Principles to disclose board-designated net assets and their purposes on their financial statements or in the notes to those statements.

Also bear in mind that designating net assets can affect the amounts in your liquidity and the availability disclosure. Designating a large chunk of cash for a capital project, for example, could reduce your liquidity.

How to manage them

Your organization should adopt formal policies and procedures related to managing board-designated net assets. For example, your policy should require your board to establish objectives for designated net assets. That might include providing an internal line of credit to better manage cash flow and allow financial flexibility. Other objectives could be related to funding future programs or projects, maintaining reserves, or funding an endowment.

Be sure your policy clearly delineates authority. Document whether it’s your board or management that can designate and undesignate funds, and under what circumstances exceptions are allowed.

Finally, describe procedures for monitoring designated net assets, including stating whether funds will be segregated. Procedures are necessary to track expenditures and comply with applicable reporting requirements as well.

Take a closer look

Board-designated net assets have their own obligations and responsibilities. If your organization is considering this option, consult with your CPA to help with the details.

Highlights of the revised Uniform Guidance

Winter 2024

Federal agencies were required to adopt the U.S. Office of Management and Budget’s (OMB) latest revised Uniform Guidance (UG) by October 1, 2024. It affects organizations with a fiscal year ending September 30, 2025, and later. The revisions are being welcomed by many nonprofit organizations because the changes aim to help reduce the burden on recipients and subrecipients of federal grants and other financial assistance. Read on to learn about some of the ways OMB is trying to make life easier for nonprofits.

Raise the thresholds

The revised UG increases several important thresholds, such as the threshold for determining if your organization is subject to a single audit of its financial statements and programmatic compliance. The audit requirement now applies only to nonprofits that spend at least $1 million in federal financial assistance in the fiscal year, up from a previous $750,000.

It also amends the Type A/B threshold for entities with total federal expenditures of $34 million or less (an increase from $25 million). For these organizations, the threshold to determine if a program is Type A for purposes of the single audit major program determination rose to $1 million from $750,000. The threshold for Type B programs requiring risk assessment increased to $250,000. Additional changes have been made to the thresholds for organizations with total annual federal expenditures exceeding $34 million.

The thresholds for equipment and unused supplies doubled to $10,000. As a result, you can expense equipment purchased for less than $10,000 — rather than capitalizing it over time — and keep, sell or otherwise dispose of it with no further responsibility to the federal agency. In addition, if unused supplies exceed $10,000 in total aggregate value at the termination or completion of a project or programs (and the supplies aren’t needed for another federal award), you must retain them to use on other activities — or sell them. Either way, you’re required to compensate the federal government for its share.

Increase the de minimis cost rate

The de minimis indirect cost rate has increased from 10% to 15% of Modified Total Direct Costs (MTDC). You may apply for lower rates if desired, but you can’t be required to apply for lower rates, unless mandated by statute. The revised UG makes clear, too, that pass-through entities must accept federally negotiated indirect cost rates for subrecipients. This means that if your nonprofit has negotiated rates with one federal agency, it will receive the same cost rate from all other federal, state and local agencies.

Note, though, that the revised UG changes the exclusion amount for subaward costs in the MTDC computation. It jumps from $25,000 to $50,000. OMB has also indicated that it might permit recipients and subrecipients to use direct labor as the base for the de minimis rate (instead of the MTDC) at some point in the future.

Encourage community engagement

The UG includes several changes that recognize that the communities most in need of assistance often have trouble navigating the complex process of grant application. For example, it eliminates the requirement to use English in notices, applications and reporting. The revised UG also requires federal agencies to improve the official descriptions of their programs (referred to as “Assistance Listings”) in the Federal Program Inventory, a new searchable website with information on the spending associated with all federal assistance programs.

Further, it instructs federal agencies to simplify their Notices of Funding Opportunities. For example, agencies must now provide basic information at the top of a grant announcement and use plain language, not jargon, when describing program requirements.

Leverage opportunities

Although many of the UG’s changes are favorable for nonprofits, the changes may require some adjustments to policies within your organization. We can help you understand the changes and advise on ensuring compliance.

Time to review compensation? — Keep excess benefit transactions in mind

Winter 2024

In a tight job market, where nonprofit organizations are competing with for-profit businesses for talent, you may find it necessary to raise your compensation. If so, keep in mind the potential tax penalties that can result if the IRS deems your compensation more than reasonable. Here are some answers to common questions on the topic.

Who’s involved?

Excess benefit transaction (EBT) rules generally apply to “covered organizations,” meaning 501(c)(3) and 501(c)(4) organizations. They don’t, however, apply to private foundations. The rules also involve “disqualified persons,” including:

  • Individuals in a position to exercise substantial influence over your organization’s affairs,
  • Family members of disqualified individuals,
  • Entities in which disqualified individuals have a 35% or greater stake,
  • Individuals able to substantially influence a Section 509(a)(3) supporting organization, and
  • Donors and donor advisors involved in transactions with donor-advised funds (DAFs).

Family members generally include a disqualified person’s parents, siblings and their spouses, children and their spouses, and grandchildren and their spouses. Under proposed regulations, the definition of “donor-advisor” would include personal investment advisors who manage the investment or provide investment advice related to both the DAF assets and the donor’s personal assets.

What’s an EBT?

Generally, an EBT is a transaction with two components:

  1. A covered organization must directly or indirectly provide an economic benefit to a “disqualified person,” and
  2. The value of the benefit must exceed the value of the consideration the nonprofit received in exchange from the disqualified person.

The IRS examines all consideration and benefits exchanged.

What are the potential tax risks?

Although revocation of your tax-exempt status technically is possible, in practice, the sole penalty is “intermediate sanctions,” also known as an excise tax. Disqualified individuals who engage in EBTs face an excise tax of 25% of the excess benefit received. They should make a timely correction to the transaction by, for example, returning the excess benefit. If they don’t, the IRS will impose an additional excise tax of 200% of the excess benefit.

Notably, your nonprofit’s managers also are at risk of a financial penalty. A manager found to have knowingly participated in an EBT might end up on the hook for a 10% tax on the excess benefit up to $20,000, to be paid by the individual.

How can you reduce threats?

The tax regulations provide nonprofits a safeguard known as the “rebuttable presumption of reasonableness.” The compensation you pay disqualified persons is presumed to be reasonable if you satisfy three requirements:

1. Advanced approval from an authorized body. The compensation arrangement should be approved by your board of directors or a board committee composed entirely of individuals who don’t have conflicts of interest.

2. Comparability. The authorized body must obtain and rely on appropriate data on the comparability of the compensation before making its determination. Appropriate data includes compensation paid by similar organizations for comparable positions, the availability of similar services in your geographic area and current compensation surveys compiled by independent firms.

3. Documentation. The authorized body needs to adequately — and concurrently — document the basis for its determination. Documentation must note the transaction’s terms and the date it’s approved; the members of the authorized body present for debate of the transaction and who voted on it; and any actions taken by a member who has a conflict of interest.

The documentation also must include comparability data and how it was obtained. This can be difficult to come up with — but smaller organizations are in luck. Authorized bodies of nonprofits with annual gross receipts of less than $1 million can fulfill the requirement if they have data on compensation paid for similar services by three comparable organizations in the same or similar communities for similar services.

Protect your organization

Rising salaries are a fact of life for many organizations. To avoid penalties, take the time to get reasonable-compensation reviews for your highest-paid employees. We can help you through the review process.