private benefit
,

Trouble For Nonprofits Who Ignore IRS’s Private Benefit Provisions

Not-for-profits that ignore the IRS’s private benefit and private inurement provisions do so at their own peril. These rules prohibit an individual inside or outside a nonprofit from reaping an excess benefit from the organization’s transactions. Violation of such rules can have devastating consequences.

Defining private benefit terms

A private benefit is any payment or transfer of assets made (directly or indirectly) by your nonprofit that’s beyond reasonable compensation for the services provided or the goods sold to your organization, or that’s for services or products that don’t further your tax-exempt purpose. If any of your nonprofit’s net earnings inure to the benefit of an individual, the IRS won’t view your nonprofit as operating primarily to further its tax-exempt purpose.

The private inurement rules extend the private benefit prohibition to your organization’s “insiders.” The term “insider” or “disqualified person” generally refers to any officer, director, individual or organization (as well as their family members and organizations they control) that’s in a position to exert significant influence over your nonprofit’s activities and finances. A violation occurs when a transaction that ultimately benefits the insider is approved.

Never too careful

Of course, the rules don’t prohibit all payments, such as salaries and wages, to an insider. They simply require that a payment be reasonable relative to the services or goods provided — and that it be made with your nonprofit’s tax-exempt purpose in mind.

To ensure you can later prove that any transaction was reasonable and made for a valid exempt purpose, formally document all payments made to insiders. Also ensure that board members understand their duty of care. This refers to a board member’s responsibility to act in good faith, in your organization’s best interest, and with such care that proper inquiry, skill and diligence has been exercised in the performance of duties.

Protect your exempt status

Any amount of private benefit or inurement is enough to cause the loss of your organization’s tax-exempt status. And individuals involved may be subject to significant excise tax penalties. Contact us if you have questions about how to maintain your exempt status.

private benefit
,

Tax Exempt? Why Your Nonprofit Must Avoid Excess Private Benefit Transactions

Not-for-profits that ignore the IRS’s private benefit and private inurement provisions do so at their own peril. These rules prohibit an individual inside or outside a nonprofit from reaping an excess benefit from the organization’s transactions. Violation of such rules can have devastating consequences and could cause the loss of tax exempt status.

Defining terms

A private benefit is any payment or transfer of assets made (directly or indirectly) by your nonprofit that’s beyond reasonable compensation for the services provided or the goods sold to your organization, or that’s for services or products that don’t further your tax-exempt purpose. If any of your nonprofit’s net earnings inure to the benefit of an individual, the IRS won’t view your nonprofit as operating primarily to further its tax-exempt purpose.

The private inurement rules extend the private benefit prohibition to your organization’s “insiders.” The term “insider” or “disqualified person” generally refers to any officer, director, individual or organization (as well as their family members and organizations they control) that’s in a position to exert significant influence over your nonprofit’s activities and finances. A violation occurs when a transaction that ultimately benefits the insider is approved.

Tax exemption refers to a monetary exemption which reduces taxable income. Tax exempt status can provide complete relief from taxes, reduced rates, or tax on only a portion of items. Examples include exemption of charitable organizations from property taxes and income taxes, veterans, and certain cross-border or multi-jurisdictional scenarios.

Tax exemption generally refers to a statutory exception to a general rule rather than the mere absence of taxation in particular circumstances, otherwise known as an exclusion. Tax exemption also refers to removal from taxation of a particular item rather than a deduction.

Never too careful with your tax exempt status

Of course, the rules don’t prohibit all payments, such as salaries and wages, to an insider. They simply require that a payment be reasonable relative to the services or goods provided — and that it be made with your nonprofit’s tax-exempt purpose in mind.

To ensure you can later prove that any transaction was reasonable and made for a valid exempt purpose, formally document all payments made to insiders. Also ensure that board members understand their duty of care. This refers to a board member’s responsibility to act in good faith, in your organization’s best interest, and with such care that proper inquiry, skill and diligence has been exercised in the performance of duties.

Protect your private benefit and tax exempt status

Any amount of private benefit or inurement is enough to cause the loss of your organization’s tax-exempt status. And individuals involved may be subject to significant excise tax penalties. Contact us if you have questions about how to maintain your exempt status.

If you need a hand estimating quarterly taxes, tracking mileage and expenses and paying or collecting invoices, My Small Business Accountants can help. Click here to schedule a free, no obligation consultation, or give us a call at: (703) 534-6040

How To Get More From Your Non Profit Budget Sheet

Is your non profit budget offering enough (or the right) programs to keep members active and engaged? New programs require time, effort and money. So when you commit to developing one, you want to get the biggest bang for your buck.

Here are some simple non profit budget dos and don’ts to get the most out of your budget sheet.

DO consult your members. Through focus groups, surveys and informal conversations, gather information about issues your membership is facing. Note gaps between your budget sheet, current program offerings and members’ wants and needs.

DON’T support foregone conclusions. Spinning member feedback to match what you think your organization needs is a big mistake.

DO target specific outcomes that align with your non profit budget. Identify the intended outcomes of proposed programs and attach to them strategic, realistic and timely goals within your budget sheet.

DON’T lose focus. Consider only program ideas that will directly contribute to your association’s mission, vision and overall goals.

DO protect your creation. If your new program is unique, protect it with appropriate trademarks, service marks, copyrights, and patents.

DON’T go it alone. Whenever possible, share expenses and resources by partnering with other organizations. Alliances can lend depth, breadth and impact to programs. Your budget sheet will thank you for it.

DO keep your promises. Deliver new programs on time, on target and on your non profit budget for the greatest impact.

DON’T overspend. Come up with a reasonable budget and stick to it. Make adjustments only when absolutely necessary.

DO start small. Launch new programs slowly and thoughtfully — and then build on initial success as your budget sheet grows.

DON’T worry about perfection. Take chances and try new strategies.

The best ideas often are those most different from what you’ve done in the past. If you seek tools for building your organization’s non profit budget and listing revenue sources on a programmatic/functional basis, we are here to guide you through. We will assist you with budget sheet items including allocation of personnel, direct and indirect non-personnel expenses and more.  For more tips on making the most of your non profit budget, please click here to contact us or give us a call at (703) 534-6040. Our cloud base solution serve clients all over the nation.

5 Nonprofit Accounting Mistakes Your Organization Should Avoid

To err is human, but your not-for-profit’s supporters, not to mention the IRS, may be less than forgiving if errors affect your financial books. Fortunately, if you attend to non profit accounting details, you can avoid these common pitfalls:

1. Failing to follow non profit accounting procedures.

Even the smallest nonprofit should set formal, documented and detailed procedures for managing financial and bookkeeping chores. Your process should include all aspects of managing your organization’s money — how to accept, document and deposit donations, pay bills, and handle every step in between. Put these procedures in writing and make sure you follow each step, every time.

2. Making data entry errors.

It’s easy to wreak havoc on your accounts by entering a $500 payment as $50 or transposing numbers. So check and double-check every entry every time. Reconcile accounts against bank statements immediately, and don’t overlook even the smallest discrepancy.

3. Working without a budget.

You can’t control overspending or invest a surplus if you don’t know they exist. Budgets don’t have to be intricate to be useful; just look at a few months’ worth of bills and deposits to create a starting point. Then refine your plan as you go along. Include a “miscellaneous” category, but don’t allow it to account for the majority of your expenses.

4. Playing loose with petty cash.

Small expenditures like picking up a few office supplies or buying a pizza for volunteers is much easier to do with a petty cash fund. Handle the cash with care, though. Lock it up, authorize only a few people to make disbursements and require receipts for all expenditures.

5. Neglecting to properly categorize.

All money coming in and going out of your organization must be assigned to the appropriate nonprofit accounting category. This is particularly important if you accept donations that may be earmarked for certain programs. To be successful at this, you need to properly set up the initial chart of accounts and define how items should be assigned.

Bonus

If you’ve mastered the steps above, here’s one more thing you can do to take it to the next level.

DOWNLOAD 2 FREE EBOOKS TO SUPPORT YOUR NON-PROFIT BUSINESS

OUR GIFT TO YOU!