August 2015

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Many nonprofit organizations rely on volunteers who provide many hours of valuable service to help the organization achieve its mission. Sometimes volunteers have out-of-pocket expenses while performing volunteer work. If the nonprofit reimburses the volunteer for those expenses, it will result in taxable compensation, unless the reimbursement is made pursuant to an accountable plan.

An accountable plan is a reimbursement or other expense allowance arrangement (plan) that requires a volunteer receipt to substantiate covered expenses and return any unsubstantiated advances. Per IRS Treasury Regulation 1.62-2(c), there are three basic rules that must be met for the plan to be accountable. These rules are generally applied on a recipient-by-recipient basis.

  1. The plan should only pay reimbursements and allowances for reasonable expenses that have a business connection. The volunteer must have paid or incurred deductible expenses while performing services for the nonprofit related to its exempt purpose. Examples of expenses include, but are not limited to, lodging and meal expenses while away from home overnight for nonprofit business and mileage reimbursed for the volunteer using his or her personal automobile for nonprofit related travel. Please note that per IRC Section 170 (i), the mileage reimbursement rate is $0.14/mile for volunteers. Any excess amount "reimbursed" to a volunteer that is not considered a common law employee is compensation reported on Form 1099-MISC.
  2. The volunteer must provide adequate substantiation for the expenses being reimbursed within a reasonable period of time. Substantiation can include completing an expense reimbursement form or submitting a detailed written record detailing the expense amount, when and where incurred, and relationship of the nonprofit organization's activities. Supporting documents can be original receipts or copies. Please note electronic documentation is also permitted. The nonprofit should exercise control over amounts paid to ensure only ordinary and necessary business expenses are paid.
  3. If expense advances or allowances are paid to a volunteer, any excess advances that exceed substantiated expenses must be returned by the volunteer to the nonprofit organization within a reasonable period of time.

Reasonable period of time is mentioned a few times in Regulation 1.62-2(c). So what is a reasonable period of time? The definition of reasonable period of time depends on the facts and circumstances of your situation. However, regardless of the facts and circumstances of your situation, actions that take place within the time specified in the following list are treated as taking place within a reasonable period of time:

  1. Volunteers receive an advance within 30 days of the time they have an expense.
  2. Volunteers adequately account for their expenses within 60 days after these expenses were paid or incurred.
  3. Volunteers return any excess reimbursement within 120 days after the expense was paid or incurred.
  4. Volunteers are given a periodic statement from the nonprofit organization (at least quarterly) that asks them to either return or adequately account for outstanding balances and that they comply within 120 days of the statement.

If the rules for an accountable plan aren't followed as discussed above, reimbursements, advances, or allowances must be treated as employee compensation to the volunteer. This is reported on a Form W-2, and the "reimbursement" is subject to Federal income tax withholding and FICA taxes just like any other form of compensation. This results in taxable income to the volunteer and additional FICA taxes to the nonprofit organization. As a nonprofit, it is important to review your accountable plan to make sure it is in compliance for both volunteers and employees.

Volunteers can claim a charitable deduction for their unreimbursed out-of-pocket expenses incurred in providing services to an IRC Section 501(c)(3) organization. These expenses require substantiation similar to the substantiation rules if the volunteer donated money to the organization. Substantiation requires the donor or volunteer to produce one of the following:

  1. A cancelled check.
  2. A receipt showing the donee's name, contribution date, and contribution amount (or a letter or other communication from the donee).
  3. Other reliable written records if neither (1) or (2) are available.

Unreimbursed expenses of $250 or more must be supported by a contemporaneous written acknowledgment from the donee, in addition to meeting one of the three previous recordkeeping requirements. Organizations should remind their volunteers of the opportunity to deduct their out-of-pocket expenses and be diligent in providing the documentation required to support the volunteer's deduction.

Another item that nonprofits should be aware of is the excess benefit and disqualified persons (DP) rule. An excess benefit is generally defined as the amount by which the economic benefit received by a DP exceeds the value of the consideration given by the DP. Disqualified persons include voting directors, certain key officers, and other employees who have substantial influence over the affairs of the organization. If a DP receives an excess benefit, he or she is subject to a 25% excise tax on the excess amount.

If you would like more information on accountable plans or any of the other topics discussed here, please contact us.

Curt BachAuthor: Curt Bach, CPA    

Contact: 715.748.1351 or cbach@hawkinsashcpas.com

 

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Recording and Releasing Donor Restrictionsrestriction 

 

When a donor makes a contribution, nonprofits must have the proper policies and procedures in place to ensure the funds are being spent in accordance with the donor's intent for the donation. Knowing when there is a restriction on a contribution and complying with that restriction is one of the most difficult aspects of nonprofit accounting.

The first step in ensuring proper policies and procedures are in place to spend funds in accordance with the donors' wishes is to understand the different types of donor restrictions. There are three types of donor restrictions, which are described below: unrestricted, temporarily restricted and permanently restricted. Once this is understood, a proper system for tracking restrictions is a necessity.

Donor Restrictions

Is the donor okay with the contribution being spent based on the greatest need as determined by management? If the answer is yes, this would be an unrestricted contribution. When seeking donations, instead of asking donors to support individual projects or purchases, consider requesting donations that support the organization as a whole. This will provide the organization with more flexibility when it comes to spending the contribution.

The donor may request that the donation be spent on a certain item, or for a certain purpose. This would be a temporarily restricted contribution. Temporarily restricted contributions require more tracking because once the restriction has been met; the revenue will need to be released to unrestricted revenue.

The last type of donor restriction is permanently restricted. With this type of contribution, the donor's intent is for the principal amount to stay intact indefinitely while the earnings may be spent. In some cases, the earnings may be unrestricted and at other times, earnings may be temporarily restricted.

Tracking Donor Restrictions

It is very important to keep documentation of the donor restrictions and to track these restrictions either in the general ledger or other software, such as Microsoft Excel. This will help when dealing with net assets released from restriction. By keeping proper documentation of the restrictions and spending of the restricted dollars, it becomes easier to demonstrate to the donors, auditors and the Board of Directors that the funds were spent in accordance with donor restrictions. For example, a donor may stipulate that the contribution be spent on supplies. This would be recorded as a temporarily restricted contribution and an increase in temporarily restricted net assets. Once the organization purchases the supplies, a release from restriction will be recorded resulting in a decrease in temporarily restricted net assets and an increase in unrestricted net assets.

One option to streamline the release from restriction is to adopt a policy that would allow for temporarily restricted funds to be considered unrestricted if the restriction has been met in the same period the funds were received. In order to adopt this policy, the organization must treat all donor-restricted contributions similarly and consistently follow the policy. Also, the policy must be disclosed in the notes to the financial statements.

By understanding the type of restriction and properly tracking the restrictions, nonprofit management can ensure donors that their money is being spent in accordance with their intent. If you have questions, please contact us.

Author: Briana Peters, CPA

Contact: 920.337.4549 or bpeters@hawkinsashcpas.com

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Mike Huck, CEO of Lakeshore CAP, shown on right, presents check to Silver Lake College's Backpack Book Club. 

Lakeshore CAP sponsors an annual volunteer recognition dinner to celebrate the organizations and individuals who step up to the plate to assist those in need in the Manitowoc community. The theme for this year's evening was "Helping, Teaching, Building." The dinner recognized organizations that rely on volunteers as well as the volunteers themselves.

"People volunteer for a variety of reasons, but universally desire to contribute to the mission of the organization or project they are assisting," said Mike Huck, CEO of Lakeshore CAP.

Lakeshore CAP awarded $3,000 to three volunteers and three organizations. The individual winners received a $500 check for their cause, given in the name of the volunteer. Organizations selected as winners this year included Painting Pathways Clubhouse, 1st Presbyterian Church and Congregation, and Silver Lake College's Backpack Book Club. Past winners of the awards have been the Miracle League of Manitowoc County, the Lakeshore Humane Society and the reading program at Silver Lake College.

This annual event also benefits the work of Lakeshore CAP in its mission to assist families and individuals in achieving economic self-sufficiency. Serving Door, Kewaunee, Manitowoc, and Sheboygan counties in Wisconsin, the Lakeshore Community Action Program promotes self-sufficiency and well-being with individuals and families through results-based programs, services, and partnerships delivered by an understanding staff with resources to provide appropriate solutions. Visit their website to learn more, www.lakeshorecap.com.

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Public Disclosure Requirementsrequirements

Organizations that are tax exempt under IRS Section 501(c)(3) vary significantly in size and mission, but they all have one thing in common. All must comply with federal tax laws, including the requirement to make certain documents available to the public upon request.

If someone makes a request and your organization fails to comply, an IRS audit and substantial penalties could result.

Application for Exempt Status

Section 501(c)(3) organizations that applied for tax-exempt status after July 15, 1987, must make a copy of their application (Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code) available for inspection and/or provide a copy when requested. The requirement covers all supporting documents and IRS correspondence related to the application.

Note: Organizations may charge a reasonable fee (no more than the per-page fee the IRS charges) for providing copies. Also note that the names and addresses of contributors listed on an exemption application are subject to public disclosure.

Information Return

Exempt organizations also must make their annual information return available for inspection and copying. This includes Form 990, Return of Organization Exempt from Income Tax, or Form 990-EZ, plus all schedules, attachments, and supporting documents. Organizations must generally make their returns available for three years and are generally not required to disclose the names or addresses of the contributors listed on Schedule B (some exceptions apply).

Income-tax Return

The public must be permitted to inspect or make copies of any Form 990-T, Exempt Organization Business Income Tax Return, filed by a 501(c)(3) organization after August 17, 2006 (along with all related schedules, attachments, and supporting documents). These documents must also be made available for a three-year period.

Compliance

If someone walks into your office and requests a copy of one or more of the documents covered under these rules, you should generally provide it the same day the request is made. The time frame for responding to written, faxed, or e-mailed requests is generally 30 days.

Another way to comply with the requirement to provide documents for copying is to make them widely available on your website or the website of an organization that maintains a database of such documents. Then, when someone requests copies, you can refer them to the appropriate website.

Penalties

Responsible persons who fail to comply with document requests may be subject to penalties. The daily penalty is $20, with a maximum penalty of $10,000 for each failure to provide a copy of an annual information return. There is no maximum penalty for failing to provide a copy of an exemption application.

Disclosure Rules for Quid Pro Quo Contributions

This is a slightly different type of disclosure rule. Organizations that hold fundraising events where something of value is provided (e.g., dinner, door prize, etc.) in return for contributions must disclose the fair market value of the service or item being provided in its fundraising materials.

Facts About Volunteering

In February, the U.S. Bureau of Labor Statistics published data on volunteering in America.* According to the report, approximately one in four Americans (25.3%) volunteered between September 2013 and September 2014. The volunteer rate for women was higher than for men (28.3% compared with 22.0%), and married people volunteered at a higher rate than those who never married (30.0% compared with 20.2%). The age group with the highest volunteer rate for the period was the cohort of 35- to 44-year-olds (29.8%).

It's interesting to note that the age group with the highest volunteer rate is most likely the busiest in terms of juggling work and family responsibilities. But the data is consistent with the results of a recent study** that found that working people who volunteer are healthier and more satisfied with their work-life balance, even though they have more on their plates than those who don't volunteer.

* Volunteering in the United States, 2014

** Funded by the Swiss National Science Foundation
 

Contact: Sandy Jensen, CPA

 

608.793.3126 or sjensen@hawkinsashcpas.com

 

Meet a Member of Our Teammember
Lora Vandevoorde, CPA  
 
I've been providing nonprofits audit and accounting services for 10 years. I like how unique nonprofit accounting and reporting can be. As an in-charge auditor, I am often my clients' first contact if they have accounting questions.  Although I often know the answer, I love when they challenge me with tough accounting questions.  I enjoy learning new things about nonprofit accounting and reporting almost as much as I enjoy teaching my clients something new.

I grew up in De Pere, WI, and graduated from UW-Green Bay. I achieved my CPA designation in 2008. I am a member of the American Institute of Certified Public Accountants, Wisconsin Institute of Certified Public Accountants, and Green Bay Area Chamber of Commerce-Young Professionals.