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Posts Tagged ‘budget’

When it comes to nonprofits and their tax-exempt status, faith-based organizations (FBOs) must be especially careful when they decide to go beyond “having church” to providing services that benefit the community overall.  For example, when a FBO decides to go from developing Sunday School curriculum for its own use to developing and selling biblical children’s stories to be used by the general public…or when a FBO expands its transitional housing efforts from housing the homeless in their multi-purpose building to providing shelter in homes the FBO has purchased…or when a FBO intends to purchase land not just for a new church building but for other uses such as senior housing and small-shop retail…and the list can go on.

Even though the examples given above can be deemed as extensions of the FBOs overall mission, these “extensions” may be viewed by the Internal Revenue Service differently.  In fact, there are many recent examples of FBOs and their leaders being investigated by the federal government questioning their tax-exempt status.  Ultimately, these investigations were dropped, but the fact remains that as budgets tighten at the federal and state levels, government bodies will continue to aggressively seek additional sources of revenue and FBOs will continue to be potential targets as the line blurs between their charitable and auxiliary activities.

One way to address this possibility is for FBOs to establish independent organizations that can facilitate these activities without jeopardizing the FBOs tax-exempt status.  For example, using the “bible children’s stories” example from above, I would recommend that the FBO create a separate entity (e.g., a publishing company) that would develop, market and sell the products so that the tax-exempt status of the FBO would not be put into question – especially when the income of the publishing company begins to increase substantially.  In addition, if the FBO intends to secure grants for various charitable activities that will benefit the community as a whole, many philanthropic organizations cannot award grants directly to FBOs, but can make awards to non-profit organizations that facilitate these charitable activities.

The examples given above are merely for illustration and not intended to be definitive.  Case law is constantly evolving in this area, so please consult with a local attorney or CPA who can help you wade through these waters.  If you have questions or comments that would help broaden this discussion, please respond.

Be strong and be blessed!

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There’s a lot of discussion going on these days about taxes – whether to increase them or reduce them, what should taxes be spent on, and so forth.  However, there is one item in the tax laws that I hope NEVER goes away – Section 501 of the Internal Revenue Code.  What is this you might ask?  Well, I’m glad you asked!  Section 501 describes organizations that are exempt from taxation.  You may have heard of the term “501(c)(3) organizations”, which describes many of the nonprofit organizations we’re most familiar with.  This entry will briefly describe the process of becoming tax-exempt.

But before I go on, let’s make sure there’s an understanding that there is a difference between being a nonprofit organization and being tax-exempt.  According to the Internal Revenue Service (IRS), nonprofit status is a state law concept.  Nonprofit status may make an organization eligible for certain benefits, such as state sales, property and income tax exemptions.  Although most federal tax-exempt organizations are nonprofit organizations, organizing as a nonprofit organization at the state level does not automatically grant the organization exemption from federal income tax.  Therefore, you must not only become certified as a nonprofit organization in your state, but you must apply to the IRS to become federally tax-exempt.

What are the benefits of becoming tax-exempt?  The two primary benefits of becoming tax-exempt are as follows [1]:

  • Donations to the nonprofit are tax-deductible. With 501(c)(3) nonprofits, donations are tax-deductible to the donor.
  • Access to grants earmarked for 501(c)(3)s. Certain grants and other public allocations are only available to 501(c)(3) organizations.

Is there a fee associated with the application?  The application fee will depend on what your anticipated “annual gross receipts” (AGR) will be – either a fee of $400 for AGR of less than $10,000 during the preceding 4 years OR $850 for AGR of greater than or equal to $10,000 during the preceding 4 years (as of September 2011).

What is the application process?

  • Obtain nonprofit status from your state;
  • Obtain an Employee Identification Number; and
  • Complete and submit Form 1023 (for most organizations) along with supplemental documentation and appropriate fee to the IRS.  NOTE: This process can be a significant investment in time, depending on the amount of work that has already been done (e.g., budget, detailed description of organization and programming, etc.).

There are many organizations, including ours, that assist organizations with completing this application for free or for a nominal fee; however, it is not necessary.  If you have other questions, please visit the IRS’s website or contact me.

Be strong and be blessed!

[1] – Source: http://www.bizfilings.com/learn/tax-exempt-nonprofit.aspx

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By now you should have a general idea of how much money you need to operate and are aware of some funding sources that could contribute toward your efforts (if not, visit some of our earlier blog entries for help).  However, there are still some key questions you should be able to answer, such as “who’s going to actually write the grant applications?” or “what’s the best way to account for these funds?” or “are there other requirements that come with this money and how do I handle them?”…among others.

A good start to answering these questions can be found in identifying some key persons and their associated tasks, including grant writers, grant managers, and bookkeepers/accountants.

Grant Writers
Just as the name implies, grant writers develop the grant package that is sent to potential funders and can assist in identifying other potential funders.  In many organizations (especially start-ups), the organization’s grant writer may also be the board chair or a congregant at the church or a student volunteer or…  In any case, this person ensures that the organization and its programming is placed in the best light for the potential funder to see. 

According to the American Association of Grant Professionals, freelance grant writers must guard against unethical behavior on the part of the organizations on behalf of which they write grants.  Some organizations may try to pay a grant writer only after the grant has been awarded or pay the grant writer with a percentage of the grant money. According to the Association, both of these practices are ethics violations.  Be mindful of this as you consider compensation for your grant writer.

Grant Managers
Consider this scenario:  You got the grant!  Everyone is thrilled…until reality hits.  Someone has to be responsible for administering the project, complying with regulations, reporting to the funder…and that someone is (drums, please) the grant manager.  Regardless of whether you are seasoned professional at a large institution or a volunteer for a grassroots organization, the job of a grant manager is a balancing act – making sure that program staff have the flexibility to accomplish something meaningful, while at the same time that every obligation to the funding source is met. [1]

Bookkeeper/Accountant
Starting out, you may be able to use Microsoft Excel or even a basic version of QuickBooks to account for revenues and expenses for your organization’s administration and programming.  However, as you secure greater amounts of funding from government and philanthropic sources, their compliance requirements may dictate that you seek out an experienced bookkeeper or accountant to report on the use of their funds.  At a minimum, they may require an annual audit of your financing by an independent CPA which, depending on the size of your organization, can cost thousands of dollars.

In conclusion, make sure that your organization’s financial plan include not only raising funds, but properly managing and accounting for these funds as well.

Be strong and be blessed!

[1] – Source: Essentials of Grant Management: A Guide to the Perplexed by Henry Flood (2001).  Article can be found at http://www.tgci.com.

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When it comes to fundraising, knowing where to find the money is as important as how to get it.  We’ve talked some about the “how” in the past, so now we’ll provide a brief introduction to the “where”.

There are five primary sources of funding for nonprofits – individuals, foundations, federated funds, churches/organizations and government [1].

  • Individuals – Individual contributors make up the largest source of giving to nonprofits and once they are contributors, they can become your most fervent advocates.  However, one key disadvantage is the cost associated with developing and reaching these individuals, with a relatively small return per contributor.
  • Foundations – According to the Foundation Center, there are more than 76,000 grantmaking foundations in the United States that give more than $40 billion in gifts annually.  There are three types of foundations: community, corporate and independent.
  • Federated Funds – A federated fund is a cooperative enterprise, owned and controlled by the nonprofit members, whose purpose is raising program and operating capital for each member agency (e.g., United Way).
  • Churches/Organizations – Depending on your organization’s mission, churches and other organizations can become key partners in achieving your goals and objectives.  These organizations are more likely to be a source for volunteers and other in-kind assistance.
  • Government – While a great source for large sums of money, the application process and on-going compliance requirements can be time-consuming and arduous.  To find out about federal government grants, go to www.grants.gov.

We’ll go into more detail on the application process and other issues regarding fundraising in future entries.

Be strong and be blessed!

[1] – Source: managementhelp.org
[2] – Source: www.businessdictionary.com

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After you’ve developed the budget for your organization, you will be in a better position to determine the type(s) of funding you will need.  There is a tendency to only focus on the different SOURCES of funding that are available (which we’ll cover in the near future) rather than recognizing and focusing on funding the different TYPES of needs you have.

In general, there are three primary expense types that require fundraising – operational, capital and programming.  As mentioned in a previous blog, operational expenses are expenditures that a business incurs as a result of performing its normal business operations.  Examples of operational expenses include salaries, office space, and supplies.  Capital expenses are expenditures creating future benefits – for example, fixed assets such as a building, property or equipment [1].  One primary difference between operational and capital expenditures is how they are treated for tax purposes.

As you begin to research funding options, you’ll discover that there are many more opportunities to secure funding for programs than there are for funding operations or capital purchases.  This is because many funders are eager to support the functions that directly impact those whose needs are being met (i.e., programming) and place less of an emphasis on the “indirect” functions that support programming (e.g., salaries and buildings).  However, as one who has been on both sides of the funding table, it is recognized that financial support for the people and assets that support programming is vital for long-term sustainability (there’s only so much that volunteers can or would be willing to do!).

To address this need for financial support for operations, many funding sources allow for a percentage of the grant to be used for this purpose (typically, 10% of the grant amount).  There are a few grantmakers that provide funding specifically for operational expenses (e.g., NC Community Development Initiative in North Carolina); however, most of them are housed within city and county governments where resources are scarce and needs are high.  You may find that this amount is insufficient to cover all operational expenses, thus the need to identify additional funding sources.

We will discuss in the near future more details about sources of funding and how to determine which ones to concentrate on for your particular funding needs.

Be strong and be blessed!

[1] – Source: Wikipedia.com

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We’ve all heard the expression “if you fail to plan, you plan to fail” …and this is certainly true when it comes to the operations of your nonprofit organization.  As in your personal life, planning for your organization’s fiscal health is a vital element in making sure that, for example, your expected revenues exceed your expenses.  In addition to determining how much money you REALLY need, a budget can help you in the execution of your organizational plan in general (e.g., how many employees do I need, should I buy or rent office space, etc.).

Before going further, it would be good to highlight some general terms that are often used [1]:

  • Fund Accounting – Nonprofit organizations aren’t in the business of making a profit (thus, it’s name :)), so they use an accounting system called fund accounting.  Fund accounting groups financial data together into funds or accounts that share a similar purpose.
  • Revenue – The amount of money that is brought into a company by its “business” activities (e.g., grants, income from programming, contributions, etc.).
  • Expense – Any expenses incurred in the ordinary course of business (e.g., salaries, office space rental fees, taxes, etc).
  • Operating expenses – A category of expenditure that a business incurs as a result of performing its normal business operations.
  • Non-operating expenses – An expense incurred by activities not relating to the core operations of the business (e.g., interest charges or other costs of borrowing funds).
  • Cash-flow – The cash generated from the operations of a company, generally defined as revenues less all operating expenses, but calculated through a series of adjustments to net income.  NOTE: It’s cash flow that pays the bills (“cash is king”)!

The financial statements for nonprofits relate to for-profit statements in the following way [2]:

Business Financial Statement Equivalent Nonprofit Statement
Income Statement Statement of Activities
Balance Sheet Statement of Financial Position
Cash Flow Statement of Cash Flows

Back to developing your budget…   It is recommended that the following steps be taken to methodically develop your budget [3]:

  1. List your monthly nonprofit operational expenses.
  2. List your monthly salaries and wages for each employee (if applicable).
  3. Identify and list your monthly expenses for your specific programs.
  4. Identify your monthly revenues.
  5. Assess the difference between your monthly revenue and expenses.

Please make sure that you are realistic and practical in your planning so that expectations are not set too high.  As with a for-profit business, sometimes an organization can get overwhelmed if it grows too fast too soon!

For more help in developing your budget, contact me or click here.

Be strong and be blessed!

[1] Source: Investopedia.com
[2] Source: http://tinyurl.com/3vyre8h
[3] Source: eHow.com

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