For effective nonprofit board oversight, regardless of the size of the organization, all board members need to be trained on their responsibilities related to the three duties of care, loyalty, and obedience, as well as the corporate laws and regulations in their state. They also need to be keenly aware of important issues affecting the nonprofit industry as a whole. This baseline education and awareness enables members to raise the bar on due diligence and promote compliance, success, and sustainability within the organizations they serve.
This article covers a ”top 10 list” of the critical tax, accounting, governance, and technology issues that today’s nonprofit boards need to be aware of. Boards will want to ensure that their audit and finance committees are diving deeper on these topics and that management is devoting the appropriate resources and infrastructure to address them.
The following are three tax-related issues affecting not-for-profit entities.1. Unrelated Business Income Tax (UBIT)
- UBIT is the tax imposed on income that is not related to the nonprofit entity’s tax-exempt purpose. Boards need to be aware of the organization’s revenue-generating activities and ensure that positions taken regarding income from potentially unrelated activities are well documented. To learn more about common areas that can produce UBIT for not-for-profits, as well as UBIT exemptions, exclusions, and recent regulatory developments, listen to this podcast.
- One of the provisions in the 2017 Tax Cuts and Jobs Act (TCJA), imposes UBIT on certain expenses paid for qualified transportation fringe benefits and parking facilities for employees. To learn more about the new “parking tax,” read this Case Study: How the New Parking Tax Affects Nonprofits.
2. Worker Classification – Determining whether workers are employees or independent contractors is a challenge for many nonprofit organizations, and it is a critical compliance issue with respect to employment taxes. To learn about this important classification, read IRS Publication 1779, Independent Contractor or Employee. Not-for-Profit Section members may also review the Employment Taxes for NFPs archived webcast.
3. Executive Compensation – Nonprofit executive compensation is under more scrutiny than ever. Boards can ensure their organizations are protecting themselves by following the rebuttable presumption of reasonableness provisions within Internal Revenue Code Section 4958. To learn more, read Exempt Organization Executive Compensation: Compliance and Curiosity.
In addition to the issue-specific resources noted previously, the IRS has a helpful Charities and Nonprofits section on their website that offers resources and subscriptions to a free e-newsletter and e-alerts.
The following are three significant accounting-related issues currently affecting not-for-profit entities.4. Financial Reporting
- It’s the responsibility of every board member—not just the treasurer—to understand the organization’s financial health at a high level and to ensure that resources are appropriately used to support mission and strategy in compliance with the approved budget. It’s essential that each member review financial information before each meeting, attend the meeting, and be prepared to ask at least one question for good due diligence. This responsibility includes having awareness and understanding of FASB ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, which is effective now and includes new liquidity disclosures among other changes. To learn more, read this article on simplifying implementation of FASB’s not-for-profit financial reporting standard.
- The board also needs to be aware of the various places where audited financial information is shared externally, that is, on Candid/GuideStar, in the annual report, on the organization’s website, etc. because the organization has a responsibility to inform the external auditor of any annual reports (or similar documents) that contain, accompany, or refer to the audited financial statements.
5. Revenue Recognition – FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and ASU 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, are effective for annual periods beginning after December 15, 2018 for nonpublic entities receiving grants. These new standards affect how not-for-profit entities recognize revenue, and board members must understand the impacts on financial reporting, processes, and controls. To learn more, visit the revenue recognition area of the Not-for-Profit Section Resource Library, or listen to this podcast on revenue recognition tips for not-for-profits.
6. Leases – FASB ASU 2016-02, Leases, is planned to be effective for annual periods beginning after December 15, 2020 for nonpublic entities pending issuance of a new ASU that extends the original effective date. Upon adoption, organizations will be responsible for reporting operating leases on their balance sheets. While this seems simple, it involves detailed reviews of existing agreements and processes, as well as potential shifts in how organizations review and store leases and contracts. Not all leases are called “leases,” so it’s important to review all agreements and contracts for embedded leases. To learn more about what organizations need to be doing now, read this article on lease accounting: keep pushing ahead.
In addition to the issue-specific resources noted previously, FASB has an Implementing New Standards section on their website that offers resources to assist organizations in adopting new accounting standards.
The following are three significant governance-related issues currently affecting not-for-profit entities.
7. Strategy – Strategy drives everything at the organization, including operational and performance goals, technology, budgets, etc. Keeping everything aligned is critical for efficiency and success. The board plays an important role in keeping the strategy relevant in today’s quickly changing environment, which means ensuring that management has a process in place to solicit staff input, continuously monitor results, and respond with appropriate changes in a timely manner.
8. IRS Form 990 – Form 990 Part VI: Governance, Management, and Disclosure includes many questions related to organizational practices. One asks if the return was made available to the full board prior to filing. As the Form 990 is open to public inspection, it is critical that when that question is answered affirmatively, each board member actually does receive a copy of the return. It is also a good practice for the external accountant to walk through the Form 990 with all interested board members, not just the audit committee or management.
9. Conflicts of Interest – This common governance topic may look familiar but is always worthy of a reminder. While the existence of a conflict of interest policy is important, the actual process of identifying and handling board, committee, and staff conflicts is critical. Perceived conflicts are just as important as real ones because either can impact a nonprofit’s number-one asset, its reputation. To learn more, download the Not-for-Profit Section’s sample conflict of interest policy.
In addition to the issue-specific resources noted previously, the Not-for-Profit Section Resource Library contains a helpful list of NFP governance and management frequently asked questions.
The following is a significant technology-related issue currently affecting not-for-profit entities.10. Information Technology Infrastructure
- Internally, the board needs to make sure the organization has the appropriate IT staffing, policies, and infrastructure to promote strategic alignment and maximize operational efficiency. This includes, for example, having an IT strategy, adequate funding for hardware and software, a portal for the board to track documents, staffing-versus-outsourcing policies, and policies and safeguards for data access and protection.
- Externally, the board needs to make sure the organization is protected from cyber threats. Cybersecurity is a real concern in today’s business environment, and it affects all nonprofit organizations, not just the big ones. To learn more, read these 9 Cybersecurity Tips for Small Not-for-Profit Organizations.
In addition to the issue-specific resources noted previously, the AICPA’s Cybersecurity Resource Center offers helpful tools and information.
Q: What do you do if your board of directors has not received baseline education on duties, laws, and regulations or is not aware of the top 10 issues discussed in this article?
A: Training, training, and more training.
Start by asking internal experts, such as the organization’s finance staff or the board treasurer or finance or audit committee members, to provide education on key topics. If external experts are needed, look at bringing in the organization’s current external auditors, tax advisors, or legal counsel or hiring outside consultants to provide the needed education. It’s best (and becoming more common) practice to have a training topic on each board agenda, and this could be as simple as having board members attend training between meetings and share what they learn with the full group.
Regulatory scrutiny is only increasing and the board must ensure the organization is protected by complying with all the requirements. Lack of knowledge isn’t a defense. Are you up to speed?