August 21, 2023

Issues Nonprofit Organizations Face While Growing

By Kaitlyn Pelletier, CPA, Supervisor, Tax & Business Services

Issues Nonprofit Organizations Face While Growing Nonprofit & Social Sector

An organization must understand the costs, time commitment, and increased oversight required to grow. When an organization plans to grow through grant applications or an increase in fundraising, it should first consider how much money it will need. Next, they should look at the reporting requirements for the state, federal, grantors, and donors. Do they require an audit? Will they have to file a 990-EZ or 990? If applying for a grant, how often must the organization report its progress on grants? Does the grantor require a functional expense report? Organizations also need to look at its structure and policies; is the conflict-of-interest policy enforced? Is there a separation of duties at the staff level? Is the board independent in both appearance and application? These questions are essential before applying for grants and accepting large donations. Audits cost money and take time to prepare, 990s are extensive, and certain states have low thresholds for financial statement reporting for licensing.

The IRS Informational Return 990 has three reporting levels, 990N, 900-EZ, and 990. Determining which form to file is based on assets and gross receipts. Gross receipts include all items of income, including program revenue and donations. The total sale proceeds are included in gross receipts, not just the net gain. Starting at the most basic is the 990N, also known as the postcard 990. Organizations will enter their address, the president and treasurer of the board of directors, mark they received less than $50,000 in donations, and e-file. Simple, easy, and due by the 16th day of the fifth month after year-end. May 15th of every year for a calendar year taxpayer. The IRS allows a 990N to be filed if the past 3 years’ gross receipts were on AVERAGE less than $50,000, meaning if an organization goes over $50,000 in one year, they can continue filing a 990N. Once an organization starts consistently receiving over $50,000 in gross receipts annually, it must file a 990-EZ. A Form 990-EZ requires additional information, including; financial information for the filing year, board of directors listing, program descriptions, mission statement for the organization, all donors who contributed over $5,000 during the year, and a list of donors who are considered “Disqualified individuals.” Depending on the activity of the organization, this list can grow exponentially The IRS has two bright red line thresholds for filing a 990; the organization received over $200,000 in gross receipts, or they have over $500,000 in assets. In addition to the standard question list for the 990-EZ, organizations also need to report the following; expenses must be grouped by function as well as category, all policies and procedures the organization has, how many payroll forms were filed by the organizations, expenses, and grants paid out by each of the top three programs, if the organization has audited or reviewed financials, they must reconcile the financials with the information reported on the 990. All returns in the Form 990 series are public documents and, except for a few schedules, are available through the IRS’ website and third-party watchdog sites. Certain states also require organizations to attach the 990 to their registration renewal or application.

Most states have a registration process for nonprofit organizations and require financial information to be reported. Each state has its threshold and looks at not only physical location but if donations are solicited from their state. For example, Tennessee has an audit threshold of $500,000, excluding government and private foundation grants and donations. However, Massachusetts has an audit threshold of only $200,000, or with prior approval, organizations that have less than $500,000 may be able to have reviewed financials. New York has more of a tiered structure, with organizations making $250,000 to one million required to have reviewed financials, and any organizations over one million must have audited financials. Some states have no requirements at all or have very loose requirements. With these additional state requirements, organizations need to look at the cost and the time commitment it takes to prepare the financial statements.

Audited or reviewed financial statements are a time and financial commitment organizations must consider before applying for grants or accepting large donations. When an organization starts getting audited financials, there is a massive amount of information auditors need to complete the audit. Auditors will examine the organization’s internal processes to determine potential risk areas. They will look at the overall financials, take a deep dive, and test specific account details. This will require someone to pull invoices, check stubs, bank statements, donor statements, grant agreements, and loan documents for the auditors to review. The audit must comply with Yellow Book Single Audit standards if the organization receives Federal funding and spends more than $750,000 in one year. These standards look at how the money was spent, and organizations will need to make sure they have properly documented where the money went before spending it. Questions may arise after the auditors review the information, and more testing and documents may be required. After this, the auditors will give the organization an opinion on their financials, or a draft of the financials if they agree to provide this service. A full set of financial statements per GAAP guidelines includes a Statement of Financial Position, Activities and Changes in Net Assets, Statement of Functional Expenses, Cash Flow statement, and all required footnotes. Organizations should make sure that they will be able to properly assist the auditors with their requests and the preparation time to make sure all financials are clean and accurate. The board of directors, or audit subcommittee, should be the ones to review the completed financials and audit opinion.

Board members have a fiduciary duty, defined as a person or group responsible for acting and doing things to benefit someone else, to the organization. They need to implement and oversee policies and procedures to guide the staff and leaders to achieve their goals with clarity and transparency. Some basic policies organizations should implement are a code of ethics, document retention policy, conflict of interest policy, compensation policy, gift acceptance policy, and risk management policy. Board members should also familiarize themselves with good governance practices to help them serve on the board. Basic governance practices include maintaining corporate minutes, having the board review and approve the IRS 990, filling out and complying with the conflict-of-interest policy, assessing the organization to similar nonprofit organizations in their area, having a code of ethics, and having staff and board members understand them, and making sure board members understand their roles and responsibilities. Most board members volunteer their time to help the organization grow. However, they need to understand the responsibilities they have.

Understanding the reporting requirements an organization has to grantors, the IRS, and state agencies help an organization understand the need to stay in compliance. Board members need to ensure the organization fulfills its mission and avoids any pitfalls that would cause the organization to lose its exempt status, ability to solicit contributions or grant funding. Taking your organization to the next level with additional revenue streams is exciting, but before jumping in to apply for the grant, make sure you understand the compliance obligations. The additional grant money may create more intensive filings, federal and state single audits, financial statement audits, and state reporting. Your organization may need to hire additional resources to comply. Make sure you evaluate all additional costs associated with the increased funding so you can determine the net impact on your organization.