Accounting, Banking and Law

Nonprofit Best Practices

Nonprofit Best Practices

One of the more innovative nonprofit best practices is harnessing technology to better serve those in need, which is what YouGiveGoods is all about. As an online donation platform, it allows for charity campaign drives to ask for online donations from all over the world using the Internet, instead of knocking on doors in a local neighborhood or area. YouGiveGoods offers food (including popular food pantry and soup kitchen products, fresh produce, weekend backpack supplies and Kosher items), baby food/supplies, personal care items, blankets, school supplies, toys and pet shelter items. Goods are delivered approximately 15 business days after the drive end date by YouGiveGoods, and donations are tax deductible. Donors are sent a tax receipt via e-mail. There is also no cost to set up and run a charitable drive, and the Web site’s marketing and promotional tools to support a drive are also free.

“We deliver donated items straight to the doorstep of the selected charity,” explains YouGiveGoods CEO Pat O’Neill. “In this way, a local charity can be supported by the generosity of people all over the country.”

In the spirit of the upcoming holiday season, COMMERCE asked New Jersey’s top accounting firms, banks and law firms for more nonprofit best practices. Here are some of the best ideas.

ACCOUNTING

Peter CagiaoAccounting Logistics LLC
By Peter J. Cagiao, CPA, President

A nonprofit organization is judged by how well it spends its funds to deliver program services for its mission. A best practice would be to develop a program/fundraising costing method that would effectively allocate costs to each initiative of the nonprofit organization. There are two types of costs: direct and indirect. The direct costs can be specifically allocated to each individual program. Indirect costs are identified by cost drivers such as salaries or use of space. The allocation methods should be consistent, documented and approved by appropriate members of management. Annual reviews of the cost allocations will ensure that the nonprofit’s financial reporting is reliable. Obtaining the true cost of a program enables the nonprofit to calculate the minimum amount of funding needed to keep a particular program solvent; whether the nonprofit is maximizing the use of its restricted funds; identifies financially unhealthy initiatives as well as defines how a nonprofit can improve the financial health of its organization to attract donors/stakeholders. There are more considerations, but the bottom line is that any nonprofit cannot accomplish its mission if it cannot properly allocate its costs.

Frank_0065CohnReznick, LLP
By Kelly Frank, CPA, Partner, Not-For-Profit and Education Industry Practice Leader

For the past few years, not-for-profits have been focused on slashing expenses. And while organizations continue to maintain a lean mentality, the larger federal and state grants are still being cut. Many not-for-profits are finding it nearly impossible to hire a fulltime grant writer to keep up with the larger number of smaller grant applications while still keeping their expenses down. As there are opportunities through grant writing to increase the revenue line, one solution might be to consider hiring a freelance grant writer on a contingency basis. There are a number of ways to pay the individual and he or she can work remotely, which would assist in keeping budget costs down and open up the organization’s options. Upon running a quick search on LinkedIn, we were able to find 959 job postings with the title of “grant writer,” of which 240 postings were for a “volunteer grant writer.” In addition, we found 134,700 people nationally with the title of “grant writer,” with 12,586 located in the New York City Metro Area and 3,457 who are now or have done freelance work. An experienced freelance grant writer can help to increase revenues without the added expense of a fulltime employee.

Cohen_RichEisnerAmper LLP
By Richard Cohen, CPA, Partner

One accounting best practice is the formal documentation of a well-designed and properly maintained system of accounting policies and procedures. Such a manual would greatly enhance the accountability and consistency of an organization’s business office. Additionally, it could also provide savings by minimizing duplication of efforts and reducing training time of accounting personnel, allowing for increased business office productivity. A well-constructed accounting manual also serves as an ongoing training tool for new employees (while reinforcing policies and procedures for current employees). It communicates essential accounting information to ensure all business office personnel are on the same page. This best practice was crucial on several occasions when key accounting personnel became ill at or near the time when the annual audit of their organizations were to take place. Rather than have the ill personnel cause delays in the audits, the manuals enabled existing personnel to familiarize themselves with the tasks that the absent employees were to perform. The results were that all documentation and supporting work requested of the organizations were provided accurately and on time, allowing for an efficient and timely delivered financial statement to our clients.

Portraits Dec. 2006Levine, Jacobs & Company, LLC
By Michael H. Karu, CPA/CFF, Partner

Information is the lifeblood of every business and it is no different for nonprofits. Accordingly, nonprofits, like for-profit companies, need to be mindful that proper recordkeeping is extremely important. The recordkeeping requirements are similar for all businesses, whether they have a for-profit motive or not. When we work with a nonprofit organization, we don’t just look at their procedures for maintaining their accounting records, but also look at the underlying procedures for tracking membership, donors, vendors, etc. For example, if the organization maintains participation records, it can target specific individuals and/or businesses for funding, advertising or attending. Those records can vary from an individual attending an event to a corporation underwriting it or taking an ad in a journal. It also is important to keep track of those who do not participate, especially if they had done so in the past. The same is true for accounting and bookkeeping records. Each event needs to have separate reporting. There should be budgets established. If an organization is small and lacks manpower, the person in charge of that event needs to step up and take control. Afterwards, by comparing the actual results to the budget, the organization can determine which areas excelled, met its expectations or fell short.

Chris_PetermannO’Connor Davies, LLP
By Christopher Petermann, CPA, Co-Partner-in-Charge, Private Foundation Practice

When asked for a single accounting best practice for a nonprofit, I would recommend sound budgeting principles. Having spent more than 30 years working with nonprofits, it’s clear to me that nothing serves an organization better than a well-crafted and closely monitored budget. It is one of the best tools that any nonprofit can utilize to ensure its continued success and viability. It is important to note that this is a true two-step process. The first being the creation of a realistic budget and the second being the timely monitoring of the budget throughout the fiscal period. Many times organizations develop a sound budget, but fail to adapt to both funding and/or operational changes that invariably occur over time. Organizations need to be nimble with a budgeting process that is dynamic; keeping pace as the organization’s goals and challenges emerge. The budget should then be reviewed on a monthly basis both on a financial and operational level. Is the actual flow of revenues and expenses matching up to the budgeted amounts? Is the organization meeting all of its operational objectives and goals? These are questions that should be addressed throughout the course of the fiscal period and not just on an annual basis.

RON_MATANSobel & Co., LLC
By Ron Matan, CPA, CGMA, PSA

We recommend that nonprofits, especially those with a small staff, consider using interns. Hiring interns means bringing in talented young people who may seek a career in the nonprofit community. They are interested in working in an organization in order to gain experience that will have applicability in the long term. In the short term, they expect to be immersed in hands-on projects that have an important impact on the nonprofit and the community it serves. There are several factors that can make or break the internship program at any nonprofit regardless of size, scope or budget. The first step is to set goals for the intern using a comprehensive strategic plan that incorporates a written job description to identify work hours/days, skills required, specific tasks, objectives and an evaluation process. Selecting the intern who is a good fit is the foundation for a successful experience. After the recruiting and hiring, training must be structured and disciplined. Ongoing communication, feedback and performance evaluations will support the training and encourage the interns to reach for responsibility. Ideally interns should also be assigned a mentor who offers personal guidance, support and career advice. At the conclusion of the internship, the exit interview should benefit both the nonprofit and the intern, eliciting critical insights from both sides.

Ron_Ries_2014WeiserMazars LLP
By Ron Ries, CPA, CGMA, Partner

Important in today’s notfor-profit environment is the way organizations account for restricted donations. Unrestricted donations can be used for any programmatic or administrative costs in pursuit of the NFP’s mission. However, donors are lately focusing on whether the institutions they contribute to under restrictive terms—either for specific programs or with a time restriction—are consistently and accurately accounting for the use of those donations. Following donors’ instructions on how to spend their money is critical to sustaining donor loyalty and organizational integrity. There is also increasing pressure on organizations to show positive operating results. All donations are valuable, whether they meet current operating needs or are earmarked for specific donor requests. Restrictions on time or purpose of a donation must be adhered to. Temptations to compromise integrity by misdirecting these funds is not only careless, but illegal. If you are a donor, make sure the donee organization confirms the intent of your gift, especially if it is restricted. And if you are a not-for-profit organization, ensure that such restrictions are honored at every level. Remember, not-for-profits are more prone to public scrutiny than any other business sector, and the final word is total integrity. There is no substitute.

BANKING

tucci imageBank of America Merrill Lynch
By Vincent Tucci, Senior Vice President

Nonprofit organizations benefit from financial solutions that help improve operational efficiencies. Identifying these solutions is easier when a nonprofit has complete (and timely) financial reporting practices in place. Clear reporting combined with openness to implementing new solutions allows a nonprofit organization to benefit from the most advanced solutions that their bank has to offer, which can increase efficiencies that enable them to focus on their mission. Take the Family Service Association (FSASJ), for example—a nonprofit, multi-service agency offering services to children, adults and families. They recently experienced the benefits of delivering strong financial reporting when Bank of America Merrill Lynch was able to quickly respond to a request for a line of credit to support their short-term working capital needs and refinance their commercial mortgage. Having timely financial reports and being open to new solutions is helping FSASJ reduce costs, save time and even improve their fundraising efforts. As FSASJ continues to deliver solid financial reports and maintain an open-minded partnership with Bank of America Merrill Lynch, we’ve been able to connect them with financial tools and services that help them to keep their focus on what they do best—strengthening individuals and families in South Jersey.

Nowaczyk_MelissaPNC Bank
By Melissa Nowaczyk, Assistant Vice President for Public Finance

Many nonprofits are highly dependent on charitable giving to sustain their operations, and with this comes a certain amount of risk for the organization’s cash flow. One way to help supplement cash flow is by establishing an endowment. Historically, large endowments (those above $500 million) have outperformed smaller endowments, but in current market conditions we are seeing that gap narrow and, in turn, provide benefits to every size of entity. When establishing an endowment, the first thing any nonprofit should do is draft and adopt an investment policy statement. The statement should contain (among other things) investment objectives; time horizon and risk tolerance; liquidity and income needs; permissible asset classes; constraints and restrictions; investment guidelines, including asset allocation ranges and performance measurement; and monitoring and reporting to help guide their investment decisions. Having an investment policy statement in place ensures proper controls around investments, while providing individual donors with a sense of confidence that the organization is thinking about protecting its future and existing in perpetuity. In challenging and uncertain economic climates, that type of focus can make all the difference.

LAW

McElhill, FrancesArcher & Greiner P.C.
By Frances A. McElhill, Esq., Chair, Nonprofit Law Practice Group

Caveat Emptor! Those two words from my high school Latin class are the best advice I can provide to nonprofit organizations, which are struggling to find new sources of revenue to fill shortfalls in public and private funding. Let the nonprofit buyer be wary of commercial enterprises wishing to “partner” with the nonprofit and provide a “commission” or “referral fee” for promoting or “co-branding” their product or service with the good works of the nonprofit. Too often nonprofits are not aware of the federal tax traps that exist in this area, i.e., the generation of taxable unrelated business income to report, the risk of private inurement and possible loss of Section 501(c)(3) exemption, and the corporate sponsorship gone awry with endorsements on the nonprofit’s Web site, let alone the requirement to pre-file the agreement for approval with the state agency that regulates charitable solicitation registration and certain commercial co-ventures. These ideas get started innocently enough—a trustee mentions an idea seen in another charity, and a one-page, one-sided agreement comes into the executive director to sign. Stop and take the time to ask, “How is this related to our mission? Do I know enough about this or should I call counsel?”

Michael SmikunCallagy Law
By Michael Smikun, Esq., Partner

Best practices require that nonprofit entities perform annual or semi-annual audits to ensure that they are operating in compliance with their own by-laws, and IRS and state regulations. Given that many organizations have (or should have) instituted an annual review, these audits create an obvious, but often neglected, opportunity to review the agreements and contracts by which every business operates. Virtually all business agreements and contracts fall into four categories: agreements with partners and owners; agreements with employees; agreements with vendors/service providers; and agreements with clients. Agreements between partners and owners should be reviewed with an especially keen eye toward IRS regulations regarding compensation. Employment agreements should be analyzed under the most current case law in employment law, as is done in the forprofit sector. Contracts with vendors and service providers should be reviewed with a focus on how disputes will be settled under the contract. Finally, an annual review of all agreements and contracts between the nonprofit and the community it seeks to serve provides a way to assess whether the organization is meeting the goals set out in its original charter.

Casey_Warren_Profile_900x1200_HI-RESDay Pitney LLP
By Warren J. Casey, Esq., Partner

Trustees of any nonprofit are “fiduciaries” of that organization and have fiduciary responsibilities.
The duty of care requires each trustee to consider all significant available information related to a matter being considered by the board, to take adequate time to review that information, to act on an informed basis and to act in the best interests of the organization. To do this, a trustee must remain actively involved and actively participate in the consideration of matters being acted upon by the board. The duty of loyalty also requires that each trustee place the interest of the nonprofit above any personal interest. If a trustee has a personal interest in any transaction or other matter, that trustee needs to adhere to clear conflict-of-interest guidelines. A trustee can be found to have violated his or her duty of good faith by consciously failing to monitor or oversee the organization or the particular matter subject to oversight of the trustees. In observing each of these duties, meetings need to be held and attended; significant or important decisions need to be fully vetted; financial matters need to be overseen; and information concerning all matters needs to be free-flowing and made available to the trustees.

Rebecca Moll-FreedGenova Burns Giantomasi Webster, LLC
By Rebecca Moll Freed, Esq., Partner

Many New Jersey nonprofits have volunteer boards of directors/trustees. Although their board members may be savvy business people, they often do not have a full understanding of their obligations as board members. We have found that when a nonprofit conducts annual training for its board members on the scope of their obligations and responsibilities, it can help increase board productivity and reduce potential liability. The necessary training is relatively straightforward and should focus on fiduciary duties and potential conflicts of interest. Under New Jersey law, board Members have two main fiduciary duties: (1) the duty of care; and (2) the duty of loyalty. Another goal of this training is to get each board member thinking about potential conflicts of interest that he/she may face when his/her personal or business life intersects with his/her position as a board member. Educating board members on when they need to recuse themselves from nonprofit matters also helps ensure that no board member puts the nonprofit in a comprised position. We have found that these annual trainings also increase board productivity and morale; help attract new board members and keep existing board members engaged in the organization and its operations.

Yingling, Beth - CFHR-cMcCarter & English, LLP
By Beth Yingling, Esq., Partner

The most important practice for nonprofits and taxexempt organizations involves timely filing of accurate annual returns (Form 990 and its progeny) and mandated reports. Failure to file puts a nonprofit’s existence in peril, and inaccuracies can result in unwanted attention from the IRS and reputational damage. Federal tax laws call for the automatic revocation of tax-exempt status of organizations that fail to file annual returns for three consecutive years—a virtual death penalty. New Jersey law, meanwhile, authorizes the Secretary of State to revoke the corporate status of any nonprofit that fails to file its mandatory annual report with the Department of the Treasury for two consecutive years. Revocation can occur swiftly, and although the reinstatement process is relatively simple, added fees and filings make it costly. Non-lethal but unpleasant consequences can arise when the 990 contains inaccuracies. A client of our firm inadvertently combined certain expenses on one line of its Form 990, triggering an inquiry by a journalist who monitored 990s for anomalous expenses in certain areas. The IRS noticed the resulting coverage and audited the client and two nonprofits related to the client. We successfully defended the audit, but the client suffered inconvenience and monetary cost.

CostelloNorris McLaughlin & Marcus, P.A.
By James J. Costello, Jr., Esq., Partner

One legal best practice that every nonprofit should observe is to institute a comprehensive conflict of interest policy. Nonprofits must navigate a maze of draconian penalty provisions designed to discourage certain transactions between the entity and those closely involved in its funding and/or governance. A comprehensive conflict of interest policy can help reduce exposure to those penalties. Private foundations must deal with a litany of excise taxes which penalize transactions between the entity and certain “disqualified persons,” who include substantial contributors to the foundation, as well as trustees, officers and their family members or related entities. The excise taxes can be imposed even when the terms of the transaction are favorable to the foundation. Public charities must avoid so-called “intermediate sanctions,” which impose a tax on “excess benefit transactions” between disqualified persons and the charity. Examples of excess benefit transactions include salaries and payments for goods and services to disqualified persons, which exceed their fair market value. A properly drafted conflict of interest policy should specifically impose an affirmative obligation on all of those involved with the entity to disclose potential conflicts and establish procedures for the board to address them.

OLYMPUS DIGITAL CAMERANPZ Law Group
By David H. Nachman, Esq., Managing Attorney

Assisting U.S. employers to bring highly skilled labor to America on visas like the H-1B is one of the many facets of the immigration law practice of the NPZ Law Group. Recently, we assisted a New Jersey employer that needed a highly skilled tech worker with a skill set that could not be located in the United States. In fact, the employer tried to recruit for many months and even tried an H-1B visa to bring a foreign national from Germany to fill the position by filing on April 1st, seeking an October 1st start date (a cap case). The case was not accepted in the “lottery.” Completely frustrated, the employer called NPZ for U.S. immigration law counseling. We met with the employer and communicated with the prospective employee. A determination was made that since the employer was a nonprofit organization and since the organization was engaged in “research,” that the case was exempt under the H-1B cap. The employee also could have obtained an O-1 visa for one with “extraordinary abilities.” After premium processing, the employer now has the benefit of the skills of the IT professional for six or more years.

ADAM WOLPERTrenk, DiPasquale, Della Fera & Sodono, P.C.
By Adam D. Wolper, Esq., Partner

In light of a recent opinion by the Delaware Supreme Court, nonprofits (particularly those formed under Delaware law) may want to consider adding a “fee-shifting” bylaw. Such a provision requires a member that brings a lawsuit against the nonprofit to pay the nonprofit’s attorneys’ fees in the event the member loses or is not substantially successful. If enacted properly, a fee-shifting bylaw can have the salutary effect of deterring frivolous litigation against the corporation. It should be noted that this decision does not directly apply to nonprofits formed in New Jersey, but nevertheless it should be persuasive authority for a New Jersey court considering the matter. In practice, the best way to find out that such a bylaw provision works is to not get sued.

HarribHighResolutionWilentz, Goldman & Spitzer, P.A.
By Brett R. Harris, Esq., Shareholder, Business, Nonprofit and Technology Attorney

At its essence, a nonprofit is all about its purpose, and a mission statement gives a nonprofit the opportunity to clearly and concisely articulate its purpose. Since a mission statement is not required by the New Jersey Nonprofit Corporation Act, it is without the legal formalities and technicalities of corporate documents required for nonprofits. While it can be codified as an attachment to the by-laws, it can also be treated as a more fluid document issued and amended from time to time by the governing body of the organization. The Internal Revenue Service does not require a mission statement per se, but the concept appears in various filings required for exempt organizations, such as the Narrative Description of the Organization’s Activities required on IRS Form 1023 “Application for Recognition of Exemption” and annually on the IRS Form 990 “Return of Organization Exempt From Income Tax in the
Summary and Statement of Program Service Accomplishments.” The mission statement becomes the public face of the organization, communicating to supporters, beneficiaries, the press and the public at large a concise presentation of the essential purposes of the nonprofit.

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