Protec'ng Your Organiza'ons $$ and Understanding Non Prot Status

NLTC Birmingham, AL September 26, 2015 Presenters: Steve Lovi, NAD Region I Board Member Philippe MontaleGe, NAD Treasurer

1

Welcome!

Ever wonder if your organiza'on is scally safe and nancially healthy?

Do you fully understand your organiza'ons policies regarding nancial management?

Are you aware of Non-Prot start up/on-going regula'ons and repor'ng requirements?

Is your organiza'on a bona de 501(c)3?

2

Todays Presentation Goals

Help you understand critical areas of financial management systems.

Build understanding of basic systems and best practices needed in a healthy

non-profit organization. Share information to help establish and

maintain organizational non profit status.

Explain key steps how to apply for tax-exempt status and what you need to know about filing federal tax forms.

(990 series) 3

Financial Management Major responsibility of the Board and

Treasurer. Have basic skills in critical areas of

developing & maintaining budgets, bookkeeping, financial controls, cash

management and creating finance statement reports.

Utilize a Finance committee to assist in reviewing income, expenditures and budget.

4

The board has final responsibility for the financial health of the nonprofit organization

Critical that new nonprofits quickly build up the roles of the treasurer and finance committee

Treasurer and finance committee can be wonderful assets to the board president when managing the

finances of the organization Board members and board president should never

completely ignore the finances by leaving them for the treasurer and other board members to manage

The board's governance of the nonprofits finances should include ongoing review of financial reports

during board meetings

Important Information to Know

5

Recording various financial transactions including keeping track of income and expenditures.

Can be prepared by someone who's doing basic clerical work in the organization. The board treasurer can help by developing and carrying out the bookkeeping system.

Bookkeeping

6

The board develops and authorizes a set of procedures for how the organization

manages its finances. The board treasurer usually coordinates the

board's responsibility for the manual, including its regular review and update.

Board and treasurer should make every effort to ensure compliance with the

procedures in the manual.

Accounting Procedures Manual

7

Accounting starts with basic record keeping (or bookkeeping). When your organization is just getting

started, your bookkeeping system will probably be based on what's called a cash-basis accounting system, rather

than accrual-basis system. Many organizations, when starting out, use the cash-

basis system and a checkbook to track transactions. In the "memo" portion of the checkbook, they note if the

amount depicted on the check is an expense or revenue, and where the amount came from or is going to.

As your organization grows, you'll begin using accounting software like Quick Books to track

transactions. In an accrual-basis system, you post entries when you

earn the money and when you owe it. Small organizations usually do not have the resources to use an

accrual-based system.

Accounting Systems for Financial Transactions

8

Manual or Automated Accounting System

Your record keeping system will be based on a manual system (where you make entries and total them by hand) or a computer system.

May evolve to using a computer-based system, which greatly automates entry of transactions,

updating of ledgers, generation of financial reports needed for board meetings

and filing taxes, etc. Quick Books is the most widely used software

for small organizations and easy to utilize.

9

Chart of Accounts

Can post each entry according to the category, or account, of the transaction.

Each account will be associated with an account number.

Chart of accounts which will tell you what account number or category to use when you post an entry.

Able to design your own chart of accounts, including coming up with your own account numbers.

Chart usually has five areas, including assets, liabilities, fund balances, revenues, and expenses.

10

Budgets

An operating budget (or annual budget) shows planned revenue and expenses, usually for the

coming year. Board is responsible to authorize the yearly

budgets. Every organizations budget will have different

needs and wants. Plan conservatively.

11

Petty Cash Fund

Small, recurring expenses needed to pay right away. For example, to buy a computer power

cord, stamps, etc. Can establish this fund by writing a check to

your organization and indicate on the check that it goes to the "petty cash" fund.

Able to withdraw from the fund by filling out a voucher that describes who took the money,

how much $, what items were purchased and date.

12

Financial Statements Statement of Activities

(Income Statement)

A nonprofits statement of

activities is issued instead of the income statement which is issued by a for-profit business.

The statement of activities focuses on the total organization (as opposed to focusing on funds within the organization) and reports the following:

1. Revenues such as contributions, program fees, membership dues, grants, investment income, and amounts released from restrictions.

2. Expenses reported in categories such as major programs, fundraising, and management and general.

Statement of Financial Position (Balance Sheet)

A Statement of Financial Position must be prepared for the organization as a whole presenting the total amounts of assets, liabilities, and net assets.

13

What is a Nonprofit Corporation?

A Separate Legal EntityOrganized and Operated for a

Recognized Nonprofit Purpose

A nonprot is a tax-exempt organiza'on that serves the public interest. In general, the purpose of this type of organiza'on must

be charitable, educa'onal, scien'c, religious or literary.

14

Statutory Members (Optional)

Board of Directors Includes Chairperson of Board (may also

include 3 statutory officers)

Statutory Officers (must include Chairperson President, Secretary and Chief Financial Officer)

Legal Structure of a Nonprofit Corporation

Nonprofit Corporation Operations (includes Executive Director and/or CEO who supervises

other employees and volunteers to operate corporations day to day activities) 15

Advantages

Eligible for Income Tax Exemption and Tax Deductible DonationsCorporate Agents Generally Not Liable

Disadvantages

Administrative BurdenLimitations on Permitted Activities Can be Costly to Form

Forming a Nonprofit Corporation

16

Formation & Tax Exemption Fees Name Reservation (Optional) $ 10

Articles of Incorporation (vary states) $ 30

Federal Tax Exemption Application $ 850

State Tax Exemption Application $ 25

Biennial Statement of Information $ 20

Registration with Attorney General (vary states) $ 25

Total $ 960

Potential Start Up Fees (Approximate Costs)

17

(vary states)

(vary states)

! Reserve Corporate Name with Secretary of State (Optional)

! Determine Who Will Be Directors and Officers

! Execute and File Articles of Incorporation with Secretary of State- This Forms the New Legal Entity

! Obtain EIN on IRS website

! Draft Corporate Bylaws

! Set up a Corporate Minute Book

! Hold First Meeting of Board of Directors " Adopt Bylaws " Elect Officers

! File Statement of Information (Domestic Nonprofit Corporation) Within 90 Days

How Do I Form a Nonprofit Corporation?

18

Articles of Incorporation

! What are the Articles of Incorporation?" The corporations basic organizational document the Articles create the corporation. Filling starts the clock running on tax deadlines.

! What must the articles include?1) the corporate name;2) a statement that the corporation is established for public or

charitable purposes (or both);3) The name and address of the initial agent for service of service;4) A provision dedicating the corporate assets to charitable purposes and

restricting the corporation from political campaigning or lobbying.

! What about filing?"The corporation must file Articles with the Secretary of State with a $30 filing fee. (Approximate fee, costs may vary)

19

! When you file articles to form the corporation, you will start the clock running on important tax deadlines.

! If your organization has not yet begun its activities, you should strongly consider waiting to incorporate (filling the articles) until you are also ready to complete tax exemption application.

! All filing records should be kept on a permanent basis. Scan any hard copies and store electronically.

! Finance and general business records should be kept on hand for at least seven years for each year of business under ethical business practice guidelines.

Helpful Reminders

20

Employer ID Number (EIN)

! Every corporation that will apply for federal tax-exemption must obtain an EIN.

! EIN is the corporations tax ID number for all federal tax purposes

" There is no separate tax-exempt number

" Just having an EIN does not mean that the corporation is tax-exempt

21

By-Laws ! The By-Laws establish the procedures for governing and operating the corporations activities.

! Typical By-Law Provisions:

" Number of Directors " Time, Place, and Manner of Director Meetings " Voting Procedures " Director and Officer Duties " Committee Structure " Amendment Procedures

22

First Board Meeting

! Initial Board Named Articles or by Incorporator

! Board Composition Must Comply with By-law Requirements:

" Number of Board Members " Qualification for Board Membership (if any)

! First Meeting Actions

" Adopt By-laws" Elect Officers " Establish Bank Accounts and Signing Authority" Authorize Officers to File Tax Exemption Application " Adopt Board Conflict of Interest Policy

23

Board Meeting Minutes

! Keep minutes of all board resolutions as evidence of valid corporate action

! Example of resolution:" RESOLVED, that the bylaws presented at this meeting and attached to these minutes are adopted as the bylaws of the Corporation.

! Maintain minute book in permanent corporate files.

! It is strongly recommended that board meeting minutes be stored electronically with a back up of hard copy minutes as well.

24

Federal Tax Exemption

! What Does It Mean to be Tax-Exempt? " Subject to a few exemptions, nonprofit corporations with federal tax exemption are NOT taxed by the IRS on income received!

! How Does a Nonprofit Corporation Obtain Federal Tax-Exemption?

" The IRS will recognize tax-exemption if a corporation qualifies under a specific exempt category defined by the Internal Revenue Code. The most commonly used tax -exempt classification is 501 (c) (3). To be treated as tax- exempt under 501 (c) (3), a corporation must generally file an application with the IRS.

25

Managing Taxes

Know Key Steps to Apply for Tax-Exempt Status

What do you need to know about filing federal tax forms (990-N, 990-EZ or 990)

26

"Form 990Nonprofit organizationswithatleast$200,000 in annual gross receipts or at least $500,000 in total assets are required to file Form 990 with the IRS.

27

Filing Specific Tax Forms Based on Criteria

"Form 990-EZ

Organizations that have gross receipts between $50,000 and $199,999 and total assets of less than $500,000 at the end of the yearmusteitherfileForm 990-EZ orfile the full Form 990.

28

Filing Specific Tax Forms Based on Criteria

"Form 990-N (also known as the e-Postcard)

Small tax-exempt organizations whose annual gross receipts are normally $50,000 or less may choose to submit Form 990-N instead of completing Form 990 or Form 990-EZ. If your nonprofit is required to file Form 990-N but fails to do so for three consecutive tax years, it will automatically lose its tax-exempt status on the filing due date of the third year. If your nonprofit loses its tax-exempt status, you'll have to apply for a federal tax exemption all over again. That means filing IRS Form 1023 again and paying the hefty filing fee that comes with it.

29

Filing Specific Tax Forms Based on Criteria

30

Is Your Organization a Bona Fide 501(C) 3 Organization?

Check with www.guidestar.org to see if your organization is registered as a Non-Profit

States also keep a registry of tax-exempt charitable organizations usually through the Attorney Generals Office or Division of Charities.

The IRS also keeps records on active and inactive NPOs.

Some organizations have never applied for federal 501(C) 3 status and mistakenly believe they are a legitimate tax exempt organization.

Organizations cannot guarantee donors a tax deduction without not having a 501(C)3 in place for their donation.

31

Directors and Officers Insurance (AKA Board and Officers Insurance)

When dealing with finances, important to consider obtaining insurance to protect the board from potential liabilities such as accidents, theft, mismanagement or fraud.

Can be expensive but gives your board peace of mind knowing that individuals who are serving cannot be personally sued by affected persons while on the board.

Useful in attracting and retaining board.

32

General Resources

www.guidestar.org

Provides nancial data and basic informa'on on every IRS registered non-prot organiza'on (NPO). Not a charity watchdog or evaluator. Easy to use and anyone can join for free. Addi'onal data can be purchased if necessary. If an NPO is not listed here, most likely the organiza'on is not considered a bona de 501(c)3 organiza'on or is no longer recognized by the IRS.

hGp://www.irs.gov/Chari'es-&-Non-Prots/Charitable-Organiza'ons/Exemp'on-Requirements-Sec'on-501(c)(3)-Organiza'ons Go To website for seing up a non-prot organiza'on, links for applica'on forms, trainings, etc.

33

hGp://www.stayexempt.irs.gov/

This website will help your NPO u'lize its tax exemp'on status appropriately.

hGp://www.stayexempt.irs.gov/Exis'ng-Organiza'ons

Many NPOs fail to follow IRS guidelines set for maintaining their tax exempt status and as a result lose their right to claim tax exemp'on. This page has helpful 'ps to be aware of with regard to important compliance informa'on.

hGp://www.stayexempt.irs.gov/Star'ng-Out

Helpful informa'on for new NPOs needing assistance with following IRS guidelines to qualify and maintain their new tax exemp'on requirements

hGp://www.stayexempt.irs.gov/Resource-Library

Chock full of informa'on, including a glossary of terms in learning more about NPO tax exempt rules.

34

hGps://www.councilofnonprots.org/tools-resources/nancial-literacy-nonprot-boards

Financial Management Self-Assessment Tool may be helpful for NPOs looking to strengthen internal controls. Smaller grassroots organiza'ons or state associa'ons will not need to cover every area listed in this document.

hGp://www.npccny.org/Form_990/990.htm

If your organiza'on les a yearly IRS 990 form, this document will help explain some of the important details that board members and related par'es should be aware of. Too omen board members are unaware of what kind of informa'on is contained within the 990 form. Small organiza'ons with less funds are not required to complete the full 990. There are several versions for these organiza'ons to u'lize.

35

Thank you for the opportunity to share this presenta'on with you! We hope this informa'on will be helpful for your NPOs!

Please ll out presenta'on evalua'on forms before you leave this room. Your feedback is important to us and NLTC.

Feel free to contact either Steve Lovi at steve.lovi@nad.org or Philippe MontaleGe at philippe.montaleGe@nad.org if you have any ques'ons!

Enjoy the rest of NLTC!