Essential and nonessential personnel and costs must be identified as part of the reserve equation. If a crisis struck –

such as 9/11, which decimated funding to many nonprofits for an extended period – how much would it take for you to keep your doors open?

This amount, coupled with the responsiveness of new funding, will give you an idea of how large your fund should be.

Once this is determined, present the information to your board for creation of a reserve fund policy and plan.

Reserve funds can be raised in several ways:

➤ A portion of unrestricted donations can be set aside.➤ A deliberate campaign approaching donors and

foundations for this purpose can be launched. ➤ Targeted fundraisers can be held. ➤ Organizational efficiency can be maximized, and an

effort made not to leave opportunities on the table.For example, one organi-

zation never bothered to obtain an approved indirect rate for government grants, which meant no overhead costs were allowed. If 10 to 30 percent of grants could cover overhead costs, that would free up the unrestricted sourc-es presently paying for them.

Plan your reserve fund strategy now so you can keep your organization operating when your clients need you most. – Elizabeth Penney, M.B.A.

The loss of a major funding source. Emergency expenditures. An opportunity to respond to a constituent’s crisis.

These are a few reasons why your organization needs to have a pool of unrestricted cash available for immediate use – a reserve fund.

The reality is that nearly 3 in 10 nonprofits have one month or less of cash on hand to cover operating expenses.

That’s according to the 2011 Nonprofit Finance Fund survey of non-profits. At the same time, 78 percent of

the nonprofits surveyed saw increased demand for their services, which underscores just how vital they are to the communities and clients they serve.

Many nonprofit organiza-tions don’t consciously include reserve planning in their fundraising efforts. The focus is on bringing in enough money to cover program expenses. Any excess is regarded with suspicion as “a profit.”

In reality, the definition of nonprofit means that excess funds are not distributed back to shareholders or owners, but rather reinvested in the orga-nization’s mission.

Of course, most grants require that all funds be spent

on specific programs or returned, so reserve funds need to be raised from unrestricted sources.

The first question is: How big should the reserve be?

Many experts talk about an amount equal to three or six months of operating expen ses. But the size should be tailored to your specific needs.

For example, if you own a building, you need to have a capital reserve for unexpected repairs, such as a furnace malfunc-tion or burst pipe. Funds for insurance deductibles should be put aside whether you rent or own and for company-owned vehicles.

In calculating operating reserves, trends and history regarding revenue sources should be examined. Organizations with a good supply of fee-paying clients or consistent, committed donors are more stable than those relying on a few large grants.

How quickly can new revenue sources contribute, if needed? In some cases, the lag period between application and award can

be six months. Close relationships with supportive foundations can be a lifesaver during a crisis, when they may allow you to apply for operating funds. Many did so during the recent recession.

Keep an eye on trends with long-term funding sources, whether foundation or government. If they cut back 10 or 20 percent, what would be the impact on your organization?

See Reserve fund on back

Why a healthy reserve fund is crucial to nonprofits

Nearly 3 in 10 nonprofits have one

month or less of cash on hand to cover operating expenses.

If a crisis struck – such as 9/11, which decimated funding

to many nonprofits for an extended period – how much would it take for you to keep your doors open?

I n s i d e

I n s i d e

➜Endowment Funds: Their unique benefits

➜Elections & NonprofitsWhat you can and can’t do without jeopardizing your tax-exempt status

Summer 2012

Reserve fund continued from front

The technical information in this newsletter is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the information contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS. © 2012 CPAmerica International

More Than Money

Financial news & notes for nonprofit organizations from:

100 Second Avenue South, Suite 600, St. Petersburg, Florida 33701 | (727) 821-6161 | www.gsscpa.com

100 Second Avenue South, Suite 600, St. Petersburg, Florida 33701www.gsscpa.com | gss@gsscpa.com

(727) 821-6161

If we may answer any of your questions on the information contained in this publication, please contact us.

A presidential election year is a good time for nonprofits to review their policies governing political activism.

Most charities, churches, universities, hospitals and social service organizations have severe limitations imposed on partisan political activities to maintain their tax-exempt status. The types of permissible political activities vary with the exempt status of the organization.

Of course, many groups support or oppose certain political issues. While these groups may articulate their views on political issues germane to their exempt purpose, the tax law prohibits them from directly or indirectly participating in, or intervening in, any political campaign on behalf of, or in opposition to, any candidate for elective public office.

The prohibition applies to all campaigns at every level: federal, state and local. Even if the organization affirmatively states that it does not expressly solicit a vote for or against a particular candidate, the prohibition may be violated by a message favoring or opposing an unnamed candidate, if the candidate can be identified through the message.

Violation of the prohibition can result in a warning letter from the IRS, the imposition of excise taxes and, in egregious cases, denial or revocation of the organization’s tax-exempt status.

The prohibition is not intended to restrict members of a group from expressing individual political views. However, partisan comments should be avoided in official organization publications or at official functions.

A group can also run afoul of the prohibition without actually endorsing or opposing a candidate, by engaging in activities such as:

➤ Distributing statements prepared by others that favor or oppose a candidate

➤ Allowing a candidate to use the group’s assets or facilities without giving equivalent access to other candidates

➤ Conducting get-out-the-vote drives in a partisan manner

➤ Preparing voter guides that compare candidates’ positions to positions supported by the tax-exempt organization

➤ Conducting prohibited activities on the group’s website, including placing links to other websites that deliver messages the tax-exempt organization is prohibited from delivering directly

An organization can sponsor functions at which candi-dates appear. But if the group invites a candidate to speak as a political candidate at a group function, it must provide an

equal opportunity to all candidates seeking the same office. The group may not indicate support or opposition for any candidate.

An organization may invite a candidate to speak for non-political reasons, or the candidate may choose to attend an organization-sponsored event that is open to the public. Such events should be nonpartisan, and neither the candidate nor any member of the organization should mention the candidacy. Communications announcing the candidate’s attendance at the event should make no mention of the indi-vidual’s candidacy or the upcoming election.

A candidate may seek to assure the group that certain activities are permissible. Keep in mind that the candidate’s staff may be focused on election laws, not the laws governing the organization’s tax-exempt status. Be sure to make an independent determination of what is permissible.

If you serve as an executive or on the board of an affected organization, you should confirm that your group has a written policy regarding political activities and that the policy has been disseminated throughout the organization. – Mike Redemske, CPA

Endowments are important financial vehicles that not only perpetuate a not-for-profit’s good works, but also

rank it in the eyes of other agencies, grantors and the busi-ness community.

Endowments can be attractive methods to create financial health and to reward major donors.

There are three types of endowment funds, and donors must be clear on what kind of endowment they are funding.

True endowment fund In a true endowment fund, the not-for-profit institution invests donated funds, and only the investment’s earnings are spent.

The gift itself is preserved “in perpetuity.” Often, not all of an endowment’s earnings are spent, and the excess is re-invested to grow the fund’s principal.

Term endowment fund This vehicle allows the principal to be spent after a period of time, or when some other pre-determined event occurs.

A term endowment may be established to exist for, say, 25 years. Then, the principal may be spent.

Or perhaps a term endowment is established to fund the equalizing of employment rates for men and women in a certain profession. Once employment parity has been achieved, the principal is released.

Quasi-endowment fund So-named because the principal can be invaded upon a decision by the board, the “quasi-endowment” may not be an endowment at all, but rather a restricted gift.

Although the donor may intend the quasi-endowed funds to be invested in perpe-tuity, if the board decides the fund’s earnings underfund its purpose, the board can decide to use the principal to fund the purpose.

Endowments offer benefits to donors that other donation vehicles may not.

➤ Donations to endowments survive beyond the lives of their givers, creating true legacies.

➤ A donor who gives to an endowment is relieved of the burden of managing those funds.

➤ Through certain planned giving strategies, the donor may continue to receive income for life after making the gift.

➤ Endowment gifts can be made in annual increments in the event the donor does not want to give away all or too

many assets at one time. The benefits of the gift for the donor may be enjoyed immediately.

➤ A donor who creates or gives to an existing endowment fund can be assured the organization will use the money for the purposes the donor wishes.

➤ Through perpetual investment, the benefit to the recipient is magnified beyond what the donor might have been able to give during his or her life.

Historically, endowments have earned as much as 10 percent and have paid out about 5 percent, or half of their earnings. The unpaid earnings are reinvested. Given a historical inflation rate of 3 percent, most endowments tend to grow in real dollar value.

In extreme circumstances, there is some risk that endowed funds held by true endowments and term endowments may be used for purposes not intended by the giver.

Endowment invasion is a practice that uses endowment funds for operating expenses and debt relief. The Uniform Prudent Management of Institutional Funds Act, adopted by virtually every state, provides guidelines for endowment invasion. Generally, endowment invasion is allowed only as a last-ditch method for avoiding the closing of the nonprofit because of financial woes.

Two books that offer insight into the benefits of endow-ments for donors: Money Well Spent by Paul Brest and Hal Harvey (Bloomberg), and Endowment Building by Diana S. Newman (AFP/Wiley Fund Development Series).

Donors who may be appropriate for endowment giving are often supported by their own financial and legal advisers. It is prudent for any not-for-profit organization to enlist the help of its own financial advisers when creating materials designed to elicit endowment donations. – Rick Compton

Most charities, churches, universities, hospitals and social service

organizations have severe limitations imposed on partisan political activities to maintain their tax-exempt status.

Historically, endowments have earned as much as 10 percent and have

paid out about 5 percent, or half of their earnings. The unpaid earnings are reinvested.

Endowment Funds: Their unique benefits

The CPAmerica AdvantageOur firm is an affiliate of CPAmerica International, one of the largest associations of CPA firms

in the world. Through CPAmerica, we put the talents of thousands of CPAs to work for you. You truly receive the best of both worlds:➤ The personal attention and sincere concern of a local CPA firm➤ The knowledge and resources of a worldwide associationOur firm and CPAmerica – working together for you!

Visit: www.cpamerica.org.

Tax-exemptStatus

Elections & NonprofitsWhat you can and can’t do without

jeopardizing your tax-exempt status

Summer 2012 More Than Money2 Summer 2012 More Than Money 3

A presidential election year is a good time for nonprofits to review their policies governing political activism.

Most charities, churches, universities, hospitals and social service organizations have severe limitations imposed on partisan political activities to maintain their tax-exempt status. The types of permissible political activities vary with the exempt status of the organization.

Of course, many groups support or oppose certain political issues. While these groups may articulate their views on political issues germane to their exempt purpose, the tax law prohibits them from directly or indirectly participating in, or intervening in, any political campaign on behalf of, or in opposition to, any candidate for elective public office.

The prohibition applies to all campaigns at every level: federal, state and local. Even if the organization affirmatively states that it does not expressly solicit a vote for or against a particular candidate, the prohibition may be violated by a message favoring or opposing an unnamed candidate, if the candidate can be identified through the message.

Violation of the prohibition can result in a warning letter from the IRS, the imposition of excise taxes and, in egregious cases, denial or revocation of the organization’s tax-exempt status.

The prohibition is not intended to restrict members of a group from expressing individual political views. However, partisan comments should be avoided in official organization publications or at official functions.

A group can also run afoul of the prohibition without actually endorsing or opposing a candidate, by engaging in activities such as:

➤ Distributing statements prepared by others that favor or oppose a candidate

➤ Allowing a candidate to use the group’s assets or facilities without giving equivalent access to other candidates

➤ Conducting get-out-the-vote drives in a partisan manner

➤ Preparing voter guides that compare candidates’ positions to positions supported by the tax-exempt organization

➤ Conducting prohibited activities on the group’s website, including placing links to other websites that deliver messages the tax-exempt organization is prohibited from delivering directly

An organization can sponsor functions at which candi-dates appear. But if the group invites a candidate to speak as a political candidate at a group function, it must provide an

equal opportunity to all candidates seeking the same office. The group may not indicate support or opposition for any candidate.

An organization may invite a candidate to speak for non-political reasons, or the candidate may choose to attend an organization-sponsored event that is open to the public. Such events should be nonpartisan, and neither the candidate nor any member of the organization should mention the candidacy. Communications announcing the candidate’s attendance at the event should make no mention of the indi-vidual’s candidacy or the upcoming election.

A candidate may seek to assure the group that certain activities are permissible. Keep in mind that the candidate’s staff may be focused on election laws, not the laws governing the organization’s tax-exempt status. Be sure to make an independent determination of what is permissible.

If you serve as an executive or on the board of an affected organization, you should confirm that your group has a written policy regarding political activities and that the policy has been disseminated throughout the organization. – Mike Redemske, CPA

Endowments are important financial vehicles that not only perpetuate a not-for-profit’s good works, but also

rank it in the eyes of other agencies, grantors and the busi-ness community.

Endowments can be attractive methods to create financial health and to reward major donors.

There are three types of endowment funds, and donors must be clear on what kind of endowment they are funding.

True endowment fund In a true endowment fund, the not-for-profit institution invests donated funds, and only the investment’s earnings are spent.

The gift itself is preserved “in perpetuity.” Often, not all of an endowment’s earnings are spent, and the excess is re-invested to grow the fund’s principal.

Term endowment fund This vehicle allows the principal to be spent after a period of time, or when some other pre-determined event occurs.

A term endowment may be established to exist for, say, 25 years. Then, the principal may be spent.

Or perhaps a term endowment is established to fund the equalizing of employment rates for men and women in a certain profession. Once employment parity has been achieved, the principal is released.

Quasi-endowment fund So-named because the principal can be invaded upon a decision by the board, the “quasi-endowment” may not be an endowment at all, but rather a restricted gift.

Although the donor may intend the quasi-endowed funds to be invested in perpe-tuity, if the board decides the fund’s earnings underfund its purpose, the board can decide to use the principal to fund the purpose.

Endowments offer benefits to donors that other donation vehicles may not.

➤ Donations to endowments survive beyond the lives of their givers, creating true legacies.

➤ A donor who gives to an endowment is relieved of the burden of managing those funds.

➤ Through certain planned giving strategies, the donor may continue to receive income for life after making the gift.

➤ Endowment gifts can be made in annual increments in the event the donor does not want to give away all or too

many assets at one time. The benefits of the gift for the donor may be enjoyed immediately.

➤ A donor who creates or gives to an existing endowment fund can be assured the organization will use the money for the purposes the donor wishes.

➤ Through perpetual investment, the benefit to the recipient is magnified beyond what the donor might have been able to give during his or her life.

Historically, endowments have earned as much as 10 percent and have paid out about 5 percent, or half of their earnings. The unpaid earnings are reinvested. Given a historical inflation rate of 3 percent, most endowments tend to grow in real dollar value.

In extreme circumstances, there is some risk that endowed funds held by true endowments and term endowments may be used for purposes not intended by the giver.

Endowment invasion is a practice that uses endowment funds for operating expenses and debt relief. The Uniform Prudent Management of Institutional Funds Act, adopted by virtually every state, provides guidelines for endowment invasion. Generally, endowment invasion is allowed only as a last-ditch method for avoiding the closing of the nonprofit because of financial woes.

Two books that offer insight into the benefits of endow-ments for donors: Money Well Spent by Paul Brest and Hal Harvey (Bloomberg), and Endowment Building by Diana S. Newman (AFP/Wiley Fund Development Series).

Donors who may be appropriate for endowment giving are often supported by their own financial and legal advisers. It is prudent for any not-for-profit organization to enlist the help of its own financial advisers when creating materials designed to elicit endowment donations. – Rick Compton

Most charities, churches, universities, hospitals and social service

organizations have severe limitations imposed on partisan political activities to maintain their tax-exempt status.

Historically, endowments have earned as much as 10 percent and have

paid out about 5 percent, or half of their earnings. The unpaid earnings are reinvested.

Endowment Funds: Their unique benefits

The CPAmerica AdvantageOur firm is an affiliate of CPAmerica International, one of the largest associations of CPA firms

in the world. Through CPAmerica, we put the talents of thousands of CPAs to work for you. You truly receive the best of both worlds:➤ The personal attention and sincere concern of a local CPA firm➤ The knowledge and resources of a worldwide associationOur firm and CPAmerica – working together for you!

Visit: www.cpamerica.org.

Tax-exemptStatus

Elections & NonprofitsWhat you can and can’t do without

jeopardizing your tax-exempt status

Summer 2012 More Than Money2 Summer 2012 More Than Money 3

Essential and nonessential personnel and costs must be identified as part of the reserve equation. If a crisis struck –

such as 9/11, which decimated funding to many nonprofits for an extended period – how much would it take for you to keep your doors open?

This amount, coupled with the responsiveness of new funding, will give you an idea of how large your fund should be.

Once this is determined, present the information to your board for creation of a reserve fund policy and plan.

Reserve funds can be raised in several ways:

➤ A portion of unrestricted donations can be set aside.➤ A deliberate campaign approaching donors and

foundations for this purpose can be launched. ➤ Targeted fundraisers can be held. ➤ Organizational efficiency can be maximized, and an

effort made not to leave opportunities on the table.For example, one organi-

zation never bothered to obtain an approved indirect rate for government grants, which meant no overhead costs were allowed. If 10 to 30 percent of grants could cover overhead costs, that would free up the unrestricted sourc-es presently paying for them.

Plan your reserve fund strategy now so you can keep your organization operating when your clients need you most. – Elizabeth Penney, M.B.A.

The loss of a major funding source. Emergency expenditures. An opportunity to respond to a constituent’s crisis.

These are a few reasons why your organization needs to have a pool of unrestricted cash available for immediate use – a reserve fund.

The reality is that nearly 3 in 10 nonprofits have one month or less of cash on hand to cover operating expenses.

That’s according to the 2011 Nonprofit Finance Fund survey of non-profits. At the same time, 78 percent of

the nonprofits surveyed saw increased demand for their services, which underscores just how vital they are to the communities and clients they serve.

Many nonprofit organiza-tions don’t consciously include reserve planning in their fundraising efforts. The focus is on bringing in enough money to cover program expenses. Any excess is regarded with suspicion as “a profit.”

In reality, the definition of nonprofit means that excess funds are not distributed back to shareholders or owners, but rather reinvested in the orga-nization’s mission.

Of course, most grants require that all funds be spent

on specific programs or returned, so reserve funds need to be raised from unrestricted sources.

The first question is: How big should the reserve be?

Many experts talk about an amount equal to three or six months of operating expen ses. But the size should be tailored to your specific needs.

For example, if you own a building, you need to have a capital reserve for unexpected repairs, such as a furnace malfunc-tion or burst pipe. Funds for insurance deductibles should be put aside whether you rent or own and for company-owned vehicles.

In calculating operating reserves, trends and history regarding revenue sources should be examined. Organizations with a good supply of fee-paying clients or consistent, committed donors are more stable than those relying on a few large grants.

How quickly can new revenue sources contribute, if needed? In some cases, the lag period between application and award can

be six months. Close relationships with supportive foundations can be a lifesaver during a crisis, when they may allow you to apply for operating funds. Many did so during the recent recession.

Keep an eye on trends with long-term funding sources, whether foundation or government. If they cut back 10 or 20 percent, what would be the impact on your organization?

See Reserve fund on back

Why a healthy reserve fund is crucial to nonprofits

Nearly 3 in 10 nonprofits have one

month or less of cash on hand to cover operating expenses.

If a crisis struck – such as 9/11, which decimated funding

to many nonprofits for an extended period – how much would it take for you to keep your doors open?

I n s i d e

I n s i d e

➜Endowment Funds: Their unique benefits

➜Elections & NonprofitsWhat you can and can’t do without jeopardizing your tax-exempt status

Summer 2012

Reserve fund continued from front

The technical information in this newsletter is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the information contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS. © 2012 CPAmerica International

More Than Money

Financial news & notes for nonprofit organizations from:

100 Second Avenue South, Suite 600, St. Petersburg, Florida 33701 | (727) 821-6161 | www.gsscpa.com

100 Second Avenue South, Suite 600, St. Petersburg, Florida 33701www.gsscpa.com | gss@gsscpa.com

(727) 821-6161

If we may answer any of your questions on the information contained in this publication, please contact us.