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Nonprofits

4 Reasons Your Nonprofit Needs an External Auditor

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How are you handling your nonprofit’s audits?

Internal audits are a great way to promote fiscal responsibility, but they’re not always the most reliable. Because the auditor is an employee of the organization with a vested interest, it can be challenging to conduct a neutral analysis.

An external auditor, on the other hand, has no affiliation with your nonprofit. They are typically CPAs who are hired to conduct a thorough review of all financial statements to ensure they fairly represent the entity. In other words, they verify the work of internal auditors — which can be beneficial to your organization for several reasons:

  1. Mitigate potential risks. External auditors are in a better position to spot discrepancies that can paint an inaccurate picture of your nonprofit’s finances. They can help board members identity any unethical practices or internal errors that could compromise the integrity of the organization.
  2. Perform a thorough analysis. The auditor will delve into balance sheets and cash flow statements, as well as leases, mortgages, donations, budgets and more. They may also interview your board members and your employees to learn more about internal controls.
  3. Offer outside expertise. Following their review, the external auditor will share their assessment with your organization’s audit committee. They may make recommendations on how to improve your processes and procedures, and safeguard assets. They will also answer any questions raised during the investigation.
  4. Strengthen donor potential. Did you know that charity rating websites take into account whether a nonprofit undergoes an external yearly audit? Donors may be more likely to contribute to a charitable organization with this distinction.

Preparing for an external audit

An external audit is usually performed at the close of an organization’s fiscal year. To streamline the process, begin by compiling the financial documentation that the auditor will likely need. This includes:

  • Banking and financial statements
  • Budgets
  • Donations
  • Payroll documents
  • Accounts receivable and accounts payable records
  • Mortgage statements or leases
  • Board meeting minutes

In addition, it’s important to share any factors or legal matters that may have impacted the organization’s reporting and recordkeeping. So be sure to collect any related documentation.

Guide your organization to a healthier financial future

Some nonprofits, because of the size of their annual budgets, or because they receive federal or state funding, are required by law to conduct an independent audit.

In other situations, a charitable nonprofit has a choice whether or not to conduct an independent audit. If you’re among the latter, you may choose to invest in an audit for the reasons mentioned above. If you need help determining if an audit would benefit your organization, give us a call at (973) 301-2300 to learn more.

6 Tips to Maintain Your Nonprofit’s Tax-exempt Status

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Once you’ve completed the process of securing your nonprofit’s tax-exempt status, the last thing you want to do is lose it. If you lead a 501(c)(3) organization, be sure to familiarize yourself with the IRS’s tax-exempt rules and prohibited activities to keep your status in good standing.

1. Political campaigning. 501(c)(3) nonprofits are banned from participating in any political campaign for or against a candidate running for public office. This applies to campaigns on all levels, including federal, state and local elections.  Your organization will be in violation of the rule if it makes contributions to political campaign funds or issues public statements favoring or opposing a candidate. However, your nonprofit is allowed to engage in certain activities promoting voter registration and participation. It can also provide voter information, as long as it remains neutral.

2. Lobbying. Lobbying is defined as attempting to persuade members of a legislative body to propose, support, oppose, amend or repeal legislation. Essentially, your organization can’t try to convince a legislator to vote a certain way. As long as lobbying doesn’t represent a “substantial part” of your nonprofit’s overall activities, it generally won’t harm your tax-exempt status. But what you consider insubstantial may differ from the IRS’s definition. Consult your tax advisor for further details.

3. Unrelated business income. Nonprofits are not designed to make money, but that doesn’t mean your organization can’t earn income, as long as it furthers your tax-exempt mission and meets several other legal tests. A nonprofit’s unrelated business income is taxed at the same tax rate as corporate income. This tax is commonly known as the unrelated business income tax (UBIT) and is triggered when an organization’s annual income exceeds $1,000.

4. Annual reporting. You can’t simply apply for and receive a tax-exempt status, then forget about it. Your organization must also satisfy regular reporting obligations (with certain exceptions for most faith-based organizations), including filing these federal forms:

    • Form 990, Return of Organization Exempt from Income Tax
    • Form 990-EZ, Short Form Return of Organization Exempt from Income Tax
    • Form 990-N, Electronic Notice (ePostcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-E

Your state may also have reporting requirements, so check with your attorney or advisor for details.

5. Private benefit inurement. No part of a 501(c)(3) organization’s net earnings may inure to the benefit of a private shareholder or individual who has the opportunity to benefit. This prohibition is aimed at preventing insiders from profiting from their charitable services. Board members, officers, directors and other key employees all qualify as insiders. The ban against private inurement includes payment of dividends, unreasonable executive compensation arrangements and transfers of property to insiders for no or below-market value.

6. Stated purpose. Your tax status may be jeopardized if you stop operating in accordance with your stated tax-exempt function. This is harder for the IRS to monitor. In general, the tax agency only acts when a nonprofit admits it’s no longer following its own mandate. For example, an organization may come under scrutiny for failing to file annual reports. The IRS investigation may subsequently indicate that its exempt function has changed.

Protect your status as a nonprofit

Spend more time championing your cause, and less time worrying about the IRS. NJ CPA firm Magone & Company can help. Give us a call today at (973) 301-2300 to learn more.

Charitable Donations: Recouping Tax Savings for Your Time and Services

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Donating to charities is a noble way to support causes that are close to your heart. But if your contributions begin and end with writing a check, you may be missing out on some satisfying volunteer opportunities — and a few tax deductions. IRS rules allow you a number of tax breaks for contributions other than cash that you can make to qualified organizations.

Going the extra mile…literally

Did you know that you can deduct the costs of going to and from a location where you volunteer your services? You can also deduct the costs of driving on behalf of the organization — for example, to pick up or deliver items. To compute your deduction for charitable driving, use the standard mileage rate of 14 cents per mile for 2020, per the IRS, or deduct the actual cost of your gas and oil. Either way, parking fees and tolls are also deductible.

Recouping your expenses

If you’re not reimbursed by the organization, the out-of-pocket expenses you pay in giving services may count as a charitable donation. While you can’t deduct your personal expenses, such as childcare costs accrued while volunteering, you can deduct the costs of buying and cleaning a uniform you’re required to wear while volunteering.

No time to volunteer?

Many charities accept non-cash donations. And giving investments that have increased in value can be a smart tax move. Instead of selling an investment and paying capital gains tax, donate it to a qualified organization. If you held the investment for more than one year, you can generally deduct its fair market value at the time of the donation. Remember, you’ll need a receipt from the organization to claim a tax deduction, and other records also may be required.

Contributions must be made to qualified organizations that meet IRS guidelines. Not sure? Let the NJ CPAs at Magone & Company help. Give us a call today at (973) 301-2300.

Managing Business Expenses: What You’re Not Doing Can Cost You

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Increasing your profits requires selling more and/or spending less. While building up your sales may require an extended effort — especially given the current economic climate — business costs are often very ripe for a quick trimming. Here are some possibilities to consider to help maintain profitability:

Supplies and other purchases
In any business, there are relatively few items that represent a large share of all outlays. The first step in cutting expenses is, therefore, to identify your highest costs. You may be able to trim many of these costs by ensuring you always bid out significant purchases or by more actively seeking less expensive alternatives. For many companies, inventory carrying costs are a huge expense. Focusing on matching your inventory quantities more closely to your short-term needs could result in significant savings.

Telecommunications and similar services
The ongoing services you buy may also offer the potential for cost savings. Revisit your choice of telecommunications vendor and your usage, and look carefully at your costs for financial services. If you borrow or maintain a line of credit, always compare the rates from more than one financing source before you commit. Make sure you’re not paying higher-than-necessary fees for your company’s checking and deposit services.

Cash management
To control cash outlays, take advantage of discounts for early payment whenever possible. And look to delay payments for as long as you can without giving up discounts. On the receiving side, deposit receipts daily, and always actively pursue collection of any invoices that are past due. To help control your working capital needs and, therefore, your credit costs, try to match any new liabilities to your anticipated cash flow.

Fixed expenses
One other category worth examining is fixed expenses that are long-term commitments. While you usually can’t change these quickly, be aware of when a window for change will open and prepare well in advance by considering lower cost alternatives

Feel free to give us a call at (973) 301-2300 to learn more ways to control your spending.

Traveling for Business and Pleasure: What’s Deductible?

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Business owners who travel out of town on business may choose to extend their trips and take a little time to relax and see the sights. When a trip is partly for business and partly for pleasure, various expenses may still be deductible.

Domestic travel

A self-employed individual whose trip is primarily for business may deduct the full cost of the travel itself (such as airfare or train fare) even though some of the trip is devoted to personal activities. Additionally, various other expenses allocable to business, such as lodging and 50% of meal costs incurred on the business days, may also be deductible.

If a trip is primarily for personal reasons, the entire cost of the travel is a nondeductible personal expense. However, expenses incurred while at the destination that are directly related to the taxpayer’s business may be deducted.

Foreign travel

The deductibility rules for combined business/pleasure trips outside of the U.S. are a little more complicated in some respects. Even if the primary purpose of the trip is business, the cost of the travel itself generally has to be allocated, and only the business portion is deductible. However, no allocation has to be made — and the full travel cost is deductible — if:

  • The trip lasts for no more than seven consecutive days (excluding the day of departure but including the day of return); or
  • Personal days total less than 25% of the total days spent on the trip (including both the day of departure and the day of return); or
  • The taxpayer can establish that the opportunity to take a personal vacation was not a major consideration for the trip. For these purposes, business days include days when business is conducted for only part of the day, days spent traveling to and from a business destination, and weekend days or holidays that fall between two business days.

With smart planning, self-employed business owners can maximize their write-offs for combined business/pleasure travel.

Navigating the new business normal

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No business sector has been spared the fear and uncertainty we’re all currently mired in.

As a firm, Magone & Company has been busy on several fronts — helping business clients seeking financing from the Small Business Administration (SBA) in the form of Economic Injury Disaster Loans (EIDL), applying for the Paycheck Protection Plan (PPP), and getting ahead of the continued business challenges to come.

If this is the new normal for the foreseeable future, here are some tips to help navigate it:

  • Cash is king. If you haven’t already done so, negotiate with landlords and vendors for some accommodation on your payment terms.
  • If you received a PPP loan, bring back your workforce and pay them within 8 weeks of receipt to ensure loan forgiveness. If you have not already done so, establish a separate account for these funds and transfer them into your operating account when paying payroll and related expenses. Keep in mind to reduce the payroll for the fund transfer for any employee making more than $100,000 annually, or $8,333 monthly/$4,166 semi-monthly. If the funds are used to pay payroll in excess of $100,000 they will not be forgiven.
  • If you have an existing credit facility, make certain you are diligent with loan covenants. Making certain to communicate immediately with lenders if you will not be meeting the various covenants — especially reporting covenants for annual financial statements.
  • Update your budgets and cash flow projections. If you don’t usually prepare them, prepare them now! You can’t go by the seat of your pants when negotiating vendor terms, rent and/or mortgage deferral.
  • Stay in touch with your banker. Let them know what changes you have made in your business, how business has been in the last six weeks, and your projections for the remainder of the year.
  • Make informed decisions. As difficult as it is to consider pay reductions, furloughs or terminations, be realistic when reviewing updated budget and cash flow numbers to determine if your business can support your previous headcount.
  • During this period, communicate with customers and vendors. More is better. Let your customers know you’re open for business, and your vendors know you’re still in business and paying their invoices.

The government has stated its desire to replenish the PPP in the amount of $250 billion, so if you missed out on the first round of funding be ready to submit your application for the next round of funding.

Of course, this is general information. Be sure to check with your accountant or financial advisor for guidance specific to your situation. Don’t have anyone to help? We invite you to check in with our team for assistance with any aspect of your business operation or future strategy.