Not-for-profit | RKL LLP
Posted on: February 15th, 2018

What Does Tax Reform Have to Do with My Nonprofit?

What Does Tax Reform Have to Do with My Nonprofit?Most of the headlines about tax reform focus on the individual and for-profit business provisions. Nonprofit leaders may wonder how the Tax Cuts and Jobs Act (TCJA) will affect their finances and operations. Let’s examine two key ways tax reform directly impacts tax-exempt organizations.

Direct nonprofit tax reform impact: Unrelated business income

Tax reform changes how unrelated business income (UBI) is calculated and taxed.

Starting in 2018, nonprofits must calculate UBI on each trade or business individually, rather than the previous aggregated method. The definitions for trade or business in the TCJA are currently unclear – for example, do investments in multiple real estate partnerships count as one trade or business or must each partnership be counted separately? This is just one of the many areas of tax reform that will require additional clarification as regulations are drafted by the IRS.

Under tax reform, UBI will now be taxed at the new corporate rate of 21 percent, instead of the previous multi-level rate schedule. The financial impact of this rate change depends on the size of the nonprofit. Smaller organizations with less than $90,000 of taxable income will now pay more due to the switch, while larger organizations will see a smaller tax burden.

Net operating losses (NOLs) from prior years may still be used to offset all UBI tax. Tax reform sets new rules for NOL carryforwards at 80 percent of taxable income. Keep in mind, all new NOLs must be calculated by trade or business and can no longer “cross pollinate.”

Tax reform also expands the definition of UBI to include certain fringe benefits offered to employees, like transportation, parking or on premise athletic facilities.

How nonprofits can prepare for UBI change

Under the new UBI tax calculation and rate, nonprofit leaders must ensure they are allocating the appropriate general or shared expenses to each trade or business to maximize benefit. Other options, such as moving multiple taxable trade or business activities into a wholly owned corporation to offset profitable activities with loss activities, should be considered with the consultation of a tax advisor.

With regard to certain fringe benefits now considered as UBI, nonprofits should consider increasing wages and eliminating qualifying benefits from pay plans to avoid an additional tax burden. Your tax advisor can demonstrate the pros and cons of such a decision.

Direct nonprofit tax reform impact: Excise taxes

To bring nonprofit pay in line with public company compensation rules, the TJCA created a new 21 percent excise tax on annual compensation of $1 million or higher to an organization’s top five highest compensated employees. This new excise tax also applies to certain “golden parachute” separation pay packages. Medical services provided by doctors, nurses and veterinarians are excluded from this new tax, which is the obligation of the nonprofit, not the employee.

There are a lot of details to unpack around this new excise tax, related to issues like separation pay calculation and renumeration, so make sure to discuss your nonprofit’s unique situation with your tax advisor.

Additionally, the net investment income of some private colleges and universities are subject to a new 1.4 percent excise tax. Institutions with at least 500 students (over half of which are based in the U.S.) and prior year assets of at least $500,000 per full-time student will be hit with this new tax. This asset threshold calculation does not include assets used to carry out a school’s educational purpose, but it does include assets and net investment income of all organizations related to the private university.

How nonprofits can prepare for excise taxes

To continually assess the annual impact of the compensation excise tax, nonprofit leaders should keep close track of “covered employees” and “remuneration” from related entities to determine liability. One tactic worth discussing with your tax advisor is whether or not certain individuals above this pay threshold can be paid partly or in full by an affiliate not deemed a related party.

RKL to monitor implementation

As mentioned earlier, many of the ambiguous or unclear areas of tax reform will be fleshed out during the rule-writing process. RKL’s team of professionals dedicated to serving the not-for-profit industry are monitoring this process with an eye to nonprofit impact and will provide additional updates and clarifications as more information becomes available.

In the meantime, contact Douglas L. Berman, CPA, RKL’s Not-for-Profit Industry Group leader, with any questions regarding tax reform’s impact on nonprofits or for assistance preparing for the new tax landscape for organizations. Visit RKL’s Tax Reform Resource Center for more information and insights.


Stephanie E. Kane, CPAContributed by Stephanie E. Kane, CPA, Manager in RKL’s Tax Services Group. Her client responsibilities include serving clients in a wide variety of industries with a focus on not-for-profit entities.






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Posted on: January 11th, 2018

Nonprofit Update: PA Raises Audit Requirement Threshold

Nonprofit Update: PA Raises Audit Requirement Threshold Starting in February 2018, Pennsylvania nonprofits must reach higher levels of annual contributions in order to trigger audit requirements.

Act 71 of 2017, which Governor Wolf signed into law in December, increased the annual contribution levels at which a nonprofit must undergo an audit, review or compilation. The new thresholds are:

  • Annual contributions of $750,000 and above: Audit required
  • Annual contributions between $250,000 and $750,000: Review or audit required
  • Annual contributions between $100,000 and $250,000: Compilation, review or audit required
  • Annual contributions below $100,000: Audit, review or compilation optional

Pennsylvania defines annual gross contributions as federated campaign contributions, membership dues (contribution portion only), all income from fundraising and gaming events, contributions from related organizations and general contributions. On Form 990, these categories of annual gross contributions are captured in Part VIII on lines 1a, 1b, 1c, 1d, 1f, 8a and 9a. On Form 990-EZ, annual gross contributions are tallied in lines 1, 6a and 6b, less any government grants.

While these new state thresholds can be a strong indicator of the type of financial statement a nonprofit must prepare, leaders of the organization should consider other circumstances that may also necessitate financial statements before making any changes to routine compliance procedures. Beyond state regulators, there are other entities that use and require financial statements, like grant issuers and financial institutions.

A companion bill simultaneously signed into law by the Governor, Act 72 of 2017, addresses the timeliness of state charitable registration forms. Currently, nonprofits must ensure their forms are received by state regulators before the renewal date to be considered timely. Under Act 72, however, nonprofit forms will be considered timely so long as they are postmarked on or before the date of renewal. Act 72 will also hold the Department of State’s Bureau of Corporations and Charitable Organizations to a standard, 15-day review timeframe for renewal forms.

Acts 71 and 72 take effect February 20, 2018. For financial statement purposes, these means any organization with a fiscal year ending March 31, 2017 or later will follow the new thresholds. For filing purposes, any return due after February 20, 2018 will be considered filed when postmarked.

For more information on these legislative changes or to assess what type of financial statement your nonprofit may require, contact Douglas L. Berman, CPA, RKL’s Not-for-Profit Industry Group Leader.


Stephanie E. Kane, CPAContributed by Stephanie E. Kane, CPA, Manager in RKL’s Tax Services Group. Her client responsibilities include serving clients in a wide variety of industries with a focus on not-for-profit entities.






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Posted on: November 29th, 2017

How New Revenue Recognition Clarification Will Impact Nonprofit Accounting for Grants and Contracts

nonprofit grants and contract revenue recognitionNonprofits will soon have clearer guidelines by which to recognize and classify revenue from grants, contracts and contributions, thanks to a new standard proposed this summer by the Financial Accounting Standards Board (FASB).

Proposed by FASB in August 2017, the Accounting Standards Update (ASU), Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made, is intended to improve and clarify existing guidance of revenue recognition of grants and contracts by not-for-profit entities.

Impact on nonprofit finance function

Nonprofit leaders and finance teams should consider this proposed ASU in conjunction with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. Together, these documents can help organizations determine whether a revenue transaction is a contribution (nonreciprocal transaction) or an exchange (reciprocal) transaction. For transactions considered contributions, the guidance clarifies the definition of conditional and unconditional contributions.

It is possible under the proposed guidance that more grants and contracts could be accounted for as contributions, or nonreciprocal transactions. With a proposed effective date of fiscal years beginning after December 15, 2018 for most entities, not-for-profits should begin evaluating their revenue transactions now under this guidance.

Define transaction as a contribution or an exchange

For those transactions supported by grant agreements or contracts, each individual agreement or contract should be evaluated. A grant transaction would be considered an exchange transaction if the resource provider receives commensurate value in return for the resources provided.

In defining commensurate value, it is important to note that if the general public is receiving the primary benefit, then the transaction is considered to be a contribution. In addition, the execution of a resource provider’s mission or the positive sentiment from acting as a donor does not constitute commensurate value. For the transactions that are considered exchange transactions, the organization should then follow other revenue recognition guidance, such as ASC Topic 606.

Define contribution as conditional or unconditional

Once a revenue transaction is determined to be a contribution transaction, the next step is determining whether it is considered conditional or unconditional. FASB’s proposed guidance clarifies the definition of conditional to require these two factors:

  • A donor-imposed stipulation that represents a barrier that must be overcome; and
  • A provision that provides the grantor the right of return of assets transferred or the right of release of the grantor from its obligation to transfer assets. The right of return of the assets transferred or the right of release of the grantor from its obligation to transfer assets must be determinable from the agreement (or another document referenced in the agreement).

The proposed ASU includes a table with a list of indicators that could be helpful in determining possible barriers. Beyond the two factors listed above, there are a variety of indicators that play into defining a contribution as conditional, with a varying degree of impact and significance, including:

  • The agreement includes measurable, performance-related goals such as achievement of a certain level of service, an identified number of units of output or a specific outcome.
  • The agreement includes a non-administrative or non-trivial stipulation that is related to the purpose of the agreement.
  • The agreement includes a stipulation that limits the discretion by the recipient on how the funds should be spent. This would not include when the only requirement is that the transferred assets be used for a general operating purpose or restricted for ongoing programs or activities.
  • The agreement requires additional actions that would be required by the recipient outside of the recipient’s normal activities.

The presence of both a barrier and a right of return or a right of release indicates that the organization would not be entitled to the transferred assets and the nonreciprocal transaction would be considered conditional. If the agreement does not have both, the transaction would be unconditional. If a contribution contains stipulations that are ambiguous and not clearly defined, the proposed ASU presumes that the contribution should be considered conditional. A conditional contribution would not be recognized as revenue until the barrier is overcome and the recipient organization is entitled to the transferred assets.

Once a contribution has been deemed unconditional, the organization would determine whether the contribution is restricted as a result of either a donor-imposed restriction or the passage of time, consistent with current generally accepted accounting principles.

Effective dates and action items for transition

The effective date for the proposed ASU for public business entities or not-for-profit entities that have issued, or are conduit bond obligors for securities that are traded, listed or quoted on an exchange or over-the-counter market, is annual periods beginning after December 15, 2017. For all other entities, the effective date is annual periods beginning after December 15, 2018.

The amendments in this ASU should be applied on a modified prospective basis in the first set of financial statements issued following the effective date to agreements that are either not yet completed as of the effective date or entered into after the effective date. A completed agreement for which revenue and/or expense has been recognized in accordance with current guidance would not be impacted by these amendments.

Additionally, for those agreements not yet completed, the amendments would be applied only to the portion of revenue or expense that has not yet been recognized before the effective date. No prior period results or activities would be restated and there would be no cumulative-effect adjustment to the opening balance of net assets or retained earnings at the beginning of the adoption year.

FASB accepted comments on this proposed ASU through November 1, 2017. Many of the comments included a request for FASB to consider adding a framework and specific examples to address the evaluation of a single transaction that is in part an exchange and in part a contribution for both the resource provider and the recipient organization.

Considering that many not-for-profit organizations are already focused on implementing other standards, such as ASU 2014-09, Revenue from Contracts With Customers, and ASU 2016-14, Not-for-Profit Entities: Presentation of Financial Statements of Not-for-Profit Entities, the effective date and required implementation of this proposed ASU could prove difficult. Nonprofits are encouraged to review these changes with their internal finance teams and external practitioners now in order to avoid potential implementation issues.

RKL’s team of advisors focused on serving nonprofits are available to answer any questions or help nonprofits prepare. Contact Douglas L. Berman, CPA, RKL’s Not-for-Profit Industry Group Leader, to get started.


Andrew D. Kehl, CPA, Manager in RKL's Audit Services GroupContributed by Andrew D. Kehl, CPA, Manager in RKL’s Audit Services Group. Andrew has accounting and auditing experience serving clients in a wide variety of industries including nonprofit, healthcare and government.





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Posted on: November 7th, 2017

Six Questions to Ask for a More Engaged, Effective Board

Six Questions to Ask for a More Engaged, Effective BoardAn effective board of directors is key to an accountable, successful organization. What does an effective, engaged board look like? Beyond the traditional financial, policy, compliance and mission-driven roles, a fully engaged board is also actively and productively invested in the work of the organization. Boosting board engagement is not an exact science and may involve some trial and error, but organizations can take actions to affect how board members feel about the organization and how they interact with each other and with the management team. Below, we outline key questions to consider when evaluating board effectiveness and engagement.

How Empowered is the Governance Committee?

Is your governance committee really just a nominating committee or is it empowered with the ongoing development and engagement of board members? This involves focusing on fundamental issues like execution of the strategic plan, adherence to the organization’s mission, assembly of an experienced, diverse board and securing the necessary education or information to seize opportunities and minimize constraints for the board.

Are You Actively Recruiting Board Members?

With 70 percent of nonprofits reporting difficulty with qualified board member recruitment, the governance committee can make it easier for the right candidates to emerge by creating specific profiles for new board positions and current members. Understanding and identifying the right mixture of skill sets, experiences and mindsets of current and potential members is critical to creating the right board team.

How Strong is Your Board Orientation?

Recruiting a board member is only the first step in what can be a very beneficial relationship. A comprehensive orientation program that introduces new board members to their roles and responsibilities and to the organization’s mission sets the tone of engagement for new board members.

A board mentoring program that assigns new board members to a veteran or past member is an effective way to address questions and pass along important information. A board member who recently rotated off may be an ideal person for this role. This helps a new member gain comfort in the role, while retaining the past member’s engagement.

Are Board Members Engaged in Successful Partnerships?

It is critical for all board members to personally connect and forge a relationship with the organization they serve. To that end, encourage board members to build relationships with one another and with the management team. This starts with the rapport between the organization’s Executive Director and the board chair. Regular and candid communication between these two leaders establishes mutual trust, and sets the stage for a shared governance model.

Are You Committed to Diversity?

In its survey of more than 1,700 nonprofit chief executives and board chairs, BoardSource found that 90 percent of CEOs and board chairs were white, as were 84 percent of all board members. These numbers are largely unchanged from BoardSource’s initial survey in 1994. Studies indicate that board diversity fosters greater engagement by allowing members to share perspectives that come from varied backgrounds and experiences. People tend to interact differently in a diverse group. They tend to probe topics more extensively, engage in fuller conversations and make better decisions.

Do You Assess Board Performance Annually?

An annual board assessment is critical to ensuring and maintaining a high level of engagement. The governance committee should take on the responsibility of leading the annual board self-assessment process. The results will help identify the board’s development opportunities for the following year.

Investing time to cultivate board engagement will pay dividends for any organization. When truly engaged, board members are the organization’s top ambassadors, advocates, strategists and supporters.

Board engagement is an ongoing, fluid process with discrete components and steps. RKL’s team of business consultants and operational improvement experts are available to assist your organization with implementing a board engagement program. Contact Douglas L. Berman, CPA, Not-for-Profit Industry Group Leader, to start the conversation.


Gretchen G. Naso, CVA, MBA, Principal in RKL’s Business Consulting Services GroupContributed by Gretchen G. Naso, CVA, MBA, Principal in RKL’s Business Consulting Services Group. As a Certified Valuation Analyst, Gretchen has extensive experience providing business valuations for privately held companies, general partnerships and family limited partnerships. She also conducts operational reviews for closely held businesses, governments and not-for-profit organizations, which allows her to identify and prioritize opportunities for financial and operational improvements.


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Posted on: October 17th, 2017

FASB Changes to Bring More Context Around Nonprofit Liquidity and Cash Flow

FASB Changes to Bring More Context Around Nonprofit Liquidity and Cash Flow The financial statements of not-for-profit organizations will soon undergo a significant transformation, courtesy of the Financial Accounting Standards Board (FASB). As part of its response to stakeholder feedback to improve usefulness and clarity for the not-for-profit reporting model, FASB published Accounting Standards Update (ASU) No. 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, in August 2016. The ASU adjusts financial reporting requirements across a variety of categories to improve consistency and comprehension of the entities that rely on this data, such as grantors, donors and creditors.

This update, which is effective for fiscal years starting after December 15, 2017, contains a broad spectrum of changes. To give nonprofit leaders a better sense of what’s ahead and how they should prepare, we have been breaking out the changes by category in separate blog posts for detailed examination. Previously, we looked at the impact on investment returns and expense reporting, followed by a deep dive into the efforts to simplify net asset classification and reporting. Today, we conclude this blog series by examining how this ASU affects disclosure of liquidity and cash flows.

New disclosures on liquidity and availability of resources

ASU 2016-14 expands the quantity and quality of required information related to a nonprofit’s liquid financial resources. This additional information can help readers of the financial statements understand the limits on how, and during what time frame, the organization’s resources can be used.

In the footnotes of the financial statements, nonprofits must provide qualitative information that communicates how the organization manages its liquid resources available to meet cash needs for general expenditures within one year of the statement of financial position date. Nonprofits can choose to include the quantitative information required by this ASU either on the face of the financials or in the footnotes. Either way, this quantitative data must communicate the availability of financial assets at the statement of financial position date to meet cash needs for general expenditure within one year of the statement of financial position date.

This disclosure must also explain how net asset restrictions affect the availability of financial assets at the date of the statement of financial position to meet short-term financial obligations. Availability may be affected by the nature of the assets, internal limits imposed by the governing board or external limits imposed by donors, grantors, laws and contracts with others.

For example, an organization could comply with this new requirement by explaining in the footnotes that it maintains liquidity by managing its working capital and having available a line of credit with a bank. To support this statement, the organization could include a table (also in the footnotes or as a reference to the face of the financials) that reflects its financial assets as of the statement of financial position dates, reduced by amounts not available for general use due to contractual or donor-imposed restrictions within one year of the statement of financial position date.

Options for statement of cash flows

Nonprofits may continue to choose either the direct or indirect method to report the net amount for operating cash flows on the face of the financial statements. For nonprofits using the direct method, this ASU frees them from the requirement to disclose indirect method reconciliation for operating cash flows. This change in reporting requirement is a small but valuable simplification of data presentation.

Even though this ASU improves and streamlines nonprofit reporting, it still represents a considerable shift from current practice. Ahead of the effective date, nonprofits should invest the time to review and familiarize themselves with this update and how it will impact their current procedures.

RKL’s dedicated team of professionals serving the nonprofit sector are here to help organizations prepare for adoption. Contact Douglas L. Berman, CPA, Not-for-Profit Industry Group Leader, with any questions or for more information.

Sally E. Stewart, CPAContributed by Sally E. Stewart, CPA, Principal in RKL’s Audit Services Group. Sally provides audit services for not-for-profit organizations and government entities.





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Posted on: September 26th, 2017

Nonprofits: Don’t Overlook This Tax-Advantaged Way to Raise Funds

Nonprofits: Don’t Overlook This Tax-Advantaged Way to Raise FundsEducation-related Pennsylvania nonprofits may be eligible to apply to the PA Department of Community and Economic Development (DCED) to receive contributions from the state’s Educational Improvement Tax Credit (EITC) program. Many organizations currently reap the benefits of this tax-advantaged funding mechanism, but recent changes to the EITC program increase the availability of these credits to businesses and their owners in ways that expand potential donor pools.

What is the EITC program?

The EITC program has long promoted expanded educational opportunities for Pennsylvania students by providing tax credits to eligible businesses that contribute to approved scholarship (including pre-kindergarten) and educational improvement organizations.

Once a nonprofit is approved by DCED to accept qualified contributions, businesses can support it with charitable donations and receive tax credits to offset certain Pennsylvania business and individual tax balances.

The EITC program encompasses two types of tax credits – Education Tax Credits and Opportunity Scholarship Tax Credits. Both of these tax credits can equal 75% of the value of the contributed amount up to a maximum of $750,000 per taxable year. The credit can be increased to 90% of the contribution if the contributor agrees to a two-year commitment. The threshold is different for using the EITC program for contributions to registered pre-kindergarten scholarship organizations. In this case, the tax credit is 100% of the first $10,000 contributed and 90% on any additional amount, up to a maximum contribution of $200,000 annually.

What types of organizations qualify to participate in the EITC program?

There are three categories of organizations registered for the EITC program: Scholarship, Educational Improvement and Pre-Kindergarten Scholarship. All three categories require an organization to be a nonprofit entity that is exempt from payment of federal income tax under IRC 501(C)(3). Beyond these criteria, each category has additional requirements, as outlined below. 

Scholarship Organization:

  • Must contribute at least 80% of its annual EITC receipts to a scholarship program, qualified under the requirements of Article XVII-F of the Tax Reform Code.

Educational Improvement Organization:

  • Must contribute at least 80% of its annual EITC receipts as grants to a public school, charter school or private school for innovative educational programs. The grants can include costs incurred by these organizations to carryout innovative educational programs in conjunction with public schools.

Pre-Kindergarten Scholarship Organization:

  • Must contribute at least 80% of its annual EITC receipts to aqualified Pre-K Scholarship Program.
  • If the nonprofit serves as both a Scholarship Organization and a Pre-K Scholarship Organization, it must maintain separate funds for contributions to each category.

What’s changed with the EITC program?

In 2014, Pennsylvania amended its tax code to expand portions of the EITC in several key ways, including broadened definitions of entity types that can apply for the credit and the addition of more tax types to be offset by the credit.

The most significant adjustment is the expanded definition of a “business firm” to include a “Special Purpose Entity” (SPE). An SPE must be formed as a pass-through entity. The sole purpose of the SPE can be to receive capital from its members, apply for the tax credits and disburse funds to approved organizations. The members of the SPE can then receive EITC credits to offset their individual tax liabilities, based upon ownership percentages, which can be varied from the formal business entity.

How can my nonprofit leverage these changes for financial benefit?

Organizations can encourage SPEs to increase the funding received through the EITC program. If any potential donors are partners, shareholders, members or employees of another business firm and wish to maximize the amount of tax credits they may earn, they can pool their contributions into an SPE, which can serve as the vehicle to financially support a nonprofit and earn tax credits. Since Pennsylvania tax law does not allow individuals to use charitable contributions to offset taxable income, funding an SPE that contributes to an EITC-eligible organization allows individuals to receive a state tax credit to offset their individual PA income tax liabilities.

Nonprofits can take advantage of the boom in the craft brewing sector to find new corporate donors by incentivizing local small brewers that pay the malt beverage tax to contribute financial support via the EITC program.  


RKL’s Not-for-Profit Industry Group can help currently registered organizations maximize the EITC expansion among potential or existing donors, and help interested organizations determine EITC eligibility and register for the program. Contact Ruthann Woll, RKL Tax Principal, at 610.376.1595 for more information or assistance.

Stephanie E. Kane, CPAContributed by Stephanie E. Kane, CPA, Manager in RKL’s Tax Services Group. Her client responsibilities include serving clients in a wide variety of industries with a focus on not-for-profit entities.





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Posted on: August 8th, 2017

Why Board Reporting Must Align with Strategic Planning

Why Board Reporting Must Align with Strategic PlanningAn engaged, effective board is critical to the successful execution of an organization’s mission and achievement of its vision. Far too often, however, the information and data the board rely upon to make significant decisions and set policy for the organization are presented without the context of the overarching strategic plan. Below, we’ll take a look at how connecting your organization’s reporting to the strategic plan helps the board manage accountability and measure progress toward its goals.

Board and management responsibilities

Before discussing improved board reporting, here’s a quick overview of the basic responsibilities of an organization’s board and management team. A good board is focused on setting policy, making key decisions and directing management to move the organization forward. A good board chair facilitates that focus by setting a clear agenda and keeping the members on track. Overall, the board is responsible for:

  • Approving and adopting the organization’s strategic plan;
  • Reviewing performance results compared to the organization’s mission, strategic goals and peer organizations;
  • Establishing performance metrics and goals for key management functions and roles; and
  • Developing a consistent schedule of review and carry out accordingly.

An organization’s management team is responsible for:

  • Maintaining a good relationship with the board;
  • Providing the board with regular performance reports and updates;
  • Executing board-approved policies to achieve strategic goals and objectives; and
  • Developing, applying and monitoring written performance standards for all organization functions.

Connect to strategic plan and measure performance

The common thread running throughout the roles and responsibilities outlined above is strategy. Without a clearly defined strategic foundation, the board cannot live its values and carry out the organization’s mission.

Once the strategic plan has been adopted, the board should identify the performance metrics that will be used to gauge progress and how regularly these metrics must be measured and reported. Ideally, performance metrics include results from the current period and a “trend period,” generally a previous five-year period, to provide helpful context and comparison.

Benchmarking data that compare the organization to its peers can also be a valuable assessment tool. Management should always include a narrative that explains negative trends, significant variances between time periods or differences between the organization and its industry or peer group. The frequency of performance metric reporting depends on the organization; however, a general best practice calls for the analysis to be completed quarterly at a minimum.

An organization’s performance metrics form the basis for evaluating and tracking progress toward strategic goal achievement. They also provide the board with information related to the organization’s goals. Goals that are not met should be assessed to determine if further action is warranted and goals that are consistently met should be evaluated to see if they should be increased or raised.

Other best practices for board reporting

An organization can also adopt the following to improve overall board reporting:

  • Adhere to established timeline for information availability and ensure that information is available well in advance of board meetings
  • Use technology and intranet (iPads, web portals, GoToMeeting) to expand access and participation
  • Develop a consistent, visual reporting format, like dashboards, charts or graphs

Interested in aligning board reporting with your strategic plan? RKL’s team of consultants can assist organizations, government agencies and other entities with this and many other financial management and operational improvement efforts. Contact one of our local offices today for more information.

Mark S. Zettlemoyer, CPA, CFEContributed by
 Mark S. Zettlemoyer, CPA, CFE, Partner in RKL’s Audit Services Group, and Gretchen G. Naso, CVA, MBA, Principal in RKL’s Business Consulting Services Group.

Mark has nearly three decades of public accounting experience serving local governments, not-for-profit organizations and a broad range of corporate clients.

Gretchen has significant experience is providing operational consulting services to both not-for-profit and commercial entities.

Gretchen G. Naso, CVA, MBA, Principal in RKL’s Business Consulting Services Group







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Posted on: June 13th, 2017

Simplified Net Asset Classification and Reporting Ahead for Nonprofits

Simplified Net Asset Classification and Reporting Ahead for Nonprofits Major changes are ahead for the presentation of nonprofit financial statements, thanks to Accounting Standards Update (ASU) No. 2016-14, Presentation of Financial Statements of Not-for-Profit Entities. Unveiled in August 2016 by the Financial Accounting Standards Board (FASB), ASU 2016-14 streamlines and simplifies requirements related to several aspects of financial reporting to improve consistency among not-for-profit organizations. This update takes effect for fiscal years beginning after December 15, 2017.

In order to help nonprofit leaders digest this significant update and prepare for the changes, we have been breaking out components for closer examination. Earlier this year, we outlined changes related to investment returns and expense reporting. Now, we turn our focus to another area of this ASU: net asset classification.

Simplified net asset classifications

One of the most significant changes from this ASU is reducing the number of net asset classifications. Currently, nonprofits must present net assets in one of these three classes: Unrestricted Net Assets, Temporarily Restricted Net Assets or Permanently Restricted Net Assets.

The current classification structure presents a number of challenges for nonprofits and related third parties (like donors, partner organizations, federal regulators, etc.), including misunderstanding of terminology, confusion around the classes, deficiencies in transparency and more. There is also a lack of information regarding how restrictions imposed by donors, laws and governing boards affect an NFP’s liquidity and classes of net assets.

For these reasons and more, ASU 2016-14 set out to simplify the presentation of net assets, reducing the classes from three to two and changing the basis of classification to address restrictions imposed by donors. This change will reduce complexity and improve understanding of financial statements. The two classes of net assets under the new standard are Without Donor Restrictions and With Donor Restrictions.

Reporting requirements for net assets

Under the new classification structure, the donor-imposed restriction category includes what was previously reported as Permanently Restricted and Temporarily Restricted. Net assets without donor-imposed restrictions, including those that are designated by the board, are those previously reported as Unrestricted. See additional information below related to board-designated net assets.

The change in classification to net assets With Donor Restrictions does not eliminate current requirements to disclose the nature and amounts of different types of donor-imposed restrictions. Additionally, separate line items may be reported within net assets with donor restrictions or in notes to financial statements to distinguish between various types of donor-imposed restrictions, such as those expected to be maintained in perpetuity and those expected to be spent over time or for a particular purpose. This information must be disclosed on the year-end balance of net assets with donor restrictions.

Revised definition and disclosure for board-designated net assets

As mentioned above, net assets that are without donor-imposed restrictions may still be designated by the board. Under current standards, board-designated net assets may be earmarked for future programs, investment or other uses. This remains true with the implementation of ASU 2016-14. Additionally, this ASU allows governing boards to delegate designation decisions to internal management, with those designations also included in board-designated net assets.

Although board-designated net assets exist under current standards, the new ASU adds a requirement to disclose information about the amounts, purpose and type of any board designations included in net assets without donor restrictions.

Underwater Endowment Funds

More minor in scope than the net asset changes, ASU 2016-14 also adds a new entry to the FASB master glossary for “underwater endowment funds,” which it defines as “donor-restricted endowment funds for which the fair value of the fund at the reporting date is less than either the original gift amount required to be maintained by the donor or by law that extends donor restrictions.”

The new underwater endowment fund definition brings with it new disclosure requirements. Nonprofits must now report the entire balance of endowment fund within the With Donor Restrictions class of net assets and, for each period a statement of financial position is presented, outline the information below in the aggregate for all underwater endowment funds:

  • Fair values of the underwater endowment funds
  • Original endowment gift amount or level required to be maintained by donor stipulations or by law that extends donor restrictions
  • Amount of the deficiencies of the underwater endowment funds.

In addition to reporting the financial characteristics of the fund as described above, nonprofits must also disclose the following:

  • An interpretation of the nonprofit’s ability to spend from underwater endowment funds.
  • A description of policy, and any actions taken during the period, concerning appropriation from underwater endowment funds.

It is important to note, however, that this ASU does not contemplate the effects of Pennsylvania’s Act 141 for endowments. It is up to organizations to consider the effect on their financial statements and disclosures, if any.

While the above changes and others contained in ASU 2016-14 will streamline and improve financial reporting for nonprofits, it will be a significant departure from current practice that will require preparation and adjustment. Nonprofit leaders and their finance teams should familiarize themselves with these impending changes prior to the fiscal year the ASU takes effect and work internally or with external practitioners to plan for adoption.

RKL’s team of professionals focused on the nonprofit sector are available to help organizations better understand and prepare for these changes. Contact Douglas L. Berman, CPA, Not-for-Profit Industry Group Leader, with any questions or for more information.

Michelle J. Frye, CPA, Manager in RKL’s Audit Services GroupContributed by Michelle J. Frye, CPA, Manager in RKL’s Audit Services Group. Michelle has over 14 years of experience in public accounting and serves the assurance needs of a wide range of not-for-profit organizations.




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Posted on: May 9th, 2017

The Nonprofit’s Guide to Tax-Smart International Giving

The Nonprofit’s Guide to Tax-Smart International GivingIn the course of philanthropic business or collaborative efforts, nonprofits based in the U.S. may wind up donating funds to a foreign tax-exempt organization. Transnational donations are, by default, subject to a 30 percent withholding in accordance with the Foreign Account Tax Compliance Act (FATCA). Though FATCA was enacted in 2010, the IRS in recent years has increased scrutiny of any foreign transactions. Nonprofits that give grants or donations to foreign charities must follow specific guidelines and maintain thorough documentation in order to avoid the 30 percent levy.

Proof needed for exemption

Through proper documentation, nonprofits can avoid FATCA’s withholding penalty via IRS Form W-8BEN-E by demonstrating that the foreign organization qualifies to be supported by a domestic nonprofit. Here are some important points to keep in mind about completing this form.

  • The foreign organization receiving the funds completes Form W-8BEN-E and provides it to the donating U.S. nonprofit, which keeps it on file.
  • Much like the Forms W-4 employers retain for each employee, Form W-8BEN-E is not filed with the IRS.
  • Once completed, the Form W-8BEN-E is valued for three years.
  • The IRS requires that organizations include the following with the signed Form W-8BEN-E:
    • IRS determination letter of 501(c)3 status if the foreign group was based in the U.S., or
    • A copy of an opinion from U.S. counsel certifying that the recipient of the donation is a section 501(c)3 organization (without regard to whether the payee is a foreign private foundation).
      • Tip: Providing copies of bylaws, articles of incorporation, copy of the country’s exemption status/law to support the confirmations listed above will help form an opinion to accompany the form.

Assistance Completing Form W-8BEN-E

Substantiating donations to fellow tax exempt organizations is always important for nonprofits, but with recent IRS focus on foreign transactions, it is particularly important that the proper forms are completed and documentation maintained. RKL has a team of tax professionals focused exclusively on the needs of nonprofits, and they are ready to answer questions about the process or help organizations complete Form W-8BEN-E and gather the correct documentation. Contact one of our local offices for guidance or assistance.


Stephanie E. Kane, CPAContributed by Stephanie E. Kane, CPA, Supervisor in RKL’s Tax Services Group. Her client responsibilities include serving clients in a wide variety of industries with a focus on not-for-profit entities.





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Posted on: March 28th, 2017

Unrelated Business Income: Two Common Examples for Nonprofits

Unrelated Business Income: Two Common Examples for NonprofitsFor nonprofit organizations heavily involved in fundraising and charitable activities, recognizing unrelated business income (UBI) and reporting it accordingly is critically important to maintaining tax-exempt status. In a previous post, we defined UBI and outlined the key exceptions. Now, we’ll take a look at two of the most common types of UBI and how to calculate them. 

Income from Debt-Financed Property

Debt-finance property is defined by the IRS as “any property which is held to produce income and with respect to which there is acquisition indebtedness at any time during the taxable year.” The same exceptions to general UBI also apply here, meaning property that derives its income from volunteer, convenience, donation, research or mission-driven activities is not considered debt-financed.

The amount included in UBI is proportionate to the debt associated with the property, and is calculated by this formula:

Gross receipts x Average Acquisition Indebtedness ÷ Average Adjusted Basis = Taxable Amount

“Average Acquisition Indebtedness” is the average amount of principal indebtedness on the property during the portion of the year the property is held. “Average Adjusted Basis” is the average of the adjusted basis of the debt-financed property on the first and last day of the year. Keep in mind, a proportionate amount of expenses associated with the rental may be claimed.

Here is a fictional example to demonstrate how the taxable amount of debt-financed income is calculated. Let’s say a not-for-profit organization owns a building, half of which is rented to a clothing store, which is unrelated to the nonprofit’s mission. The not-for-profit has debt of $100,000 on the property. The adjusted basis of the property is $200,000 and the rental income from the store is $20,000. Using the formula above, we calculate: $20,000 x ($100,000  $200,000) = $10,000 taxable income. Since it is over the $1,000 IRS threshold, this amount must be reported as UBI using Form 990-T.

Income from Controlled Entities

Normally, passive income is exempt from UBI. According to the IRS, however, interest, annuities, rents or royalties received from a controlled organization may constitute UBI. Dividends received from controlled entities are not considered UBI. The threshold for determining control is “more than 50 percent,” which means the tax-exempt organization owns more than 50 percent of the stock, profits or capital interest. Here are two examples to illustrate this concept:

  • Example #1: A §501(c)(3) educational organization licenses the right to use its name and logo to a taxable subsidiary that produces a television show. The subsidiary pays the organization $100,000 annually in royalties. The subsidiary had taxable income for the year of $900,000. The $100,000 royalty is considered UBI and must be reported as such.
  • Example #2: A not-for-profit organization owns a for-profit corporation to which it loans money. The for-profit corporation takes a deduction for interest expense on the loan, but the interest income to the not-for-profit is subject to UBI.

As with all taxation issues, specific circumstances and situations can impact the categorization or calculation of income as UBI. RKL’s Not-for-Profit Industry Group is here to help nonprofit leaders and financial executives determine UBI and file the necessary paperwork to preserve tax-exempt status. Contact one of our local offices today for assistance. 

Ruthann J. Woll, CPAContributed by Ruthann J. Woll, CPA, Principal in RKL’s Tax Services Group and member of the firm’s Not-for-Profit Industry Group. Ruthann has significant experience in tax planning and compliance and specializes in serving individual and not-for-profit clients.




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