Kế toán, kiểm toán - Chapter 14: Not - For - profit organizations — Regulatory, taxation, and performance issues

Chapter14Not-for-Profit Organizations—Regulatory, Taxation, and Performance IssuesLearning ObjectivesAfter studying Chapter 14, you should be able to:Identify oversight bodies and the source of their authority over not-for-profit organizations (NFPs)Describe how and why states regulate NFPs, and describe:Not-for-profit incorporation lawsRegistration, licenses, and tax-exemptionLearning Objectives (Cont’d)Identify how the federal government regulates NFPs, and describe:Tax-exempt status—public charities and private foundationsUnrelated business income taxRestricting political activityExcessive benefits received by officersReorganization and dissolution`Learning Objectives (Cont’d)Describe governance issues of NFP Boards, including:Incorporating documentsBoard membershipIdentify how benchmarks and performance measures can be used to evaluate NFPsNFP organizations receive tremendous amounts of contributed resources and benefits, including, in many cases, tax-exempt status It is important that NFPs be held accountable for the resources and benefits providedNot-for-profit OrganizationsState governments have oversight over NFPs because states grant legal existence through not-for-profit incorporation laws, charitable trust laws, or limited liability companiesThe federal government has oversight over NFPs because the federal government grants exemption from federal income taxation (i.e., tax-exempt status)Oversight BodiesStarting out (registering as a not-for-profit corporation, charitable trust, LLC)Licenses (e.g., for charitable solicitation or to operate a facility) Annual compliance reportingTax compliance (e.g., sales and use tax)Limit on political activityStates Regulate NFPs in Several Ways(See Ill. 14-1)An NFP will interact with the Federalgovernment throughout its life cycle (see Ill. 14-2): Starting out Applying to the IRS for tax-exemptionRequired annual filings Ongoing complianceSignificant events Federal Government Oversight of NFPs Applying for Tax-exempt StatusNFPs will apply on Form 1023 or Form 1024 to be exempt from federal income taxesChurches, integrated auxiliaries of churches, and NFPs with gross receipts not more than $5,000 per taxable year need not apply for exempt status to be considered exempt under 503(c)(3)Public Charity or Private Foundation?Public charities are funded by the public at large rather than a limited number of donorsPrivate foundations receive support from a limited number of individuals or corporations and investment incomeWhen an NFP first applies for tax-exemption, it will be presumed to be a public charity and will have to meet the public support test at the end of the fifth year to remain a public charityPublic Charities – Public Support TestThe public support test is generally met if > 1/3 of total support comes from the government, directly or indirectly from the general public, or some combination thereofThere is a limit on how much support given by one individual can be counted toward meeting the public support testPolitical ActivityParticipating in a political campaign for (or against) a candidate for public office can result in the loss of tax-exempt statusNo substantial part of a charity’s activities can involve propaganda (biased information with a tendency to have little or no factual basis)A charity is allowed a limited amount of direct lobbying and grass-roots lobbying (appeal to the general public) without jeopardizing its tax-exempt statusRequired Annual FilingsBased on annual gross receipts, NFPs will file either a Form 990-N, Form 990-EZ, or Form 990 information return annuallyNFPs that have more than $1,000 of gross income from an unrelated business will file a Form 990-T and be taxed at corporate tax ratesWhich Organizations Must File a Form 990 with the IRS?NFPs that are tax-exempt under IRC Sec. 501Private foundations file a Form 990-PF Note that churches and federal agencies are not required to file Form 990sThe Form 990 is comprised of a 12-page core form and 16 different schedules (prepared as needed)Included are a summary front page with the signature of the NFP officer and questions related to governance and performance in addition to the NFP’s financial informationForm 990 (See Ill. 14-4)Financial information includes:Balance sheet and statement of activitiesDetails of revenue sources and functional expensesCompensation to key employees and othersLobbying expensesNonfinancial information includes:Largest contributions with donors’ namesStatement of program services accomplishmentsInformation on a Form 990 An NFP that earns income from activities that are not substantially related to its charitable or tax-exempt mission must pay tax On the unrelated business net income That exceeds $1,000At corporate tax ratesUnrelated Business Income Tax (UBIT)Investment income Royalties and fees for use of intangible property (including sale of mailing lists according to recent court cases)Gains on sale of property Work done by volunteersLegally conducted games of chanceRents from real propertyActivities that primarily benefit membersActivities That are Not Subject to UBIT:SponsorshipsAdvertisingAffinity credit card arrangementsTravel servicesFund-raising eventsExamples of Activities That Could Result in Unrelated Business IncomeIntermediate sanctions or revocation of an NFP’s tax-exempt status can occur if excess benefits are provided to officers or those with substantial influence over the NFPExcess benefits include unreasonable compensation, sales at bargain prices, and special lease arrangementsExcessive Benefits Received by OfficersExcessive Benefits Received by OfficersIntermediate sanctions result in these penalties: Repay the excess benefit Pay a tax of 25% of the excess benefit Pay another 10% tax if the managers were aware the transaction was improper Pay 200% more of the excess benefit if the transaction is not corrected within the periodReorganization and DissolutionReorganization may occur if the NFP finds it needs to redefine its mission to better meet society’s needsAlternatively, an NFP may opt to merge or dissolve If dissolution is selected some accounting issues include:Ensure all creditors are paidEnsure all taxes are paidEnsure all assets are appropriately transferred according to incorporation laws, state laws, or IRS regulationsArticles of incorporation (external focus) describe the purpose of the organization and exempt purpose for which it was establishedBy-laws (internal focus) describe the functional rules of the organizationMinutes of the board meetings (legal history of the organization)Governance Issues:Incorporating DocumentsSet policyProvide fiscal and ongoing guidanceMonitor continuous quality improvementFund-raisingGovernance Issues:Responsibilities of Board MembersHave custody of corporate funds and securitiesKeep full and accurate records of all receipts and disbursementsDeposit money and valuables in designated depositoriesAuthorize disbursementsBoard TreasurersBenchmarking & PerformanceIncreasingly, information about NFP operations is becoming available, allowing for contributors and oversight bodies to assess an NFP’s performanceThe Web sites for several watchdog agencies provide useful information for those attempting to assess an NFP’s performance Several groups monitor and evaluate NFPs and compare their performance measures to benchmarks, and/or provide resources for NFPs and donors. For example, BBB Wise Giving Alliance www.give.org American Institute of Philanthropy www.charitywatch.org Independent Sector www.independentsector.org Urban Institute www.nccs.urban.org Guidestar www.guidestar.org (makes Form 990s easily accessible on the Internet)Watchdog AgenciesLiquidity measures (Can the organization pay its current bills?)Going concern measures (Are revenues sufficient to cover expenses?)Capital structure (Does the organization rely more on debt or equity to finance its operations?)Program effectiveness (Is an appropriate amount spent on accomplishing the NFP’s goals?)Financial Performance Measures (See Ill. 14-6) Efficiency (Is the cost per achieved output decreasing over time?)Leverage and debt coverage (Is the debt service expense adequately covered by revenue?)Fund-raising ratio and efficiency (What percent of contributions remains after adjusting for the cost of raising the contributions?)Investment performance (Is the rate of total return on investments reasonable?)Financial Performance Measures (Ill. 14-6) (Cont’d) In addition to financial performance many donors and creditors what to know that the NFP is effective in meeting its goals and missionThe Urban Institute reports a common outcome indicator framework that can be used to monitor and chart effectiveness in 14 program areas Non-financial Performance MeasuresAccountants report on whether NFPs comply with laws and regulationsNFPs first receive legal status from a state and then apply to the IRS for exemption from federal corporate income taxes; hence are accountable to state and federal governments throughout their life cycleThe ability to benchmark and compare NFP performance is increasing with the availability and revision of the Form 990END Concluding Comments