There is a lot of confusion about the need for workers compensation, federal and New York State unemployment by charities and other nonprofits. Here is a summary of the rules.
I will start with workers compensation because the penalties for lapses in coverage can be extreme.
You don’t have to cover board members or other volunteers with workers compensation, but remember volunteers are individuals who aren’t paid salary, stipends or perks that have monetary value.
Board members who receive compensation from a charitable organization are also exempt as long as they perform no manual labor.
Paid clergy and members of religious orders are exempt from mandatory coverage but can elect coverage
Similarly, paid individuals teaching for a religious, charitable or educational institution are also exempt from mandatory coverage.
Paid individuals who perform non-manual services for religious, charitable or educational organization are also exempt from mandatory coverage, but manual labor includes everything from filing and playing musical instruments to shoveling snow and mowing lawns.
Individuals receiving rehabilitation in a sheltered workshop and those in similar circumstances, who receive aid from a charity and perform work in return for such aid, are exempt from coverage.
Federal Unemployment, charities exempt under Internal Revenue Code section 501(c)(3) are automatically exempt from federal unemployment. They are subject to New York State Unemployment but they may elect to opt out of payment of quarterly unemployment tax and alternatively reimburse the state for unemployment claims that are made. The registration is made on form NYS-100N.
In addition, certain nonprofit employees are exempt from New York State unemployment including:
ordained clergy members
members of religious orders
lay members of religious orders engaged in religious functions
caretakers for religious organizations
sheltered workshop, rehabilitation, and youth service program participants, but they all must meet certain requirements.
Call us or check New York State Department of Labor website for more information
Be sure you are clear on the rules before you exclude individuals from coverage. Penalties can be extremely high.
There are many special rules and exceptions for real estate rental.
First, if the rental furthers your charitable purpose, such as with affordable, emergency, or transitional housing, there is generally no unrelated business activity.
If your rental activity is unrelated, but there is no debt related to the property, rental income will be treated like dividends and interest (taxable to social clubs but exempt for most other nonprofits).
If there are loans related to the property, there are complex calculations of how much is taxable.
One of the twists in these rules applies when there is rental of personal property, like furnishings, with the real estate. This won’t affect you if 10% or less of the income is related to personal property. However, if personal property represents more than 10% but no more than 50% of the income, that percentage will be considered unrelated, and if more than 50% of the rent relates to personal property, all of the rent will be a unrelated business income.
If you operate a parking lot, that income is taxable but if you lease your parking lot to an operator it will qualify as a real property rental.
If services are provided as part of the rental, it can make the rental subject to unrelated business income treatment.
Be aware that the sale of real estate that is loan financed results in Unrelated Business Income.
A couple more exceptions you should be aware of include loan financed property that is purchased with an intention to use it as part of your program but which isn’t currently being used in that way, and property that is donated but which has a mortgage or other loan. In both of these cases there can be exceptions to unrelated business income treatment.
Finally, don’t forget your get out of jail free card. An activity must be “regularly carried on” to be treated as an unrelated business activity. A limited or occasional rental of property won’t be unrelated business income regardless of whether personal property is included, or whether there are outstanding loans against the property.
Recently there have been numerous reports of significantly increased enforcement of requirements for documenting payroll allocations with personnel activity reports whenever federal funding is received. So some of the provisions contained in the “Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards”, effective for 2015, will be welcome. Some of these provide some relief from recordkeeping requirements and others provide some welcome clarification
Specifically, rules for documenting payroll allocation include:
Budget estimates can be used on an interim basis as long as they are reasonable approximations of time actually worked, they are updated when appropriate, and ultimately adjusted as necessary.
Charges to federal awards for salaries and wages must be based on records that accurately reflect the work performed and is supported by a system of internal control which provides reasonable assurance that the charges are accurate, allowable and properly allocated.
Another provision states that, for records which meet these standards, the entity will not be required to provide additional support or documentation for work performed. However, later on it says that in cases where records do not meet the standards, the federal government may require personal activity reports.
The section on payroll documentation goes on to say that cognizant agencies for indirect costs are encouraged to approve alternative proposals based on outcomes and milestones for program performance where these are clearly documented. These can be acceptable alternatives to the documentation requirements above.
Incentive compensation is allowable if it’s based on cost reduction, efficient performance, safety awards, and similar criteria, as long as overall compensation is reasonable
Compensation is also allowable when paid to trustees, directors, or officers when it is reasonable and is paid for services.
Fringe benefits, including standard items, authorized absences, pursuant to an organization’s policy, and even certain reserves for self-insurance of unemployment are allowable.
Paid personal use of company vehicles is not allowed even if it is reported as compensation.
Postretirement health insurance is allowed generally on a pay-as-you-go basis.
Severance pay is allowable as long as it meets certain criteria such as being subject to an established policy.
If you receive and spend federal awards, documentation for payroll cost is still very important, but this flexibility is a welcome relief.
If you receive federal awards and pass some portion to other organizations, the first thing you should do is verify whether an organization is really a sub-recipient or is a contractor.
determines eligibility to participate in a federal program
makes decisions about the program
is responsible for complying with federal program requirements
carries out the program
provides goods or services as part of their regular business operations, which are similar to goods or services they provide to different purchasers,
operates in a competitive environment,
their goods or services are ancillary to the operation of the federal program.
If you pass money through to a sub-recipient, you must provide them with:
the federal award, name, and CFDA number,
the federal awarding agency,
the current federal award amount being passed through,
the cumulative federal award amounts being passed through,
the date of the award,
the timeframe for performing services,
the contact person with your agency,
the pass-through entity’s name and ID number, and
the indirect cost rate (their rate if they have an approved indirect cost rate or have agreed to use the de minimis 10% rate).
Under Uniform Guidance, now you must also:
assess the risk of the sub-recipient not complying with all requirements (based on your prior experience with the sub-recipient, or on the results of previous audits, or the results of federal monitoring that you are aware of),
monitor sub-recipients for performance and compliance (review reports of services they have provided, review audit reports, compare actual accomplishment to objectives,
where appropriate. Calculate whether per unit costs are as expected, and obtain information about cost overruns, failure to meet goals, delays and the like),
consider withholding funds if there are issues, until evidence of acceptable performance is received,
consider additional monitoring and more detailed reporting, and
If issues are identified consider training, consider on-site reviews or agreed-upon procedures audits of aspects of their program.
The sub recipient entity must provide:
confirmation of their indirect cost rate if they have one , and
access to records and financial statements.
Heveron and Company may be able to help with this process. We can provide sub recipient monitoring services or provide agreed-upon procedures examinations to help assure sub-recipient compliance. In either case you would have a report to document compliance with your responsibilities. Call us if we could help or if you have questions.
The annual Report to the Nations by the Association of Certified Fraud Examiners contains sad but true facts about the impact of fraud. This year is no exception, Organizations lose about 5% of revenues to fraud each year, and it is clear that our smaller organizations aren’t exempt. In fact, they are the hardest hit – about 30% of the reported cases occurred in firms with fewer than 100 employees. And, the median losses suffered by those firms was $150,000.
What’s different this year is the optimistic news that if your organization takes certain actions, the likelihood of fraud will be reduced by a lot. The main actions that were mentioned in the report were management reviews, fraud training for employees, codes of conduct and antifraud policies, and telephone hotlines.
The study showed that organizations with antifraud controls uncovered frauds in half the time and reduced the fraud loss by more than 50% (the median loss went from $200,000 down to $92,000.
Interestingly, three quarters of organizations with over 100 employees have fraud hotlines but only one quarter of organizations with fewer employees do.
Google ACFE Report to the Nations for more information.
If you have federal awards that reimburse costs for programs you operate, you should have a compliant purchasing policy in place now.
If you aren’t required to have a federally compliant purchasing policy, you might benefit from some of the wisdom and best practices required for these policies.
Consider the following, and start with your objectives to:
limit purchases to necessary items
minimize the possibility of theft or misuse
control costs while ensuring quality
comply with funder requirements and regulations, and
properly identify the programs that benefit from the service
Any conflicts of interest with purchasing should be prohibited.
Objectives for purchases should be documented, for example:
Purchases must be necessary and reasonable for the performance of the activity.
Economical purchase procedures (such as consolidation of purchases), and lease versus purchase, where appropriate, should be considered.
Federal purchasing rules put purchases in the three categories based on their size, let’s call them small, medium and large, with increasing oversight based on the size. For smaller purchases, just be thoughtful and consider different vendors. For larger purchases, investigate pricing and consider a lease versus purchasing. For the largest purchases, use competitive bidding-sealed bids for construction contracts.
Federal rules also strongly encourage purchases from minority and woman-owned businesses. By the way, Heveron & Company, CPAs is a New York State certified woman owned business.
Finally, your policy should state that any violations of the policy will be subject to disciplinary action.
For pre-grant due diligence, an organization should create a policy specifying the types of grants and amounts given, types of organizations that qualify, purposes and activities that qualify, timelines, the application and approval process, responsible and authorized personnel, and file management and retention. Organizations should create a process for receiving, reviewing, and evaluating requests for funding. Application materials may include:
a proposal or letter of request;
information on the project to be funded;
proof of 501(c)(3) exemption;
proposed budgets for the organization and the project;
audited financial statements;
prior years’ Forms 990;
information regarding personnel involved in the project; and
information on other sources of support (assuring continuity of the program).
Grant Documentation and Monitoring
Once a grant is approved, the organization should execute a grant agreement that describes the terms of the grant and what is expected of the grantee. It may include:
grantee’s reporting requirements;
amount of the grant and payment schedule;
purpose of the grant;
duration of the grant;
description of the project that is being funded (sometimes references grant application);
commitment of the grantee to use the funds for that purpose;
specifications of prohibited uses of the grant funds;
provision for unexpended funds;
requirement that the grant is paid back if the money is not used for the intended purpose;
reporting requirements of the grantee, including changes in exempt status or key personnel;
grantor’s right to terminate or revoke the grant if the grant terms are not met; and
procedures for requesting modifications to the grant terms.
Although current tax law does not require reporting by the grantee to domestic public charities, it is a recommended practice. Depending on the size, type, and terms of the grant, organizations might consider requiring an annual reporting that may include a financial report showing how the money was spent and a narrative of accomplishments. The requirement could vary depending on the amount or type of grant or type of grantee. The organization should evaluate the report and indicate in its policy or procedures the persons responsible for the evaluation. If the grant is funded over a number of years, it is common to require reports prior to releasing the subsequent year’s grant funds. This insures that the charity receives timely reports as to the results and effectiveness of the grant.
Grant closing procedures are not always formally done. However, the grant closing process is a good opportunity to assess the outcome of the program. Establishing a grant closing procedure is a recommended best practice. The grant closing process should begin within a reasonable time after the last payment has been made and the final reporting from the grantee has been received. A closing procedure may include:
notifying the grantee that the final report or any other required documents are due or that all requirements have been fulfilled;
evaluating the grant;
reporting to the board;
file management; and
recommendation as to whether the organization would recommend future grants to the grantee either for its own purposes or if other funders inquire.
The IRS has not issued Treasury Regulations for Code Sec. 4966 as of this publication. For now, it is reasonable to rely on the requirements of Code Sec. 4945(h), which are referenced in Code Sec. 4966. One unresolved issue is the final requirement of expenditure responsibility oversight, “to make full and detailed reports with respect to such expenditures to the Secretary” (Code Sec. 4945(h)(3)).
Foreign Grant Procedures
Organizations that give foreign grants have additional recommended procedures. They should follow the pre-grant, grant monitoring, and post-grant procedures, as well as comply with Executive Order 13224, the Patriot Act, and Treasury Guidelines.
On September 23, 2001, the President issued Executive Order 13224,”Blocking Property and Prohibiting Transactions with Persons who Commit, Threaten to Commit, or Support Terrorism.” The executive order can be violated even where the grantmaking organization lacks knowledge that it is engaging in a prohibited transaction.
As part of the campaign against terrorist financing, all U.S. persons, including U.S.-based charities, are prohibited from dealing with individuals and entities identified as being associated with terrorism unless first authorized by the Treasury Department’s Office of Foreign Assets Control (OFAC).
The Patriot Act, passed in October 2001, also prohibits material support to terrorists. For grantmakers, the Patriot Act prohibits an organization from willfully providing or collecting funds with the intention or knowledge that such funds will be used to carry out acts of terrorism.
Thus, checking the Specially Designated Nationals and Blocked Persons List (SDNs) database (www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default.aspx), maintained by the Office of Foreign Assets Control, and the Foreign Terrorist Organizations List (FTO) (www.state.gov/j/ct/rls/other/des/123085.htm), maintained by the U.S. Department of State Bureau of Counterterrorism, should be part of the pre-grant procedure followed by organizations making foreign grants. Charities should not enter into a relationship with a grantee where any doubt exists about the grantee’s ability to ensure that the grant does not find its way to terrorist organizations. Organizations should also consider safeguards in any downstream sub-grantees to protect charitable resources from exploitation by terrorists.
The U.S. Department of the Treasury Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities, issued in 2002 and revised in 2006, provides clear guidance for charities involved in foreign grantmaking (see full text at Appendix AC).
In addition, the U.S. Department of the Treasury has also published a risk matrix for organizations to assess the risk of potential grants. The higher the risk, the more due diligence the grantmaking organization should undertake to ensure the proper use of grant funds. Lower risk grants require less additional due diligence than the baseline due diligence performed on all grants made by the organization.
I’ve Been Everywhere Man, but Do I Need to Register There Man?
Johnny Cash’s song “I’ve Been Everywhere” includes the lyrics
I’ve been to:
Reno, Chicago, Fargo, Minnesota,
Buffalo, Toronto, Winslow, Sarasota,
Wichita, Tulsa, Ottawa, Oklahoma,
Tampa, Panama, Mattawa, La Paloma,
Bangor, Baltimore, Salvador, Amarillo,
Tocapillo, Baranquilla, and Perdilla, I’m a killer.
Whether you need to register in other states depends on your connection with those states. Unfortunately, the states are inconsistent with their interpretation of whether you have nexus or a connection, and must register.
The most reliable guidance for registration would be the final version of the Charleston Principles (find these easily with Google).
The Charleston Principles are guidelines for and by state charities officials. . They are developed by the National Association of State Charity Officials (the Attorney General’s Charities Bureau in each of the states). The final version of their Internet fund-raising guidelines were recently released. They are only guidelines, so states are not required to comply with them and there are some varying interpretations, but they provide a great basis for understanding your responsibilities.
The guidelines say that, charities that are not domiciled within a state will need to register if they solicit contributions through an interactive website (where donors can process their payment online) and it either targets persons physically located in that state or receives contributions from the state on a repeated an ongoing basis. Additionally even if the website is not interactive, but the charity specifically invites further online activity to complete a contribution or establishes other contacts with potential donors in that state, such as by using email, they will also need to register. For example, if a charity does not specifically solicit in Pennsylvania, receives a contribution to their website and then sends follow-up solicitations by email, they will be treated as soliciting contributions in that state and will need to register unless they meet one of the exceptions to registration. The most common exceptions are based on the dollar amount of contributions received. Thresholds normally vary between $5,000 and $25,000, but again there are exceptions.
The timing of registrations also varies. In most cases registration will be required within a certain amount of time after the year-end in which you raise the stipulated amount of contributions, but in some states, registration is required in advance and in other states, registration is required within a period of time after you reach the dollar limit for registration.
The National Association of Charities Officials website http://www.nasconet.org/ has information for charity registrations. The website also confirms that they are undertaking a project to facilitate multistate registrations.
If you have questions about your responsibilities for filing or registration in other states, please contact us. We can hope you determine what your responsibilities are in each state.
The recently enacted tax law has both direct and indirect effect on nonprofits. The indirect effect is the decreased tax incentive for charitable contributions that results from doubling the standard deduction, decreasing individual and corporate tax rates, and increasing the estate tax exemption. It is difficult to know how these will affect charitable giving, but the huge increase in online giving at year-end (The Chronicle of Philanthropy reported that online donors gave 38% more to charities during the last week of 2017 than in the last week of 2016) indicates that tax incentives do impact charitable giving. The fact that individuals can now deduct cash contributions to qualified charities up to 60% of adjusted gross income (previously 50%) isn’t likely to do much to offset these disincentives.
Unrelated Business Income
Although lower rates will apply to nonprofits paying unrelated business income tax, a new provision restricts losses from one unrelated activity from being offset against other activities.
Unrelated Business Income Taxation will also be applied to certain fringe benefits paid for by tax exempt organizations for qualified transportation fringe benefits, or for on -premises athletic facilities. There is also an excise tax on certain nonprofit salaries exceeding $1 million.
Moving Expense Deductibility
If your organization pays moving expenses for new or current employees, these are no longer excludable from taxable income. This may require nonprofit employers to pay more to make their employees “whole”.
Provisions That Did Not Make It into the Final Law
Several provisions did not make it into the final law, including:
repeal of the Johnson amendment,
changes to private foundation excise taxes,
reductions to qualified tuition plans and employer-provided educational assistance,
taxing the value of housing for the convenience of the employer,
unrelated business income tax on royalties from licensing an exempt organization’s name, and from research activities where results were not made publicly available,
enhanced donor advised fund reporting, and
taxing interest on certain private activity bonds.