Purchasing Policies for Nonprofits That Are Not Required to Have Federally Compliant Purchasing Policies

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.

Grantmaking and Grant Monitoring by Charities Grants to Foreign Charities

Pre-grant Inquiry

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;
organizational documents;
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 responsibilities;
grantee’s reporting requirements;
grantor’s responsibilities;
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.

Post-Grant Procedures

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.

Nonprofit Multistate Filing

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.

How the New Tax Law Affects Nonprofits

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.

How the New Federal Tax Law and the New York State Budget Affect Affordable Housing: Heveron & Company CPAs

The new tax law was not a direct hit on affordable housing, affordable housing tax credits remain intact, and interest on affordable housing private activity bonds continue to be nontaxable, but some say that it will have a significant indirect adverse affect, because reduced corporate tax rates decrease incentive to purchase affordable housing tax credits.

State governments award credits to affordable housing developers who sell them to taxpayers in exchange for equity investments in affordable housing.

The taxpayers who buy these credits are mostly corporations, particularly banks who can satisfy Community Reinvestment Act obligations by acquiring these credits. But, the new tax law cuts the top corporate rate from 35% to 21% which decreases incentive to acquire these tax credits. However, while corporate tax rates are significantly lower, a dollar of affordable housing tax credit still eliminates a dollar of federal tax, so we will need to wait and see how the appetite for these affordable housing credits changes under the new federal tax laws.

The demand for affordable housing continues to increase, and the benefit of affordable housing to communities is well-documented. A report by Harvard’s Joint Center for Housing Studies finds that the number of renters has surged to about 1 million additional renters per year since 2010.

Although it is not final, the New York State budget for the year beginning April 1, 2018 contains a combination of good and bad news for affordable housing.

First, the governor’s proposal to defer the use of tax credits (when they exceed $2 million in the aggregate) does apply to Low Income Housing Credits, the Green Building Credit, the Brownfield Redevelopment Credit, and the Historic Properties Credit.

The budget does include $44.2 million for the Low Income Housing Trust Fund Program, $26 million for the Affordable Housing Corporation, and it continues budgets for the Neighborhood Preservation Program and the Rural Reservation Program.

New Rules for Raffles; Solving a Problem You Didn’t Know You Had

If you conduct even an occasional raffle, you may not know that you can only accept cash for purchases of lottery tickets, no debit cards, no checks and no charge cards. Those rules had been on the books since 1995 but only came to light for many charities when Governor Cuomo proposed new legislation to allow charities to accept checks, charges, credit and debit cards.

The new legislation will also make it easier to conduct games of chance at locations other than their own, and would simplify some of the paperwork for charities. It would allow alcoholic beverages to be included as prizes and increase the size of prizes.

The new legislation isn’t law as we write this newsletter but we will watch the progress and you should as well if it affects you.

Nonprofit Multistate Filing

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.

Measuring and Reporting Nonprofit Outcomes

In its ongoing effort to help auditors, our national professional society, the AICPA, annually provides us with an Audit Risk Alert, which is a summary of key legislation and other matters that are currently impacting the nonprofit world. This is so we can understand your environment and adjust our procedures accordingly.

This year one of the areas that was cited was measuring effectiveness. The alert said that donors, regulators and rating agencies, as well as your annual federal reporting form (990, 990EZ) are requiring more performance reporting and nonprofits are looking for new ways to present results. They said that charities are using fact sheets, third-party studies and visual illustrations of how programs are designed, monitored and evaluated.

In this day and age, you need to do performance reporting. How can you do it well and efficiently so you don’t have to take too much time away from performance?

The United Way of America and our local United Way have been focused on outcome measures for many years. One useful resource can be found on Strengthening Nonprofits’ Resource Library. Although guidance on measuring outcomes was developed years ago, it remains as a valuable resource to nonprofits.

Their training uses some United Way descriptions including:

  • “outcome measurement” – the regular systematic tracking of the extent to which program participants experienced benefits or changes that were intended, and
  • “outcome” – not “how many worms the bird feeds its young, but how well the fledgling flies”.

As you plan your outcome measurement process you should consider:

  • what you intend the impact to be
  • what will it look like if/when you achieve the desired outcome
  • what behaviors need to change to achieve that outcome
  • what must people know or do so that behavior can change
  • what training is necessary, and
  • what resources are required to achieve desired outcomes

Strengthening Nonprofits training provides sample logic models that describe

  • inputs (time, money, equipment, and facilities)
  • activities (services, workshops, publications,)
  • outputs (clients, caregivers, and family that are reached)
  • initial outcomes (change in knowledge, skills, motivation, awareness and attitude)
  • intermediate outcomes (change in behavior, practices and procedures)
  • long-term outcomes (change in social, economic and political conditions and the environment)

There are personal and financial costs of focusing on outcome measurement, but the National Council of Nonprofits states that “in an environment of increasingly limited resources, those nonprofits that can demonstrate that they are truly making an impact will be the ones most likely to attract resources and talent, and therefore be the most sustainable”.

Internal Controls over Federal Awards

Uniform Guidance (guidelines for organizations receiving federal awards) states that you must establish and maintain internal controls over federal awards that provide reasonable assurance that you are managing them in compliance with general federal requirements and the specific rules for the funding you receive. Internal controls should be in compliance with the Green Book and/or with COSO.

  1. COSO, which stands for The Committee of Sponsoring Organizations (composed of accounting leadership organizations), or
  2. The Green Book – Standards for Internal Control in the Federal Government

Both of these have been recently updated to take into account how changes in technology have affected all businesses.

Here are links for more information about each of these:

COSO Internal Control Structure – Executive Summary http://www.coso.org/documents/coso%202013%20icfr%20executive_summary.pdf

The Green Book http://www.gao.gov/greenbook/overview

You don’t need to master both of these; in fact, they are very similar. They both identify same elements that are necessary for proper internal controls. They are:

  • The Control Environment – your board and senior management competence and commitment to proper controls,
  • Risk Assessment – a careful look at your organization’s operations and consideration of what could “go wrong” (what might prevent you from accomplishing your objectives, expose you to risk with funders or regulators, or cause financial loss or be an embarrassment),
  • Control Activities – policies and procedures that are put in place such as segregation of responsibilities, reviews, and reconciliations,
  • Information and Communication – clear communication from management to staff about the policies, procedures, and controls that are in place, and
  • Monitoring Activities – periodic follow-up to reassess potential risks, to make sure that controls are still appropriate based on current operations and that they are still being followed. In big organizations, this can be done with an internal audit function. In smaller organizations it will more likely be done by an audit or finance committee.

Possible Monitoring Activities

Your written policies set standards for performance. Monitoring should include a review of your policies to be sure they are current and appropriate. It should also determine whether staff are familiar with your policies. Is training of new and current staff appropriate? Be sure to review personnel, conflict-of-interest and whistleblower protection policies.

Determine what security measures are in place over confidential information such as employee, donor and credit card information.

Your risk assessment and monitoring should also consider the safety of your staff, clients and others who have a relationship with your organization.

Review your Organization’s hiring procedures; determine whether references are verified and background checks are used.

Check whether images of checks are provided with your checking account bank statement and verify whether an independent person reviews checks, electronic payments and transfers to be sure they are proper.

Check how up-to-date bank reconciliations are.

Look at documentation for vouchers/drawdowns to be sure that it is properly detailed and supports the voucher.

Look at some invoices for purchases to determine whether they are properly marked to document approval, nonpayment of sales tax, and to note payment.

Check whether unused checks and undeposited checks and cash received are kept in a locked/secure area.

Review charge card statements to see if there is an independent review and the documentation for all purchases.

Review expense reimbursements, especially for senior personnel to verify that there is proper documentation and an independent review.

The great majority of frauds are uncovered by employees. Interview to be sure that employees know that they are encouraged to communicate any wrongdoing, and that they are familiar with the process for doing so.

Look at how time worked is documented and whether there was an independent review of time worked.

So, as you establish controls over your federal awards, keep these principles in mind and remember that controls are a system, and an ongoing process, not an event.

In our next issue we will provide a list of potential controls and the risks they are designed to minimize.

New York State Charities Bureau Registration and Annual Filing Requirements

We have talked a bit about registering and filing with charities bureaus in other states where you carry on activities, but are you clear on the rules for New York State registration and annual filing?

The NYS Charities Bureau website has a good overview of registration and filing requirements, but here is a concise overview.

First, the New York State Charities Bureau administers two laws that affect charities registration and filing. They are, Article 7A of the Executive Law (Article 7A), and the Estates, Powers and Trust Law (EPTL).
Registration requirements for Article 7A apply to all charities that solicit contributions from New York State residents, foundations, corporations, government agencies and other entities with certain exceptions. The exceptions can be found in Charities Bureau Schedule E.

Key exceptions include:
• contributions are less than and will continue to be less than $25,000 per year and the organization does not use the services of a fund raising professional or counsel.