Not-for-Profit Organization Technical Issues

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Not-for-Profit Organization Issues

Accounting and Auditing Issues
Tax issues
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Accounting and Auditing Issues

The following summary highlights some current audit and accounting issues related to employee benefit plans.

Accounting for Costs of Activities (of Not-for-Profit Organizations) That Include Fund Raising

Test for Allocation of Costs to Joint Activities: A Step-by-Step Guide

Accounting for Costs of Activities (of Not-for-Profit Organizations) That Include Fund Raising
Not-for-profit organizations (NPOs) often conduct activities that simultaneously serve more than one organizational objectives, hence the name "joint activities." Fund-raising is a frequent component of a joint activity. In accordance with AICPA Statement of Position 98-2, Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund Raising , unless three criteria are met, all costs associated with the joint activity are charged to fund-raising--even if some of those costs are bona fide program costs. The accounting challenge is to determine whether the organization meets the tests in order to be able allocate part of the joint costs to the other, non-fund-raising components.
If an activity meets the three specific criteria of purpose, audience and content (the tests must be applied in that order), then the organization should record the costs of the joint activities in the following manner. Costs that can be identified with a particular function should be charged to that function. Joint costs should be allocated between fund-raising and the appropriate program activities or management and general activities. If any of the three criteria are not met, then all of the costs of the joint activity should be charged to fund-raising. This includes costs that would be considered program or management and general costs had they been incurred in a different activity. The exception to this rule is that costs of goods or services provided in exchange transactions that are part of joint activities should not be reported as fund-raising costs.

The standard does not specify the method that should be used for allocating costs other than the method should be rational and systematic. In addition, the method should be applied consistently under similar facts and circumstances.

We have prepared a Test for Allocation of Costs to Joint Activities: A Step-by-Step Guide as a tool to help you answer specific questions in order to determine whether you can allocate costs of joint activities that include fund-raising.

The standard applies to financial statements of all nongovernmental NPOs and all state and local governmental entities that solicit contributions for years beginning on or after December 15, 1998 (therefore, applies to all 1999 and later calendar year financial statements.)

Read full article that include definitions for critical terms.

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Tax Issues

The following summary highlights some current audit and accounting issues related to employee benefit plans.

Temporary IRS Regulations on Excise Taxes on Excess Benefits
Intermediate Sanctions - What Are They?

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Intermediate Sanctions – Excise Taxes on Excess Benefit Transactions:
Internal Revenue Service: Temporary Regulations
Source: January 10, Federal Register, page 2144

SUMMARY:
This document contains temporary regulations relating to the excise taxes on excess benefit transactions under section 4958 of the Internal Revenue Code, as well as certain amendments and additions to existing Income Tax Regulations affected by section 4958. Section 4958 was enacted in section 1311 of the Taxpayer Bill of Rights 2. Section 4958 imposes excise taxes on transactions that provide excess economic benefits to disqualified persons of public charities and social welfare organizations (referred to as applicable tax-exempt organizations). Disqualified persons who benefit from an excess benefit transaction with an applicable tax-exempt organization are liable for a tax of 25 percent of the excess benefit. Such persons are also liable for a tax of 200 percent of the excess benefit if the excess benefit is not corrected by a certain date. Additionally, organization managers who participate in an excess benefit transaction knowingly, willfully, and without reasonable cause, are liable for a tax of 10 percent of the excess benefit. The tax for which participating organization managers are liable cannot exceed $10,000 for any one excess benefit transaction.

Effective Date: These regulations are effective January 10, 2001.

Applicability Date: These regulations apply as of January 10, 2001 and will cease to apply January 9, 2004.

Intermediate Sanctions - What Are They?
Under the Intermediate Sanctions law (I.R.C. section 4958) tax-exempt organizations can not directly or indirectly inure their funds or assets to any individual. In essence, this means that individuals who created or control a tax-exempt organization, including its members, employees, and other "insiders," may not acquire any of its funds or assets except when paid reasonable compensation for services rendered or pay an amount equal to fair market value for any of the organization’s assets they receive. This reasonableness test also extends to the interests of persons who, though not "insiders", do not comprise a charitable class.

In other words, IRC 501(c)(3) does not prohibit all dealings between a charitable organization and its founder or with those in controlling positions. An organization's trustees, officers, members, founders, and contributors may, of course, receive reasonable compensation or fair market value for services or goods, or other expenditures in furtherance of exempt purposes. However, those in control may not, by reason of their position, acquire any of the charitable organization's funds. If funds are diverted from exempt purposes to private purposes, the organization's exemption is in jeopardy.

Short of loss of exempt status, a person who receives an "excess benefit" may be liable to an excise tax of 25% of the excess benefit which is defined as the amount the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit.

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	The following summary highlights some current audit and accounting issues related to employee benefit plans. Accounting for Costs of Activities (of Not-for-Profit Organizations) That Include Fund Raising Test for Allocation of Costs to Joint Activities: A Step-by-Step Guide

	Accounting for Costs of Activities (of Not-for-Profit Organizations) That Include Fund Raising Not-for-profit organizations (NPOs) often conduct activities that simultaneously serve more than one organizational objectives, hence the name "joint activities." Fund-raising is a frequent component of a joint activity. In accordance with AICPA Statement of Position 98-2, Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund Raising , unless three criteria are met, all costs associated with the joint activity are charged to fund-raising--even if some of those costs are bona fide program costs. The accounting challenge is to determine whether the organization meets the tests in order to be able allocate part of the joint costs to the other, non-fund-raising components. If an activity meets the three specific criteria of purpose, audience and content (the tests must be applied in that order), then the organization should record the costs of the joint activities in the following manner. Costs that can be identified with a particular function should be charged to that function. Joint costs should be allocated between fund-raising and the appropriate program activities or management and general activities. If any of the three criteria are not met, then all of the costs of the joint activity should be charged to fund-raising. This includes costs that would be considered program or management and general costs had they been incurred in a different activity. The exception to this rule is that costs of goods or services provided in exchange transactions that are part of joint activities should not be reported as fund-raising costs. The standard does not specify the method that should be used for allocating costs other than the method should be rational and systematic. In addition, the method should be applied consistently under similar facts and circumstances. We have prepared a Test for Allocation of Costs to Joint Activities: A Step-by-Step Guide as a tool to help you answer specific questions in order to determine whether you can allocate costs of joint activities that include fund-raising. The standard applies to financial statements of all nongovernmental NPOs and all state and local governmental entities that solicit contributions for years beginning on or after December 15, 1998 (therefore, applies to all 1999 and later calendar year financial statements.) Read full article that include definitions for critical terms.

	Top of Issues Not-for-Profit Entities page Reference Section

	The following summary highlights some current audit and accounting issues related to employee benefit plans. Temporary IRS Regulations on Excise Taxes on Excess Benefits Intermediate Sanctions - What Are They? Back to:] Not-for-Profit Entities page Reference Information page

	Intermediate Sanctions – Excise Taxes on Excess Benefit Transactions: Internal Revenue Service: Temporary Regulations Source: January 10, Federal Register, page 2144 SUMMARY: This document contains temporary regulations relating to the excise taxes on excess benefit transactions under section 4958 of the Internal Revenue Code, as well as certain amendments and additions to existing Income Tax Regulations affected by section 4958. Section 4958 was enacted in section 1311 of the Taxpayer Bill of Rights 2. Section 4958 imposes excise taxes on transactions that provide excess economic benefits to disqualified persons of public charities and social welfare organizations (referred to as applicable tax-exempt organizations). Disqualified persons who benefit from an excess benefit transaction with an applicable tax-exempt organization are liable for a tax of 25 percent of the excess benefit. Such persons are also liable for a tax of 200 percent of the excess benefit if the excess benefit is not corrected by a certain date. Additionally, organization managers who participate in an excess benefit transaction knowingly, willfully, and without reasonable cause, are liable for a tax of 10 percent of the excess benefit. The tax for which participating organization managers are liable cannot exceed $10,000 for any one excess benefit transaction. Effective Date: These regulations are effective January 10, 2001. Applicability Date: These regulations apply as of January 10, 2001 and will cease to apply January 9, 2004.
	Intermediate Sanctions - What Are They? Under the Intermediate Sanctions law (I.R.C. section 4958) tax-exempt organizations can not directly or indirectly inure their funds or assets to any individual. In essence, this means that individuals who created or control a tax-exempt organization, including its members, employees, and other "insiders," may not acquire any of its funds or assets except when paid reasonable compensation for services rendered or pay an amount equal to fair market value for any of the organization’s assets they receive. This reasonableness test also extends to the interests of persons who, though not "insiders", do not comprise a charitable class. In other words, IRC 501(c)(3) does not prohibit all dealings between a charitable organization and its founder or with those in controlling positions. An organization's trustees, officers, members, founders, and contributors may, of course, receive reasonable compensation or fair market value for services or goods, or other expenditures in furtherance of exempt purposes. However, those in control may not, by reason of their position, acquire any of the charitable organization's funds. If funds are diverted from exempt purposes to private purposes, the organization's exemption is in jeopardy. Short of loss of exempt status, a person who receives an "excess benefit" may be liable to an excise tax of 25% of the excess benefit which is defined as the amount the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit. Top of Issues

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