MYTH: Build it and the grants will come.

FACT: Uh, good luck with that.

We get to burst this balloon a lot.  Many who are starting nonprofits for the first time are convinced the government is waiting with bated breath for them to get going so they can cut them a check.  Given the drunken sailor spending spree in Washington, it’s certainly understandable, isn’t it?  Jokes aside, this is too often the by-product of a less-than-ethical fringe of the fundraising profession.  Whether it is over-hyping the latest grant writing workshop or selling books on late night infomercials, this mindset doesn’t just come by accident.  Here’s a newsflash:  Startups are rarely grant funding recipients!  The typical startup is much better served by focusing its efforts on building a fanbase of committed donors and only later looking to grants to help them expand what they have proven they can do.

MYTH: Nonprofit means you must zero-out at the end of the year.

FACT: Great plan…assuming you’ve got a pot of money waiting for you New Year’s Day!

Just a couple of weeks ago, a good friend approached me at church.  She was recently elected to serve on the board of a small charity and at her first meeting, several of the existing board members were discussing their dilemma:  The organization was quickly approaching the end of the fiscal year, but still had money left over.  The conversation revolved around how they could spend down this money before the clock ran out.  Well, her instincts told her this didn’t sound right.  Good for her!  And even better that she asked me about it.

I suspect the origins of this myth might be in the corporate world where departmental budgets are often use-it-or-lose-it.  Anyone who has worked for a large corporation may be familiar with the race to spend down the budget in years of surplus.  Combine that mindset with the notion of nonprofit, and you’ve got a myth in the making.  I certainly hope your nonprofit is not sitting on $0 when the ball drops in Times Square!

MYTH: If our nonprofit’s purpose is not panning out, we’ll just shift gears and go in another direction.

FACT: Not so fast.  You might want to make sure Uncle Sam is OK with that.

This sort of thing happens all the time.  For example, ABC Charity was formed to raise money for cancer research.  After a couple of years of disappointing results, the board sees the devastation from the latest disaster and decides to retool their organization as a disaster-relief charity.  They make plans to travel to Haiti/New Orleans/Wherever and provide shelter and hot meals to those impacted.

Don’t get me wrong…there is nothing wrong with that in principle.  In practice, it is not so simple.  When the IRS granted tax-exempt status to this nonprofit, it was on the basis of its proposed program:  fundraising for cancer research, not disaster relief.  A serious change in purpose and program requires that the IRS be notified in detail on the next Form 990 that is due.  Even then, it is highly probable that your case will be transferred to Cincinnati for further review and questions before approval is granted.

This list could go on and on and on.  Sometime soon, we’ll share some more common myths and their corresponding realities.  Here’s to facts!

If you have been a client or follower of Foundation Group for any length of time, you have heard us hounding you to get your organization in compliance.  In other words, do everything you need to do comply with local, state and federal law regarding your nonprofit.  A complete list of compliance items looks rather daunting.  It typically includes everything from filing your corporate annual report to properly keeping your books and records to registering with your state’s Solicitations Department.  We tend to talk about these things so often, it can come across more as a series of dos and don’ts and, in the process, the true cost of noncompliance can get lost.  Let me share with you some real life examples that will help you see what I mean.  Each case discussed is an FG client that we have helped to clean up the mess:

Case #1 – IRS Form 990. Client X is a 501(c)(3) public charity that provides equine therapy to children.  The organization is a small nonprofit with a big heart to work with troubled kids.  The board and volunteers of X work hard to provide their services with very limited resources.  Although X’s board knew about Form 990, it just wasn’t as pressing as the day-to-day operations of the program.  Besides, the organization simply didn’t have the financial resources to pay someone to do it for them.  Eventually, X’s president struggled through it herself and filed it many months after the due date.  “Better late than never and better incomplete than not at all”, she thought.  All was assumed OK until X received a penalty letter from the IRS for nearly $5,000 for late filing, followed later in the year by an audit notice.  And they thought getting a Form 990 prepared properly was expensive…

Case #2 – Improper compensation and record-keeping. Client Y is a ministry organization that provides Christian counseling to the arts community.  Overall, Y did a better than average job of keeping it between the lines.  Several years ago, Y was the unfortunate recipient of an IRS audit.  Y was chosen at random by the IRS as part of a nationwide examination of executive compensation.  In the process of reviewing the organization’s books, it was discovered that the organization had lent the executive director around $6,000 to get some work done to his house.  This type activity is not illegal, but is not considered a best practice.  Y was advised prior to this to reconsider the idea, but the board was determined to help out the executive director.  But because the loan payback terms had not been properly structured, nor the transaction properly recorded in Y’s board meeting minutes, the IRS deemed the transaction to be taxable compensation to the executive director even though the loan was eventually paid back!

Case #3 – Charitable Solicitations registration. Client Z assists the homeless by meeting some of their immediate needs like food and shelter, but more importantly by teaching them vital life-skills.  One of Z’s primary means of soliciting is on the street, person-to-person.  Z knew about the requirement to register with the state’s Department of Charitable Solicitations, but didn’t want to delay fundraising until it registered.  Someone reported their activity to the state, which fined Z substantially and ordered it to cease and desist.  Z quickly complied, but the incident cost a great deal of time and money…and not a small amount of embarrassment.

To be sure, compliance has a cost, but it pales in comparison to the cost of noncompliance.  The above examples are but 3 of the hundreds we have helped through similar situations.  Protect your nonprofit…get compliant and stay there!

For those organizations under the same threat, but needing to file Form 990EZ, they will also get an extension to October 15, but will face a financial penalty.

Sound familiar?  Sure it does.  We have all heard those stories.  But what about your nonprofit?  Is it possible that this very ostrich-like tendency can also plague a nonprofit?  I’m here to answer that question with a resounding, “YES”!  We see it everyday, and the results are just as deadly.  What you don’t know absolutely CAN hurt you!

So how can you avoid getting a bad prognosis?  By learning to recognize the warning signs of impending problems and proactively addressing the issues…before they prove too much to deal with.  Let’s take a look at three common symptoms and what you can do about them:

1.  You know your bookkeeping is pitiful, but you just don’t know anything about accounting. This one is epidemic.  It is also inexcusable and can literally threaten your organization’s existence.  There are both legal and practical issues at play here.  A nonprofit, just like any other business, is required by law to keep accurate records of financial transactions.  This includes income and expenses, asset and liability balances, records of donations received…every penny tracked.  Problem is, few nonprofits have qualified people internally to do this properly.  Some hire a professional (like us!) to do it for them.  Far too many, however, choose the ostrich method and pray nothing bad happens.  Eventually, bad happens.  It may be the IRS catching up you.  Or, it may be that donors lose confidence in your organization because your financials are not trustworthy.  Either way, this pain is avoidable…and much less expensive to fix now than later.

2.  You know you have an improper board structure, but you don’t really care because it’s just easier this way. First, let’s define improper.  I’m assuming here that we are talking about a 501(c)(3) public charity.  By improper, I mean a board with a majority of members related by blood, marriage or common business interest, a board with a majority of members being paid as employees of the organization…or both.  Again, we have issues both legal and practical.  From a legal standpoint, the IRS considers such a board structure to be completely unacceptable for a public charity.  Such a structure does not allow for the necessary arms-length dealing.  It can also subject the nonprofit to unwanted IRS scrutiny and even financial penalties, called Intermediate Sanctions, levied against the board members personally.  And from a practical standpoint, there is simply no way to adequately serve the public interest, at least in the long term, when you have such close control.  There is too much opportunity for self-dealing and not enough opportunity for input by others who should have a seat at the table.

3.  Critical, delegated tasks are not getting done correctly (or at all!), but you have such a hard time securing volunteers, you would rather put up with it than confront it. That’s fine if you are talking about something minor.  Unfortunately, we see this involving major issues quite frequently.  Things like donor receipting, record-keeping…even payroll issues.  Make no mistake, this is a failure of leadership.  While it can be a difficult task to recruit and retain volunteers, that is no excuse to put the organization’s effectiveness in jeopardy.  Frankly, most volunteers have no problem being corrected and redirected.  If you are not confrontational enough to do what is necessary, let someone who is handle the responsibility.

Don’t be an ostrich.  Don’t let fear keep you from dealing with what must be dealt with.  The earlier you tackle your problems, the less likely one of them will turn into a terminal issue.

According to today’s Chronicle of Philanthropy, nearly 300,000 nonprofits are in danger of losing their tax exemptions.  Approximately 196,000 have officially missed their filing deadline and another 96,500 have deadlines between now and April 2011.

Interestingly, it seems many of these organizations may not even exist anymore.  When the Chronicle attempted to contact 100 such nonprofits, only 25 were found to still be operating.  Of those, most had no idea about the rule changes.

To read the full article, go here.

Let’s try a little exercise.  Grab a piece of paper and write down 5 creative ideas for raising a significant amount of money for your organization.  Now, take a look at the list.  What do the 5 items have in common?  If you are like most people, your list is mostly populated by event ideas.  I bet that half of you wrote down a golf tournament!

First of all, there is absolutely nothing wrong with events.  Events, such as golf tournaments, can indeed be successful exercises that raise your organization’s profile, as well as some money.  But events are costly, both in terms of overhead and labor.  Large events can take months to plan, scores of volunteers to pull off…and may or may not end up netting much money.  Nothing like having 6 months of planning go down the drain when it rains on the big day!  If you want to see big improvements in your fundraising ability, you simply must learn to think differently.  Think relational instead of transactional.

Consider how much time and effort went into your last major event.  Now, imagine that same effort strategically targeted toward cultivating a lifetime donor…a fan who loves and supports your mission over the long term.  This single concept, so often ignored, can make the difference between surviving from event to event and having a steady stream of program-sustaining money coming into your nonprofit.  Nothing will net rewards with your donors like relationship building.

But how do you do it?  Here are some key principles you can leverage in building these relationships:

Track all donations. By tracking, I mean know who gave what, when.  That’s where it starts.  Frankly, that is your minimum threshold anyway when it comes to recordkeeping and proper acknowledgement of donations.

Thank your donors. Sincerely, creatively…and often.  Every time they give they should be getting a “thank you” letter letting them know how much their gift is appreciated and what it helps your organization accomplish.  You simply cannot slack on this one.  Studies have shown that donors who are thanked are much more likely to give in the future.  Another tip is to give thanks in the manner the gift was received.  For example, if you got a check by mail, it is best to mail a thank you letter.  If the donation was made online, it is entirely appropriate to acknowledge that donation by like means.  And, don’t send the same letter each time.  Change it up.

Focus on your big donors. Who are your biggest donors?  Hopefully you know this already, but maybe you don’t.  If not, find out.  How often do they give?  Once a year…quarterly…annually?  Is it in response to targeted solicitations or general fund requests?  Once you know these things, then your goal is to find out why they are giving.  You cannot assume this.  Truth be told, you are likely to assume incorrectly anyway.  My Dad’s favorite quote is, “Assumption is the lowest form of knowledge”.  How true!  Spend real time building relationship with these individuals.  Find out what motivates their giving.  Take the time to forge real bonds with these people.  You will be amazed how far this can go.

Make fans of everyone else. You do that by communicating often.  Start a newsletter.  Let your supporters know what is happening with your organziation…your successes, your plans, your needs.  Just be careful how you communicate need.  People much prefer to give to vision, not bills.  Explain what their giving can help you achieve with regard to your mission.  Don’t tell them you need support so you can afford rent.  Message is everything.

Using your time and energy to build relationships will go much farther in the long run to help you establish a stable support base.  Once you have done this, then you are in a much better position to return your attention to events and other transactional fundraising efforts.

With acknowledgments to fundraising consultant (and our good friend), Sandy Rees, who teaches these concepts at our Nonprofit Boot Camps.

“If they can do it, why can’t I?”

The reason businesses (including nonprofits) like to use independent contractors is simple:  it saves on employment taxes.  The problem lies in the fact that the person your nonprofit is paying is not an independent contractor simply because you want her to be.  Whether or not someone is legitimately an independent contractor depends upon a set of well-defined rules.  And understanding these rules can save you a lot of headache with Uncle Sam.

The IRS uses a 20-factor test, while the Department of Labor uses a more generalized, 7-factor test.  You can click on the links to learn more about these tests. Whichever test you employ (Get it?  Employ?), it boils down to three, simple concepts:

Concept #1:  Behavioral. Does the company control or have the right to control what the worker does and how the worker does his or her job?

Let’s use an example.  Suppose you operate a daycare and you have a clogged drain in the kitchen area.  What do you do?  You call a plumber, of course.  It is very unlikely that you will stand over the plumber and instruct him on how to fix your drain.  No, you called a professional for a reason.  He knows how to fix your clog!  You may have some input or preferences.  But for the most part, he is in control of what he does and how he does it.

Conversely, if you hire a part-time receptionist, it is very likely that the balance of control lies with the organization, not the receptionist.  The receptionist is told when to come in everyday, how long to stay and what the job expectations are…even to the point of being trained in how to do most every aspect of the job!

Concept #2:  Financial. Are the business aspects of the worker’s job controlled by the payer?  These include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.

In our example of the plumber, what is the likelihood you will be supplying the plumber with tools to open your drain.  Not very likely.  Your receptionist, on the other hand, probably won’t be expected to supply her own phone and computer.

Another financial consideration involves the element of risk.  Contractors have opportunity to experience financial loss, whether it be from underbidding a particular job or simply running his or her business in the red.  Employees are not generally exposed to the potential for loss.  If they have a job, they get paid.

Concept #3:  Type of relationship. Are there written contracts or employee-type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

When the plumber is finished, you will be invoiced.  He decides the fee.  You may or may not have an ongoing contract with him for future services, but the relationship is clearly one of professional and client.  I’ve yet to meet the receptionist who bills for her services at a fee she determines.

The reality is, it isn’t that complicated.  People just want to make it that way.  And the game they are playing by treating employees as contractors will catch up with them eventually…and when it does, it will be very, very expensive indeed.  Don’t take chances that can greatly harm your nonprofit.  It’s not worth the risk to either your organization’s finances or reputation.

The Foundation Group provides full-service payroll processing for nonprofits.  Click the link to learn more!

So what are the new rules and why are they so bad?  We’ll explain that, but let’s first take a look at what the current rules are.

Under current law, a business is required to give a Form 1099-MISC to any independent contractor who is paid $600 or greater in a calendar year.  An independent contractor is defined as a non-corporate business entity, such as an sole proprietor or partnership.  For most businesses, this doesn’t create much of a burden.  That’s all about to change…

Starting after 2011, businesses will be required to provide a Form 1099-MISC to all vendors and service providers who are paid greater than $600.  You read that correctly!  We’re talking Wal-Mart, Office Max, the local gas station…all vendors!  The burden this will put on small business, both for-profit and nonprofit, will be tremendous.  Imagine having to get the tax ID number and address of every company you do business with.  Then you must make sure you track every penny you spend with them, complete a Form 1099-MISC and try to get it to where it is supposed to go.  It’s going to be nuts!  To make matters worse, the IRS’s guidance on the matter is rather confusing regarding certain types of vendors.

The best case scenario is a public outcry that will lead to changes in the rules.  Keep in mind that, just like the Form 990-N rule changes, this is a matter of law.  Therefore, any future changes must be legislative.  If you are sick and tired of seeing unrealistic burdens put on small business, including your nonprofit, let your elected officials know about it.  Enough is enough!  Let your voice be heard.

And, if they won’t hear it now, let them hear it this coming November!

So, how many got their filing in on time and how many did not?  We just don’t know yet.  Here is how this whole thing is supposed to work:

NPOs that had their tax exemption revoked will not be notified by the IRS until the end of this year.  Why?  According to the Director of Exempt Organizations, Lois Lerner, it is because the IRS is very concerned that they get this right.  In other words, the scope of this thing is so big, they cannot afford to get it wrong.  But, the revocations are effective May 18.  This means that from May 18 forward, organizations that have lost tax exemption will be liable to file taxes as a for-profit company…even though they may not find out about this until December.  Even more interesting is the fact that donors will still be able to consider their post-May 18 donations tax deductible through the end of the year.

For effected organizations, the only path to reinstated tax exempt status is to file another Form 1023, pay the required filing fee and start all over…at least, that is what has been said.  The IRS’s FAQ page on the matter unequivocally says that this is statutory law.  No waivers, no appeals, no grace.  Done deal.

Not so fast!  Now, according to Doug Shulman, IRS Commissioner, they are considering granting some measure of grace to small organizations, presumably those who were required to file Form 990-N.  This is in direct contradiction to prior guidance.  In fact, under law, they cannot do this.  It appears that the only way to grant grace is to have Congress amend the law.  We’ll see.  For those affected organizations that were required to file Form 990-EZ or higher, it looks like you’re out of luck.

This is a fluid situation.  Stay tuned and we’ll bring you the latest as we learn it.

Consider this quote from Diane Aviv, president of the Independent Sector, a nonprofit trade group: “It’s going to be an unholy mess once these organizations realize what’s happened to them.”

We implore you to pay attention now before it is too late.

So, why is this happening, what does it mean…and how can you avoid being among the 400,000?

First, the why. In August 2006, Congress passed the Pension Protection Act of 2006.  As the name suggests, this particular bill was an overhaul of the US code regarding the operation of large, corporate pension funds.  Slipped into the bill in conference committee, however, was 393 pages of legislation that have been progressively affecting 501(c)(3) and other tax exempt entities ever since.  While most nonprofits have been relatively unaffected by the PPA until now, that is about to change in the most dramatic of ways.

Historically, only nonprofits with annual gross revenue in excess of $25,000 were required to file Form 990.  The PPA changed all that with the introduction of the Form 990-N for small, low revenue organizations.  The 2007 tax year was the first year Form 990-N was required.  But Form 990-N was just the beginning.  The real kicker in the PPA is the rule that will culminate with the automatic revocation of the tax exemption of any nonprofit that fails to file its required Form 990 for three consecutive years.  Year three for most organizations is the due date of their 2009 return:  Monday, May 17.

What does it mean? The IRS is being uncharacteristically blunt regarding the outcome of the exemption revocations:  There is no recourse short of reapplying for 501(c) status. In other words, you will have to start all over.  These revocations are automatic and statutory.  No one is making a thumbs-up or thumbs-down determination.  Either you fall into the category or you don’t.  Pretty simple.

What can you do about it? File your Form 990…period!  It’s not too late.  If your nonprofit normally files Form 990 or Form 990-EZ, your due date can be delayed by 3 months, but only if you get a timely extension filed.  There is no extension for Form 990-N…so failure to file will mean the end of your tax exemption.

If you need help, call us. The Foundation Group prepares Form 990 for hundreds of nonprofits each year.  But time is quickly running out, so do not delay!

For more information, please see our Form 990 web page and the IRS FAQ on the subject.