CF Joseph CPA P.C.

Your not-for-profit likely follows a spending policy to determine how much of the value of your investments to tap each year for operating costs and capital projects. Although it’s usually a good idea to stick with an established spending policy, circumstances may warrant changes. There are several types of policies, including fixed rate, rolling average, inflation-based, geometric and hybrid, all with pros and cons. When selecting a model, you should consider how that method potentially could cause you to increase spending and undermine your investments’ long-term growth.

In general, 501(3)(c) organizations are prohibited from political campaign activities. These include supporting a candidate or party, contributing financially or fundraising for a campaign, offering an endorsement for the politician’s support or distributing campaign materials. However, there are ways your nonprofit can get involved in the political process. For example, you may be able to safely host a candidate forum, advocate on behalf of an issue or launch a “get out the vote” drive. Although fines, taxes and other penalties are relatively rare, your nonprofit should err on the side of caution.

Many not-for-profits are still suffering financially from the pandemic, particularly as inflation makes expenses more costly. Before you consider cutting staff, find other expenses to slash. For example, if employees now work from home, see if you can break or renegotiate your office lease. And if you have more than one location, try to combine them for greater cost efficiencies. You may also be able to renegotiate terms with vendors. Just watch out for termination fees. Be assertive: Vendors may be willing to offer nonprofit discounts or donations.

Business owners are aware that the price of gas is historically high, which has made their vehicle costs soar. Fortunately, the IRS is providing some relief. The tax agency announced an increase in the optional standard mileage rate for the last six months of 2022. Taxpayers may use the optional cents-per-mile rate to calculate the deductible costs of operating a vehicle for business. From July 1–Dec. 31, 2022, the standard mileage rate for business travel will be 62.5 cents per mile, up from 58.5 cents per mile for Jan. 1–June 30, 2022. Taxpayers also have the option of calculating the actual costs of using their vehicles rather than using the standard mileage rate.

The 2022 Report to the Nations from the Association of Certified Fraud Examiners reports that not-for-profits are the least likely type of organization to experience occupational fraud. Sounds like good news, right? Unfortunately, the $60,000 median loss is more than most nonprofits can afford. Fewer financial and staff resources and less vigorous oversight and enforcement of internal controls can make nonprofits vulnerable. But inexpensive controls can help you prevent fraud. For example, a code of conduct, mandatory vacations, fraud training for employees and refusal to override controls can reduce potential losses.

There’s a valuable tax deduction available to a C corporation when it receives dividends. The “dividends-received deduction” reduces or eliminates an extra level of tax on dividends received. As a result, a corporation will typically be taxed at a lower rate on dividends than capital gains. Ordinarily, the deduction is 50% of the dividend, meaning only 50% of the dividend received is effectively subject to tax. For example, if a corporation receives a $1,000 dividend, it includes $1,000 in income, but after the $500 dividends-received deduction, its taxable income from the dividend is only $500. The tax break may be higher or lower, depending on the circumstances, and other rules apply.

If your not-for-profit hasn’t conducted an executive search since before the pandemic, anticipate an altered search landscape. For example, the job market now is tighter and, given the prevalence of working from home, candidates may not want to consider relocating. A search committee of board members should keep comprehensive, up-to-date job descriptions for executive positions and list the knowledge, skills, abilities and attitudes required. Also, the committee will want to discuss compensation to ensure your nonprofit’s offer is competitive with those of similar organizations.

If your small business or start-up is planning to claim the research tax credit, here’s an option. Subject to limits, you can elect to apply all or some of research tax credits that you earn against payroll taxes instead of your income tax. Many new businesses, even if they have some cash flow, or even net positive cash flow and/or a book profit, pay no income taxes and won’t for some time. Thus, there’s no amount against which business credits, including the research credit, can be applied. On the other hand, a wage-paying business, even a new one, has payroll tax liabilities. The payroll tax election is an opportunity to get immediate use out of the research credits that a business earns.

In general, quid pro quo donations occur when a not-for-profit receives a contribution of more than $75 and it provides the donor with goods or services valued at less than the donation amount. These arrangements create reporting obligations for your nonprofit. You must give written notice to donors that they can deduct only the amount in excess of the value of goods or services they receive. Also give donors good faith estimates of their value. You don’t need to provide written notice if you give donors token gifts or certain membership or intangible religious benefits.

Your nonprofit can’t just ask for a grant and expect to receive it. Qualifying for the funding you need generally requires you to submit a thorough, professional and compelling grant proposal. So, familiarize yourself with the grantmaker’s goals and objectives, the types of projects it funds, and its processes and procedures. Your proposal must follow the grantmaker’s instructions, meet all deadlines and include facts and figures that support your request. Don’t forget to double-check for spelling, math and other errors.

If you’re a partner in a business, you may have come across a situation that’s puzzling. In a given year, you may be taxed on more partnership income than was distributed to you from the partnership in which you’re a partner. Why? It’s due to the way partnerships and partners are taxed. Unlike C corporations, partnerships aren’t subject to income tax. Instead, each partner is taxed on partnership earnings whether or not they’re distributed. And if a partnership has a loss, it’s passed through to partners. (However, various rules may prevent partners from currently using their share of a partnership’s loss to offset other income.)

Ongoing economic insecurity and uncertainty about the future have prompted some not-for-profits to make board designations of unrestricted assets. “Board-designated assets” refers to funds that haven’t been restricted by donors but are subject to self-imposed limits on their use. They’re typically intended to ensure that funding is available when needed. Funds generally are designated by the board, but, in some cases, the board assigns responsibility to management. Designating assets can make it easier to comply with financial reporting requirements. But make sure you adopt formal policies for managing these assets.