Accounting & Tax 101 for Chapters

Fall 2011 NCCS Conference

Mr. Brian Giganti, CPA of Regardie, Brooks & Lewis CPAs presented a mini-seminar to Conference attendees entitled “Accounting & Tax 101 for Chapters”.  His outline is attached and can be viewed by clicking on the link below this synopsis.

Brian set forth four broad goals for the session:

bulletgain an understanding of basic accounting & internal controls;

bulletreview organizational considerations of tax exempt organizations;

bulletconsider financial and tax compliance responsibilities of tax exempt organizations;  

bulletgain an understanding of endowments.

Basic Accounting & Internal Controls

Discussion of basic accounting and internal controls of an organization crosses over to the subject of organizational considerations.  The goal of both subject areas is to have the organization establish written procedures & guidelines and follow them in a manner which results in “best practices” in the financial and reporting responsibilities of the organization.

Fundamental good practice requires that the organization have

bulletbank account in the name of the organization;

bulletmaintain a basic set of books and

bullethave written procedures and guidelines for handling the organizations money.

Bank account(s) should be:

bulletFDIC insured;

bullethave more than one signer on the account; and

bulletthe functions of depositing funds and reconciling statements/accounts should never be one single person’s duty.

The manner in which money is deposited, bank statements reconciled and payment of invoices are processed should lend itself to a system of checks and balances - one person performs one task and a separate person reviews the documentation related to the task.

Brian discussed available accounting software programs:

bulletPeachtree (if you are an accountant it’s sophisticated report format will appeal to you, but others will find it too difficult to navigate)

bulletQuicken not terribly different from using an Excel spreadsheet) but it has all the basic

bulletFinancials, charts of account and simple reconciliation functions.

bulletQuick Books either the software program or the on-line version.

QuickBooks on-line version is approximately $24.00/month.  It is designed for the non-accountant and although the formats for reports is more limited it is probably sufficient for organizations with less than $100,000 in annual revenues.  The terrific advantage to QuickBooks on line is the accessibility through the Internet of account information in terms of transactions, balances and reconciliation in terms of seeing which checks have cleared the bank.  On line access for withdrawals, transfers and other significant account transactions can be limited by the number of persons who have passwords that permit them to do these tasks.  Others can have the ability to view but not enter into transactions. Brian noted that most banks today will not reimburse the account holder for fraudulently cashed checks unless the bank is notified within one billing cycle of the date the check was presented for payment, which is typically 30 days.

Written procedures & guidelines do not have to be complicated.  An accounting manual should say (1) what we do; (2) why we do it; (3) how to do it.  This will give you continuity over different years with different board members.  Sample accounting manuals can be viewed for free at www.asaecenter.org which is the web site for the American Society of Association Executives.

Cash Receipts should be handled as follows:

Person A & B go to the P.O. Box to collect donations [or sit at the registration table at the banquet dinner TOGETHER; Person A writes up the deposit slip and Person B takes it to the Bank.  You are making sure that one person is not doing all activities related to depositing of money.

Documentation, whether receipts are by cash, check or credit card are important for two reasons: with cash you need to have the name, address, amount received and date of deposit.  This is necessary for good accounting practices, but it is absolutely essential if the amount is over $250 so that you can provide the written acknowledgment for a charitable donation.  Brian suggested that you photocopy or preferably scan all checks received.  Most photocopy machines now have scanning capacity.  As more and more financial institutions go paperless [you get your statements but the actual checks are no longer returned to you with the statement] you need to consider how to keep, in orderly fashion, documentation of your receipts. 

Scanning is the solution.

Your accounting manual, or written policies and procedures, should be kept with other important organizational documents such as contributor information, grant agreements, articles of incorporation and tax exemption letters.  The IRS record retention policy is 7 years: the current year plus 6 for most invoices.  A model record retention policy can be found at the Regardie, Brooks & Lewis’ firm web site www.rblcpa.com .  Records retention has become an important issue because of the Sarbanes Oxley legislation where destruction of certain records in relation to certain organization events can result in the imposition of civil penalties for destruction.  The most important thing is SET A POLICY, WRITE THE POLICY DOWN and FOLLOW IT.

Question: If you write the deposit information in your Quicken or Quickbooks check register, including all the name, date and address info in the memo portion do you still need to scan the check?

Answer: As an auditor I would have to say “yes”.  Even if you write all this information down in the memo portion of the electronic register, how do you know when the check came in?  You know when you deposited it, but that might be a later date than the date on the check. 

Another member suggested that scanning the check is critical because if the donor calls you 2 months after you received the check and says “I just received the charitable donation acknowledgment and it says I sent you $500 but I remember the check was for $1,000", you can print out the scanned copy of the check, send it to the donor and establish that it was only for $500, or even better you can email the donor an electronic copy of the scanned check and save the paper and postage!

Question: When you get an invoice and write a check to pay it is it enough to write the date and check number on the invoice?

Answer:  Supporting documentation for payment of vendor invoices is important.  To avoid accidental double payments and to establish good practices buy a stationary store stamp that allows you to stamp the invoice paid with the date and the initials of the person paying the invoice.  Then scan it and you have both electronic and paper documentation of expenditures.

Organizational Considerations

Brian concluded with the subject of non profit tax exempt organizational tools.  NCCS is an integrated organization under the IRS exemptions for “churches, synagogues etc.” so that not every chapter is required to be a separately incorporated IRC §501(c)(3) tax exempt organization, and Brian emphasized chapters need not be because the dollar amount of annual revenue should drive whether a chapter seeks an independent 501(c)(3) status. 

The IRS Form 1023 is the application for a federal tax exemption as a non-profit entity.  Once the exemption is granted the entity must file an annual IRS Form 990.  

bulletThe 990 is 26 pages in length and is required where annual revenues are over $200,000;

bulletthe 990EZ is 10 pages in length and is required where annual revenues are between $50,000 and $200,000;

bulletthe 990N (postcard) is where the annual revenues are less than $50,000 per year.

Quickbooks has a 990 report form in its software.  You could prepare it and give it to an accountant for review and filing, but it is the narrative parts of the 990, what you say about your organization, that are tricky and require the input of a tax professional.

Remember that a 501(c)(3) status exempts the chapter from Federal Income Tax but other taxes operate independently of the federal tax.  Federal tax exempt status does not exempt you from sales tax requirements, property taxes and certain franchise tax board taxes imposed by states.  Certain fund raising activities lead to tax issues.  There is currently pending a landmark case involving the Girls Scouts of America, their franchise structure and taxes.  Brian said it is a landmark case and the decision will reverberate throughout all non profits.  Brian also noted that even non profits should be careful about the hiring of independent contractors and the need to issue Form 1099's for those they pay more than $600 per year.

Question: Aren’t there organizational considerations to getting a federal tax exemption, like you have to be incorporated and have by laws By-Laws?

Answer: NCCS provides Bylaws in the OMG which govern the chapters, which you can use.   Some states require incorporation while others allow for unincorporated associations (nonprofits).  In either instance, there is a registration process with the State in which you are located.  I would recommend speaking with an attorney about incorporating and the ramifications to your chapter.

Question: If CCS Akron sells something like an apron in Ohio is there an obligation to pay sales tax and how does the organization have to handle the sales tax, particularly when the sale is done via a web site.

Answer:  You should talk with a local accountant or attorney as to the sales tax regulations in your state.  Usually, the chapter must register with the state/county/city with respect to the sales tax, but the chapter has the option of stating the price is $10 including sales tax, or $10 plus sales tax.  The chapter has to file and pay the appropriate state agency the sales tax at least annually.

Question: The chapter is having a silent auction and X buys something for $100 which was donated and was really only worth $10 but X really wanted to get it.  Do you charge sales tax on $100 or $10?

Answer: The sales tax is usually charged on the actual selling price, and not the fair value but you need to check your state sales tax regulations to be sure there isn’t an exception made for non-profit fundraising.

Endowments

Finally, Brian addressed endowments and the difference between “True” or external source endowments which involve the permanent restriction of use on net assets versus internal source endowments where a Board of Directors designates certain assets for a certain purpose.

Brian suggested that those interested go to www.upmifa.org to look at some of the guidelines set out in the Uniform Prudent Management of Institutional Funds Act which has been adopted by many states.  The site contains links to individual states within the U.S.

Briefly every organization with a restricted endowment, as part of its best practices needs to:

bulletSegregate underlying assets;

bulletHave an articulated investment policy;

bulletHave an articulated spending policy.

Question: Can you set aside a reserve for an internal source endowment?

Answer: Every organization needs a reserve but that is different and separate from an endowment.  If you have an internally sourced endowment it can’t be restricted because it is something that was established inside, you can commingle money on an internally sourced endowment whereas a “true” endowment which is outside sourced cannot be commingled.

Question: What is a competitive amount to pay for investment advice with respect to management of endowment funds?

Answer: Look to some of the guidelines referred to at www.upmifa.org and recognize that so long as the investment policy takes the long view and you don’t rigidly adhere to a spending policy that does not take into account market fluctuations you will avoid claims of  poor management of the endowment funds.  Under $1 million under management the standard charge is 1%.  Under $3 million under management the standard charge is .75%. 

Question: Can a for profit business sublet a portion of its real property to a CCS chapter and then deduct the value of the rent as a charitable donation?

Answer: [This answer presumes the business is renting its property]

The problem with this suggestion is that you cannot get both the fair market value of the rental and the business  deduction (for the rent paid).  So, in most cases you are better off just taking the business deduction.  If the property rents for $1,000 per month and the for profit business uses $800 worth of the location, letting CCS take $200 worth of space it is better for the business to take 12 x $200 as the business deduction .

Question: What is the difference between an audit and a review?  Which do we need?

Answer: An audit means that certified public accountants look at your transactions [income, expenses, investment income, everything] and render an opinion as to whether your reports are a fair presentation of your financial condition.  The audit letter states that generally accepted accounting principles have been followed and the audit letter has notes which explain certain transactions.  It is in effect an auditor’s “opinion letter”.  A compilation is similar in that the  accountant looks at the financial statements but does not do the in depth analysis, or notation and does not prepare an “opinion letter”.  A review is between and audit and a compilation but also does not produce an “opinion letter”.

Question: Which do you recommend for chapters and what if your By Laws require an audit?

Answer: You can change your By Laws if they require an annual audit and that is particularly true if the annual revenue of your chapter does not justify the cost of an annual audit and a certified public accountancy firm believes that in your circumstances a review or compilation is adequate.

Brian agreed to post a short article on the NCCS web site about “agreed upon procedures” and audit versus review versus compilation.


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