Why a Cost Allocation Plan is Important for Nonprofits

Developing a cost allocation plan for a nonprofit organization can be a tricky process. Understanding how a cost allocation plan (CAP) works is critical to responsible financial management and reporting; however, not all nonprofit organizations realize its importance. How costs are allocated affects the public view of your nonprofit and can greatly impact your ability to receive funding.

What is a Cost Allocation Plan?

Simply put, a cost allocation plan is the method used for allocating expenses that are not directly tied to a particular activity. It is your plan for allocating expenses that benefit more than one activity. When donors look at your financial reporting, they expect to see a clear picture of how their funds are being spent. In fact, formally allocating costs is required by governmental agencies and most major funders.

A cost allocation plan allows your nonprofit to communicate the true costs of providing certain services. For example, when your monthly electric bill for $800 arrives, rather than coding it simply as “utilities,” you would divide it out between the different functional areas that actually utilized that electricity. If your administrative office was responsible for approximately 20% of its use and your program center utilized 80%, it would be divided as follows:

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The Importance of Cost Allocation

When done accurately and consistently, allocating costs will provide a true picture of what your different programs and activities cost. How you allocate your costs will also determine the percentage of management, program and fundraising costs that will be reflected on your IRS Form 990 and other financial reports. This is important because these forms are utilized by potential donors to ensure that your organization is using its funds wisely. Especially when it comes to government funding, how funds are allocated will determine what costs are reimbursable. When a large percentage of costs are allocated to fundraising efforts, many funders will not consider your organization’s request for a donation. Why? Donors tend to give when their dollars go directly to mission critical programs and services.

When it comes to allocating costs, one of the largest expenses and most complicated of those requiring allocation is payroll. Some staff positions are easily categorized, but some positions, particularly those in the management or administrative realm can actually be divided based on the nature of a job and how much time and effort is devoted to a particular activity.

No matter the size or nature of your nonprofit organization, creating a cost allocation plan is a must. By determining how your funds are utilized, you can better communicate the value of your work, the importance of donor giving and how together you are making positive changes in the community.

At Ernst Wintter & Associates, our nonprofit audit services will give you peace of mind and help you decide how to best utilize your financial resources. If you have any questions about our nonprofit services, one of our CPAs would be happy to speak with you at (925) 933-2626 or, email us at info@winttercpa.com.

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This post originally appeared at Ernst Wintter & Associates LLP.

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Nonprofit’s Guide to Giving Gifts

During the holiday season, thoughts turn to gift giving. Many employers choose this joyous season to recognize and celebrate with their employees. While sharing gifts in the workplace is common, nonprofit leaders must take care during the holiday season to ensure that they are following tax law and will not run into complications during an audit of nonprofits.

The Complications of Giving Gift Cards

Gift cards that are gifted to a non-profit organization are usually used to buy food or other supplies for a charitable purpose, however, some organizations have been known to give these cards to employees as gifts or bonuses. What these organizations may not realize is that gifts, including gift cards given to employees, are generally considered to be taxable compensation.

Not all gifts are considered taxable. Birthday, sympathy and holiday gifts with a low market value like flowers, books or food baskets are not required to be taxed. Holiday parties, group meals or celebratory get-togethers are also excluded. Basically, any cash, even if it’s a very small amount, or cash-equivalent like a gift certificate is taxable, according to Federal law.

Gifts to Volunteers

Further complicating the matter is the fact that many non-profit organizations also utilize volunteers. The policies surrounding volunteers are also scrutinized closely during an audit of nonprofits. Once a gift card or cash is given to a volunteer, no matter how nominal, on behalf of the organization, they are now considered an employee or independent contractor, with all of the requirements that employing an individual requires. This also means the required withholding of income and Social Security taxes.

What You May Gift to Volunteers and Employees

All of these regulations may leave you saying “bah-humbug,” but it is important that you abide by all applicable tax laws. Some benefits or gifts may be considered de minimis such as:

  • Holiday gifts, other than cash or gift card equivalents, with a low fair market value.
    • Such as an ornament or mug, etc.
  • Occasional parties or picnics for staff and their guests.
    • Such as a holiday luncheon.
  • Occasional coffee, doughnuts, or soft drinks.
  • Flowers or fruit for special circumstances.
  • Occasional tickets for theater or sporting events.
    • Such as a discounted movie ticket as a token of appreciation.

Whether an item or service is de minimis depends on all the facts and circumstances. It is important to remember that a key factor in determining if a gift is de minimis is its frequency and value.  During an audit of nonprofits, compliance will be thoroughly reviewed. Your board of directors, donors and even government entities are looking at your nonprofit organization closely to make sure that you are compliant with State and Federal laws and being a good steward of the funds you’ve received.

If you have concerns or questions about nonprofit gift giving or giving gifts to staff and volunteers, contact one of our CPAs at (925) 933-2626 or email us at info@winttercpa.com. We would be happy to speak with you.

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This blog post originally appeared at Ernst Wintter & Associates LLP.

Nonprofit Audit Requirements for California

When it comes to defining the term “audit,” it has several meanings. While it can mean Internal Review, External Management, or Contract Monitoring, many individuals think immediately of an IRS review. In reality, however, a financial audit most often refers to an independent review of a business or an organization’s financial books.

This is normally conducted on an annual basis, and it’s simply a part of reliable checks-and-balances to ensure everything is in order. Today, we will explore the California nonprofit audit requirements and all it entails.

Audit Requirements for Non-Profit Organizations in California

It should not surprise you that a good number of non-profit organizations in California are not aware that they’re required by law to submit an annual financial statement audit. According to California’s Nonprofit Integrity Act of 2004, Non-profit organizations that are registered with the state’s attorney general and have annual gross revenue of at least $2 million must have an Independent Audit of their annual financial statements.

If your organization is a charitable corporation, unincorporated association, or a charitable trust, then you are subject to the California nonprofit audit requirement. However, this requirement exempts organizations that are not required to file annual reports with the attorney general. They include:

  • Cemeteries
  • Educational institutions
  • Hospitals
  • Religious organizations

Additional Requirements

Other requirements for California nonprofit audit includes the following:

  • The audits must be carried out by an independent, certified accountant if your organization’s revenue is over $2 million. It is worth noting that there are certain exceptions for some government grants.
  • The audited financial statements should be made available to not only the attorney general, but also the public for inspection.
  • The audit must be carried out in line with the generally accepted accounting principles  – GAAP
  • It must be finalized within nine months of the financial year end.

Furthermore, you are required to create and maintain an independent audit committee, which should be separate from the other financial committees that may exist in your organization. You need to also ensure that the Audit Committee excludes staff members; not even the C.E.O, the treasurer or the chief financial officer should be in the committee. It can, however, include individuals who are not members of the board. It is worth noting that the Audit Committee advises the board of directors on employing and firing the auditor. It can also negotiate the auditor’s fee. Forming an audit committee may be an intimidating idea, buy you have no other way out.

Conclusion

An independent audit is an examination of your financial statements and accounting records by an independent auditor – usually, a certified professional accountant (CPA) hired and paid by your non-profit. The auditor will conduct an independent investigation to examine the accuracy of your accounting records as well as internal records.

Once done, the auditor will issue a report stating whether, in his professional judgment, your year-end financial statements and accounting records fairly represent your organization’s financial position with regard to generally accepted accounting principles – GAAP. The auditor report, which is in letter form, is normally attached to the front of the financial statements. With a clean bill of health from the auditor, the world will know that you are keeping your financial books in a responsible manner.

Contact Ernst Wintter & Associates LLP today to find out how we can help.

Defining a Nonprofit Organization

While nonprofits have a wide range of objectives, their general charter is to accumulate and distribute funds to address specific social objectives and to improve society in some notable way.  Government approval is required to be designated a nonprofit and thereby enjoy tax benefits that profit-seeking organizations do not.  In return, the nonprofit must abide by regulations that disallow the use assets for non-related purposes. To that end, nonprofit responsibilities include the creation of a board of governance to oversee and maintain compliance.

Audit Committee Responsibilities

Though nonprofit organizations do not have the same responsibility to shareholders as profit-driven corporations, these certainly have an obligation to maintain accurate and detailed financial reporting. Supported by funds from donors and foundations, plus the government from a tax-exempt perspective, accounting and audit procedures must comply with the organization’s charter and applicable tax laws.

An Audit Committee is commissioned by the Board of Directors of the nonprofit to monitor, review and oversee the nonprofit responsibilities to create and maintain accurate accounting and audit processes. The charter of responsibilities should be clear to all, so that the Committee may execute their duties without interference. At least one member of the Committee should be well-versed in accounting principles or, alternatively, a consultant should be budgeted for and hired to ensure that accounting procedures and fund disbursement are managed properly. And systematic check and balance processes should be created to eliminate improper or fraudulent handling of the nonprofit’s assets.

Effective Nonprofit Audit Committees fulfill nonprofit responsibilities by:

  • continually improving the financial system with well-defined procedures and reporting.
  • creating deterrents to mismanagement and fraud .
  • establishing effective audit processes, both internal and external.

Securing an Auditor

The Audit Committee is responsible for hiring an auditor to summarize the financial process. Charged with the oversight responsibility, the Audit Committee must make available all records for the auditor to perform effectively. Ongoing communication with the auditor is important to ensure that apparent obstacles that may be hindering the audit process are removed.

Reviewing the Audit Report

When the audit is completed and the report submitted, the Audit Committee will meet with the auditor to review the findings and ensure the nonprofit responsibilities are being met.  Ideally everything is in order. But if irregularities and variances should exist, these will be brought to light for discussion of futher investigation and resolution. Some discrepancies may require changes in procedure and stronger check and balance. Serious problems might result in employee dismissal, legal prosecution and a substantial revamping of the bookkeeping procedures.

Presenting to the Board of Directors

The Audit Committee will assemble a summary with specific conclusions and recommendations for presentation to the Board of Directors.  During this presentation, the Audit Committee will:

  1. Provide a summary of the audit.
  2. Summarize the current financial situation.
  3. Review variations or discrepancies discovered.
  4. Recommend solutions for resolving any mishandling issues.
  5. Make recommendations to strengthen overall financial management.
  6. Provide an assessment of the auditor and the audit process.

With Board approval, the Audit Committee will proceed to immediately resolve mismanagement issues.

Importance of the Audit Committee Function

Effective Audit Committees are vital to the life the organization and meeting nonprofit responsibilities.  Poor oversight may compromise the integrity of the organization and eventually jeopardize the future of the endeavor.

Contact Ernst Wintter & Associates LLP today to see how we can help you through the process of a nonprofit audit.

Full Scope or Limited Scope Audit – Which One and Why?

When planning for an audit of your 401(k) or other retirement plan, you might question if a full scope audit or limited scope audit should be conducted.  It is important to determine if your plan requires an audit, and know your options. Failure to comply with audit requirements can lead to a host of long-term complications for your business.

Is an Audit Required for My Company’s Retirement Plan?

Retirement plans are subject to U.S. Department of Labor and IRS regulations. For the protection of investors, these agencies ensure that they are appropriately managed. Generally, qualified benefit plans with 100 or more eligible participants, as of the first day of a plan year, require an audit. Each employee who is eligible to contribute to the plan is treated as an eligible participant, whether they contribute or not. Retirees and separated participantsalong with the beneficiaries of deceased participants who are receiving benefits, or are entitled to receive benefits, are also treated as eligible participants.

The regulations surrounding 401(k) audits are strict and complex. Non-compliance can lead to expensive fines and litigation. Trusting an experienced auditor to advise you throughout the audit process is essential to avoiding complications.

Full vs. Limited Scope Audit – Which is right for me?

Limited Scope Audits

To qualify for a limited scope audit, an insurance carrier or bank must act as the trustee or custodian for the plan. This entity must be state or federally chartered and regulated, supervised and subject to examination. The trustee must also certify to the accuracy and completeness of any investment information.

A limited scope audit works well for some. They usually come along with lower fees and fewer areas subject to audit testing. It’s important to note that the accounting firm that is charged with performing a limited scope audit cannot give an unqualified opinion on the plan’s financial statements. An unqualified opinion is an independent auditor’s report that your financials are fair and accurately presented. Reports that accompany limited scope audits are referred to as a Disclaimer of Opinion.

Full Scope Audits

In a full scope audit, audit work is performed on the plan’s investments. Procedures include sending confirmations to the custodian, trustee or insurance company to verify ownership of investments, along with the valuation of investments, investment transactions and investment income.

The accounting firm performing the full scope audit, will provide an independent auditor’s opinion on the plan’s financial statements.

The independent auditors’ report, financial statements and required schedules are filed with the Department of Labor. This is due on the last day of the 7th calendar month after the end of the plan year, unless an extension is requested.

It is vital for small to mid-size businesses to plan for the appropriate full or limited scope audit of their 401(k) plan. Contact Ernst Wintter & Associates at <a href=”tel:9259332626″>(925) 933-2626</a> to discuss your audit questions and determine which option is best suited for the unique needs of your business. 

Why Does My Small Business Need to Keep All These Accounting Records?

Running a small business is a big task.  Between the everyday tasks at the core of your company and keeping your staff and customers happy, you may be compelled to expunge files to make space.  Before you opt to get rid of your small business accounting records, take note of these reasons for keeping your files in shape and on hand.

  • Audits.  The Internal Revenue Service is a powerful entity with the ability to request years of records if an audit is initiated.  Payroll records should be kept for at least four years, and a tax audit can go back as far as six years.  In general, it is helpful to keep records for at least seven years before expunging them to ensure that you cover any potentially needs, should an audit be scheduled.
  • Monitoring Progress.  You can’t know where you’re going until you know where you’ve been.  Keeping track of your small business accounting records will afford you the ability to paint an accurate picture of your company’s progress.  By documenting your income statements, balance sheets, and sales records, you’ll be able to better understand which items are selling, how much inventory you’re storing unnecessarily, and how you can improve your overall business functions.
  • Preparing for Credit Needs.  As your company grows, you may find yourself in need of additional funds to help with the expansion of your business.  Well-kept small business accounting records can mean the difference between wanting a loan and obtaining one.  Properly kept small business accounting records, including balance sheets, income statements, and payroll documents can provide you with the leeway you need to grow your business for the long term.  On the other hand, poorly kept or inadequate documentation could potentially lose a loan that could have meant big things for your business.
  • Employee Inquiries.  Whether you’re talking about present or past employees, anyone who has worked for you in most forms or fashions can generally request information at any time.  It’s important to remember that your small business accounting records don’t solely include financial statements that could be audited by outside inquirers.  You may be required to present information relative to employee benefits, including details about benefit plans, contributions, payments, and other imperative details.  It’s vital that your small business accounting records are healthy enough to withstand any inquiry so your staff can answer any necessary questions at a moment’s notice.

Small business accounting records needs to be kept tidy to ensure the health of the companies they encompass.  Between local, state, and federal regulations, the housekeeping of these records is not only ideal, but it’s essential.  It can also be tough to do if you’re operating a company that’s stretched in resources as it is.

If you need help keeping your small business accounting records in order, contact our team at Ernst Wintter & Associates, and let’s talk about how we can help.

Tax Implications of Selling Your Home

The process of buying or selling a home is often mind-boggling. Misinformation about the tax implications of real estate sales abound and it is easy to get overwhelmed by these complex transactions.

Whether a seller is responsible for paying taxes on the sale of a home and the amount of those taxes depends on how long they’ve lived in the home. In many cases, homeowners can pocket up to $250,000, or $500,000 if filing jointly with a spouse, tax-free. The IRS has specific guidelines outlining this exemption and exactly who qualifies.

Exclusion of Taxes for Real Estate Transactions

For those homeowners receiving larger amounts from the sale of their main home may qualify to exclude up to $250,000 of that gain from their income when filing their tax return. This can be extended up to $500,000 when the return is filed jointly with a spouse.

To qualify for this tax break, homeowners must meet both the ownership test and the use test, which is determined by the IRS. This means that eligibility requires that a homeowner has used a home as their main home for at least two of the five years leading up to its date of sale. The ownership and use test can be based on different two-year periods; however, both of the tests must be met during the five-year period ending on the date of the sale.

Exceptions to the Exclusion

For those selling properties such as vacation homes, investment homes or rental properties, these exclusions generally do not apply. These transactions are typically subject to taxes on the entire income gained in the sale.

Homeowners who have sold another home within the five-year period, and were eligible for the exclusion, will generally not be eligible for a second exclusion. The IRS requires that the sale of a home be reported on a tax return, even if it is excluded. Sales with a gain over $250,000 (or $500,000 for a married couple) are subject to capital gains tax.

Certain special situations allow homeowners to suspend the five-year test period. For example, some active duty military personnel and their spouses may elect to extend the period up to 10 years.

The Benefits of Working with a Financial Professional

The tax implications of a real estate transaction can be complex. This is why many homeowners trust the counsel of a reliable professional when selling their homes. Relying on the expertise of an experienced financial professional will help you to make wise decisions regarding the sale of your home.

At Ernst Wintter & Associates we understand the financial intricacies of selling your property. We will be with you each step of the way to help you understand the process and the scope of any tax ramifications. Learn more by contacting our accounting experts today.