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Not-for-Profit Accounting, Tax, and Reporting Requirements 4e.pdf
NOT-FOR-PROFIT ACCOUNTING, TAX, AND REPORTING REQUIREMENTS Fourth Edition NOT-FOR-PROFIT ACCOUNTING, TAX, AND REPORTING REQUIREMENTS Fourth Edition EDWARD J. McMILLAN, CPA, CAE John Wiley & Sons, Inc. Copyright © 2010 by John Wiley & Sons, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www. copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particu- lar purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: McMillan, Edward J., 1949- Not-for-profit accounting, tax, and reporting requirements / Edward J. McMillan. — 2nd ed. p. cm. Includes index. ISBN 978-0-470-57538-3 (pbk.) 1. Nonprofit organizations—United States—Finance. 2. Nonprofit organizations—United States—Accounting. 3. Nonprofit organizations—Taxation—United States. 4. Financial statements—United States. I. Title. HG4027.65.M363 2010 657'.980973—dc22 2010003129 Printed in the United States of America. 10 9 8 7 6 5 4 3 2 1 To my beautiful daughter, Terryn, Spencer, her dedicated husband, David, and their three terrific boys, Patrick, Benjamin, and John vii About the Author Edward J. McMillan, CPA, CAE, has spent his entire career in not-for-profit financial management. He has served as the controller of the national office of the Associated Builders and Contractors and as the finance and membership director of the American Correctional Association. In 1993, McMillan was appointed faculty chair for finance for the United States Chamber of Commerce’s Institutes for Organization Manage- ment program. McMillan has written several books on not-for-profit financial management. His publishers include the American Society of Association Executives, McGraw-Hill, the U.S. Chamber of Commerce, and the American Chamber of Commerce Executives. McMillan now concentrates solely on speaking, writing, and consulting on financial management topics for associations and chambers of commerce. He lives near Baltimore, Maryland. In his free time, he enjoys coaching youth sports and motocross racing. You may contact McMillan at P.O. Box 771, Forest Hill, MD 21050; phone/fax: (410) 893–2308; e-mail: emcmillan@sprintmail.com. Also see his web site at www.nonprofitguru.com. ix Contents Acknowledgments xiii Preface xv Disclaimer xvii Chapter 1 Classification of Tax-Exempt Organizations 1 Chapter 2 Financial Responsibilities of Not-for-Profit Board Members 9 Chapter 3 The Basics of Form 990, Form 990-EZ, and Form N 15 Chapter 4 Tax on Unrelated Business Income and Form 990-T 25 Chapter 5 Other IRS Issues 33 Chapter 6 Disclosure of Information 39 Chapter 7 Conditions of Employment Agreement 47 Chapter 8 Wholly Owned Taxable Subsidiaries 55 Chapter 9 Internal Revenue Service Audits 59 Chapter 10 Developing Strong Internal Controls and Documenting a Fraud Action Plan 69 Chapter 11 Using CPA Firms and Understanding Their Functions 87 Chapter 12 Grant Accounting and Auditing 111 Chapter 13 Implications of Lobbying Expenditures 127 Chapter 14 Campaign Contributions, PACs, and 527s 141 Chapter 15 Internal Audit Committees 149 Chapter 16 The Accounting Policies and Procedures Manual 153 Chapter 17 Restricted-Fund Transactions 159 Chapter 18 The Basics of Intermediate Sanctions 167 Chapter 19 The Basics of Not-for-Profit Accounting and Financial Statements 171 Chapter 20 Private Foundations 179 Appendixes Appendix A. Statement of Financial Accounting Standards #117: Financial Statements of Not-for-Profit Organizations 183 Appendix B. Statement of Financial Accounting Standards #116: Accounting for Contributions Received and Contributions Made 215 x Contents Appendix C. Statement of Financial Accounting Standards #124: Accounting for Certain Investments Held by Not-for-Profit Organizations 233 Appendix D. Statement of Financial Accounting Standards #136: Transfer of Assets to a Not-for-Profit Organization or Charitable Trust that Raises or Holds Contributions for Others 239 Glossary 245 Index 255 Contents xi xiii Acknowledgments The publisher and author would like to take this opportunity to gratefully thank and recognize Lynn M. Craig, CPA and Patrick R. Blanda, CPA for the generous contribu- tions of their time and expertise incorporated in this handbook. Lynn is a senior manager for the S & F Company, CPAs and Business Advisors located in Wormleysburg, PA. Lynn is recognized as an authority on not-for-profit auditing, taxation and reporting requirements. Her contact information is: Lynn M. Craig, CPA Seligman, Friedman & Company, P.C. 1027 Mumma Road Wormleysburg, PA 17043 (717) 761–0211 Pat Blanda is currently the Controller of ROSECOR, Inc., and has extensive expe- rience in business analysis, improving accounting operations and fraud investigation among several other essential business applications. Additionally, Pat served five years as an Adjunct College Instructor: Accounting, Tax & Auditing. Also, Pat is a current member of the Leadership Cabinet of the Indiana CPA Society. Pat’s contact information is: Patrick R. Blanda, CPA 10949 Gorden Setter Drive Osceola, IN 46561 (260) 494–7608 xv The accounting principles, tax issues, reporting requirements, and general work envi- ronment of not-for-profit organizations are remarkably different from similar issues affecting commercial organizations. This handbook is designed to help bookkeepers, managers, volunteers, and auditing CPA firms working with trade associations, pro- fessional associations, charities, chambers of commerce, and other not-for-profit organizations in their various financial responsibilities. It provides guidance and assurance in understanding and addressing their fiduciary obligations. The accounting standards addressed herein are in accordance with applicable standards promulgated by the American Institute of Certified Public Accountants (AICPA) and the Financial Accounting Standards Board (FASB), as of the date of this publication. Additionally, all tax issues and reporting requirements are similarly current. Edward J. McMillan, CPA, CAE June, 2010 Preface [...]... When Are Form 990s Due? The 15th day of the 5th month following the end of their year Where Are Form 990 and Form 990-EZ Filed? Department of the Treasury Internal Revenue Service Center Ogden, UT 84201–0027 15 Not- for- Profit Accounting, Tax, and Reporting Requirements, Fourth Edition by Edward J McMillan Copyright © 2010 John Wiley & Sons, Inc 16 Not- for- Profit Accounting, Tax, and Reporting Requirements. .. adhere to organization policies 9 Not- for- Profit Accounting, Tax, and Reporting Requirements, Fourth Edition by Edward J McMillan Copyright © 2010 John Wiley & Sons, Inc 10 Not- for- Profit Accounting, Tax, and Reporting Requirements Care Care requires board members to make prudent business decisions that are in the best interest of the organization and protect confidential information With regard to fiduciary... disadvantages Exhibit 1.2 lists other 501(c) organizations, and Exhibit 1.3 lists other important IRS classifications of organizations 1 Not- for- Profit Accounting, Tax, and Reporting Requirements, Fourth Edition by Edward J McMillan Copyright © 2010 John Wiley & Sons, Inc 2 Not- for- Profit Accounting, Tax, and Reporting Requirements EXHIBIT 1.1 IRS Classifications and Types of Tax-Exempt Organizations IRS Classification:... Tax, and Reporting Requirements, Fourth Edition by Edward J McMillan Copyright © 2010 John Wiley & Sons, Inc 26 Not- for- Profit Accounting, Tax, and Reporting Requirements Are 990-T Returns Available for Public Inspection? Although the annual information return filed by an exempt organization (Form 990) is available for public inspection, an exempt organization’s income tax return (Form 990-T) is not. .. or more and total assets are $500,000, the not- for- profit organization must file Form 990 The Basics of Form 990, Form 990-EZ, and Form N 19 Important Items Tax Accounting Methods Simply, Form 990 states that the organization should use the same accounting method that it uses to maintain its books and records Typically, most new not- for- profit organizations start with using the cash basis and switches... method, Form 3115 must be filed Professional Accounting Standards Most not- for- profit organizations eventually retain the services of an independent CPA Auditing CPAs are required to follow Not- For- Profit Professional Accounting Standards as follows: ➢ SFAS #116 ➢ SFAS #117 ➢ SFAS #124 ➢ SFAS #136 Please see the chapters in this handbook that fully explain these not- for- profit specific standards Other standards... While not all of the following is directly connected with financial responsibilities, it is advisable that board members consider the following action to further reduce any liabilities: ➢ Ensure the organization’s general counsel specializes in not- for- profit law 14 Not- for- Profit Accounting, Tax, and Reporting Requirements ➢ Ensure that insurance policies for Officers and Directors Errors and Omissions... exempt from filing Finally, Private Foundations must file Form 990-PF Form 990-EZ What Not- for- Profit Organizations May File Form 990-EZ? Year 2008 2009 2010 Gross Receipts >$25,000 and $25,000 and $25,000 and . NOT-FOR-PROFIT ACCOUNTING, TAX, AND REPORTING REQUIREMENTS Fourth Edition NOT-FOR-PROFIT ACCOUNTING, TAX, AND REPORTING REQUIREMENTS Fourth. financial statement understanding at the board retreat or stand-alone seminar. 10 Not-for-Profit Accounting, Tax, and Reporting Requirements