NOT-FOR-PROFIT INSIDER VOLUME 9 :: ISSUE 3 In This Issue: Streamlining OMB Guidance For Federal Funding Of Nonprofit Organizations New 1023-EZ Makes Applying For 501(C)(3) Tax-Exempt Status Easier Identifying And Determining Related And Interested Parties For Form 990 Website Development Costs STREAMLINING OMB GUIDANCE FOR FEDERAL FUNDING OF NONPROFIT ORGANIZATIONS After more than two years of consideration, on December 26, 2013, the Office of Management and Budget (OMB) published final guidance Uniform Administration Requirements, Cost Principles and Audit Requirements for Federal Awards. The reforms are designed to provide a governmentwide framework for management of grants which will reduce the administrative burden for grantees and reduce the risk of waste, fraud and abuse. This guidance replaces requirements that were formerly included in OMB Circulars A-21, A-87, A-110, and A-122, A-89, A-201 and A-133 (commonly known as the Single Audit Circular). Consolidation of these circulars should clarify for users where policies are uniform for all entities or where there are differences depending upon the grantee. An independent member of UHY International through from another organization, will need to be sure they understand the implications the new regulations (located in CFR Title 2) have for their responsibilities in administering funds provided by federal programs. Among the areas OMB considers as major policy reforms are: 1. Eliminating duplicative and conflicting guidance a. Combines all OMB guidance to be included in Title 2 of the CFR b. Eliminates conflicting and duplicative guidance for different types of grantees c. Provides for implementation by all Federal agencies at the same time 2. Focusing on performance over compliance for accountability a. Provides for waiver of certain compliance requirements on a case-by-case basis and encourages new strategies for innovative program designs including pay-forperformance approaches b. Includes provisions for fixed amount awards that minimize compliance requirements in favor of performance milestones c. Requires awarding agencies The regulations, effective immediately, are lengthy and complex. Nonprofit organizations who receive federal funding, whether directly or as a passto provide clear performance goals to recipients d. Strengthens the requirements to maintain high standards of internal control over salaries while allowing flexibility in meeting those standards 3. Encouraging efficient use of information technology and shared services a. Clarifies the definition of supplies and allows the less burdensome acquisition requirements when the acquisition cost is less than the grantee s capitalization policy b. Requires reasonable measures to safeguard protected personal and/or sensitive information c. Encourages inter-entity agreements for shared goods and services d. Allows costs of idle facilities when necessary to meet workload fluctuations Continued on Page 2... The next level of service
2 UHY LLP NOT-FOR-PROFIT INSIDER STREAMLINING OMB GUIDANCE FOR FEDERAL FUNDING OF NONPROFIT ORGANIZATIONS, CONT. Continued from Page 1... 4. Providing for consistent and transparent treatment of costs a. Provides a de minimus indirect cost rate of 10% to entities that have never had a negotiated indirect cost rate b. Provides guidance on cost sharing and matching policies c. Requires pass-through entities to provide an indirect cost rate to subrecipients d. Requires Federal agencies to accept negotiated indirect cost rates with some exceptions 5. Limiting allowable costs to make best use of federal resources a. Clarifies allowable conference costs b. Eliminates the allowance for morale costs c. Limits the time for which a Federal award may be charged related to relocation costs d. Disallows costs for student activities 6. Setting standard business processes using data definitions a. Provides standard acronyms and definitions of terms b. Provides a standard set of data elements to be provided in federal notices of funding opportunities as well as in all federal awards 7. Encouraging family-friendly policies a. Allows costs of identifying (but not providing) child care services for conferences b. Allows temporary dependent care costs resulting directly from travel in some circumstances 8. Strengthening oversight a. Requires disclosure of conflict of interest or violations of federal criminal law b. Specifies federal agencies responsibility for evaluate the merits and risks of potential awards and impose specific conditions where appropriate c. Includes internal control guidance as administrative requirements so that the appropriate controls can be put into place immediately when the grant is awarded d. Provides clear post federal award requirements for closeouts of grants 9. Targeting audit requirements on risk of waste, fraud and abuse a. Raises the Single Audit threshold to $750,000 in federal awards per year b. Requires publication of Single Audit Reports online with certain safeguards and exceptions c. Requires awarding agencies to designate a senior accountable official to have responsibility for overseeing effective use of the Single Audit d. Focuses audits on the areas with internal control deficiencies that have been identified as material weaknesses in determining major programs The consolidation of the guidance into CFR 2 is a step forward for OMB in making the grant environment more efficient and transparent, but at 100 plus pages, along with a supplement that was issued relating to specific program testing requirements for major programs, it is complex and can be confusing. While most of the requirements of federal funding will not change significantly, it is important for every nonprofit receiving such funding to be aware of the requirements of their specific grants and contracts to determine how the streamlined guidance will affect their grant operations. The regulations, effective immediately, are lengthy and complex. By Marilyn Pendergast, Partner (Albany, NY)
UHY LLP NOT-FOR-PROFIT INSIDER 3 NEW 1023-EZ MAKES APPLYING FOR 501(C)(3) TAX-EXEMPT STATUS EASIER On July 1, 2014, the IRS announced the release of a new, shorter application for small organizations seeking recognition of tax exempt status under Section 501(c)(3). Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, is the IRS attempt to help small charities apply for tax-exempt status more easily. The new form takes the complicated 26-page Form 1023 and streamlines it to only three pages. The IRS believes the new form will allow small organizations to avoid the overly complicated Form 1023 while freeing up resources within the IRS to speed up the approval process. Currently, per the IRS, there are more than 60,000 501(c)(3) applications in its backlog, with many of them pending for nine months. As many as 70 percent of all applicants are believed to be qualified to use the new, streamlined Form 1023-EZ. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible. The IRS has provided an eligibility worksheet with the Form 1023-EZ instructions outlining organizations that are not eligible to file the new form. Under the Form 1023-EZ Eligibility Worksheet, an organization must do a projection of annual gross receipts for their current year and the two following years. If projected gross receipts during the next three years exceed $50,000 annually, the organization would be ineligible to file Form 1023-EZ. Form 1023-EZ is required to be filed electronically and is expected to drastically reduce the wait period for organizations to receive favorable determination letters. Organizations that have already submitted a Form 1023 to the IRS, may still submit Form 1023-EZ if the Form 1023 has not yet been assigned for review. In this case, the IRS will treat the Form 1023 as withdrawn and will instead process the organization s Form 1023-EZ. By Justin Forster, Staff Accountant (Farmington Hills, MI)
4 UHY LLP NOT-FOR-PROFIT INSIDER WHEN PREPARING A FORM 990, ONE OF THE FIRST STEPS SHOULD BE TO IDENTIFY WHAT ARE CALLED RELATED ORGANIZATIONS AND INTERESTED PARTIES.
UHY LLP NOT-FOR-PROFIT INSIDER 5 IDENTIFYING AND DETERMINING RELATED AND INTERESTED PARTIES FOR FORM 990 When preparing a Form 990, one of the first steps should be to identify what are called related organizations and interested parties. These relationships come into play on various parts and schedules of the 990, so it s helpful to identify them early in the process. RELATED ORGANIZATIONS By definition, a related organization is any entity that has one of the following relationships with your nonprofit organization: parent, subsidiary, brother/sister, supporting [509(a)(3)], supported [509(a)(1) or 509(a)(2)], and a few associations related to voluntary employee beneficiary association plans (or VEBAs). These related organizations could be nonprofit organizations, corporations, partnerships, trusts or government units. In determining when your nonprofit is in a parent, subsidiary, or brother/sister relationship with another entity, the key is control: control by your nonprofit (parent), control of your nonprofit (subsidiary) or common control under and with another entity (brother/sister). For this purpose, control means having the power to remove and replace a majority of another organization s directors or a majority of the members who elect the directors. Control in either direction creates related parties. To better understand this issue of control, ask yourself the following: Are a majority of your nonprofit s directors being elected by the potentially related organization? Are a majority of your nonprofit s directors comprised of individuals connected to the potentially related organization as its directors, officers, employees or agents? Control in either direction creates related parties; for example, another entity electing a majority of your nonprofit s directors or your nonprofit electing a majority of another entity s directors. Control can also be direct or indirect. For example: nonprofit #1 appoints the board of nonprofit #2. Nonprofit #2 appoints the board of nonprofit #3. Nonprofits #1 and #2 are related parties (directly); #2 and #3 are related parties (directly); and #1 and #3 are related parties (indirectly). When related parties exist, they are reported on the 990 s supplemental Schedule R. In addition to naming the related parties, certain transactions with related parties must be disclosed. These are detailed in the instructions to Schedule R. INTERESTED PARTIES The definition of interested party varies with each section of the 990 s supplemental Schedule L. It can mean: Trustees, directors, officers, key employees (TDOKE) and family members thereof; Substantial contributors (which is a term unique to Schedule L) and family members thereof; a substantial contributor is anyone who made a contribution of $5,000 or more and is required to be reported on Schedule B; Grant selection committee members and family members thereof; and/or An entity of which any of the above parties owned or controlled 35 percent or more (where the meaning of control is the same as described in Related Organizations above). Schedule L of the 990 reports various types of transactions with interested parties, including excess benefit transactions, loans, grants or other assistance, and other business transactions. There are various reporting thresholds and exceptions, depending on the type of interested party and the type of transaction. These are detailed in the instructions to Schedule L. It s important to note that Schedule L reportable transactions can impact the independence of board members (Question 1b on Part VI of the 990). Here are some examples of transactions that may be reportable on Schedule L, if specific reporting thresholds are met: A family member of a director is an employee of the nonprofit organization; The spouse or child of a current or former director or officer is a partner in a law firm to whom the nonprofit makes payments for services; and/or The nonprofit utilizes a management company to whom they pay a management fee; and the owner of the management company serves as executive director of the nonprofit. IDENTIFYING RELATED AND INTERESTED PARTIES The IRS requires reasonable effort of your organization to gather information required on related and interested parties. An annual questionnaire distributed to each TDOKE that addresses the issues of relationships and transactions would be considered reasonable effort. The instructions for both Schedule L and Schedule R provide all the details needed to identify and determine your nonprofit organization s related and interested parties. You should consult with tax professionals who can help you navigate through this complex information. By Cindy McGiffin, Senior Accountant (Columbia, MD)
6 UHY LLP NOT-FOR-PROFIT INSIDER Website Development Costs
UHY LLP NOT-FOR-PROFIT INSIDER 7 An area of confusion that frequently occurs on audits is the treatment of website development costs. Clients tend to place their entire website development costs in one bucket, either expensing or capitalizing everything. The correct treatment is somewhere in the middle and knowing which activities are which is important. Fortunately, there are detailed accounting rules on what to capitalize and what to expense. Website development costs can generally be divided into various stages. The following table summarizes the accounting treatment for the most common activities in each stage. The table is based on FASB ASC 350-50, Intangibles Goodwill and Other: Website Development Costs. It is intended as an overview and exceptions may apply. STAGE ACTIVITIES TREATMENT Planning Application and Infrastructure Development Graphics Development Content Development Operating Stage Developing the business/project plan Determining functionalities Identifying hardware and web applications/software Conceptual formation of graphics and content Selection of vendor(s) Acquiring or developing hardware and software needed to operate the website Obtaining domain name Developing or acquiring the software for website operations, database and applications Purchasing the hardware Installing the hardware/software Testing the hardware/software Overall design of web pages (design, layout, color, images) Data entry and data conversion of content Software used to integrate a database with the website Training employees on the new website Registering the website with internet search engines User administration activities Backups On-going maintenance Upgrades and enhancements that increase functionality Expense Capitalize Capitalize Expense Capitalize Expense Capitalize Ask your website development consultant to provide a breakdown of their fees based on this table. Imagine the delight of your auditors when they see the spectacular job you ve done of properly accounting for your website development costs! By Cindy McGiffin, Senior Accountant (Columbia, MD)
NOT-FOR-PROFIT INDUSTRY INSIGHT With the increasing complexity of laws and regulations, it s important for associations, foundations, charities, hospitals, schools and other tax-exempt entities to seek out professionals with extensive experience in nonprofit compliance issues. We understand there are many challenges affecting the industry and provide the attention needed to help clients stay focused on their job at hand. UHY LLP s National Not-For-Profit Practice offers comprehensive audit and assurance, tax planning and compliance and business advisory services to meet the unique, complex needs of nonprofit organizations. These types of specialized services, which cut across the traditional service lines, demonstrate our philosophy of skilled professionals integrating industry expertise with technical services. OUR LOCATIONS CT New Haven 203 401 2101 GA Atlanta 678 602 4470 MD Columbia 410 423 4800 MI Farmington Hills 248 355 1040 MI Sterling Heights 586 254 1040 MO St. Louis 314 615 1301 NJ Oakland 201 644 2767 NY Albany 518 449 3171 NY New York 212 381 4800 NY Rye Brook 914 697 4966 TX Dallas 214 243 2900 TX Houston 713 561 6500 ADDITIONAL UHY ADVISORS LOCATIONS IL Chicago 312 578 9600 DC Washington 202 609 6100 Our firm provides the information in this newsletter as tax information and general business or economic information or analysis for educational purposes, and none of the information contained herein is intended to serve as a solicitation of any service or product. This information does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided as is, with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. UHY LLP is a licensed independent CPA firm that performs attest services in an alternative practice structure with UHY Advisors, Inc. and its subsidiary entities. UHY Advisors, Inc. provides tax and business consulting services through wholly owned subsidiary entities that operate under the name of UHY Advisors. UHY Advisors, Inc. and its subsidiary entities are not licensed CPA firms. UHY LLP and UHY Advisors, Inc. are U.S. members of Urbach Hacker Young International Limited, a UK company, and form part of the international UHY network of legally independent accounting and consulting firms. UHY is the brand name for the UHY international network. Any services described herein are provided by UHY LLP and/or UHY Advisors (as the case may be) and not by UHY or any other member firm of UHY. Neither UHY nor any member of UHY has any liability for services provided by other members. 2014 UHY LLP. All rights reserved. [0814] www.uhy-us.com