GAAP Requires Nonprofits to Report In-Kind Donations on Financial Statements

Date February 15, 2022
Authors Anthony Savasta
Categories

The GAAP requirement for the reporting of gifts in-kind has been in existence for a number of years. In June 2018, the Board issued Accounting Standards Update No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. This Standard focused predominately on the revenue recognition of donations in-kind and with a heightened focus on donated services rather than all nonfinancial assets. The presentation and disclosure of contributed nonfinancial assets differed greatly among nonprofit entities.

To help supplement its cash resources, many nonprofit entities rely heavily on donors for contributions, which can be classified as either financial or in-kind, i.e., nonfinancial assets. Financial contributions are commonly received in the form of grants, pledges, or donations and are received by the organization through a transfer of monetary funds from the donor. In-kind contributions are nonfinancial assets, including goods or services received at no cost or below market cost. Nonfinancial assets include tangible items such as food, clothing, medical or other supplies, furniture and intangible items such as services, voluntary labor, or facilities.

Some of the most frequently overlooked gifts in kind include contributions of advertising time, technical services, use of facilities, costs associated with fundraising events, collection items, car donations, and borrowings at below market interest rates.

In-kind services are only recorded on the organization’s financial statements if they meet specified criteria as determined by Generally Accepted Accounting Principles (GAAP), which requires services contributed in-kind must be performed by professionals and tradesmen with a specialized skill in the service. In-kind contributors are typically accountants, architects, carpenters, doctors, electricians, awyers, nurses, plumbers, teachers, and other professionals and tradesmen. When analyzing these types of services, the organization needs to focus on the notion of “specialized skills” GAAP also requires that contributed services create or enhance a nonfinancial asset belonging to the organization and that it would otherwise have to purchase the service. For example, an electrician donating his services during a construction project at a cost below market or for no cost. Under GAAP, the service would qualify as an in-kind contribution as the electrician has a specialized skill that the nonprofit would otherwise have to purchase. The organization would record the receipt of these services in the “statement of activities” with an offsetting expense or capital assets addition, as explained below.

There is a common misconception among nonprofits that because in-kind donations are provided at little or no cost, the organization doesn’t have to report them on its financial statements. Stakeholders and other readers of the financial statements might dispute that recording these items will merely gross-up revenue and expenses with no effect on the operating results. But conversely, not recording these items can distort an NFP’s financial statements, understating the organization’s revenue and expenses, and does not allow for true comparison between similar organizations. As such, nonprofits are required to report these contributions.

GAAP requires the organization to report the donated items or services meeting the criteria for in-kind donations as revenue in the operating section of the organization’s “statement of activities” on the date the contribution is made known to the organization, regardless of the date on which the item or service is received. As explained in FASB ASC 958-605, the donated nonfinancial assets must be reported at fair market value, defined by ASC topic 820 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” As well, GAAP requires an offsetting expense in the proper natural expense category on the organization’s “statement of functional expenses,” also reported at the determined fair market value as described in ASC topic 820. Suppose the item or service is an asset that exceeds the organization’s capitalization policy, like the electrician cited above. In that case, the asset is recorded in the proper fixed asset category on the “statement of financial position,” and revenue is recognized for the asset’s fair market value. Determining the fair value to be recorded is often the most challenging part of the accounting exercise.

FASB Accounting Update

Based on stakeholder feedback, the FASB issued this update to increase transparency through enhanced financial statement presentation and disclosure of nonfinancial assets. However, the revenue recognition and measurement requirements for these nonfinancial assets remain unchanged in ASC 958-605.

FASB Accounting Standards Update (ASU) No. 2020-07, Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets, are effective for nonprofits with annual periods beginning after June 15, 2021, and interim periods within annual periods beginning after June 15, 2022. Early adoption of the standard is permitted by nonprofits. Retrospective transition is required. So any periods reported upon must comply with the updated standard. The enhanced presentation and disclosure requirements are:

  • The contributed nonfinancial assets are stated separately from other contributions in the statement of activities.
  • A footnote disclosure must be made to disaggregate the contributed nonfinancial assets by type such as food, medical supplies, fixed assets, facility usage, services, to name a few.
  • The NFP’s policy (if any) on liquidating rather than using contributed nonfinancial assets for each type of nonfinancial asset identified.
  • Qualitative considerations to be disclosed include:

    -Whether the contributed nonfinancial assets were liquidated.

    -A description of any restrictions requested at the time of contribution by the donors.

    -A description of the technique the organization uses to arrive at the fair value measurement of the nonfinancial asset in accordance with paragraph 820-10-50- 2(bbb)(1), at the time the asset is initially recorded.

    -The principal market used to arrive at the fair value measurement (The principal market is the market with the greatest volume of activity that the organization is legally able to access in order to value the asset.)

Under the new standard, when an organization receives donated services it must disclose the services received during the financial statement period, including the revenue recorded on the statement of activities and the programs or activities the services were used for. The organization is required under the new standard to provide disclosure regarding services received in-kind regardless of whether they meet the revenue recognition criteria defined by GAAP; however, the organization is only required to record revenue on the statement of activities if it meets the GAAP criteria. The standard allows for the nature and extent of such services disclosed but not recorded to be described in the footnotes by nonmonetary information, which can include but is not limited to the number of hours received in services or outputs provided by board members or volunteers, such as contributions raised. Many organizations may have donated services that are recorded as contributions and others that are only disclosed in the footnotes.

As the effective date of FASB Accounting Standards Update (ASU) No. 2020-07, Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets draws near, it will be important for nonprofit organizations to closely monitor the receipt of nonfinancial assets and services received as well as their methods of valuing such contributions. HBK Nonprofit Solutions team members will be happy to assist you with these accounting challenges.

Read the full Winter issue of Insights, the HBK Nonprofit Solutions quarterly newsletter.

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Before and After the Board Meeting: Time Well Spent

Date January 27, 2022
Categories

You will know when you’ve sat through either a good, productive board meeting or a bad, unproductive meeting. The last thing organizations want to do is waste the precious hours that board members donate. Good organization plus sensitivity to the people and issues involved can ensure productive meetings.

Here are ten suggestions for before, during, and after board meetings:

The Before

1. Agenda prep.

The board president or chair and executive director (ED) typically plan the agenda together. Many boards now use consent agendas to streamline meetings and allow the focus to be on substantive issues. A consent agenda groups the routine, procedural, informational, and self explanatory non-controversial items typically found in an agenda. These items are then presented to the board in a single motion for an up or down vote after allowing anyone to request that a specific item be moved to the full agenda for individual attention. Other items, particularly those requiring strategic thought, decision-making, or action, are handled on the full agenda.

In preparing the full agenda, don’t try to cover every issue your nonprofit is facing in every meeting. Make certain items a priority. Discuss your most important agenda items early in the meeting when members are most engaged. Make sure time-sensitive, critical items requiring board action have ample agenda time.

2. Documents and information. Supply the board with the information it needs to make informed decisions, particularly if you are asking them to vote or take action at this meeting. Include relevant reports and financial statements. Encourage board members to review the agenda and meeting documents before the meeting.

Gone are the days of the three-inch board binder. Most boards have begun using board management software that saves time and provides for better governance—and improves collaboration both before and during the meeting. Some board training may be required for those members who are less tech-savvy.

3. Financial facts. Provide your board with good financial information in a format that doesn’t overwhelm them. Consider using a dashboard-type presentation rather than columns and rows of data.

Think seriously about the amount of detailed financial data you distribute to the full board. First, will they understand it? Second, will it be meaningful in terms of a decision they are making? Many boards use dashboards and leave the more detailed reporting to their finance committee. Be wary of what is distributed and discussed, particularly if you allow the public to join your meeting.

4. Sensitivity to controversial issues. Be aware of issues that might prompt a strong difference of opinion, and never begin or end a meeting with one. Good boards can weather heated discussions, and the best results often follow a better understanding of both sides of an issue. But you need to foster unity at the start and the end of your gatherings. Consider if certain items require a “closed session” where invited guests and the public are asked to leave the meeting.

Boards typically don’t understand Robert’s Rules of Order until there is a contentious meeting. Every board should have a parliamentarian, official, or “unofficial” to bring contentious meetings back on track.

5. Two-way communication. Don’t let communications from the ED, staff, or board committees be dictatorial. For example, if the ED presents a monthly report, solicit board opinion and allot time for member response. If a response isn’t needed, simply put a copy of the report in the preliminary board materials.

6. Ongoing education. Use some of the meeting time to educate board members. For example, a staff member could present “how to read a financial statement” one month, and the ED could present a summary of the board’s legal responsibilities another time. Be sure to allow some time for questions and answers.

7. Ongoing programs and activities. Board members want to know about programs and activities, so allocate time to showcase a different program at each meeting. Let the staff make presentations and be proud of their accomplishments!

8. “Dumb” questions are permitted. Board members need to feel safe asking relevant questions to get the information they need for intelligent decision-making. Some questions about how the organization works and its history may be necessary.

9. No shrinking violets. Make sure that each board member talks at least once during the meeting. Example: “Audrey, at the last meeting, you mentioned you were going to talk to your friend at Mega Compute Corporation about program sponsorship. How did that go? Do you have any other suggestions for potential sponsors?”

10. Follow-up. Follow up on the meeting with a summary of the key matters discussed, the conclusions, and action items. Include individual assignments and the next scheduled meeting date. A short debrief with the ED or Executive Committee may be a good idea.

The After

Minutes of board meetings are more than a parliamentary formality; they’re a legal record of your nonprofit’s activity. It’s important that board members ensure the minutes adequately detail matters of importance.

Why do minutes matter?

If your nonprofit is audited by the IRS or another authority, such as a state attorney general, board meeting minutes are likely to be one of the first things reviewed. Therefore, always prepare them in a manner that would withstand official scrutiny.

For example, if the IRS reviews your organization’s executive compensation policies, it will review board minutes to understand the process the board used to set compensation. If no reference is made to any discussion of compensation issues, the IRS would have to assume that decisions were made arbitrarily.

The minutes represent the actions of the board, and it’s often said that if something isn’t mentioned in the minutes, it never happened.

What should you include?

The board secretary is usually responsible for recording minutes during meetings and preparing them for the board’s review. The board then approves or amends the minutes. A final copy should be distributed to every member and retained in the board member manual and your organization’s official records.

At a minimum, your board minutes should include:

  • Meeting date, and start and end times
  • A roll call of board members
  • Voting results, i.e., actions taken, and the names of abstainers and dissenters
  • A general narrative of proceedings, including mentions of presentations, reports or documents introduced, and a summary of major discussions or debates
  • Future action steps
  • Signatures of the secretary and board chair

Also, make notations such as whether a quorum exists and guests who were present.

How much is too much?

Considering the pressure nonprofits face to be as transparent as possible in their operations, your organization may want to highlight certain types of information that are of interest to regulatory groups and stakeholders.

Areas of interest include:

  • Acknowledgment of significant gifts or contributions
  • Approval of funding contracts
  • Approval of annual budgets or proposed budget changes during the year
  • Authorization of banking institutions
  • Board approval or acceptance for investment, conflict-of-interest and other policies
  • Approval for purchases of equipment or other major items
  • Board designations for the use of certain funds
  • Recognition of restrictions on monies received
  • Salary adjustment approvals
  • Review and approval of the executive director’s salary

It is absolutely not necessary to capture every single word uttered at the meeting; documenting the key discussions and decisions should be the priority.

Read the full Winter issue of Insights, the HBK Nonprofit Solutions quarterly newsletter.

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Important Items to Know about Charitable Contributions

Date December 22, 2021
Categories

The holidays are often a time of giving. There is nothing like the warm fuzzy feeling of knowing that you are helping your community, and picking up potential tax deductions. But before you go putting every gift down as a tax deduction on your tax return, stop and ask yourself: what makes a charitable contribution deductible on your tax return? Are there limitations on what I can deduct? How about how much I can deduct? And is there anything else I should know?

Let’s dive right in.

What is a charitable contribution?

A charitable contribution is a voluntary donation, or gift, to a qualified organization, that is made without receiving or expecting to receive, something of equal value.

Well, then what is a qualified organization?

A qualified organization is a nonprofit group that can be religious, educational, charitable, scientific, or literary in purpose or that works to prevent cruelty to children or animals. The IRS has a Tax Exempt Organization Search tool that can be used to check an organization’s ability to receive tax-deductible contributions https://www.irs.gov/charities-non-profits/tax-exempt-organization-search

Also, it is worth noting – there is the first category of qualified organizations (this would include churches, publicly supported charities, certain medical organizations, and other items like that) and the second category of qualified organizations (everything that does not fall into the list of the first category). This can impact the deduction limitations, so you must understand what type of organization you are donating to.

What are some common items that do not qualify as charitable contributions?

Not every good act is tax-deductible as a charitable contribution. Gifts to individuals, contributions to GoFundMe campaigns, the value of donated time or professional services, pledged donations (you can only deduct the amount given, not the amount pledged), political contributions, and blood donations are all common areas that taxpayers may think are deductible, but are not. If you have questions, please contact an HBK professional to discuss.

Also, note – it is common to see a partial deduction for donations given at charitable events. For example, you may pay for tickets to dinner to help a local art organization for $250. However, on the ticket, it will tell you the value that you are receiving (let’s say $50 for the dinner itself) which means that only $200 of your $250 ticket is deductible. The organization typically lists if any goods or services were received and what the value was so that you can treat this correctly.

So can I only deduct cash donations?

No! First though – to see a benefit related to charitable contributions, you may need to be a taxpayer who itemizes deduction rather than taking the standard deduction. Cash donations to qualified organizations are not the only option though. You can also potentially deduct non-cash contributions. Common examples of these would include stocks/securities, furniture, clothes, artwork, cars, and any other number of items. Often there can be worthwhile tax planning opportunities when donating non-cash items and you should discuss with your HBK tax professional. Note that if you are donating something of value, other than a publicly-traded stock, over $5,000 you will likely need a qualified appraisal.

The CARES Act did allow in 2020 for a maximum $300 deduction for those who made cash contributions and did take the standard deduction still though. This was what is known as an “above-the-line” deduction. This was extended into 2021, and expanded to $600 if you are a taxpayer with a married filing joint status – it remains $300 for single, married filing separate, etc. This means that for tax years 2020 and 2021, it is possible to have a tax deduction related to charitable contributions even if you take the standard deduction.

Can I deduct the full amount of my donation?

Now it is time for every accountant’s favorite answer: it depends. As noted above, you first must confirm that you did not receive back some value of goods or services in exchange for your donation. But then you also must consider that different donation types may allow you to deduct different total amounts of your AGI.

What are these limitations?

Let’s start with the 100% and 60% limitation – as you will see, it makes sense to discuss them together since they are based on cash donations.

If your donations for the year are 20% or less of your AGI, you will be able to fully deduct all of your charitable contributions for the year and will not be limited. If you have donated more than 20% of your AGI for the year, the potential for limitations comes into play based on what types of donations you made, and to what types of organizations.

Before 2020, the highest percentage of your AGI you could deduct based on charitable contributions would have been 60%. For the tax year 2020, the CARES Act increased this to a potential deduction of 100% of AGI. This was extended to 2021 as well and is currently set to return to the 60% limitation in 2022.

The 100% limit is applied to qualified cash contributions – that is, you cannot achieve a 100% AGI deduction by donating only stocks or other non-cash items. If you elect not to treat the donation as a 100% AGI qualified cash contribution, the limitation becomes 60% as under the pre-2020 rules.

What is the next limitation?

50% of AGI is the next limit – this limitation applied to two different scenarios (one is much more common than the other). First – if you make noncash contributions to a 50% organization, your deduction may be limited to 50% of AGI. Also, less commonly, qualified conservation contributions are limited to 50% of AGI.

It is important to note, this is calculated as 50% of your AGI minus cash contributions subject to a 60% limit. This means that if you donate cash up to 55% of your AGI, and noncash for another 5% – you will see only the 55% deduction related to cash, as you must first subtract 60% limitation items. The additional 5% related to noncash contributions would be carried into the future. Understanding the structuring of the limitations can be important for planning purposes, and it is recommended you discuss with your HBK tax professional.

I’m guessing there are more limitations still?

Correct! Capital gain property contributions to a 50% organization are limited to 30% of AGI. Contributions to the second category of qualified organizations also may be limited to 30% of AGI. And finally, noncash contributions to the second category of qualified organizations may also be limited, but this time it may be to 20% of AGI.

Well now that I know all of that – what do I need to keep as documentation related to charitable contributions?

Another great hypothetical question. Once again we look to our tried and true answer: it depends. This time it depends on what type of donation you made. For cash donations, you will need either a bank record (think canceled check, bank statement, credit card statement, etc.), a receipt (which may also be a letter or email) that lists the organization, date and amount contributed, or a record of a payroll deduction (think to pay stub or W-2). If your cash contribution was over $250, you need to have a contemporaneous written acknowledgment that has a set of parameters as well (name, date, value of services given/received, etc).

Noncash contributions have different levels of substantiation based on the amount as well. For most noncash contributions, you will need a written document showing the name and address of the organization, the date, and location of the contribution, and a description of the items (publicly traded securities should also include information about the security itself). For noncash contributions greater than $5,000 – you may be required to have an appraisal.

That’s a lot of information to process!

Yes, it is – charitable giving can be a great way to support your community as well as a great tax planning opportunity. But there can be many factors to consider, so please make sure to consult with your HBK tax advisor.

Sources: IRS Publication 526

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Employee Retention Credit – Changes from The Infrastructure Investment and Jobs Act

Date November 16, 2021
Categories

On November 15, 2021, President Joe Biden signed The Infrastructure Investment and Jobs Act. The new law includes significant changes to the Employee Retention Credit (ERC) for the fourth calendar quarter of 2021.

The ERC has been eliminated for wages paid after October 1, 2021. For employers that were anticipating a credit for the fourth quarter of 2021 and have been holding payroll tax deposits should begin making deposits again immediately. We will continue to monitor if the IRS grants any relief for deposits that were not made timely.

An employer can still claim an ERC of up to $50,000 if they qualify under the recovery startup business rules for the fourth calendar quarter of 2021. This opportunity applies to businesses starting after February 15, 2020 and having annual gross receipts of less than $1 million. If the employer owns multiple businesses, there are additional test that will need to be met before determining eligibility.

While the ERC is eliminated, there is still opportunity to claim credits related to 2020 and the first three quarters of 2021. To see if you may qualify, refer to our July 27th Webinar to learn more about the credit. We’re here to help. Please reach out to HBK to discuss your situation.

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Paycheck Protection Program & Employee Retention Credit for Nonprofits

Date July 23, 2021
Categories
The CARES Act, passed in March 2020, included the Employee Retention Credit (ERC) and Paycheck Protection Program (PPP) both intended to support employers with payroll expenses during the COVID-19 Pandemic. Initially, businesses were forced to choose between the two programs, as they could only use one. However, when Congress passed the Consolidated Appropriations Act (CAA) in December 2020, eligible organizations were offered more support as they could benefit from both programs, even retroactively. Paycheck Protection Program: first and second draw loans With the enactment of the CAA and American Rescue Plan Act (ARPA), eligibility was expanded to allow certain previously excluded nonprofit entities to apply for a first-draw PPP loan while others who received the first-draw loan could apply for a second-draw loan. This expansion provided many nonprofit organizations additional relief from the COVID-19 pandemic. The program was scheduled to close on March 31; then Congress extended the deadline to May 31. However, on May 5, the Small Business Administration (SBA) announced that lender funding was depleted, closing the application opportunity for most organizations. PPP forgiveness update Borrowers should be aware that any “excess loan amount” received will not be entitled to forgiveness. An excess loan amount is defined as a “borrower or lender error made in good faith that caused a borrower to receive a PPP loan amount that exceeds the borrower’s correct maximum loan amount under the CARES Act and the Economic Aid Act.” Excess loan amounts do not include a knowing misstatement, which could result in fraud charges. The CAA made several changes to PPP loan forgiveness, including making additional nonpayroll costs—certain supplier costs, worker protection expenditures, operations costs, and property damage costs—eligible for forgiveness; permitting borrowers with loans under $150,000 to use a simplified forgiveness application, and giving all borrowers the option to choose a covered period of between 8 and 24 weeks. Borrowers who have not applied for forgiveness for the first-draw PPP loans may want to prepare to apply. The SBA states that “If the borrower does not apply for loan forgiveness within ten months after the last day of the maximum covered period of 24 weeks, or if SBA determines that the loan is not eligible for forgiveness (in whole or in part), the PPP loan is no longer deferred and the borrower must begin paying principal and interest.” Borrowers should review guidance and forgiveness instructions carefully before beginning the application process. They should also consider benefits applied for and received from other COVID-19 relief programs, such as the Employee Retention Credit (ERC) and Families First Coronavirus Response Act (FFCRA) COVID-19 sick and expanded family leave, to ensure programs are used properly in relationship to one another. 2020 Employee Retention Credit The ERC is a 50 percent refundable payroll tax credit for eligible employers on up to $10,000 of qualified wages paid to employees between March 12 and December 31, 2020. The credit can be broken into two steps: • Determining Eligible Employers: Eligible employers are certain organizations that experienced either of the following during a calendar quarter of 2020: – The organization’s operations were fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings for commercial, social, religious, or other purposes due to COVID-19 – A significant decline in gross receipts during a calendar quarter as compared to the same quarter of 2019. The first eligible quarter is the quarter in which gross receipts are less than 50 percent of the gross receipts for the same quarter in the prior year. Each succeeding quarter is eligible until the following quarter, in which gross receipts exceed 80 percent of the gross receipts for the same quarter in the prior year. For nonprofit employers, the definition of gross receipts has been modified solely for purposes of the ERC to include all operations, investment income, rents, royalties, gross amounts received as contributions, gifts, grants, and similar amounts. • Determining Qualified Wages: Qualifying wages are wages and allocable healthcare costs. For employers eligible under the first scenario above, only wages paid during the period in which operations were suspended qualify. For employers eligible under the second scenario, all wages paid during the quarter fall within the qualifying period. Employers that did not pay wages but covered healthcare costs are eligible for a credit. Qualified wages are further distinguished based on the number of full-time equivalent employees (FTE) during 2019: – For employers with more than 100 FTEs, qualified wages are wages paid to employees not providing services during the qualifying period. – For employers with 100 FTEs or fewer, qualified wages are any wages paid to employees during the qualifying period. Claiming both ERC and PPP loan forgiveness PPP loan borrowers should understand how the PPP interacts with the ERC. The CAA explains: • Wages and health care costs used to substantiate the ERC cannot be used for PPP loan forgiveness (no double-dipping). • Wages must be used first to claim the ERC. • Employers can elect not to include certain wage and healthcare costs in the computation of the ERC, to maximize PPP forgiveness. • Eligible employers may recalculate the ERC in the event the PPP loan is not forgiven. In Notice 2021-20, the IRS provided updated guidance and examples of maximizing the ERC while satisfying PPP loan forgiveness. Generally, the guidance allows taxpayers to take the minimal amount of wages required to satisfy PPP loan forgiveness while potentially increasing their ERC. To claim the ERC for the 2020 tax year, the taxpayer will need to amend their quarterly payroll tax form 941 by filing form 941X for the applicable quarters. If a shutdown impacted the eligible organization in the first quarter of 2020, claim the credit by filing a 941X for the second quarter. 2021 Employee Retention Credit   In addition to permitting organizations that received PPP loans to be eligible for the ERC, the CAA enhanced the ERC through the first two quarters of 2021 as follows: • The credit was increased from 50 to 70 percent of qualified wages. • Qualifying wages were increased from $10,000 per employee per year to $10,000 per employee per quarter. • The “significant decline” in gross receipts was changed from 50 to 80 percent for either quarter as compared to 2019. • Employers can elect to use the immediately preceding quarter and the matching quarter from the prior year to satisfy the gross receipts test. • The number of FTEs was increased from 100 to 500 for determining qualified wages. • The cap on qualified wages using the equivalent duration during the 30-day period immediately before the eligible quarter in which wages were paid was removed. • Businesses can receive the credit in advance. American Rescue Plan Act (ARPA)   On March 11, 2021, ARPA became law, creating additional modifications to the ERC for 2021: • Extends the availability of the credit through December 31, 2021. The ERC and PPP have been modified with multiple changes since their introduction. Employers should consider their options and the relationship between COVID-19 relief programs to maximize their benefits. • Removes the alternative method allowing employers to use the immediately preceding quarter and the matching quarter from the prior year to satisfy the gross receipts test. • Adds Recovery Startup Businesses (RSB) to the list of eligible employers. To qualify as an RSB, the business must have been started after February 15, 2020; have less than $1 million in gross receipts; not be subject to a shutdown order, and not have a significant decrease in gross receipts. RSBs are eligible for and limited to a $50,000 credit for the ERC in the third and fourth quarters of 2021. • Allows “severely financially distressed” employers, those whose quarterly gross receipts declined 90 percent or more compared to the same calendar quarter in 2019, to treat all wages (up to the $10,000 limitation) paid during those quarters as qualified wages. The rule allows an employer with over 500 employees under severe financial distress to treat those wages as qualified wages whether or not its employees actually provide services for the third and fourth quarter of 2021. Eligible employers have three options for claiming the ERC for the 2021 tax year: • Report the ERC on quarterly Form 941, and request a refund or apply it as a credit to the following quarter. • Reduce federal employment tax deposits based on the anticipation of the ERC for the quarter. • File Form 7200 to request the refund in advance based on a projected credit amount that exceeds the amounts that can be withheld from federal employment tax deposits. Use Form 941 to reconcile the actual amount of the credit to the projected amount to correct any balance due or overpayment. The ERC and PPP have been modified with multiple changes since their introduction. Employers should consider their options and the relationship between COVID-19 relief programs to maximize their benefits. We’re here to help. Please reach out to HBK to discuss your situation. Read the full Summer issue of HBK Nonprofit Solutions quarterly newsletter.

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State Registration Required for Nonprofits

Date December 14, 2020
Authors Ashlynn Reeder Teal Strammer, CPA
Categories

Non-profit organizations soliciting donations within a specific state may be required to register with that state in order to maintain compliance while soliciting donations. Maintaining compliance can be burdensome, and often complicated, depending on how many states an organization is required to register with. Generally, an organization meets the definition of soliciting if they are asking for a donation using any type of medium. Common examples are asking friends and family to donate through social media or texting, mailing out letters at the end of each year asking for donations, and having a donate button on your organization’s website. Organizations should be aware of their state’s charitable solicitation registration requirements, along with any other states they are actively soliciting donations in. Not all state requirements to register are the same, and fees for registering vary from state to state. Understanding if you meet the requirement to register with your state and the registration process itself is helpful to avoid future penalties, loss of the exemption, negative publicity, and potential legal action against your organization.

In general, the following types of organizations are typically exempt from registering with their state: hospitals, religious organizations, some schools, and organizations that only receive donations from their members. Other ways organizations may be exempt is if they fall below a gross revenue or donation threshold, have a limited number of donors, and more. In some states the exemption is automatic, but other states require organizations to file for an exemption from registration, and these filings may be required yearly. If you are unsure whether your organization is exempt from registration, an HBK nonprofit specialist can help guide you. Registrations are important because they are public information, and donors use this information to verify that an organization is compliant. Registration usually occurs with the State’s Attorney General or their Secretary of State.

The registration process typically involves filling out a state-specific form, supplying supporting documentation, and paying a registration fee. Supporting documentation usually includes the information provided when starting a non-profit organization, such as the organization documents and the IRS determination letter. Additionally, organizations will generally need to supply current financial information and a listing of the organization’s board members. Once registered, an organization may have to file yearly to maintain its registration. Each state has its own due date for registration, so it is important to review the registration requirements for each state an organization is operating in on a regular basis.

Currently, there is no uniformity of charity registration rules across states. Therefore, awareness of the varying requirements is imperative to ensuring an organization remains in compliance. For additional information or questions please contact your HBK tax advisor.

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