Nonprofits and Donor-Advised Funds – an Accounting Perspective

Contributions to nonprofits made through donor advised funds (DAF) have steadily increased, with some studies suggesting they have risen over 400% in the last decade. We continue to receive questions in our practice on the proper accounting treatment, from the perspective of a nonprofit organization receiving funds from a DAF.

What is a donor advised fund? A DAF is an identified account operated by a section 501(c)(3) organization, which is called a sponsoring organization. Individual donors contribute money to these accounts held by the sponsoring organization.  Donors can recommend grants to charities of their choice, but the funds are ultimately at the discretion of the sponsoring organization, which is required in order for the transaction to be considered a charitable contribution to the donor. A tax advantage is that donors get an immediate charitable deduction for amounts donated to DAFs, while they can request that the donations to the nonprofit organizations can be spaced out over multiple years. Also, donors can potentially avoid capital gains tax by donating appreciated assets to a DAF.

Some of the larger donor advised funds are Fidelity, Schwab and Vanguard Charitable. Fun fact – since they are all 501(c)(3) organizations you can look up their 990s on Guidestar.

What are the advantages of a nonprofit organization receiving contributions through a donor advised fund? Generally speaking, many donations received from a donor advised fund are considered to be without donor restrictions. This then means there are no reporting requirements on these gifts, which cuts down on administrative time and allows the funds to be used for general operations of the nonprofit organization.

What are the potential drawbacks? Also, contributions from a DAF can limit access to donor information as the donor is not required to be specified, which may make the development of donors difficult.

Can a contribution from a donor advised fund be used to fulfill an individual donor’s promise to give?  This appears to be a grey area with no explicit guidance.  The IRS did issue Notice 2017-73 that discusses this topic, but it’s not authoritative.

As indicated above, the ultimate decision on the use of funds is with the DAF.  However, the notice discusses that a payment from a DAF may fulfill an individual pledge if no reference is made that the DAF is fulfilling the individual pledge, the individual donor doesn’t receive any benefits (more than incidental) as result of this payment, and that the donor does not attempt to claim a charitable deduction as a result of the DAF payment.  Some examples of more than incidental benefits could be using the DAF distribution to pay for Gala tickets or membership fees.

What are the tax considerations of donor advised funds for nonprofit organizations?  As of December 31, 2023, contributions received from DAFs do not count towards the 2% limitation when calculating the public support test on Schedule A of the Form 990 as they are treated as donations from public charities. The Department of the Treasury has issued proposed regulations that would remove this benefit, but it has yet to be enacted.

These donations do get added to Schedule B (if they are above the threshold) but are shown as donations from the donor advised fund, not the individual.  Also, nonprofit organizations may thank the original donor to the DAF, but they should not issue a donor acknowledgement letter to the DAF or the original donor.

If you have any questions on the accounting for donor-advised contributions, please do not hesitate to contact us.

By: Keith Jennings and Rachel Zutshi

 

 

What is the Corporate Transparency Act and who needs to report Beneficial Ownership Information to the FinCEN?

The Corporate Transparency Act (CTA) was passed in January 2021, with an effective date of January 1, 2024.  As such, there has been much recent mention of this new requirement for businesses to report Beneficial Ownership Information (BOI) to the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of Treasury. This reporting requirement can be complicated, and if not done correctly, costly.  We encourage business owners to work with their legal advisors to address their reporting requirements. This article will cover the who, why, when, what, and how of this new requirement.

Who needs to comply with this requirement?  “Reporting companies” are generally businesses who have registered to do business with their secretary of state.  This can also include a foreign company that is registered to do business in the United States.  Such businesses may include Corporations, Limited Liability Companies (LLCs), or other legal entities.  If a business meets the criteria and does not qualify for an exemption they need to comply with the CTA and self-report the BOI.  There are several entities that are exempt from filing.  Details on the exemptions can be found on the FinCEN website via the Small Entity Compliance Guide.  FinCEN has estimated that nearly 33 million businesses will be required to comply with the CTA this year.

Why is this now a requirement? The primary reasoning is to make it harder for offenders to misuse US corporations and LLCs to benefit from or hide any unlawful activities using these business structures.  Collecting this data will allow for better monitoring, as well as provide standards for state incorporation practices, and allowing better ability to identify the beneficials owners of such entities.

When is a reporting company required to self-report their BOI?  If your company existed prior to January 1, 2024, you must self-report your BOI to FinCEN by January 1, 2025.

If your company is established on or after January 1, 2024, and before January 1, 2025, you have 90 calendar days to report your BOI from the formation date of your company.  If your company is established on January 1, 2025 or after, you have 30 days to report from the formation of your company.

There is also a requirement for all Reporting Companies to update their filing if there are any changes to any beneficial ownership data and/or reporting company data.  This must be updated within 30 days of such changes.

What information is required to be reported?  Information to be reported includes data on the “Reporting Company” as well as data on the beneficial owners.  Data for the company includes legal name, any trade or dba names, current street address of principal business, the jurisdiction it was formed or registered in, and its tax identification number.

The qualifications of who is a “Beneficial Owner” may be complex depending on the business structure.  Clarification on who is a beneficial owner can be found here.  Data required to be reported for the beneficial owners includes name, date of birth, residential address, identification number from an acceptable identification document, as well as images of such document.

How is the information to be reported?  The Beneficial Ownership Information reporting is done online at BOI E-Filing System.  There are multiple methods to submit the required information, as outlined on the website.

Do not ignore this reporting requirement.  There are stiff fines for failing to report this information.  One who willfully fails to report this information could be subject to civil penalties up to $500 per day.  They may also be subject to criminal penalties, including jail time and a fine up to $10,000.

Detailed information, FAQs, reference materials, and more can be found at https://www.fincen.gov/boi.

Business management and owners will likely need to spend significant time in 2024 to assess these requirements and self-report accordingly.  Snyder Cohn encourages you to start this process now and to work with your legal advisors for assistance.

 

By: Billy Litz and Suzanne Miller

Congratulations Keith and Billy!

Snyder Cohn, PC is pleased to announce that Keith Jennings and Billy Litz are now shareholders of the firm!

Keith’s passion lies in serving nonprofit organizations and he is the firm’s champion in this area, supporting Executive Directors and their financial teams by providing audit, tax, and consulting services that ensure the success of their worthwhile initiatives, while maintaining compliance and reducing risk. Keith is also the head of the firm’s Client Accounting Advisory Services Department, which is a growing team of QuickBooks Certified professionals who provide accounting, bookkeeping, and CFO advisory services to businesses and nonprofit organizations.

Keith joined Snyder Cohn in 2003 and became principal at the firm in 2019. Keith has been involved with many local and national charitable organizations including roles as a board member and treasurer, and has presented at conferences and events on various nonprofit accounting topics. Keith graduated from Bucknell University with a Bachelor of Science degree in Accounting and is a graduate of the Leadership Montgomery Emerging Leaders class of 2015. He is a certified public accountant licensed in Virginia and is a member of the American Institute of Certified Public Accountants and the Greater Washington Society of Certified Public Accountants.

Billy works closely with real estate investors and commercial and residential developers, assisting these high-net-worth individuals to preserve their wealth and ensure their families’ success for years to come. He enjoys meeting entrepreneurs and learning about their business operations and being a trusted advisor to his clients. Billy takes pride in offering tax strategies that make a large impact and loves helping his clients to solve problems in an ever-changing tax environment. His specialties include comprehensive tax planning, property acquisition due diligence analysis, as well as financial statement and high-level tax return preparation. As head of the firm’s Tax Department, Billy remains excited about the growth and development of Snyder Cohn associates.

Billy has been a valued member of Snyder Cohn since he joined the firm in 2006 and was named principal in 2020. He served in the US Air Force and holds a Bachelor of Science degree in Accounting from the University of Maryland and is a graduate of the Leadership Montgomery Emerging Leaders class of 2016. He is a certified public accountant licensed in Maryland and is a member of both the American Institute of Certified Public Accountants and the Greater Washington Society of Certified Public Accountants.

 

 

Promotions of 2024

We are proud to announce the promotions of six of our associates effective January 1, 2024!

We celebrate the hard work and professional growth exhibited by these individuals throughout their journey with us. Their dedication to our clients and core values is truly appreciated, and we look forward to their continued development and success.

These well-deserved promotions not only highlight their achievements but also reflect Snyder Cohn’s commitment to recognizing and nurturing talent within our firm. We value their contributions and are proud to have them as part of our team.

 

BKR Scholarship Recipients

As the Washington, DC member firm of BKR International, Snyder Cohn, CPAs and Trusted Advisors, is proud to announce the recipients of this year’s BKR International Scholarship Award. BKR International is an exclusive association of independent accounting and advisory firms, and this prestigious scholarship is awarded annually to outstanding students who have demonstrated exemplary academic performance in the accounting field.

This year’s recipients of the BKR International Scholarship Award are Amy Jacobs, accounting graduate of the University of Maryland, College Park and current accounting graduate student at Mount St. Mary’s University and Ashley Kiss, accounting student at Penn State. Both Amy and Ashley have exhibited enthusiasm and professionalism while pursuing their educational goals. Snyder Cohn is dedicated to supporting academic excellence and promoting professional growth in the public accounting industry.

Congratulations to both Amy and Ashley!

 

Introducing: MarylandSaves Program

Many states are implementing state-sponsored retirement savings programs to promote retirement savings and tackle the looming retirement crisis. Maryland is no exception and has introduced the MarylandSaves Program, a program geared toward small to medium-sized businesses and designed to offer retirement savings options to employees who do not have access to a retirement plan through their employers.

The MarylandSaves Program uses individual retirement accounts (IRAs) for employee retirement savings. Employers who elect into this program would facilitate employee contributions to IRAs through automatic payroll deductions. Contributions are deducted from employees’ paychecks and deposited into their IRA accounts. The accounts are portable, meaning employees can retain their accounts even if they change jobs.

One of the key advantages of the MarylandSaves Program for employers is the minimal administrative burden. Employers are not responsible for managing or investing in IRAs and do not contribute to the accounts. They simply facilitate payroll deductions and transmit employee contributions to the program.  If an employer participates in the program, employees can opt out if they wish, but they will be automatically enrolled otherwise.

Maryland has incentivized employers to participate in MarylandSaves or provide another type of retirement plan for their employees.  If a business enrolls in MarylandSaves, or if they offer another retirement plan to their employees, Maryland State Department of Assessments and Taxation will waive their $300 annual report fee.  If the business already offers a retirement plan, they must file a certification with MarylandSaves.  The certification is only good for one year, so this will need to be done annually.  To qualify for the 2024 annual report fee exemption, a business must file the certification online at MarylandSaves.org by December 1, 2023.

As with any retirement program, there are many rules and restrictions so you should consult with your attorney or tax professional before enrolling your business.  If you are a business that already has a retirement plan in place, we encourage you to file the certification before December 1, 2023 to have your $300 annual report fee waived. If you have any questions or want to learn more about the MarylandSaves program, please contact a Snyder Cohn team member or visit MarylandSaves.org.

 

by: Billy Litz

Estate and Gift Tax Updates for 2023 and Beyond

The premier conference for estate planning professionals to hear the latest legal and tax strategies in estate planning is presented by The Heckerling Institute on Estate Planning (aka “Heckerling”) every January.  This year marked the 57th year of the conference, which I attended with my colleague, and once again, it did not disappoint, imparting some good takeaways for our clients.  Nine months into 2023 seems like a good time to revisit these items that will impact estate planning techniques in the coming years.

Several presenters spoke on estate and gift tax planning in anticipation of the upcoming sunsetting of the increased lifetime exemption after 2025.  The Tax Cuts and Jobs Act of 2017 doubled each person’s lifetime estate and gift exclusion to $10 million, which, when adjusted for inflation, for 2023 is $12,920,000.  If the TCJA provisions are allowed to sunset, this will likely be cut to about $6,000,000.  Heckerling speakers were generally of the opinion that Congress would not pass legislation extending the increased amounts after 2025.  Clients interested in making substantial gifts should make them prior to 2026 to take advantage of this higher exemption amount.  There should be no concern that gifts made prior to 2026 would be subject to retroactive gift and estate tax due to the IRS 2019 guidance on anti-claw back rules.

Speakers also highlighted the IRS’ helpful guidance in the estate area that came out in 2022 – specifically with respect to the estate portability election and payout requirements for inherited IRA’s. In Rev. Proc. 2022-32 the IRS extended the period for an estate to elect portability of a deceased spouse’s unused exemption (“DSUE”) from 2 years to 5 years. This gives more time for estates that are below the estate tax return filing thresholds, which might be handled by personal representatives or surviving spouses where there is a delay in administering the estate or difficulty obtaining valuations to make the election.

For inherited IRA’s by non-spouses, the payout of required minimum distributions (“RMD”) is now 10 years in most cases. IRS relief, in the form of Notice 2022-53 (and recently extended by Notice 2023-54), now provides that confusion over the timing of the 10 year RMD payment obligation will not result in penalties until after 2023.

The last hot topic at Heckerling this year was a discussion on The Corporate Transparency Act, which is mainly an anti-money laundering law. This act is in regard to the necessary reporting by certain companies to disclose information on their beneficial owners.  Though not affecting trusts directly, if trusts are owners of these reporting companies, then their information will need to be reported as to the beneficiaries, trustees and grantors.   This was enacted on January 1, 2021 and is to become effective January 1, 2024 with a compliance deadline of January 1, 2025.

We are looking forward to seeing what Heckerling will present in January 2024 – updates to these topics and more as we head into an election year. As always, feel free to reach out to Snyder Cohn with any questions.

 

 

Promotions of 2023

We are pleased to announce the 2023 promotions of four of our associates!

We take much pride in recognizing the efforts and growth that each of them has achieved during their career with us and we look forward to their continued growth and success.

Preparing your Nonprofit Organization for an audit

Many nonprofit organizations, especially 501c3 exempt organizations, are required to conduct an audit due to state solicitation regulations or sources of funding (federal, state, or private grant) requirements. A first-time audit can be overwhelming, but there are steps you can take to minimize the burden on your Organization’s staff as well as the potential cost of the audit.

Accumulating documentation – As part of the audit process your auditors should provide you with a checklist, preferably electronically, that will list out all the documents needed for the audit. While some documents may not be available until just before the audit fieldwork begins, a significant amount of documentation can be accumulated and retained throughout the year. These include:

  • leases and contracts
  • organizational documents such as bylaws, employee handbooks and policy documents
  • board minutes
  • grant agreements and donation letters.

We would also recommend ensuring all documentation for any unusual or extraordinary items is accumulated. If you have any questions on the accounting treatment for these items, it is helpful to discuss those with the auditors before fieldwork commences.

Setting the plan and preparing for the audit – before the audit commences it’s important to set the expected timeline with your external auditors.  You want to ensure that the audit is scheduled with time for your staff to accumulate all the requested information, and for the auditors to meet all deadlines.

The deadlines could include organizational deadlines such as board meetings or external deadlines such as grantor/governmental requirements as well as the Form 990 deadlines (the audit should be prepared before the Form 990 if at all possible).

It also would be helpful to have an audit planning meeting at the start of the engagement so that you can go over any of the pertinent information for the year under audit and the auditors can discuss their audit plan as well as any changes or updates in the accounting guidance for the year. For 2022, the big change is the implementation of the new lease standards.

Audit fieldwork – whether the audit will be conducted remotely or in your office, it is particularly important to remember the following to reduce the time and potential cost of the audit:

  1. Provide the auditors ALL of their requested information at the start of fieldwork. If you are unclear about what is being requested, it’s best to reach out to the auditors in advance of fieldwork.
  2. Be sure to make all staff that will be responsible for interacting with the auditors available during the week(s) of fieldwork. Auditors interact a lot with staff during fieldwork, so it’s important to provide staff with time to respond to questions and help progress the audit. Some staff duties may need to be delayed or rotated during the audit process.

The auditors will focus on the following areas:  understanding the procedures and internal controls of the organization, conducting fraud interviews, testing detail transactions for year-end account balances as well as revenue and expense transactions, and inquiring about significant changes in account balances from year to year. It is also essential that all supporting documentation provided agree to the trial balance of the Organization.

There are some common trouble spots worth mentioning for initial nonprofit audits:

  1. Revenue and net assets – all revenue and net assets should be properly classified as donor restricted vs. without restrictions. There should also be documentation to support the releases from restrictions.
  2. Functional expenses – have you properly allocated all expenses across the program/G&A/fundraising categories either in your accounting system or a separate schedule? The auditors will ask questions about this allocation including the methodology and salary allocations
  3. Grants/contributions receivable – the auditors will look into whether the receivables have been collected after year-end. If not, there needs to be an evaluation as to whether or not they are truly collectible and an allowance should be recorded.

Audit wrap-up process – after audit fieldwork the wrap-up stage consists of multiple levels of review within the audit firm (detail/manager, partner, and quality control review). Depending on open items at the end of fieldwork, this process can take 3-6 weeks after the end of fieldwork. The auditors should provide you draft financial statements, as well as a governance letter and possibly an internal control letter.  It’s imperative for you to thoroughly review these drafts and ask questions as it is required for you to take responsibility for these statements. The internal control letter includes suggestions for improvements in processes and procedures. These should be discussed and addressed before the next year’s audit.

At the end of the audit it’s best practice (though not required) for the auditors to meet with the audit/finance committee to go over the results of the audit.  Given the Board’s governance responsibilities, it’s important for them to be aware of the audit results and help enact any significant changes if they are needed.

While an audit can be a scary and challenging prospect, following these guidelines can lead to an easier process and a positive experience. While the audit may be a required process, it can also be a way to maintain and even elevate the financial credibility of the Organization. Please feel to reach out to Snyder Cohn if you have any questions regarding the audit process.

 

Bonus Depreciation Dropping to 80% in 2023

Businesses and business owners have been able to use bonus depreciation in varying amounts for some time. For many years, this form of accelerated depreciation has provided incentive for businesses to invest in new equipment and property while simultaneously enjoying tax advantages.

The Tax Cuts and Jobs Act (TCJA) of 2017 initially allowed taxpayers to claim a depreciation deduction of 100% of the purchase price on qualifying property instead of deducting smaller amounts each year over the useful life of the property. Qualified property includes assets with a recovery period of 20 years or less, depreciable computer software, and qualified improvement property. This applies for new and used assets if the taxpayer has not previously used the acquired property or received it from a related party. Beginning on January 1, 2023, bonus depreciation has begun to phase out over the next four years, as follows:

  • 2023 (1/1/23 – 12/31/23) – 80% bonus depreciation allowed
  • 2024 (1/1/24 – 12/31/24) – 60% bonus depreciation allowed
  • 2025 (1/1/25 – 12/31/25) – 40% bonus depreciation allowed
  • 2026 (1/1/26 – 12/31/26) – 20% bonus depreciation allowed

Without any new legislation, bonus depreciation will be completely phased out starting on January 1, 2027.

However, there is still an opportunity to accomplish the same goal as 100% bonus depreciation by electing Section 179 on your qualified property. Section 179 is set to remain the same throughout the bonus phase out but comes with its own set of limitations. Section 179 allows for the immediate expensing of 100% of the asset cost up to $1,160,000 for 2023. The full deduction can be taken unless the total equipment purchases are greater than $2,890,000 for the tax year, in which case the deduction will reduce dollar for dollar by the amount above the threshold. The deduction will also only apply if the business is profitable as it cannot be used to create a tax loss. Section 179 may be more flexible than bonus depreciation, as it allows the taxpayer to take the deduction on specific assets rather than an entire class of assets.

Each form of accelerated depreciation has state implications. Different states may or may not conform to the Federal guidelines. Many states in the area do not allow the bonus depreciation expense that is available at the Federal level and have also placed their own limitations on Section 179 expensing. State legislation will be an important factor when determining the benefits between bonus depreciation and Section 179. The chart below provides a summary of state conformity:

State: Bonus Depreciation Section 179
Maryland Not allowed Expense capped at $25,000;

Phase-out threshold of $200,000

Virginia Not allowed Follows Federal
District of Columbia Not allowed Expense capped at $25,000

 

There are many complications that can arise when tax planning for the future. Be sure to discuss with your tax advisor these potential tax planning strategies and see if your business will be impacted by the bonus depreciation changes. Please reach out to Snyder Cohn if you have any questions.

 

By: Matthew DeLong