Nonprofit accounting: Changes in standards and tax credits demand attention to details
By David J. Manbeck, CPA, Principal
Here’s information on three hot topics in accounting for nonprofits -- reporting non-financial assets, reporting operating leases, and qualifying for the Employee Retention Tax Credit.
Each affects all nonprofits, but as always, the impact depends on the unique circumstances of every organization.
Reporting non-financial assets
Under Accounting Standards Update 2020-07, nonprofits now report contributions more transparently, designed to eliminate the problem of organizations overreporting the share of revenue spent on services as opposed to general management activities.
The Financial Accounting Standards Board’s standards require that financial statements show disaggregation of non-cash contributions versus cash. By revealing the actual cost of contributions, the disaggregation helps determine the true cost of raising a dollar and running the organization.
Keep these points in mind:
- Definitions: A financial asset is liquid and easily spent or converted to cash.
- Contributed services: Contributed services generally have a skill behind them, such as a builder who volunteers to renovate a space or a lawyer who provides pro bono Donated time by volunteers, including board members, doesn’t count.
- Footnotes: The standard requires disaggregation between cash and non-cash in financial statements and footnote presentations. In the footnotes, non-financial assets should be listed by category, with disclosures on whether they were monetized, any donor restrictions, and the organization determined value.
Non-profits and for-profits alike must comply with ASC 842, new accounting guidelines that greatly expand the financial reporting requirements for leases.
Once again, transparency is the goal -- in this case, peering into lease transactions. The standard largely covers the accounting treatment of operating leases, taking them from an income statement perspective to the balance sheet. It’s a significant change and a complex standard, so it’s crucial that organizations understand the appropriate presentation.
Nonprofits with numerous lease agreements need to recognize a “right to use” asset on their statement of financial position with a corresponding lease liability. The information shows what the organization should incur in future obligations for lease agreements.
To comply, nonprofits should gather and review all lease agreements and documents for language relevant to the standard. Potentially applicable leases include traditional leases of vehicles and buildings and “embedded” leases for such elements as data and cloud-based services or warehouse storage.
Calculating lease liability involves many complex factors and nonprofits should consult with accountants to get the full picture.
Employee Retention Tax Credit
Chances are, most nonprofits have recently received unsolicited communications from intermediaries offering to help collect the Employee Retention Tax Credit – for a hefty commission, of course.
However, the rules haven’t changed so dramatically that more organizations now qualify.
Initially, the CARES Act limited the ERTC to organizations that didn’t receive PPP, making the credit not much of a concern because most organizations received PPP aid.
With the second round of PPP, changes took effect, but with a caveat. Employers could still get the ERTC but couldn’t use the same wages for both.
One of two occurrences could trigger eligibility:
- Business disruption due to a government order: The government order must be an official declaration pertaining directly to the business. Employers must identify how it impacted the entity. Pandemic ripple effects such as low attendance at an annual gala or employees switching to remote work don’t qualify.
- Gross receipts declined compared to 2019: A 50 percent decline in 2020 qualifies, as well as revenues for the first three quarters of 2021 that stay below 80 percent of the same calendar quarter of 2019. While many organizations didn’t see a 50 percent decline, many others did qualify for 2021 due to a 20 percent decline.
To collect the credit, employers should amend their payroll tax. Once again, calling in a second set of eyes in the form of professional accountants for review is prudent because eligibility could lurk in the organization's unique circumstances.
For help navigating new rules regarding reporting and tax credits, nonprofits can trust the team of Boyer & Ritter. Contact David J. Manbeck, CPA at firstname.lastname@example.org.