Reporting and tax changes help nonprofits tell their stories
For years, nonprofits have operated under relatively stable financial reporting and taxability rules. Then came an upheaval. Accounting standards changed. So did tax laws.
In this new age, nonprofits can seize the opportunity to align financial policies with their missions. Leveraging the changes precipitated by The Financial Accounting Standards Board’s (FASB) 2016-14 update and the tax reforms of 2017, nonprofits can cultivate the transparency that donors crave and shine a light on the difference their dollars can make.
FASB’s 6 key accounting changes
FASB’s new not-for-profit reporting standard is meant to update, not overhaul. The time was ripe for clarifying old misunderstandings between permanently restricted versus temporarily restricted giving. The new standard – ASU 2016-14 — improves the asset net classification scheme and the information on financial statements and notes about financial performance, cash flows, and liquidity.
As a result, nonprofits can sharpen their financial stories shared with donors and potential donors. Let’s look at how, exploring the six key changes inherent in the new standard:
- New liquidity and availability disclosures: Not-for-profits must provide quantitative information on managing available liquid resources and liquidity risk.
- Fewer net asset classes: Under this major change, unrestricted donations will be reported as “without donor restrictions,” which includes board-designated donations. The old categories of temporarily restricted and permanently restricted are all now in the “without donor restrictions” category.
- Additional underwater disclosures: Hopefully, few not-for-profits find themselves in this situation, but those who do must now report their interpretation of the ability to spend from an underwater endowment and the policy and actions regarding appropriations from the fund.
- Reporting functional expenses: Not-for-profits must now report expenses by nature and function in one place, and describe the methods used to allocate among functional categories.
- Simplified net investment return: Filers now present investment returns on a net basis, rather than reporting investment income components and related expenses separately.
- Less reconciliation: Nonprofits that choose direct method for statement of cash flows no longer have to reconcile with the indirect method.
These changes take effect in fiscal years beginning after Dec. 15, 2017.
Tax Cuts and Jobs Act of 2017
On the heels of ASU 2016-14 came the Tax Cuts and Jobs Act of 2017 (TCJA). Nonprofits should be aware that TCJA, among many changes, gave Unrelated Business Taxable Income, or UBTI, a very different look:
- Employer costs for Commuter transportation, transit passes, and parking fringe benefits, plus on-premise fitness facilities for employees and families, fall under reportable UBTI. A net operating loss carryforward can offset the UBTI on these expenses.
- Net operating losses can now offset no more than 80 percent of taxable income.
- Nonprofits must track unrelated business activities in silos, and income from one activity can’t offset losses in another. The IRS will look at three baskets of expenses to calculate UBTI: directly connected to the business activity, which are deducted in full; directly related to the exempt activity, such as lobbying or a development officer, which is nondeductible; or dual-use, such as overhead, which can be allocated by time, space, or other method.
- Nonprofit corporations (as opposed to trusts) that report substantial UBTI gains could benefit from a universal drop in the maximum corporate tax rate on net UBTI to 21 percent.
A redesigned 990-T accompanies the tax reforms. We’re not sure the government realized the goal of simplifying a complex public-disclosure document in the redesign, which is primarily to facilitate reporting each unrelated business activity as a separate silo.
Impact and strategies
As for those TCJA changes affecting itemized deductions and other tax implications of giving, not-for-profits worry about their impact. Will Americans remain charitable-minded if fewer are deducting donations because they now are utilizing the increased standard deduction? The American Enterprise Institute estimates a 4 percent drop in charitable giving for 2018 from 2017, but other research credits Americans with the deep-seated desire to help those in need. And will GDP gains offset any losses? Time will tell.
In this atmosphere, charities can pursue strategies to sustain their cash flows while helping donors maximize tax benefits. Possible approaches include:
- Bundling contributions: Contributors give to a donor-advised fund every other year and make yearly distributions, frontloading the donation so they can itemize in that year, while distributing annually to charity. In essence, donors itemize every other year.
- Utilizing IRA distributions: Those over age 70½ can gift to charity up to $100,000 a year directly from their IRAs. The gifted amounts are excluded from income even if though they utilized the standard deduction.
TCJA’s provisions are being finalized and clarified. A CPA or trusted financial advisor can guide nonprofits through the uncertainty, helping them project assurance to donors eager to support the causes closest to their hearts.
David J. Manbeck, CPA is a Principal and Donna M. Mullin JD, CPA is the Director of the Tax Department for Boyer & Ritter LLC and have extensive experience working with not-for-profit entities. They can be reached at 717-761-7210 or via email at email@example.com or firstname.lastname@example.org