4Thought Blog

Most nonprofit executives are aware of the prohibition against private inurement. Generally, nonprofit directors and executives — and their family members — aren't allowed to personally benefit from their positions while putting their organization at a disadvantage.

Penalties for violating the private inurement mandate could include financial sanctions for violators and, in the rare worst-case scenario, loss of the organization's tax-exempt status.

Usually, violations involve large organizations, yet smaller charities aren't immune. But whether a nonprofit is large or small, there are three areas where private inurement violations typically occur.

Since navigating the headwinds of the past year, nonprofit organizations have reimagined their operations to maintain relationships with donors, volunteers and the communities they serve while discovering new means to protect mission funding.

Even so, the impacts of the pandemic and calls to further social justice work won’t subside overnight, leaving many organizations continuing to reassess their processes, approaches and impact.

In this first blog of a two-part series, we outline five of the top 10 considerations nonprofits are contending with and how organizations can approach them:

The Tax Cuts and Jobs Act contains an often-overlooked crackdown on seven-figure compensation amounts paid to the highest earners. Essentially, beginning in 2018, your nonprofit organization could be charged a hefty excise tax if it pays more than $1 million to certain "covered" employees. 

The IRS issued final regulations in early 2021 that generally mirror proposed regs released in 2020 and guidance provided in Notice 2019-09. The new regs, which fall short of wholesale changes requested by nonprofits and other members of the tax community, went into effect on January 15, 2021.

But technically, they don't apply until tax years beginning after 2021. So you still have time to get up-to-speed.

Was your annual audit or quarterly filing process painful? Did you hear more about issues, or did you access meaningful insights?

Whether you’re looking for new perspective, enhanced access to resources, or greater responsiveness, developing a new auditor relationship can seem like a daunting task.

However, the transition can be made simpler with a vetting process that identifies the right firm, people, processes and technology to meet your needs and ensure seamless onboarding.

Due to its mission-driven purpose, a nonprofit organization’s financial and operational sustainability is significantly impacted by its environment. Natural disasters, economic slowdowns and unforeseen events are just a few factors that can adversely affect nonprofit organizations.

That is why a strong internal control system has always been a priority for audit committees and management of nonprofit organizations. They’ve established policies to address the primary question—“what could go wrong?”

Now nonprofits are facing the challenges of dealing with the results of the global novel coronavirus (COVID-19) pandemic, which include a scattered and remote workforce. As a result, management of nonprofit organizations are asking themselves—are the internal controls that were once effective still operating in a manner to achieve our objectives in this unprecedented time?

What can nonprofit organizations implement in order to adapt to this remote environment, when their employees, resources, technology and documentation may only be accessible through virtual means? Below are five tips that nonprofit organization management should consider to strengthen their internal control environment in response to a remote environment:

Many nonprofit organizations have been hanging on for dear life for the past year. But the days of survival mode are coming to an end.

Now, nonprofit leaders need to be innovative to position their organizations for future growth. In other words, if you're not moving forward, you're moving backward.

But how do you cultivate a culture of innovation in a nonprofit where it doesn't traditionally exist? There's no foolproof plan, but five techniques can help get you and your staffers in the right mindset.

If your nonprofit managed to keep staffers employed throughout the COVID-19 pandemic, there could be a tax reward.

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, employers may be entitled to claim an Employee Retention Credit (ERC) for wages paid between March 13, 2020, and December 31, 2020. In December of 2020, the Consolidated Appropriations Act (CAA) enhanced and extended the credit through June 30, 2021.

And on March 11, 2021, the American Rescue Plan Act (ARPA) extended the ERC until December 31, 2021. In addition, the IRS recently issued guidance (Notice 2021-20) for employers — including nonprofits — that may claim the ERC.

What can nonprofit organizations expect in 2021 and beyond? One recent report, "11 Trends in Philanthropy for 2021," offers some answers. Produced by the Dorothy A. Johnson Center for Philanthropy at Grand Valley State University, the 32-page report pinpoints trends such as the growth of social justice funding and new opportunities to build public trust.

We look at five of the trends that are most likely to affect your nonprofit's fiscal health. We also explain how these developments could provide opportunities to build greater resilience and efficacy.

The sweeping second federal stimulus included two extended provisions nonprofits should pay particular attention to: a tax break for donors of smaller charitable gifts and one that will be advantageous to big donors. The new law also extends tax breaks for corporate donors. 

This is good news for some nonprofits that have struggled financially over the past year. But you can't assume that your supporters know about these changes in the law. Educate them about tax benefits as you solicit new donations.

So you think investment policies are only for nonprofits with millions to invest? Not true. If your organization holds funds in reserve — for example, to cover emergencies or meet long-term goals — it's prudent to have investment policies.

Such policies will help ensure that you manage reserve funds responsibly according to their purpose and take steps to minimize investment risk.