Financial and Legal Archives - Page 4 of 11 - Spokes

Investing your reserve funds

January 29, 2024 by Michael Simkins

Our board is looking to know legalities a nonprofit board should be aware of in deciding how to handle or invest a financial reserve.

When one of our nonprofits approached Spokes for help with that topic, our first reply was, “We are not attorneys, tax experts, or financial advisors.” That said, we can offer practical suggestions based on our experience with the many nonprofits we serve.

The most important thing to keep in mind is the board’s fiduciary responsibility to the organization. As part of that responsibility it must act with prudence and with the organization’s best interests in mind.

California has adopted the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which provides guidelines for the investment and management of nonprofit institutional funds. It includes eight factors to consider:

General economic conditions.
The possible effect of inflation or deflation.
The expected tax consequences, if any, of investment decisions or strategies.
The role that each investment or course of action plays within the overall investment portfolio of the fund.
The expected total return from income and the appreciation of investments.
Other resources of the institution.
The needs of the institution and the fund to make distributions and to preserve capital.
An asset’s special relationship or special value, if any, to the charitable purposes of the institution.

In San Luis Obispo County, some of our smaller nonprofits with surplus funds have placed them in FDIC-insured certificates of deposit with varying terms to ensure that funds are available when needed. Nonprofits with greater reserves will want to adopt a sound investment policy in line with UPMIFA.

Learn more about UPMIFA.

Old Invoices

December 20, 2023 by Michael Simkins

Our Board recently received an invoice from someone doing social media and website work for our nonprofit, yet it was for work done over two years ago. How late can people submit invoices and still expect to get paid?

Generally, if your organization engaged a contractor to do work , the work was done, and you accepted it, your organization owes the contractor for the work. Not sending you a timely invoice is a poor business practice but does not cancel your obligation to pay for the services you received.

In California, there is generally a four-year limit for filing a lawsuit to collect a debt based on a written agreement. However, the creditor may still send you collection notices, call you to try to get you to pay, or report your debt to credit reporting companies.

Can we pay our volunteers?

November 20, 2023 by Michael Simkins

We appreciate our volunteers so much. Most of our nonprofits could not begin to provide services without the help of selfless volunteers. It’s natural to want to reward them. But can you pay them something for their hard work?

Frankly, no. California Labor Code has a strict definition of volunteer. It is someone who “performs work for civic, charitable, or humanitarian reasons…without promise, expectation, or receipt of any compensation for work performed.”

It is permissible to reimburse volunteers for necessary expenses incurred in their volunteer work for you. You can certainly have a volunteer appreciation party and treat everyone to some refreshments. Likewise, a token of appreciation such as some flowers, a plaque, or a framed certificate of appreciation is fine.

Just not cash or a check (or even a “cash equivalent” such as a gift card). From the IRS’s point of view, that would be income. From California’s point of view, it could make them your “employee.”

Learn more:

Can the treasurer be the bookkeeper?

October 8, 2023 by Michael Simkins

A new nonprofit was struggling to put together its first board of directors. The organizers had contracted with someone to be the bookkeeper and they wondered if it would be acceptable to have that person also serve on the board as the treasurer. The answer: maybe, but it might not be the best idea.

One issue is conflict of interest. Directors of nonprofits are not to benefit financially from their role on the board. So, even if the bookkeeper were a director but not the treasurer, if her firm is paid to do the bookkeeping, that could easily be seen as a conflict of interest. That might be mitigated if the firm did the bookkeeping pro bono. Another possible mitigation is to get bids from several bookkeepers and, if the bookkeeper’s firm is willing to do the work for significantly less, then that also might mitigate the conflict. In the latter situation, the board would want to clearly document the research that was done, and the bookkeeper would recuse herself from participating in the decision to contract with her firm.

A second issue to consider is that a fundamental part of the treasurer’s responsibilities is to provide financial oversight. So, if the treasurer is the bookkeeper, he/she is overseeing him/herself. In that case, it would be prudent to put a structure in place to ensure oversight. For example, the board might formally appoint another person to be the Chief Finance Officer and provide a written description of the CFO’s duties, which would include oversight.

The board also needs to keep in mind that if the organization is paying the director/bookkeeper, then that person becomes an “interested person.” In California, no more than 49% of the board of directors may be interested persons.

Finally, whatever arrangements are made, the board would be wise to put in place some basic internal controls. Here are two useful resources on that topic.

Documentation for Your Donors

January 1, 2023 by Michael Simkins

It’s the new year and our donors will start to gather the necessary materials to prepare their income tax returns. It’s also a good time to be certain we have provided them with the appropriate documentation of their gifts. Here are two of the most important things to keep in mind.

Gifts of $250 or more

We need to provide donors with “contemporaneous written acknowledgement” of each gift of $250 or more, or separate gifts made on the same day that total $250 or more. Here, contemporaneous means that the donor has the documentation in hand by the time they file their annual return.

Your thank you letter to the donor can serve this purpose as long as it includes:

The date the gift was received (not pledged, but actually received)
Whether or not the donor received any goods or services in exchange for the donation and, if so, an estimate of their value.

For gifts you have already acknowledged with that information, you’ve met that requirement. But for those end-of-year, last minute gifts you receive, be sure to provide the necessary documentation promptly in January.

Quid pro quo contributions

When a donor does receive goods or services in exchange for a contribution to your organization, it is called a quid pro quo contribution. You must provide a written disclosure statement to donors if the contribution is greater than $75. Here’s an example. If for a donation of $100 the donor receives tickets to an event that would have cost $40, the deductible amount would be $60. However, because the total contribution exceeds $75, written disclosure is required. This can be done either when soliciting the gift or as part of your thank you once the gift is received. The written statement must:

Inform the donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of any money (and the value of any property other than money) contributed by the donor over the value of goods or services provided by the charity, and
Provide the donor with a good faith estimate of the value of the goods or services that the donor received.

For more specific information, visit the IRS at Substantiating Charitable Contributions.