The NonProfit Times - December 1, 2008 - (Page 20)

TAXING ISSUES HARVEY BERGER, D. GREG GOLLER AND MARY TORRETTA The Revised 990 Provides opportunity to reconsider expense allocation y now, you are probably deep into figuring out how the “new” Form 990 will affect you and your organization. It is true that you will have to compile numerous pieces of information to complete the form. However, an item that can have a dramatic impact has been around for many years and is often given short shrift by the preparers of Form 990. It’s your allocation of expenses among program services, management and general, and fundraising. Form 990 for 2008 moves the Statement of Functional Expenses from Part II (990, page 2) to Part IX (990, page 10).While this might lead you to think that the allocation of functional expenses is less important than it used to be, that is not the case. Many prospective donors look closely at your types of expenses and their respective proportions in making funding decisions. Watchdog groups also monitor expenses in making their recommendations. Organizations exempt under Section 501(c)(3) or (4) are required to allocate expenses among program services, management and general, and fundraising. If your organization is exempt under a Code section other than 501(c)(3) or (c)(4), you are B not required to allocate your expenses on Form 990 (although your auditors will probably do so on your financial statements). The instructions for Form 990 offer little help as to how to report your expenses. In fact, the instructions do not appear to have changed much from prior years in this area. The instructions still define the three categories of expenses as follows: 1. Program services – Expenses for those activities that further the organization’s exempt purposes. 2. Management and general – Expenses related to the organization’s overall operations and management, rather than fundraising activities or program services. 3. Fundraising – Expenses incurred in soliciting contributions, gifts and grants. DIRECT COSTS V. INDIRECT COSTS The instructions further provide that you should allocate expenses that relate to a specific activity or project to the appropriate category. For example, if you operate a school, you can allocate all teacher salaries and related costs to program services, as that is your exempt purpose. Contrarily, the costs of your development department generally are allocable to fundraising.These are referred to as direct costs, and are relatively easy to handle for Form 990 reporting purposes. Program service expenses are often primarily direct expenses, but the expenses are always related to the exempt function of the organization. The 990 instructions provide examples of direct costs. Program service expenses may also include the costs of activities that generate unrelated business income, such as advertising in your organization’s periodicals. Costs related to work done under grants are considered to be program services, even if the grants are included as contributions in Part VIII. Certain expenses are classified as management and general. These include the costs of managing investments, board and committee meetings, general legal services, accounting, liability insurance, office management, and human resources. Fundraising costs include those incurred to solicit contributions,grants and bequests, distribute fundraising manuals and other materials, and conduct fundraising events. Indirect costs present a more complicated issue than direct costs. Indirect costs are the costs of functions that benefit program services and fundraising as well as management. Because of the expenses’ multi-functionality, you must allocate these costs among the various categories using a consistent “reasonable method of allocation.”In addition, the IRS requires you to report the amounts accurately and also document your method of allocation. ALLOCATIONS USING ACCOUNTING SYSTEMS Some organizations use an accounting system that classifies expenses in significant detail, including allocation as costs are incurred. For example, under these systems, staff members who spend time performing program services and management may turn in detailed time sheets so that their salaries can be allocated between both functions. Some systems allow supplies to be categorized depending on how they are used by the organization. However, even these detailed methods are likely to have some expenditure that requires further allocation by you using your “reasonable method.” Contrary to the intent of those who de- INTRODUCING NPT DESKTOP DELIVERY SERVICE A New Way To Receive The Latest Nonprofit News THE NONPROFIT TIMES is excited to announce a new way to receive breaking nonprofit news, fundraising tips, job postings, information on upcoming events and more, without opening your email! Introducing NPT DESKTOP DELIVERY, a communication tool which sends subscribers daily nonprofit updates directly to their desktops. How Does It Work? • Download NPT DESKTOP DELIVERY, a free service provided by THINK360. • Choose what time of the day you would like to receive your message. Don’t have time to read it? Click it, it goes away and you can bring it back up later by clicking on the NPT DESKTOP DELIVERY icon that will be placed on your desktop. You’ll get just one message per day. • Sign up today, get your first update tomorrow! Top Reasons To Use NPT DESKTOP DELIVERY: • NPT updates delivered straight to your desktop • You control when messages are delivered • No more blocked emails, so you won’t miss important nonprofit news! • Completely hacker-proof Visit www.nptimes.com/desktop for more information and to download. 20 DECEMBER 1, 2008 THE NONPROFIT TIMES www.nptimes.com http://www.nptimes.com/desktop http://www.nptimes.com

Table of Contents Feed for the Digital Edition of The NonProfit Times - December 1, 2008

The NonProfit Times - December 1, 2008 Contents A Nation of Volunteers Nonprofits Start Franchising Page 4 Tidings Of Good Cheer Donor-Restricted Endowments Membership Revenue Isn’t Free Divining A Skills Set Special Report: 2008 The Year in Review The Revised 990 Giving And The Economy Annual Buyers Guide Advertiser Index NPT Jobs Resource Directory

The NonProfit Times - December 1, 2008

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