Fall 2013 Issue of Horizons

ensure their continued connection to the organization’s mission. Staying true to the mission and ensuring program outcomes and impacts are at appropriate levels help ensure sustainability.

On the revenue side, organizations have also had to adapt. Not-for-profits that receive government funding, whether federal or state, have had to adapt to changes in that revenue source. Focus has also been on maintaining other revenue streams and finding new sources of funds to supplement declines elsewhere. Some organizations were forced to use reserves that had been accumulated to weather the economic storm; in fact, this is one of the reasons reserves (and a reserve policy) are necessary – to help the organization through challenging times, particularly those which the entity can’t control. As the economy improves, these organizations should revisit their reserve policies, analyze where they stand with respect to reaching the goal reserve level stated in the policy, and establish a plan to re-accumulate those reserves. Having timely and detailed financial records that allow the organization to actively monitor its financial position facilitates the organization’s ability to proactively identify future challenges and take action as necessary. Mission Clarity A second key area related to sustainability is mission clarity. Funders are very focused on program outcomes and impacts and often request such information. The economic downturn forced not-for-profits to use this information internally to ensure outcomes were measurable and positive. Specifically, existing programs have been analyzed for purposes of determining the number of clients served/reached and the true “costs” of running each program versus the benefits derived. In addition, as organizations looked for new revenue-generating activities, new and existing programs were reviewed to

IRS Focus on Unrelated Business Income Filings A report completed earlier this year provides insight into the examination issues raised by the Internal Revenue Service (IRS). Thirty-four colleges and universities were examined as part of an IRS project. The same issues are likely to be raised in a variety of nonprofit organization returns. Below is an overview of one of the issues. The IRS disallowed losses on 75% of the returns examined. This includes net operating loss carry- forwards as well as current year losses. Net operating losses (NOL) must be substantiated. The report does not go into detail. As a general rule, the prior years’ returns do not prove the NOL. The taxpayer may need to produce books and records for the loss years. With a twenty year loss carry-forward, the IRS essentially has an opportunity to review a return filed up to twenty years ago. If nothing is produced other than the loss year return, it is likely the IRS will disallow the NOL. Alternatively, if there is an adjustment to a loss in a current year, the IRS may assert that the prior year losses are disallowed until the taxpayer can prove the effect of a comparable adjustment in all prior years for the issue identified in the current year. Your losses just vanished.

Look for more details on this topic on our website at www.RubinBrown.com.

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