Managing Nonprofit Finances

Managing household or business finances directly impacts your and your family’s future. Managing nonprofit finances is just as impactful, with one big difference. Household and business finances involve your funds. Nonprofit finances consist of other people’s funds – contributions entrusted to the nonprofit by community members and other donors.

Managing nonprofit finances involves fiduciary responsibility for donor funds, which boils down to treating entrusted funds with due care, and only using funds to support the nonprofit’s mission. Effectively managing finances is one way that a nonprofit fulfills its fiduciary responsibility.

So, what does “effectively managing” mean? It starts with these three fundamentals:

  1. Actual vs. Budgeted Performance

Every month, the nonprofit’s year-to-date actual financial performance should be compared to the budget. Variances between budgeted and actual performance should be explained, especially for key income and program expense categories. Identify why variances are occurring and take remedial action, as needed. For example, assess the potential for overreliance on one individual funding source, indicating the need to diversify.

  1. Cash Flow

A monthly review of checking and money market account balances should be performed to determine whether cash reserves are adequate. The cash reserves target should be based on the amount needed to cover operating expenses without any funds coming in and without liquidating any investments. Another method to assess the nonprofit’s cash flow health is to assess unrestricted net assets vs. total liabilities.

  1. Long Term View

At least once a year, nonprofits should assess whether the financial aspects of long-term financial objectives are being met. Long-term financial objectives are often reflected in the strategic plan, the annual budget, and in Investment Policy and Board Resolutions. If established financial objectives are not on track to be met within the defined time frame, remedial action should be taken.

Managing nonprofit finances means fulfilling the fiduciary responsibility for the contributions entrusted to the nonprofit by community members and other donors. That boils down to treating entrusted funds with due care, and only using funds to support the nonprofit’s mission. Starting with the three fundamentals – year-to-date performance, cash flow, and long-term view – helps nonprofits keep promises to donors and make solid financial decisions.

Education Tax Benefits

Millions of workers lost their jobs during the pandemic. Some others quit their jobs. The stress and change brought by COVID-19 made them reflect on their careers and ponder how they want to spend the rest of their working years. Whether they quit or not, thousands of adults have been preparing for new career opportunities by enrolling in education of one type or another: college, professional certifications, graduate school, etc.

Investing in education to meet new challenges is a smart move. But it can be expensive. Good news – there are two education tax benefits available to eligible taxpayers that can reduce those out-of-pocket education expenses. The IRS has all the details here at their website https://www.irs.gov/newsroom/tax-benefits-for-education-information-center. It’s a lot to read, so here are a couple of highlights:

  • Education Tax Credits

An education credit, either the American Opportunity Tax Credit or the Lifetime Learning Credit, helps to defray the cost of higher education with a dollar-for-dollar federal tax liability reduction. The credit is refundable, so it can reduce your tax below zero. To take the tax credit, you, your spouse, or your dependent must incur and pay qualified expenses for higher education at an eligible education institution. Qualified expenses include tuition, fees, and other related expense for an eligible student required for enrollment or attendance.

  • Student Loan Interest Deduction

Generally, personal interest is not deductible, other than for a home mortgage. However, if your modified adjusted gross income (MAGI) is less than $85,000 ($170,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan used for qualified higher education expenses. The student loan interest deduction can reduce the amount of your income subject to tax by up to $2,500. The amount of actual tax savings will depend on your marginal income tax bracket.

Stressful times, like the pandemic, often make people reflect on the course of their lives, including their career. That reflection can lead to enrolling in additional training or education. If you are deciding whether to invest in education, due to COVID-19 or another reason, you need to know the overall cost. Two education tax benefits can, depending on your situation, reduce your federal income tax liability and defray your out-of-pocket education expenses. 

Want more details? Check out the IRS website at https://www.irs.gov/newsroom/tax-benefits-for-education-information-center.

Need to Pay Estimated Income Taxes?

The IRS requires taxpayers to pay their income tax liability as their income is earned. States that charge income tax and the District of Columbia have similar rules. Employers withhold and remit income taxes to cover their employees’ tax liability on wages and other compensation. Job done. But taxpayers with non-compensation income like interest, dividends, capital gains, prizes and awards may have to make estimated tax payments to cover the related income tax liability.

Taxpayers with profits from self-employment must regularly assess their need to make estimated income tax payments, as well as other taxes such as the self-employment tax. “Regularly” means at least quarterly. All the necessary details about making payments, when and how much are at https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

It’s a lot to read, so let’s boil it down to three important things to know:

  1. When are Estimated Taxes Due?

For estimated tax purposes, the year is divided into four quarters. Although some payment due dates changed temporarily due to COVID, estimated tax payments are generally due on April 15, June 15, September 15, and January 15 of the following year. If the payment due date falls on a Saturday, a Sunday, or a legal holiday, the payment is due the next business day.

  1. How Much Do You Need to Pay?

Estimated tax payments are based on estimated income and resulting tax liability. An estimated tax payment is due if the liability is at least $1,000, after subtracting withholding and refundable credits. Withholdings or estimated payments must equal or exceed the smaller of 90% of your 2021 tax liability, or 100% of your 2020 tax liability. Calculate your 2021 tax liability at this link https://www.irs.gov/forms-pubs/about-form-1040-es

  1. What if You Don’t Pay Enough?

Interest is due on any unpaid balance, accrued daily from the time the tax liability was created (i.e., by receiving income) until the tax is paid. Interest accrues daily, which can really add to your tax bill. Clearly, the IRS is serious about getting paid on time. Figure your 2021 federal income tax bill by using the IRS Withholding Estimator at https://www.irs.gov/individuals/tax-withholding-estimator.

Taxpayers who paid a lot when filing their 2020 income tax return and those who receive income with no tax withholdings should look at whether 2021 estimated income tax payments are needed. The IRS has all the tools to figure it out at https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes.