Blog

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.

Projecting Your Cash Flow

You’ve heard the adage “Cash is King”. Whoever came up with that sure was right; your business can’t run without enough cash to keep it going. So, how do you assess the amount of cash you have compared to what’s “enough”? You can look at your bank balance, but that won’t tell you how much cash you will have next week, next month, or at the end of the year.

Projecting your cash flow is the only way to get the information you need to figure out if you have enough cash to get your business through the week, month, and year. Standard financial reports that businesses generally produce – a Profit and Loss Statement (P&L) and a Balance Sheet – don’t answer questions about your future cash situation. But the P&L and balance sheet can be used as the starting point to project your cash flow.

How do you project cash flow to get a realistic view of your business’s ability to pay the bills? 

Here are four tips to project cash flow:
  1. Start with What You Know

Revenue and expenses related to a contract, lease, or other agreement are a good place to start because those payments are defined. Examples are wages and rent. Be sure that you consider the timing of each item. For example, if you pay wages every two weeks, some months will include three pay periods instead of two.

  1. Look at Your History

Last year’s financial details are a gold mine for projecting cash flow where revenue and expenses vary from month to month. Look at the months or quarters when income was historically received, and expenses were paid. Also determine how many days it takes, on average, for customers to pay your invoices and build that time into your projections. 

  1. Document Assumptions

For income and expenses where you have no history or documents for guidance, you will have to estimate the amounts based on your assumptions. Be sure to document your assumptions to preserve them. Chances are that you will need to revisit and update your assumptions as you learn more, and circumstances change.

  1. Start Small and Build

Projecting an entire year of cash flow may be too daunting to start with. Start by projecting your cash flow for three months. Once you get comfortable with three-month projections, expand to six months, eventually working up to a year. Once you get accustomed to projecting your cash flow, the process will get easier.

Projecting cash flow gets you the information needed to assess if you have enough cash to get your business through the next week, month, and year. Follow these four tips to get a realistic view of your business’s ability to pay the bills. If you don’t, that Cash King could become a Penniless Pauper.

Summer School for Tax Preparers

In the last few weeks of summer, many taxpayers are headed to the beach. But for nearly 11,000 tax preparers across the country, it’s time for Summer School, also known as the annual IRS Tax Forum. The IRS provides the Tax Forum every summer to help tax professionals keep up with tax law updates and issues that affect their clients.

Why does this matter to you? Taxpayers need to keep up with the income tax changes on their own or hire a tax preparer who does it on their clients’ behalf. Taxpayers are responsible for all the information on their income tax return, no matter who prepared it. Hiring a tax preparer who keeps up is essential, especially in years when there are multiple tax law changes (like now).

Feel confident that your tax return is prepared by a qualified tax preparer who keeps up with all the tax law changes by following these five tips:

  1. Ask about professional credentials, such as a Certified Public Accountant (CPA) or an Enrolled Agent (EA). Credentialed return preparers are required to fulfill annual continuing education. The IRS maintains a Directory of Federal Return Preparers with their credentials and qualifications at https://irs.treasury.gov/rpo/rpo.jsf.
  2. Verify that the preparer has a Preparer Tax Identification Number (PTIN) and enters it on your return that is electronically filed with the IRS. Tax preparers who charge a fee are required to have a PTIN and to file returns electronically or submit a reason for paper filing with the return.
  3. Inquire about the tax preparer’s education and training, and how she or he keeps up with tax law changes and IRS processes. Tax pros who are not a CPA or EA should still get annual tax updates to keep up their knowledge. 
  4. Ask about service fees and get a cost estimate in writing. Steer clear of tax preparers who base fees on a percentage of the refund, or who want their fee paid by direct deposit from your refund. These are both unethical practices prohibited by IRS regulations.
  5. Make sure the tax preparer is available all year, after tax season is over, in case you need her or him. For example, notices can come from tax agencies any time of the year. Tax projections sometimes need refreshing before estimated tax payments are due again. 

Getting dependable tax services starts with selecting a qualified tax preparer who keeps up with tax law changes and issues. Whether that person went to Summer School for Tax Preparers or not, following the five tips above will help you to get qualified tax help. 

Need more? The IRS has it for you at https://www.irs.gov/tax-professionals/choosing-a-tax-professional.

Protect Your IRS Tax Identity

It’s not big news that scams, frauds, and identity theft are on the rise. New, pandemic-inspired scams related to Economic Impact Payments (EIPs) and Paycheck Protection Program (PPP) funds have started, while income tax filings and financial information remain big, juicy targets for criminals. 

Scrabble tiles spelling "who are you" in a square.

The IRS has responded by expanding its Identity Protection Program to any taxpayer who can verify her or his identity, instead of being limited to taxpayers who report an identity theft issue. The IRS and the tax preparer community want to inform taxpayers about the Identity Protection PIN Opt-In Program to protect against tax-related identity theft when filing a federal income tax return.

Six things to know about the Identity Protection PIN Opt-In Program (IP PIN):

  1. The IP PIN is a six-digit code known only to the taxpayer and to the IRS. It helps prevent identity thieves from filing fraudulent tax returns using a taxpayers’ personally identifiable information.
  1. To obtain an IP PIN, the best option is Get an IP PIN, the IRS online tool. Taxpayers must validate their identities to access the tool and their IP PIN. Before attempting the process, see Secure Access: How to Register for Certain Online Self-Help Tools
  1. Once issued by the IRS, the taxpayer’s tax account is locked, and the IP PIN serves as the key to opening that account. Electronically-filed federal income tax returns that do not contain the correct IP PIN will be rejected and a paper return must be filed.
  1. An IP PIN is valid for one specific calendar year. A new IP PIN must be obtained for each filing season.
  1. Current tax-related identity theft victims who have been receiving IP PINs via mail will continue to receive an annual IP PIN to file her or his federal income tax return.
  1. There is no opt-out option. The IRS is working on it for 2022. Taxpayers who cannot provide an IP PIN or obtain a replacement can’t unlock her or his tax account and must file the return in paper form. Any refund will take several weeks to process.

The IRS IP-PIN Program is an option for taxpayers to protect her or his identity from theft and fraudulent tax filings. For taxpayers that want to use the program, the IRS offers more information and instructions at this link – https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin.

Seven Years and Going Strong

A few days ago, I suddenly realized that it’s been seven years since I quit my corporate J.O.B. and started my business. Wow, seven years and going strong! With diligence and good luck, I’ve achieved my business and personal goals. Plus, I’ve had some fun along the way. The fun is probably why the time has flown by so quickly.

Milestones are worth celebrating – albeit briefly – and are the perfect time for reflection. It’s also important to periodically step back to assess your progress, identify areas of potential improvement, and update your goals. Businesses that survive long enough to celebrate many milestones are the same ones that invest some time and effort in these four activities:

  • Plan to Meet Defined Objectives

A business plan is a road map to get where you want to go and help to keep your “Eye on The Prize”. Unless you know what you’re reaching for, you can’t grab it. Set your overall objectives and describe the detailed steps to achieve them. Set interim milestones along the way to help measure your progress and keep you motivated.

  • Execute Your Plan

Actively work through the detailed steps in your plan. It’s exhilarating to achieve goals and move forward. Executing your plan also gives you opportunities to get more information. Use new information to adapt your plan and make course corrections. Also listen to how your network receives your message and adjust the wording to get your message across better.

  • Outsource Needs You Can’t (or Shouldn’t) Meet

Be realistic about aspects of your business where you do not have the necessary expertise or can’t take the time away from your core business to do yourself. Legal, accounting, and social media are some areas where engaging an expert can accomplish specialized tasks, free up your time, and prevent you from making costly mistakes.

  • Give Back

Answering general questions in your area of expertise and presenting at workshops are ways that you can share knowledge with your network and establish your credibility. Sharing tips and perspective helps to create your brand and draw people to you and your business. Being generous is often its own reward, over the long run.

The last seven years of having my own business have been hard work, fun, and rewarding – all at the same time. It takes a lot more than investing in the four activities described above to be successful. But businesses that invest in planning, executing, outsourcing, and giving back have an opportunity to achieve seven years in business and keep going strong.

Tax Balance Payment Options

Believe it or not, the IRS is still opening mail and processing tax returns that stacked up during the COVID-19 pandemic. Another IRS task that backed up over the last year is sending notices to taxpayers who have outstanding tax balances. If an IRS notice arrives in your mailbox, don’t panic. Open it right away, read it carefully, and verify the contents with your tax records. 

Even if the notice is due to an IRS mistake, you need to respond to get your tax records corrected. But what if the notice is accurate and you do owe taxes to the IRS? How can you pay?

The IRS offers several payment options, depending on your situation:

  1. Pay Now – Paying the full balance online is free if you can have the balance due debited from the bank account of your choice. Paying by credit card is an option but the fees are high, so make sure that you read the fine print first before making your decision. https://www.irs.gov/payments/online-payment-agreement-application
  1. Short Term Payment Plan – If you can pay the amount due in 120 days or less and the total amount due is less than $100,000, this could be the best option for you. No set-up fee is charged, and you can pay via direct debit from the bank account of your choice. https://www.irs.gov/payments/online-payment-agreement-application 
  1. Installment Agreement – If you need more than 120 days to pay, this option requires a set-up fee of between $31 and $225. Installment Agreements may require some financial information from you, depending on the amount due. https://www.irs.gov/payments/payment-plans-installment-agreements#costs
  1. Offer in Compromise – The IRS wants to collect all taxes due but does not want to create a financial burden on taxpayers. An Offer in Compromise allows you to settle your tax debt for less than the full amount owed if paying your full tax liability would create a financial hardship. See if you qualify at https://www.irs.gov/payments/offer-in-compromise.
Other considerations to keep in mind are:
  • Payment plan applications are generally easier to get approved for lower tax liabilities due than for large balances. 
  • The application process differs based on the tax liability outstanding. For example, applications for $10,000 or less are automatically approved as a guaranteed Installment Agreement. Amounts over $50,000 require a more thorough review to determine if assets can be liquidated to pay the taxes due.

The IRS has been catching up with its pandemic backlog, including sending out notices to taxpayers who have outstanding tax balances. If an IRS notice arrives in your mailbox, check it against your records. Really owe what it says? Remember that the IRS offers several payment options, depending on your situation.