Not-for-profits in the US: It's all about the mission
US not-for-profits encompass a wide variety of industries that include health care, higher education, credit unions and public authorities, to name a few. Andrea Murad speaks to the individuals who ensure they maintain their nonprofit status.
Nonprofit organizations are unique, because while they’re considered charities, they can also generate billions of dollars in revenues and have tens of thousands of employees.
The accounting functions can be complex, especially when there are international operations. For every nonprofit however, the organization’s goal is to advance an underlying mission, with finances structured in a way to achieve this.
“The mantra of ‘No Margin, No Mission’ is very commonly heard in the not-for-profit world,” reveals Ian Stevenson CA, Senior Financial Analyst in the Clinical Trials Office at Beth Israel Deaconess Medical Center.
There is a long history in the US of not-for-profits being monitored by the IRS under a variety of code sections depending on the nature of the entity.
His role involves complex ‘close-out’ audits of medical studies to ensure compliance with regulations and policies, as well as identifying where to re-allocate cost efficiencies.
Nonprofits attract top business talent to their boards in the spirit of giving back to humankind, but the tax-exempt arena still has rigorous IRS scrutiny: “To the casual observer, a lot of US not-for-profits look increasingly like their for-profit counterparts — it’s a rapidly changing field and an exciting one,” added Ian.
“There is a long history in the US of not-for-profits being monitored by the IRS under a variety of code sections depending on the nature of the entity.”
Nonprofits and the IRS Code
Nonprofits are tax-exempt under section 501(c)(3) of the Internal Revenue Code, and there are about 27 different sections that determine whether the entity permits tax deductions from donors, which is key for many nonprofits.
Even though an organization is tax-exempt, it’s still a business. These organizations create jobs for the economy and provide charity, but they may not generate sufficient revenue to cover all expenses, explained Marilyn Pendergast, Partner at UHY LLP and Managing Director at UHY Advisors NY, Inc. “The difference is made up by private contributions or grants by various private or government entities.”
In the nonprofit sector, there’s a focus on needing to understand budgeting, understanding the interaction on fundraising and finances, and the statistics.
As nonprofits generally do not pay any taxes, money normally allocated for this use is instead deployed to fund activities that advance the mission. For any research projects, organisations are able to sell, license or present their findings for public use, and any leftover funds are re-committed to pay for further research.
It’s not uncommon for a nonprofit to own a for-profit that receives royalties on a patent, for example. “When that happens, the not-for-profit origination has something that they’re going to have to pay an unrelated business tax income on and has the potential to raise a lot of money, so they don’t want it to overcome their not-for-profit status,” said Marilyn.
Auditing and Accounting
For auditors, understanding the nuances - such as fundraising and issues related to donors and operations - is key. Hospitals, for example, recognize revenue differently than higher education, which is primarily tuition and fees.
“In the nonprofit sector, there’s a focus on needing to understand budgeting, understanding the interaction on fundraising and finances, and the statistics,” said Marilyn.
Depending on the type of nonprofit, there is plenty of cost versus benefit financial analysis unique to the sector. All nonprofits file a Form 990, Return of Organization Exempt From Income Tax, that’s available to the public and provides the IRS with an overview of the organization’s activities, governance and financials.
“If you’re auditing a not-for-profit, you’re making sure any restrictions that were put on the use of those funds, are followed,” explained Marilyn. “There are limitations on use of funds, and that’s what you look for in auditing, to make sure that any donor restrictions are followed.”
Progressing the Charitable Mission
In a heavily regulated sector, it’s imperative to ensure all parties are comfortable that the appropriate controls are in place.
“In industrial trials, for example, there are specific budgets constructed for every study with strict contractual roles governing the generation of funds through milestone grids, and when efficiencies can permit funds to flow to next level research and when they cannot,” said Ian.
There is rapid business innovation within nonprofits that is driven through a complex mosaic of technological improvements and financial modelling.
Nonprofits sometimes innovate in partnership with for-profits, similar to how teaching hospitals engage with pharmaceutical companies to advance research.
This requires legal agreements along with rigorous internal policies that govern consulting fee limits earned by research investigators and sign off approvals for transfers for next level research. The catch is that funds from third parties come with specific provisions requiring money be returned if the specific provisions aren’t met.
Why pursue charitable work?
Nonprofits are able to attract the very best talent from world-class universities with pure competitive drive to be first to market — that market being global and not just in the US.
Ian explained that there is rapid business innovation within nonprofits that is driven through a complex mosaic of technological improvements and financial modelling.
Supporting this mission, the accounting work provides rich opportunities for personal growth, a fast-paced lifestyle and the sense that you’re a part of something meaningful and special in your daily work life. “The prestigious CA credential is the starting point, not the end point, of professional growth and knowledge,” said Ian.