More complex Form 990, shrinking funding bases; looking for ways to thrive

[caption id="attachment_31224" align="alignleft" width="220" caption="Christina Hollingsworth"][/caption]

The idea of a merger or acquisition often conjures up images of one or both of the entities struggling financially. Business combinations, however, are not necessarily a means to survive, but rather a way to thrive. For many nonprofits, joining forces can be a way to strengthen their existing programs and continue to grow, as opposed to just maintaining the status quo.

'Nonprofit Boot Camp' set for May 19 and 24

Pisenti & Brinker and the Business Journal are collaborating on the 2011 “Nonprofit Boot Camp,” two forums designed specifically for nonprofit board members and executives.

Among other topics, the conferences will be addressing accounting treatments applicable for various revenue transactions in the nonprofit world.

The morning forums are on May 19 in Napa and May 24 in Sonoma County.

Look for registration information in coming issues of the Journal.

Fundraising has become increasingly challenging given the macroeconomic state of affairs. To compensate, nonprofits have inevitably ended up in direct competition with other local charities for fewer donor resources. Many have scheduled their annual fundraisers earlier and earlier in the "fundraising season" and have worked hard to distinguish themselves from others with similar missions.

Making charitable donations is not an easy task, even for willing donors. With limited budgets, donors often struggle to differentiate between nonprofits that run similar programs with similar focus. Donors have to face the ultimate dilemma of how to "slice the pie." Joining forces can allow nonprofits to eliminate unnecessary competition with one another while creating a more powerful voice to promote their common mission, which can lead to additional funding.

It is important to acknowledge that the sputtering economy is not the only problem for the struggling not-for-profit industry. Decreased private donations and diminished government funding only contribute partially to many nonprofits' challenges, and the difficult economic environment has just aggravated the situation.

The increased IRS scrutiny on governance and the constantly changing regulations and reporting requirements have not only further burdened office staff, but also called for outside professional help that lead to increased expenses.

For instance, the IRS recently redesigned Form 990, the nonprofit tax return, with governance as one of the service's main focal points. The new Form 990 addresses many policies and procedures related to board governance, a number of which have never before been brought to the attention of volunteer boards of directors.

While the IRS insists that the service is not auditing charities for their governance practice, an IRS official recently explained that these inquiries will help "target and calibrate our attention" to nonprofit groups. One of my nonprofit clients adeptly expressed the concern of many organizations, "we don't want to be the one to find out the consequences of answering 'no' to those questions."

The new Form 990 also standardizes the reporting format and makes it easier for donors to compare the effectiveness and efficiency of nonprofit organizations' operations. This transparency in reporting makes it more difficult for a less structured nonprofit to "hide" its problems in the once-convoluted tax forms. When two or more nonprofits with similar programs come together, they can focus on one set of governing policies and procedures, simplifying the process and therefore strengthening their operations with less effort.

As most nonprofit executives know, being exempt from income taxes does not equate to being exempt from many other regulations and reporting requirements. It is challenging for most nonprofits to keep up with the ever-evolving accounting guidance, compliance and reporting requirements, employment law regulations, and many other issues related to day-to-day operations. As a result, nonprofits incur additional costs to find professional help to either plan ahead to address these issues, or in a less desirable situation, get help to avoid penalties because the business transactions were not performed properly in the first place.

The cost saving benefit will be apparent when two or more nonprofits come together. Sharing the knowledge that each has accumulated throughout the years and utilizing best practices will translate into a stronger bottom line.

According to guidestar.org, there are currently more than 9,000 registered tax-exempt organizations in Marin, Sonoma, Napa and Solano counties. While many nonprofit executives have to scramble to cover all the bases, bringing talents together will encourage better use of their time. A more efficient management structure may allow some staff to stay focused on administrative matters, and direct others' energy towards the heart of the organization's ultimate mission.

Considering the efficiencies and effectiveness that a combined operation can achieve, joining forces with other nonprofits with similar missions can be a win-win arrangement for many nonprofits.

Business combination transactions can be complicated. Planning ahead is essential for a smooth transition. Along with understanding the similar accounting guidance followed in the for-profit world, there is also specific guidance for mergers and acquisitions among nonprofit organizations.

This guidance includes how to account for assets and liabilities unique to nonprofits. There are also specific reporting requirements to be considered. Talking to professionals who are familiar with such transactions ahead of time, such as CPAs and legal counsel, can help nonprofits thrive through successful partnerships.


Christina Hollingsworth, CPA, is a manager at Pisenti & Brinker LLP, serving many local not-for-profit organizations.