Today, perhaps more so than previously recognised, nonprofits have garnered immense support from the civil community, as the internet and social media enable them to share their causes more frequently and to a wider audience. 

According to The NonProfit Times, a leading publication and media outlet for nonprofitable organisations, 2021 contributions totalled more than $484.85 billion, with 67% coming from individuals alone, a significant increase from the 33% it represented at the start of the century in 2000. 

As society and younger generations look to become more vocal around the causes and communities nonprofits serve, the more than 1.5 million American nonprofits - that employ around 10% of the American workforce, and contribute roughly 5.4% to the nation's GDP - will only increase their impact and empower them to advance their mission. 

Although nonprofits do make a difference in our civil society, whether it’s through the programmes they orchestrate or the support they offer, regulatory factors regarding taxation and accounting still require nonprofits to adhere to strict protocols outlined by the federal government and the Internal Revenue Services (IRS).

Luckily for the 27 types of nonprofit organisations, there are specific rules that guide them on their tax-deductible contributions and nonprofit accounting. 

To make sense of this whirlwind of information, this simple guide looks to help add more clarity for accountants, and non-accountants that have found themselves working for a nonprofit. Here’s a simple look at the basics for beginners. 

Nonprofit Tax-Exemption Status

Seeing as nonprofits conduct efforts on a charitable basis, with most of the donations and proceeds going towards fulfilling the organisations' mission, a majority of these groups and organisations will generally be exempt from paying federal taxes. 

Organisations are only exempt if they meet requirements outlined by Publication 557 on Tax-Exempt Status released by the Department of the Treasury and IRS. 

With no direct ownership, shareholders or investors, nonprofits are required to fulfil certain requirements to keep their nonprofit status - and this is where nonprofit accounting becomes a crucial part of their operations. 

A Short Summary Of Nonprofit Accounting 

Oftentimes referred to as fund accounting, nonprofit accounting records all financial and monetary accounts held by the organisation. 

Seeing as all nonprofits are different, the fund accounting system works to keep track of income and expenses to help ensure organisations can achieve their goals and adhere to regulatory conditions. 

Nonprofit accounting can include some of the following: 

• Setting up a budget 
• Analysing financial records and statements
• Recording transactions such as in-kind donations 
• Managing various bank accounts 
• Performing bank reconciliations 
• Fund accounting and bookkeeping 

Simply put, nonprofits will need to appoint a treasurer or accountant that will help to balance the books and keep track of funding accounts. 

Setting up a budget 

Just like with for-profit businesses and companies, a budget helps to determine how profits will be used to achieve certain goals, and how the money will be allocated accordingly. 

For nonprofits, a budget may look somewhat different, as they generate income from donations and other forms of charitable causes. This means a budget will usually have an expected income and expenses. 

The expected income and expenses will outline where money will be coming from, whether it’s through corporate contributions, in-kind donations, voluntary work, or other programmes. At the same time, expenses will help keep track of where nonprofits are spending money including payroll, programmes, and events. 

Analysing financial records and statements

The second part of fund accounting is making sure to analyse financial records and statements the nonprofit incurs during the financial period. As with regular businesses, financial records and statements help to keep track of all income generated by the organisation, where it was spent, and how it got there. 

For the sake of accounting and taxation purposes, nonprofits must make use of digital tools that will help them manage and control their financial statements more seamlessly. Ultimately, these statements act as a way to keep a record of all accounts, and expenses a nonprofit generates over time. 

Recording transactions

As mentioned, financial statements can play a big part in the overall funding account management procedure and seeing as many nonprofits will oftentimes receive in-kind donations and voluntary aid, these will need to be recorded as well. 

In-kind donations are those that are acted upon by a person or company as a gesture of goodwill. For example, if a photographer says that he will assist with new portraits and photographs for the organisation's website, the nonprofit will need to record the in-kind donation in their statements. 

The nonprofit will have a separate account in its accounting ledgers for all in-kind donations and will record a receipt based on the fair market value of the donation. Thus saying, if the photographer charges $550.00 for 100 photos, the nonprofit will record the $550.00 as an in-kind donation. 

Managing various bank accounts

Smaller nonprofits may have one or two bank accounts at the beginning, but over time, as the organisation grows, different bank accounts will be required for different activities. 

Some nonprofits may have a regular check account but will have a separate savings account for emergencies. Some financial institutions offer tailored checking accounts for nonprofits that act as regular business accounts but have been customised for nonprofits. 

It’s not a smart idea to have a singular bank account from which all transactions are conducted, as this makes accounting practices increasingly difficult and complex. 

Performing bank reconciliations

Both individuals and businesses tend to perform bank reconciliations when it comes to filing annual taxes. A bank reconciliation is simply checking to see whether transactions completed on a specific bank account line up with those recorded on the financial statements. 

The bank reconciliation helps to keep track of purchases and expenses that may be exempt from tax, or which are filed and accounted for differently. 

Fund accounting and bookkeeping

Then finally, fund accounting and bookkeeping are where most nonprofits will start to organise their financial and monetary statements or transactions in one place. 

Instead of having different ledgers that help to keep track of the various transactions completed by the nonprofit, some organisations tend to make use of automated software and computerised programmes to help keep all their financial proceedings in one secure place. 

Additionally, it’s advised that nonprofit organisations make use of some form of bookkeeping and accounting services that are tailored to their needs and their tax-exempt status. Not only does it help them ensure more financial credibility, but it enables them to align their financial proceedings with their missions and regulatory factors. 

To Finish Off 

We know that nonprofit organisations play a massive role in our general community and civil society, acting as a voice for disadvantaged communities across the world. While it’s true that these organisations can make a difference, regardless of their mission, they must align their accounting and financial position with the regulatory factors outlined by federal authorities. 

Nonprofit accounting may seem like a tumultuous challenge at first, but once a person gets used to the ins and outs, it becomes almost instinct for people to keep better track of their financial situation. 

Julie, tell us a little bit more about your role.

My own role is not portfolio management, but rather I find I act as something of a sounding board for the CEOs, Finance Directors or Investment Committee Chairs of clients on a wide range of policy and governance issues. In doing so, I draw on the full range of my experience in the legal and financial sectors, as well as my academic role at Edinburgh Napier University where I am a Visiting Professor in Governance and Innovation. The forward-thinking approach to flexible working at abrdn plc has enabled me to move to part-time hours in recent years, to accommodate my academic work.

abrdn plc has offices around the globe with a global AUM of £542bn (as of 31 December 2021). The focus of my work involves supporting colleagues in the specialist Charities Investment Team in London, Edinburgh and Leeds in particular, as well as liaising with colleagues in our Jersey office. The firm offers investment solutions for charities across the spectrum ranging from liquidity funds to ethically screened bespoke portfolios, to private market solutions.

What are the current trends for charity investors?

First and foremost, I’ve had a series of conversations with charity boards recently about environmental themes and how they can be reflected in their investment policy and portfolio. This began before COP26 in Glasgow and has continued since, in particular for health bodies and charities focused on young people. There are a range of options abrdn offers charity clients in how they can look to align their portfolio with their charitable purposes. For some charities, they choose to stay invested in oil and gas, preferring that we focus our plc efforts on engagement and voting to influence corporate change in companies that way (to the extent we can alone, or with others in industry coalitions such as Climate Action 100+). Other charities choose to exclude investment in coal/tar sands, for example or have screens relating to biodiversity. There are also a number of charities that avoid investment in coal, oil and gas, either for alignment with their charitable purposes or reputational risk reasons.  It’s not a “one size fits all” approach.

A reason that we are able to go into depth in how we accommodate individual charity requirements is due to our investment approach, which involves global stock-picking. This means a charity is not faced with a ‘take it or leave it’ pre-determined set of screens that come with a fund: instead, screens can be shaped individually by each charity and we then apply these at individual stock level across a bespoke portfolio of stocks.

A more recent trend has been around positive impact investment, aligned to the UN Sustainable Development Goals.  This approach filters investments to focus on those addressing the world’s key challenges, such as clean water, clean energy and good health, to name just three.

A new development in the last year or so has been the interest shown by some charities in taking on board the input from key stakeholders when framing their investment policy approach. For education bodies, this can involve pupils or students. For other institutions, it can involve members of staff. I’m always pleased to see organisations placing value on that kind of engagement activity and finding ways to incorporate the input received into the end policy – it’s healthy good governance.

A more recent trend has been around positive impact investment, aligned to the UN Sustainable Development Goals.  This approach filters investments to focus on those addressing the world’s key challenges, such as clean water, clean energy and good health, to name just three.

What is abrdn’s own approach to charitable giving?

This is something we’re often asked about, as people want to know what kind of company we are and how we interact with the voluntary sector.  There are a number of strands to this.  At a very local level, during lockdown, we focused on supporting local parklands. Many of us discovered local parks we had not been in before or parks we had not visited in years, during the time when daily walks became part of the necessary rhythm of life. In more recent times, reflecting abrdn’s future focus, we have formed a partnership with Hello World, to fund WIFI hubs in Uganda for online education.  We’ve recently formed a three-year partnership with UNESCO to support programmes on environmental sustainability, climate change and ocean science.  We’re also co-creating the Centre for Investing Innovation at the University of Edinburgh.

What are some of the challenges facing charity boards at the moment?

Recruitment of trustees often comes up as a theme. I’d encourage anyone reading this to consider whether they might be interested in volunteering some of their time as a charity trustee or finance committee member – finance experience is always sought-after on a charity board.

During lockdown, we launched a webinar series specifically aimed at new trustees, called ‘Next Gen Now’.  We’ve covered various topics, including how to read and interpret charity accounts (which have their own accounting standards and norms); and an overview of the many different underlying legal structures to be found in the charity sector. We’ve also looked at case studies of how a charity can change its structure. We’ve found our webinar programme better attended than in-person training events ever were. Our NextGen Now webinars are free and open access – visit abrdn.com/discretionary for more information and to view previous webinars.

What does the landscape look like for charities in the next year or two?

One area to watch is the kind of reporting required in the trustees’ annual reports and accounts. The accounting standards are currently under review and it’s possible that trustees will need to report on a wider range of matters, such as environmental measures. This would not be a surprise, given all parts of the economy and society are going to be in transition to net zero in the period ahead, and measures are likely to emerge to track progress in that area.  The carbon footprint of an investment portfolio could be part of that picture, and we’re already seeing interest from charities about that kind of expanded reporting for their investments.

For more information, visit: https://www.abrdn.com/

While many deductions are commonly known, like mortgage interest and charitable contributions, you may be wondering if life insurance is tax deductible too. But before you go writing off life insurance premiums this tax season, here’s what you need to know.

What is a tax deduction?

Tax deductions are amounts that you can subtract from your taxable income to help you pay less in taxes. Some standard tax deductions are contributions to health savings accounts (HSAs) and what you pay in property taxes. That means when tax season rolls around, you’ll add up your taxable income, then subtract any deductions that you qualify for before determining how much you’re going to pay or receive in a refund. Since there are different eligibility rules for each deduction, it may be wise to consult with a tax professional if you’re unsure which specific ones apply to you.

Is life insurance tax deductible?

For the average person taking out a personal life insurance policy, the premiums you pay are typically not tax deductible. That’s because they’re considered a personal expense. And since life insurance isn’t required by the government, there’s no mandate that you must be insured, which means no government tax breaks. But that doesn’t mean there aren’t unique situations where you can deduct life insurance premiums from your taxes, like:

When you own a business

If you own a business and pay life insurance premiums for your employees, those premium payments may be deducted as a business expense. For most businesses offering a group term life policy to employees, the premiums are typically deductible up to the first $50,000 in coverage per employee.

When the beneficiary is a charity

If you take out a life insurance policy and name a charitable organisation as the beneficiary, you may be able to write off some of the premiums as a tax deduction. But in addition to naming the charity as the beneficiary, you’ll also need to transfer policy ownership. And that means there’s no changing your mind after the fact. So, if you’re debating making a charity the beneficiary of your life insurance policy, you may want to discuss tax deductions with a financial professional first.

How to determine if your life insurance is tax deductible

Working with a qualified tax planner or professional is a good idea if you’re unsure if your life insurance premiums are tax deductible. And it’s important to work with an expert if you’re a business owner that’s not 100% sure how to go about deducting the premiums. Plus, it’s worth noting that while your premiums may not be tax deductible, the death benefit paid out to your beneficiaries is often tax-free. You’ll also receive the benefit of tax-deferred growth if your life insurance policy has a cash value component. So, you can think of it as paying your dues on the front end so your loved ones can receive a higher benefit and lower tax burden down the line.

The bottom line

For many people, life insurance is not a tax-deductible expense. But the benefits of maintaining a policy far outweigh the downside of not receiving a tax break. If you think you may be eligible to deduct life insurance premiums, seek the advice of an expert financial or tax professional to confirm.

Finance Monthly speaks to the Director of the Financial Planning Program at Stephen F. Austin State University - Banker Phares, who has been licensed to practice law in the State of Texas since 1964. He was founding member of the Estate Planning and Probate Specialty for the State Bar of Texas in 1977 and still holds that specialty certification which is renewed every five years. Representing individuals, businesses, and foundations interested in charitable giving, he provides advice concerning the amount, structure, use, and deductibility of charitable gifts.

What do you think prompts charitable giving in the US?

In 2017, I wrote an article on Charitable Giving in the United States. Using a report published by Giving USA Foundation, I found that charitable gifts in the United States totaled $410.2 billion in 2017. The percentage breakdown is as follows: 70% was given by individuals, 16% by foundations, 9% by bequests at death, and 5% by corporations.

A study by The Comparative Nonprofit Sector Project sponsored by Johns Hopkins Center for Civil Society Studies made a study of the level of giving by different countries. According to that study, the level of giving is determined by comparing the giving to the Gross Domestic Product (GDP) of a country. Using that test, individuals in the United States gave 1.85% of the GDP, Israel gave 1.34%, and Canada gave 1.17%. When volunteerism is the sole criteria, the study concludes that the Netherlands is first, followed by Sweden and then the United States.

Using a report published by Giving USA Foundation, I found that charitable gifts in the United States totaled $410.2 billion in 2017.

It is difficult to determine why a business makes a charitable contribution. From my 54 years of experience, I know that some do it for public relations purposes and some do it out of social conscience. I have listened to discussions where leadership groups “cherry pick” charitable organisations – not for altruistic purposes - but for the favorable publicity. Regardless of motive, the charities benefit.

What should businesses be mindful of when supporting charities?

Businesses should be very selective, and should examine the annual filings of the charity to determine the reputation of a charity and the amount a charity uses for charitable purposes. A large business has the opportunity to make a substantial contribution thereby allowing a charity to carry out charitable purposes it otherwise would be unable to undertake.

Businesses should be very selective, and should examine the annual filings of the charity to determine the reputation of a charity and the amount a charity uses for charitable purposes.

About Banker Phares

Banker Phares graduated from the Southern Methodist School of Law with Juris Doctor Degree in 1964, and, while there, served on Board of Editors of Southwestern Law Journal, and as a member of the Barristers. He became Board Certified in Estate Planning and Probate Law in 1977 by the State Bar of Texas. He is the Director of the Financial Planning Program at Stephen F. Austin University, and teaches in the Department of Economics and Finance. He is the John and Karen Mast Professor. He is also the Director of the Marleta Chadwick Student Financial Advisors, organised to the purpose of informing students and the public with the need for financial planning.
Banker Phares is engaged in Solo practice of law in his area of specialty with law offices in Beaumont and Nacogdoches, Texas. He has designed charitable estate plans which include gifts to universities as well as public and private foundations. He has also created public and private foundations as a component of estate plans. The gifting methods utilised include direct gifts of cash and other property to charitable lead and charitable remainder trusts, and the design of conservation easements.

A report from MHA MacIntyre Hudson and Charity Finance Group based on a survey of over 120 trustees has raised concerns about complacency on financial governance within charities.

57% of respondents said that they understood strategic financial governance matters well or very well, with only 12% saying that they had a poor or inadequate understanding. This is very positive and indicates that boards are taking financial matters seriously.

Yet 84% of respondents said that it would be beneficial for their charity to have a better understanding of strategic financial governance matters.

This could be linked to the fact that only 16% of respondents always assessed board competency for charity finance skills, with 28% assessing skills sometimes and 30% occasionally. This was compounded by the fact that 47% of respondents never or only occasionally assessed the effectiveness of their financial governance.

Other interesting findings were:

• Only 22% of charities indicated that they always made available charity finance training for trustees that needed it.
• Less than one in five respondents considered that they had the complete skills and knowledge required to fulfil their responsibilities.
• 49% of respondents said that they had used the latest Charity Commission guidance on charity finance.

Commenting on the findings of this report, Sudhir Singh, Partner and Head of Not for Profit, MHA MacIntyre Hudson said: “Strong financial governance is a major contributor to successful and effective charities, so whilst we don’t want to be overly critical of the good intentions of most trustees and charities, it is difficult to escape the very clear conclusion that many people just need to do better.

Andrew O’Brien, Director of Policy and Engagement, Charity Finance Group said: “This report is an important wake up call for the charity trustees and executive teams. Every charity should be regularly assessing its skills and understanding at board level to ensure that it has the ability to govern itself financially. There are lots of resources out there, but charities need to make a commitment to using them Complacency is simply not an option.”

(Source: MHA MacIntyre Hudson)

Among the thousands of individuals, charities and businesses’ making donations towards hurricane Harvey relief, and in the wake of another pending hurricane in the Caribbean, KPMG has teamed with brand ambassador Stacy Lewis this weekend to make a combined donation of $390,000 to support Hurricane Harvey relief efforts. This follows Lewis' win at the Cambia Portland Classic where she donated 100% of her tournament winnings.

Stacy Lewis was raised and currently resides in the Houston, TX area and Lewis' husband, Gerrod Chadwell, is Head Golf Coach for the University of Houston Women's Golf Team. Stacy dedicated her play on this week's LPGA Tour tournament to relief efforts, which KPMG matched. Asked what the week has taught her, Stacy reflected: "Being more appreciative. It definitely puts things into perspective."

This win marks Stacy's 12th on the LPGA Tour and first victory since 2014. In addition to KPMG's donation to relief efforts, each time a KPMG Brand Ambassador wins on Tour, KPMG makes a donation of books and refurbishes a local library as part of KPMG's Family for Literacy (KFFL) initiative. To honor this special win by Stacy, KPMG will double the typical donation with 10,000 new books to be provided to children and local KPMG volunteers will refurbish two libraries in the Houston area.

KPMG US Chairman and CEO Lynne Doughtie said: "In times like this, coming together to support one another matters the most. We are touched by the generosity displayed by Stacy, and so many across the country, to help those impacted by Hurricane Harvey."

In addition, KPMG has pledged to match partner and employee contributions up to $400,000 to the KPMG Disaster Relief Fund to provide Hurricane Harvey relief.

(Source: KPMG LLP)