Wednesday, June 19, 2013

Reporting Program Service Expenses on the 990

Just as a follow up to yesterday's post on the Oregon spendig requirement, I took a quick look again at the Form 990 (go to page 10) and its instructions regarding the allocation of program service expenses (go to pages 41 through 43).   My personal favorite is the instruction on how to allocate indirect costs, which requires the charity to list everything as an administrative cost in column C (that being not a program service expense) and then to add a separate, self-created line under "Other" in which the charity is instructed to place a negative number in column C in order to allocate indirect costs to program service in B or to fundraising expenses in D.   So that's clear as mud -- no chance of error there.  

Also, take a look at the list of administrative expenses to be reported in column C and think about a smallish charity - one that does a full Form 990 but is still relatively small in terms of revenue and expense - for example, a small medical clinic.  The list in the instructions includes the CEO and staff by default (unless directly involved in program service oversight) as well as "costs of board of directors' meetings; committee meetings, and staff meetings (unless they involve specific program services or fundraising activities); general legal services; accounting (including patient accounting and billing); general liability insurance; office management; auditing, human resources, and other centralized services; preparation, publication, and distribution of an annual report; and management of investments."  I wouldn't be surprised if such a charity had issues, or at least is forced into taking a fairly aggressive position on indirect cost allocations.

When we think about fradulent charities, I don't think most of us think of these types of expenses.

Just a thought.  EWW

June 19, 2013 in Federal – Executive, In the News, State – Executive, State – Legislative | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 18, 2013

Oregon Now Requires 30% Program Spending

Thanks to Lloyd Mayer for pointing me to new legislation in Oregon that will disqualify state charitable contributions to organizations that spend less than 30% of their functional expenses on charitable programs.

H.B. 2060 was signed into law by Governor Kitzhaber on June 4, 2013 and goes into effect 91 days after the 2013 regular session of the Oregon Legislative Assembly ends. Specifically, the Oregon Attorney General can disqualify an organization from receiving state income tax deductible contributions if

the organization has failed to expend at least 30 percent of the organization's total annual functional expenses on program services when those expenses are averaged over the most recent three fiscal years for which the Attorney General has reports containing expense information. The calculation of program services expenses and total functional expenses shall be based on the amounts of program services expenses and total functional expenses identified by the organization in the organization's Internal Revenue Service Form 990 return or other Internal Revenue Service return required to be filed as part of the organization's report to the Attorney General.

Oregon H.B. 2060, Section 2(1) (emphasis added).  There is an appeal procedure that would allow the charity to show that payments were made to affiliates, were being accumulated for capital campaigns, or  "such other mitigating circumstances as may be identified by the Attorney General by rule."  Section 2(2)(c).  A disqualified charity is required to notify its donors that donations to it are not deductible.  Interestingly, a disqualification order may not be issued to "an organization that receives less than 50 percent of the organization's total annual revenues from contributions or grants identified in accordance with Internal Revenue Service Form 990 or an equivalent form" (fee for service charities, rejoice!)  Section 2(4)(g).  The legislation can be found here.

There are a number of issues that first came to mind when I read this legislation.  

  • The first, of course, is the fallacy that a certain level of  "program service" expenditures  is an appropriate indicator of a charity's effectiveness.  Even if it were an appropriate measure, why set it at 30%?  Why exempt fee-for-service charities?  Why exempt small charities?  (On this topic, see GuideStar, BBB Wise Giving Alliance, and Charity Navigator on the “Overhead Myth”).
  • At least in the short term, this legislation punishes the wrong party - a charity's donors - by disallowing the state income tax charitable deduction.   It does appear to also take away the ability of the charity to be tax exempt and, of course, in the long term, the charity's donor base could essentially disappear. 
  • Along those same lines, I am concerned that you could have a charity that is disqualified due to a temporary blip in financials and is then required to send a donor notice.  Even if that charity is subsequently rehabilitated, it is permanently damaged.  The state has now devalued one of the charity's most valuable assets: its donor list.   The Oregon Attorney General's press release talks about targetting bogus charities - I'm not convinced initially that its scope will be so limited.
  • Finally, as is pointed out in this commentary by Nonprofit Quarterly, the error rate on preparing the Form 990 is ridiculously high.  I am somewhat troubled by the assertion by the Nonprofit Association of Oregon that organizations that make a reasonable attempt to allocate expenses won't get caught in this trap.  In my experience, even sophisticated clients with paid accountants regularly misstate program service expenditures.  (I note that the Nonprofit Association takes the position that only full Form 990 filers (not N or EZ filers) would be affected by the legislation.)

Thoughts, especially from our Oregon friends?  EWW        

 

 

June 18, 2013 in Current Affairs, In the News, State – Executive, State – Legislative | Permalink | Comments (0) | TrackBack (0)