Tuesday, October 21, 2014

Repair regulations considerations

Editor’s note: Last October, the IRS issued its final regulations regarding the rules for deduction versus capitalization of tangible property. These final regulations clarify the previous regulations under IRC Sections 162 (a) and 263 (a) and affect all taxpayers who acquire, produce or improve tangible property. The following is a reprint of an article that appeared on BKD’s website in March.
By Robert Conner, national tax assistant director, BKD
The IRS recently issued final “repair” regulations clarifying when tangible property expenditures may be deducted instead of capitalized for tax purposes. For tax years beginning on or after January 1, 2014, exempt organizations with unrelated business income (UBI) or taxable subsidiaries should look to these new rules to determine the proper tax treatment of expenditures related to tangible property acquisitions, improvements, repair and maintenance activities. 
One of the provisions most favorable to taxpayers in the repair regulations is the new de minimis safe harbor, which allows companies to deduct tangible property expenditures falling below their financial statement capitalization policy threshold. To qualify for the safe harbor election, an organization must have an accounting policy in place on the first day of the applicable tax year that calls for expensing amounts paid for property less than a specified amount. If such requirements are satisfied, the otherwise capital acquisition cost of tangible property subject to the policy may be currently expensed for tax purposes.
For taxpayers with applicable financial statements—generally an audited financial statement—the policy can be as high as $5,000 per invoice or item and must be in writing as of the beginning of the tax year. For all other taxpayers, the amount is $500 or less per invoice or item, and the policy is not required to be in writing.
Exempt organizations with UBI or taxable subsidiaries should review applicable expensing policies in light of the new de minimis safe harbor to determine if the expensing thresholds are appropriate. If your organization does not currently have a written capitalization policy, consider adopting a policy prior to the start of your next fiscal year. The regulations do not require board-level approval to adopt or change a written capitalization policy. However, organizations considering a change should consult their tax advisor and external auditor (if applicable) to reconcile any competing tax and nontax considerations.
To learn more about how the repair regulations may apply to your organization, or for help formalizing a capitalization policy that makes sense for your organization, contact your BKD advisor.

Robert Conner serves as a national tax assistant director BKD’s national office in Springfield, MO.  He performs tax consultations and quality control reviews with the firm’s offices. He has worked as a tax advisor since 2005, graduating from Illinois State University 

Tuesday, October 14, 2014

So you want a lawyer on your board …

By Zac S. Kester, executive director, Charitable Allies
Good nonprofit organizations seek out community leaders from diverse backgrounds to serve on their boards of directors. As they recruit directors, they know that having the right people with the right skills helps the organization achieve its strategic goals.
Nonprofits are tapping lawyers not only for their legal expertise, but also for their personal networks and reputation. With increased regulatory focus and challenges in nonprofit governance, business transactions and donations have taken on a new complexity that can benefit from a legal perspective.
Having a lawyer on board can be good for both sides: nonprofits receive the benefit of legal counsel, while lawyers get to support a cause they are likely passionate about, and connects them to other community leaders outside the legal circle. This opportunity is not lost on new lawyers who are encouraged by their firms to invest time volunteering in the community.
One nonprofit recently avoided a massive wage claim liability when it laid off several employees. The lawyer on board was able to help ensure banked vacation days were paid. Otherwise, the nonprofit and its board and officers could have faced triple damages and attorney fees awards for the nonpayment of wages.
Three primary benefits of bringing a lawyer on a nonprofit board:
·       Receive general legal knowledge. By virtue of their training, lawyers are analytical thinkers. They are steeped in the basics of law, including contracts, lawsuits, liability and liability insurance, as well as issues concerning employment, immigration, health care and government regulations. Lawyers on board draw from this knowledge while serving and can help make business and programming decisions.

·       Have help making the tough decision(s). Because of their training and experience, many lawyers can identify problems early. They can also help problem solve and mediate myriad interests among the board and stakeholders of the nonprofit.

§  Make connections. Most successful lawyers have many community connections. These may include grant-making organizations, community activists, politicians, business leaders, school leaders, accountants and other lawyers. Connecting the organization and its staff with some of these contacts is par for the course of serving on a board. Nonprofits can leverage the lawyer’s relationships to build a bigger network and increase their donor base. 

Despite these advantages, there are three cautions to consider:
·       Ensure subject-matter knowledge. Lawyers are required to be “competent” in a field or subject of law before providing legal services in that field. Out of a desire to help, many lawyers may attempt to answer questions outside of their competency or knowledge. Today’s nonprofits require professional advice specific to the nonprofit sector and the board members should be prepared to acknowledge this and seek outside and independent legal counsel where appropriate.

§  Properly manage conflicts. In addition to the typical conflicts that arise in the nonprofit sector (i.e. private benefit), Rules of Professional Conduct control many situations that happen when a lawyer’s representation of one client adversely affects his representation of another or his personal interests. For example, the lawyer may be asked to formulate an opinion on the appropriateness of a board decision in which the lawyer participated, making the lawyer a defendant or key witness and therefore ineligible to make such an opinion.

§  Protect the attorney-client privilege. It can be difficult to delineate exactly when the attorney-client relationship begins, especially when dealing with a lawyer on board. Additionally, if the lawyer does not make it clear that he or she is wearing only the “lawyer” hat when giving legal advice in the boardroom, then conversations with that lawyer-board member may not be privileged.

Having a lawyer on board can come with great benefits, both to the lawyer and the organization, and also comes with some risks to both. But when the risks are properly managed, the lawyer’s service can be positive and fruitful.

Attorney Zac Kester provides generalist and strategic nonprofit legal and consulting services. He holds a Master of Law, a post-law school advanced degree, in which he studied the unique needs of tax-exempt nonprofit organizations. His legal and consulting career has focused on nonprofit organizations. Contact Zac Kester, executive director, at 317-429-1649 or zkester@charitableallies.org with any questions.

Tips for CEO transitions

By Bryan Orander, president, Charitable Advisors

Over the past five years, Charitable Advisors has guided and advised more than 25 nonprofit organizations’ boards as they replaced staff leaders. Nearly half of these searches resulted from retirements of long-term leaders or founders.
While hiring an organization’s executive leader to fill a vacancy caused by retirement or any reason is one of a board’s most important responsibilities, over time in this support role, a number of lessons have become clear, as we provided support.
 Boards must step up: Organizations that have made successful transitions began early. Several years before a leader may retire, a board executive team should identify the board leaders as the organization moves through the transition and searches for a replacement.
A board must be prepared to suddenly be assertive even if its past engagement and participation were low because it had developed a level of trust with a capable long-term leader.

Boards should engage the outgoing leader: While I would never suggest that the retiring executive be a part of the search committee, he or she should absolutely play a part in planning for the transition and offering insight through the process. Often, he or she is more anxious about making the transition successful than anyone else and clearly defining his or her role during the transition is important. 

Boards must understand emotion is part of the equation: Many people have strong emotional responses to the retirement of a long-term leader and friend that need to be acknowledged. Staff, in particular, should not be ignored in the process and providing a channel to listen to and address their concerns is key.   

Boards must communicate: In the case of a retirement, people on the outside are not usually surprised about the announcement, but they do expect their relationship with the organization to be taken into account. Most of the time, at the same time staff is notified, funders and major donors should be contacted directly and quietly. This should be followed by an announcement to all donors/volunteers before a public announcement.
While certain topics such as candidate names are obviously confidential, it is helpful to be as open as possible with stakeholders about the progress of the search process, and include it in monthly staff newsletters and donor updates.

If the shoes fit

By Lynn Sygiel, editor, Charitable Advisors 

Familiarity breeds contempt. It may be good advice in some relationships, but maybe not if you are a new boss.

When Eric Strickland was hired as the new executive director of Riley Area Development Corporation a little more than a year ago to replace a longtime leader, he didn’t come in cold. As a former board member, he was familiar with the operation. He knew the staff. He knew what to expect. It was a comfortable fit.

“When I came in to step into the shoes, they were really the right size. I knew a lot about the history, how that leader led and understood it,” said Strickland, who heads the 37-year-old nonprofit organization that aims to improve housing and development opportunities in neighborhoods near downtown. 
With predictions in 2007 that a demographic shift might see 50 to 75 percent of current nonprofit leaders moving on, a number of new leaders will likely be entering the scene, often replacing established directors and facing a new set of technological and cultural challenges.
Strickland had a built-in advantage, perhaps, in Riley’s transition to new leadership, but he didn’t rest on that advantage or take it for granted.
Early on, he and the former leader spent time reviewing two- to three-year projects’ directions and tying up ends.
He also believes it’s good practice for a nonprofit’s board to provide a road map for the first 100 days, in addition to the new leader having a plan.
“You should have a 100-day plan by staff and board that just really interlocks with yours. An organization that’s running for a long time has some board-driven expectations.”
Barbara Stuckwisch has been at the helm of Safe Sitter for less than a year. She believes replacing a longtime leader adds a layer of complexity. She also cut her teeth on the job by working side-by-side with the departing leader.
“The two of us worked together through my orientation period for those two weeks. That was a great opportunity that not many new executive directors get,” said Stuckwisch, a lawyer, who came to Safe Sitter last December.
The same was true for Susan G. Komen’s Natalie Sutton.  Before she was hired, she spent time with Komen’s outgoing leader where she learned the nitty-gritty of the organization. When she walked into her final interview for the job, she had her questions answered. Once on the job, she also spent a transition period with her predecessor.
Children’s Bureau CEO and president, Tina Cloer, had a working relationship with the agency. When her previous employer, Adult and Child Mental Health Center, transitioned a program to the Children’s Bureau over a decade ago, she was the negotiator.
“I spent several months working with Ron Carpenter and Janice Klein to work towards transitioning that program over and do due diligence and all those things,” she said. “I was fortunate to have some understanding of the agency, although it was an outside look. “
All agreed, road map or not, a new director needs clear direction and clear expectations, and also must quickly articulate a vision so that employees have a reason to follow. Additionally, an organization’s strategic plan is an important tool that clarifies a nonprofit’s direction.
Having a plan, though, is not enough. Strickland says the key is to use it. “If you are a new leader and you’re taking a board resolution for approval, starting a project or starting an initiative, reference that strategic plan. It sets a culture.”
Before Cloer took the reins, she and a key staff member co-authored a proposal that would allow them to craft a strategic plan. Successful in securing a grant, she was able to hire a national consultant, and in her second month conduct a full portfolio analysis of all 92 cost centers, a process that included board and staff.

“I think it definitely would have taken me a long time to figure everything out, put it all together. We were able to do the portfolio analysis right at the beginning of my time here,” Cloer said. She also offered a math workshop in her first three weeks, a course that continues for new employees. “I came from Mental Health Center, everything we did was fee for service. Social workers aren’t wired that way.”  Cloer trained as a social worker with an MBA sees the need for both.

Organizations cannot be stagnant, said Stuckwisch, they have to change because the world around is changing. Spending time learning about the organization and its history, though, gave her the foundation to lay out Safe Sitter’s future programming.
And change is something Cloer understands. While the Children’s Bureau has been around for 163 years, during her predecessor’s tenure, it had become a statewide organization, inheriting programs along the way. What she found when she arrived nearly two years ago was that it hadn’t taken the time to embrace its new identity.

“I don’t think the agency fully dealt with the growth and being statewide and they needed to be pulled together. Not that every office needed to be the same, because they’re not the same, they reflect their communities. But they needed an identity, as Children’s Bureau, as a whole and to know what that meant -- that we were going to share resources, we were going to share successes and joys,” said Cloer.

Both Sutton and Cloer addressed efficiency issues early in their tenures. At Komen, Sutton reestablished some forgotten processes and Cloer found that she had to invest heavily in technology in her first six months. She bought laptops so her staff could write their reports on site, which is best practice.
Strickland, too, knew that Riley’s legacy had had significant growth, and he had to adjust to that growth.
“You get used to doing things at the early scale, maybe 10 years ago, when let’s say you owned 30 apartments, and you know everybody who lives there, and now you have 300.
“We had to learn how to work beyond the initial 35 years,” said Strickland. “As a nonprofit, we’ve focused on an area, and we were very successful with Mass Ave. How do we use that? What is left to do here? One of our successes was we created a lot of small business opportunities, but those small businesses really have more potential. So how do we help them grow beyond this boundary.”
For all, the biggest challenge was to recognize that building and managing relationships needed to be a priority.
“Relationship building helps translate your dreams and the service you want to do for your community into action,” said Cloer. “You know it’s so funny ‘cause I was so nervous about addressing the whole development piece of things because the language was so foreign to me. But I know how to do relationships and so it’s come to me way more naturally than I thought it would be. It’s actually fun because it’s fun to see people in the for-profit world get excited about what we do.”

Tuesday, October 7, 2014

Following a Founder or Long-Timer Requires a Hard Head

This article is reprinted with permission from Blue Avocado, a practical and readable online magazine for nonprofits.  Subscribe free by contacting the Blue Avocado editor or visiting, www.blueavocado.org. The original article can be found here.

When Blue Avocado asked for potential interviewees who had followed a founder or a long-time executive, we didn't expect 58 people to respond. We interviewed 18 executive directors who followed founders, and another 10 who followed long-time execs. Last issue's First Person Nonprofit and this article are also ramp-ups to the national survey of nonprofit leaders in similar positions. CompassPoint Nonprofit Services has conducted a study of such executives among grantees of the Packard Foundation, with the data so interesting that we are pleased to partner with them on the expansion of the study to a national audience. Nonprofit executives: please! Click here to take the survey!
If founding a nonprofit takes strong self-confidence and a soaring vision, following such a leader takes hard-headed management skills and just plain hard work, according to 28 "followers" -- let's call them "successors" because they succeeded long-timers. They work at organizations that range from 2 to 300 staff.
Here's a story that combines several themes: "I replaced the founder of 35 years. Plus, she was my mother! I'll have been in this job for 10 years come July, and nine of them have been a financial struggle. I'd be putting on this warrior clothing to go out and battle and find money and keep this vision solid. And then my mother would come in and say you're doing it all wrong. You're compromising all the things I worked for, for what, a dollar?"

Strong programs but weak management
Almost all successors came into organizations they saw as having strong programming but weak management. Many of struggled with personnel problems as their predecessors had idiosyncratic salary schedules and often had made special arrangements for individuals:
"I'm following a founder -- it's been 7 months now -- who was a charismatic and wonderful person who left the organization in terrible shape. There was not one part of the organization that didn't need attention."
"Some people had been there 15 or 20 years and never had an evaluation. Some people were paid way over what they should been paid and others weren't getting enough; it was due to favoritism."
"I did fire quite a few people. I had to take them to a coffee shop to do it because my office didn't have a door. I realized I had subconsciously established a pattern of which coffee shop I took people to: one to talk and one to fire them in."
In general, successors found that they were professionalizing organizations that had understandably developed around a strong founder:
"We started certain classes at 6:30 at night. I said why? I was told we start them at that time because the husband of the founder was done with his dinner by then."
"The founder was a volunteer ED. I'm the first full time paid executive director. Definitely changed the budget."
On the other hand:
"One advantage you have at the beginning is that there's some appetite for risk-taking in a stable, staid organization. You can come in with a white hat for a brief period and say I know we've always done it this way, but  . . . ."

Financial problems
In particular, many organizations were in financial straits. In some cases a founder or long-time executive was having less and less success in fundraising and left bogged down in helplessness and failure. In other cases financial difficulties led to his or her being fired. And in too many cases, there was a looming problem or a house of cards teetering and ready to fall.
"When I took over 4 years ago we had close to $50,000 in liabilities. Grants were way down. Hadn't applied for grants. I guess it was because she was ill and didn't ask for help."
"We were 90% funded by state contracts. Four months after I started our first budget cuts from the state came and we lost 250K and then another 500K."
"In the two weeks before the final offer, the board chair said our biggest funder -- 40% of the funding stream -- was leaving. But by then I was falling in love with the organization and the clients they served. Later the board confessed that if they hadn't found the right leader they were ready to shut down the nonprofit."
"He could see the crash was coming so he got out before he had to deal with the consequences of that. It was 'borrow from Peter to pay Paul.'"

A board built for a different regime
Founders often seek board members who are friends and will stay out of the way. Over time, most long-time executives build boards that support and complement them. And successful executives -- whether founders or not -- build confidence in their boards who then step back.
Despite the fear that a post-founder board will micromanage, instead, successors found themselves disappointed in the level of engagement or even interest from the board:
"The board was acting as an advisory board rubber stamping staff decisions."
"They had so much trust and faith in the former [executive], they had become overly deferential. They did not hold him accountable."
"I expected the board to have higher expectations. They were just ticking along for 24 years."
Over time, successors either found ways to work with the board or actively replaced them. They try hard to win the approval of the board. We appreciated this comment:
"You find yourself worrying more about what board needs than what the organization needs."

Founders are different from non-founders, even if the non-founder has been there for decades
"Founders are giving up their babies. Non-founders put on their coats and leave." So says Tim Wolfred, long-time head of CompassPoint's executive transitions program, and our interviews bore that out:
"My [founder] predecessor came to staff meetings for six months. The first one she just came in and sat down. The second one I thought: maybe she needs some time. But eventually I had to take her to lunch and say this is really confusing for staff and I 'd like you to stop. She was very, very hurt."
"At first he [a non-founder] gave me advice and I just said well, I'm going to do something else. Now he barbecues for the staff barbecue; that's all he does."
"The founder always described this organization as 'my baby.' She knew that I have two adopted children and it gave her comfort that I understood what she was talking about in giving her baby to me."

Managing the predecessor
Although departing executives often feel that they are being helpful by staying involved, their successors struggle to manage them while trying to honor their past:
"They were coming off a big campaign and the ED said she didn't want to go back to doing regular ED work. So she stayed with a different title about strategic initiatives and stayed reporting to the board. The board did this to keep her community connections like the Chamber, but effectively that meant I couldn't step into any of those connections."
"My predecessor was showing up every other day to use our copy machine. At the beginning everyone was excited to see him because they really like him. But one manager told him that she had work to do and couldn't talk. It was hard."
"When I shut down a legacy program I was really grateful that my predecessor did not fan the flames. I reached out to him advance. It was very emotional for both staff and volunteers and donors. It was really helpful that he did not step in."
"My predecessor is now one of my funders -- she moved to a foundation that's been a long-time funder. So I now have regular phone calls and she's wearing two hats -- as founder and as funder. We got off to a rocky start . . . for 2.5 hours [in our first conversation] she told me I wasn't the right choice for the position. I've been working my way out of that deficit since then."
"Every two to three months I reach out for coffee with the former executive. I give her an update. She feels that I'm respecting the relationship and that I want to learn from her."

Advice for yourself when you were taking the job?
We asked interviewees to go back in time and give advice to themselves at the moment they were deciding whether to take their current jobs:
"I should have asked: how engaged was the board? They seemed extremely engaged during the interviews. But it turned out they had all approved the budget without knowing what was in it."
"It wouldn't have stopped me from taking the job, but I would have asked directly: do you have outcomes and performance indicators? Is the board engaged in fund development? I made assumptions and didn't questions."
"In my current position [the second time following a founder] I asked to be reviewed after the first 90 days. A check-in, I can see what the demands of the job are, a good time for me to set out my goals and discuss them."
"I should have asked if there are any employees who aren't performing and are being protected by the ED who probably have to be fired."
"The board said we are in great financial health. Why did I not dig deeper?"
"I'm in the 12th percentile for pay. I would have asked them to pay me at the 50th percentile."

Closing comments
Successors work hard, and many of them stay for many years. They typically focus on management and infrastructure, more rarely on programmatic adaptation. They also recognize that every organization has issues to work on:
"A lot of this stuff isn't founder's stuff. It's the cyclical nature of how an organization makes progress, gets stuck, makes progress again and gets stuck again. Rather than focusing on what the founder did or didn't do, you have to think about where in this cycle the organization is now."

Our thanks to Jenn Brandon, John Britz, Marie Cubillas, Jeffrey Dollinger, Cassandra Flipper, Valerie Golik, Peter Hainley, Jenny Hansell, Rutheanne Hill, Chris Hoene, Susan Hughes, Emily Hopkins, Susan Joy, Marie Lipetz, Camille Llanes-Fontanilla, Nishant Mehta, Dotty Metcalf, Sarah Milligan-Toffler, Chandra Montgomery Nicol, Tess Reynolds, Pam Rodriguez, L Carol Scott, Sue Sherbrook, Trudy Soucoup, Anne Viricel, MK Wegman, Barbara Wertheimer, Cheryl Zoll, and Cathy of Oregon. You made so many insightful and compelling comments that we weren't able to include here. Your thoughts will be part of the larger national study on this issue as well.

Budget preparation: a time for problem solving

By VonLehman staff

Many nonprofit managers regard budgeting as a necessary evil that must be done to satisfy the board of directors and funders.

In addition to the chore of gathering financial data, there is often an uneasy feeling triggered by forecasting the unknown. What will happen if you don’t achieve the needed revenue figures?

But there is another way to look at the process: try to consider budgeting as an informative process that will help you reach goals, solve problems before they occur and make important decisions.

Learn from the past

Before looking to the future, gather the last three years of profit and loss statements, ideally with budget comparisons. The goal is to discover trends, patterns and problem areas, both in revenue and expense items. Examine each line item. Has it gone up or down over the three years? Of course, some expense categories will likely show a steady increase as prices rise. Those expenses can be easily budgeted with a percentage uptick.

What you’re looking for are the trends and anomalies. For example, are revenues from a certain event declining steadily? Perhaps it’s time to either revamp the fundraiser or stop holding it.

Do payrolls end up higher than budgeted because you’re overly optimistic about workloads and staff capacity? Note that.

An in-depth review will both reveal circumstances affecting your organization and blind-spot areas in your budget process.

Set your course

If there is one step many organizations can benefit from, it’s tying the budgeting process more closely to strategic and action plans.

Many just look at the budget as a whole, a big pot that will somehow cover every department or project, regardless of performance. Ideally, staff should meet before the new fiscal year begins and talk about program and project goals. It’s also important for each staff person to have an understanding of the revenues and costs associated with their areas of responsibility.

Take for example a meal program for children that costs $250 annually per child. The original cost was determined by the accountant, but should be reviewed periodically to ensure that it is accurate. While discussing goals for the meal program, perhaps 100 more needy children have been identified. This will cost the organization an additional $25,000. The manager may say additional children can be handled without adding staff, but enthusiastic growth without considering staff workload is a common pitfall.

Next should come an examination of the revenue sources for the program to determine shortfall or excess. If additional funds are needed, staff should be engaged in ideas on how to make that happen, as well as the likelihood of reaching the goal.

The end result of the planning session should be concrete performance goals and an understanding of the associated costs and revenue needs for each program, project and department.
Staff members who actively participate in setting and managing the budgets under their control do a better job of controlling expenditures. In fact, their input and commitment to reducing the cost of overhead expenses can also help the organization run leaner and more efficiently.

One caveat: Don’t be a paperclip manager. These are managers who are uncomfortable with a hard look at the big items so tell their staff to watch consumption of office supplies in response to financial challenges. Unless you run a printing press, paper and ink costs won’t sink a healthy ship or save a sinking one.

Fine-tune your expenses and plan for the unexpected

The budgeting process is an ideal time to review some of your ongoing costs such as insurance, utility use and other regular vendors. Over time, pricing increases can sneak up on you. This is also an opportunity to review business-as-usual habits, like buying boxes of business cards for employees who rarely meet the public. Marketing materials, too, are frequently expensive. Taking a hard look at what is most effective will help you decide whether or not to print another 5,000 brochures.

In tandem with whittling away discretionary expenses, be sure to budget for a capital reserve fund and emergency funds. What happens if the furnace dies in the middle of winter, for example? It’s no fun scrambling for dollars in an emergency situation.

Create your budget

Now that you’ve set goals, gathered data and gotten new quotes, you’re ready to prepare the budget.

Start with the basis of what you absolutely know – expenses and revenues.
Through the goal-setting process, you identified revenue dollars needed to cover program goals. Now you need to decide where those gap monies will come from.

This is also a good time to discuss if the organization will hold another appeal, create an event or seek grant funding?
It’s a rare nonprofit that has all revenue sources nailed down before the fiscal year starts. Knowing how, when and where you will raise funding is a great start.

Once the budget is approved, keep a close eye on expenditures and cash flow every month so course corrections can be made. Staging growth by matching revenues and associated expenses will help maintain the organization’s financial health.