For decades, non-profit organizations have been looking for ways to increase revenue in order to better achieve their charitable purpose. One way they have found to do this is by entering into a joint venture arrangement with a for-profit entity. The joint venture arrangement provides details on the creation of a partnership of limited liability company that is owned by a non-profit organization and a for-profit entity. Some reasons for forming a joint venture agreement are to raise capital or take advantage of tax credits such as federal Low-Income Housing Tax Credits. An example of a joint venture agreement would be a zoo contracting with a gift shop operator to sell items unrelated to the zoo’s exempt purpose. The revenue earned by the non-profit organization from the joint venture could be tax exempt if the joint venture arrangement follows these guidelines set in Revenue Ruling 98-15:
1. The joint venture member's participation must further a charitable purpose.
2. The joint venture agreement explicitly provides for the furtherance of the charitable purpose and only incidentally for the benefit of the for-profit owners.
According to various court cases, the proper question is simply who has effective control, regardless of whether it is based on a majority of the governing body or on powers granted in the partnership agreement. Before entering into a joint venture (or general partnership or limited liability company) arrangement with taxable partners, please consult a tax professional to help determine if the joint venture satisfies the requirements of Revenue Ruling 98-15. The non-profit partner could lose its exemption if a private party can control or use the non-profit's activities or assets for the benefit of the private party, unless the benefit is incidental to the accomplishment of exempt purposes. More information on this topic can be found on the Sikich Blog.
A study released by the Urban Institute, conducted in partnership with the National Council of Nonprofits, examined the government contract and grant experience of nonprofits in 2012 compared to 2009. The release included an expert panel discussion. Article summarized from www.nonprofitquarterly.org.
Though there is certainly a contrast between the state payment environments of Illinois and Indiana, the study both confirms and identifies important issues for nonprofits who contract with the government at all levels. This is an important read for both board and staff leaders.
- The average among of money owed by state government to nonprofits has declined by 17.7 percent from 2009 to 2012.
- Human service nonprofits report that grant and contract payments typically do not cover the full costs of services.
- Roughly two-thirds of nonprofits surveyed found problems with differing government agency applications, reporting formats, outcome requirements, and financial or budget categories.
- More than half of nonprofits reported problems with differing definitions of services and target populations.
- Nonprofits report significant limitations placed on administrative expense recovery.
- Government grants and contracts increasingly require nonprofits to front the costs of service delivery.
- A troubling issue is governmental agencies requiring nonprofits to come to the table with matching funds – a government-mandated form of cost sharing.
- The nonprofits best able to weather these grant and contract challenges and obstacles are the larger nonprofits.
- Government grant and contract procedures are increasingly "rigged" to favor for-profits who can meet working capital and other requirements and that for-profits are not ask to do things such as cost sharing.
Beyond the holiday festivities that will take place during the month of December, many of our clients view December as the time to gear up for the close of another fiscal year. Other nonprofit clients are hitting their fiscal year’s halfway mark and are now ready for a mid-year checkup.
Organizations may spend hours preparing budget reports and plans at the start of their fiscal year. They may not maintain the same level of effort in managing and evaluating that budget throughout the year. Various factors may have altered how they would prepare their budget today versus how they prepared it six-to-seven months ago. Budgets should be used as operating tools and updated as factors change.
Finance Committees should be evaluating cash flows and anticipated spending for the second half of the year to understand shortcomings and how to invest additional cash that may not have been in the original budget. (I know many of you are thinking, “that’s a problem I’d love to have.”) Are there any expenditures that have been incurred that weren’t expected? Many organizations that own a building or utilize equipment for day-to-day operations face this at least once a year.
How has accounting personnel changed this year and are controls still adequate to prevent and detect instances of fraud? Oftentimes a change has taken place and Management does not adjust vendor contacts or authorized signers in a timely manner. It’s prudent to evaluate any documented internal control procedures to ensure they are still accurate.
It’s always good to maintain open dialogue with the Organization’s bankers, accountants, investments advisors, and any significant vendors. Meeting annually with these providers helps ensure you are maximizing the benefit of the respective relationships. The ever-changing economy makes investment advisors very useful in ensuring that your organization is getting the best possible return.
Lastly, what goals did the Organization establish that may have fallen by the wayside? We all know the next six months will speed by in much the same way. Take a high level view of the Organization and ask the question “how is our year really going?” Utilizing committee meetings over the next couple months to answer this question will help the Organization zero-in on those important elements that will help make 2014 a great year.
For further assistance in evaluating the progress of your Organization and assessing Board Development needs, please contact Natalie Hopkins, Audit Manager for Alerding CPA Group, at 317-569-4181 ext. 244 or email@example.com. Check out our website to view our firm’s commitment to nonprofit organizations and our community.