Newsletter by Hawkins Ash CPAs
In this edition
November 2019

Net Operating Losses and Unrelated Business Taxable Income

Beneficial Interest in a Community Foundation: How do I Record This?

Client Feature and Executive Director Q&A: Howe Community Resource Center

Employee Feature: Emily McGuire, CPA
Net Operating Losses and Unrelated Business Taxable Income
The Tax Cuts and Jobs Act of 2017 (TCJA) that was signed into law on December 22, 2017, has some tax implications that impact nonprofit organizations. In this article we specifically address the Net Operating Loss (NOL) rules and how they apply to Unrelated Business Taxable Income (UBTI) for nonprofit organizations that file Form 990-T. These rules are generally effective January 1, 2018.

Under the pre-TCJA tax law, a non-profit could net together its various business activities that produced UBTI in determining the amount subject to income tax. Under the TCJA, nonprofits must calculate UBTI for each unrelated trade or business separately, with the total UBTI equaling the sum of each activity’s UBTI. Any activity that produces a loss cannot be used in reducing the current year total UBTI; instead that specific activity will have an NOL that it can carry forward to offset future UBTI for that specific activity only. The NOL cannot be used to offset UBTI from other unrelated business activities. 

Also as part of the TCJA, NOLs generated after 2017 can only be carried forward; they cannot be carried back to offset prior tax. In addition, NOLs generated after 2017 can only be used to the extent of 80% of taxable income computed without regard to the NOL. Thus you may not be able reduce your current UBTI to zero by using a prior year NOL. For example, unrelated business Activity A has a 2018 loss of $10,000. This NOL is carried forward to 2019. In 2019, Activity A has profit before considering the 2018 NOL, of $8,000. The NOL that can be used in 2019 is $6,400 ($8,000 profit before NOL times 80%). Resulting UBTI for Activity A in 2019 is $1,600 and the 2018 NOL that remains is $3,600 ($10,000 less $6,400) which can be carried forward to 2020. Now if we change the facts for 2019 and the profit is $13,000 before NOL usage, 80% equals $10,400; now we can use the entire $10,000 NOL from 2018 to reduce 2019 UBTI to $3,000.

If your organization has a pre-2018 NOL generated from UBTI activities, that NOL can be used to offset total UBTI. It is not required to be allocated to any specific business activity. 

One final thought; as part of the TCJA, the corporate tax rate changed from a tier (bracket) tax system (0%, 15%, 25%, 34%, and 39%) to a flat 21%. This could be good news or bad news depending on your organization’s level of UBTI. You can reference IRS Publication 598 regarding Tax on Unrelated Business Income, or you can contact your local Hawkins Ash representative for help.

Author: Curt Bach, CPA
Direct: 715.748.1351
Beneficial Interest in a Community Foundation: How do I Record This?
A community foundation “Foundation” is a tax-exempt charitable organization that focuses primarily on addressing community needs and supporting local non-profit organizations in a specific geographical area through funds it maintains and administers on behalf of multiple donors. 

Over the years, there has been significant growth in the number of non-profit organizations “Organization” moving cash and other financial assets to these Foundations to establish endowment funds or other designated accounts. Benefits to the Organization would include: 1) professional investment management, 2) basic administrative services and technical assistance provided by the Foundation, 3) increased community awareness and potential giving opportunities with donors that give to the Foundation, and 4) increased donor confidence of the Organization through their affiliation with the Foundation which is a “strong stewardship of Organization assets”. 

Although the record keeping for this transaction from the Organization’s standpoint may appear simplistic (similar to any other investment transaction with a third party investment manager), there are multiple things to consider in the asset transfer to the Foundation:

  • Does the Organization retain the right to redirect the assets to another beneficiary?
  • Is the transfer revocable or repayable?
  • Has the Organization specified itself or its affiliate as the beneficiary?
  • Did the Organization, or donor, grant variance power to the Foundation?
  • Are the Organization and the Foundation financially interrelated?

The two illustrations below – taken directly from the FASB Accounting Standards Codification (the source of authoritative generally accepted accounting principles [GAAP]), provide two very common situations in a transaction between an Organization and Foundation:

Recipient Entity is Granted Variance Power

The governing board of City Botanical Society E decides to raise funds to build an endowment. The governing board signs an agreement to establish a fund at Community Foundation F. Community Foundation F and City Botanical Society E are not financially interrelated entities. City Botanical Society E solicits gifts to the fund. The campaign materials inform donors that the endowment will be owned and held by Community Foundation F. The materials explain that the gifts will be invested and that the return from their investment will be distributed to City Botanical Society E, subject to Community Foundation F’s spending policy and to Community Foundation F’s right to redirect the return to another beneficiary without the approval of the donor, City Botanical Society E, or any other party if distributions to City Botanical Society E become unnecessary, impossible, or inconsistent with the needs of the community. The donor-response card also clearly describes the Community Foundation F’s right to redirect the return of the fund. The campaign materials indicate that donors should send their contributions to Community Foundation F using a preaddressed envelope included for that purpose.

Community Foundation F would recognize the fair value of gifts received as an asset and as contribution revenue. The donors explicitly granted variance power by using a donor-response card that clearly states that gifts are subject to Community Foundation F’s unilateral power to redirect the return to another beneficiary.

City Botanical Society E is precluded from recognizing its potential rights to the assets held by Community Foundation F because the donors explicitly granted variance power. City Botanical Society E would recognize only its annual grants from Community Foundation F as contributions.

Whether a donor intended to make a contribution to Community Foundation F may not be clear if the donor responds to the campaign materials by sending a contribution and the donor-response card directly to City Botanical Society E. City Botanical Society E could resolve the ambiguity by a review of the facts and circumstances surrounding the gift, communications with the donor, or both. If it is ultimately determined that the donor intended to make a gift to the fund owned and held by Community Foundation F and to explicitly grant variance power, City Botanical Society E would be an agent responsible for transferring that gift to Community Foundation F. 

Resource Provider Names Itself as the Specified Beneficiary

Symphony Orchestra M receives a large gift of securities without donor restrictions from an individual. Because it has no investment expertise, Symphony Orchestra M transfers the securities to Community Foundation N to establish an endowment fund. The agreement between Symphony Orchestra M and Community Foundation N states that the transfer is irrevocable and the transferred assets will not be returned to Symphony Orchestra M. However, Community Foundation N will make annual distributions of the income earned on the endowment fund, subject to Community Foundation N’s spending policy. The agreement also permits Community Foundation N to substitute another beneficiary in the place of Symphony Orchestra M if Symphony Orchestra M ceases to exist or if the governing board of Community Foundation N votes that support of Symphony Orchestra M is no longer necessary or is inconsistent with the needs of the community (that is, Symphony Orchestra M explicitly grants variance power to Community Foundation N). The agreement does not permit either entity to appoint members to the other entity’s governing board or otherwise participate in the policymaking process of the other.

Community Foundation N would recognize the fair value of the transferred securities as an increase in investments and a liability to Symphony Orchestra M because Symphony Orchestra M transferred assets to the Community Foundation N and specified itself as beneficiary. The transfer is not an equity transaction because Community Foundation N and Symphony Orchestra M are not financially interrelated entities. Symphony Orchestra M is unable to influence the operating or financial decisions of Community Foundation N.

Symphony Orchestra M would recognize the fair value of the gift of securities from the individual as contribution revenue. When it transfers the securities to Community Foundation N, it would recognize the transfer as a decrease in investments and an increase in an asset; for example, a beneficial interest in assets held by Community Foundation N. Also, Symphony Orchestra M would disclose in its financial statements the identity of Community Foundation N, the terms under which Community Foundation N will distribute amounts to Symphony Orchestra M, a description of the variance power granted to Community Foundation N, and the aggregate amount reported in the statement of financial position and how that amount is described.

The above illustrations provide two common reporting examples for transactions occurring between an Organization and a Foundation; however, all situations are different. If your non-profit organization decides to pursue a relationship with a community foundation, your first call should be to your Hawkins Ash representative.

Author: Matt Neu, CPA
Direct: 920.684.2549
Client Feature and Executive Director Q&A: Howe Community Resource Center
Nearly 90 percent of children who attend Howe Community School in Green Bay, WI come from economically disadvantaged households. With the sole mission of eliminating the barriers these children and families face in achieving success in education, the Howe Community Resource Center (HCRC) was founded 23 years ago. Starting in a single classroom within the school, HCRC now has a building next to the school which supports numerous programs for children, parents, and families in the Howe community and Brown County.
Through HCRC and its generous supporters, every Howe scholar receives school supplies, winter gear, and a free bus to school no matter how close a student lives to the school. Its snack program has alleviated the need for teachers to purchase afternoon classroom snacks. And HCRC also provides mental health services to students, as well.
"We've seen many successes through these programs, such as increased school attendance with the bus program and reports of better attention and behavior in the classroom following the afternoon snack," said Amanda Johnson, Executive Director of Howe Community Resource Center. 
In addition to school-aged children, HCRC provides programming for parents and families. Its home visit program has assisted parents in achieving GEDs, college degrees, and employment. Families in this program have gained access to quality childcare, improved living standards, self-sufficiency, and parenting skills. HCRC even provides family dinner nights for families and hosts special community events like Trunk or Treat, which welcomed 700 attendees this year. 
In 2018, in addressing behavioral issues of middle school students, the Green Bay Area School District partnered with HCRC and the Brown County United Way to pilot a new community school model at Howe Community School. According to the Coalition of Community Schools, Community schools purposefully integrate academic, health, and social services; youth and community development; and community engagement. It draws in school partners with resources to improve student and adult learning, strengthen families, and promote healthy communities. 
"As the lead partner in the community school pilot, HCRC is very excited to be supporting significant gains in student achievement, both academic and nonacademic," said Johnson. 
Earlier this year, HCRC was selected to participate in the Green Bay Community Foundation's Give Big campaign, allowing the organization to raise $65,000 in a 24-hour period. Through this significant boost of funds, the organization was able to sustain its snack and other programs. HCRC was also able to bring in JusTme, a hip-hop artist and mindfulness instructor for weeklong programming that reinforced the importance of school and mindfulness key concepts: being present, being aware, using our thoughts and emotions, and embodying self-love and care. 
Amanda Johnson joined the Howe Community Resource Center team in July 2012. Prior to this, she worked as a case manager for families experiencing homelessness, as well as in crisis intervention. She received her Master’s degree in Social Work from UW-Oshkosh in 2011. We had a chance to ask Amanda a few questions about nonprofit leadership. Here’s what she had to say.

What are some things you know now that you wish you knew when you first started as a non-profit leader?
I wish I knew that it was okay to not be okay sometimes. The work is exhausting and not always joyful. I wish when I started, I would have put less pressure on myself and reached out for support. So many people offered support but I had the mantra that "I can do this on my own.” Luckily, I know this now, fully recognize it is vital to my career, and enjoy my participation in peer support groups.

What has been your biggest source of pride as executive director?
I would have to say the renewed relationship with Howe Community School and the school district. When I first became the leader, it was necessary to really start over and re-establish relationships. As a result of this, we have been able to do incredible things! 

What are your biggest accomplishments in your career as a nonprofit leader?
1. Being named the lead partner in the community schools initiative.
2. Leading my staff to become blue-ribbon accredited for Parents as Teachers
3. Being named National Parent Educator of the Year in 2017.

What are the dominant challenges that you see nonprofit organizations facing and what you do think are viable solutions?
Our families’ needs are increasing and, now more than ever, the need to meet mental health and housing needs is paramount. For any of us that work with children and youth, if we can't address the basic human needs, we can't expect children to learn successfully. We use a cartoon of a student coming into school with a backpack full of the issues they face; trauma, homelessness and hunger.... if those needs aren’t met, the child is not ready to learn. Of course, we need more funding to help in this but I think we can also collaborate more with other partners. We have incredible non-profits in the Green Bay community and we need to work together. We have started this work with the community schools, and I look forward to what the future holds! 

What aspects of nonprofit accounting do you find most challenging?
All of it! I truly appreciate Hawkins Ash, especially Brianna and Becky who are so patient with me! To be honest, when I first started, it was crazy. I had a very quick training on the job for the position so there was a lot that wasn't covered. Both of these ladies have truly saved me multiple times and calmed my anxiety. My high school math teacher would be proud of how much I have learned though!

What other executive directors or leaders do you look up to?
I truly can't say enough about Michael Schwartz at Brown County Oral Health Partnership. He really has been my rock throughout the past two years, and I am in awe of the work he is doing. He is truly a community partner and I can't say enough about him. I also have to give a shout-out to Robyn Davis, Brown County United Way President and CEO, and Kim Schanock, Coordinator of Community Partnerships and Grants with the Green Bay School District. They knew me when I first started my nonprofit journey after returning to college as an adult, and they both saw something in me that even I didn't see at the time. I will forever be grateful to them and enjoy working with them side-by-side today. 

How do you see the organization changing in the next two years, and how do you see yourself creating that change?
We are just getting started. We have done some amazing, and some may say impossible, things lately. But watch out, you haven't seen anything yet! My dream is that in 5-15 years, we will see more kids ready for school, more kids succeeding and attending school, and families truly engaged in this district and beyond. It is starting at Howe but I see a district of many community schools. I see a community that becomes known for the work and the amazing success stories to come. It isn't going to be easy but it will come. I plan on being here for a long time to support, and maybe sometimes challenge, so that ALL students are healthy, safe, and ready for academic success. A lofty goal, yes, but completely achievable. 
Employee Feature: Emily McGuire, CPA
Emily is a senior audit associate who works from our Green Bay office. She assists clients in performing reviews, compilations and audits of nonprofits, voucher school programs, and credit unions.

Bachelor of Business Administration
St. Norbert College

Certified Public Accountant

Contact Emily
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