Although the United States Economy has been going through an economic crisis and many nonprofit organizations had projected decreased donations, research has shown that there is actually good news for the nonprofit organizations. According to research, last year’s nonprofit organizations were not down as much as they had originally projected and they are projecting increased donations into the future.

The research indicates that fundraising in 2008 trended higher than in 2000. The majority of organizations across the board predict a recovery time of two years or less. For many groups, the economic downturn is an opportunity to focus on strategic priorities, reconnect with their mission, build relationships, collaborate with new partners, and get creative. Many have seen an increase in the use of their services and/or plan to expand programs/services in 2009.

Organizations that are doing well are not necessarily the ones with the biggest budgets or the ones that had the best fundraising year in 2008.

Trends of these organizations include:

• Diversified revenue streams and a variety of ways to give
• Engaged leadership (executive, development/fundraising, and board) that is prepared to address the changes in the coming year
• More effort expended into donor outreach and cultivating relationships
• Investment in development staff, resources, and/or activities
• Proactive planning. They are looking to do more, not less

Many organizations that saw a decline in fundraising attributed it to the economy in some fashion; few were contributing organizational factors. A significant number of groups started the year with only short-term solutions planned, such as cost containment, reducing staff/programs, or dipping into reserves or credit lines as a first-line strategy. For those that predict a longer recovery time, there are two common elements: organizational issues, including leadership problems; and insufficient effort/focus/staff for development and fundraising.

Organizations that are not doing very well are not necessarily the ones with the smallest budgets or number of staff. “Worst” fundraising year in 2008, or the longest predicted economic recovery time.

Trends of these organizations include:

• Leadership, board, or organizational problems (lack of engagement, turnover, communication, unity of vision)
• Lack of planning or proactive strategies to address changes in the future; strategies are often reactive and focused on cost containment
• Lack of donor stewardship
• Reliance on fundraising sources not particularly fruitful in the past
• Lack of effort/staff in development/fundraising

2009 Plans:

• Organizational missions will not change (75%) or will expand (17%)
• Programs and services are set to either increase (38%) or not change (36%); only a small number will decrease them (13%)
• Communication with donors will increase (81%) or not change (15%)
• Many respondents (71%) expect to partner or collaborate with other agencies
• Morale is reported to be good. So far, current circumstances have either had no effect (37%) or increased unity (33%);
• While most respondents (70%) are not worried about losing their job in the next year, it is a concern for the remainder

The good news is that while the economy has not recovered completely, it is recovering faster than originally projected. The nonprofit sector has fared better than expected and the downturn actually strengthened many organizations.  The projections for the future include a positive trend.

When the IRS examines a 501(c)(3) application, one of the major issues they are looking for is any potential conflict that exists. This conflict of interest could exist between the nonprofit organization and its board members, directors, trustees, or key employees. In my experience working with clients who are applying for their 501(c)(3) status, I have seen many situations arise in which a conflict of interest presents itself and may jeopardize the approval of the application. Even if this issue does pass the initial review completed by the IRS, if the conflict of interest is not addressed and dealt with appropriately, it could jeopardize future compliance with the IRS as well as damage the organization’s reputation; which, in turn, will damage funding.

Conflicts of interest in nonprofit organizations must be addressed very seriously whether they seem small or large. How an organization manages conflicts of interest that arise will determine whether an organization is frequently involved in legal problems and public scandals or actually accomplishing the organization’s mission. Conflicts of interest can arise whenever an individual, who has authority or decision-making power in a nonprofit organization, will privately benefit from a transaction, agreement, or activity of the organization.

One simple example of a conflict of interest is a board member with voting rights who will also be employed by the organization for other duties. The board of directors are responsible for reviewing and approving a nonprofit organization’s budget which would include the salaries and compensation of employees and independent contractors. If one of your board members will receive compensation then an obvious conflict arises if this board member has the authority to set his or her compensation. There are multiple ways to deal with this issue, some more extreme than others. For example, one solution would be to remove the board member from the board of directors altogether. However, such as drastic step does not need to be taken. A typical solution to such an issue would be to have this board member abstain from voting on his or her’s individual compensation. This in turn allows the board member to remain on the board and receive compensation for their duties as an employee, while avoiding a dangerous conflict. Although this issue may seem obvious, many board members do not see some of the more discrete conflicts of interests that arise throughout the lifecycle of their organization.

A useful way to discover if a conflict of interest exists during a decision-making process is to check and see if a decision will benefit any of your director. Of course, this will require all of your directors to be upfront and honest about any aspect of the decision that may benefit them.

Another asset to your organization is your conflict of interest policy. When you organization applies for its 501(c)(3) tax exempt status, the IRS requests that you adopt a conflict of interest policy and submit it with your application. However, you should always remember that this policy serves as a guideline and cannot replace careful consideration and an ethical approach to any decision made by a board. Each member of your Board should be required to acknowledge acceptance of the conflict of interest policy on an annual basis, and the policy should be reviewed at the initiation of all Board meetings. This will serve as a key reminder to every decision maker about their responsibility to disclose and avoid any conflicts of interest.

Nonprofit board members and executives must not only be able to recognize potential conflicts of interest, but they must determine when these conflicts present areas of concern and what to do about them. This can be a great responsibility and should be taken seriously – your organization’s tax exempt status and your future funding depend on it.

The Cyber-Assistant will do good things for first-time 501(c)(3) applicants but will it do enough to justify waiting to submit your 1023 application?

In 2003, the IRS started a review and revision process of how they examined applications for 501(c)(3) tax exempt status. They called this process, “Project ASPIRE,” and was created in response to the large increase in 1023 applications. At that point, the number of exempt applications was increasing by over 40% while the number of IRS Exempt Organization employees was remaining the same. The goal of Project Aspire was to find ways to streamline the 1023 application process, both for the applicant and the IRS. Following the project the IRS made some good strides, most notably, the elimination of Form 8734 (Advance Ruling Period). However, the major recommendation of this project was to continue previous efforts to develop a fully interactive filing for the 1023 application, termed the “Cyber-Assistant.”

One of the major changes in submitting your 1023 application through the Cyber-Assistant will be the stated decrease in the filing fee ($200 regardless of previous or projected revenue). It also may cut down on paper; however, since the last report, the application would still be printed and then mailed to the IRS. 

For as much flak as the IRS takes, I must say that they are doing the right thing here. After all, that 2003 project that was mentioned earlier, Project ASPIRE, stands for:

Alleviate any application backlog

Streamline the determinations process

Prioritize application review

Improve customer service

Redirect resources to cases deserving enhanced review and compliance

Enhance quality control 

But while all of this is good, is it really beneficial to wait for the Cyber Assistant to apply for your 501(c)(3) tax exempt status? After all, the idea for the Cyber Assistant dates back well beyond 2003 and the IRS has promised its release year after year.

Here are some reasons you should not wait:

1. Benefits of obtaining 501(c)(3) status that may apply to your organization include discounts on postage, exemption from state and sales taxes, property tax exemptions, and eligibility for private and government grants. In determining whether or not to wait, you need to determine if you can afford to miss these benefits.
2. Your 501(c)(3) status will be retroactive to the date of your incorporation as long as you submit your 1023 application within 27 months of being formed. This means that previous donations to your organization may qualify as tax deductible contributions. If you submit your1023 application after this, you will lose this benefit and be required to submit additional paperwork.
3. Delays and technical issues may plague the Cyber Assistant for many of its initial months once it is released. Although the IRS has designed it with the end-user in mind, good intentions do not always mean good implementation. As with most new software releases, the Cyber Assistant will not be immune to bugs and technical issues, which may add delays to processing your 1023 application. Furthermore, with the stated lower filing fee, I would guess that there will be more applications than ever…leading to further delays!

Above all, you should know that the Cyber Assistant will not make foolproof the 1023 application, just make it more convenient. The point of the Cyber Assistant is to refer you to previous IRS publications when you arrive to a question that you do not know how to answer. But this still means that you will have to read that IRS publication and try to figure out what they are saying! In some cases, the Cyber Assistant will provide broad advice on certain subjects but that will not replace professional advice to your specific organization and questions. So weigh your options carefully when you are considering whether or not to wait for the Cyber Assistant. 

Information taken from:
Advisory Committee on Tax Exempt and Government Entities
http://www.irs.gov/pub/irs-tege/act_rpt2_part1.pdf

Many non-profits do not take the time to hash out an estimated budget for their programs before embarking on the grant proposal process. However, establishing a budget is an essential step in the operation of every organization, regardless of whether or not they are seeking grant funding. Without conducting some research regarding costs and making financial calculations, a non-profit cannot accurately determine how much money they need in order to achieve their goals, and therefore do not know the amount of funding they should request from foundations.

Fortunately, The Foundation Center offers a free online Proposal Budgeting Basics course:

“This online course is designed to help with the basics of developing a project budget, and it is geared for those who have general knowledge of proposal development. (Beginners might want to take the Proposal Writing Short Course.) When you complete this course, you will know:

• The basic components of a project budget
• Different types of financial documents often required for proposals
• How overhead costs and fringe benefits may be incorporated within the budget
• How to access resources on the Web, which provide templates of project budgets”

You do not need an accountant to prepare your non-profit organization’s budget; however, if you have little knowledge about project budgeting, hiring an accountant can be useful the first time around. 

Here are a few additional resources that will aid in preparing your organization’s budget:

• Nonprofit Guides provides a sample budget, proposal cover letter, letter of inquiry, proposal, and other helpful examples.
• The Cleveland Foundation’s website offers a Grantee Toolkit including sample templates for a project budget request.
• Register on the CharityNet USA website and gain access to a variety of free non-profit tools and resources.

On a day to day basis I have dealings with a variety of nonprofit organizations, and have discovered one pressing issue that seems to be faced by all organizations, startup and established, big and small-conflicts of interest. Because conflicts of interest can be a serious threat to both an organization′s reputation and their exempt status, administrators must be diligent in avoiding and addressing potential conflicts. The key for nonprofit boards is not to try to avoid all possible conflict-of-interest situations, but to identify and follow a process for handling them effectively. How an organization manages conflicts of interest and assures open and honest deliberation affects all aspects of its operations and is critical to making good decisions, avoiding legal problems and public scandals, and remaining focused on the organization′s mission.

 The nonprofit sector depends on the spirit of volunteerism displayed by board members′personal and professional knowledge, experience, and community engagement. These board members can, however, face challenges in carrying out their board responsibilities because of the number and breadth of associations and connections they have. Therefore, nonprofit board members and executives must not only be able to recognize potential conflicts of interest, but they must determine when these conflicts present areas of concern and what to do about them.

 While most people say they understand conflict of interest, most people cannot articulate a clear and general statement. They may be able to give extreme examples but cannot identify potential conflict in more mundane circumstances. A useful way of looking at conflict of interest is to turn it around and say that directors should avoid any self-serving conduct. If it benefits the director then the action is suspect. Most theorists allow that if the action benefits everyone in the community then it is not self-serving.

 In order to help the board of directors understand and avoid conflicts of interest the board should develop or adopt a written expression of its intentions. Board members should remember that a written code serves as a guideline. It cannot replace careful consideration and an ethical approach. Each member of the Board should be required to acknowledge acceptance of the policy on an annual basis, and the policy should be reviewed at the initiation of all Board meetings. Finally, keep these things in mind to help you assure that your organization does not face potential conflict:

• Full Disclosure to the board – Since when most conflict situations arise only a couple of people in an organization know, full disclosure can establish good faith among boards.
• Distancing Oneself From Potential Conflicts – A Board member should excuse himself from portions of the meeting that may lead to any potential conflict, in addition to abstaining from voting on matters that may pose a conflict.
• Best Interests In the Forefront – Create an arrangement that decides with out ones′ involvement in certain discussions, that the best interests of the organization, not that board member, will be emphasized.
• Compensation – If a board member is compensated in any way by a nonprofit, make sure their pay is either fair market value or less, a common mistake among boards.