5 Myth-Busting Common Accounting Traps
August 20, 2018 The NonProfit Times
They could have gotten away with it, the assumptions and practices leading your organization astray. You were buried under false beliefs and inefficient passages. If only for those meddlesome kids.
Jane M. Searing and Jennifer Becker Harris, CPAs and shareholders at accounting firm Clark Nuber in Bellevue, Wash., stood in for the Scooby Gang. Instead of the Mystery Machine, the two debunked falsities during their session “Private Foundation Case Studies: 10 Myths of Private Foundations” at the 2018 American Institute of Certified Public Accountants (AICPA) Not-For-Profit Conference in National Harbor, Md.
- Myths busted during the session included:
- “A private foundation cannot make a grant to another private foundation.” This is absolutely false, according to Searing. Private foundations often boast experts in a variety of fields — including education and the environment — and can benefit from collaboration. The key consideration is what kind of foundation the grant is being made to and what sorts of reports are required. If the grant is to a private foundation, out-of-corpus (OOC) and expenditure responsibility (ER) reports are required. Only an ER report is necessary for grants to operating foundations and neither is needed for grants made to exempt operating foundations;
- “It is acceptable to report early or not include ER reports on grants to non-charitable entities or private foundations so long as all other required documentation is included.” This is inaccurate. The code is clear that any outstanding report or amount needs to be disclosed on the Internal Revenue Service (IRS) Form 990 PF. The IRS expects foundation leaders to know this and are generally unwilling to abate penalties, according to Becker Harris;
- “A capital loss from a program-related investment cannot offset capital gains from non-charitable use assets.” This is false. If a program-related investment is sold or becomes worthless, a foundation is entitled to take a capital losses to the extent of gains — a 4940 capital loss, said Searing.
- “So long as the foundation is getting the better end of the deal, financial transactions with disqualified persons are acceptable.” Incorrect. A disqualified person generally refers to substantial contributors and the person’s family member or an entity largely controlled by the disqualified person.The speakers used the example of a disqualified person who sells land worth $1 million to a private foundation for $400,000, the amount for which it was originally purchased. The sale takes place several years earlier, prior to the person’s dealings with the foundation, and the person invests the money — earning $27,000 over three years before the transaction is noted as a potential issue. In this situation, the $427,000 gained for the transaction ought to be donated and a 10 percent excise tax is placed on the disqualified person. The questions would remain whether the gift is actually a gift if it is forced. Also, if your foundation catches self-dealing, fix it before you report it. Excise taxes increase to 200 percent if not corrected within 90 days of reporting; and,
- “If a prior year’s minimum investment return value or excess distributions have been miscalculated, those prior filings must be amended.” This is unnecessary. Instead, one can attach information explaining the miscalculation to the current return. Amending prior returns is not advised. “Any time you amend a return, you invite inquiry,” Searing explained. “To the extent that you don’t have to do that, you may not want to do that.”