ACC325 Accounting for Nonprofit Organizations


August 9, 2022

Establishing A Nonprofit

Nonprofit’s name, mission, and state details

Bankhead Forest Preservation & Recreation is a nonprofit dedicated to preserving and protecting the national forest while providing the youth with activities discouraging boredom and drug experimentation. This nonprofit idea came from the fact that I live near this forest, and the nearest town to me is plagued with drug-abusing youth. So I want to solve these two problems simultaneously with this organization.

The nonprofit’s mission is the following: “Bankhead Forest Preservation & Recreation strives to protect and preserve the national forest and to provide activities that discourage the youth from illegal drug abuse and instead, encourage the love of the forest.” The state this nonprofit is located in is Alabama, specifically somewhere near the forest.

The organization’s activities include cleaning garbage from the forest, planting trees, hiking, and exploring various species in the forest. These activities are further detailed as the activities the organization offers and are as follows:

  • Forest Clean-ups

This program is self-explanatory and is the first focus of this organization.

  • Creative Recycling

Members are encouraged to create art from the garbage collected in the clean-ups. Art can be sold for revenue. The revenue goes back to the organization and is used for continuing the organization’s mission.

  • Hiking + Species Exploration

Members will be taken on a hike in the forest and explore species (from plants, flowers, grass, and animals) that exist and thrive in the Bankhead Forest.

  • Advocacy

This program is the second focus of the organization. This activity focuses on spreading awareness about the forest’s issues and tries to educate and encourage the youth to focus on the forest and develop a love for nature instead of drug abuse.

Corporate Structure and Corporate Governance

            For a nonprofit to be established, it has to have a formation meeting. In this meeting, the “initial board of directors is installed and officer titles determined. The minutes (notes) of this meeting should include a resolution that shows unanimous affirmation by the initial board to establish the organization and pursue both incorporation and federal tax exemption” (Foundation Group, 2019). Following Alabama nonprofit requirements, the nonprofit’s board of directors shall have at least three members, meet at least four times a year, introduce all new board members to the Standards for Excellence® code, and elect the following officers: president, vice president, secretary, and treasurer (TRUiC, 2020).

            The board members must be passionate about protecting the Bankhead National Forest and the youth from illegal drug abuse. In addition, they must possess soft skills such as organization, time management, and teamwork. Experience in nonprofit organizations is preferable but not a requirement. Living near the forest is preferable but not a requirement as long as the member can attend the meetings that happen at least four times a year. Additionally, according to the National Council of Nonprofits, the board members must continue to educate themselves through special programs, BoardSource, important policy issues, and Nonprofit Risk Management (National Council of Nonprofits, 2017).

            Nepotism and self-dealings are possible conflicts of interest; for example, a board member dating an employee or staff member may result in a conflict of interest (Eisenstein, 2019). Another example is a board member’s unsustainable business that harms the forest.

            Alabama does not have state laws requiring nonprofit audits, but this nonprofit organization shall have one to ensure transparency. The audit committee shall be composed of three to five members. They must not be employed by the nonprofit, are financially literate, and at least one of the members must be familiar with the nonprofit audit process (National Council of Nonprofits, 2015). Additionally, the members must be independent and free from any potential conflict of interests. The audit committee makes sure the reporting of the nonprofit is correct. Meanwhile, the finance committee is headed by the appointed treasurer from the nonprofit’s board of directors and must compose at least three to five financially literate members. The finance committee’s role is to oversee the budgets, preparations, and financial decisions.

Legal Requirements and Process 

            The agencies needed to contact to establish the nonprofit are the IRS for a FEIN, tax exemption status, and a Federal IRS Form 990, the secretary of state and probate judge for incorporation, and finally, Alabama’s Department of Revenue for a Charitable Organization Registration Statement and Sales Tax Certificate of Exemption (Foundation Group, 2019).

            The forms needed to establish the nonprofit are as follows: Application for Employer Identification Number, Domestic Nonprofit Corporation Certificate of Formation, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, Charitable Organization Registration Statement, and Application for Sales Tax Certificate of Exemption (Foundation Group, 2019).

Reporting & Stakeholders

Submission of Financial Reports

The annual report will be submitted to the organization’s board of directors for review. The appointed president must confirm the report and sign it. The signing of the report by the organization’s president is a nod to the Sarbanes-Oxley Act of 2002. While the organization is a nonprofit, it still has been incorporated. Thus, the SOX Act applies to it. Following Alabama State’s requirements, the annual report shall be submitted with the IRS Form 990 or any financial report prescribed by the Alabama Attorney General to the Alabama Attorney General (Hurwit & Associates, 2021). In addition, the organization must submit Form 990 to the IRS. Finally, the reports must be uploaded on the organization’s website and to databases such as GuideStar to allow other stakeholders to access the organization’s financial information.

Annual Filing Requirements 

            The federal tax reporting and legal filing requirements to maintain the nonprofit status is an IRS FORM 990 filing (Foundation Group, 2019). The specific form is Form 990-N because the organization may not have a gross receipt of more than or equal to $50,000. The form will be filed “every year by the 15th day of the fifth month after the close of your tax year” (Internal Revenue Service, 2016). Finally, the IRS requires employment taxes (if the organization has employees) and Unrelated Business Income Tax (for unrelated sales). Form 990-T must be filed if the organization earned $1,000 or more from an unrelated business (Internal Revenue Service, 2016).

            Alabama State only requires “a yearly report together with the IRS Form 990 or any financial report prescribed by the Attorney General” (Hurwit & Associates, 2021) must be submitted to the Attorney General. Additionally, the organization must submit its annual return Form 990 to the Internal Revenue Service. If the organization has employees, it shall be required to register and apply to the following departments: Alabama’s Department of Revenue and Alabama’s Department of Labor. These ongoing nonprofit compliance requirements are consistent with Foundation Group. Foundation Group (2019) says that a nonprofit organization must file for an IRS Form 990, renew for Charitable Solicitations (if required), and report and file for any employees.

Summary & Reflection

The future of Bankhead Forest Preservation & Recreation’s budget

Just like for-profit businesses, a nonprofit organization requires a budget if it wants to continue operating smoothly in the future. Having a budget ensures the organization’s continuity and fulfillment of its goals in the upcoming years. In addition, it serves as a guide and financial health indicator for the organization.

In calculating the 2019 Budget, the numbers are based on percentages taken from the actual results from 2018, except for the depreciation expense account. The depreciation expense is assumed to be calculated from a straight-line method. The contributions with and without donor restrictions and investment income without donor restrictions are expected to increase by 10% next year. Meanwhile, all expenses except depreciation are expected to increase by 5% next year due to inflation and the organization’s expected growth. With all these said, one cannot always predict what the future will bring, but a budget is necessary to ensure the organization’s continuity. There may be accounts that may not increase as much as 5%. However, I wanted financial padding in case the nonprofit organization runs into emergencies such as forest fires or search-and-rescue operations. Instead of borrowing money to cover unexpected expenses, an account’s unneeded 5% increased budget can cover emergencies.

Financial Analysis

If the organization has to use only three ratios to inform any future changes, these three ratios would be the Going Concern, Program Effectiveness, and Fundraising Efficiency. These three ratios indicate whether the organization is running smoothly and fulfilling its’ missions.

The Going Concern ratio may be the most important because it reveals whether or not the organization has enough revenues to pay its expenses on time and how long it can do that. “[It means the] company…is financially stable enough to meet its obligations and continue its business for the foreseeable future” (Kenton, 2021). The organization’s current Going Concern ratio is 1.15, which means it is in excellent standing and earning more revenues than it spends on expenses.

Another important ratio is Program Effectiveness. This ratio measures how much the organization spent on programs than other expenses and the proportion between program expenses and total expenses. People want to know that their contributions are used in the programs designed to help people and not on other miscellaneous things that may cause concerns from the public. The ideal is 1, but the organization may need other forms of support. The higher the number, the better at effectiveness. The organization currently has 0.69 Program Efficiency. As a result, the organization has to work harder to achieve a number close to 1. It can minimize spending on other categories unless it helps run the organization and fundraising programs. However, “agencies, such as the Better Business Bureau’s Wise Giving Alliance, recommend a ratio of 65% or higher” (Sanchez, 2021). The organization is still in excellent standing with its’ Program Effectiveness.

Finally, Fundraising Efficiency “measures the efficiency of an organization’s fundraising activities. Simply put, it measures how much revenue is being generated for every dollar that is spent on fundraising” (Sanchez, 2021). The organization’s Fundraising Efficiency is at  0.09, which means that for every dollar earned, there was a cost of $0.09. That said, Charity Navigator has given the organization a high rating for being able to spend less than $0.10 for every dollar raised (Sanchez, 2021). This number also shows the organization’s fundraising strategy’s effectiveness and garners more public support, allowing it to keep following its mission for more years.

Summary

Bankhead Forest Preservation & Recreation, a nonprofit that seeks to preserve and encourage the youth to care for the forest, has been successful in its first year. The incorporation went smoothly. The public has commended the board of directors for their passion for preserving and sharing the love for the forest with others. The organization has prepared its 2019 budget and hopes for more successful years. 

IV. References

‌ Eisenstein, L. (2019, December 6). Conflict of Interest: Examples for a Nonprofit Board | BoardEffect. BoardEffect. https://www.boardeffect.com/blog/conflict-interest-examples-nonprofit-board/#:~:text=A%20conflict%20of%20interest%20is,considered%20a%20conflict%20of%20interest.

‌Foundation Group. (2019, Aug. 27). How to Start a Nonprofit in Alabama. Foundation Group®. https://www.501c3.org/state-nonprofit-guide/how-to-start-a-nonprofit-in-alabama/

Foundation Group. (2019, Aug. 27). How to Start a Nonprofit in Alabama. Foundation Group®. https://www.501c3.org/state-nonprofit-guide/how-to-start-a-nonprofit-in-alabama/

‌Internal Revenue Service. (2016). Exempt Organizations - Required Filings | Internal Revenue Service. Irs.gov. https://www.irs.gov/charities-non-profits/exempt-organizations-required-filings

‌Internal Revenue Service. (2016). Unrelated Business Income Tax | Internal Revenue Service. Irs.gov. https://www.irs.gov/charities-non-profits/unrelated-business-income-tax

Internal Revenue Service. (2017). Life Cycle of an Exempt Organization | Internal Revenue Service. Irs.gov. https://www.irs.gov/charities-non-profits/life-cycle-of-an-exempt-organization

Kenton, W. (2021, October 7). Going Concern. Investopedia. https://www.investopedia.com/terms/g/goingconcern.asp

‌ National Council of Nonprofits. (2015, Jan. 13). Organizing an Audit Committee. National Council of Nonprofits. https://www.councilofnonprofits.org/nonprofit-audit-guide/organizing-audit-committee

‌ National Council of Nonprofits. (2017, February). Board Roles and Responsibilities. National Council of Nonprofits. https://www.councilofnonprofits.org/tools-resources/board-roles-and-responsibilities

Sanchez, M. (2021, May 12). Nonprofit Ratios: How to Use Them and What They Measure for Your Organization | Warren Averett CPAs & Advisors. Warren Averett CPAs & Advisors. https://warrenaverett.com/insights/nonprofit-ratios/

‌ TRUiC. (2020, Sept. 15). How to Develop a Board of Directors for a Nonprofit in Alabama. Howtostartanllc.com; TRUiC. https://howtostartanllc.com/start-a-501c3-nonprofit/alabama-nonprofit-board-of-directors