From the Nov/Dec 2019 issue of New Jersey CPA magazine (njcpa.org/newjerseycpa)
By Kathleen Hoffelder, NJCPA Content Editor
In my previous CFOs have experienced one of the most dramatic transformations of any in recent years — from number crunchers to strategic advisors who help lead the direction of their organizations. Nonprofit CFOs are no different, except they often face even more challenges amid shifts in tax policy and finding alternative ways to obtain revenue. They are more analytical than ever, but they need to also consider the organization’s growth.
As James P. Ferrone, CPA, CGMA, director at Gramkow, Carnevale, Seifert & Co., LLC, notes, the nonprofit CFO/controller function has changed such that the CFO is not only the tracker of expenses and revenue, but a person who is key to fundraising. The controller/CFO needs to stay current on any changes in reporting, he says, to make sure the nonprofit is in compliance with the Financial Accounting Standards Board (FASB) and other regulations. “They need to be the person with the full skills, knowledge and experience no matter the size of the nonprofit,” he adds.
Dr. Joseph Howe, CPA, CFE, CGFM, the CFO of a government entity in New Jersey, agrees. “Being a nonprofit CFO today is much more than balance sheets and income statements. The job entails a command of communication and risk management skills in order to keep the organization’s mission in focus,” he says.
And that’s not always easy. Since nonprofit CFOs budget for events and programs compared to traditional physical products, it can be challenging to obtain the budget data needed. “CFOs working in the nonprofit community must help their organizations understand that the term ‘nonprofit’ reflects their tax status and not their business plan,” explains Bridget Hartnett, CPA, partner in charge of the nonprofit practice at SobelCo. They need to prepare realistic budgets and cash flow analyses, but all too often the organization does not know the complete cost of a program, making it difficult to determine the true return on investment. “The decision of when to sunset a project is complicated when the costs are not estimated accurately early in the process,” she adds.
Today’s nonprofit CFO must be more entrepreneurial with his or her thought processes than in the past, adds Caren C. Jesseman, CPA, MBA, a provider of CFO advisory services. “That’s a thought that may be foreign to some in the nonprofit world and previously belonged only in the halls of corporate America. However, the days of reliance on grant funds or donations have gone by the wayside. As a result of budget deficits at many government levels, grant funding has dried up, or at best, remained at constant levels.”
As Jesseman explains, it may be necessary for nonprofits to “become creative with revenue sources.” For example, one charity that had a mission to vocationally train individuals with developmental disabilities in preparation for gainful employment decided to expand their vocational training to include janitorial and shredding services as grant funding dried up. “The result was an increased revenue base which allowed for expansion of the programs to train additional consumers in a more comprehensive way,” she says.
“There is no doubt that in this changing economy, nonprofit CFOs have to be in the know more than ever before,” adds Jason Cullari, CPA, MBA, PSA, managing member of CullariCarrico. “Pinpointing what is important to donors, knowing how to ask for gifts and how to showcase the nonprofit’s mission and metrics are all important factors when trying to grow a sustainable nonprofit into the future.”
And selling goods and services in ways that provide revenue to the organization, while benefiting and maximizing their social impact, is becoming an essential move for nonprofits, he adds. For example, a New Jersey-based nonprofit providing supportive employment services to adults with autism needs donations to support the deficiency of funding provided by Medicaid. But, as Cullari says, this isn’t a sustainable model. “Adding a profitable social enterprise, such as a farm, warehousing/distribution or even eateries, can provide jobs for the adults with autism while driving profit to the nonprofit.”
With the implementation of the Tax Cuts and Jobs Act (TCJA) of 2017, the job of a nonprofit CFO and controller became a bit more complicated. As charitable donations slow down due to the inability for many households to claim an itemized deduction for their charitable gifts, CFOs have had to be much more open to new ways to receive revenue. According to Urban-Brookings Tax Policy Center estimates1, the TCJA reduced the marginal tax benefit of giving to charity by more than 30 percent in 2018, raising the after-tax cost of donating by about 7 percent. The TCJA increased the standard deduction to $12,000 for single tax filers and $24,000 for married couple tax filers, while limiting the state and local tax deduction to $10,000. “Unless taxpayers increase their net sacrifice — that is, charitable gifts less tax subsidies — charities and those who benefit from their charitable works, not the taxpayers, will bear the brunt of these changes,” according to the Tax Policy Center.
With the changes in tax law, nonprofits may see a change in how their donors donate, explains Ferrone. “Some taxpayers may no longer see a benefit from making donations on their 1040s. Charities may need to inform their donors, along with the assistance of tax advisors, on how to instruct donations to receive benefits.” He has seen donors double up in one year to receive a benefit on their 1040 filing, which means the charity will need to make adjustments to their cash flow as these larger donations in year one will be much smaller in year two.
Maria C. Plucinsky, CPA, partner at SAX LLP, adds that “by increasing donations in one year to a level where they would qualify to itemize their deductions, and in turn, save on taxes, it may provide enough incentive for some to continue donating to an organization.” Nonprofits, she says, may need to adjust budgets by reducing expenses to deal with any significant reductions in donations, in addition to having verbal conversations with their donors about the options at hand.
The TCJA has also made nonprofit CFOs think strategically about how organizations can participate in alternative fundraising options. While giving by corporations has increased by an estimated 5.4 percent in 2018 to $20.05 billion (an increase of 2.9 percent, adjusted for inflation), according to Giving USA2, giving by individuals declined 1.1 percent (a decrease of 3.4 percent, adjusted for inflation) in 2018 to an estimated
$292.09 billion. CFOs, in turn, have had to become more aware of revenue-making opportunities. According to Hartnett, savvy CFOs are helping their organizations by suggesting alternative fundraising options. “Many put time and effort into new, bolder #GivingTuesday campaigns (where nonprofits have come to launch giving campaigns after the Thanksgiving holiday for all kinds of donations), while also leveraging live auctions as well as silent auctions at events, identifying passionate supporters whose donations are not predicated on a tax deduction,” she says. Nonprofit organizations have also expanded their fundraising efforts to reach more diverse audiences to ensure sustainability.
The TCJA is also likely to require nonprofits to pay more taxes on qualified transportation fringes, such as on any parking or mass transit benefits it offers to employees, adds Hartnett. If an organization provides these benefits, it may be required to complete Form 990-T (Exempt Organization Business Income Tax Return) and incur a 21-percent tax
on those amounts. “The overall impact can be very significant. For example, if an organization pays $10,000 to a third-party provider for its employees to park during the workday, they would be subject to approximately $2,000 in tax after allowable deductions.”
Similarly, she says nonprofits may also have to pay unrelated business income tax (UBIT) since under the TCJA, starting in 2018, each unrelated business must determine its net income without regard to losses from other unrelated businesses.
More data analysis
The increased use of new data and analytics tools has helped free nonprofit CFOs from pure number crunching. “Thanks to the advanced technologies of today, nonprofit CFOs can utilize data to predict, and in as much alter, financial outcomes of tomorrow,” explains Jesseman. “Today’s nonprofit CFO can make decisions based on data in a way that can positively impact the bottom line which correlates to advancement of the organization’s mission.”
Since donors today have more knowledge of the proper questions to ask nonprofits than ever before, CFOs and their development team need to work hand in hand to understand the proper metrics and numbers that they need to convey to potential donors, once the donor has expressed an interest to give, explains Cullari. Therefore, “CFOs and their development team need to ensure that their organizational story is consistent, relatable, qualitative and quantitative,” he adds.
Amy MacFadyen, CPA, partner at EisnerAmper LLP, sees CFOs benefitting immensely from technological advancements. “As technology evolves, so does the role of the CFO/controller. Technology offers options to gain process efficiencies, but it can also remove some of the key controls that can be performed with manual/paper processes. Implementing new technology can greatly save a company time and money, however, it still needs to consider which controls are needed to maintain best practices,” she says.
And as Hartnett adds, while technology is minimizing the need for nonprofit CFOs to generate the financial data and reports, they are expected to share insights, offer suggestions and assume a consultative role. This way, “they provide resources for the organizations assisting with board selection; fundraising, including planned giving; governance guidelines and other tactics.”
Managing reputational risk is another task that a CFO must deal with today, and perhaps no CFO is more impacted by reputational risk than the nonprofit CFO. As Howe explains, “all nonprofits are inherently businesses that rely on public trust, so reputational risk can be particularly pronounced. Malfeasance by directors, employees and even donors/funders can ill effect the viability of the organization.” When this happens, he adds, nonprofits that rely on outside funding can be especially hurt by donations and grants being pulled.
Keeping the lines of communication open between nonprofit CFOs and the organization’s board can lessen the impact from such risks. Together the board and the CFO can discuss which reports, budget considerations, new policies, procedures and risks — whether financial or reputational — they want to discuss, says MacFadyen.