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An operating reserve is an unrestricted and relatively liquid portion of a not-for-profit’s net assets. Securing this reserve for use in emergencies or simply when your budget falls short is critical to your organization’s security and long-term survival.

Long-Term Effort
Building an adequate operating reserve takes time and should be regarded as a continuous project. Your board of directors needs to determine your not-for-profit’s policy on building an operating reserve, the desired fund amount and the circumstances under which it can be drawn down.

Reserve funds can come from unrestricted contributions, investment income and planned surpluses. Many boards designate a portion of their organizations’ unrestricted net assets as an operating reserve.

Continue Reading How Your Not-For-Profit’s Operating Reserve is Your Financial Safety Net

With the dawn of 2019 on the near horizon, here’s a quick list of tax and financial to-dos you should address before 2018 ends.

Check your FSA balance. If you have a Flexible Spending Account (FSA) for health care expenses, you need to incur qualifying expenses by December 31 to use up these funds or you’ll potentially lose them. (Some plans allow you to carry over up to $500 to the following year or give you a 2½-month grace period to incur qualifying expenses.) Use expiring FSA funds to pay for eyeglasses, dental work or eligible drugs or health products.

Max out tax-advantaged savings. Reduce your 2018 income by contributing to traditional IRAs, employer-sponsored retirement plans or Health Savings Accounts to the extent you’re eligible. (Certain vehicles, including traditional and SEP IRAs, allow you to deduct contributions on your 2018 return if they’re made by April 15, 2019.)

Take RMDs. If you’ve reached age 70½, you generally must take required minimum distributions (RMDs) from IRAs or qualified employer-sponsored retirement plans before the end of the year to avoid a 50% penalty. If you turned 70½ this year, you have until April 1, 2019, to take your first RMD. But keep in mind that, if you defer your first distribution, you’ll have to take two next year.

Consider a QCD. If you’re 70½ or older and charitably inclined, a qualified charitable distribution (QCD) allows you to transfer up to $100,000 tax-free directly from your IRA to a qualified charity and to apply the amount toward your RMD. This is a big advantage if you wouldn’t otherwise qualify for a charitable deduction (because you don’t itemize, for example).

Use it or lose it. Make the most of annual limits that don’t carry over from year to year, even if doing so won’t provide an income tax deduction. For example, if gift and estate taxes are a concern, make annual exclusion gifts up to $15,000 per recipient. If you have a Coverdell Education Savings Account, contribute the maximum amount you’re allowed.

Contribute to a Sec. 529 plan. Sec. 529 prepaid tuition or college savings plans aren’t subject to federal annual contribution limits and don’t provide a federal income tax deduction. But contributions may entitle you to a state income tax deduction (depending on your state and plan).

Review withholding. The IRS cautions that people with more complex tax situations face the possibility of having their income taxes underwithheld due to changes under the Tax Cuts and Jobs Act. Use its withholding calculator (available at irs.gov) to review your situation. If it looks like you could face underpayment penalties, increase withholdings from your or your spouse’s wages for the remainder of the year. (Withholdings, unlike estimated tax payments, are treated as if they were paid evenly over the year.)

Jen: This is PKF Texas The Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Danielle Supkis Cheek, a director on our Entrepreneurial Advisory Services team, as well as our not-for-profit team. Danielle, welcome back to the Playbook.

Danielle: Thank you again.

Jen: I know there have been some pretty big changes on how not-for-profits present their financials. What do you know about that and what can we tell our audience?

Danielle: So right now is… Actually if you’re on a calendar year, the financial statement rules changes are effective right now, 2018. What it really goes down to is that you have, in the past three different groups of net assets for nonprofits, that’s now taking it down to two, which is with donor restriction and without donor restriction. I can get into a long, technical deals with it, but really what it’s taking is that temporarily restricted and permanently restricted and putting that into one category to say with donor restriction.

This actually helps if anybody has an underwater endowment; this helps clean up the accounting. A couple of other changes – a statement of functional expenses is going to be a required disclosure now and statement, which if you had yourself set up to have those in the past no big deal, no change. But if you’re not being able to track how you’re spending your money with the natural classification of expense as well as within that admin fundraising program, you may need a system change now depending on your year end. And then a couple other more nuance topics – probably the most problematic for a lot of nonprofits may be the liquidity disclosures and liquidity disclosures about how much cash they actually have access to, as unrestricted or not.

Jen: Now what size not-for-profit does this impact? Everyone?

Danielle: Everyone that follows US GAAP.

Jen: That sounds really important, especially for those smaller ones.

Danielle: It does and actually there are more standards changing coming right now that will help align some of the nonprofit rules with the new revenue recognition rules and how to handle exchange transactions where you’re actually providing a service for, let’s say, a government entity versus just receiving donations.

Jen: Wow, well we’ll definitely get you back to talk about some of that revenue recognition stuff.

Danielle: Of course.

Jen: Perfect, thank you. For more about this topic, visit PKFTexas.com. This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook, tune in next week for another chapter.