Top Issues for Not-For-Profit Organizations in 2023
2022 was another year of change for not-for-profit organizations as the world began to emerge from the effects of the COVID-19 pandemic. 2023 promises to be a year where not-for-profit organizations will experience a variable environment with an array of challenges to navigate. Please find below our annual list of top issues that not-for-profit leaders, accounting and finance managers, and board members should be aware of as we look ahead to the coming year.
Current Expected Credit Loss (CECL) Implementation
Accounting Standards Updates (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, is effective for fiscal years beginning after December 15, 2022, for not-for-profit organizations. It replaces the CECL methodology for recognizing credit losses with the requirement to estimate credit losses expected over the contractual life of a financial asset. Moving forward under this model, expected losses must be based on historical experience, current conditions, and reasonable/supportable forecasts. This standard does not apply to receivables under the scope of FASB Accounting Standards Codification (ASC) Topic 958-605, Not-for-Profit Entities: Revenue Recognition, (promises to give). The AICPA NFP Expert Panel is currently reviewing potential impact on trade receivables and programmatic loans/investments.
Internal Revenue Service (IRS) Update
The IRS continues to experience delays and millions of unprocessed returns and letters remain as a result from facility shutdowns early in the pandemic. Not-for-profit organizations can expect delays of six to nine months or more for certain requests. Below are several other topics related to the IRS that not-for-profit organizations should be aware of:
- Reorganization of IRS under the Taxpayer First Act
- The Tax Exempt and Government Entitiesfunction will move under a newly created Compliance Division.
- The lines of reporting in the new structure remain unclear.
- Not-for-profit organizations are improperly filing Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or Form 990-EZ.
- The IRS is utilizing other filings to search for organizations whose gross receipts exceed the $50,000 threshold.
- The IRS is also identifying Internal Revenue Code (IRC) Section 509(a)(3) supporting organizations filing Form 990-N.
- Excise tax on excess compensation
- The IRC imposes an excise tax on compensation paid in excess of $1 million to “covered employees.”
- The IRS is cross-referencing Part VII, Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors of Form 990, Return of Organization Exempt from Income Tax.
- Worker classification
- The IRS reminds organizations to correctly classify employees vs. independent contractors.
- The IRS issued a memo on the qualified appraisal requirement for charitable contributions of cryptocurrency.
- FASB is expected to issue a final Accounting Standards Update (ASU) on accounting for and disclosure of crypto assets in the fourth quarter of 2023.
- Renewable energy credits
- Tax-exempt organizations and local governments are eligible for clean energy tax credits for “qualifying energy projects.”
- Certain taxpayers will have access to “elective pay” tax credits (direct payments).
- Elective pay is only effective for taxable years beginning after December 31, 2022.
- The deadline for filing to claim elective pay is the due date (including extensions of time) for the tax return for the taxable year for which the election is made.
- Credits will be paid similar to payments of IRS refunds. Proposed regulations were issued in June 2023.
- Organizations that do not pay federal income tax can file Form 990-T to claim elective pay.
- Tax credits are earned in the year in which the project is placed into service.
- The IRA has twenty different incentives, either new or transformed. The incentives can be grouped into five general buckets: (1) energy generation and carbon capture, (2) clean energy related manufacturing, (3) clean vehicles, (4) clean fuels, and (5) energy efficiency.
Employee Retention Credits (ERC)
The ERC is a refundable tax credit for businesses that continued to pay employees while shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 12, 2020, to Dec. 31, 2021. The ERC filing window closes only once for each year of the ERC; for all quarters in 2020, the deadline to apply for the ERC is April 15, 2024, and for all quarters in 2021, the deadline is April 15, 2025. Not-for-profit organizations should be cognizant that the IRS has issued renewed warnings on ERC claims and should be prepared to support their submissions in the event of an audit. There is still time to amend previously filed Forms 941, Employer’s Quarterly Federal Tax Return, and still qualify for retroactive ERC claims. Employment tax returns for the year are deemed to be filed on April 15, so the three-year statute of limitations would apply to the earliest affected returns.
Staffing, Retention, and Culture
Branding and brand awareness are essential to attracting top talent. Not-for-profit organizations should consider using their websites and social media to tell their stories. The prospect of working with a not-for-profit organization that has a meaningful mission beyond a profit motive is often a significant factor in attracting high-performing staff. A brand reflects an organization’s reputation, core values, and reasons why staff enjoy working there. Job seekers want to be associated with organizations that are concerned about their employees. It is therefore critical that messaging take a more human and empathetic tone. Organizations that project empathy and care will likely be more successful with staff recruitment.
Lack of upward mobility is a major contributor to employee turnover. Not-for-profit organizations should focus on career advancement and work with staff on their professional development for skill enhancement. Employees value the ability to thrive and grow within an organization, so this will be a key factor in the success of your retention efforts.