“Field of Dreams” vs. Responsible Capital Projects

“GetInvolved Nonprofit Guide” Article for November 2011 from Cover & Rossiter, P.A.

“Field of Dreams” vs. Responsible Capital Projects

By Pete Kennedy, CPA of Cover & Rossiter, P.A.

There have been several local stories recently regarding nonprofit organizations that have fallen on hard times after undertaking building projects without the financial means to complete them.  As I write this article, the News Journal is reporting that the Hockessin Community Center’s building and property are being sent to Sheriff’s sale to cover unpaid construction bills.  Isn’t this ironic for an organization that lists among its programs “Foreclosure Prevention and Intervention Counseling” and “Mortgage Delinquency and Default & Resolution Counseling?” How does this happen?  Why would an organization undertake a building project without the means to pay for it?
 
We’ve seen dozens of capital campaigns in a variety of situations.  There are some common themes and tendencies that should be considered when thinking about capital expansion:

- Capital campaigns are exciting, particularly where buildings are involved.  New/renovated buildings say “permanence” in a way that new programs or enlarged endowments never can.  It is also a way for a Board of Directors or Chief Executive to say “Here is my lasting legacy with this organization.”  In the heady atmosphere where buildings are being discussed, it takes a strong, pragmatic Board to ask the tough questions involved in making sure the project is financially viable before taking the leap.    

- I’ve never met a gloomy, cynical Development person.  They are universally upbeat, enthusiastic and optimistic – great people to be around.  This mindset can be dangerous where a capital campaign is involved, since in many campaigns realistic fundraising targets and tracking progress toward them is crucial to decision-makers understanding where they stand financially and in forming their decisions on which direction to take.   Anyone involved in a capital campaign has probably seen one of those donor pyramids that fundraising consultants use – large lead donors at the top and stepping down to the smaller masses of $100 gifts at the bottom.  It makes the whole thing seem attainable if the blocks can be populated with names.  Even if the large upper blocks are filled with formal commitments, it takes a great deal of effort to fill in the lower ones.

The confluence of the two issues discussed above can create a “perfect storm” environment.  It comes as no surprise that many organizations begin building campaigns without all the financing lined up to complete them.  A certain type of “groupthink” can accompany the thought process around building campaigns.  Famous last words can include “Only a few more blocks on that pyramid to fill;” “What will the donors who already gave think if we turn back now?”; “Once the project starts we will have increased visibility and a further outpouring of support;” “We’ll just borrow the money now and pay it down when the donations come in.” 

To nonprofit decision makers, it may seem like words are being whispered in your ear “Go the distance” and “If you build it, they will come.”  Unlike (Field of Dreams protagonist) Ray Kinsella’s happy ending, there are many cautionary tales of capital expansion plans gone badly awry, threatening the financial viability of the nonprofit organization.  Instead of a statement of permanence, a new building can become a tombstone if the financial viability of the project is not carefully and critically appraised before committing.

Even if all the planned funding is lined up, you’re still not out of the woods.  There are a few other things you can generally count on:

- Buildings usually cost more than anticipated:  Contractors will often deliver the bad news up front in the form of a “contingency” line in the neighborhood of 5-10% of the total contract.  This isn’t a slush fund for the contractor to tap into.  Things can and do happen in the building/renovation process that are impossible to foresee and are beyond the contractor’s ability to control.

- Increased operating costs:  Programs are often offered at cost or at a loss that is subsidized.  More programs equal more costs to be covered.  Larger building square footage equals more space to heat or cool equals more costs.  Offering more programs does not always equal more contributions to support them. 

 

- Decreased annual fund giving:  Capital giving nearly always results in decreased annual fund giving.  Donors who give to a capital campaign will often not give to the annual fund or won’t give as much.   This should be factored in to your operating budget for the duration of the fundraising effort.

For help in planning your capital campaign, please contact Pete Kennedy or any other member of our Nonprofit Practice team at Cover & Rossiter at (302) 656-6632.

Cover & Rossiter, P.A. (www.CoverRossiter.com) is one of the most respected and experienced CPA firms serving the accounting, tax and audit needs of the nonprofit community in Delaware.  This article was published in this yesterday's GetInvolved Nonprofit Guide in The News Journal. You can also find this article

Captive Insurance Taxation – The Basics

Captive Insurance Taxation – The Basics
A captive insurance company is essentially a form of self-insurance.   In its simplest form, an operating company sets up a subsidiary, which is the captive insurance company, and moves risk off the parent company’s book onto the subsidiary’s books by paying premiums to the captive insurance company.   The captive insurance company acts as the insurance company for the parent and invests the premium dollars so that they grow and are available to pay claims when they arise.

In recent years, the use of captives, both domestic and foreign, has increased dramatically.  Use of captives opens numerous issues which have ramifications for federal income tax purposes.

The main issue for captives is whether the captive insurance company is a valid insurance entity from an IRS standpoint.

This is an important factor in determining whether or not the insurance premiums that are paid to the captive insurance company are deductible by the insured and whether or not the captive insurance company is able to take advantage of the unique tax treatment available to insurance companies (i.e., deductibility of reserves). 

In order for the captive to be treated as a true insurance entity for income tax purposes, the elements of risk-shifting and risk distribution must be present.

Risk-shifting is defined as the transfer of the impact of a potential loss from the insured to the insurer.   If the insured has truly shifted the risk, then a loss incurred on the risk does not affect the insured.   Instead, the insurer bears the loss in its payment of proceeds to the insured. 

Risk-distribution is the spreading of the risk of loss to others beyond the insured (typically through reinsurance).  Therefore, if the insured suffers a loss, the cost of the loss is distributed to all parties who have paid a premium to the insurer.   The more parties which insure their risks and pay insurance premiums to the insurer, the more distribution of risk there is.

There are a number of revenue rulings and tax court cases that discuss these two factors at length.  
At the very least, I would recommend you read Revenue Rulings 2005-40, 2002-89, 90 and 2002-91.
If you have any questions or would like more information, please contact:

Joanne Shaver, CPA
302-656-6632
JShaver@CoverRossiter.com

QuickBooks Tip #25 - Merging Duplicate Customer Names

QuickBooks Tip #25: Merging Duplicate customer names.
First of all - Once you merge two customers or jobs, you can't reverse it.

• All transactions, even in closed periods, will be under the one name. It may also affect previous financial reports. The data associated with the merged customer or job, such as address, phone number, etc., is removed from your records along with the name.

Merge two customers or jobs:

• Click the Customer Center.
• Click the Customers & Jobs tab.
• Double-click the customer or job you don't want to use.
• In the Edit window, change the customer or job name (at the top of the window) to the same name as the entry you're combining it with.
• Click OK.
• Click Yes to confirm that you want to merge the two names under the same name.

Situations where you can't merge a customer or job:

• You can't combine more than two names at a time.
• You can't combine customer names if both names have jobs. You must first delete or move the jobs from the customer name you want remove.

How do I do this?

• You may occasionally need to move sub-entries to be under a different top-level entry. For example, say you entered a job under the wrong customer. You can move it under the correct customer.
• You can't merge a customer name with a name from a different list, such as merging a customer with a vendor.

Limitations:

• You can recognize the lists that can be reorganized by the small diamond that appears in front of each list entry. These lists are: Chart of Accounts, Class, Customers & Jobs, Customer Type, Item, Job Type, Memorized Transaction, and Vendor Type. 
• On the Chart of Accounts, accounts of the same type must remain together. On the Item list, items of the same type must remain together.
• You can't move entries in a list that has been sorted. Click the diamond column to return to the original sort order.

For more Cover & Rossiter QuickBooks Tips, explore http://bit.ly/TipSeries. If you have any questions about this tip or any other tips, please email Marketing@CoverRossiter.com or call 302-656-6632. Visit our website at www.CoverRossiter.com/ for more information about our firm and its services.