Virtual currency = risk

Cryptocurrency refers to a decentralized form of digital currency that’s tracked in a blockchain ledger. Unlike traditional currencies, the ledger doesn’t reside with a central authority, such as a bank or government, but across public peer-to-peer networks. The value of cryptocurrencies derives in part from its scarcity. In the case of Bitcoins, for example, the supply is limited to 21 million “coins.”

One of the most significant risks related to cryptocurrencies is their price volatility. The price for Bitcoin can shift more than 10% in a single day. Imagine a donation that drops that much in value within hours of receipt. Of course, cryptocurrencies also can quickly appreciate in value dramatically. That’s one reason owners might want to donate them — to avoid capital gains tax on the appreciation.

Third-party facilitators can help

Given such price volatility, you need to decide whether your nonprofit can assume the risks. One way to manage them is to accept cryptocurrency through a third-party facilitator, such as The Giving Block, BitPay or Engiven. These platforms allow nonprofits to almost immediately convert crypto donations into dollars — before their value can fall.

Facilitators typically charge a small fee, similar to credit card transaction fees. Check with your financial institution before signing an agreement with a facilitator, though. Some are wary of transactions involving players in the virtual currency industry.

If, on the other hand, you decide to accept cryptocurrency donations directly, and perhaps benefit from appreciation, you must create a “digital wallet” through a bank or mobile phone app. Wallets store the public and private “keys” required to send and receive coins. And you’ll need to implement internal controls and security measures to secure your keys and wallets.

Your reporting obligations

When it comes to reporting, the IRS says nonprofits should treat these obligations as noncash contributions on Form 990 and, if applicable, Schedule M. You must file Schedule M if you receive more than $25,000 in noncash contributions or contributions of art, historical treasures or similar assets, or qualified conservation contributions.

If you accept cryptocurrency directly and convert it to cash within three years after receipt, you must file Form 8282, Donee Information Return, and give the donor a copy. If the donation is worth more than $5,000, your organization will need to sign the donor’s Form 8283, Noncash Charitable Contributions.

Prepare now

If you haven’t yet been approached by a supporter offering a cryptocurrency contribution, it’s only a matter of time. So prepare now. You’ll need new security and compliance policies and should make a gift acceptance policy addendum. Contact us for more information and help.

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Inflated values

The updated rules were generated in response to concerns about U.S. wholesale market prices being used to determine the value of donated pharmaceuticals that can’t legally be sold in the United States. A donor, for example, could contribute such drugs for use only outside the country.

Stakeholders worried that the values will be inflated, which could increase an organization’s revenue and program expenses. The nonprofit might, therefore, appear larger and more efficient than a smaller organization or one with lower values for its gifts-in-kind donations.

New procedures and disclosures

The most dramatic change from previous gifts-in-kind rules is that donations should be reported by type of asset (for example, building, food or pharmaceuticals), rather than reported in aggregate. The rules also require you to report gifts-in-kind donations as a separate line item in the statement of activities.

Further, you must disclose:

• Your organization’s policies for monetizing in-kind donations (such as by selling them), rather than actually using the donations in your operations,
• Any donor restrictions,
• The valuation techniques and data used to calculate a gift’s value, and
• The principal market or most advantageous market used to calculate the gift’s value.

This last disclosure is necessary if donor restrictions prohibit your nonprofit from selling or using the donation in the principal or most advantageous market. The principal market has the highest volume of activity for the donated asset. The most advantageous market generally maximizes the amount that would be received if the donation were sold.

Compliance required soon

If you aren’t already following the rules, prepare to comply with them. They take effect for annual reporting periods starting after June 15, 2021, and interim periods within fiscal years starting after June 15, 2022. Contact us if you have questions or need help.

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High-net-worth individuals donated $5.8 billion during the first six months of the COVID-19 pandemic — generous giving by most standards. This is according to a recent report, “Philanthropy and COVID-19 in the first half of 2020,” from the Center for Disaster Philanthropy and information service Candid. However, that $5.8 billion amount is deceptive, because nearly three-quarters of it came from one donor, Mackenzie Scott (the ex-wife of Amazon’s Jeff Bezos).

In fact, a 2020 study from the Milken Institute Center for Strategic Philanthropy found that only a relatively small percentage, 36%, of the ultra-wealthy are involved in charitable giving. This may sound like ominous news for not-for-profit organizations. But there are ways to tap this group’s ample resources.

Bad news, good news

The Milken Institute report, “Stepping off the Sidelines: The Unrealized Potential of Strategic Ultra-High-Net-Worth Philanthropy,” studied individuals with more than $30 million in assets and found that only 9% had made charitable gifts of $1 million or more. The Institute summarizes the current issue this way: “the personal wealth of the world’s richest is accumulating faster than philanthropic capital is being deployed, and faster than global issues are being solved.”

However, the report identifies some cause for optimism. Although women currently make up one of every seven ultra-high-net-worth individuals, they’re growing in number. And wealthy women generally give more generously than their male peers. Their motivations also tend to be different. Men are more likely to give to create a legacy, and women are more likely to give to support a cause.

Strategic targeting

So if your nonprofit doesn’t already, you may want to focus more development efforts on both women who are already wealthy and younger female executives and business owners on the way up. Even if they aren’t in the position to make gifts right now, they may be in decades to come and will want to support charities they know and trust.

Also explore building relationships with the financial advisors of high-net-worth individuals. These include estate planners as well as advisors to donor-advised funds (DAFs), family offices and private foundations (which must spend at least 5% of their net investment assets annually). DAFs are the fastest growing charitable giving vehicles (over 100% in the past five years). And many are sitting on hefty cash cushions, thanks to a surging stock market and no minimum payout requirements. But public pressure and potential legislation might force DAF owners to step up their charitable donations in the near future.

Help rebuilding

If your nonprofit is working to rebuild its emergency fund or an endowment it was forced to tap during the COVID-19 pandemic, consider focusing on high-net-worth individuals. We can help you devise a targeted development plan.

The post Ultra-Wealthy Donors: Elusive But Worth Your Nonprofit’s Efforts appeared first on The Forde Firm.

Events of the past year put a dent in many not-for-profit’s reserves. Perhaps you tapped this stash to buy personal protective equipment or to pay staffers’ salaries when your budget no longer proved adequate. As the pandemic wanes and economic conditions improve, you’ll need to start thinking about rebuilding your operating reserves.

Back on steady ground

Assembling an adequate operating reserve takes time and should be regarded as a continuous project. Obviously, it’s nearly impossible to contribute to reserves when you’re under financial stress. But once you feel your nonprofit is on steadier ground, your board of directors needs to determine what amount to target and how your organization will reach that target. It’s also a good time to review circumstances under which reserves 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. On the other hand, funds that shouldn’t be considered part of an operating reserve include endowments and temporarily restricted funds. Net assets tied up in illiquid fixed assets used in operations, such as your buildings and equipment, generally don’t qualify either.

Protection and flexibility

Determining how much should be in your operating reserve depends on your organization and its operations. Generally, if you depend heavily on only a few funders or government grants, your nonprofit probably will benefit from a larger reserve. Likewise, if personnel costs are high, your organization could use a healthy reserve cushion.

Three months of reserves is typically considered a minimum accumulation. Six months of reserves provides greater security. A three-to-six-month reserve should enable your organization to continue its operations for a relatively brief transition in operations or funding. Or, in the worst-case scenario, it would allow for an orderly winding up of affairs.

An operating reserve of more than six months provides greater protection if, for example, something similar to the COVID-19 lockdown occurs again. And a bigger reserve can give you financial flexibility. For example, you might have the funds to pursue a new program initiative that’s not fully funded, or to leverage debt funding for needed facilities or equipment.

No hoarding

Note that it’s generally not a good idea to put aside more than 12 months of expenses. Increasingly, donors want to see the nonprofits they support put funds to work, not hoard them. Contact us for more information about operating reserves and setting policies that are appropriate for your organization.

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Many not-for-profits experience a flood of last-minute donations at the end of the year. Although cash is easy to value, valuing noncash property donations is trickier. If you’re struggling to assign amounts to contributions — either for a donor or your own records — review this cheat sheet.

Price on the open market

Most noncash donations are valued based on their fair market value (FMV) — generally, the price that property would sell for on the open market. For example, if a donor contributes used clothes, the FMV would be the price that typical buyers pay for clothes of the same age, condition, style and use.

If the property is subject to any type of restriction on use, the FMV must reflect it. So, if a donor stipulates that a painting must be displayed, not sold, that restriction affects its value. Restrictions on the use of real estate can dramatically affect the value of such gifts — for example, land that isn’t eligible for commercial development.

3 relevant factors

According to the IRS, there are three particularly relevant FMV factors. The first is the cost or selling price. This is the amount the donor paid for the item or the actual selling price received by your organization. But because market conditions can change, the cost or price becomes less important the further in time the purchase or sale was from the contribution date.

Another factor is comparable sales, or the sales price of property similar to the donated property. The IRS may give more or less weight to a comparable sale depending on the similarity between the property sold and the donated property, time of the sale, circumstances of the sale and market conditions.

Finally, there’s replacement cost. FMV should consider the cost of buying or creating property similar to the donated item. However, the replacement cost must have a reasonable relationship with the FMV.

Inventory exception

Inventory generally is subject to different valuation rules. Businesses that contribute inventory can usually deduct the smaller of its FMV on the day of the contribution or the inventory’s “basis.”

The basis is any cost incurred for the inventory in an earlier year that the business would otherwise include in its opening inventory for the year of the contribution. If the cost of donated inventory isn’t included in the opening inventory, its basis is zero and the business can’t claim a deduction.

It’s important to note that even if a donor can’t deduct a noncash donation (including a piece of tangible property or property rights), you may need to record the donation on your financial statements. Such donations should be recognized at their fair value or what it would cost for you to buy the donation outright. Contact us for more information.

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