Wednesday, December 28, 2011

It's The Most Wonderful Time of the Year! (Nonprofit Cash & Individual Contribution Revenue Cut-offs)

Hopefully for your nonprofit organization this is the most wonderful time of the year and you are still receiving contributions!

The first two weeks of January are generally very busy for the accounting and development departments of a nonprofit.  Contributions are still being received and processed and acknowledgment letters need to be sent to donors.

Cash and revenue cut-offs are especially important during this period. Cut-offs are not only important from an accounting/financial statement perspective, but in order to properly acknowledge donors for the proper year of their contribution. One way to anger and possibly lose a donor is to acknowledge them for their contribution for the wrong year!

Another significant reason for the proper accounting of contributions, is that depending on the dollar level of the contribution this information might then reported annually to the IRS on Form 990.

Most valid year-end contributions and pledge payments will be received by the end of the first week of January. Inevitably, you may receive some contributions dated 12/31 at the end of January. I have seen some contributions dated 12/31 received during February!

So what is the easiest way to determine the correct year for the contributions and pledge payments and to prove prove to your auditors or anyone else who reviews your records that you accounted for these payments correctly?

One recommendation is that the organization could retain the postmarked envelope (in addition to the correspondence and check copies for the contributions/pledge payment) received during the first week or two weeks of January. Paperless organizations could maintain pdfs of the same package. Generally most organizations should receive the majority of their donations/pledge payments during this time period.

In practice, many nonprofits will consider contributions and pledge payments postmarked for the first mailing date in January to be part of 12/31. This accounts for any contributions/payments that were mailed on 12/31, but the donor missed the mailing cut-off or for any post office issues. For example, for 2011, as December 31, 2011 is a Saturday, and Monday, January 2, 2011 is a federal holiday, a nonprofit might consider all contributions/payments postmarked Tuesday, January 3, 2011 to be as of December 31, 2011. 

There will be exceptions. There may be post office issues where mail is post marked 12/31 or prior and received very late. For organizations that may have moved locations, year-end checks will be mailed to the prior address causing delays. Blizzards or other actions of nature could cause delays. The envelopes (or pdfs)and any related support should be retained for all exceptions. The organization might also consider drafting a memo to file for the exceptions with pertinent details.  The firm should consider reviewing anything material, significant, and questionable with their tax partner. 

*Multi-year pledges and foundation grants will be discussed in subsequent posts