Religious and Other Faith Based Nonprofits: Management Tax and Accounting

There are probably more than two million nonprofit organizations operating in the United States today. A large percentage of those are religious, religiousaffiliated or based, to some degree, on principles of faith. In some respects these nonprofits are like most other nonprofits. Religious and other faith-based nonprofits do have some unique characteristics, however, and they affect management, tax and accounting issues. This course takes a look at all three areas from the standpoint of managing for efficiency and mission effectiveness, compliance with laws and regulations and consistency and transparency of financial reporting.

Objectives:

• Understand what a faith-based organization is
• Become acquainted with the origin of and the rather short history of Faith-Based and Community Initiative (FBCI)
• Become familiar with the definitions and nature of the various types of nonprofit entities that are generically known as religious
• Understand the importance of internal controls and the issue of fraud protection to religious organizations
• Understand the principles underlying the presentation of financial information of a faith-based organization
• Be able to design financial statements to fit a particular type of religious or other faith-based nonprofit organization

Prerequisite: None

Chapter 0

Putting moral virtues at the highest, and religion at the lowest, religion must still be allowed to be a collateral security, at least, to virtue; and every prudent man will sooner trust to two securities than to one.

Earl of Chesterfield (1694-1773)

What do religion, government, management, and accounting have in common? More than meets the eye perhaps! Consider the following: When James Madison drafted the first 10 Amendments to the United States Constitution, he began by penning "Congress shall make no law respecting the establishment of religion, or prohibiting the free exercise thereof..."

The federal government has, since December 15, 1791, the date that the Bill of Rights was ratified, held true to its dual responsibility of not establishing or sanctioning any religion while protecting every citizen's right to worship without interference from the government.

One cannot say that the government is totally uninvolved with religious institutions, however. Religious organizations are granted special privileges by federal and local tax laws, and are also regulated thereby as a result of volumes of tax laws and regulations. Consequently the government in the United States, in its role as protector of the basic individual freedoms, interacts with religious organizations in many ways. While some may claim that this interaction constitutes a violation of the principle of separation of church and state, a close look at the wording of the Constitution would not bear that out. In its current and long-standing role as a regulator of nonprofit organizations the United States Government (through employment tax and income tax laws and regulations) in the author's opinion, does not appear to be establishing any religion, nor prohibiting the free exercise of any religion.

Consider also that religious institutions and government institutions are little different from any other of man's institutions when it comes to the necessity to manage to be effective and efficient, nor in their responsibility to provide fiscal accountability to their stakeholders, whether they be members, citizens, donors, taxpayers, or beneficiaries.

This course is about the interaction of government and religious and other faith-based organizations and also about how such organizations can operate efficiently and effectively and how they can, or, are required to account for their fiscal activities.

In the first chapter we will explore the federal government's recent efforts in expanding the working relationship between the government and private nonprofit organizations in an effort to address the needs of individuals and society. The Initiative, as it is called, is an initiative by the federal government to attempt to combine the monetary and expertise resources of the federal government with the manpower resources of the many nonprofit organizations whose missions are in line with those of the federal government as to tending to social and individual needs.

The program, begun only in this young century by Presidential Executive Orders, is controversial and has yet to be enacted into law. Nonetheless, it is up and running and is being administered by no less than eleven federal agencies consisting of Cabinet Departments and other agencies. Several state and regional coordinating agencies have also been established, grants are being awarded, and the overall process of obtaining federal funding has the appearance of being more efficient and less cumbersome.

Chapter 1 looks at the brief history, the present status, and explores the possible future of the Initiative.

In Chapter 2, we will explore religious institutions as a special type of nonprofit organization. We will define several different types of religious organizations. This chapter also defines and describes the characteristics of other faith-based organizations that are spiritually motivated but not necessarily organized or operated by any particular faith or sect.

The organizational make-up of the various nonprofit institutions comprising the broad spectrum of religious and other faith-based entities is also a subject of Chapter 2. We will take a look at the responsibilities of the individuals who manage such organizations and this will include responsibilities to the government, to society, and to individuals who are affected by the various missions of the organizations.

Chapter 2 will also discuss the potential for fraud in religious and other faith-based organizations and some of the precautions that management can take to prevent the occurrence of loss from various types of fraud. Other topics in Chapter 2 include the nonprofit industry's reaction to the Sarbanes-Oxley Act, internal controls, budgeting and strategic planning.

How religious and other faith-based nonprofit organizations keep their books, manage the organization's finances, and report to members and the public are all topics of Chapter 3. In this chapter the reader will gain an understanding of generally accepted accounting principles as they relate to religious and other faith-based organizations. We will explore techniques of presenting financial information to donors and other interested parties by including sample financial statements. Recording and reporting on unusual transactions or financial matters unique to the religious organization will also be discussed.

We will consider the importance of the cash flow statement to the typical religious or other faithbased nonprofit organization, and how to use the information to plan and report financial activities. The importance of financial disclosure and of reporting expense by function as well as by natural expense categories will be considered in this chapter as well.

Chapter 4 explores the relationship between the faith-based nonprofit organization, particularly the religious institution, and the federal and state governments. The chapter emphasizes that corporations and other formal institutions are citizen institutions, and as such have certain responsibilities to the oversight governments. To many such organizations these responsibilities may seem like an unnecessary burden on the mission-oriented nonprofit entity. The chapter attempts to put into the proper prospective, the various reporting and accountability responsibilities of the religious and other faith-based organization to the government.

We will consider obtaining and protecting the income tax exemption, annual filing requirements, unrelated business income, lobbying and other political involvement, private inurement, and Intermediate Sanctions, to name a few. Also covered will be obligations to donors, the receipt of in-kind contributions, and implications of fund-raising activities such as raffles and silent auctions.

Management aspects are touched upon in all of the chapters, but in Chapter 5 we take a close look at managing the three principal types of resources employed by all religious and other faithbased nonprofit organizations in the pursuit of the mission. We will discuss pitfalls a nonprofit organization might encounter and suggestions for positive action in the management of people, money, and materials or fixed-assets.

Chapter 1 - Faith-Based and Community Initiative: An NPO-Government Partnership?

Charity and Mercy. Not unholy names, I hope?

Charles Dickens 1812-1870
The Life and Adventures of Martin Chuzzlewit

When you have completed this chapter you will

• Know what a faith-based organization is.
• Be acquainted with the origin of and the rather short history of the Faith-Based and Community Initiative (FBCI).
• Understand what the FBCI means to religious and other nonprofit organizations.
• Be prepared to further explore the ramifications the FBCI might have to your church, religious affiliate or other nonprofit organization.

The Faith-Based and Community Initiative (FBCI) came into being on January 29, 2001, as a result of two executive orders issued by the President of the United States. Thus President Bush gave life to his proposed concept of a "more level playing field" among spiritually-motivated organizations and other community institutions involved in government social programs. By the end of 2006 a series of additional executive orders relating to FBCI were in effect and a dozen or more federal agencies are now involved. Access to those agencies will be discussed in this chapter as well as pending or proposed legislation.

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