Choosing An Investment Manager

A nonprofit with substantial endowments likely needs an investment manager — especially if that expertise doesn’t exist in-house and if the organization relies on endowments as a steady income stream. Who Will Handle Your Endowments? If your nonprofit has substantial endowments, you likely need an investment manager — unless you’re lucky enough to possess that expertise in-house. Having an investment manager may be especially important if your organization relies on endowments as a steady income stream. Here are some suggestions for selecting the right professional. A Pool of Qualified Candidates Finding the right investment manager (also commonly referred to as an investment advisor) for your organization starts with identifying a pool of qualified candidates with proven track records and requesting detailed proposals as to how they would manage your investments. Experience working with nonprofit endowments is the key. Ask for referrals from local private foundations (possibly ones that have funded you in the past) or other area nonprofits. Allow search committee members to talk to other nonprofit leaders to gauge their satisfaction level with your short list. Board members may know investment managers they can recommend, but make sure that the individuals you select to receive your request for proposal have the right experience. The Importance of Trust In most types of business transactions, trust is important. When the transaction involves your not-for-profit’s endowments, trust becomes critical. To help you select an investment manager who fits the bill, ask yourself if you’d wholeheartedly trust this person if he or she were handling your personal life savings. Committee members should ask candidates to outline in their proposal how they’ll be compensated for their services, because this can have a major impact on trust. Do they charge fees or commissions on trades? Or, are their fees based on the asset values they’re managing or the time they spend managing the assets? Many nonprofits insist that their investment manager’s compensation be based on asset value managed or time spent rather than commission. A commission structure can put a strain on the relationship between the not-for-profit and the investment manager — questions can come up regarding whether trades are truly in the best interest of the nonprofit or made just to generate revenue for the manager. After reviewing the proposals and checking references, select at least two or three candidates to interview. Questions to Ask Members of your investment or finance committee should interview investment manager candidates thoroughly. Here are some questions committee members should be asking themselves during each interview. Does this person:

• Understand trends in investment resources, stocks, commodities, bonds, international finance, currencies, and so on — so that he or she can offer balanced advice?
• Express empathy toward the kinds of problems facing your organization and suggest investment solutions tailored to them?
• Generate commonsense ideas that make you ask, “Why didn’t we come up with these ourselves?”
• Have experience assisting investment committees in drafting or changing investment policies?

Important questions to ask the candidates directly include:

• How do you tailor your advice for an organization that is more (or less) risk averse than the traditional nonprofit?
• How much time do you anticipate spending each month on our account?
• Will you be available for meetings outside the business day?

Last, consider whether the candidate possesses the ability to educate. Your investment manager should be able to clearly explain the processes and considerations involved in investment decisions. Your investment team will become more effective going forward as a result. Accomplish Investment Goals Your investment manager doesn’t need to beat Wall Street or exceed your benchmarks. But that person does need to protect your assets while meeting your investment or finance committee’s investment targets. Make sure that you select an individual who can accomplish both goals.

Accountable Plans Save Employees Tax Dollars

With salaries on a plateau or rising only slightly at most nonprofits, employers should be alert to any way to give their employees a financial break. Having an accountable plan for business expense reimbursement is one way to save your employees some money. Setting up a Plan A not-for-profit (or other employer) can’t reimburse employees for their business expenses tax-free just because the employees submit expense records. But, if the nonprofit also has a properly executed accountable plan in place, it need not report qualifying reimbursed expenses as earnings on the employees’ W-2 forms. Thus, the employees won’t be taxed on the reimbursed amounts. While the accountable plan isn’t required to be in writing, a formally established plan makes it easier for the nonprofit to prove its validity to the IRS if ever challenged. A written plan also gives the nonprofit a structure for describing its requirements for expense reimbursement. The IRS stipulates that all expenses covered in the accountable plan have a business connection and be “reasonable.” This begs the question “What isn’t reasonable?” Let’s say an organization reimburses an employee at 80 cents per mile, rather than the 55.5 cents per mile allowed by the IRS. The IRS would consider the extra 24.5 cents excessive and treat it as taxable income. Additionally, an employer can’t reimburse the employee more than what he or she paid for any business expense. The IRS also requires that the employee account to you for his or her expenses and return any excess allowance within a reasonable period of time. Following Reimbursement Rules If an expense could otherwise qualify as a business deduction for an employee, it generally can qualify as a tax-free reimbursement under an accountable plan. For meals and entertainment, the plan may reimburse expenses at 100% that would be deductible by the employee at only 50%. You must identify the reimbursement or expense payment and keep these amounts separate from other amounts, such as wages. The accountable plan must reimburse expenses in addition to an employee’s regular compensation. No matter how informal your nonprofit, you can’t substitute tax-free reimbursements for compensation employees otherwise would have received. Assume, for example, that an employee receives $250 for a day’s work — whether traveling or not — and on a business trip incurs $75 in reimbursable expenses. You can’t treat $75 as tax-free reimbursement and report $175 as taxable income. If you give your employees an advance for expenses and the funds aren’t used for qualified expenses, they’ll be considered to have been reimbursements under a nonaccountable plan and be taxable to the employee. Accounting for Expenses The IRS requires that the employer keep the following records for business expenses that are reimbursed: 1) the amount of the expense and the date, 2) the place of the travel, meal or transportation, 3) the business purpose of the expense, and 4) the business relationship of the people entertained or fed. Credit card statements may be used to provide key elements of documentation, such as the place and date of the expense, and employees must supplement the statement with documentation of other elements, which can be provided on a standard expense reporting form. Require employees to submit receipts for any other expenses of $75 or more and for all lodging, unless your nonprofit uses a per diem plan. Such a plan can be used for lodging, meals and incidental expenses only when your employees are away from home on business. The IRS has set standard per day amounts that taxpayers may use in lieu of actual amounts spent for meal expenses incurred while away from home on business travel. U.S. rates are available in IRS Publication 1542, Per Diem Rates, which also includes the IRS per day amounts for combined meal and lodging expenses. When using a per diem for travel — or mileage for vehicle usage — an employer may adopt a lower amount than the IRS maximum. Speaking of mileage, employees need to keep track of that, too. An account book, diary, log, trip sheet or similar record may be used to substantiate a vehicle’s business use. This is the best way for employees to maximize and protect this deduction. Keep in mind that commuting mileage generally doesn’t qualify. IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses, provides more details on this topic. Enjoy Full Tax Benefits An accountable plan allows you and your employees to enjoy full tax benefits. If you don’t have a plan in place, your CPA can assist you in setting up a plan that will hold up to IRS scrutiny.

Five Tips For Limiting Damage From a Public Relations Crisis

A disaster plan can save a nonprofit’s important data from destruction suffered in an earthquake, flood or other natural disaster. But what about a non-natural disaster, such as a financial scandal or other public maelstrom? Take the Right Measures As with a natural disaster, it pays to be prepared. Here are five tips for limiting damage to your not-for-profit’s reputation from a public relations crisis: 1. Avoid scandal in the first place. Although this statement should be obvious, many nonprofits operate without a documented code of ethics — and that’s risky business. Deter bad behavior by spelling out the kind of conduct that won’t be tolerated at your organization. Make sure that your board of directors approves a code of ethics that’s tailored to your nonprofit and its paid and unpaid leaders, staff and volunteers. 2. Have a plan. Don’t kid yourself: Negative publicity can strike any organization at any time, whether warranted or not. Don’t rely on your national organization (if you have one) or a public relations firm that it engages to fight your battles. Have a crisis communication plan in place — modeled after your national plan if appropriate — so that your organization is able to quickly defend itself locally. In devising your crisis communication plan, brainstorm possible disasters, such as embezzlement, misuse of funds, sexual misbehavior, a volunteer’s on-the-job death or injury, and so on. Plans typically address such concerns as:

• How fast the organization will respond to negative publicity,
• Who will be the spokesperson to communicate with the media,
• How actions might vary for online media vs. traditional media, and
• How the organization will communicate with donors and other funders.

Finally, the plan should emphasize that speculation should be avoided — the spokesperson should tell the media only the facts and not speculate about the cause, the cost or other matters. 3. Train employees. Follow up on your communication crisis plan by training the employee (and a backup) who will be communicating with the media, and inform your entire staff of this designation. Your overall public relations plan should include a steady stream of positive information about your organization to the media, to establish its reputation in the community before any crisis occurs. Also inform your board of directors of the plan. 4. Audit yourself. The first time your organization experiences a crisis — even a small one — self-audit to determine whether board and staff followed the guidelines in your crisis communication plan. Did your spokesperson take the initiative with the media? Were the statements to the press and online limited to the facts? Were key funders contacted in a timely and effective manner? Discuss what worked well and what needs improvement. 5. Evaluate leadership. Do you have the kind of leaders, both paid and unpaid, who would respond well to a nonnatural disaster? Would the chair of your board of directors, for example, take the initiative to address the problem directly in the community, rather than hide from it? Keep such qualities in mind during your next candidate selection process. Be Prepared There are other opportunities your not-for-profit can take advantage of to ready itself for a public relations crisis, no matter how unlikely you think such an event might be. Your area college or university, for example, might offer a public relations course that covers the topic. Do what you can to be prepared: Your nonprofit’s reputation is an asset too valuable to put at risk.

News for Nonprofits

This issue’s “News for Nonprofits” shows how “deal of the day” sites such as Groupon, Deals for Deeds and others can be innovative — and lucrative — fundraising tools. It also cites professionals who discuss how including employee feedback in strategic planning and other decision-making processes is one way to improve the satisfaction level of nonprofit employees. “Deal of the Day” Sites Raise Money for Charities Are you looking for new ways to raise money to support your mission? Some nonprofits are finding that “deal of the day” sites such as Groupon, Deals for Deeds and others can be innovative — and lucrative — fundraising tools. Not Alone, a nonprofit that helps veterans and their families deal with combat-induced mental strains, recently raised more than $60,000 through a Groupon offer. Not Alone worked through Groupon’s G-Team, which handles charitable efforts. Patty Huber, of the G-Team, recently told an online nonprofit audience that, for nonprofit campaigns, Groupon uses a custom “tipping point” style. For example, “If we raise $1,000, then we’ll build a garden at the school,” she said. According to Groupon, 100% of the funds raised in G-Team campaigns goes back to the nonprofit, and Groupon picks up the credit card fees. Some nonprofits are even creating their own “deal of the day” sites. Green America, for instance, teamed up with Q4 Marketing to launch GreenDeals.org last year. The website provides people with green-related deals from local and national online green companies. More than 100,000 people have already signed on to GreenDeals, according to the organization. Boosting Employee Spirits Including employee feedback in strategic planning and other decision-making processes is one way to improve the satisfaction level of nonprofit employees, according to participants in a recent live blog called “How to keep nonprofit employees happy.” The blog was sponsored by the Chronicle of Philanthropy, which found in a recent survey that more than 80% of nonprofit employee respondents were either currently job hunting or would be if the economy were stronger. Trish Tchume, national director of Young Nonprofit Professionals Network, a 30,000-member organization, indicated that giving younger employees a bigger role in the planning and decision-making processes at their organizations would likely improve morale. Jan Masaoka, chief executive of the California Association of Nonprofits and author of a forthcoming book, The Nonprofit’s Guide to Human Resources, agreed that inclusion in decision making is a driver in employee satisfaction. She encouraged nonprofits to seek more feedback from all employees but to clarify who’ll make the final decisions. Other suggestions for improving morale included:

• Asking employees what non-costly changes at the organization would make them happier employees, and
• Offering greater flexibility in work hours and work space — that is, allowing employees to work from home.

Tchume said that not-for-profits need to do “a better job of looking at employee satisfaction and community impact as a joint issue.”

Spotlight on Marks Paneth

Marks Paneth NOMINATED AGAIN IN NYLJ READER RANKING SURVEY Marks Paneth is honored to have been nominated for the third year running in the New York Law Journal’s (NYLJ) Reader Ranking Survey. We are nominated in the three categories:

• Best Litigation Valuation Provider
• Best Forensic Accounting Provider
• Best Business Accounting Provider

Marks Paneth is proud to have earned a reputation for providing litigation support, corporate financial advisory, labor and employment, dispute analysis and forensic accounting services of the highest quality and look forward to continuing to serve the legal community. The top three finishers in each of the 2012 survey categories will be announced in the September 10th issue of the NYLJ. Marks Paneth DIRECTOR PUBLISHED IN MCC Josefina Tranfa-Abboud, a Director in the Litigation and Corporate Financial Advisory Services Group specializing in labor and employment matters, was recently published in Metropolitan Corporate Counsel (MCC). To read her article entitled, “Employee Benefits: Not All Are Created Equal” please visit this website, http://www.metrocorpcounsel.com/articles/19597/employee-benefits-not-all-are-created-equal. DOING BUSINESS GUIDES Doing business around the world presents a variety of challenges. Morison International (MI), the association of independent accounting and consulting firms of which we are a member, has begun publishing a series of Doing Business Guides. The first three guides are for China, India and Singapore and can be found in the Library on the Marks Paneth website. The guides are written by the MI member firm in the country that is being profiled and provide an introduction to foreign investors on the various aspects of doing business.

For Further Information

If you have any questions, please contact Michael L. McNee, Partner-in-Charge, Nonprofit and Government Services Group, at 212.503.8954 or mmcnee@markspaneth.com. You may also contact one of the following members of the group:

• Partners
  • Hope Goldstein hgoldstein@markspaneth.com
  • Joseph J. Kanjamala jkanjamala@markspaneth.com
  • Warren Ruppel wruppel@markspaneth.com
  • Anthony J. Tempesta ttempesta@markspaneth.com

• Directors

  • Howard Becker hbecker@markspaneth.com
  • Robert Lyons rlyons@markspaneth.com

IRS Circular 230 Disclosure

Treasury Regulations require us to inform you that any Federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © Marks Paneth LLP 2012 MANHATTAN | LONG ISLAND | WESTCHESTER | CAYMAN ISLANDS

About Michael McNee