Why do states and the federal government exercise oversight responsibility over not-for-profit, tax-exempt corporations?

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Why do states and the federal government exercise oversight responsibility over not-for-profit, tax-exempt corporations?

Not-for-profit, tax-exempt corporation must follow steps regulated by the state to first be recognized as a non-profit corporation and then need to request the tax-exempt status with the Internal Revenue Service. The tax-exempt status will make the corporation exempt from filing federal tax returns and also allows them to make purchases exempt from state sales tax. When these two steps are completed, the organization accepts oversight, responsibility and transparency and performance accountability. 

State and federal government exercise oversight responsibility over non-for-profit, tax-exempt organizations to ensure that the public good is protected as NFPs solicit charitable contributions and conduct business. A model not-for-profit corporation act developed by the American Bar Association and a model charitable solicitation act prepared by the National Association of Attorneys General provide a basic framework of best practices that have been used by many states and by many NFP organizations.

1. How do states and the federal government differ in the way they exercise this responsibility?

The state provides information to the organizations and give them legal power to create the not-for-profit corporation according to the state laws. Once an organization is recognized by the state as an NFP, the state has a responsibility to represent public beneficiaries of charities and contributors. The state’s responsibilities include detecting cases when managers or directors have diverted resources, mismanaged, or defrauded the charity and the public.

The federal government has encouraged not-for-profit associations and charitable contributions since the first revenue act in 1894, because the main purpose of non-for-profit charitable organizations is to serve the common good. The public expects the federal government to monitor organizations receiving tax benefits to ensure that these privileges are not abused. NFPs must follow general laws that govern businesses (such as fair labor standards, older workers’ benefits protection, equal employment opportunities acts, disabilities acts, civil rights laws, drug-free workplace laws, immigration laws, antidiscrimination and harassment laws, and veterans and whistleblowers’ protection) unless they are specifically exempted. This section describes federal law and regulations that are unique to NFPs.

1. In a college and university setting what is the difference between an permanent endowment and a term endowment?

Permanent endowments are not in spendable form, meaning they are not expected to be converted into cash, but are supposed to be maintain intact. Examples of permanent endowments are inventories, prepaid amounts and long-term notes receivable. The institution receives the endowment with the stipulation that cannot liquidated and it also regulates the use of the funds generated by the endowment. 

Term endowments are classified as temporarily restricted net assets because as the term expires, the assets can be used at the discretion of the NFP. Quasi-endowments or “funds functioning as endowments” are those the board sets aside; however, since the board can reverse that decision, this form of endowment is classified as an unrestricted net asset. Permanently restricted net assets may also be in the form of artwork, land, or other assets that must be used for a certain purpose and may not be sold. Information on temporarily and permanently restricted net assets can be reported on the face of the statement of financial position or disclosed in the notes to the financial statements.

1. What are three things that you have learned as a result of taking this course as it relates to the material that has been covered?

A. The main differences in financial reporting between a regular corporation and not-for-profit organizations.

B. The responsibilities of the state and federal government to regulate not-for-profit, tax-exempts organization in order to protect the public and prevent abuse and misuse of the tax-exempt status.

C. The difference between a state and federal deficit and how is handled from the financial reporting perspective.

I have truly learned a lot from this course and it has ignite in me the desire to learn more about not-for-profit accounting and financial reporting. I will definitely continue to review the material studied in this class.

References:

Reck, Lowensohn & Wilson. (2016). Accounting for Governmental & Nonprofit Entities. New York:           

McGraw-Hill Education.

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