Throughout the years, I’ve received questions from nonprofit organizations regarding the costs and benefits of changing to a fiscal year-end. I’ve seen organizations transition from December 31 to fiscal year-end for many reasons, but the overarching motive is the budget challenge. Many organizations with individual driven contributions receive a majority of revenues in the fourth quarter of the calendar year. With a calendar year-end, many nonprofits are waiting for generous donors to contribute last minute for personal tax reasons.
The purpose of this article is to gather information to cite some of the benefits and costs of changing to a fiscal year-end.
The IRS states a fiscal year should coincide with the organization’s natural operating cycle. These are some example questions:
- What is your organization’s most significant quarter for revenue generation?
- Do you rely mostly on individual giving, traditionally taking place near the December 31 year-end?
- Are you an educational institution where a significant portion of tuition is generated in the fall?
- Are revenues are mostly generated in the summer months, e.g., zoos?
Many organizations are shifting from a traditional June 30 or December 31 year-end to better enable themselves to monitor budget to actual by placing the largest revenue-generating quarter as the first in the fiscal year. Likely, your development team will thank you, but your administrative team won’t be pleased.
One of the more significant administrative burdens has been reporting actual results to budget and providing comparative financials to funders, creditors and other readers. Organizations have noted that most of the time, funders didn’t have significant issues with reviewing financials of an organization in the year of change. In case of questions, organizations had internal financials available for providing comparative information.
Other burdens have included tracking programmatic goals year-over-year in the transition year and objectives of the board of directors’ meetings, such as budget approval and review of audited financial statements and tax returns. These need to change to coincide with the new fiscal year.
The NonProfit Times blog cites Thomas Wolf’s book, Managing a Nonprofit Organization by stating great care should be taken in choosing a year-end date. Additional considerations: the fiscal year end should coincide with the organization’s programs, and program revenues shouldn’t cross fiscal years. Another rule of thumb is that a fiscal year should end before a period of inactivity. In addition, the fiscal year-end may be chosen to coincide with a primary funder’s fiscal year-end and resulting reporting requirements. For example, if a major portion of an organization’s support is from the state government, the NFP may select the same fiscal year-end as the state to simplify reporting on state grants.
Per Erin Pulling, CEO, of Project Angel Heart in Denver, Colorado:
Project Angel Heart receives nearly half of its annual revenue during October through December, with much of that revenue coming in during late December, a trend that will only grow as we focus fundraising efforts on individuals. With a December 31 fiscal year-end, we had no opportunity to be strategic with any budget overage or loss. We were often literally at the last few days of the year, rushing to make strategic purchases or hold off on expenses until January. In our opinion, that is no way to responsibly run an organization. The change to an October through September fiscal year has been worth the minor administrative headaches so that we can be strategic, positioning the organization for success with well-timed expenditures and savings. We only wish we would have made this change years ago.
The big selling point for us is the large percentage of revenue that we bring in during December, and the large percentage of that which is unknown. Making this change allows us to be strategic with any budget overage since we then know how the year will go once fiscal quarter 1 (October–December) is done. We happened to have our best fundraising quarter ever October–December 2014 [after changing to a September 30, 2014] which gave us time to purchase supplies throughout the organization, do staff bonuses, ramp up training, etc. for the nine months following. If it were the reverse and fundraising didn’t meet expectations, we’d have nine months to ramp up efforts and recover.
IRS requirements: If the organization changes its accounting period, it must file a Form 990 for the short period resulting from the change, and write “Change of Accounting Period” at the top of this short-period return.
If the organization has previously changed its annual accounting period at any time within the 10-calendar-year period that includes the beginning of the short period resulting from the current change in accounting period, and it had a Form 990-series filing requirement or income tax return filing requirement at any time during that 10-year period, it must also file a Form 1128, Application To Adopt, Change, or Retain a Tax Year, with the short-period return. See Rev. Proc. 85-58, 1985-2 C.B. 740.
By Nikki Kubly, CPA, BKD, LLP
This article is for general information purposes only and is not to be considered as legal advice. This information was written by qualified, experienced BKD professionals, but applying this information to your particular situation requires careful consideration of your specific facts and circumstances. Consult your BKD advisor or legal counsel before acting on any matter covered in this update.
Article reprinted with permission from BKD, LLP, bkd.com. All rights reserved.