Nonprofit Standard Newsletter - Fall 2023

Cash Benefits for Supporting ESG - New Markets Tax Credit

By Jesse Tsai, CPA, JD

With an increasing focus on environmental, social and governance (ESG) issues, some organizations are seeking ways to fund various ESG initiatives. Tax credits and incentives have played an important role in subsidizing ESG initiatives, with the Inflation Reduction Act significantly enhancing their impact on environmental investments. However, the often-overlooked social aspect of ESG can also be supported by tax credits and incentives.

The social dimension of ESG focuses on an organization's relationship with society, including the well-being of employees and the communities the organizations operate in. One mechanism that organizations can utilize to fund initiatives supporting local communities is the New Markets Tax Credit (NMTC)

What is the NMTC?

The NMTC is a federal program established in 2000 to incentivize investment in low-income communities. Codified under Internal Revenue Code Section 45D, the program has been continuously extended through legislative packages. The latest extension provides a $5 billion annual allocation through 2025.

The CDFI Fund, an agency of the U.S. Treasury, administers the program through certified community development entities (CDEs). CDEs use the NMTC allocation to generate a 39% tax credit, which can be monetized by tax credit investors.

Using tax credit equity, the CDEs fund projects in low-income communities, often through loans with flexible features such as below-market interest rates and principal forgiveness. 

CDEs help the CDFI Fund allocate funds nationwide, carefully selecting projects that have a significant impact on low-income communities. These projects commonly focus on creating jobs, developing the workforce, providing goods and services to the community, improving healthcare and other community benefits.

The NMTC program requires annual reporting of community outcomes generated by each project, making it an effective tool to support the "S" in ESG initiatives.

Nonprofits and the NMTC

Nonprofit organizations receive a significant portion of NMTC funding each year. The social mission of nonprofits aligns well with the NMTC program's goal of community development, particularly for underserved populations. NMTC funds often serve as a valuable source of funding for nonprofits to supplement their capital campaigns and other fundraising efforts.

However, nonprofits face challenges in utilizing the leveraged structure commonly used for NMTC funding. In a leveraged structure, tax credit investors create an investment fund that combines their tax credit equity with other financing sources to provide project funding. One challenge nonprofit organizations face is that the leveraged structure typically requires two taxable entities. To address this, many nonprofits establish supporting organizations to facilitate NMTC transactions. Additionally, securing upfront funding sources can create time-value pressure on cash flow, especially for nonprofits that finance their projects over time.

To illustrate how NMTCs can support a project, consider a nonprofit health clinic that aims to expand its facility and acquire equipment to enhance services for disadvantaged individuals in an eligible low-income census tract. The total project cost is $10 million and, despite receiving donations and other funding sources, the clinic can raise only $7.5 million. The clinic can bridge the financing gap through an NMTC loan, which is funded by the tax equity generated from the CDE’s NMTC allocation, enabling the project to move forward. An additional advantage is that the NMTC loan principal is often forgiven after a seven-year term, resulting in a permanent cash benefit to the organization.

For more information, contact Jesse Tsai, Business Incentives Group Managing Director.

Return to Table of Contents

The IRS Weighs in on Nonprofit NIL Collectives

By Marc R. Berger, CPA, JD, LLM

The IRS on June 9, 2023, released generic legal advice memorandum AM 2023-004,1 which addresses whether developing paid name, image and likeness (NIL) opportunities for collegiate student-athletes furthers an exempt purpose under Internal Revenue Code Section 501(c)(3).

The memorandum concludes that many 501(c)(3) organizations developing these opportunities for student athletes are not tax-exempt because the private benefits they provide to student-athletes are not incidental, either qualitatively or quantitatively, to any exempt purpose furthered by that activity.

In 2021, the NCAA adopted an interim NIL policy permitting student-athletes to be compensated for use of their NIL without impacting their NCAA eligibility. Under the interim policy, student-athletes may receive compensation for NIL activities subject to certain limitations.

The interim policy prohibits NIL agreements without a quid pro quo (i.e., compensation for work not performed) and agreements in which compensation is contingent on enrollment at a particular school or athletic participation or achievement. In addition, state laws and university-specific NIL policies may impose additional requirements or limitations on student-athlete NIL activities.

Since the interim policy was adopted, many organizations, generally referred to as “NIL collectives,” have been established by boosters and fans of one or more of a university’s athletic programs to develop, fund or otherwise facilitate NIL deals for student-athletes. NIL collectives generally operate independently of the affiliated university, and some are formed as nonprofit entities under state law and have applied for and received recognition of tax exemption under Section 501(c)(3) using Forms 1023 and 1023-EZ.

In general, a nonprofit NIL collective pools contributions, identifies and partners with local and regional charities to develop paid NIL opportunities for student-athletes of the university, and pays compensation to the student-athletes in exchange for their NIL in a manner consistent with NCAA regulations, university policies, and state and local laws. The paid NIL opportunities typically include promoting the collective or a partner charity through a video or social media post, attending a fundraising event, autographing memorabilia for the collective or a partner charity to sell, or participating in or leading a sports camp.

The issue considered in the IRS memorandum is whether an organization that develops paid NIL opportunities furthers an exempt purpose under Section 501(c)(3).

Section 501(c)(3) provides exemption for organizations organized and operated exclusively for one or more of the exempt purposes set forth in 501(c)(3). The regulations provide that an organization is not operated exclusively for exempt purposes unless it serves public and not private interests.When an organization serves both public and private interests, the private benefit must be clearly incidental to the overriding public interest.

Unlike the prohibition against private inurement to insiders, which is absolute, private benefit to non-insiders will not preclude an organization from exemption under Section 501(c) (3) if the private benefit is incidental in both a qualitative and quantitative sense. To be qualitatively incidental, the private benefit must be a byproduct of the exempt activity or a necessary collateral result to the accomplishment of the exempt purpose. To be quantitatively incidental, the private benefit must be insubstantial in amount when compared to the overall public benefit conferred by the activity.

Applying these principles to nonprofit NIL collectives, the IRS states in the memorandum that the benefit to private interests will, in most cases, be more than incidental, both qualitatively and quantitatively. The IRS found that the private benefit received by the student-athletes was not qualitatively incidental for numerous reasons. The memorandum notes that the compensation received by the student-athletes is not a byproduct — but rather a fundamental part — of a nonprofit NIL collective’s activities, and that in many circumstances the compensation for NIL activities is the very justification for the organization’s existence. It further noted that the benefits received by the student-athletes extend beyond compensation by relieving the student-athletes of the transaction and compliance costs they would otherwise incur to participate in an NIL deal (e.g., identifying and vetting partner charities, negotiating the terms of the NIL deal and ensuring compliance with state NIL laws).

The IRS also found that the private benefit to student-athletes is not quantitatively incidental because the private benefit received by the student-athletes was not insubstantial when compared to the overall public benefit conferred by the activity. The memorandum noted that many NIL collectives pay, or intend to pay, all funds to student athletes after payment of administrative and other expenses, with some promising to pay 80% or even 100% of all contributions to student-athletes, which by any measure could not be considered incidental.

The IRS Office of Chief Counsel concluded that many organizations that develop paid NIL opportunities for student athletes are not tax-exempt as described in Section 501(c)(3) because the private benefits they provide to the student-athletes are not incidental — either qualitatively or quantitatively — to any exempt purpose furthered by that activity.

BDO INSIGHT: Although not binding law or precedential guidance, the memorandum provides a strong sign of the position the IRS is likely to take when reviewing new applications for exemption and in examinations of NIL collectives that have recently received favorable determination letters. Furthermore, boosters seeking to write off donations to NIL collectives as tax deductible should be aware of the IRS’s newly stated position.

For more information, contact Marc Berger, National Director Nonprofit Tax Services.

Return to Table of Contents

A generic legal advice memorandum, or GLAM, constitutes internal IRS legal advice from the Office of Chief Counsel to assist IRS service personnel in administering their duties. It is not binding law and cannot be used or cited as precedent.

Treas. Reg. Sec. 1.501(c)(3)-1(d)(1)

GASB Implementation Guide No. 2023-1, Implementation Guidance Update-2023

By Sam Thompson, CPA

On July 10, 2023, the Governmental Accounting Standards Board issued Implementation Guide No. 2023-1, Implementation Guidance Update-2023 (Implementation Guide 2023-1). Implementation Guide 2023-1 contains 10 new questions and one amendment to a previously issued question-and-answers document. All questions within Implementation Guide 2023-1 are effective for fiscal years beginning after June 15, 2023, with earlier application encouraged if the pronouncement addressed by the question and answer has been implemented.


The GASB periodically issues implementation guides to provide guidance that clarifies, explains or elaborates on GASB statements. New questions and answers included in implementation guides address issues raised by the GASB’s stakeholders through inquiries posed and issues identified by the GASB in anticipation of questions that will arise during implementation of board pronouncements. Questions and answers in implementation guides (along with GASB technical bulletins and AICPA literature cleared by the GASB) are considered Category B guidance in the hierarchy of generally accepted accounting principles, whereas GASB-issued statements are considered Category A guidance. If the accounting treatment for a transaction or other event is not specified by a pronouncement in Category A, a governmental entity should consider whether the accounting treatment is specified by a source in Category B.

The GASB issued two exposure drafts related to what would ultimately become Implementation Guide 2023- 1. Both exposure drafts received public comment from stakeholders that the GASB considered and used to clarify certain questions and answers.

Topics Covered


Implementation Guide 2023-1 includes seven questions and answers regarding leases. Questions 4.1 through 4.3 address short-term leases. Question 4.1 clarifies that for periods for which either the lessee and lessor do not have an unconditional right to terminate a lease, there are no cancelable periods to exclude from the maximum possible term of a lease since there are no periods for which both the lessee and the lessor have an option to terminate. This includes periods in which the lessee may terminate the lease, but the lessor may only terminate upon default of the lessee on payments. Question 4.2 reaffirms that the maximum possible term at the commencement of the lease includes all options to extend, regardless of probability of being exercised. Question 4.3 clarifies there are two circumstances in which a lease modification results in a short-term lease: (1) if the lease was a short-term lease before modification and after modification the lease remains 12 months or less, or (2) after modification a resulting separate lease has a maximum possible term of 12 months or less.

Questions 4.4 and 4.5 cover lessee recognition and measurement for leases other than short-term leases and contracts that transfer ownership. Question 4.4 states governments should recognize interest expense over the entire lease term as interest expense represents the amortization of the discount of the lease liability, even in situations where a government is not making payments. Question 4.5 states that the currency in which lease payments are made does not affect whether lease payments are considered fixed, and that increases or decreases in expected U.S. dollar cash flows are considered a foreign currency transaction gain or loss.

Question 4.6 addresses lessor accounting and states that for a business-type activity or enterprise fund whether revenue recognized from the deferred inflow of resources related to a lease is operating revenue or nonoperating revenue depends on (a) the purpose of the lease, (b) the nature of the activity being reported as a business type activity or in an enterprise fund, and (c) the government’s policy defining operating revenue.

Question 5.1 has the distinction of being the sole question and answer in Implementation Guide 2023-1 that is an amendment to a previously issued question and answer. Question 5.1 amends question 4.16 in Implementation Guide 2019-3 and states that factors to consider when determining whether it is reasonably certain that the lessee or lessor will not exercise the option to terminate a lease include significant economic disincentives, such as cancellation penalties. Periods for which it is reasonably certain that a lessee or lessor will not unilaterally terminate a lease should not be excluded from the lease term.

Subscription-Based Information Technology Arrangements (SBITAs)

Implementation Guide 2023-1 contains three questions and answers addressing SBITAs. Question 4.7 clarifies that a licensing arrangement that automatically renews until canceled is not a perpetual license. Rather, the provision is an option to terminate the agreement at each renewal date, as opposed to a purchase in which a government is granted a permanent right to use the vendor’s computer software. Question 4.8 addresses whether the presence of tangible capital assets in combination with IT software impacts the applicability of GASB 96, Subscription-Based Information Technology Arrangements (GASB 96) on cloud computing arrangements. Many common deployment models of cloud computing arrangements contain IT software used in combination with tangible capital assets. Governments should evaluate the substance of the arrangement in accordance with GASB 96 paragraph 6 to determine if the arrangement meets the definition of a SBITA. Question 4.9 covers the determination of a subscription term, and states that the subscription term does not begin until the initial implementation stage is completed.

Accounting Changes and Error Corrections

Implementation Guide 2023-1 has one question and answer related to GASB 100, Accounting Changes and Error Corrections (GASB 100). Question 4.10 addresses whether the closing out of a major fund and movement of remaining resources to another fund constitutes a change to or within the financial reporting entity. The removal of a fund that does not result from a movement of continuing operations does not constitute a change to or within the financial reporting entity in accordance with paragraph 9a of GASB 100. Instead, the movement of remaining resources should be reported as interfund activity.

Implementation Considerations

Questions 4.1-4.9 and 5.1 are effective for fiscal years beginning after June 15, 2023. Earlier application is encouraged if the pronouncement addressed by the question and answer has been implemented. Changes, if any, should be reported as a change in accounting principle in accordance with GASB 100. If questions 4.1-4.9 or 5.1 are implemented prior to GASB 100, any changes adopted at transition should be applied retroactively by restating financial statements, if practicable, for all prior periods presented. If restatement is not practicable, the cumulative effect, if any, should be reported as a restatement of beginning net position, fund balance, or fund net position, as applicable, for the earliest period restated.

Question 4.10 should be applied simultaneously with the requirements of GASB 100, which are effective for accounting changes made in fiscal years beginning after June 15, 2023. If GASB 100 was implemented prior to issuance of Implementation Guide 2023-1, Question 4.10 is effective for fiscal years beginning after June 15, 2023, with earlier application encouraged.

For more information, contact Sam Thompson, Assurance Technical Director, Industry – Government.

Return to Table of Contents

The Evolving Role of CFOs in Driving ESG Initiatives

BDO ESG Leaders

According to BDO Middle Market CFO Outlook Survey, 64% of chief financial officers (CFOs) believe environmental, social and governance (ESG) adoption will improve their organization’s long-term financial performance. However, for sustainability initiatives to succeed, ESG needs to be a cross-functional collaboration. Finance leaders must play a leading role in advancing their organization’s ESG strategy as they have access to large amounts of organizational data and influence over budget and business strategy. CFOs must lead efforts to identify, measure and report ESG factors, integrate ESG risks into overall enterprise risk management, and collaborate with risk leaders to address both strategy and oversight around issues like climate, workplace matters, and reputation.

CFOs must also navigate new metrics as ESG reporting will soon escalate from best practice to a regulatory mandate for certain entities. Organizations with international operations may already face sustainability reporting requirements. Once the SEC finalizes its proposed climate change disclosures, publicly traded U.S. companies will be required to disclose the impact of material climate risks on their business, operations, value chain and strategy, and greenhouse gas emissions data. Private entities and nonprofit organizations can use this as a basis to look at what may become a focus area of their stakeholders and determine whether to voluntarily adopt ESG reporting. CFOs must collaborate with the organization’s sustainability leader to assess the significance of ESG risks and determine stakeholder materiality, nonfinancial ESG priorities, industry-specific standards and disclosure of best practices.

Finally, CFOs need to embed ESG into their own decision-making processes, drive accountability and take the lead in transforming ESG strategy from vague values to tangible action. CFOs must ensure that ESG initiatives are implemented with an eye on the bottom line by striking a balance between targeted, socially responsible cost- reduction initiatives and smart spending to fuel sustainable growth. History has shown that organizations with sustainable business models generally grow faster than those without them, and sustainable business model innovation is quickly becoming necessary to attract and retain ESG-conscious stakeholders.

To learn more about the CFO’s role in ESG, read our insight which provides additional information and perspective on this important topic. Stay tuned for the 2023 NFP Benchmarking Survey, which is due to be released at later this fall.

Return to Table of Contents

Are Your Processes Innovative or Merely Electronic? Leverage Technology the Right Way

By Gina McDonald, CPA

Decades of innovation have transformed the finance office from a mindset of processing transactions to one of strategic financial management. But even with this advancement, nonprofit organizations are operating in an increasingly complex environment that requires them to balance routine and new tasks with a higher volume of information.

When the topic of efficiency is raised to an organization whose finance team is at capacity, it is not unusual to hear the team is already using technology and that, perhaps, no further innovation is possible. However, asking a few questions helps to uncover whether the tools they have implemented are really transforming their processes or whether they have merely replaced manual processes with electronic ones.

Confusing “Electronic” With “Innovative”

As a result of the pandemic, most finance offices were forced to shift to virtual operations. Understandably, many were unable to put a strategic plan in place before making this transition and simply replicated a manual workflow that layered into it an electronic component, such as email or another paperless option. Many of these workflows still exist today but present confusing workarounds for typical tasks, such as:

  • Emailing vendor invoices as message attachments, with approval indicated in the body of the email message, and then saving the email as a PDF as supporting documentation and manually entering data from the invoice for payment processing.
  • Completing time sheets via spreadsheets that then are manually reviewed, corrected and compiled for manual data entry into the payroll system for processing.
  • Using shared electronic folders for collecting scanned credit card receipts for manual reconciliation via spreadsheet at month’s end.

What all these examples have in common is that they replace paper with an electronic file. But these modifications do not introduce any real workflow changes or innovative technology that is designed and customized to support that workflow. In fact, workflows like this can be less efficient and less effective, especially in a high-volume environment.

Real Innovation

There are a variety of innovative technology solutions that enhance efficiency and effectiveness for the finance team. For example, the following simple solutions can help address the situations above:

  • Utilize one of the many electronic accounts payable (AP) tools that enable electronic invoice routing based on an organization’s defined approval workflow, facilitate electronic coding that syncs to the general ledger and have a mobile app option. These tools also will facilitate electronic vendor payments without time-consuming manual data entry.
  • Implement electronic time sheets that work with your organization’s payroll processing technology, eliminating the potential for mathematical errors, facilitating tracking paid time off and syncing for payroll processing without manual entry.
  • Consider an expense management system with mobile app capability. Similar to the AP solutions, these tools allow credit card holders to take pictures of receipts and other supporting documentation, code and approve within the app, and facilitate month-end reconciliation. Expense management systems are also designed to automate employee expense reimbursements in a similar way.

Beyond electronic accounts payable, time sheets and credit card management, other common areas for innovation include:

  • Automated financial reporting—including budget versus actual, dashboards and forecasting—that reduces the need to download data to a spreadsheet for manual report creation.
  • System integrations, so that information—including development revenue, inventory balances or deposit details—is automatically updated in the general ledger and not manually entered.
  • Expense allocations that are automatically calculated based on set parameters to avoid time-consuming calculations.
  • Document routing and storage systems that are designed to circulate important items—including grant agreements, information for grant reports and vendor contracts—for internal approval and to house final versions in a central location.

When beginning to assess which tools may improve efficiency, it is helpful to focus first on the most time-consuming areas for the finance team, also keeping in mind how the team would spend time if capacity were increased. These are just a few of the most common areas for innovation, and there is certainly no shortage of technology solutions. BDO can help organizations assess finance team infrastructure needs, including opportunities for technology innovations, and help with related implementation and internal training.

For more information, contact Gina McDonald, Managing Director, Industry Specialty Services.

Article adapted from the Nonprofit Standard blog.

Return to Table of Contents

BDO Professionals in the News

BDO professionals are regularly asked to speak at various conferences due to their recognized experience in the industry. You can hear BDO professionals speak at these upcoming events:


Marc Berger is presenting a session titled “Five Years In, Living in the World of UBI Solos, A Look Backward and Forward” at the Greater Washington Society of CPAs’ Annual Nonprofit Symposium on Oct. 26. The conference is a hybrid event and this session will be virtual.


Lee Klumpp is presenting a session titled “Nonprofit Update” at the Virginia Society of CPAs’ 53rd Annual Virginia Accounting and Auditing Conference on Nov. 16 in Virginia Beach, Va.


Sam Thompson is presenting the following two sessions at the Alaska Government Finance Officers Association conference in Anchorage, Alaska on Dec. 7 and 8:

  • GASB 94 and 96, PPP and SBITAs
  • PERS and OPEB Accounting Adjustments

Klumpp is also presenting the session titled “Nonprofit Update” at the Virginia Society of CPAs’ 53rd Annual Virginia Accounting and Auditing Conference virtually on Dec. 11.

Return to Table of Contents

Form 990 Review: What Nonprofit Boards Should Look For

By Marc Berger, CPA, JD, LLM

Many in the nonprofit world know Form 990 as the all important nonprofit tax form that details an organization’s activities and financial standing. In addition to justifying an organization’s tax-exempt status, Form 990 reveals key information that charity-rating organizations and grantmakers use when evaluating nonprofits.

The IRS does not mandate that nonprofit boards review Form 990, but due to the form’s importance, board review is a widely adopted best practice. And if the board does review the form, the IRS requires an organization to disclose its Form 990 review process. Establishing a consistent board review process helps organizations mitigate compliance risk, but also helps board members identify and address any issues that may raise a red flag to funders, donors and charity watchdogs.

Form 990 should include detailed information about the significant programs the organization conducts, how much revenue it generates and where it is spending money. It’s also important to note that prominent foundations and other philanthropic institutions look for a detailed Form 990 during their grantmaking due diligence, and making sure this information is accurate, up-to-date, and readily available can help board members secure larger donations.

Enhancing Accuracy and Addressing Compliance Concerns

Most nonprofit boards see reviewing Form 990 as a part of their fiduciary responsibility to the organizations they serve. Given this responsibility, legal and financial professionals who have the skills to understand the information reported in the return and flag compliance concerns can provide a great deal of value as nonprofit board members. When reviewing Form 990, here are some issues the board should look for:

  • Compensation issues: If the IRS determines nonprofit executives are unreasonably compensated, executives may be liable to pay an excise tax and return the excess benefit. Board members who approve the excessive compensation may also be liable for an excise tax. Beyond the IRS, funders and donors may also want to understand how executive compensation is determined as they make funding decisions.
  • Cost allocation: In part IX of Form 990, nonprofits are required to allocate their expenses between program service activities, management and general expenses, and fundraising. The IRS requires that the process for cost allocation is reasonable under the circumstances and that the allocation process is documented thoroughly. Additionally, charity watchdogs and funders and donors will analyze what percentage of overall funding is going toward program activities to help determine their funding decisions.
  • Transaction and loan ethics: The IRS is interested in transactions that may involve “interested persons” such as directors and officers and others with substantial influence in the organization. These transactions are disclosed in Schedule L of the return and should be “at fair market value and arm’s length” as it pertains to the nonprofit. Board members should review Form 990 for these transactions in order to confirm that they meet the arm’s length and fair market value standard. In addition to transactions, loans made by an organization to an interested person could raise a red flag. The IRS will look for these loans to carry commercially reasonable terms and carry an interest rate and security as a bank loan would.

If organizations cannot demonstrate that transactions and loans “are at fair market value and arm’s length,” the organization and individuals involved could be subjected to excise tax penalties. If these transactions and loans are particularly egregious, they could jeopardize the organization’s tax-exempt status.

As nonprofits face increasing demands for transparency, a formalized board review process for Form 990 can help organizations put their best foot forward with the IRS, the public and donors.

Creating a Powerful Narrative to Support Your Mission

Form 990 is an important component of an organization’s ability to navigate increasing scrutiny and pursue funding opportunities. By applying their knowledge and experience to the reporting process, board members can help the nonprofits they serve maintain compliance with IRS regulations as well as reinforce the organization’s commitment to its mission in the eyes of donors and the public. Finally, a detailed Form 990 arms the organization with the information it needs to communicate its story, highlights the impact of its work, and makes a compelling case to donors, grantmakers and the public at large.

For more information, contact Marc Berger, National Director Nonprofit Tax Services.

Article adapted from the Nonprofit Standard blog.

Return to Table of Contents