Nonprofit entities have an added and entirely different set of accounting considerations than for-profit entities. For museums, there are even more complexities to be aware of. Museums hold a wide variety of assets, both tangible and intangible. They recognize multiple revenue streams, each of which demands adherence to distinct tax reporting standards, and have an entirely different set of operational considerations to other types of nonprofit organizations.
These complexities can be challenging to navigate during normal times, but in the pandemic era, almost all museums have had to fundamentally alter the way they operate. Pivoting to a virtual approach (and now to a combination of in-person and virtual), accessing government stimulus (and reporting it), and scaling new revenue streams brought a raft of new challenges that museum leaders need additional support to handle.
From an accounting perspective, negotiating these complexities demands significant levels of nuance and expertise. That’s true not only of the executive team and board of directors charged with running the museum, but also of the accounting firms that museums partner with, throughout the year and during compliance and reporting engagements.
Nonprofit accounting for museums is a very distinct field of accounting, and it’s important for leaders to be aware of the considerations that impact the financial infrastructure of their museums. Understanding the key components of both accounting, audit and tax services is a valuable first step. In addition, it’s also critical that museum leaders understand how to identify an accounting partner that can elevate their financial infrastructure to industry-leading standards.
Museums are pillars of our communities: both nationally, and on a local level. They bestow civic pride, a cornucopia of culture, and unparalleled educational opportunities. Enhancing this cultural influence requires long-term stability, and that’s only possible if a healthy financial infrastructure is in place.
Ensuring the long-term strategic and operational success of a museum requires a considered approach to accounting that recognizes the complexities in a museum’s financial management. There are numerous elements that characterize nonprofit accounting for museums as distinct to other forms of nonprofit accounting, including:
Many museums hold a broad range of assets that encompass everything from historic works of art or artifacts to venerable buildings located on prime real estate. Accurately valuing and reporting these assets is a complex task.
While museums do not have to report the value of their collections in their financial statements, there are many other assets they must account for. These include the physical building itself, as well as all the supporting infrastructure: from storage spaces to parking lots. It’s important to accurately account for the carrying costs of these assets, including maintenance and depreciation over time.
From a tax and Generally Accepted Accounting Principles (GAAP) perspective, the variety of revenue streams recognized by major museums is uniquely complex. Some revenue streams––such as ticketing––are relatively straightforward transactional revenue, but others are significantly more complicated.
Donation revenue is often one of the most common forms of income realized by museums, but it’s also perhaps the most heterogeneous. Many donations take the form of sponsorships, and from a GAAP and tax reporting perspective, it’s critical to understand which portion of the sponsorship is a pure donation, and which portion carries some obligations, such as a co-branded advertising agreement.
It’s best to evaluate these transactions on a case-by-case basis to understand exactly what has been agreed to in each instance. Often, one line item of revenue must be allocated in multiple directions. It’s crucial to have the guidance of an experienced CPA in this process.
Museums hold significant quantities of personally identifiable information; from the details of individual donors to the social security numbers of their employees. Proactively taking steps to safeguard this data and to have plans in the event of a data breach is vitally important. Many museums are now proactively seeking cyber risk assessments and risk mitigation plans to ensure their proprietary information is protected from bad actors. Our Cyber Risk Management + Compliance team stresses that it is not a matter of “if” but rather “when” an organization will experience some type of cyber event.
Large museums are truly global institutions. Many manage significant endowments, which often include foreign investments that require additional reporting. Foreign activities can also include grant making or supporting foreign entities with a “friends of” type organization. For other museums, trips abroad to scout out new exhibits or collections can create a need for additional disclosures that must be included with annual tax returns. It’s important to understand the rules and to ensure they are reporting correctly on the Form 990.
For all the reasons outlined above, accounting services for museums are highly complex and demand the experience of CPAs from specialized accounting firms. There are many aspects to the services firms will provide, and it’s important that museum leadership know exactly what to look for to ensure they select the best-qualified partner.
In many areas, museums are required to have their financial statements audited on an annual basis. During the audit process, CPAs will closely scrutinize not only financial records but also the overall financial infrastructure of the museum. This involves an analysis of internal financial controls, an assessment of segregation of duties, and a thorough evaluation of the museum’s contracts and transactions.
However, accounting services for museums are not limited to audit-based engagements. The most successful partnerships encompass a much broader view of the organization and are grounded in a long-term relationship that places the ongoing success of the museum front and center. Accounting should not be transactional: its ultimate goal is to further the mission of the museum by supporting financial accuracy and strength.
To this end, many accounting firms offer a selection of advisory services that help museum leadership navigate challenging financial issues throughout the year. Forming a working relationship with a trusted accounting firm makes a huge difference: it’s easy for museum leaders to pick up the phone and proactively address an issue with expert assistance.
The importance of maintaining this type of advisory relationship has never been more evident than in the past couple of years. Many museums have been eligible to receive government support, most recently the Employee Retention Credit. Many museums may not have realized that they qualified for such programs, but at Smith and Howard, we continue to help museums amend their 2020 and 2021 Payroll Tax Returns to realize the benefit of this stimulus. Even as this credit expires, it underscores the importance of partnering with an accounting firm that can proactively guide leaders in this sector through timely opportunities.
Alongside the accounting complexities unique to museums come a range of special tax considerations. There are many intricacies in how museums report their activities, and often, facts specific to each museum drive the reporting requirements.
There are several important components of tax services for museums.
Each year, museums claiming federal tax-exempt status are required to file a Form 990 with the Internal Revenue Service (IRS). The form details annual revenue and expenses and also outlines the museum’s total assets and liabilities. In addition to financial disclosures, Form 990 also devotes space to reporting on mission-related activities and results, as well as the overall governance of the organization’s charitable assets.
It’s important to bear in mind that Form 990 is a public document; one that’s easily viewable on the internet and evaluated by watchdog organizations like Guidestar and Charity Navigator. Adhering to compliance requirements is critical, but museums should also consider what readers outside of the IRS––including journalists, donors, and the public––will think when they read through the return.
Many museums derive income from business activities that are unrelated to their tax-exempt purpose. For museums, notable examples include sales of products from a gift store or the rental of museum space for special events.
This type of income is referred to as unrelated business income and may be liable to taxation under the IRS rules for Unrelated Business Income Taxation (UBIT). Defining exactly which activities are exposed to this tax requires nuance, and is defined by the facts surrounding each case. A specialized nonprofit accounting firm will be able to share best practices in this area and accurately define a variety of complex forms of business income.
While cash donations play an important role in supplementing the operating budgets of museums, many museums also receive non-cash donations. These are typically artwork, historical artifacts, or other display pieces of value, but may also be stock, or even emerging asset classes including cryptocurrency.
When these non-cash donations are valued at more than $500, the donor is required to complete IRS Form 8283.
The accounting and tax requirements of museums are markedly different from those of other nonprofits, never mind a for-profit enterprise. These distinct requirements demand the expertise of an accounting firm that specializes in museums.
There are a number of reasons museums should embrace a partnership with a specialized nonprofit accounting firm. The experience of such a firm ensures rigorous accuracy in recognizing different revenue streams and satisfying reporting requirements, but the value derived from this expertise goes far beyond checking the right boxes in an audit.
Specialized accounting firms work with the nation’s top museums and cultural institutions on a daily basis, and have a keen understanding of industry benchmarks and best practices. They provide guidance on all kinds of issues, from the debt-to-asset ratios of similar museums to advising on best-in-class solutions around internal financial controls.
The board of directors of museums is entrusted with important fiduciary duties. A major element of that is continuously improving infrastructure to advance the vision of the museum. Access to specialized nonprofit accountants accelerates this transformation, enabling museums to better approach strategic and technical challenges.
At Smith and Howard, we’re proud to offer a wide range of accounting, audit and tax services to museums across the United States. We’re honored to partner with some of the nation’s most prominent museums, and our team of specially trained CPAs possess the expertise essential to ensure the long-term strategic and operational success of a museum.
To learn more about Smith and Howard’s nonprofit accounting services for museums, contact us today.
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