Accounting Question - Scholarships

[Jean in Newcastle]

Doing the books for camp which relies heavily on donations for scholarships.  I know how to log donations on the books.  But once it comes time to divvy out scholarships, is it just listed as an expense?  Do I have to link it back to donations or is it ok that it all comes out of the "pot" so to speak?  I'm taking over from a treasurer who resigned due to mental decline and so I can't rely on what she did (and she actually didn't record scholarships at all).  Is it ok that scholarships weren't recorded?  (ie.  were just part of operating expenses).  I have googled but am not really getting good answers because I might not be asking the right questions in the right way.

[Bootsie]

What is the legal structure of the camp?  Does it have a not-for-profit designation?  Is it a 501c3 charitable organization?  Are people donating money specifically for scholarships (restricted donations), or are they donating money to be used in general support of the organization?  How are scholarship recepients being chosen?  Is there a general scholarship pool to be used when needed or are is there money donated for a particular scholarship of a particular amount for a given time period?  I know that is a lot of questions, but it would be important in determining what needs to be done as far as recording keeping--especially for the IRS.  

[Jean in Newcastle]

We are a 501c3 charitable organization. Most donations are not designated. I have had a couple of donations wanting to be specifically attached to a scholarship child (a request that I honor). Scholarships (full or partial) are given to whoever asks for one. (We’ve never had to turn anyone away due to lack of funds). We are relatively new as our own charity- before we were part of a bigger organization that folded. When they folded we decided to keep going on our own. So we’re trying to figure things out- especially the bookkeeping. I don’t have access to the books from the original organization so I don’t know what they did. And our first treasurer was honest but struggling mightily with the job. I have been unscrambling things like transposed tax id numbers!  
 

So far I am confident that all legal paperwork is correct. I am confident that all funds are accounted for and if designated, are being used correctly. I just got confused by how to track donations which are being used for scholarships but are still part of one large check being paid out to the campground that we rent. (100% of our money goes to actual expenses. We take nothing for ourselves and all of us are volunteers. ). 

[Bootsie]

If donors are giving $ to support the organization's programming, not much needs to be tracked as far as where those particular dollars are going. 

If donors are giving $ specifically for scholarships, then a "scholarship fund" pool should be tracked on paper.  So, if you have $20,000 in cash in your account and then receive $5000 donation for scholarships, there is $25,000 in your account (the money can be mixed). But, you should have a ledger that says that $5000 is in the scholarship pool.  Until a scholarship is made, the organization should not spend more than $20,000.  The amount available to spend should be the cash in your account minus the scholarship fund.  If a scholarship of $1000 is granted, then $21,000 can be spent and $4000 is in the scholarship pool.  

Granting scholarships, however, becomes a bit tricky.  Mr. Smith cannot say he is making a $1000 donation for a scholarship  that he would like to go to Billy--in other words, he cannot designate the recipient of the scholarship.  He can pay Billy's fees if he wants, but he can't make a donation (receive a tax benefit) and specifiy that the donation is to benefit a specific person.  According to the IRS, you need a process in place for applying for and granting scholarships.  

[Scarlett]

1 hour ago, Bootsie said:

If donors are giving $ to support the organization's programming, not much needs to be tracked as far as where those particular dollars are going. 

If donors are giving $ specifically for scholarships, then a "scholarship fund" pool should be tracked on paper.  So, if you have $20,000 in cash in your account and then receive $5000 donation for scholarships, there is $25,000 in your account (the money can be mixed). But, you should have a ledger that says that $5000 is in the scholarship pool.  Until a scholarship is made, the organization should not spend more than $20,000.  The amount available to spend should be the cash in your account minus the scholarship fund.  If a scholarship of $1000 is granted, then $21,000 can be spent and $4000 is in the scholarship pool.  

Granting scholarships, however, becomes a bit tricky.  Mr. Smith cannot say he is making a $1000 donation for a scholarship  that he would like to go to Billy--in other words, he cannot designate the recipient of the scholarship.  He can pay Billy's fees if he wants, but he can't make a donation (receive a tax benefit) and specifiy that the donation is to benefit a specific person.  According to the IRS, you need a process in place for applying for and granting scholarships.  

This is my experience in my own religion too…as far as how tax laws have been explained to me.

[Jean in Newcastle]

Ok - while I offer a tax document that designates how people have donated to the charity, some people don’t want it. I assume because they aren’t planning on listing it in their taxes. So those people wouldn’t be bound by the same rules?  (Not that I am planning to do anything different for them-  I just wondered because of how you phrased your answers.). 

[Lecka]

Someone could have a change in circumstance and ask for a tax document later.  

[Jean in Newcastle]

8 minutes ago, Lecka said:

Someone could have a change in circumstance and ask for a tax document later.  

True. I always generate them anyway and save copies. 

[Bootsie]

if you are a 501c3, then the proceeds that you receive may either be a donation made by the individual or a fee paid for a service.  So, if Mr. Smith gives $1000 saying that he wants it to go to Billy's summer camp, it could be applied as a fee paid for Billy's camp, but not as a donation.  Mr. Smith cannot get a tax deduction and the $1000 is a gift to Billy.  This $1000 would need to be included on the 501c3's income tax return under revenues generated from fees, rather than classified as a donation.

Another sticky point comes in as to whether the scholarship is taxable income to Billy, and what documentation you have to provide Billy.  I was on the board of a 501c3 and some of these issues became so murky and difficult to navigate that we eliminated a scholarship program.

We found it easier to do something along the lines of:  donors made general contributions to the 501c3, a sliding fee was charged to participants--$2000 if family income was more than $100,000, $1500 if family income was between $75,000 and 100,000, and free for those who had family income below $75,000 (with other adjustments for family size)  This allowed us to subsidize our target group without granting scholarships or having to tie specific donor gifts to specific recipients.

IME, these accounting issues for a 501c3 get messy really quickly.  While people have good intentions--let's be generous to Billy--you can easily find that you are in violation of tax laws.  To make matters even more complicated, the state in which the 501c3 is created can also have tax laws that one needs to be aware of.  The tax laws are not easy to read and often a specific situation isn't outlined--you have to find a ruling on a similar case and make some assumptions.  I have been looking for several years for a good, simple guide to help 501c3 boards navigate these waters and haven't found one yet.  

[Jean in Newcastle]

Thanks, Bootsie. You have been extremely helpful. 

[Beth S]

I've been following this thread, trying to get an understanding of what YOU are responsible for.
To protect yourself, I would keep track of as much as you can.
Our Friends of the Library group treasurer talked briefly to a CPA, to make sure she was doing the right thing.
Oftentimes the treasurer gets blamed when the group's finances go bad.
So our treasurer meets with the other officers annually, to open the books & make sure the officers agree that the books are being kept correctly.

 

[Jean in Newcastle]

26 minutes ago, Beth S said:

I've been following this thread, trying to get an understanding of what YOU are responsible for.
To protect yourself, I would keep track of as much as you can.
Our Friends of the Library group treasurer talked briefly to a CPA, to make sure she was doing the right thing.
Oftentimes the treasurer gets blamed when the group's finances go bad.
So our treasurer meets with the other officers annually, to open the books & make sure the officers agree that the books are being kept correctly.

 

I am the director of the camp. I am also treasurer, which I only agreed to do under duress with the caveat that all bank records are open to the entire board of directors (five people) and that the board reviews and votes on all financial decisions. I did this because I don’t want any hint of conflict of interest  or too much power with me being the director. 

[Bootsie]

The IRS has some information Welcome to StayExempt | Stay Exempt (irs.gov) about record keeping requirements for 501c3 organizations.  If you haven't looked at this information before, you might find some of it helpful.   

Does your organization have Directors and Officers liability insurance?  Personally, I would not serve on a 501c3 board without this protection in place. 

[Jean in Newcastle]

1 hour ago, Bootsie said:

The IRS has some information Welcome to StayExempt | Stay Exempt (irs.gov) about record keeping requirements for 501c3 organizations.  If you haven't looked at this information before, you might find some of it helpful.   

Does your organization have Directors and Officers liability insurance?  Personally, I would not serve on a 501c3 board without this protection in place. 

Yes, we have that insurance in place