Re: [44net] ARDC's 2020 tax returns & audited financials

Hi 44net! Today it's 2022, but due to Covid delays and other issues, it took us until a few months ago to finish our 2020 tax returns. (Future messages will talk about our 2021 and 2022 finances.) Back in August, I wrote to 44net: ARDC's 2020 tax return and audit are now published! I chair the Audit Committee, which worked with our accountants and auditors to finalize these documents. The Audit Committee is, by California law, composed of people who are not paid by the org and have no financial stake in it. Most of the work of the audit and tax returns was actually done by Rosy and Bdale, our executive director and treasurer, and our accounting firm, AAFCPA.com. All of our public financial information is visible at this URL, with the 2020 info at the bottom of the page: https://www.ampr.org/about/legal/ There were no irregularities in our audit. In 2020, ARDC had a great investment year, funded a lot of worthwhile projects, improved our internal operations, and learned a few surprises about nonprofit law and accounting. 2020 was a great year for us, as it was for many steady investors. Our $109 million in investments gained $22 million, about a 20% gain, with our assets reaching $128 million. (We simply invest in the broad stock and bond markets, using exchange-traded mutual funds, while keeping multiple years' worth of cash available in case of downturns.) In 2020, we ramped up our grant-making programs, as well as reducing the volunteer board's workload by hiring Rosy, our first Executive Director since Brian Kantor died. We spent only about $450,000 in expenses like salaries, contractors, and taxes. We gave out about $3.2 million in grants. Those grants are listed on our "Awarded Grants" pages: https://www.ampr.org/grants/ https://www.ampr.org/2020-grants/ They are also listed on pages 11, 15 and 16 of the 990-PF tax return. These include more than $1 million in scholarships, half a million dollars toward improved satellite transceiver modulation, and a variety of both engineering projects and local infrastructure improvements. 2020 was the first year in which ARDC operated as a private foundation. That is an IRS category for charitable nonprofits that make most of their income in some way other than with donations from the general public. The IRS is more suspicious of private foundations than they are of public charities, since there are more opportunities for mischief when a broad cross-section of the public isn't watching. Most of what they look out for is self-serving behavior, like paying ourselves outrageous salaries, or funding things using non-taxable money that would pump up a related for-profit business. Private foundations can't give money to individuals without filing a detailed plan with the IRS. And to give money to organizations that aren't US 501c3 nonprofits, there are more controls and hoops to jump through. For example, when we funded DARC.DE, the German amateur radio club, to upgrade various parts of the European ham infrastructure, we and they had to go through a months-long paperwork exercise to prove that DARC is the German "equivalent" of a US 501c3 public charity. We have had to do a lot of consulting with lawyers and accountants to do everything properly. We want to be able to fund ham activities, education, and digital communications R&D throughout the world, not just in the United States. And to also be able to help small ham clubs that aren't organized as charitable 501c3 nonprofits. Private foundations also pay a small "excise tax" on their investment income -- about 1.39%. Yes, we're a charitable nonprofit, but Congress has figured out how to tax us anyway. For 2020, that cost us $33,730. And the biggest chunk of our $450,000 in expenses was when we accrued a deferred expense of about $277,000 for the "unrealized" investment gains that happened when the stock market went up so much. We won't have to pay that tax until we actually sell the investments that went up, but the deferred expense reminds us of what we will owe. In 2020, we failed at one IRS requirement. Luckily, the rules give us an extra year to make up for it, before we'd have to pay penalties. That is the requirement that every private foundation has to spend or give away 5% of the "fair market value" of its investable assets every year. This has to be calculated on a cash basis (not by accrual), so if a grant check was not cashed until 2021, it didn't count. This is often mis-described as a requirement that we give away 5% of our "income" or "investment returns", but actually a foundation owes it whether or not it has any income or investment returns. Even if a private foundation doesn't invest some of its assets, if they aren't directly using those assets for charitable purposes, they have to give 5% of them away annually. The whole idea is that to justify their income tax exemption, nonprofit private foundations have to actually do good in the world, spreading their wealth around, rather than just sitting pretty and hoarding their assets. This is a laudable goal, but now see how it applied to us. Since our average investment assets throughout the year were almost $117 million, our "distributable amount" was 5% of that, or about $5.8 million. We only spent or gave out about $3.2 million, so that's how we failed. That calculation is on pages 8 and 9 of our tax return. We would have done better, but we didn't realize that we would be treated as a private foundation in 2020; we thought we had another year as a public charity. Having learned that in 2021, we believe that for 2021 we have met and exceeded that 5% requirement, and we expect to reduce or eliminate our carried-over shortfall of spending from 2020. Our ability to follow the 5% rule is only easy because we are not treating our remaining IP addresses as an investment asset. Instead, we are using them directly in our charitable works (including both providing small numbers of addresses to hams, and accomplishing scientific research using the other addresses via the Network Telescope). If we did have to treat those addresses as an investment asset, we would be required to spend 5% of their value every year. Because the addresses we still have are 3x as many as what we sold off in 2019, and the value of IP addresses is rising, the IRS would require us to annually spend about 4x as much as we do today! That would deplete all of our liquid assets within a small number of years, and then require us to sell off a new 5% of our addresses every year, just to create the cash to grant out 5% of their worth every year. This is what I meant when I said back in August that our situation is "complicated and interesting". It's a bit like the "use it or lose it" nature of ham frequency band allocations. If we really didn't use the IP addresses for charitable purposes, then we would be forced to gradually lose them. In summary, in 2020, ARDC had a great investment year, funded a lot of worthwhile projects, improved our internal operations, and learned a few surprises about nonprofit law and accounting. With what we learned in 2020, we expect to finish our 2021 audit and taxes much sooner -- in the first half of 2022. Any questions? John Gilmore, chair, ARDC Audit Committee _________________________________________ 44Net mailing list 44Net(a)mailman.ampr.org https://mailman.ampr.org/mailman/listinfo/44net