Accounting for nonprofits should including setting fair transfer pricing policies for organizations that buy and sell goods or services internally.
Transfer pricing is simply the price set for one division of your company to charge another in the event that it must ‘sell’ or set a price for its goods or services to another group internally. For example, if your creative services department is paid by members for graphic design services, you may also set an internal transfer price for their services so that if your membership division requests graphic design work, the number of hours spent on an internal project can be on the books in a similar way to an external paid request.
The problem with many transfer pricing situations is that the internal department selling the goods or services has an incentive to change the full amount, while the group purchasing it has an incentive to seek lower costs. The two may have difficulty negotiating prices since negotiations do not serve either party’s best interest. Instead, the purchasing group usually capitulates and pays more than it should for a service internally than they could get from an external source.
In order to make transfer pricing work, as part of accounting for nonprofits, the following tips and strategies may be helpful.
- Enable better decision-making on internal pricing transfers: Smart accounting for nonprofits starts with accurate data. To make better decisions around setting prices, you must first have an accurate depiction of the costs that go into the goods being priced. This is where having a good nonprofit financial accounting system helps because it is easier to extract data from such systems and analyze it to build price points.
- Build fair transfer-pricing policies: Written policies prevent miscommunications and mishaps during transfer policies. They also help organizations and companies set fair prices for all. A written policy can clarify how transfer pricing agreements can be reached and how to conduct internal transfers.
- Assess autonomy levels: Some companies do well with a high degree of autonomy granted to both parties during a transfer negotiation. Assessing and understanding how much autonomy is healthy for your organization is an essential part of setting transfer pricing policies.
Why Bother with Transfer Pricing?
Accounting for nonprofits must include accurate depictions of both revenues and expenses, as well as labor costs, in order to make fair calculations. Without knowing what your transfer costs are, you could miscalculate and under- or over-estimate costs for your organization. Transfer pricing makes things fair, balanced, and transparent in your financials.
Recently, the IRS has also stepped up its review of nonprofit compliance with transfer pricing rules. Organizations that do not have documentation regarding their transfer pricing policies and rules may come under additional IRS scrutiny. Adjustments, penalties, and loss of tax-exempt status may result if the IRS investigates and finds your organization’s transfer pricing inadequately documented or handled. It pays to be proactive and take steps now to create the rules and documentation necessary to clarify how it is handled.
Although transfer pricing is most often thought of as a way to improve tax tracking and reporting, especially in cross-border transfers, it is also an integral part of accounting for nonprofits. Understanding and managing transfer pricing can help your nonprofit improve its financial management and compliance with taxation and financial rules and guidelines.
Accounting for Nonprofits with Beck & Company
If transfer pricing and other accounting for nonprofit topics are confusing for your organization, or you require audit assistance or other nonprofit accounting services, contact Beck & Company.
Beck & Company can help with your nonprofit financial management needs. We are a CPA and business advisory firm dedicated to the nonprofit sector. Our many years of experience can help you update your financial compliance or handle all types of accounting for nonprofits. Please contact Beck & Company today for further details.