CharityNet USA

It’s that time again! Tax season is right around the corner! As I’m sure you’re aware, as of the 2007 fiscal year all nonprofit organization, regardless of revenue, are required to file an annual return with the Internal Revenue Service. In addition to that change, the IRS has established new filing guidelines and revised forms for this 2008 tax year. The IRS issued an updated version of Form 990, and provided transition relief so that small exempt organizations will have time to adjust to the new form.

The final form contains a redesigned format, consisting of a core form and a series of schedules. In response to public comments, the new core form allows an organization to describe its exempt accomplishments and mission up-front and provides more opportunities throughout the form for the organization to explain its activities. Other major changes were made to the form’s summary page, governance section, and various schedules, including those relating to executive compensation, related organizations, foreign activities, hospitals, non-cash contributions and tax exempt bonds. A checklist of schedules was also added.

The IRS also announced a graduated transition period for smaller organizations. These organizations will be allowed to file the Form 990-EZ instead of the Form 990. For the 2008 tax year, organizations with gross receipts over $1.0 million or total assets over $2.5 million will be required to file the Form 990. For the 2009 tax year, organizations with gross receipts over $500,000 or total assets over $1.25 million will be required to file the Form 990. The filing thresholds will be set permanently at $200,000 gross receipts and $500,000 total assets beginning with the 2010 tax year. Also, starting with the 2010 tax year, the IRS will increase the filing threshold for organizations required to file Form 990-N from $25,000 to $50,000.

The IRS also announced a phase-in of the form’s new hospital and tax exempt bond schedules. Certain identifying information will be required for the 2008 tax year, with completion of the entire schedules required for the 2009 tax year. In response to the nonprofit sector’’s safety and security concerns regarding disclosure of certain foreign workers and volunteers, the IRS revised the form to permit reporting of foreign activities by region, rather than by country, until other safeguards may be implemented to protect the privacy interests of such persons.

All sound like a lot to tackle? Well, it may be. But that’s where the assistance of an experienced nonprofit accountant comes into play. If you need our help, we’re here for you.

In times where our current economic crisis is adversely affecting charitable giving in the U.S., it is more important now than ever for nonprofit administrators to develop cost-effective methods of marketing their services, recruiting volunteers, fundraising, and cultivating donors. One such method to affordably undertake such critical activities is to become involved in Web 2.0.

As defined by TechSoup, Web 2.0 is a category of new Internet tools and technologies created around the idea that the people who consume media, access the Internet, and use the Web shouldn”t passively absorb what’’s available; rather, they should be active contributors, helping customize media and technology for their own purposes, as well as those of their communities. These new tools include, but are by no means limited to, blogs, social networking applications, RSS, social networking tools, and wikis.

But Web 2.0 isn”t just the latest set of toys for geeks, it’’s the beginning of a new era in technology — one that promises to help nonprofits operate more efficiently, generate more funding, and affect more lives. Websites such as Myspace, Facebook, Twitter and LinkedIn are becoming vital networking tools for nonprofits. Additionally, there are sites springing up that are geared specifically at the nonprofit audience, such as Care2 and Blue Goose. More and more nonprofit leaders are blogging to keep their constituents up to date with the organization’s activities. Overall, it is apparent that nonprofits are realizing the value of such tools, both quantitatively and qualitatively. Is your organization on board with Web 2.0?

Charitable gaming is one of the most common and successful methods of fundraising for many tax-exempt organizations. However, careful attention to regulations is imperative. Charitable gaming activities may include, but are not limited to:
• Bingo
• Beano
• Raffles
• Lotteries
• Pull-tabs
• Scratch-offs
• Pari-mutuel betting
• Calcutta wagering
• Pickle jars
• Punchboards
• Tip boards
• Tip jars
• Video games

In order for your gaming fundraiser to be successful without jeopardizing the organization’s funds or, more importantly, their exempt status, all exempt organizations conducting or sponsoring gaming activities, whether for one night out of the year or throughout the year, whether in their primary place of operation or at remote sites, must be aware of all state and federal regulations concerning gaming activities.

Lawful gaming ordinarily requires a gaming license from the state that conducts it. Most states require that an organization be recognized by the IRS as exempt from federal income tax before issuing a license, and many states limit licenses to organizations recognized under specific subsections of Code section 501(c), such as 501(c)(3), 501(c)(4), and 501(c)(19). Additionally, many states make stipulations regarding the length of time an organization must be in operations and/or the specific areas and methods by which gaming sales may be conducted, thus it may be best to consult a professional nonprofit consultant to review the statutes in your area prior to commencing a gaming activity.

As far as the IRS is concerned, for almost all tax-exempt organizations, including 501(c)(3)s, gaming activities do not further an exempt purpose. This is true even if all proceeds from gaming will be used to fund exempt purposes. The result of such ruling is that the revenue generated from gaming is ordinarily subject to unrelated business income taxes. One exception is in North Dakota, where income from lawful gaming is excluded from UBI tax regulations.

An important consideration when conducting charitable gaming activities is the need for diligent recordkeeping. Organizations conducting gaming generate a substantial amount of income at each session, primarily in the form of cash. The cash passes through many hands, which could result in numerous abuses. Thus, every organization should be actively involved in overseeing and controlling each facet of the gaming activity to insure funds are not diverted to private individuals or for private purposes. Organizations conducting gaming activities must maintain records of gross income, prize payouts, and disbursements to substantiate the information submitted on the informational return, Form 990, and the income tax return, Form 990-T. Gross income from gaming activities is determined before any deduction for prizes, taxes, or any other expenses is taken. Additionally, the organization must retain and submit taxes frm the winnings. State and local laws may contain additional recordkeeping and reporting requirements for organizations conducting gaming.

If an organization is selling goods or services to generate income, even if it is conducting the activity within a larger group of activities related to its exempt purpose, the activity is a trade or business. It is important that you file the correct return and pay taxes on this income.

Sales of merchandise, publications, and other media can generate UBI if the items sold are not substantially related to the organization’s exempt purposes. If the items do have a substantial relationship, then the sales do not generate UBI, but their relationship to the exempt purpose must be clearly identifiable.

For example, the sale of educational videos or publication subscriptions by an animal welfare group would be substantially related if the content of those videos or publications promotes the organization’s exempt purpose. If the same animal welfare group sold pet accessories and apparel, the sale of these items would generate unrelated business income.

Exceptions and Exclusions

• Volunteer Labor: Any trade or business is excluded in which substantially all the work is performed for the organization without compensation. Some fundraising activities, such as volunteer operated bake sales, may meet this exception.
• Convenience of Members: Any trade or business is excluded that is carried on by an organization described in section 501(c)(3) or by a governmental college or university primarily for the convenience of its members, students, patients, officers, or employees. A typical example of this is a school cafeteria.
• Selling Donated Merchandise: Any trade or business is excluded that consists of selling merchandise, substantially all of which the organization received as gifts or contributions. Many thrift shop operations of exempt organizations would meet this exception.

If you have questions or concerns about whether your planned activity may generate UBI and thus subject you to taxation and/or jeopardize your tax exempt status, you may want to seek consultation with a nonprofit expert.

For many small startup nonprofits, learning the ins and outs of nonprofit operations, especially as an organization exempt under IRC 501(c)(3), can be overwhelming. However, it may be best to first begin to acquire knowledge of what activities have the potential of jeopardizing the exempt status that you have worked so diligently to achieve. Four primary types of activities exist that may result in revocation of an organizatio’’s tax exempt status: Private Inurement, Lobbying, Political Campaign Intervention, and Unrelated Business Income.

Private benefit/inurement

The prohibition of inurement to insiders is absolute. Any amount of inurement is grounds for loss of tax-exempt status. In addition, the insider involved may be subject to excise tax.
In contrast, if the activities of an organization privately benefit someone who is not an insider, that benefit must be substantial in order to jeopardize the organization’s tax-exempt status.

Lobbying

Lobbying is activity designed to influence legislation. A 501(c)(3) is attempting to influence legislation if it contacts, or urges the public to contact, a member or employee of a legislative body to propose, support, or oppose legislation, or if the 501(c)(3) advocates or opposes legislation.

Political campaign activity

501(c)(3)s are prohibited from engaging in any “political campaign activity”—that is, directly or indirectly participating or intervening in any political campaign on behalf of or in opposition to any candidate for public office. This includes making contributions to political campaign funds or making public statements for or against the candidate. The prohibition of political campaign activity is absolute.

Activities generating excessive unrelated business income (UBI)

UBI is income from a regularly-carried-on trade or business that is not substantially related to the organization’s exempt purpose.

If you have any concerns as to whether or not your ongoing or planned activities may place your organization’’s tax privileges in jeopardy, I”m here to help.

I believe steadfastly that nonprofit Boards should be fully contributing. However, in addition to contributing cash to their organizations, members of the Board of Directors should also assist in the generall fundraising efforts. When determining whether or not to fund your organization, in many cases funders will consider three questions:

1. What percentage of the board is contributing to the organziation? (the answer should be 100 percent)

2. How much, in total, does the organziation receive in board contributions? (the answer should be a substantial portion of individual contributions, perhaps 20 percent)

3. How active is the board in soliciting funds? (the answer should be very active)

While not all trustees feel comfortable in asking for money, they still can be involved in the general fundraising endeavors. For those not at ease with direct solicitation there are other activities. These may include working on a special fundraising event, updating mailing lists, undertaking analysis of donor records, writing personalized fundraising letters, researching funding sources, or hosting fundraising luncheons. There are plenty of tasks for everyone.

The most important reason why your board should be active in fundraising is because people give to people, and especially peers give to peers. To the extent that board members are active within the community, are givers themselves, and are not afraid to ask for money, the organization will be more successful in the fundraising effort. Futher, the fiscal health of the organization may depend on the extent that the board feels the income gap is their responsibility. Thus, board involvement in revenue procurement is one way that the funding community takes the measure of the organization’s vitality and health.

Although there are over 60,000 foundations and countless corporations and individuals ready and willing to contribute to every cause, there is today tremendous competition for winning grants. The growth of the nonprofit sector is a major cause of this intense grant competition. Now, more than ever, it is important grantseekers to be educated in the fundamentals of grant writing and research. With foundation grant funding, specifically, it is imperative that you are aware of the correct foundations that you should be submitting your proposal to.

There are 4 types of foundations: private, corporate, operating, and community. The correct foundation from which to request funding depends on your organization’s specific situation and needs.

Private Foundations

Private foundations are most often set up by wealthy individuals or families. These foundations are typically set up to benefit a particular cause or causes. The Bylaws stipulate the types of causes it will support and the types of agencies it will fund. In general, foundations do not provide multi-year funding. Amounts of funding vary depending on the assets of the foundation. It is important that your organization submit proposals only to those private foundations whose guidelines your programs are well aligned with.

Corporate Foundations

This type of foundation must have the approval of its corporate board and shareholders. Corporate foundations will typically fund programs within their geographical service area that will be of benefit to their employees or their community.

Operating Foundations

Operating foundations are organized to operate research, social welfare, or other charitable programs deemed worthwhile by the donor or governing body. These foundations do not usually fund other organizations’ programs and thus state “applications not accepted” in their guidelines.

Community Foundations

Community Foundations are set up within geographic locations and generally will only make grant awards within a specifically targeted geographic area. Awards are typically small and not for multi-year awards. A community foundation accepts contributions from various sources and combines them in order to have sufficient assets to run the foundation, invest for growth, and award grants.

The bottom line is if you’re considering seeking foundation grant funding for your organization, you’ll need to be quite diligent and informed in your research. Not only will you need to choose the correct foundations, but also be aware of application forms, deadlines, award ranges, etc. Luckily, we’re here to help.

While your Board of Directors should consist of a highly competent and skilled cross-section of the community you serve, most organizations, especially small startup nonprofits, will encounter the need to hire a consultant from time to time to assist either board members or staff members with their respective duties. Even if board members could do the specified job well, the politics of some situations or the lack of time to focus on the task may suggest the need for a consultant. To avoid conflicts of interest, employ an outside expert as a consultant rather than an individual who has been elected to serve on the board of directors.

Many attorneys, accountants, and other professionals specialize in the nonprofit sector. These individuals possess specialized skills, experience, and networking contacts gained from working with other nonprofit organizations. More importantly, these individuals will be objective, outside observers without any personal interests in the organization. This enables them to provide unbiased feedback and a new perspective on the issue at hand.

Common tasks for which to seek the assistance of an outside consultant include:

• Program Development Assistance
• Assistance with State and Federal Compliance
• Board Development and Training
• Organizational Governance
• Fund Development
• Cash Management
• Program Evaluation
• Executive Leadership
• Mission-based Marketing
• Volunteer Coordination
• Strategic Planning Recommendations

I’m often asked by those new to the nonprofit sector what type of charity accounting and bookkeeping is necessary for churches and charities. My typical response is that is critical that nonprofit directors and executives develop at least basic skills in financial management. Expecting others in the organization to manage finances is clearly asking for trouble. Basic abilities in financial management begin in the critical areas of cash management and bookkeeping, which should be done according to certain financial controls to ensure reliability in the acounting and bookkeeping process. Nonprofit administrators should learn how to generate financial statements and to analyze those statements to really understand the financial state of the nonprofit organization.

Diligent financial management of nonprofit organizations involves the use of financial statements as a management tool; the elements of an accounting system and identification of its best use; basic methods of internal controls and preparation for a third party audit; the budget cycle and annual filings. These aspects are indispensable to an organization’s finance and audit committee of the Board of Directors, and are essential in the oversight of the organization’s financial soundness.

Because each nonprofit organization faces different fiscal issues and has different fundraising ideas to bring to pecuniary functions, each organization will choose a different set of regular financial reports to prepare and analyze. At different times an organization will need different reports to provide information to support its decision making. The required reports will depend on several things, including the extent to which the organization is financially stable, the degree and extent to which the financial outlook changes during the period, the availability of resources to meet financial obligations, the availability of staff or other professionals to prepare reports, etc.

Common Monthly reports include:

• Statement of Position (Balance Sheet)

• Statement of Activities (consolidated) showing budget to actual information

• Departmental Income and Expense Statement showing budget to actual information

• Narrative report including tax and financial highlights, important grants received, recommendations for short term loans, or other means of managing cash flow

Common Quarterly reports include:

• Fundraising Reports; actuals vs. projections for donations; status report on all foundation proposals.

• Cash flow projections for the next six months

• Payroll tax reports

• Fee for service report showing number of fee-paying clients and revenue against projections.

Common Annual Reports include:

• Annual Federal forms, including 990 and Schedule A; State Reports

• Draft financial statements for year: Statement of Activities; Statement of Position; Income Statement for each program.

• Audited financial statements for the entire organization, including Statement of Position, Statement of Activities, Statement of Cash Flows, Statement of Functional Expenses

• Management letter from the auditor

It has come to my attention, once again, that numerous small businesses are receiving correspondence from Corporate Compliance in their state. Operating under the guise of a government agency, a private business is distributing very official looking documents to the registered agents of small corporations claiming a need to file annual meeting minutes in order to remain in compliance with corporation statutes.

Attention folks: Such filing of annual meeting minutes is not an official requirement, and Corporate Compliance is not a governmental agency! They are simply hoping that they can trick as many small business owners as possible into believing that they need to do this filing, which of course requires the remittance of a hefty filing fee that is to be made payable to their company. Please be diligent in reading the small print in any mailing that you are not positive is from an official government agency. On the aforementioned mailings there should be a tiny disclaimer somewhere that mentions that they do not represent any government agency.

Now I’ve heard of this scam before but it had slipped my mind until a client recently phoned to inquire about its legitimacy. After doing some quick research on the web I’ve found from many other sources that these notices come under the ruse of a variety of agencies, including:

• (Enter Your state Here) Corporation Compliance
• Corporation Compliance Recorder
• Minutes and Compliance Affairs
• Compliance Annual Minutes Board

So please, I implore you, if you receive any such mailings requesting annual filings be sure to check for an official state seal, that the notice clearly states it is from the Secretary of State or Division of Corporations in your state. While there are annual filings required of corporations, these filings do not typically require submission of minutes and carry a minimal filing fee. If you have any question as to what annual filings are required for your corporation to remain in compliance don’t hesitate to check with an expert .