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Q&A #55 – What Board members are considered independent for purposes of reviewing executive compensation?
The key guidance addressing independent review and approval of executive compensation for Form 990 purposes is set forth in Treas. Reg. § 53-4958-6. The key principle is that the persons reviewing and approving executive compensation should not be in a position to economically benefit from the compensation and should not be family members of the person receiving the compensation or otherwise have a business or employment relationship with this person.
Q&A #54 – What comparability data must a small 501(c)(3) organization review when determining executive compensation?
For small organizations, the rule for reviewing comparability data when determining compensation amounts is relatively easy to satisfy. This Form 990 question is based on Treasury Regulations issued under the “intermediate sanctions” rules. Treas. Reg. § 53-4958-6 provides that organizations with less than $1 million in annual revenue (averaged over the three prior tax years) can satisfy this standard by reviewing “data on compensation paid by three comparable organizations in the same or similar communities for similar services.”
Q&A #53 – How should a nonprofit provide a copy of its Form 990 to the Board before filing?
Virtually all organizations check “Yes” to Part VI, Line 11a on page 6 of the Form 990, to affirm that they provided a complete copy of the Form 990 to all members of their governing Board, and failure to check “Yes” can negatively impact an organization’s reputation and appearance to honor transparency (and for publicly supported charities, affect their rating on charity watchdog websites). However, organizations should put careful thought into what it means to satisfy this standard.
Q&A #52 – Is it better to provide combined PTO or have separate vacation and sick leave policies?
In evaluating whether to provide combined PTO vs. separate vacation and sick leave policies, there is no one answer that applies to all organizations. Both approaches have pros and cons. The choice involves weighing which pros and cons best match your organization’s priorities and capabilities. In general, combined PTO policies are easier to administer, while separate vacation and sick leave policies potentially have lower financial burdens on the organization.
Q&A #51 – How can a 501(c)(3) organization change its public support test?
It is not uncommon for organizations to switch to a different public support test due to evolution in their programs and funding sources. Switching between the 170(b)(1)(A)(vi) test (sometimes also called the 509(a)(1) test) and the 509(a)(2) test can be done simply by checking the appropriate box and filling out the applicable parts in your next Form 990, Schedule A. However, this change will not be reflected in the IRS records or tax-exempt organization database, which may cause some confusion with your grantors or donors if additional steps are not taken.
Q&A #50 – What are the duties of a corporate secretary?
The secretary is the officer who is generally in charge of the corporate records. The time commitment of any Board or officer position varies widely depending on the particular organization and how much staff support and outside assistance the organization can afford. However, while the secretary is a very important role, it fair to say that the secretary role is usually the least time intensive of the three main officer positions (president or chair, treasurer, and secretary).
Q&A #49 – Can a nonprofit Board of Directors vote to temporarily suspend a provision in the Bylaws?
The short answer is that the Board of Directors generally does not have the power to vote to suspend a provision in the Bylaws apart from the formal Bylaws amendment process (although you should check the applicable state nonprofit corporation statute to be sure). The Bylaws are binding and must be followed, even under extenuating circumstances. However, there are creative approaches you could explore to avoid making the amendment more permanent than is desired.
Q&A #48 – Are nonprofits that received PPP funds eligible to receive employee retention credits?
The Consolidated Appropriations Act of 2021 (P.L. 116-260), which was signed into law on December 27, 2020, included a significant expansion of the employee retention credit (ERC), so it is true that your organization may indeed be eligible to receive both Paycheck Protection Program (PPP) loan forgiveness and ERC. However, there are important limits nonprofits that received PPP funds must be aware of.
Q&A #47 – Is my nonprofit permitted to record volunteer services as in-kind contributions?
While the Form 990 does not allow inclusion of in-kind gifts of services as revenue, whether volunteer services can be recorded as in-kind contributions under generally accepted accounting principles (GAAP) is a separate issue that is governed by the Financial Accounting Standards Board (FASB), specifically, FASB’s Accounting Standards Codification found at ASC 958-605-25-16, discussed further below. However, regardless of whether these volunteer services can be recorded in the financial statements, tracking and documenting in-kind contributions of goods and services is always important and beneficial to a nonprofit organization.
Q&A #46 – What are the downsides of using the Form 1023-EZ instead of the Form 1023?
True to its name, the Form 1023-EZ is certainly an easier, faster, and cheaper way to apply for 501(c)(3) status for organizations that meet the eligibility criteria (mainly, organizations that are not projecting more than $50,000 in gross receipts in any of their first 3 years and do not currently have more than $250,000 in assets, among other requirements). But there are some downsides that should be considered, especially since both the Form 1023 and Form 1023-EZ are public documents.
Q&A #45 – What donor incentives were included in the COVID-19 relief legislation that was enacted in December 2020?
You are referring to the Consolidated Appropriations Act of 2021 (P.L. 116-260), which was signed into law on December 27, 2020. In addition to many other provisions (the law is over 5,000 pages long), there are three main donor incentives: (1) the reestablishment (and slight modification) of the $300 “above the line” charitable deduction; (2) the extension of increased limits on deductible contributions for corporations and individuals who itemize; and (3) a special increased deduction limit for certain disaster relief contributions made by corporations.
Q&A #44 – Should a Board member personally own a nonprofit organization’s trademarks and website URL?
I have not seen guidance from the IRS directly addressing this situation, but I think it is problematic for a founder or Board member to personally own a nonprofit organization’s trademarks, website URL, social media accounts, and other types of intangible assets. While one could make an argument that there is no harm if the nonprofit is allowed to use these assets for free (or for a fee that is no more than fair market value), there are problems with this situation that become increasingly apparent over time.
Q&A #43 – Should a nonprofit conflict of interest policy address non-financial conflicts?
You are correct that perceived or actual conflicts of interest can arise in a variety of different contexts and not all of them involve financial transactions. However, it is generally best to keep your conflict of interest policy focused on financial conflicts, while addressing concerns about non-financial conflicts in other ways.
Q&A #42 – When must an Executive Director obtain Board approval for a transaction?
This is one of those questions that is both extremely common and unusually difficult. Whether or not a transaction should (or must) have Board approval depends on the individual organization and the particular transaction. In some cases, the answer is clearly yes, such as with the sale of a major asset like a building. However, there are many cases where the answer is not so clearly defined.
Q&A #41 – How should new nonprofits acknowledge donations received prior to approval of 501(c)(3) status?
This question is one that is shared by virtually all new nonprofits that are seeking 501(c)(3) status. You are correct that an acknowledgment letter will be required in order for your donors to use the charitable deduction for their donations (assuming the donations exceed $250). And yes, donations made prior to the organization receiving 501(c)(3) status should retroactively qualify for the charitable deduction if and when 501(c)(3) status is approved (assuming the Form 1023 was correctly prepared and timely submitted). Your main question regarding how to handle the donation acknowledgment letter requires a bit more explanation.