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Q&A #130 – Is monthly distribution of financial reports to the Board a best practice?
Monthly distribution of financial reports to the Board and finance committee is absolutely a best practice for nonprofit organizations, and I also recommend this as a must-have procedure in your accounting policies and procedures manual. Board and finance committee members have a fiduciary responsibility to help oversee and ensure the safety and proper use of a nonprofit organization’s financial assets. Monthly financial reports are a key tool for fulfilling this important role.
Q&A #129 – Are 501(c)(3) organizations automatically exempt from state corporate income tax?
Organizations that receive IRS approval of 501(c)(3) status are almost always eligible for exemption from state corporate income tax, subject to exceptions for certain types of revenue. However, the process varies widely depending on the state and you should not assume that the exemption from state corporate income tax is automatic. In some states, this exemption automatically applies upon IRS approval of 501(c)(3) status and no additional steps are required. Other states require a separate application to be filed.
Q&A #128 – Does the tax-exemption reinstatement process require organizations to file the Forms 990 they missed?
The process for reinstating the tax-exempt status of an automatically revoked organization is described in IRS Revenue Procedure 2014-11. In short, to obtain the maximum protection of the reinstatement process, organizations must file any missed Forms 990 or 990-EZ except to the extent they: (1) were eligible to file Form 990-N during the relevant years; and (2) file for reinstatement by the 15-month deadline.
Q&A #127 – What happens when an organization’s nonprofit corporation status is revoked?
Revocation of an organization’s status as a “nonprofit corporation,” which is often called “administrative dissolution” or “termination,” has numerous consequences that warrant immediate attention, but this is separate and distinct from revocation of federal tax-exempt status. Thus, revocation of an organization’s nonprofit corporation status does not mean that its 501(c)(3) status has been revoked.
Q&A #126 – Are 501(c)(3) organizations automatically exempt from sales and use tax?
A nonprofit organization’s eligibility to qualify for exemption from sales tax (and a related tax called “use tax”) is determined by the laws and procedures of the applicable state, but in general IRS approval of 501(c)(3) status does not result in automatic exemption from sales and use tax. 501(c)(3) status is often a prerequisite for exemption from sales and use tax, but most states have a separate detailed application process for this exemption. Further, in many states the sales and use tax exemption has rigid criteria and not all 501(c)(3) organizations will qualify.
Q&A #125 – Are in-kind contributions by Board members considered conflict of interest transactions?
Nonprofit conflict of interest policies are generally aimed at ensuring the organization’s assets are not used to provide excessive benefit to the people who run the organization. While purely donative arrangements (such as providing free office space to the organization) are not typically considered conflict of interest transactions, it is best to err on the side of full disclosure and review by independent Board members because individuals sometimes benefit from these transactions in ways that are not immediately apparent.
Q&A #124 – Can the volunteer exception to the unrelated business income tax (UBIT) apply if the business is partially run by paid staff?
Under section 513(a)(1) of the Internal Revenue Code, an activity that otherwise meets the definition of an “unrelated trade or business” does not trigger unrelated business income tax (UBIT) if “substantially all the work in carrying on such trade or business is performed for the organization without compensation.” Having paid staff does not disqualify an organization from using the volunteer exception if paid staff’s role in the activity is sufficiently minimal that the “substantially all” standard is still satisfied.
Q&A #123 – Are merchandise sales considered a related activity for unrelated business income tax (UBIT) purposes?
The sale of t-shirts and other merchandise can, under some circumstances, be considered “related” to an organization’s tax-exempt purpose and therefore avoid unrelated business income tax (UBIT). However, it is necessary to show that the merchandise sales directly further the organization’s mission without regard to how the revenue is used. Only certain types of items will satisfy this standard.
Q&A #122 – Why would a nonprofit, tax-exempt organization form a single-member LLC?
When properly formed, a single-member LLC (SMLLC) that is wholly owned by a tax-exempt organization protects the parent organization from liability for the SMLLC’s activities while providing the SMLLC with the benefits of the parent organization’s tax-exempt status for federal tax purposes. The SMLLC structure is also generally easier to establish and more flexible than a subsidiary corporation.
Q&A #121 – Is a nonprofit permitted to compensate Board members for their Board service?
Nonprofit organizations are generally permitted to provide reasonable compensation to Board members for their Board service, provided this is not prohibited by the organization’s Articles of Incorporation or Bylaws, and subject to certain provisions of the applicable state nonprofit corporation statute.
Q&A #120 – Can a program be transferred from a 501(c)(3) organization to a 501(c)(6) organization?
Internal Revenue Service rulings suggest that it is possible to transfer a program from a 501(c)(3) organization to a 501(c)(6) organization so long as the transfer is subject to certain restrictions that ensure the assets remain dedicated to proper 501(c)(3) purposes. However, the specific circumstances are likely to impact the analysis of this issue so retaining legal counsel to advise the organization on the transaction is highly recommended.
Q&A #119 – Are officers of a nonprofit required to be Board members?
Whether the officers of a nonprofit organization are required to be Board members is determined by the organization’s Bylaws. Many organizations specify in their Bylaws that officer positions such as the President, Secretary, Treasurer must be filled by Board members (hence the common but potentially misleading term “Board Officer”). However, it is also common to have Bylaws that allow officers to be appointed from outside of the Board such as from senior management staff positions.
Q&A #118 – What happens if an organization misses the 27-month deadline to submit the Form 1023?
The IRS generally will not approve retroactive 501(c)(3) status back to the date of the organization’s formation if the organization fails to file the Form 1023 (or Form 1023-EZ) within 27 months from the end of the month in which it was organized. In most cases, filing late means that 501(c)(3) status, if approved, will apply as of the date the application was submitted to the IRS. However, there are some important nuances in these rules to keep in mind.
Q&A #117 – How does a nonprofit transfer a program to another nonprofit?
Transferring a program from one nonprofit to another can be unexpectedly complicated, and the details will vary depending on the specific circumstances. In effect, the process is similar to a merger or acquisition, and requires extensive due diligence, identifying the assets associated with the program, executing a written agreement with the appropriate terms and conditions, and obtaining the necessary approvals by the respective Boards of Directors (and sometimes voting members, if applicable).
Q&A #116 – Do restricted funds need to be kept in a separate bank account?
No, it is almost never required nor advisable for a nonprofit organization to keep restricted funds in one or more separate bank accounts, and this is not an accepted best practice. The reason is that using separate bank accounts for restricted funds makes managing these funds more difficult and does not enhance safeguards or strengthen internal accounting control systems. The opposite often results. Having unnecessary bank accounts can lead to operational inefficiencies and increased chances for errors.