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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.
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Use Key Assumptions to Focus and Frame Planning and Messaging [SUBSCRIBERS-ONLY]
My favorite “go-to” tactic for working though complex planning challenges is to develop a short list of “key assumptions” that focuses on strategic objectives and desired results. This approach helps to simplify messaging and fast-track consensus and approval by diminishing feelings of negativity and confusion.
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.
The Overlooked Effects of Changing a Fiscal Year-End
“Should we change our fiscal year-end?” This an interesting question that will naturally pop up over time for many nonprofit organizations. As with most complicated, multi-layered questions, the highly visible positive aspects need to be balanced against potential negative outcomes that are often hidden or ignored. One often-overlooked downside of a change in fiscal year-end (FYE) is the impact on an organization’s operating reserves.
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.
VIDEO: Formatting an Operating Reserve Policy | 5-Minute Lessons 4 Nonprofits
SE4N's A. Michael Gellman provides a short lesson on how to format an operating reserve policy in a way that shows your nonprofit organization's operating reserve goals in terms of both programs and percentage of budget, sets clear bottom-line budget targets, and provides a framework for operating reserve status reports.
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.
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Applying Segregation of Duties Beyond Standard Checks and Balances [SUBSCRIBERS-ONLY]
Segregation of duties is a bedrock principal of internal accounting control systems and is visible in many elements of nonprofit organization accounting policies and procedures. Without segregation of duties, internal accounting control systems would not be safe or effective. Less often recognized is the powerful impact segregation of duties can have when applied to operational planning and resource management.
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.
To Be Sustainable, Nonprofits Need to Have Profits
It is difficult to search for a single aspirational goal that works for all nonprofit organizations because nonprofits are a lot like people, with no two organizations exactly alike. However, I believe there is one aspirational goal that most nonprofits have in common: to have a long, stable, and sustainable existence. To achieve this goal, nonprofits need to commit to making a profit.
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.
Building Trust and Connection with Financial Reports
Financial reports for nonprofit organizations are important. Most people agree on this point. The challenge lies in getting people to connect with and trust financial reports. When trust and connection are absent, financial reports go unused. Getting users to trust financial reports requires mostly routine tactics while getting them to connect with financial reports requires more personalized creative approaches.
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.
CHECKLIST: Simplified Balance Sheet Assessment
Balance sheets are part of standard nonprofit organization financial reporting, but are intimidating to most individuals and often misunderstood. This 3-step checklist uses easy-to-understand “Yes” or “No” questions to help you to work through a new balance sheet and make a quick assessment of an organization’s current financial position and changing financial health trends.
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Determining When to Involve the Board in HR Matters [SUBSCRIBERS-ONLY]
Nonprofit organizations must be extra vigilant when it comes to managing unexpected and often rapidly changing human resources (HR) issues. Hesitation to react can lead to dire consequences. However, reacting without meaningful contemplation can be equally dangerous. One critical consideration is how to develop guidance for discussions and messaging with Board members on changing HR issues.