Category Archives: Compliance

The 1023-EZ User Fee Is Now $275, Down from $400

If you’re considering starting a 501(c)(3) organization, and your organization is eligible to file Form 1023-EZ, there’s good news for you. Beginning July 1, 2016, IRS has reduced the 1023-EZ user fee to $275–down from $400.

This, of course, is great for anyone planning to file the 1023-EZ. That said, I’ve argued that the 1023-EZ process would improve with a little more oversight, and a lower user fee suggests that maybe that sort of change isn’t going to happen.

So, how do you know if your organization is eligible to file Form 1023-EZ? The Instructions for Form 1023-EZ include an eligibility checklist. The financial eligibility requirements to file Form 1023-EZ are:

  • The organization does not expect annual gross receipts of more than $50,000 in any of the next 3 years;
  • The organization has not had annual gross receipts of more than $50,000 in any of the past 3 years; and
  • The organization does not have total assets exceeding $250,000.

There are 26 items total on the eligibility checklist, so you’ll want to review the whole thing. If the IRS finds that your organization is ineligible to file 1023-EZ, it will reject your application and you’ll have to file a full 1023, so make sure you’re eligible prior to submission.

A woman punching a man in the face, which is not really how conflicts of interest work, thankfully.

Why Your Organization Needs a Conflict of Interest Policy

When I meet with a new 501(c)(3) organization client, one of the things I usually ask about is whether the organization has a conflict of interest policy. Usually, one of two things happens:

  1. “Yes, we do have a policy in place.”
  2. “A conflict of interest policy? What is that? Do we need one?”

No matter which answer I get, it’s okay. Conflict of interest policies are important, but it’s not hard to get one and adopt it. Let’s answer the questions in #2 up there to explain why this is a big deal. Continue reading

What is Unrelated Business Income?

One of the big traps that can tangle up an organization is engaging in some sort of fundraising activity that generates what the government calls “unrelated business income,” which can cause an organization to have to pay taxes or, in extreme cases, even forfeit the 501(c)(3) tax exemption altogether.

Some sources of income are automatically excluded from UBI (and I’ll give you some other exceptions near the end), like dividends and interest, some types of investment income, royalties, some types of rental income, and some capital gains.

If you do have unrelated business income of $1,000 or more, you must file Form 990-T for the tax year involved. If you expect to have more than $500 in UBI during a particular year, your organization must pay estimated tax.

What is Unrelated Business Income?

Unrelated business income is money earned by an organization that meets three requirements:

  • It’s earned from activities that constitute a “trade or business.”
  • The activity is “regularly carried on.”
  • The activity does not further the organization’s exempt purpose.

For something to count as UBI, it must meet all these requirements; if one is missing, it’s not UBI. Let’s talk about each of these requirements in more detail.

What is a “trade or business?”

Here’s how I think about this requirement: is the money-making activity something that a for-profit business would engage in to make money? If you’re exchanging a good or service for money, you’re probably engaging in a trade or business. Car washes, bake sales, and selling advertising in programs, for instance, have obvious for-profit equivalents: the commercial car wash, the local bakery, and newspapers and magazines that sell ad space do the same thing. Each of those would qualify as a trade or business.

Of course, not every activity that raises funds is a trade or business. Receiving donations is not a trade or business–there’s no exchange taking place. Likewise, applying for grants from other organizations or charitable trusts isn’t a trade or business; it’s a donation.

What does it mean to be “regularly carried on?”

Generally, an activity is “regularly carried on” if it occurs roughly as often as it would for a for-profit business engaged in the activity. If a for-profit business does the activity year-round, and you’re only doing the activity every now and then, it probably won’t be considered regularly carried on.

For example, imagine that your organization operates a sandwich stand for a couple of weeks out of a year. Most for-profit sandwich sellers operate year-round, and a couple of weeks isn’t going to be frequent enough to be regularly carried on (that example is from Treasury Regulation 1.513–1(c)(2)(i), if you want to see it for yourself). On the other hand, the regulations also say that if you were to run that same sandwich stand one day each week throughout the year, that would be sufficient for the activity to be regularly carried on. Also, if a for-profit business would operate the activity on a seasonal basis, a couple of weeks of that activity within the same season might be enough.

The closer your activity is to a comparable for-profit business in terms of how frequently you’re open for business, the more likely your activity will be “regularly carried on” for UBI purposes.

What do you mean, the activity doesn’t further an exempt purpose?

This criterion often surprises people. To be “substantially related to an exempt purpose,” the activity itself has to help achieve the exempt purpose. The classic example is tuition for an educational institution. Education is one of the 501(c)(3) exempt purposes, so students enrolling and taking classes directly furthers the school’s purpose.

Here’s what gets people: fundraising activities do not “further an exempt purpose” even if all the money you raise is going to an exempt purpose. Let’s go back to the car wash example. Washing cars is not an exempt purpose. So, if you have a car wash fundraiser, that doesn’t “further an exempt purpose” even if every cent you raise goes to fund your organization’s exempt purposes.

Again, don’t forget that for the organization’s income to count as unrelated business income, it must meet all 3 of these requirements. And even then, there are exceptions.

Exceptions to Unrelated Business Income

So, let’s say that your organization does engage in some sort of money-making activity that meets all three requirements for unrelated business income. We’re not done yet! There might be an exception available. There are four big exceptions:

  • Volunteer labor: Your activity is run entirely by unpaid volunteers
  • Convenience of members: Your activity is carried on primarily for your members, students, patients, or employees–(examples from the regulations: leasing dormitory apartments to students of a college, school or hospital cafeterias, or hospital parking lot all fall under this exception)
  • Selling donated merchandise: Your activity involves selling merchandise which was donated or gifted to your organization
  • Bingo: Bingo should probably get its own post, but the exception applies in bingo games where you complete a pre-selected pattern on a card (5 in a row is most common) to determine a winner, and wagers are made, winners are determined, and prizes are awarded simultaneously.

One more thing about bingo: don’t forget that bingo games may be regulated by your state or local government! You may need to apply for permits or register–or you might not be able to do it at all.

In addition to those exceptions,

Unrelated business income is an easy issue to miss–every time you consider a new fundraising activity, you should always take a moment to consider if this activity will create UBI for your organization.

Documentation Requirements for Donors Making Donations of $250 or More

Note: An earlier version of this post originally appeared on my firm’s website, attorneykevinkelly.com. You can read the the post about $250 contributions here, and the post about $75 contributions here. I have updated and revised both posts for posting here. Enjoy!

If you run a 501(c)(3) organization, one of the important benefits your donors enjoy is the ability to deduct their contributions on their taxes. In certain cases, the IRS requires the organization receiving the donation to provide donors with written acknowledgements of the contribution. It’s not difficult, but it is critically important for your donors.

There are two situations that require written acknowledgement from charities:

  • Any contribution of $250 or more, and
  • A contribution of $75 or more when the donor receives goods or services in exchange.

Contributions of $250 or More

If a donor makes a single donation of at least $250 to your organization, the donor needs a contemporaneous written acknowledgement of the contribution. The acknowledgement must contain:

  • The name of your organization;
  • If any money was contributed, the amount of money donated;
  • If there was a non-cash contribution, a description of the contribution (but you need not provide the value);
  • If no goods or services were received by the donor, a statement saying that;
  • If goods or services were received by the donor (more on that in a moment), a description and a good faith estimate of the value of the goods or services; and
  • If only intangible religious benefits were received by the donor, a statement saying that.

What is “contemporaneous?” You don’t actually have to provide the acknowledgement immediately–it’s “contemporaneous” as long the donor receives it before the donor files his or her tax return or the due date (plus extensions) for filing the tax return. Because taxpayers may still be getting W-2s through the end of January, January 31 of the year following the year of the contribution is about as late as I’d want to wait.

As a practical matter, though, why wait that long? I think it’s probably best to issue written acknowledgements shortly after receiving the donation so you don’t forget later. If you do wait, you may wind up having a bunch to issue at once (that doesn’t sound fun) or you might miss the deadline, which will disqualify those donations from deduction (which makes for angry donors, which also doesn’t sound fun).

Above, I mentioned that if there were goods or services received by the donor, a description and good faith estimate of the value of those goods or services is required. There are a couple exceptions to that rule:

  • Low-value items. I like to think of this as the “tote bag” or “coffee mug” exception. An item qualifies for this if:
    • The fair market value of the benefit received no greater than 2% of the donation or $106 (the $106 part is adjusted each year for inflation–that’s the 2016 value), or
    • These three things are true:
      • The donation is at least $53 (again, that’s inflation-adjusted, and $53 is the value for 2016),
      • The only items provided bear the organization’s name or logo, and
      • The cost of the items is within the limit for “low-cost articles,” which is $10.60 for 2016 (and is also inflation-adjusted)
  • Membership benefits. If members get some sort of benefit for an annual payment of $75 or less, it doesn’t count as substantial. For instance, free/discounted admissions, parking, or gift shop discounts for members would qualify under this exception.

One of the great things the IRS does in Publication 1771 is to give you clear examples of acknowledgements that follow the rules:

Cash contribution, nothing in return:

“Thank you for your cash contribution of $300 that (organization’s name) received on December 12, 2015. No goods or services were provided in exchange for your contribution.”

Cash contribution, something substantial in return:

“Thank you for your cash contribution of $350 that (organization’s name) received on May 6, 2015. In exchange for your contribution, we gave you a cookbook with an estimated fair market value of $60.”

Non-cash contribution:

“Thank you for your contribution of a used oak baby crib and matching dresser that (organization’s name) received on March 15, 2015. No goods or services were provided in exchange for your contribution.”

 

Contributions of $75 or more where the donor receives goods or services in return

From the point of view of a charitable organization, this documentation requirement is different than the “$250 disclosure” in a very important way: failure to provide written documentation when a donor contributes more than $75 and receives something in return results in a penalty to the charitable organization. The penalty is $10 per undocumented contribution with a cap of $5,000 per fundraising event or mailing.

The reason the IRS is so interested in whether or not a donor receives goods or services in return for a contribution because that affects how much of the contribution is deductible. If a donor receives something in return, the value of whatever he or she received is not deductible. For example, if a donor donates $200 to a charitable organization, and gets an item in return that is valued at $50, only $150 of that contribution is deductible.

The written statement has to have two additional key pieces of information:

  • A statement informing the donor that, in the words of 26 U.S.C. 6115(a)(1), “the amount of the contribution that is deductible for Federal income tax purposes is limited to the excess of the amount of any money and the value of any property other than money contributed by the donor over the value of the goods or services provided by the organization,” and
  • A good faith estimate of the goods and/or services received.

A “good faith estimate” is exactly what it sounds like: a fair estimate of what the goods or services provided were worth.

The disclosure must be made either during the solicitation or once the contribution is received, and the disclosure has to be made in writing that would be sufficient to get the donor’s attention.

There are also a couple of exceptions to this rule. A written disclosure is not required when:

  • The “low-value item” (or as the IRS calls it, the “token” exception) or “membership benefits” exceptions that we discussed earlier apply,
  • The only benefit consists of intangible religious benefits, or
  • There’s no real donative intent involved–the classic example is a sale of an item at a gift shop, it’s not really a donation, it’s more like a retail sale.

Beyond the legal stuff: donor communication

These acknowledgments don’t have to be bland, “let’s meet those legal requirements” boring stuff. Donation acknowledgements are a great way to deepen your relationship with your donors and help them feel like they’re supporting a great cause–because they are, right?

I’m a blood donor (I know, I talk about this a lot, but stick with me here). Every time that I do a donation, the blood center sends me an e-mail, thanking me for my donation and telling me that my donation helped save lives, and they usually provide an example patient–usually a cute, smiling kid that needed blood. It’s not a legal requirement, but they want me to feel good about my donation and encourage me to keep coming back in the future. You have to communicate with the donor anyway, why not use it to meet the legal requirements and deepen your relationship with the donor?

Photo credit: Volkan Olmez, via unsplash.com, licensed under CC-0

Form 990 Deadline Looms for Calendar-Year Organizations

For organizations that use the calendar year as its fiscal year, the deadline for filing your annual information return (on Form 990, or some variant of it) is fast approaching: May 16, 2016. Let’s look at some of the basics of annual information return reporting for 501(c)(3) organizations:

 Which version of Form 990 do I file?

There are three main variants for Form 990:

  • Form 990, for most organizations with gross receipts of $200,000 or more OR total assets of $500,000 or more;
  • Form 990-EZ, for most organizations with gross receipts of less than $200,000 AND total assets of less than $500,000;
  • Form 990-N (e-Postcard), for most organizations with gross receipts under $50,000.

Private foundations have their own 990, the 990-PF, and black lung trusts also have their own variant, the 990-BL.

Don’t forget that your filing may be more than just the form itself–you may have additional schedules to fill out as well. If you’re working on these forms, be careful; make sure you get all the schedules you need as well–and you may want to have a professional work on it anyway.

If you qualify for 990-N (e-Postcard) filing, there is no paper form; the form is submitted electronically through the IRS website. If you’ve filed a 990-N before, that’s a new thing–the IRS had accepted them through the Urban Institute, but that changed at the end of February 2016.

There are still some organizations that are exempt from filing Form 990, and the IRS has a list of those exceptions. If your organization is of a type on that list, make sure you review the list closely to ensure that you don’t have to file something else instead. For instance, the list includes stock bonus, pension, or profit-sharing trusts that qualify under section 401 of the Internal Revenue Code. However, that entry also indicates that those trusts should file Form 5500, so be careful to make sure you don’t have some other reporting requirement.

When do I have to file?

Form 990 is due by the 15th day of the 5th month following the close of your fiscal year. If your organization’s fiscal year is the calendar year, that usually means May 15 of the following year. This year, May 15, 2016 happens to fall on a Sunday, so the deadline falls on the following Monday, May 16. If you have a different fiscal year, you’ll need to calculate it from the end of your fiscal year.

What if I miss required filings?

If you don’t file for 3 consecutive years, the IRS will automatically revoke your organization’s tax-exempt status. If that happens, the organization will no longer be tax-exempt starting from the due date of the third missed return. If the organization was a 501(c)(3) organization prior to revocation, any contributions you receive after revocation will no longer be tax-deductible for your donors, which can be a very big mess.

If your organization is automatically revoked, it is significant work to have the tax-exempt status reinstated. If this happens, you have to file an application to have your organization’s tax-exempt status reinstated. Depending on the circumstances, this can be a lot of work–in one case, I had an organization that had to file a new 1023, 990-EZs for each of the missing years, and a statement explaining why the failures occurred and how the failures would be prevented in the future. Short version: make sure the return gets filed each year!

If your organization needs an extension, it can apply for one using Form 8868.

Remember, Form 990 is a public document, and it tells the public a lot about your finances. It should be completed carefully and accurately. However, it also gives you some opportunity to brag about the projects you’ve completed, so you really can use it as an opportunity to show off your organization’s work.

Note: a version of this post originally appeared on my firm’s website, attorneykevinkelly.com, and has been updated for publication here.

Photo credit: Mari Helin-Tuominen, via unsplash.com, licensed under CC0