A Not-for-Profit organization should have a formal, written conflict of interest policy. Every board member and executive, as well as employees involved in the accounting function should be required to sign a statement disclosing any conflicts of interest.
An important thing to note is that conflicts of interest may be actual conflicts or perceived conflicts. Board members should be seen as independent. If a conflict of interest is present, the board member should recuse himself from any discussion or vote on the issue, and the organization should document this process in writing.
A few questions you should ask yourself:
Does your Not-for-Profit organization have a written conflict of interest policy?
Have your board members and applicable organization employees signed a disclosure statement?
Do any actual conflicts exist? How have you addressed?
Do any perceived conflicts exist? How have you addressed?
If you need assistance with drafting a conflict of interest policy, or assistance with determining if any conflicts – whether actual or perceived – exist, contact us today.
Not-for-Profit Organizations with annual periods beginning after June 15, 2021 are subject to a change in the way gifts-in-kind are presented on the Organization’s financial statements.
This change is primarily for presentation purposes. There will likely be additional information that you will need to provide to your accountant beginning this year and moving forward. Since it is easiest to track the information as the gifts occur, now is a good time to set up a system to properly track these details.
Gifts-in-kind will now be separated into the type of gifts received. Examples include: services, supplies, food, clothing, and household goods.
Once you have separated them by type, each category will need the following additional information:
The dollar amount equivalent received.
If the gifts were used as is or if they were converted to monetary resources.
Which area of the organization the gifts were used in. Specifically, if they were used for program purposes (and which one, if you have more than one program), or if the gifts were used in management & general, or fundraising activities.
If they were restricted by the donor and if the donor included the purpose or time period of the restriction.
Valuation technique utilized.
In addition, the Organization will want to provide any policy it has about monetizing rather than using gifts in kind.
If you need help navigating this reporting change, please contact us today.
A prohibited transaction can cause a Not-for-Profit Organization to be denied exemption from taxation. IRC Section 503(b) lists prohibited transactions as the following:
If an Organization lends any part of its income or corpus without the receipt of adequate security and a reasonable rate of interest.
If an Organization pays compensation in excess of a reasonable allowance for salaries or other compensation for services rendered to the organization.
If an Organization makes any part of its services available on a preferential basis.
If an Organization makes any substantial purchase of securities or any other property for more than adequate consideration (purchase above market value).
If an Organization sells any substantial portion of its securities or other property for less than adequate considerations (sale below market value).
If an Organization engages in any other transaction which results in a substantial diversion of income or corpus to related parties.
Whether a specific transaction is considered prohibited or not depends on the facts and circumstances of the particular transaction. If you have questions about a transaction you are considering or have recently completed, please reach out to the DBC NPO niche team today
Reasons why a tax-exempt organization’s determination letter may be revoked or modified include:
The organization no longer qualifies under the Code section for which it originally applied for recognition of tax-exempt status. In such cases, the determination letter will be revoked, rather than modified.
The organization omitted or misstated material information. This includes an incorrect representation or attestation as to the organization’s organizational documents, the organization’s exempt purpose, the organization’s conduct of prohibited and restricted activities, or the organization’s eligibility to file Form 1023-EZ.
The organization operated in a manner materially different from that originally represented in an application for recognition of exemption.
The organization, organized under Code Section 503, engaged in a prohibited transaction with the purpose of diverting corpus or income of the organization from its exempt purpose and such transaction involved a substantial part of the corpus or income of the organization.
Based on Rev. Proc. 2021-5, a tax-exempt organization’s determination letter may be revoked or modified by:
A notice to the taxpayer to whom the determination letter was issued
Enactment of legislation or ratification of a tax treaty,
A decision by the Supreme Court of the United States,
The issuance of temporary or final regulations,
The issuance of a revenue ruling, revenue procedure, or other statement published in the Internal Revenue Bulletin, or
Automatically, by operation of Section 6033(j), for failure to file a required annual return or notice for three consecutive years.
Have the bank accounts been reconciled year-to-date?
Are the accounting records complete?
Accounts Receivable, Prepaids, Inventory, Fixed Assets, Accounts Payable, Accruals, Net Asset Restrictions, etc.
Has a current file for the year been prepared and provided to the incoming treasurer?
Bank statements and reconciliations for each month year-to-date
Any correspondence received during the year-to-date
Has the incoming treasurer been given access to all accounting information/records?
Locked file access
Has the outgoing treasurer reviewed/explained any journal entries made to the accounting records year-to-date to the incoming treasurer?
Has the outgoing treasurer reviewed prior year financial statements and/or Form 990 with the incoming treasurer?
Restrictions on cash or funds
Non-cash donation reporting
Other organization-specific unusual items
Have procedures been written down (e.g., Procedures Manual) for future reference?
While likely not all-inclusive, we hope this checklist provides enough information to get the process going and to spark thought/conversation all the way through. If you have any questions or would like assistance with a treasurer transition, reach out to the DBC NPO Niche team today!
In the State of Michigan, certain Not-for-Profit organizations are exempt from sales and use tax on tangible personal property used or consumed primarily in carrying out the organization’s purpose, as stated in the bylaws or articles of organization. In addition, there must be no reimbursement of cost or defrayment by the organization’s members. The list of exempt organizations includes schools, churches, not-for-profit hospitals, governmental Agencies, 501(c)(3) organizations, and 501(c)(4) organizations.
It is important to distinguish between items purchased for use in the organization’s stated purpose and items purchased to be used in fundraising. Fundraising is a means to achieve the organization’s purpose but is not the organization’s stated purpose. Therefore, purchases of tangible personal property used in fundraising activities are subject to sales and use tax.
Volunteers play a pivotal role in many not-for-profit organizations. But keeping track of and organizing volunteers can be cumbersome and time consuming. This begs the question: Does software exist to help organize volunteers? The answer is yes! Both of the not-for-profit organizations I am currently involved with as a board member use VolunteerHub.
VolunteerHub allows an organization to manage and engage volunteers. It’s a simple, secure and cost-effective volunteer management software program. It is also highly customizable by the organization.
As a volunteer, I have my own login and password for each organization. I can easily see what opportunities are available to volunteer for, both in list or calendar format. It is easy to select and register for a volunteer shift.
With cryptocurrency becoming more and more popular, Not-For-Profits will likely have to decide if accepting cryptocurrency is the right decision for the organization. Here are several things to think about before making the decision:
The Not-For-Profit will have to treat the donation as a noncash contribution;
There is potential for the value of the cryptocurrency to increase, or decrease;
A virtual wallet may need to be opened by the Not-For-Profit in order to accept the funds in virtual form;
There may be a fee involved to convert the cryptocurrency from virtual to actual US dollars;
In the future, there may be additional reporting requirements with the IRS. There are currently discussions about making cryptocurrency subject to foreign account reporting.
While the idea of cryptocurrency is enticing because of the growth potential, there are many other factors to take into account before a Not-For-Profit will be able to use the funds.
If you have questions about the implications of accepting cryptocurrency donations, contact us today.
Under most circumstances, donations received without conditions or donor restrictions by a nonprofit organization are not required to be refunded. Organizations should establish a refund policy regarding if and when they are open to issuing refunds for these types of donations.
When it comes to donations received with conditions or donor restrictions the nonprofit organization may run into a situation where a refund of donation is required. One situation would be if the organization is either unable to, or decides not to, fulfil the purpose of the donation. For example, if a donation is received in response to a capital campaign to build a new building, and later the organization decides not to follow through with a new building, the organization must reach out to the donors to determine if they are willing to release their restriction and allow for those funds to be used in a different way. If the donors are not willing to release the purpose restriction, a refund would be required at that time.
For most organizations, Unrelated Business Income (UBI) is income from a trade or business that is regularly carried on and is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption.
This can be a very confusing piece of the tax-exempt tax law, as an activity that may be considered unrelated business income for one organization may be considered related business income for another, and vice-versa. Therefore the specific circumstances surrounding the activity/income, and the organization’s exempt purpose are the main factors to consider when making the determination of whether an activity is producing related or unrelated business income. Additionally, there are in excess of 40 categories of income specifically excluded by the Internal Revenue Code from unrelated business income.
Activities that may produce unrelated business income include sales of advertising in a publication, rents, ancillary services provided by a tax-exempt organization to an unrelated organization, real estate transactions, mailing list sales, income from travel tours, operating parking facilities, and the list goes on and on. Rent is a particularly tricky activity, as there are exclusions and exceptions. The best way to ascertain if an activity is producing related or unrelated business income is to consult with a knowledgeable professional who can assist in gathering all of the facts and circumstances to assist you in making the determination.
Generally, a donor advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once a donor makes a contribution, the organization has legal control over it. However, the donor (or the donor’s representative) retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.
The benefit of a donor advised fund is that it allows an individual to make a charitable contribution to the fund and receive a potential charitable deduction as of the date the fund receives the contribution. The donor can then advise how the funds will be gifted at a later date. The donor can spread the gifting over multiple years and/or organizations.
501(c)(3) – An organization that is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code is also exempt from the requirements of the Federal Unemployment Tax Act (FUTA). This exemption cannot be waived. Organizations should not file Form 940 to report wages or pay the tax. Nonprofits in the state of Michigan are not exempt from paying state unemployment taxes.
Other than 501(c)(3) – Nonprofits that are not section 501(c)(3) organizations are not exempt from paying FUTA tax. However, if an employee is paid less than $50 in a calendar quarter, his or her wages are not subject to FUTA tax for that quarter. Nonprofits in the state of Michigan are not exempt from paying state unemployment taxes.
For more information on unemployment and other employer taxes, see Employees of Exempt Organizations in Publication 15-A.
In order to maximize your social media presence, you need to determine what will best engage the audience you’re seeking. What do you find of interest on social media? We have found that we get the most “hits” on posts that include pictures of our staff engaging in activities together or posts containing staff promotion announcements. For your organization, maybe the most popular posts are those including testimonials from clients who have used your services or staff/board member spotlights.
The other key to maximizing your social media presence is making sure that your social media posts are being liked and shared. Encourage your staff, board members, and key volunteers to be active in helping you make this happen.
While numerous statutes may apply to entities with a charitable purpose, there are three major Michigan laws that affect most charities:
Charitable Organizations and Solicitations Act, MCL 440.271 et seq., which registers charitable organizations and licenses professional fundraisers who solicit in Michigan;
Supervision of Trustees for Charitable Purposes Act, MCL 14.251 et seq., which registers entities (e.g., charities, trusts, foundations) holding any charitable assets in Michigan;
Dissolution of Charitable Purpose Corporations Act (Dissolution Act), MCL 450.251 et seq., which ensures that charitable assets are transferred to an organization with a like purpose if a charity dissolves.
Charitable Organizations and Solicitations Act (COSA)
The COSA requires an organization to register if it solicits or receives contributions in Michigan.
The act requires an annual filing of the License to Solicit Donations form, and—depending on the amount of revenue from contributions and fundraising—a reviewed or audited financial statement prepared by an independent certified public accountant may also be required. The organization’s Federal Form 990 accompanies this filing.
For more information on the COSA and the Solicitation registration forms, see COSA.
The act does exempt some organizations from registration. For more information on exemption, see exemption.
Supervision of Trustees for Charitable Purposes Act (STCPA)
The STCPA requires a trust to register if it holds assets for a charitable purpose. Broadly defined, a Charitable Trust includes every person or legal entity which holds property for a charitable purpose.
This act requires an annual registration and inventory of an organization’s assets. This requirement is met by providing a copy of the organization’s Federal Form 990 annually.
The STCPA does exempt some organizations from registration. For more information on exemption see exemption.
This act requires that notice and accounting be provided to the attorney general in the event of a dissolution, a merger, or any amendments to or restatement of the articles of incorporation, and more.
For more information on the Dissolution Act, see Dissolution.
Employers with less than 50 full-time equivalent employees are not subject to the employer shared responsibility provisions under the Affordable Care Act.
All employers that are Applicable Large Employers are subject to the employer shared responsibility provisions, including not-for-profit organizations (whether a tax-exempt organization or not). To determine if you are an Applicable Large Employer, click here.
Attracting and retaining top talent is important for all organizations. It can be particularly difficult for not-for-profit organizations, where budget constraints impact amounts that can be paid for salaries. During the recruiting process, you will want to find someone who fully believes in the mission of your organization and is passionate about moving the mission forward.
Attract: Most people going to work in a not-for-profit organization are aware of budget constraints related to wages. Clear communication throughout the hiring and onboarding processing is essential. Instead of focusing on the wage itself, focus on the entire benefit package including organizational culture and mission. Part of that culture may be a flexible work schedule, the ability to work from home at times that are beneficial to both the organization and the employee, and PTO above and beyond the corporate norm.
Retain: Provide training opportunities for employees to help them advance within the organization and to grow their skill set. Be sure to provide opportunities for employees to take on additional responsibilities and leadership roles within the organization. These opportunities will not only benefit the employee, but the organization as well.
Organizations can claim a refund or credit of the Unrelated Business Income Tax paid in 2017 and 2018 related to qualified transportation fringes by filing an Amended Form 990-T for those tax years. Be sure to note “Amended Return – Section 512(a)(7) Repeal” at the top of the form.
Keep in mind that the time limits for filing refund claims found in IRC Section 6511 apply to these refund claims. Typically, these time limits are three years from the time the original Form 990-T was filed or two years from the time the tax was paid, whichever is later.
Contact us for questions or to assist your organization with amended return filing.
When funds are received with a donor restriction, those funds are legally limited to the use listed by the donor. Restrictions typically come in the form of time restrictions, or purpose restrictions, and depending on how specific the restriction language is, the organization may have some or no flexibility with respect to expending those funds.
Less specific restriction language means that a larger number of expenditures may meet the requirement. For example, a restriction for a new stove is more specific than a restriction for the kitchen, which could include equipment, dishes, silverware, kitchen salaries, food, etc.
Sometimes not-for-profit organizations unknowingly restrict donations themselves. For example, announcing at an event that funds will be used for the purchase of food to be given to the needy. This immediately restricts all donations from that event to food, when the organization may have intended to provide much more than just food to the needy. Another example would be listing a specific use of funds in an annual donation request letter. The organization should be mindful to stay away from specifics unless needed, as to not restrict funds unintentionally.
During the year 2020 many organizations have faced unforeseen challenges and uncertainties. During this time, having funds that are restricted for long term purposes when short term needs are not be being met can be difficult. An organization may consider reaching out to the original donor of any remaining restricted funds to obtain permission, in writing, to release those funds for general use.
It is very important to maintain detailed records of donations, particularly donations with restrictions. Tracking the receipt of, and subsequent expenditure of, restricted donations is integral to the records of the organization. If your organization needs assistance in developing a method to ensure complete and accurate records in this area, we are here to help.
US Taxpayers who don’t itemize deductions for their 2020 individual tax returns may still be eligible for a $300 tax deduction for charitable donations. A provision in the CARES Act, intended to provide some relief for Charitable Organizations, permits eligible individuals who do not itemize deductions to deduct $300 of qualified charitable contributions as an adjustment in determining AGI (adjusted gross income) for tax years beginning in 2020. Educating donors about the existence of this provision may help Charitable Organizations in their efforts to draw in contributions as we approach year end.
If you forgot to file Form 990 for just one tax year, file the return as soon as possible. Be aware that penalties for late filing will be imposed if the organization doesn’t provide reasonable cause for the late filing. For an organization with gross receipts less than $1,000,000 for its tax year, the IRS will impose a penalty of $20 per day for each day the return is late. The maximum penalty is $10,000 or 5% of the organizations gross receipts, whichever is less. The penalty increases to $100 per day, up to a maximum of $50,000 for an organization with gross receipts over $1,000,000.
If an organization is required to file a return or electronic notice and fails to do so for three consecutive years, the organization will lose its tax-exempt status as of the filing due date of the third year. For the organization to have its tax-exempt status reinstated, it must apply (reapply) for tax exempt status.
State law governs not-for-profit status, which is determined by an organization’s articles or incorporation or trust documents. Federal law governs tax-exempt status.
The steps needed to obtain for tax-exempt status are:
Gather your organization documents: Articles of incorporation for a corporation, articles of association for an association, or trust agreement for a trust.
Determine State registration requirements. Michigan requires registration under either the Charitable Organization Solicitations Act (COSA) or the Supervision of Trustees for Charitable Purposes Act (STCPA), unless the organization is exempt from registration. For more information regarding exemption from registration, see exemption.
Obtain an EIN (employer identification number) for the organization.
Determine what type of tax-exempt status you want.
All Michigan not-for-profit organizations must obtain the Attorney General’s approval, or a letter from the Attorney General stating that approval is not necessary, before submitting a Certificate of Dissolution to the Corporation Division of the Bureau of Commercial Services, Department of Licensing and Regulatory Affairs.
To obtain approval, the organization should submit the Dissolution Questionnaire and required attachments to the Attorney General’s Charitable Trust Section.
If the organization is a non-charitable not-for-profit or religious organization, it should submit a letter to the Attorney General’s office explaining that the organization is dissolving and provide a copy of the organization’s articles of incorporation.
Mergers are considered similar to dissolutions because at least one entity will cease to exist. However, the Dissolution Questionnaire is not necessary for these transactions. Charitable organizations wishing to merge or convert should send the Charitable Trust Section a complete explanation regarding the proposed transaction with supporting documentation such as articles of incorporation, plans of merger, and IRS returns and financial statements.
For more information, visit the Attorney General website page here.
For Federal tax purposes, the not-for-profit will indicate on Form 990 if it has liquidated, terminated, dissolved, and ceased operations, and will complete Schedule N to Form 990. Schedule N and instructions can be found here.
As long as the organization submitted a complete and accurate registration statement, the registration is effective on the date the registration statement is received by the Department of Attorney General. While you may not receive written confirmation of your registration for several weeks, you can check your filing status online.
Within a few days of receipt of your registration statement, your registration status online should be listed as “pending.” It will remain as “pending” until your registration (or license in the case of a professional fundraiser) confirmation is sent to you. Unless you have received a letter from the Department of Attorney General asking for missing information, you may solicit while in pending status.
Registration is typically required for all 501(c)(3) organizations that solicit or receive contributions in excess of $25,000 from Michigan per year. However, if an organization pays anyone for fundraising services, it will need to be registered even if it solicits or receives less than $25,000.
There are exemptions for some types of organizations. For example, churches, approved Michigan schools, and veterans’ organizations chartered by the federal government. To determine if the organization needs to register, refer to the Request for Exemption Form.
Even though an organization is recognized as tax exempt, it still may be liable for tax on its unrelated business income. For most organizations, unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption. An exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990-T.
Unrelated Business Income defined:
For most organizations, an activity is an unrelated business (and subject to unrelated business income tax) if it meets three requirements: