FAQs

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.

Did You Know?

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.

For more information, click here.

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:

1. Gather your organization documents: Articles of incorporation for a corporation, articles of association for an association, or trust agreement for a trust.
2. 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.
3. Obtain an EIN (employer identification number) for the organization.
4. Determine what type of tax-exempt status you want.
5. Apply for recognition of exemption by filing either Form 1023 or Form 1024.

For more information, see the IRS FAQ.

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.

Most tax-exempt organizations are required to file an annual return. Which form an organization must file generally depends on its financial activity.

Organizations with gross receipts normally less than $50,000 may file the e-Postcard, Form 990-N. They may also choose to file a full Form 990 return.

Organizations with gross receipts less than $200,000 and total assets less than $500,000 may file the short form, Form 990-EZ. They may also choose to file the full Form 990 return.

Organizations with gross receipts of $200,000 or greater or total assets of $500,000 or greater must file the full Form 990 return.

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:

1. It is a trade or business,
2. It is regularly carried on, and
3. It is not substantially related to furthering the exempt purpose of the organization.

There are, however, a number of modifications, exclusions, and exceptions to the general definition of unrelated business income.

Additional Information:

• Publication 598, Tax on Unrelated Business Income of Exempt Organizations
• Exempt Organizations Continuing Professional Education Text article (1999)