FAQs

There are several things to consider when approaching the retirement of an Executive Director. For example:

• Has the board created a hiring committee?
• Is the Executive Director’s job description complete and accurate?
• Does the organization have a fully-developed orientation/onboarding process?
• Are current policies and procedures well documented?
• Are there any current employees that have the knowledge, skill, and desire to move into the position?
• Have bank and credit card accounts been updated for authorized signors/users?

If you need help navigating the retirement of your Executive Director, we can help! Contact us today.

You have likely heard about ChatGPT and may be wondering if it’s something your organization should utilize. AI has many uses, but there are factors to consider before jumping in. We shared an article related to responsible adoption of AI in our last newsletter, The Nonprofit Edge. Click here to read this important article, “8 Steps Nonprofits Can Take to Adopt AI Responsibly.” If you have any questions about how your Organization might utilize AI, contact us today.

Not for profit organizations around the country are fighting the battle for donation dollars. Many organizations lean on history – previous supporters – when determining their fundraising budgets. Are they missing out on potential donations?

Some things to consider:

1. How much is your organization investing in fundraising?
2. Prospecting is important. Go out and find new donors! Relying solely on historical donors should not be the organization’s only method of fundraising.
3. Develop your internal fundraisers – find support and training for your staff, as well as your board.
4. Should the organization hire a professional fundraiser?

If the organization views fundraising as a necessary evil, it is likely leaving money on the table. Self-evaluation and consideration of the above items is essential to unlocking your organization’s full fundraising potential. If you would like to talk this through, please contact us today.

Bylaws are a requirement for Not for Profit organizations in the state of Michigan. While there is no requirement to submit bylaws to the State, they are still mandatory. Bylaws are a legally binding document; due to this, the organization must strive to be in compliance with them. If an organization is found to be out of compliance with their bylaws, both the organization and the board of directors could be held liable.

Below are some tips for staying in compliance with your bylaws:

• Each member of the board of directors and the leadership team should regularly review the bylaws so they are familiar with the contents.
• Check that each item is currently operating as described.
• If anything has been operating in violation of the bylaws, make the necessary changes to correct this.
• Evaluate the current bylaws regularly to determine they still accurately serve the organization’s mission. If modifications are needed, it is possible to amend the bylaws.

If you have questions regarding how to evaluate if your organization is in compliance with it’s bylaws, or have determined the bylaws needs to updated and need a referral to an attorney who specializes in the Not For Profit sector, please contact us today.

Board self-evaluation is an important tool every Not-for-Profit board should utilize. The importance of evaluating items such as board structure, meetings, understanding of the organization, responsibilities, policies and procedures, and governance and oversight cannot be emphasized enough.

Encouraging each board member to honestly assess the board in these areas can open up valuable discussions for your board. Going through the process of rating yourself may shine a light on an area of weakness that needs further development, or highlight an area of strength that could be leveraged.

So don’t shy away from the process of self-evaluation. Incorporate it into your meetings annually. Begin each year with an honest evaluation, and see where it takes you. If you need ideas on specific items to rate in each of the areas mentioned above, please contact us today.

Not-for-Profit organizations are required by law to transfer all remaining assets to another tax-exempt organization or to the government upon closing/dissolution. The Not-for-Profit organization can sell its assets as long as the individual or entity purchasing the asset is paying a reasonable amount, ideally “fair market value.” Assets easily sold include inventory, office furniture and fixtures, and office equipment. In the case of asset sale, the resulting cash received would then be transferred to another tax-exempt organization.

Determining what to do with the organization’s assets is just one small piece of all that needs to happen when a Not-for-Profit organization dissolves. If you need assistance with a dissolution plan, please contact us today.

The Wallace Foundation and BDO have partnered to bring helpful Toolkits to the Not for profit sector. 

The Wallace Foundation is a philanthropy working nationally to answer important questions that, if solved, could help strengthen practices and policies within a field. BDO is an international accounting firm and DeBoer, Baumann is part of their BDO USA Alliance. This allows us the ability to tap into their resources and grant us a broader reach than most local firms have.

The toolkits can be found at strongnonprofits.org, and include spreadsheets that can be downloaded in the areas of budgeting, cash flows, operations and so much more. There are also self-assessments for organizations to determine where they are in certain areas, such as audit readiness, strengthening the relationship between the Finance Team and the Development Team.

If you would like assistance in implementing any of these tools please contact us today.

We receive many requests for audit proposals annually. When an audit is not required by governing agencies, we begin the conversation by asking the following question: “What are you hoping to achieve by undergoing an audit?”

Some organizations are looking to gain some assurance that their internal controls are operating effectively, and that policies and procedures are adhered to. Others are looking to confirm appropriate recording of specific revenues or expenses. In either case, we often recommend an agreed-upon procedures engagement vs. an audit.

Why? The biggest reason is cost. An audit is a very costly undertaking – both in organization time and financial resources. Agreed-upon procedures engagements are tailored to the specific area(s) of interest, and often take about half the time and financial resources of an audit. The information gained from an agreed-upon procedures engagement can be instrumental in future policy and procedure making, as well as give your not-for-profit organization peace of mind that internal controls are set up well, and operating effectively.

There are no guarantees that errors or fraud will be identified in either an audit or an agree-upon procedures engagement, but when management has a specific area of concern, an agreed-upon procedures engagement can be a valuable tool.

If your organization would like to discuss what an agreed-upon procedure engagement might look like for you, please contact us today.

Many organizations – public, private, not-for-profit, governmental – fall victim to fraud. Unfortunately, not-for-profit organizations seem to top the list, often due to the small number of staff members. One of the best weapons against potential fraud, even in the smallest organizations, is the proper structuring of internal controls.

Internal controls include direction over what information/duties specific staff members are allowed to perform or access, appropriate segregation of duties, receipt and verification of documentation (i.e. invoices, timecards, bank/loan statements, etc.), and process review and oversight.

Organizations can evaluate their internal controls by considering three questions:

• What process is used to complete a transaction? Does the process capture data, allow changes to data, or potentially allow for errors to data?

• What could go wrong? Are there gaps in the process that should be addressed? Do the controls provide for effective operation and oversight?

• What controls are in place to prevent errors? These controls can be manual or application controls, management oversight or involvement in the process, or other prevention or detection controls.

Along with proper structuring of internal controls comes education. Educating staff, managers, executive directors, and the board of directors about the risk of fraud is a crucial step toward protecting the organization. Working through and documenting each step in the internal control process provides for proper understanding and empowerment. Reviewing the processes annually provides opportunity for the organization to identify potential efficiencies.

If you need help with your internal controls – documentation, education, or review – reach out to us today.

For fraud to occur, three elements are typically present. These elements are commonly known as the fraud triangle:

Pressure/Incentive – perceived or actual pressure on management and employees. For example, the requirement to hit a certain level of fundraising by end of year, or incentives to understate expenses in an effort to appear more efficient to obtain grantor/donor funds.

Opportunity – small staff size can result in a lack of internal controls or ineffective internal controls, which creates an opportunity for fraud. In addition, organization leadership may not properly address fraud risk, refusing to believe anyone would want to defraud the organization.

Rationalization/Attitude – employees may rationalize the misappropriation of assets as compensation for their low payrate.

Bottom line – a typical organization loses 5% of revenues each year due to fraud. Organization leadership must take the time to access and address fraud risk on an annual basis, keeping the “fraud triangle” in mind.

If you would like help in identifying potential fraud risks in your organization, contact us today.

Not-for-Profit Organizations are often more vulnerable to fraud due to their small number of administrative staff, lack of internal controls and separation of duties, and absence of mitigating controls to combat these issues. Today’s world of technology only adds to the risk. So what are some prevention measures that can be taken?

An easy first measure is to reach out to your insurance provider and confirm you have Cyber Insurance and are clear on exactly what it does and doesn’t cover.

A second measure is to reach out to your current banker to determine if your bank offers Positive Pay on your accounts (be sure to ask if they discount the fee for NFP organizations). Positive Pay is an automated cash-management service used by banks to deter check fraud. Banks use Positive Pay to match the checks issued by the Organization with those items presented to the bank for payment. Any check presented that doesn’t match the listing provided to the bank from the Organization is sent back to the issuer without being cashed.

If you have questions regarding your Organization’s fraud risk or the measures discussed here, or are in need of a referral to a bank, please contact us.

Not-for-Profit organizations have been crowdfunding for years. What is crowdfunding? Crowdfunding is the practice of fundraising by seeking many small amounts of money from a large number of people. The internet has certainly made crowdfunding easier, but it has been a tool utilized for many years in the Not-for-Profit world. Donations received via crowdfunding are no different than a “typical” donation.

The first important item to consider is that contributions are tax-deductible to donors when made to a 501(c)(3) organization. The second item to consider is any fee that may be charged by an online crowdfunding platform along with any transaction processing fees. Lastly, be sure that if the request specifies how the monies will be used (which in essence restricts the donations received) the Organization properly tracks the receipt and disbursements of funds towards that purpose.

With the shift to electronic delivery of almost everything, online fundraising is a great way for a Not-forProfit organization to reach their supporters and potentially expand their donor pool. It can also be a great way for Not-for-Profit organizations to track the donations they receive.

If you have any questions about how crowdfunding may benefit your Not-for-Profit organization, please reach out to us today.

The board of directors (“board”) may use discretion in determining the number of meetings held during a given year. The decision should factor in the size and complexity of the Not-for-Profit organization, as well as the importance of board responsibility and board effectiveness. The IRS expects (and state law usually dictates) that a Not-for-Profit Organization’s board meet a minimum of once annually. But is that enough? What happens if the board meets too often? What happens if the board doesn’t meet often enough?

There is no “magic” number. There is no “one-size-fits-all” solution. The board needs to decide how many meetings will keep the board engaged, provide appropriate oversight to the Organization, and ensure the meetings are fresh and productive. Board members need to be committed to involvement and attendance, and the board needs to have the flexibility to reschedule when necessary, or add meetings during times where additional board support/oversight/involvement are needed. Consider polling your board to obtain feedback related to these considerations.

If your board would like help determining a meeting schedule best suited for your Not-for-Profit organization, reach out to us today.

Several factors should be considered when determining compensation for the Executive Director/CEO of your Not-for-Profit organization. A few of these considerations are: the size of your organization, annual revenues, and number of employees.

It is important to note there are organizations set up to provide support and resources to your Not-for-Profit organization. Locally in West Michigan, the Lakeshore Nonprofit Alliance is one such organization. Every three years they perform a community assessment, wherein they gather compensation information for the Executive Director/CEO and other top employees of not-for-profit organizations. This is a great resource when it comes time to set annual compensation.

If you would like to talk through your process for determining compensation, please contact us today.

Solicitation materials and other items sent to donors and the public must clearly identify the Not-for-Profit organization and be accurate and truthful.

Additionally:

• If an organization is not eligible to receive tax-deductible contributions, this must be disclosed in the solicitation.
• If goods or services are provided in exchange for a donation of more than $75 (i.e. dinner, golf, etc.) the organization must:
  • Provide the donor with written notice of the fair market value of the goods or services received, and
  • Tell the donor that only the portion of the donation that exceeds the fair market value of goods or services received is tax-deductible.

If you have any questions regarding appropriate disclosures in your fundraising materials, contact us today.

Segregation of duties is vital in any organization and is particularly helpful in the safeguarding of assets. While not all-inclusive, the following list contains some important segregation of duties considerations:

• The individual receiving cash/checks should not also be the one creating the bank deposit record.
• The vendor list should be approved by someone other than the individual preparing vendor payment checks.
• Invoices received should be thoroughly reviewed and approved by someone prior to payment being made, and by someone other than the individual preparing the vendor payment checks.
• Employee records should be carefully reviewed by someone other than the individual preparing payroll to ensure no “fake” employees have been created for payment.
• Bank reconciliations should be carefully reviewed by someone other than the individual who prepared it.

In many cases, a small Not-for-Profit organization may have an Executive Director and a Staff Accountant, along with Program Staff. In this case, the Executive Director and/or the Board Treasurer would be the one to split duties with/review the work of the Staff Accountant.

If you need help in determining how best to safeguard your Organization’s assets, please contact us today.

Part VI of Form 990 asks questions related to the Not-for-Profit Organization’s Governance, Management, and Disclosure. Section B of Part VI relates specifically to Policies of the Organization. A sample of these questions follows: 

• Question 12a: “Did the Organization have a written conflict of interest policy?” 
• Question 13: “Did the Organization have a written whistleblower policy?” 
• Question 14: “Did the Organization have a written document retention and destruction policy?”

It is clear that the IRS encourages written policies. Interestingly though, the tax codes governing Not-for-Profit Organizations do not require written policies. So, this begs the question: “Should we have our policies in writing?”

The simple answer is YES! When you think about your Organization’s policies, think of them as the foundation over which all business practices take place. Do you want to set a firm foundation based on clear, written policies? Or do you want to simply trust that the policies as verbally communicated are fully understood? You’ve heard of the “telephone game,” right? How far off track is the communication now, from where it began? Ensure your Organization has a solid framework with clear, written policies.

Do you need help documenting your policies? Contact the DBC NPO team today.

Yes, generally a Not-for-Profit Organization can begin operations before receiving tax-exempt status. Recognition is usually effective retroactive to the earlier of: a) the date of the Organization’s legal formation, or b) the beginning of the Organization’s programs. Therefore, the Organization’s activities are retroactively tax-exempt and donations are also retroactively tax-deductible to the donor.

Note: in order for the program date to be considered the effective date of tax exemption, there must be an organizing document of some kind. Signed minutes from an organizing meeting of the board of directors may be sufficient.

If you are part of a newly formed Not-for-Profit Organization and would like assistance with making sure your Organization is on the right track, contact us today.

When a Not-for-Profit organization purchases an item that it expects will provide a benefit to the organization for more than one year, the organization should consider capitalizing the cost of that item.

A capitalization policy is an important tool for every Not-for-Profit organization. This policy, adopted through a Board decision, establishes a specific dollar threshold (i.e. $1,000) at which any purchase meeting or exceeding that threshold, where the item also has a useful life exceeding one year, must be capitalized and depreciated over time, rather than expensed immediately. If capitalized, the item is referred to as a fixed asset.

A Not-for-Profit organization must apply depreciation to the fixed asset annually, until the purchase price has been fully expensed. Not-for-Profit organizations typically utilize straight line depreciation, which evenly allocates the cost of the asset over the estimated useful life of the asset. The useful life is a based on guidelines set by the IRS, and does not necessarily correlate to the length of time the asset is actually used by the organization.

There are a couple of benefits to capitalizing and depreciating a fixed asset, even though there is no tax implication for Not-for-Profit organizations. First, it spreads the cost of the item over several years rather than showing a large expense in the year of purchase and second, it more accurately reflects the value of the fixed asset.

If you have questions about establishing or properly applying a capitalization policy, please contact us today.

As a Not-for-Profit Organization, it can be a challenge to create a budget when your revenues depend heavily on donations from the public. Here are a few thoughts to consider as you form a budget:

• Prior year(s) donations
  • Review the prior year’s actual donations. This will allow you to predict on a monthly basis where the highs and lows typically fall. If the most recent year was “outside of the norm,” either positively or negatively, review the most recent year that was “normal” and revise based on what you know has changed since that time.
• Fundraising events
  • Are you holding all of the same events?
    • If you have planned additional events, or have decided to cut back on events, be sure to update the budget for those decisions.
  • Large “one-time” gifts
    • Keep in mind any large one-time gifts received in the prior year(s) and remove them from the budget since they are unlikely to be repeated.
  • Marketing
    • Has the Organization been working on any marketing tactics that could increase donations?

As you can see, many of the considerations are based on prior year(s) amounts. So what if you are just starting out? How does a first year Organization plan their income? When just getting started it’s best to be realistic when setting up your budget. Having big goals is great, and the Organization wouldn’t exist without them, but when it comes to budgeting for the financials, assume a low contribution level, and keep costs low as well.

Let’s talk a bit about expenses. Be sure to identify in your budget expenses that are “fixed” – for example rent, insurance, utilities, etc. – and costs that can be eliminated, if needed. For example, a 5-year lease is not as easy to get out of as cancelling a subscription. Separating costs between these categories provides the Organization with important information to allow for quick decision-making if income happens to fall short. These quick decisions are important to keep the Organization on track with its mission.

The budget is ultimately an assumption. It is a tool for gauging how you project the year will go, and provides something tangible to measure up against throughout the year. Prepare a budget-to-actual summary on a monthly basis to see how the year is performing in comparison to the budget. Timely review of the summary provides the Organization with vital information needed to be able to make decisions about reaching out for additional donations, adding a fundraising event, or cutting costs.

If your Organization needs assistance with developing a budget, reach out to us today.

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:

1. If an Organization lends any part of its income or corpus without the receipt of adequate security and a reasonable rate of interest.
2. If an Organization pays compensation in excess of a reasonable allowance for salaries or other compensation for services rendered to the organization.
3. If an Organization makes any part of its services available on a preferential basis.
4. If an Organization makes any substantial purchase of securities or any other property for more than adequate consideration (purchase above market value).
5. If an Organization sells any substantial portion of its securities or other property for less than adequate considerations (sale below market value).
6. 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:

1. A notice to the taxpayer to whom the determination letter was issued
2. Enactment of legislation or ratification of a tax treaty,
3. A decision by the Supreme Court of the United States,
4. The issuance of temporary or final regulations,
5. The issuance of a revenue ruling, revenue procedure, or other statement published in the Internal Revenue Bulletin, or
6. Automatically, by operation of Section 6033(j), for failure to file a required annual return or notice for three consecutive years.

Outgoing treasurer “checklist:”

1. Have the bank accounts been reconciled year-to-date?
2. Are the accounting records complete?
   • Accounts Receivable, Prepaids, Inventory, Fixed Assets, Accounts Payable, Accruals, Net Asset Restrictions, etc.
3. Has a current file for the year been prepared and provided to the incoming treasurer?
   1. Bank statements and reconciliations for each month year-to-date
   2. Any correspondence received during the year-to-date
4. Has the incoming treasurer been given access to all accounting information/records?
   1. Bank accounts
   2. Payroll accounts
   3. File passwords/privileges
   4. Locked file access
5. Has the outgoing treasurer reviewed/explained any journal entries made to the accounting records year-to-date to the incoming treasurer?
6. Has the outgoing treasurer reviewed prior year financial statements and/or Form 990 with the incoming treasurer?
   1. Restrictions on cash or funds
   2. Non-cash donation reporting
   3. Other organization-specific unusual items
7. 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.

To request a demo of VolunteerHub, visit https://www.volunteerhub.com/request-demo-nav/.

If you would like to speak with another organization that uses VolunteerHub, reach out to us and we will put you in contact with an organization we know uses this software.

Volunteers are necessary. Sweating over the details isn’t. Contact us today to get the conversation started.

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:

1. The Not-For-Profit will have to treat the donation as a noncash contribution;
2. There is potential for the value of the cryptocurrency to increase, or decrease;
3. A virtual wallet may need to be opened by the Not-For-Profit in order to accept the funds in virtual form;
4. There may be a fee involved to convert the cryptocurrency from virtual to actual US dollars;
5. 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:

1. Charitable Organizations and Solicitations Act, MCL 440.271 et seq., which registers charitable organizations and licenses professional fundraisers who solicit in Michigan;
2. 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;
3. 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.

For more information on the STCPA, see STCPA.

The STCPA does exempt some organizations from registration. For more information on exemption see exemption.

Dissolution Act

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.

Raffles in Michigan (Powerpoint Presentation .pptx) »

If you are charging people or requiring them to donate or provide something of value to participate in a drawing where a prize will be awarded, you are conducting a raffle.

Common misconceptions:

• “We are only giving away door prizes; we aren’t conducting a raffle.”
  • If people are being charged to attend a function where prizes are awarded through a drawing, you are conducting a raffle.

• “We are conducting a 50/50, not a raffle.”
  • Contrary to many opinions, 50/50 drawings ARE raffles.

Raffle license requirements:

• Almost all raffles conducted in Michigan need to be licensed.
  • There are two different types of licenses:
    • Small Raffle License – total prize value of ALL raffle prizes < $500 in a single day
    • Large Raffle License – total prize value of ALL raffle prizes > $500 in a single day

• No raffle license is required for:
  • Qualified organizations
  • Single gatherings
  • No pre-sale of tickets
  • Total prize value < $100

Raffle accounting requirements:

• Raffle rules require accountability for tickets, cash and prizes
• Ticket stubs and unsold tickets must be recorded and returned with accounting
• The number of ticket stubs and unsold tickets needs to equal the original number of tickets received
• If discounted tickets are sold (i.e. $1/1 ticket or $5/6 tickets), they must be accounted for separately

Raffle reporting requirements:

• Only large raffle licensees
• Must submit a financial statement
  • Form is included in the envelope with the license
• Submit by 10th day of month following the month in which the raffle was held
• Failure to submit statement will prevent future license issuance

For more information check out the State of Michigan Charitable Gaming Division Raffle page here.

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)