- Drive donors to Facebook, Twitter and other social media accounts
- Share progress photos of a school being built in the Sudan
- Raise money for a freshwater well in a remote village in Kenya
- Tell a story of a child receiving life-changing surgery in the Philippines
- Invite donors to a quarterly fundraising drive benefitting local sports teams
- Send donors a thank you video for contributing to a holiday food drive
Just a friendly reminder that if your nonprofit’s fiscal year
ends December 31st, your filings are DUE May 15th.
Filing your annual financial data with the IRS is a crucial
way to maintain your 501c3 status. You don’t want your 501c3
status to be revoked like so many nonprofits did last year.
We’re offering a discount on our nonprofit tax filing services.
Remember you must file your 990 tax filing by four and one half
months after the end of your fiscal year. Give us a call to find out more.
We will throw in handling your annual state compliance as
well as part of this special offering (your organization
will be responsible for the state filing fees).
Please call us at 800-928-4161 to discuss how we can help
your nonprofit stay compliant as tax season approaches.
We’ve recently come across an interesting brief on the nonprofit sector and thought we’d share it with you. It’s put about by the Urban Institute’s National Center for Charitable Statistics. It’s from 2007 so no doubt these numbers have changed, but it’s still compelling stuff, even at 5 years old.
For instance, did you know that there are about 1.4 million nonprofits registered with the IRS? Nonprofits account for 8.3% of the nation’s employment and 5.2% of the gross domestic product (GDP). There were $260 billion in charitable contributions and about 29% of Americans volunteered thru an organization that has been formalized (has its tax exempt status). Just think of what your organization could do with just a fractionof that support. There are some great charts on graphs in this report too that can provide invaluable information for your nonprofit in terms of targeting supporters, donors and volunteers.
What’s particularly interested us was looking at the final chart of nonprofits by state and region. It mirrored our client base in a truly fascinating way (as reflected in our client map). No matter where you are, we’re here to help your organization thrive. Don’t hesistate to let us know how we can better serve you.
We get a lot of questions from our clients about risks related to running the nonprofit, liability for the board and dealing with employeees and volunteers. For nonprofits that are working with children, have international activities, dealing with animals or doing anything that has a higher risk of accidents, you need to be thinking about creating a risk management plan. This isn’t to scare you, but to prepare you! They say about disaster preparedness that if you start preparing when the disaster starts, it’s already too late. Make sure that you and your board and staff have thought this piece through. Here are some excellent resources to help you in this journey. We’re also here to help for feel free to give us a call at 800-928-4161. We look forward to hearing from you.
Nonprofit Risk Management Center – a great place to start is this article on the difference between employees and volunteers and their book on risk mamangement for nonprofit executives.
E-volunteerism – this resource is especially useful for organizations that work with volunteers though some of the reports listed here would be helpful to just about any nonprofit.
Some of the information may be a little out of date so if you’re having a specific issue or have a specific question, check with us. We stay on top of changes in laws and IRS code so that you don’t have to.
Are you an executive director of a nonprofit based in San Francisco who wants to improve your leadership and management skills? Enhance the capacity of your organization? Build collaborative relationships with other nonprofit leaders? If yes, LeaderSpring invites you to apply to a two-year, on-the-job Fellowship program. Information sessions are taking place in August and applications are due Friday, September 2nd, 2011. For more information, visit the LeaderSpring website.
We receive a lot of questions about insurance, so I want to
introduce you to an insurance specialist, Shanika Gunesekera to
address your questions and insurance needs. I find her to be a
person of integrity and truly interested in serving her clients.
Here is something she wrote to get you thinking about insurance
issues. She is also happy to answer your questions at her email or
telephone number below.
Risk Management requires proactive planning to avoid or to limit
potential losses. Unfortunately, many non-profit organizations
consider buying insurance as simply a reaction to regulation and
outside requirement. However, losses do happen, and can vary from a
fire that destroys a building to a non-profit’s Board of Directors
being sued. Some of these losses can be large and even threaten the
survival of a non-profit institution. The function of an insurance
program is to indemnify you and your non-profit in the event of an
insurable loss, and help the non-profit set up loss control
procedures to prevent costly accidents from ever happening.
As a non-profit organization, a few questions to consider are:
1)Volunteers are the backbone of most non-profit organizations.
Are they covered if they are hurt while volunteering?
2)Lawsuits against Board Members have been increasing at a
shocking rate. Does your organization have a substantial ‘Directors
& Officers’ (D&O) policy?
3)Has anyone from your organization been fired? Employment
practices claims are one of the most prevalent source of litigation
in the non-profit sector today. Does your organization have
4)Do employees who reconcile the monthly bank statements also
either sign checks or handle deposits ?
5)Do your employees use their own vehicles for work?
6)Does the public have access to fine art or internal premises,
where theft can take place due to inadequate security?
7)If your non-profit organization has several different
locations, are they all scheduled on the declaration?
8)If you provide a service such as counseling and medical/legal
advice, do you have sufficient Errors & Omissions or Malpractice
9)Are you getting the best coverage for the most competitive price?
While insurance may not be at the top of most non-profit’s list of
priorities it is important to make sure your non-profit is
sufficiently covered. A comprehensive insurance program will ensure
that in an event of an insurable loss your organization can get
back on its feet, with minimal delay, to continue the valuable work
that you do.
If you have questions about insurance for your non-profit, you can
speak with an insurance specialist, Shanika Gunesekera at
650-227-7227 or e-mail her at firstname.lastname@example.org. She can answer
The Internal Revenue Service today announced that it has released a listing of approximately 275,000 organizations that under the law have automatically lost their tax-exempt status because they have not filed annual reports as legally required for the past three years. If an organization appears on the list of auto-revoked organizations it is because IRS records indicate the organization has a filing requirement and has not filed the required returns or notices for 2007, 2008 and 2009.
The IRS has issued guidance on how organizations can apply for reinstatement of their tax-exempt status, including retroactive reinstatement. In addition, the IRS announced transition relief for certain smaller tax-exempt groups – those with annual gross receipts of $50,000 or less for 2010 and eligible to file Form 990-N, the e-Postcard. The relief allows eligible revoked groups to gain retroactive tax-exempt status and pay a reduced application fee of $100 rather than the typical $400 fee. More information, including FAQs and a Fact Sheet, can be found on the IRS website.
We get a lot of questions from people who have a family member or a friend who has an illness. Our heart goes out to those families and communities dealing with illnesses of all kinds. We appreciate that so many people want to help by holding fundraisers to help their loved ones with medical and living expenses.
Unfortunately, a 501c3 nonprofit organization needs to benefit an entire class of people rather than just a single individual. If you wish to start an organization to help many people living with cancer or other disease in your community, we’re able to help. If you want to just focus on a particular individual, we recommend consulting with the hospital about the best route to go. Many have programs to help people help patients. Your bank can often advise you on the best accounts to set up for the funds raised.
Contributions to a nonprofit earmarked for a specific individual are allowed and appreciated, however these donations are not tax deductible. The donation is considered a gift to an individual and are not tax deductible.
Whether you are an individual planning to donate money to a 501c3 Nonprofit or an existing Nonprofit accepting donations, it is important to understand the restrictions and limitations of contributions; so as to make the most out of one’s 501c3 Tax Exempt Status.
Contributions You Cannot Deduct
There are some contributions you cannot deduct. There are others you can deduct only part of.
You cannot deduct as a charitable contribution:
1. A contribution to a specific individual,
2. A contribution to a nonqualified organization,
3. The part of a contribution from which you receive or expect to receive a benefit,
4. The value of your time or services,
5. Your personal expenses,
6. A qualified charitable distribution from an individual retirement arrangement (IRA),
7. Appraisal fees,
8. Certain contributions to donor advised funds, or
9. Certain contributions of partial interests in property.
Detailed discussions of these items follow.
Contributions to Individuals
You cannot deduct contributions to specific individuals, including the following.
- Contributions to fraternal societies made for the purpose of paying medical or burial expenses of deceased members.
- Contributions to individuals who are needy or worthy. This includes contributions to a qualified organization if you indicate that your contribution is for a specific person. But you can deduct a contribution that you give to a qualified organization that in turn helps needy or worthy individuals if you do not indicate that your contribution is for a specific person.
Example. You can deduct contributions for flood relief, hurricane relief, or other disaster relief to a qualified organization. However, you cannot deduct contributions earmarked for relief of a particular individual or family.
- Payments to a member of the clergy that can be spent as he or she wishes, such as for personal expenses.
- Expenses you paid for another person who provided services to a qualified organization.
Example. Your son does missionary work. You pay his expenses. You cannot claim a deduction for your son’s unreimbursed expenses related to his contribution of services.
- Payments to a hospital that are for a specific patient’s care or for services for a specific patient. You cannot deduct these payments even if the hospital is operated by a city, state, or other qualified organization.
1. What is a private foundation, or family foundation? Technically, it is a not-for-profit entity that can be controlled by a person, family or business. Sometimes private foundations are referred to as ‘family foundations’. They are organized exclusively for charitable, educational, religious, scientific and literary purposes under Section 501(c)(3) of the IRS Code. The foundation must be officially recognized by the IRS in order for contributions to it to be tax deductible. In practice, a private foundation is a unique planned giving vehicle that fosters family involvement, provides significant control over assets and giving, and allows donors to receive an immediate tax deduction for charitable donations that are made in the future.
2. What are the benefits of a private foundation?
- Family legacy. A private foundation establishes a legacy of giving that can carry the family name, supports causes that are important to you, and promotes charitable activities into the future.
- Control. Private foundations provide the greatest control of any planned giving vehicle. You decide which charities to support and how the assets are invested. You also have great latitude as to the types of assets you can donate to the foundation.
- Family involvement. A private foundation enables you to involve the family in philanthropy and pass values on to future generations.
- Current tax deduction for future grants. You can take an immediate tax deduction for contributed assets, even if the foundation does not make charitable grants until a later date. You are also able to remove taxable assets from your estate, without incurring capital gains taxes. (Consult with your tax advisor.
3. How does a private foundation compare to a Donor Advised Fund? The difference is mainly in control and flexibility. With a private foundation, the donor retains control over charitable donations and other disbursements. Foundations can hire staff, reimburse expenses, set up structured giving programs such as scholarships, and make grants directly to individuals in need. In addition, donors can contribute a much wider variety of assets to fund the foundation, such as “144” restricted stock, and the founder retains control over how the assets are invested. Contributors to a donor advised fund make irrevocable contributions to a nonprofit organization that administers the fund and makes decisions regarding fund investments. Contributors may recommend eligible charities as recipients for grants, but the fund’s governing body is free to accept or reject any recommendation.
4. What is the difference between a private foundation and a public charity?
The Foundation Center defines a private foundation as a nongovernmental, nonprofit organization having a principal fund managed by its own trustees or directors. Private foundations maintain or aid charitable, educational, religious, or other activities serving the public good, primarily through the making of grants to other nonprofit organizations.
To understand what a private foundation is, it helps to understand what it is not. Every U.S. and foreign charity that qualifies under Section 501(c)(3) of the Internal Revenue Service Code as tax-exempt is a “private foundation” unless it demonstrates to the IRS that it falls into another category. Broadly speaking, organizations that are not private foundations are public charities as described in Section 509(a) of the Internal Revenue Service Code.
Another difference between private foundations and public charities is that public charities generally derive their funding or support primarily from the general public, receiving grants from individuals, government, and private foundations. Although some public charities engage in grantmaking activities (see information and resources below on grantmaking public charities), most conduct direct service or other tax-exempt activities. A private foundation, on the other hand, usually derives its principal fund from a single source, such as an individual, family, or corporation, and more often than not is a grantmaker. A private foundation does not solicit funds from the public.
Not every organization that uses the word “foundation” in its name is a private foundation, and the word “foundation” has no legal meaning in and of itself. Instead you must look at how the IRS designates an organization and inquire as to whether they file a Form 990-PF (the tax return filed by private foundations) or a Form 990 (the tax return filed by public charities and other nonprofit organizations).
5. How may foundation assets be used? Donations to a private foundation may only be used for charitable purposes and certain administrative expenses.
6. Can I or members of my family be employed by my foundation? Yes. By appointing children or other family members as officers or directors, you will have the option of making the foundation a family affair. However, paying yourself or family members requires strict adherence to detailed IRS rules. To avoid the potential for legal problems, you must consult with your attorney before paying yourself or family members.
7. Can my family or I engage in transactions with the foundation? The IRS strictly prohibits self dealing. Disqualified individuals (the donor, lineal descendants and antecedents, e.g., parents, children and their spouses, and people under their employment) may not engage in transactions with the foundation except to make donations to it, or under limited circumstances, to receive fair market value compensation for services. Examples of self dealing include:
* Purchasing items from or selling items to the foundation.
* Personal use of foundation assets or income.
* Borrowing money from the foundation.
* Retaining foundation assets (e.g., paintings) on private premises.
8. Who can a private foundation give money (make grants) to? Private foundations typically carry out their philanthropy by making grants to recognized public charities. This includes churches and synagogues, educational, scientific and cultural institutions, poverty relief agencies or any other organization that qualifies as a 501(c)(3) charity according to the IRS. In some instances, a private foundation may provide grant money to individuals in the form of scholarships or grants for a particular project such as a art grant.
Private foundations are generally precluded from making grants to political campaigns or organizations that exist to influence legislation and voting.
9. Is there a minimum or maximum amount a private foundation must give away each year? The IRS requires that private foundations pay out at least 5% of the previous year’s average net assets for charitable purposes. This can include certain administrative expenses. There is no maximum limit on giving.
10. What types of organizations can a private foundation make grants to? Private foundations can give to any organization recognized by the Internal Revenue Service as a public charity. This includes churches and synagogues, educational, scientific and cultural institutions, poverty relief agencies or any other organization that qualifies as a 501(c)(3) charity according to the IRS.
11. How does a nonprofit supporting organization, compare to a private foundation?
A supporting organization is actually a private foundation as well, but it is treated, for tax purposes, as a public charity. This is because, under the tax law, it is so closely connected to at least one public charity that it is almost a part of that organization. The connection can be achieved by having a majority of the Foundation’s board appointed by the public charity. Or, the purpose of the Foundation can be to support specific projects of the public charity, in such amounts that the government can be reasonably assured that the public charity will be supervising the activities of the Foundation. The special tax status is granted because Congress is comfortable that the public will be protected, through the oversight and control by a public charity. Be careful, here, however, because the IRS has increasingly scrutinized both the applications of new supporting organizations, and their operations, just to be sure that there is such active oversight and control.
12. What are the penalties for failing to make the 5% payout within the designated time period?
Failure to make the 5% minimum payout results in a penalty equal to 15 percent of the remaining amount of the total payout that was not distributed as required. Remember, though, that this 5% payout requirement does not require payment during the first year of the foundation’s operation; while establishing yourself, you can defer grants into the second year – but not beyond (except under special set-aside rules).
13. Is it legal to compensate the trustees/board members of a charitable foundation?
Yes. Although the charity cannot exist for the significant benefit of a private individual, board service does involve devotion of time and expertise, for which individuals may be reasonably compensated.
The issue of “reasonable” compensation is a critical consideration. What comprises reasonable payments? The best guideline may be what other foundations in your area, with similar assets, do or do not pay their officers. This information is publicly available, as is federally mandated.
14. What is self-dealing and why is it illegal?
Self-dealing involves a direct or indirect transaction (generally a financial transaction) between the foundation and a “disqualified person” – even if the transaction would benefit the foundation. Self-dealing also includes any use of foundation income or assets by a private foundation for the benefit of a “disqualified person.” The self-dealing rules are outlined in Internal Revenue Code Section 4941 and were created to prevent misuse of foundation funds and assets for the personal gain of officers/directors and their friends or family.
Disqualified persons include, among others:
- Foundation trustees, directors, managers, or officers;
- Substantial contributors to the foundation;
- An owner of more than 20% of any business that is a substantial contributor;
- Members of the family of any of the above, including spouses, children, grandchildren, great- grandchildren, parents, other ancestors, or spouses of children, grandchildren or great-grandchildren;
- Any corporation in which more than 35% of the voting power is owned by disqualified persons; and
- Certain government officials.
Prohibited transactions include:
- The sale, exchange or leasing of property (e.g. purchasing office supplies, printing or insurance from a disqualified person);
- The lending of money or extensions of credit;
- The furnishing of goods, services or facilities for money;
- The transfer of, or use of the income or assets of a foundation for the benefit of a disqualified person; and
- The payment of money or property to a government official.
Questions to consider if you want to start your own foundation:
1) What state will be the foundation’s base?
Foundations are organized under state law and are generally established in the state where the foundation intends to do business. Unless laws vary drastically from IRS regulations in your state, generally, there is no need to state-shop when setting up a foundation. If the foundation is incorporated in one state but has a primary office in another state, the law requires that you file annually in both states.
2) What type of foundation?
- Private/Independent/Family Foundation: The IRS classifies an organization as a private foundation rather than a public charity when its funding comes from limited sources – an individual, a family, a corporation, or a small group of donors – rather than major support from the general public. The terms private and independent are often used interchangeably with the term family foundation. Family foundations are usually organized in the form of a nonprofit corporation or a trust and the bulk of the budget is usually made up of grants to other charitable organizations.
Private foundations have more autonomy and flexibility that other types of foundations. For example, directors are not subject to constant review by the organization’s members and are not responsible to shareholders. Private foundations are governed by different legal regulations than public charities and are required to pay a tax on investment income and make charitable expenditures that equal or exceed 5 percent of their endowment.
- Company/Corporate Foundation: This model is subject to the same rules as a private foundation but the source of funds is a for-profit company. It usually has a small endowment allowing for a reserve during low-profit years, funds pass through the foundation, and grants made generally come from charitable contributions of the for-profit company in the same year.
- Pass-Through or Conduit Foundation: A private, nonoperating foundation usually established by a donor during his/her lifetime to establish governing rules in anticipation of a large future bequest. Donors may take advantage of more liberal charitable deduction rules, no gifts may be used to build an endowment and all contributions must pass through the foundation no later than two and a half months after the end of the tax year in which the gifts are made.
- Pooled Common Fund: In this model, one or more donors may make contributions that are pooled into a common fund. A donor (or donor’s spouse) may retain the right to designate annually which organizations will benefit from income from donor’s contributions. All recipients of funds must be public charities as defined in Section 509(a)(1) of the tax code. The fund’s governing instrument must provide for distributions and in fact pay out all adjusted net income after certain other requirements are met.This model also provides the donor with substantial control over distribution of funds and donors are subject to more liberal charitable deduction rules.
- Operating Foundation: Directly operates its own charitable program (i.e. running a museum) instead of making grants to other charitable organizations. Donors may take advantage of more liberal charitable deduction rules and the foundation generally must spend at least 85 percent of its investment income directly for the operation of its charitable activities. Other regulations apply (see article).
3) Will the foundation be established as a charitable trust or in corporate form?
Many donors choose to establish a charitable trust because it is simple to create and generally does not require approval by a governmental agency. The law of trusts is based on common laws and is therefore more flexible and less precise than the laws of incorporation. Trusts also have more flexibility in receiving and disposing of real property than nonprofit corporations.
On the other hand, a nonprofit corporation provides greater protection from liability for directors. Directors of a nonprofit corporation are held to less stringent fiduciary standards than trustees of a trust. Delegation of investment decisions, enlarging the governing board or replacing board members may also be handled more effectively in the corporate form.
4) How do I incorporate?
If you choose to incorporate, the foundation’s proposed name should be cleared with the state, and a “certificate of incorporation” or similar document must be prepared in accordance with state laws. The federal requirements for exempt status as a private foundation demand that the certificate include:
- language establishing its charitable, educational or similar purpose in the purpose clause;
- a statement that the earnings of the corporation shall not result in any private benefit to its members, trustees, or officers (except for reasonable compensation for personal services rendered);
- a statement that no substantial part of the corporation’s activities shall consist of attempts to influence legislation (except where that legislation may affect the foundation’s operation) and that it shall not participate in political campaigns;
- a clause providing that on dissolution the assets shall be disposed of for charitable purposes;
- a statement that the corporation will comply with the requirements of Sections 4941, 4942, 4943, 4944, and 4945 of the Internal Revenue Code.
Note: Many purpose clauses are drafted in general language to simplify the process of obtaining tax exemption and to allow the governing board flexibility to modify policy in the future. The purpose clause should be drafted with more specificity if the donor’s intent is to make sure that the foundation adheres closely to particular charitable purpose.
5) Will the foundation created have a limited life or perpetuity?
Most states give perpetual life to corporations created by statute while providing ways for their members and others to terminate them. In most states, trusts created for the benefit of charity can exist in perpetuity. Some donors choose to limit the foundation’s life to a term of years, at the end of which all assets must be distributed.
Following are some issues that must be considered in determining the life of the foundation: Is the foundation’s charitable purpose an area with limited life or one that can be funded in perpetuity? Will work be carried on by future generations or is it something the donor wants to end at a particular point in time? Will the initial endowment carry into the future? Will the foundation raise funds to add to the endowment? Will the foundation set up an investment policy to increase the endowment, or will the intent be for initial endowment to be disbursed, and the foundation dissolved upon final disbursement?
6) What will the governing body look like?
Once a foundation is established, the donor must decide the size, make-up, method of election, and tenure of its governing body. Specifics of the governing body may be outlined in the foundation’s bylaws rather than in the certificate of incorporation because they will be easier to change. The bylaws should contain authorization for appointing committees of the board, electing officers, notice and waiver of notice of meetings, and similar provisions addressing the foundation’s administration. Basically, they should make clear that the board has authority to run the foundation.
7) What is an organizational meeting?
Under state law, corporations generally hold an initial meeting to: elect director(s) and officers, adopt the corporation’s bylaws, pass a resolution to open bank accounts and sign signature cards, establish the fiscal year, adopt a corporate seal, provide for recruitment of initial or interim staff, record the minutes of this meeting and file them with subsequent meeting minutes to be kept for the life of the foundation. This meeting can be held as soon as the state has approved the foundation’s certificate of incorporation, thus making the foundation a legal entity.
8) How do I file for Exempt Status with the IRS?
Upon receiving the certificate of incorporation and adopting bylaws, the foundation can seek exemption from federal income tax. This will assure that contributions to the foundation are tax deductible. A Form 1023 must be filed with the appropriate IRS district within fifteen months of the foundation’s organization under state law. When granted, IRS recognition of exempt status will then be retroactive to the date of organization.
In addition to the Form 1023, a foundation must file for an employer identification number on Form SS-4 (this is necessary whether or not the foundation intends to hire employees). After filing Form1023, the foundation waits for a determination letter from IRS (generally a few months). In the meantime, the foundation must file a Form 990-PF with IRS and state authorities on or before the due date as if the federal tax-exempt status has been determined.