Jennifer V. Abelaj, Guest on the Inside BS Show Podcast, hosted by Dave Lorenzo: The Right Way to Plan Your Estate and Gifts to Charitable Institutions (Show 97, originally aired 06-29-2022)
I enjoyed my recent discussion with Dave Lorenzo, who is the host of The Inside BS Show podcast about The Right Way to Plan Your Estate and Gifts to Charitable Institutions.
Dave’s daily podcast includes informative discussions with professionals in the spaces of marketing, sales, business strategy and all the big secrets THEY don’t want you to know. The show will entertain you with great interviews, help you make more money, and give you the inside scoop on all the best secrets most people never share.
I’m so pleased to be a guest on this show and provide information about estate and philanthropic planning. I had a great time chatting with Dave, who is an excellent podcast host and an expert in sales techniques.
Below is a bio for the show, as well as a link to the audio and YouTube. Hopefully you get to learn more about Wills, Trusts and my passion for philanthropic planning. Let me know what you think!
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The Right Way to Plan Your Estate and Gifts to Charitable Institutions
This show is important for anyone who cares about his/her family. Today Dave Lorenzo has a conversation with Jennifer Abelaj, a New York Estate Planning Attorney.
Join us!
Non-Profit Directors Vs. Officers
When working with non-profits, a question often arises about the difference between non-profit directors vs. officers. Both directors and officers have their distinct roles within a non-profit organization. According to a report by the Office of the New York State Comptroller, New York accounted for the second-highest number of non-profit organizations in the United States. As of 2019, the number of non-profits in New York was over 33,700. Often, the smooth and efficient operation of a non-profit organization depends on both directors and officers. However, it is important to understand the difference between the two roles because each has its distinct duties and responsibilities. At Jennifer V. Abelaj Law Firm, we assist non-profit organizations with various legal needs. Whether you need help setting up a non-profit organization or counsel for your existing organization, consider calling 212-328-9568 to schedule a consultation.
Who Are Non-Profit Directors?
The board of directors is the governing body of the non-profit organization. Non-profit directors make high-level decisions that affect the organization and focus on its accountability. The primary duty of directors is the financial management of the non-profit organization. Key decisions that non-profit directors make include but are not limited to:
- Determining the organization’s mission
- Approving the organization’s annual budget
- Providing proper financial oversight
- Ensuring legal and ethical integrity
- Establishing governance policies
- Interviewing and electing officers and other managerial positions
- Maintaining the organization’s accountability
The non-profit organization’s bylaws usually govern how and when the board of directors will vote on issues affecting the organization. New members can join the board of directors if a designated individual or entity appoints them or the board of directors elects them. A non-profit director cannot make any key decisions on behalf of the non-profit organization unless the board votes on the issue or he or she has permission from the board.
Who Are Non-Profit Officers?
The board of directors can interview and elect non-profit officers. The primary duty of non-profit officers is to run the organization’s day-to-day operations within the limits of the authority that was delegated by the non-profit directors. Usually, the organization’s bylaws will indicate whether or not the elected officer must be a member of the board of directors. The most common positions for non-profit officers are secretary, president, and treasurer. However, the organization may also require officers to serve in the capacity of:
- Executive Director (Chief Executive Officer)
- Chief Financial Officer
- Chief Operating Officer
The duties and responsibilities of these non-profit officers include recruiting and retaining, paying the organization’s bills, keeping records, and more.
What Is the Difference Between Non-Profit Directors vs. Officers?
Unlike non-profit officers, directors do not run the day-to-day operations of the organization. The duties and responsibilities of non-profit directors include delegating authorities related to the management of the organization to non-profit officers. The main comparison of non-profit directors vs. officers is that directors control and monitor the day-to-date operations of the non-profit organization while officers are the ones who run the daily operations in a way that aligns with the vision and mission of the organization. The success of the non-profit organization depends on the good management and leadership skills of directors and the officers’ ability to fulfill key objectives when running the day-to-day operations. Without non-profit officers, directors would have to hold meetings and vote on every daily decision that must be made on behalf of the organization.
Can Non-Profit Directors Also Serve as Officers?
Yes, non-profit directors can also be officers. However, doing so can cause a conflict of interest. For this reason, most non-profit organizations choose to have separate people to serve as non-profit directors and officers to avoid unnecessary disagreements and conflicts. However, it is not uncommon for non-profit directors to also serve as officers. When one individual serves as both a non-profit director and officer, the organization usually pays that person as an independent contractor for serving as the director and as an employee for performing the duties of the officer.
However, if a non-profit organization appoints a director to also serve as the officer, it is critical to have a conflict-of-interest policy in place to address situations when a director/officer may benefit from personal or financial interests. At Jennifer V. Abelaj Law Firm, we assist non-profits with resolving their conflicts of interest and helping them with a wide range of other legal issues.
Non-Profit Directors and Officers: Avoiding Conflict of Interest
When a non-profit director also serves as the organization’s officer, there may be the potential for a conflict of interest. Many states, therefore, require non-profit organizations to adopt a conflict-of-interest policy. New York is one of those states. Under the New York Non-Profit Revitalization Act of 2013, all non-profits must have a conflict-of-interest policy. The Act also offers guidelines for drafting the policy and requires that non-profit directors, officers, and employees act in the best interest of the non-profit organization.
A well-drafted and valid conflict-of-interest policy must contain a provision requiring parties in conflict to disclose the details of the conflict. The policy must also prohibit members of the board of directors from voting on a matter in which they may have a potential conflict of interest. The policy must also contain the mechanisms for resolving and managing potential conflicts. In fact, IRS Form 990 specifically asks whether or not the non-profit organization has a conflict-of-interest policy and whether the policy establishes mechanisms for managing conflicts within the organization.
Non-Profit Attorneys Can Help
Directors and officers serve crucial roles in a non-profit organization, which is why it is essential to understand non-profit directors vs. officers to ensure efficient management of the organization. Jennifer V. Abelaj Law Firm provides non-profits in New York with personalized legal representation in various legal matters, including forming the organization, managing conflicts of interests, drafting bylaws and governing documents, and many more. Consider calling 212-328-9568 to schedule a case review with our experienced non-profit attorneys.
The IRS Now Mandates Electronic Filing For All Non-Profits
Even though the Internal Revenue Service (IRS) has long accepted electronic tax filings, tax-exempt organizations have been able to rely exclusively on paper returns and filings until recently. The IRS now mandates electronic filing for all non-profits. The new mandate is designed to streamline the filing process, modernize technology, and improve tax compliance in the tax-exempt sector. To help your non-profit organization comply with the new mandate, consider contacting the Jennifer V. Abelaj Law Firm at 212-328-9568 before the next tax deadline.
New Requirements for Non-Profit Electronic Filing
In the years prior to 2019, exempt organizations were only required to electronically file returns if they had at least 245 employees or reported assets of $10 million or more. However, on July 1, 2019, President Donald J. Trump signed the Taxpayer First Act into law, requiring all tax-exempt organizations to e-file their returns.
Smaller exempt organizations were initially provided some relief by being allowed to file paper returns if they filed Form 990-EZ, Short Form Return of Organization Exempt for Income Tax. However, the IRS has stopped accepting paper returns even for this purpose as of July 31, 2021. Due to the new IRS update, all exempt organizations, including those that filed Form 990-EZ, must file their returns electronically.
Forms to Be Electronically Filed
Since the IRS now mandates electronic filing for all non-profits, the following Form 990 series must be electronically filed:
- Form 990, Return of Organization Exempt from Income Tax
- Form 990-EZ, Return of Organization Exempt from Income Tax (Short Form)
- Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation
- Form 990-N, Electronic Notice
- Form 990-T, Exempt Organization Business Income Tax Return
Additionally, tax-exempt organizations that file any of the following forms must now file them electronically:
- Form 8872, Political Organization Report of Contributions and Expenditures
- Form 1120-POL, United States Income Tax Return for Certain Political Organizations
- Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code
- Form 1065, United States Return of Partnership Income
About Form 990
The IRS Form 990 series provides transparency and accountability for the non-profit sector. These forms can generally be viewed and inspected by the public and are the primary source for basic information about the non-profit organization. However, the filing of paper returns often created a lag between the time when the non-profit organization submitted its required forms and when the public had access to view the contents. That made it difficult for the public to have accurate and timely information about many organizations in the non-profit sector. The new mandate is expected to provide more timely data for donors, regulators, and other stakeholders.
The IRS does not require certain non-profit organizations to file Form 990 or even Form 990-EZ. These include:
- Certain religious organizations
- Certain government organizations
- Certain political organizations
- Organizations with gross receipts less than $50,000 (although they must file Form 990-N)
- Certain organizations that file different kinds of annual information returns, such as private charitable entities exempt under section 501(c)(3) and described in section 509(a), private charitable entities terminating their status by becoming a public charity, religious or apostolic organizations described in section 501(d), and stock bonus, pension, or profit-sharing trusts that qualify under section 401.
E-Filing Deadline
The electronic filing deadline for non-profit organizations is July 31. Although smaller exempt organizations were provided with transitional relief to give them more time to switch over from filing paper returns to electronic filing, all tax-exempt organizations except those with a specific exemption must now prepare electronic filings. All entities, including the ones that previously used Form 990-EZ, were required to electronically file forms 990 and 990-EZ with tax years ending July 31, 2021, and later.
How to Comply with the New Mandate
Organizations that previously filed paper tax forms were sent a letter from the IRS notifying them that the IRS now mandates electronic filing for all non-profits. If organizations filed a paper return after the applicable deadline, the IRS might have responded by saying that they needed to redo the return electronically. The IRS might have flagged the return as late when providing this notification. To abide by the new tax law, exempt organizations can engage the services of an outside tax professional or use one of the IRS’s pre-approved software providers to prepare their electronic return.
Because tax-exempt organizations may have complex reporting requirements that are substantially different than for regular taxpayers, they may wish to work with a tax consultant or legal professional who has more experience with the system. The Jennifer V. Abelaj Law Firm works closely with non-profit organizations and is well-versed in the laws and regulations that affect them. Consider contacting the office for help with tax filings and answers to any questions you have.
Contact a Non-Profit Lawyer for Help
If you are uncertain about how to comply with the current requirements for tax filings since the IRS now mandates electronic filings for all non-profits, you might consider reaching out to a lawyer who focuses in this area of the law. The Jennifer V. Abelaj Law Firm has years of experience working with various non-profit organizations, including public charities, private foundations, social welfare organizations, business associations, and more. We also assist with estate planning so that your non-profit organization can benefit from legacy gifts. Numerous charities and non-profit organizations depend on us for help with their creation, governance, transaction assistance, advocacy, tax compliance, and dissolution. We are also prepared to handle any potential legal issues that arise during tax filing season. Because we know all about the new mandate, we can help to ensure compliance and help you achieve your non-profit’s objectives by explaining whether the new mandate applies to your organization, how to transition from paper returns to electronic returns, and how to electronically file a return. Consider contacting the Jennifer V. Abelaj Law Firm at 212-328-9568 to discuss your non-profit organization’s current challenges, tax filing status, and goals.
Guide To Non-Profit Board Meetings: Minutes and Agendas
Holding a productive board meeting requires thorough planning. Crafting a well-structured agenda can help ensure that all of the organization’s most pertinent concerns are covered. During the non-profit board meeting, minutes will serve as an official recording of what takes place. Proficient handling of both minutes and agendas can add significant benefit to the structure of nonprofit board meetings. You can learn more about these and other nonprofit strategies by contacting the experienced New York nonprofit lawyers at the Jennifer V. Abelaj Law Firm (abelajlaw.com): call today at 212-328-9568.
What Should a Nonprofit Include in Board Meeting Minutes?
The Internal Revenue Service (IRS) and most states legally require nonprofit organizations (and all other corporations) to record and keep copies of their board meeting minutes. According to the New York Department of State, not-for-profit corporations must maintain minutes for the proceedings of members, the board of directors, and the executive committee. Minutes should be treated as a concise summary of the meeting. While there are several key components that should be included, it is not necessary to transcribe the meeting word-for-word.
Nonprofits should consider including the following information in their minutes records:
- The time and date that the meeting is held
- The name of the venue where the meeting is held
- Name of the organization holding the meeting
- The names of participants, as well as board members who were absent
- Names of other non-board member attendees
- Identify who is recording the minutes
- Purpose of the meeting
- A record that the previous meeting’s minutes have been approved
- A summary of motions, including an exact transcription of any motion statements, the name of the person who made the motion, and the results of the vote
- The time the meeting ends and a signature from the individual who recorded the minutes
Legal Considerations For Board Meeting Minutes
In order to protect from potential future liability issues, it is usually best to keep minutes as concise as possible. Unnecessary information may provide little value while potentially opening up the possibility of legal complications. Showing legal compliance with both IRS and state standards is one of the main benefits of keeping a concise yet accurate minutes record.
Some organizations choose to employ legal counsel for minutes recording on the basis of confidentiality and to ensure all legal standards are met. You can learn more about the legal aspects of keeping minutes for nonprofit board meetings by contacting the Jennifer V. Abelaj Law Firm.
Creating an Effective Board Meeting Agenda
A well-prepared board meeting agenda can help determine the course of the meeting. A thoroughly researched agenda will address all of the most worthwhile topics for the organization at the time of the meeting, and ideally, arrive at valuable answers to many of the organization’s current concerns. Conversely, poorly prepared board meeting agendas might waste time and make nonprofit board meetings much less productive.
What Information Should a Nonprofit Board Meeting Agenda Contain?
While each board meeting agenda will vary, there are a few types of information commonly found in these documents:
- Header – This should only include basic information, such as the name of the nonprofit, contact information for the organization, and the board meeting date, time, and location.
- Call to order – The call to order starts the meeting, usually with a statement from the chair to the board, company mission statements, and introductions.
- Agenda changes – Following the call to order, the chair may ask if anyone would like to suggest changes to the agenda, including adding or deleting information.
- Minutes approval – During this stage, board members can either approve the minutes of the previous meeting or suggest corrections. The board can provide final approval for these minutes after the secretary has finished correcting any errors.
- Reports – The Executive Director and Financial Director may each provide reports to board members, which cover the nonprofit’s operations, projects, business outlook, finances, and more.
- Old and new business concerns – Unresolved previous business concerns and new business items may be discussed at this stage.
- Special announcements – If applicable, the chair can make special announcements regarding the organization. Board members may also be given the opportunity to make announcements or mention other business concerns.
- Adjournment – The board chair may formally end the meeting, including a statement of the ending time which can be included in the board meeting minutes. The next meeting date may also be mentioned during the adjournment.
Board Room Agenda Best Practices
Every nonprofit will have its own needs and unique strategy for board meeting agendas. However, there are a few best practices that most organizations will benefit from adhering to:
- Set a beginning and end time for the meeting.
- Budget time towards discussing the most important organizational concerns and voting on these issues.
- Organize and distribute all relevant information regarding the board meeting topics to all board members. This includes research, reports, and background information.
- Include a list of questions for board members, carefully considering how they are phrased, the order in which they will be asked, and who will be asked to answer.
The nonprofit chair and board secretary should collaborate to plan the agenda, which may be a combination of standard best practices and unique concerns of the business.
Learn More About Minutes and Agendas by Contacting an Experienced New York Nonprofit Lawyer
New nonprofits and existing ones alike can often benefit from the assistance of legal counsel. At the Jennifer V. Abelaj Law Firm, our experienced New York nonprofit lawyers are available to assist not-for-profit organizations with a variety of legal matters. We are prepared to help organizations get off the ground during the early stages, make sure they are tax-compliant and adherent to state and federal legal standards, and assist with other related matters.
If you are looking for guidance regarding agendas, minutes, or any other concerns related to nonprofit board meetings, you can learn more about your organization’s options in a free consultation: give us a call today at 212-328-9568.
Fiscal Sponsorships and Your Non-Profit Organization
Having a philanthropic mission is a laudable goal. However, establishing a non-profit organization to fulfill that mission can be much more difficult. A fiscal sponsorship may be a way that you can accomplish your goal in less time. The knowledgeable attorneys at the Jennifer V. Abelaj Law Firm can discuss fiscal sponsorships and your non-profit organization during a confidential consultation.
What Is a Fiscal Sponsorship?
To receive tax-exempt status from the Internal Revenue Service, a charitable organization must be considered a 501(c)(3) organization. The organization must meet various requirements, including:
- It must be organized and operated exclusively for Internal Revenue Service (IRS) tax exempt purposes
- Its earnings cannot inure to private shareholders or individuals
- It cannot attempt to secure legislative influence as a significant portion of its activities or participate in any campaign activity for or against a political candidate
Some people may want to advance charitable goals but may not want to create their own 501(c)(3) nonprofit organization. A fiscal sponsorship can serve as a viable alternative to creating a nonprofit organization. Through a fiscal sponsorship, an existing nonprofit organization can extend its tax-exempt status to others related to the organization’s mission. The fiscal sponsor agrees to accept tax-deductible donations and grants on behalf of the sponsored organization. To meet IRS guidelines, the sponsor must have full discretion and control over the donated funds, according to the American Bar Association. The sponsor is responsible for ensuring the funds are used for charitable purposes and comply with any additional donor restrictions. In exchange for providing its services, the fiscal sponsor charges a fee, usually around five to fifteen percent of the donated funds it helped raise.
What Do Fiscal Sponsors Do?
The specific responsibilities of a fiscal sponsor depend on the agreement between the sponsor and the sponsored organization. Some of the more common functions of fiscal sponsors include:
- Receiving and acknowledge charitable donations from third parties
- Retaining discretion and control over donated funds
- Overseeing the use of funds to ensure compliance
- Performing back-office functions
The Jennifer V. Abelaj Law Firm can help create an agreement regarding fiscal sponsorships and your nonprofit organization that clearly delineates your responsibilities and that of the fiscal sponsor.
Reasons to Use a Fiscal Sponsorship
There are many common reasons for using fiscal sponsorships, including:
- A newly formed nonprofit needs to raise funds during their start-up phase before the IRS recognizes them as tax-exempt
- The need to attract funding that is tax-deductible to donors
- A philanthropist anticipates that the project will only have a short lifespan, so they do not want to go through the extra work of establishing a separate 501(c)(3) organization
- To receive grants from a private foundation that explicitly requires the grantee to be recognized by the IRS as tax-exempt
- The need to test out ideas to determine if there is an available market for projects
- To take advantage of an established nonprofit organization’s existing network of donors and improved access to funding
- The ability to leverage an established nonprofit organization’s credibility
- To concentrate on core functions while outsourcing administrative functions
- To gain access to low-cost financial and administrative services
Benefits of Fiscal Sponsorships
A significant benefit of fiscal sponsorships is the ability for a charitable project to use the sponsor’s 501(c)(3) status to advance its mission. The project can receive tax-deductible donations from donors, which attracts more funding for the mission. Additionally, the sponsored project may have access to better fundraising options by leveraging the network and expertise of the fiscal sponsor. Some fiscal sponsors are well-established charitable organizations that have a large network of donors and solid experience with raising funds for philanthropic purposes.
Another benefit of using a fiscal sponsor is that it allows a charitable group to start up and begin advancing their mission more quickly than they would if they had to establish a separate 501(c)(3) organization. The group is not required to incorporate or obtain its own charitable group status simply to use a fiscal sponsor. It is also much more affordable for the group to get started. Fiscal sponsorship can benefit the fiscal sponsor as well because the organizations are managed from a common administrative platform. The fee they receive can also enable them to have a greater reach than if they had to do everything singularly.
Possible Services from a Fiscal Sponsor
The fiscal sponsor may provide numerous services to the sponsored organization in exchange for their fee. This may include:
- Administrative support
- Accounting
- Grant writing
- Payroll
- Employee benefits
- Fundraising assistance
- Publicity
- Marketing
- Training services
Some fiscal sponsors also provide office space and logistical support. A fiscal sponsor may be able to purchase a blanket liability insurance policy to make insurance more affordable for both entities than it would be if the entities purchased insurance separately.
How Fiscal Sponsorships Work
Donations to projects that have a fiscal sponsor are directed to the sponsor, who typically has 501(c)(3) exempt status. The donations for this project are considered to be restricted funds by the fiscal sponsor. The fiscal sponsor decides how to use the funds. It cannot give control or decision-making authority regarding the funds to the organization, or the pass-through option can be lost.
However, the fiscal sponsor can delegate the management of the project’s funds to specific employees, contractors, or volunteers, if they set up the arrangement in this manner. This approach is known as a “comprehensive fiscal sponsorship.” As an alternative, the fiscal sponsor may be able to grant funds to a pre-selected grantee to administer. This type of arrangement is called a pre-approved grant relationship fiscal sponsorship.
Contact Us for Help with Fiscal Sponsorships and Your Nonprofit Organization
If you would like more information about fiscal sponsorship and your nonprofit organization, contact a knowledgeable attorney at the Jennifer V. Abelaj Law Firm. We work closely with nonprofit organizations on legal matters such as acquiring 501(c)(3) status, forming agreements with fiscal sponsors, and crafting customized legal solutions. Contact us today by calling 212-328-9568.
Ongoing Tax and Governance Compliance for Tax-Exempt Organizations
Existing not-for-profit organizations (“NPO”) must ensure that they annually comply with corporate and tax laws. The failure to do so may impact the NPO is minor ways or in significant ways.
Tax Compliance
Annual Tax Return Filing (Form 990)
An existing NPO must file a Return of Organization Exempt from Income Tax (Form 990) as soon as it completes its first fiscal year of existence. Occasionally, the NPO may still be awaiting a determination letter from the IRS approving its tax-exempt status. However, the NPO must file the appropriate Form 990 based on the activities and gross receipts within the first year.
An amended return can be filed if the IRS determines that the NPO is tax-exempt under a tax section which differs from the application request. For example, an NPO may apply for exemption as a public charity. However, the IRS may approve the application as a private foundation. In such a case, the organization would be able to file an amended Form 990-PF for the year in question.
Following receipt of the determination letter, and assuming the NPO agrees with the IRS’s determination, the NPO must file an annual Form 990. In some cases, it may be as simple as the online filing of Form 990-N for organizations with gross receipts of less than $50,000 in the taxable year (and less than $250,000 in assets). An NPO that requires a full Form 990 must ensure that they provide their CPA with annual financials necessary for timely and complete preparation.
Failure to file a Form 990 for three consecutive years automatically revokes the organization’s tax-exempt status. The process to reinstate tax-exempt status requires the assistance of your attorney and accountant.
Estimated Tax Payments on Unrelated Business Income
If an NPO has unrelated business income in excess of $500 a year, it is required to pay quarterly taxes on Form 990-W. Unrelated business income is a complex area and beyond the scope of this article, but it is generally an investment by the NPO that is not related to its charitable activities in which it expects to receive an income. The IRS allows an NPO to receive UBI without losing its tax-exempt status if the UBI is not significant. The challenge is that there is no formula to determine the amount is not significant.
Failure to monitor UBI could place the organization in jeopardy of losing its tax-exempt status.
Tax Payments on Net Investment Income for Private Foundations
A private foundation must pay taxes on its annual net investment income. The payment may be done at the time of filing the tax return (Form 990-PF) or in quarterly estimated payments.
Governance Compliance
Registration and Filing with the Office of Attorney General
NPOs that fundraise within New York State must register with the Charities Bureau of the New York State Office of Attorney General (“Charities Bureau”). The initial registration is completed contemporaneously with filing of the Application for Tax-Exempt status or shortly following receipt of the IRS determination letter.
An NPO must file an annual report with the Charities Bureau, along with a copy of their Form 990. A filing fee may be required as determined by the NPO’s annual gross receipts. The annual filing, including the Form 990, is publicly available on the Charities Bureau’s website. Religious organizations are not required to register or to submit an annual filing.
Annual Meetings
New York State requires that an NPO hold a membership meeting at least once each year. NPC-L 603(b). The membership meeting generally includes voting of directors or officers, discussion of the Board’s annual activities and financial reports, and ratification of certain actions, such as changes in the Bylaws.
Although the NPO does not require an annual meeting of directors, it is likely that the NPO’s Bylaws mandate an annual Board meeting. Discussions include long-term strategy for the NPO, goals on how to effectuate the NPO’s charitable purposes, financial and tax considerations, and building a team of advisors and support for the Board.
Annual Compliance Makes NPO Management Easier in the Long Run
Taking small steps each year to maintain compliance with the tax and governance laws applicable to your NPO has a big impact for the success of the organization. Regular communication with your Board, members and advisors ensures that the NPO is proactively managing its activities to avoid potential troubles.
If you have questions about ongoing governance or tax compliance, please contact us to discuss how we can assist your organization.
Substantial Contributors to Public Charities: With Reward comes Some Risk
Charitable organizations are created and operated for a public good and not for purposes of making a profit for investors. But there is a cost to operating and carrying out a charity’s goals. The cost is covered by a portion of the contributions received by the charity.
It’s great when a charity is the potential recipient of an unusually large contribution. It will help the charity carry out its objectives and pay the expenses necessary to do so. But such a large gift may place the organization in jeopardy of losing its tax-exempt status, as described in this article.
Impact of Substantial Contributor on Governance and Taxation
If a donor makes a large contribution to an organization, the donor may be classified as a “substantial contributor” to the charity. A substantial contributor impacts the charity in two important ways: (i) determining whether the substantial contributor is a disqualified person, and (ii) determining whether the charity meets the public support test for IRS purposes. The tentacles of a substantial contributor classification reach very long lengths.
Identifying a Substantial Contributor
A substantial contributor is any person or entity (other than a 501(c)(3) pubic charity or government entity) who contributes or bequeaths a total amount of more than $5,000 to the charity if the amount is more than 2% of the total contributions and bequests received prior to the end of the year. Substantial Contributor Private Foundation | Internal Revenue Service (irs.gov).
If an officer or director’s family member makes a substantial contribution, that officer or director is considered to be a disqualified person.
A corporation or partnership is a disqualified person if a substantial contributor has a 35% interest in the corporation (i.e., total voting power) or partnership (i.e., ownership of profit interest in partnership). In addition, if a corporation/partnership is a substantial contributor, then any person who has an interest of 20% or more therein is also a disqualified person. This includes employees of the substantial contributor.
Once a person meets substantial contributor status, she remains a substantial contributor for 10 years, even if she does not meet substantial contributor status in subsequent years.
(i) Disqualified Person
Most charities understand that a director of officer has a special relationship with the organization and are aware to avoid any conflicts of interest. In the IRS’s view, these persons are considered “disqualified persons,” such that they must recuse themselves from certain actions or decisions that may create a conflict of interest.
The IRS also considers a substantial contributor to be a disqualified person.
A substantial contributor may be on a charity’s Board, but too many substantial contributors may place the charity’s tax-exempt status in jeopardy. The voting power of a disqualified person (whether as a substantial contributor, director, officer or key person) must be a MINORITY (i.e., specifically 49% or less, of the board’s total voting power). Further, the combination of the voting power of multiple disqualified persons must be 49% or less.
Any disqualified person is deemed to have control over the Board if her voting power, in combination with the voting power of another disqualified person, exceeds the 49% rule.
This is a big deal when you combine it with the 10-year rule mentioned above.
(ii) Public Support Test
A charitable organization, unlike a private foundation, must be publicly supported. Although there are various formulas to satisfy the public support test, a commonly used formula is that at least 1/3 of annual contributions received are received from the general public.
In determining the contributions that are counted toward the 1/3 calculation, contributions received from disqualified persons is excluded. This may impact the organization’s ability to satisfy the public support test and be treated as a private foundation for tax purposes.
Consider the following simple examples for a charity that has annual contributions of $100,000.
Example 1. Satisfies Public Support Test. Of the $100,000 received, a contribution of $10,000 was from one disqualified person (i.e., a director, officer, or family member), which is 10% of the total contributions received. A portion of the contribution must be excluded from the total support test because it is greater than $5,000 and the amount is more than 2% of the total support received (i.e., $2,000). The amount excluded from the total support test is $8,000, which is the contribution in excess of 2% of total contributions ($2,000) (i.e., $10,000 minus $2,000). Total support for the 1/3 test is $92,000 (i.e., $100,000 minus $8,000). The charity satisfies the public support test because 92% of its contributions are from the general public.
Example 2. Fails Public Support Test. Of the $100,000 received, a contribution of $10,000 was from one disqualified person (i.e., a director, officer, or family member), $15,000 was from a partnership in which an officer’s family member has at least 35% income interest, and various $50,000 substantial contributions carried over from the prior 5-year period. A portion of all these contributions must be excluded from the total support test because they are more than 2% of the total support received for the year ($2,000). The amount excluded is approximately $69,000 ($10,000 minus $2,000 = $8,000; $15,000 minus $2000 = $13,000; $50,000 minus $2000 = $48,000). Total support for the 1/3 test is $31,000 (i.e, $100,000 minus $69,000). The charity fails the public support test because 31% of its contributions are from the general public.
2-Year Rule for Failure to Satisfy Test
Although it is beyond the scope of this article, the IRS provides that a public charity fails to meet the public support test for 2 consecutive years loses its public charity status and must file as a private foundation. This is important to note in order to forecast when and what amount of substantial contributors a charity can receive to safeguard its charitable tax status. 26 CFR § 1.509(a)-3(c)(1)(i).
Final Thoughts
An excise tax may be imposed for a charity that fails the public support test after two consecutive years. It is advisable for a charity to take note of who is a disqualified person and whether any substantial contributor rules may impact the charity’s fundraising effort.
A charity should work closely with their CPA to monitor the organization’s finances and charitable tax calculations.
Advocacy and Lobbying by Non-Profits
Non-profits often wonder if they can carry out lobbying as part of their charitable activities without jeopardizing their charitable status. Various factors must first be carefully considered. These may include identifying the type of activity to be carried out, the tax classification of the non-profit organization and the proportion of time devoted to lobbying.
Activity Type: Advocacy, Lobbying or Political Activity
The IRS considers advocacy, lobbying and political activity to be separate activities. The specific type of activity must be identified in order to determine the extent to which it can be carried out by the organization without jeopardizing its tax-exempt status.
Advocacy is generally defined as an activity that seeks to influence social change in furtherance of the organization’s corporate purposes. An example is advocacy for environmental causes, gender and racial equality, or get-out-the vote drives to assist and encourage registration.
Lobbying is an extension of advocacy activity. Where advocacy strives to educate and influence the minds of the general public, lobbying activity is directed at influencing policy and legislative changes in furtherance of the social interest. An example is supporting legislation or working with lobbyists to advance new and modified laws and policies that would support the organization’s social goals.
Political activity specifically encourages voters to support or oppose a particular candidate for office.
It is important to identify and distinguish the activities because the organization’s tax classification will determine how, and to what extent, it can carry out advocacy, lobbying or political activity.
Tax Classification
Non-profit organizations are either charitable or non-charitable. Organizations such as public charities (which receive at least 1/3 of their contributions from the general public) or private foundations (which often receive a small number of generous donations) are considered charitable non-profits.
Most other non-profits are non-charitable – the most popular of which are social welfare/civic organizations (501(c)(4)) and membership organizations (501(c)(6)).
Time Devoted to Advocacy or Lobbying
Advocacy. There is generally no limit to the amount of advocacy that an organization may carry out. However, it is important to note that advocacy activity is not considered to be a charitable in nature. Accordingly, it cannot be the primary purpose of a public charity, such as a 501(c)(3).
Social welfare organizations which have exemption under 501(c)(4) may engage in unlimited advocacy. The IRS accepts that advocacy may be the primary purpose of a social welfare organization.
Legislative activity. Public charities (501(c)(3)) may engage in very limited lobbying, so long as an insubstantial amount of their funds are being used for lobbying purposes. There is no calculation or figure to define an “insubstantial” amount. If a public charity anticipates or chooses to engage in lobbying activity, it may request that the IRS review its anticipated lobbying activities under Section 501(h) to abide by the IRS’s formula which dictates the amount of lobbying authorized without jeopardizing a charity’s status.
Social welfare organizations (501(c)(4)) are allowed to engage in unlimited legislative activities if it is in furtherance of its corporate purposes.
Political activity. Public charities are prohibited from engaging in political activity. Social welfare organizations (501(c)(4)) are authorized to engage in political activity, provided it is not the organization’s primary purpose or primary activity.
Considerations
A non-profit organization that intends to carry out lobbying, advocacy or political activities must closely review their activities to ensure that they do not jeopardize the charitable status with the IRS.