Tax Reform 2014- What Does it Mean for Nonprofits?

The U.S. House of Representatives Ways and Means Committee recently released the Tax Reform Act of 2014 (“TRA 2014”).  This proposed tax reform package contains many provisions that will be of interest to nonprofits.  Nonprofit organizations should pay specific attention to the following items, as the discussion continues on the Tax Reform Act of 2014:

Royalties and Corporate Sponsorships.  Royalties paid to a tax-exempt organization for the licensing of their name and logo will be treated as unrelated business income tax.  Many tax-exempt organizations have developed a steady income stream from licensing their names and logos- the TRA 2014 would discontinue the tax-exemption for such income.

Additionally, organizations will have to change their current corporate sponsorship arrangements.  Currently, organizations can receive corporate sponsorship payments in exchange for providing the corporate sponsor with certain benefits.  Specifically, tax-exempt organizations will not be allowed to make reference to specific corporate product lines, and will have additional restrictions placed on the use of a sponsor’s name when the organization receives more than $25,000 for the sponsorship of a single event.

Excise Taxes (Intermediate Sanctions).  Excise taxes (intermediate sanctions) are assessed if an organization makes excessive payments to an insider of 501(c)(3) and 501(c)(4) organizations.  The TRA 2014 will expand the applicability of these intermediate sanctions by: (i) expanding coverage of the provision o apply to 501(c)(5) and 501(c)(6) organizations; (ii) adding a new excessive benefit tax on the organization, equal to 10% of the excess benefit, if certain minimum due diligence standards were not followed; (iii) removing the professional advice safe harbor (managers who approved such excess benefit transaction were protected if they relied on professional advice); and, (iv) removing the “rebuttable presumption of reasonableness”, which provides a presumption that a transaction is not excessive if certain procedures or steps were taken by the organization.

Penalties.  The proposal will double current fines relating to failures to file returns and failure to make returns available for public inspection.  Additionally, a 5% penalty may be imposed on managers for an underpayment of income tax due to a manager’s understatement of income.

A number of other changes are included in the Tax Reform Act of 2014.  We urge all nonprofit organizations to take a look at the proposal and make sure you are aware of the potential changes.  Furthermore this is your time to voice your concerns over the proposed changes.

 

Accepting Gifts: It’s Really Not As Simple As You Think

What we don’t realize when someone comes to a charity and offers to give them the title to their thirty (30) year old dilapidated lake house or to sponsor an organization’s project by doing it themselves (or hiring a contractor to do it), is that a gift can be a great benefit or a great liability.  To avoid stumbling over unanticipated legal issues associated with gifts, every organization should draft and have on hand a gift or contribution policy.

The goal of this policy is to take the guesswork out of whether or not a particular gift is worth accepting.  When drafting such policies keep the following in mind:

One size does not fit all.  The goal is to draft a policy that fits your organization.  For smaller nonprofits or startups, it is possible to use another organization’s template, but it is imperative to develop your own policy.  Individual policies more accurately reflect what gifts you are comfortable accepting, and will be tailored to the resources you have on hand.

Cover the what and the who.  The policy should discuss what types of contributions or gifts will be accepted; gifts can come in the form of money, personal and real property, sponsorships, etc.  In addition, the policy should discuss who can accept what gifts.  Certain staff may be allowed to accept cash gifts on behalf of the nonprofit, but real property might be something the board wants to weigh in on.

Don’t forget the purpose.  The purpose of the policy should be to protect the organization.  The policy should be easy to read and understand and should provide board members and staff with the framework to evaluate various gifts.

Review and revise.  A policy is only as good as you make it.  If your organization has grown, your policies should grow with it.  Make sure to review your policies routinely to incorporate industry best practices and your organizational best practices.

Don’t forget the details.  Make sure to have a nonprofit attorney review the policy so that you don’t forget the finer details.  Your policy should consider who will be responsible for paying maintenance costs, appraisal fees, reporting fees, attorney’s fees associated with larger transactions, etc.  Also, make sure your policy includes items such as acknowledging the gift, thanking the donor, and general follow-up activities.

The Right Processor For Your Nonprofit: Minimizing Lag Time in Processing Contributions

As society races towards newer and better technology, nonprofits must keep pace or they risk being left behind for good.  Over the last 10 years, cash donations (which, of course, cash is still king) and checks have had to make room at the table for online donations, and rightfully so.  The fact remains that in order for nonprofits to be successful, they have to believe in their mission, they have to produce results, and they have to make it easy for people to contribute.  There are numerous technology companies that offer online donation processing services; however, all nonprofits should make sure that their online payment processors meet their needs and share the same commitment to their success.

Acteva, an online payment processor, has had numerous complaints made against it by nonprofits claiming that they never received money processed through Acteva.  In fact, in a recent article, Acteva’s CEO stated that this was due to cash-flow issues and that Acteva would be able to pay back the money by taking on new clients and developing new technology.  This is not ok.  This type of business practice is not ok for any industry, and it definitely is not ok for an industry that, in exchange for its client’s donations, delivers a promise to bring about change.

As a nonprofit, it is imperative that your Board make smart, diligent financial decisions.  Make sure to ask questions and get the necessary information to make an informed business decisions.  Specifically, review any quotes for the following:

  1. Processing time from donation to deposit in your bank account and what actions can delay processing.
  2. Find out what the pricing model is: (i) is it Interchange (bank rate for card payments); (ii) flat monthly transaction fee; or, (iii) Interchange + flat transaction fee.
  3. Know about hidden costs – review the quote and other documents to determine if there are account management costs, fees associate with calling customer service, or fees for reporting.
  4. Make sure your contract term is flexible enough to allow you to leave if you are not satisfied with the service.

Your nonprofit’s reputation is everything, and your ability to use your contributions effectively is what can set you apart from other nonprofit organizations.  Don’t jeopardize your success or reputation by signing up with the first company; do your research, take your time, and make the right choice for your organization and your donors.

Maintaining Organizational Integrity When Dealing With Conflicts of Interest

Every tax-exempt organization will inevitably find itself in a situation where directors, officers or staff members may benefit from decisions they make on behalf of the organization.   Directors, officers, and staff routinely tap into their own network to support the activities of the organizations they serve.  To protect the organization from public and IRS scrutiny, we recommend implementing a strong conflict of interest policy.

While conflict of interest policies are not legally required, the IRS requires organizations to disclose whether they have implemented a conflict of interest policy and to provide an explanation if they do not, when applying for tax-exemption.  Additionally, the Form 990 asks whether organizations follow a conflict of interest policy.  Individual states may also require nonprofit organizations to adopt conflict of interest policies by way of state laws and regulations.  We have yet to run across a good reason as to why an organization does not abide by a conflict of interest policy.

A sound conflicts of interest policy will prompt the organization to take specific steps to isolate and manage the conflict.  Such steps may include:

  • Disclosure. Individuals must disclose any potential conflicts prior to joining the Board or the staff of an organization.  Additionally, organizations may require a disclosure if and when a conflict arises.
  • Risk Analysis. The Board (or a committee) should determine whether any disclosed conflicts can potentially influence decisions and rise to the level of a conflict of interest.
  • Recusal.  If a conflict of interest does exist, the interested individual should refrain from voting on the matter.  The interested individual may provide general background information; however, the interested individual should leave the room while the remaining board members decide the matter.
  • Alternatives.  Directors should consider all possible alternatives that do result in a conflict of interest.  If, after reviewing the alternatives, the disinterested directors determine that the conflicted transaction is in the organization’s best interest, they can approve it with confidence.
  • Document.  Finally, meetings involving conflicts should be carefully documented.  Minutes should reflect who was present at the meeting, describe to conflict, the fact that the interested individual recused himself from the vote; the alternatives considered, and the basis for the final decision.  If the conflicted transaction is approved, the minutes should state why the board decided it was in the organization’s best interest.

Handling conflicts of interest in this deliberate manner helps the organization avoid legal violations and enhances the organization’s reputation.

New Procedures for Reinstatement of Tax-Exempt Status

The Internal Revenue Service (IRS) has implemented new reinstatement procedures (Revenue Procedure 2014-11) for tax-exempt organizations that have received notices that their tax-exempt status has been automatically revoked because of a failure to file required annual returns for three consecutive years.  Revenue Procedure 2014-11 outlines three procedures that organizations may use to apply for reinstatement.

First, small organizations eligible to file a short form (Form 990-EZ) or postcard return (Form 990-N) (such eligibility is dependent upon the annual income/contributions received by a tax-exempt organization) may have their tax-exempt status retroactively reinstated to the date of revocation if, (i) they have not previously had their exemptions automatically revoked, and (ii) the organizations complete and submit Form 1023 or Form 1024 within 15 months of their automatic revocation.

Second, organizations not eligible for the streamlined process (because they do not file Form 990-EZ or Form 990-N) have a more involved retroactive reinstatement process, and must demonstrate reasonable cause for their earlier non-filing.  Of such organizations, those that submit their Form 1023 applications within 15 months of revocation must demonstrate reasonable cause for failure to file required annual returns for at least one of the three consecutive years in which they failed to file.  For organizations that submit 1023 applications more than 15 months after revocation, they must show reasonable cause for failure to file required annual returns for all three years.

Finally, organizations that do not qualify for reinstatement under the aforementioned procedures may apply for reinstatement of their tax-exemption status effective from the post-mark date of their new 1023 applications.

The IRS will not impose the usual monetary penalties for failure to file Form 990s for the three consecutive taxable years that caused the automatic revocations.

March 1st Deadline for Identification of “Responsible Party”

 

The Internal Revenue Service (IRS) has implemented a March 1, 2014 (February 28, 2014 submission) deadline for all non-profit organizations to report and provide up-to-date information as to who is the organization’s responsible partyIf the change in your responsible party occurred prior to 2014, you can report such change in your responsible party by completing and submitting IRS Form 8822-B.

 For a nonprofit organization, the “responsible party” is the individual who has a level of control over the funds or assets of an entity, that as a practical matter, allows the individual to, directly or indirectly, control or manage the organization and the disposition of its funds or assets.  Generally speaking, this individual will most likely be the organization’s chairman or president.

It is likely that the individual serving as the responsible party will likely have greater exposure for a failure to pay payroll taxes (if the organization has W-2 employees).  Internal Revenue Code (IRC) Section 6672(a) provides:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

While Section 6672 does not specifically mention a “responsible party”, it may be difficult for the responsible party to claim she or he was not the party responsible for collecting, accounting for, and paying withholding taxes.  “Person,” as used in Section 6672, explicitly includes officers and employees, and Section 6672 does not exclude volunteer board members from penalties unless: (i) they solely serve in an honorary capacity; (ii) do not participate in day-to-day or financial operations of the organization; and, (iii) do not have actual knowledge of the failure to collect, truthfully account for, and/or pay withholding taxes, and so long as someone else can be held liable for the penalty.

Nonprofit organizations may have identified a responsible party when it first applied for an EIN.  If the individual listed as the responsible party has since changed, the nonprofit organization must file Form 8822-B by no later than February 28, 2014 to report such change.

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Quick Tips for 2014

As you begin the new year, we want to share some tips and suggestions for running your organization and making 2014 a stress-free year!

Tip 1:

Solicitations and fundraising campaigns in states where you are not incorporated (or registered as a foreign corporation) and properly registered with the Attorney General’s office (required for most states) may result in penalties and fines.  Please note that social media campaigns are no exceptions!

Tip 2:

Make sure you know who your employees are, who your independent contractors are, and the legal difference between both.  While we are on the subject, make sure you know who your agents are.  If you have agents representing your organization make sure to give them guidelines and parameters within which they can operate, both online and live, personal interactions.

Tip 3:

Be careful who you partner with.  It is not uncommon for established non-profit organizations to sponsor or work closely with a startup.  If you are in a similar situation, make sure to have a properly drafted and executed Memorandum of Understanding (MOU) or agreement between you and your partner.  Lay out roles, responsibilities, rights, obligations, and most importantly- make sure that your organization has a right to review pending 1023 applications or can get other assurances that your partner is in full compliance with the law.

Tip 4:

Use social media safely!  Monitor staff use of social media to ensure that personal opinions are not being attributed to the organization and that staff members are not engaging in inappropriate behavior online that can reflect poorly on the organization; to remedy the above, have internal policies in place to explain acceptable social media usage and potential disciplinary actions for policy violations.

Protecting Your Organization’s Biggest Asset – Its Reputation

In a slow economy, non-profit organizations have to fight for every charitable dollar they can get.  Sometimes in the rush to put on a great gala, fundraiser, or dinner, organizations forget to take simple steps to protect their biggest asset- the organization’s reputation.

The first thing organizations should be aware of is that any arrangement between an organization and another entity or person should always be in writing; a performer is no different than a catering company, they both provide services and both will be compensated (handsomely, in some instances) for their services.

Draft a contract between the organization and the other party.  Make sure the contract specifically lists what the parties will be expected to do, what the performance obligations will include, and how and when they should be completed.  The contract should also discuss payment terms such as the amount, how it will be paid, and when it will be paid.  Don’t shy away from such discussions because you may be dealing with an individual rather than another organization.   Also, if intellectual property rights are involved (and they likely will be if the other party is brand-sensitive or an entertainer), securing a license to use the name and other intellectual property rights associated with the party will reduce headaches later on.  Most importantly the contract should contain provisions protecting the organization in the event of a dispute.

Protective provisions include dispute resolution, indemnification, and non-disparagement/confidentiality clauses.  Specifically, dispute resolution provisions govern how a potential dispute will be resolved between the parties.  As a non-profit organization, it may not be cost-effective to litigate every single contract; in some instances, mandatory arbitration or mediation is just as effective in resolving a dispute.  Indemnification provisions protect the organization in the event a performer (or any other service/goods provider) makes a mistake the results in potential liability for the organization.  Non-disparagement and confidentiality clauses ensure that during and after dispute resolution, that the parties do not discuss or share information with the general public or make comments that may impact a party’s reputation.

Remember that your organization relies on its reputation to raise funds, grow its brand, and carry out its mission; a scratch on your reputation is not easily removed, it may take years to recover.  Take simple steps beforehand to protect your biggest asset for the future.

Exempt Organizations and the IRS: Areas of Risk and Concern

Given the recent scandal at the IRS, we can expect the IRS to start doing more with less: meaning, while we don’t know yet how the IRS will recover and move forward, we do know that they will continue to assess risk by way of activities that require the least amount of resources but provide the most coverage and impact.  This can, and will most likely, include surveys, focused sampling and examinations, and questionnaires.  Once the IRS receives your application for exemption, multiple years of tax filings and internal documentation may be subject to review.  If any of the following is an area of weakness for your organization, don’t wait- correct it immediately.

1. Fundraising Expenses.  Organizations with high fundraising to program expenses ratios raise an immediate red flag for the IRS.  A high ratio shows a lack of efficiency in the operations of the organization.  Alternatively, showing little or no fundraising expenses and high contributions is also likely to raise suspicions and concerns.  Fundraising expenses should be proportionally reasonable to your organization’s program expenses.  The IRS recently selected about 170 organizations with skewed fundraising to program expenses for further examinations.  When applying, make sure that you spend time to submit an application that accurately reflects the operations of your organization.

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2. Employee Compensation.  This area remains a money maker for the IRS.  Every dollar allocated to compensation enforcement generates a high return for the IRS in tax revenue.   Employee or director compensation should be made pursuant to a conflicts of interest policy and in light of industry norms and generic viagra professional averages.  Additionally, remember to appropriately classify your employees as independent contractors or employees, withhold taxes, and use and retain w-4’s and w-9’s properly.

3. Unrelated Business Expense Allocation.  Nonprofit organizations are routinely showing losses in activities that do not have any profit motive for them.  Organizations are becoming very savy at allocating losses to offset taxable gains.  Nonprofits are, in large part, becoming more and more involved in unrelated business activities such as advertising, rental of properties, and selling merchandise.

4. Transactions Between Parent and Subsidiary Organization.  Activities between related entities are often overlooked.  Rental agreements, management agreements, or loans between parent/subsidiary or sibling entities must be carefully reviewed to ensure that they do not generate taxable income for the nonprofit organizations.

5. Political Activity.  The IRS recognizes that with each election cycle, more and more political contributions are coming from the exempt sector.  While exempt organizations can be involved in the political process, be careful to ensure that your organization is not engaged in advocacy if your classification does not allow for it.