Starting and maintaining non profit organizations

Starting and Maintaining Nonprofit OrganizationsAttorney Ronald Nesbitt, LL.M., Tax

Public AlliesFriday, 04/29/2011

AgendaStarting and Maintaining Nonprofit Organizations

• Nonprofit and tax exempt status

• Creating the Bones for a Great Organization

• The 501(c)(3) Application

• Jeopardizing tax exempt status

• IRS Compliance Activity

5/29/11 2Attorney Ronald Nesbitt, LL.M. Tax

Source: IRS.gov

Nonprofit and Tax Exempt Status Starting and Maintaining Nonprofit Organizations

• Nonprofit Organization– Fla. Stat. 617 – Corporation Not for Profit

– Corporations for any lawful purpose or purposes not for pecuniary profit and not specifically prohibited to corporations under other laws of Florida.


Source: IRS.gov


• Nonprofit Organization: ExamplesCorporations whose purposes include, without limitation, charitable, benevolent, eleemosynary, educational, historical, civic, patriotic, political, religious, social, fraternal, literary, cultural, athletic, scientific, agricultural, horticultural, animal husbandry, and professional, commercial, industrial, or trade association purposes.

– But nonprofit organizations are not automatically tax-exempt. They must file a special application with the IRS, requesting to be exempt from paying Federal tax. Some states also require a separate filing in order to be tax-exempt from paying state taxes.


Source: IRS.gov


• Tax Exempt Organizations– Internal Revenue Code – 501(c)(1) – (28), – (d)(religious org) or– 401(a) – Qualified Pension, Profit-Sharing,

and Stock Bonus Plans


Source: IRS.gov


• Tax Exempt Organization– A business that does not have to pay Federal taxes

is considered to be "tax exempt.”

– Examples of 501(c)(3) organizations: Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations


Source: IRS.gov

Creating Good Bones Starting and Maintaining Nonprofit Organizations

• Organizational Infrastructure– Bet on the Jockey and the Trainers

– Benefits of Directors and Advisors


Source: IRS.gov


• Have a Clear Vision–Mission

–Purpose

–Reduce the Vision to a Plan


Source: IRS.gov


• Light the Way to Success Through Order

–Articles of Incorporation

–Bylaws

–Corporate Governance


Source: IRS.gov


By-Laws• The Board of Directors (“The Board”)

shall consist of not fewer than three (3) persons, and of not more than a maximum number determined in the Constitution or By-Laws of the Corporation as amended from time to time


Source: IRS.gov


• Majority. A majority is fifty-one (51) percent or greater.• Term. The term of each Director shall be established in

the Constitution or By-Laws. Unless otherwise provided, each Director shall serve on the board for an indefinite period of time.

• Election. Unless the Constitution or By-Laws provide differently (in which case such Constitution or By-Laws shall control), Directors shall be elected by the remaining Directors by a majority vote upon the expiration of a Director’s term or a vacancy for any reason.


Source: IRS.gov


Corporate Governance• Audit Committee

• CONTRACT REVIEW AND SIGNATURE AUTHORITY POLICY

• BOARD OF DIRECTORS CORPORATE GOVERNANCE GUIDELINES

• COMPANY POLICY STATEMENT ON REPORTING AND PROTECTION FROM RETALIATION


Source: IRS.gov


Audit Committee – Corporate Governance• (a) To assist the Board in its oversight of (1) the quality and integrity

of the Company's financial statements, financial reporting and disclosure controls and procedures, including internal controls; (2) the performance of the Company's internal audit function; and (3) the Company's compliance with legal and regulatory requirements;

• • (b) To interact directly with and evaluate the performance of the

independent auditors, including to determine whether to engage or dismiss the independent auditors and to monitor the independent auditors' qualifications and independence; and

• • (c) To prepare annually the report(s) required by the by State and

Federal laws.


Source: IRS.gov


CONTRACT REVIEW AND SIGNATURE AUTHORITY POLICY

Corporate Governance

• This policy defines and describes the guidelines and procedures to be followed by officers, managers and other employees of ______ (the "Company") for creation and review of contracts to which the Company will be a party and designates who, within the Company, is to authorized to sign contracts on behalf of the Company. This policy also describes the procedures that must be followed with respect to retention and administration of contracts to which the Company becomes a party.


Source: IRS.gov


Share the Vision

Unseen, Untold…Unsold


Source: IRS.gov


• Meet and Measure–Regularly Scheduled

Organizational Meetings

–Measure What You Do, What You’ve Done and Adjust


Source: IRS.gov

The 501(c)(3) Application Starting and Maintaining Nonprofit Organizations

• 30 + Page Application

• $400 for organizations whose gross receipts do not exceed $10,000 or less annually over a 4-year period.

• $850 for organizations whose gross receipts exceed $10,000 annually over a 4-year period.


Source: IRS.gov


• Section 501(c)(3) requires that your organizing document state your exempt purpose(s), such as charitable, religious, educational, and/or scientific purposes.


Source: IRS.gov


• Section 501(c)(3) requires that upon dissolution of your organization, your remaining assets must be used exclusively for exempt purposes, such as charitable, religious, educational, and/or scientific purposes.


Source: IRS.gov


The Application is a Planning Opportunity

“Using an attachment, describe your past, present, and planned activities

in a narrative.”


Source: IRS.gov


The Application is a Planning Opportunity

Financial Data

Ideas About Sources and Uses of Funding

(Page 9 - 10 of 1023)


Source: IRS.gov


BEWARE:

Public Inspection of

Exemption Applications,

Annual Returns,

and Political Organization Reporting Forms


Source: IRS.gov

Jeopardizing Tax Exempt Status Starting and Maintaining Nonprofit Organizations

• There are five types of activities that can jeopardize that status. – Private benefit or inurement– Lobbying– Political campaign activity– Activities generating excessive unrelated business

income (UBI)– Failure to comply with annual reporting obligation


Source: IRS.gov


• Private benefit or inurement– Private Benefit: 501(c)(3)s must avoid all activities

that will benefit substantially the private interest of any individual or organization. Instead, the 501(c)(3)’s activities must serve a public interest.

– Private Inurement: The concept of inurement takes the notion of private benefit further. Code section 501(c)(3) states that no part of an organization’s net earnings may inure to the benefit of a private shareholder or individual. This means that a 501(c)(3) organization is prohibited from allowing its income or assets to accrue to insiders.


Source: IRS.gov


• Lobbying– Lobbying is activity designed to influence legislation .

A 501(c)(3) is attempting to influence legislation if it contacts, or urges the public to contact, a member or employee of a legislative body to propose, support, or oppose legislation, or if the 501(c)(3) advocates or opposes legislation.

– Beware of Lobbying Ceiling for Organizations that have made an election and normally make lobbying expenditures and are not disqualified (churches)


Source: IRS.gov


• Political campaign activity– 501(c)(3)s are prohibited from engaging in any

"political campaign activity"—that is, directly or indirectly participating or intervening in any political campaign on behalf of or in opposition to any candidate for public office. This includes making contributions to political campaign funds or making public statements for or against the candidate.

– But See Citizens United & 501(c)(4) organizations


Source: IRS.gov


• Political campaign activity– 501(c)(4) organizations may lobby for legislation;

they may also participate in political campaigns and elections, as long as campaigning is not the organization's primary purpose.

– Contributions to 501(c)(4) organizations are not deductible as charitable contributions. 501(c)(4) organizations are not required to disclose their donors publicly.

– Civic Leagues, Social Welfare Organizations, and Local Associations of Employees


Source: IRS.gov


• Activities generating excessive unrelated business income (UBI)– UBI is income from a regularly-carried-on trade or business

that is not substantially related to the organization’s exempt purpose.

• Three-Part Test:– A trade or business– Regularly carried on– Not substantially related


Source: IRS.gov


• Examples – Trade or Business– A hospital pharmacy furnishes supplies to the

hospital in accordance with its exempt purpose, but it also sells to the general public. Sales made to the public are treated separately as an unrelated trade or business.

– A tax-exempt organization solicits, sells, and publishes advertisements for commercial vendors in its publication. Even though the publication contains content related to the organization’s exempt purpose, the publishing of advertising is still an unrelated trade or business.


Source: IRS.gov


• Examples – Regularly Carried On

• If the activity shows frequency and continuity and is conducted the same way that a non-exempt organization would run a similar business, it is regularly carried on.


Source: IRS.gov


• Examples – Regularly Carried On

• A hospital auxiliary operates a health food stand for one week at a preventative health education conference. Because the activity is a one-time occurrence and is unlikely to compete with for-profit health food stores that operate year-round, the activity is not “regularly carried on.”

• However, if the hospital auxiliary operates a health-food stand daily at the hospital, that is likely the regular conduct of a trade or business.


Source: IRS.gov


• Examples – Substantially Related

• Any income-producing activity that does not directly further the organization’s exempt purpose could generate UBI.

• Sometimes, activities that ARE related to exempt purposes can still generate UBI if they are conducted on a larger scale than is reasonably necessary to perform an exempt function. In this instance, the portion that is more than needed is considered an unrelated trade or business.


Source: IRS.gov


• Examples – Substantially Related

• If the hospital auxiliary health food stand operates daily, it will likely generate both related and unrelated business income.

• Sales to hospital staff and patients could escape UBI tax—due to an exception explained later—while sales to the general public would be subject to UBI tax.


Source: IRS.gov


• Exceptions to UBI

• Volunteer workforce • Convenience of members• Sale of donated merchandise• Distribution of low-cost articles• Convention or trade show activity• Sponsorship• Traditional bingo


Source: IRS.gov


• Failure to comply with annual reporting obligation– While 501(c)(3)s are exempt from Federal income

tax and unemployment tax, most of them will have information reporting obligations. These are met by filing Form 990, 990-EZ, or 990-N.

– In addition, 501(c)(3)s may also be liable for

employment taxes [such as Form 941 taxes], unrelated business income tax, excise taxes, and certain state and local taxes.


Source: IRS.gov


• Failure to comply with annual reporting obligation– Form 990-N, or e-Postcard, is a new reporting

requirement for almost all small tax-exempt organizations, not just 501(c)(3)s.

– Beginning in calendar year 2008, all organizations not required to file Form 990 or Form 990-EZ because the organization’s gross receipts are normally $25,000 or less must submit an e-Postcard.


Source: IRS.gov


• Failure to comply with annual reporting obligation– If an organization does not file for three consecutive

years, its tax exempt status will be revoked as of the filing due date for the third return.

– If tax-exempt status is revoked on this basis, the organization must apply (or reapply) by filing Form 1023 and paying the appropriate user fee to have its tax-exempt status reinstated.

– If it can show reasonable cause for not filing, the reinstatement of tax-exempt status may be retroactive.


Source: IRS.gov

IRS Compliance Activity Starting and Maintaining Nonprofit Organizations

• Audits

• Denial of Tax Exempt Status

• Revocation of Tax Exempt Status

• Imposition of Excise Tax for UBI


Source: IRS.gov

Contact Information

Ronald Nesbitt

Ronald C. Nesbitt, PA

Phone: 407.803.1140

Fax: 407.233.4679

[email protected]


Source: IRS.gov

Starting and maintaining non profit organizations

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