Check out this inspiring article from MSNBC.com…

Charity Gets Personal Amid Economic Hardship

‘Tis the season of giving!

At the end of most newsletters, we put out the call for “topic requests”.  We wanted to get to some reader questions before the year ended. We will try to answer questions like these, that don’t require a whole article, from time to time. If you have article topics that you would like us to cover, email them to us at mail@foundationgroup.com or simply reply to the email newsletter when you receive it.  We cannot guarantee your question will be chosen, but we’ll try.  On to the questions…

Q) Do all donations need to be spent by year’s end?

A) The quick answer is, no. “Nonprofit” does not mean that at the end of the year there should be no money left in the account.  A 501(c)(3) organization can have money left at the end of the year. It would probably be a good idea if it can.  Money left over can go toward adding programs, improving existing programs, make up for less funding next year, etc.  Never forget that you’re still running a business (of sorts)…you gotta make more than you spend!

Q) What are the IRS rules about raffles and drawings held at events?

A) Below is a list of what “gaming” includes, from the Introduction of IRS Publication 3079:

The term “gaming” includes activities such as Bingo, Beano, lotteries, pull-tabs, parimutuel betting, Calcutta wagering, pickle jars, punch boards, tip boards, tip jars, certain video games, 21, etc.  All exempt organizations conducting or sponsoring gaming activities, whether for one night out of the year or throughout the year, whether in their primary place of operation or at remote sites, must be aware of the federal requirements for:  Income Tax, Employment Tax and Excise Tax.

There are “state” issues that you need to be aware of before you begin to think about IRS rules.  The main question is, “Does your state even allowing gaming at all?”  You’ll need to contact your state Gaming Commission or Secretary of State to get any rules that they have.  After that, if you are allowed to have gaming, there is the IRS.

Some things to remember:

• Gambling is not charitable.
• Tax-exempt organizations may be subject to tax:  Unrelated Business Income Tax, Employment Taxes, Excise Taxes, Withholding Taxes.
• Records of gross revenue & expenses must be maintained.

If you want to have “gaming” events, make sure that you read and become familliar with IRS Publication 3079, Gaming Publication for Tax-Exempt Organizations.

Q) What are some tips to build a Board of Directors from scratch?

A) The Board of Directors is the governing body of the organization.  If you are beginning a nonprofit organization, who you pick for the Board of Directors is the one of the most important decisions you will make.  The following is a short list of key qualifications:

1. They should be people who believe in what you are trying to accomplish.
2. They should share your vision for the organization.  Note:  That is not the same as “yes men”.  You need people who will constructively challenge you.
3. They should be people who understand business principles.
4. They should be people who are willing to give of their time, talents and money.  Yes, money!  Board members who do not financially support the organization they help govern are not worth the chair they sit in.
5. Avoid choosing professionals based on what you think they can provide professionally.  Choosing an accountant or a lawyer simply because they are an accountant or lawyer isn’t a good idea. Pro bono work is usually worth what you pay for it.   It’s better to hire competent professionals.

The Board of Directors is responsible for the governance of the organization;  they are not just figureheads. You need to choose carefully and wisely who will represent and make decisions about your dream.

We will answer more reader questions at a later date, so stay tuned!  Merry Christmas!

A little less than a month from now (December 31) marks the end of most organizations’ fiscal year. Have you been preparing for your IRS annual reporting requirement?  Do you at least know where your records are?  Or who has them? (If the answers to the last two questions have you concerned, you might want to see our new Vital Document Archive product.)

Most 501(c)(3) organizations must file an annual information return called Form 990.  Small 501(c)(3) organizations will file a Form 990EZ. Really small organizations with gross revenue normally less than $25,000 may only have to file an electronic information “postcard” return called the Form 990-N.  This form will require the organization’s name, any name it operates under, mailing address, web site, EIN, name and address of a principal officer, organization’s annual tax period, verification that the organization’s annual gross receipts are still normally $25,000 or less, and notification if the organization has terminated.  Large 501(c)(3)s typically file Form 990.

The goods news is that the gross revenue threshold for having to file a full-blown Form 990 (instead of 990EZ) has been significantly raised (see chart below).  Not that a 990EZ is a piece of cake…but, it is nothing compared to the 990 long form.

All 990s due by the 15th day of the fifth month after the close of the tax year (May 15 if your accounting year ends December 31).

This filing requirement doesn’t apply to churches or private foundations. Churches are not required to file an annual information return and private foundations have their own form to file, called Form 990-PF, regardless of the amount of gross receipts.

Any organization that fails to meet its annual reporting requirement for three consecutive years will automatically lose its tax-exempt status. To regain its exempt status an organization will have to reapply for recognition as a tax-exempt organization.  Needless to say, if your 501(c)(3) is required to file, don’t forget to do it.  If you did forget, file it late.  The penalties will be painful, but not as painful losing you tax exempt status.

One more important note…Maybe your organization has been operating for a while, but has not yet applied for 501(c)(3) status.  Or maybe you have applied, but not yet been approved by the IRS.  In either case, if your organization’s tax year is ending, you still owe the IRS a Form 990.  Don’t be caught unaware!

Form 990 and 990EZ can be downloaded from the IRS website, though we recommend using the services of an accountant or tax preparer familiar with 501(c)(3) requirements.  For Form 990-N, see the IRS website at www.irs.gov.  Type “990-N” into the search box at the top right of the page, then follow the links.

This is installment #2 in our ongoing series on leadership.  Our first installment was more of an introduction.  In this post, we are going to explore the concept of governance vs. management.

Governance and management:  For many, these are interchangeable terms.  They shouldn’t be.  And in far too many nonprofits, the leadership fails to understand the difference.  Properly separating the concepts of goverance and management can be critical to the success of your endeavor.

Governance is leadership of the big picture.  Primarily the responsibility of the board of directors, governance describes the notion of governing. Several ideas are simultaneously embodied in the concept of governance, including: mission establishment, strategic development, planning, goal setting, responsibility, accountability, oversight…the list goes on.  Most successful organizations rely on a group of individuals with a diversity of talents who collectively chart the course for the organization and actively pursue the accomplishment of its mission.

Management, on the other hand, is task oriented.  It is much more hands-on. Typically the role of management is bestowed on the person(s) responsible for the day to day operation of the organization’s activities. Once the mission and agenda is set by the governing team, management carries out the task of accomplishing that mission through the conduct of the organization’s programs. Management is accountable to governance.

Let’s be realistic. In the early days of your organization, chances are you will have members of your governing team also responsible for management. That’s OK. What is important, however, is that everyone understands their role…especially anyone who will be wearing more than one hat. Changing hats when necessary is a deliberate and learned skill. Differentiating multiple roles is essential to avoid confusion and “mission creep”.

We will continue our exploration of nonprofit leadership in future installments.  Until then, keep leading!

The year is coming to an end. Thanksgiving is just around the corner. Christmas is close enough that you can smell it. If your nonprofit’s fiscal year is January through December, then your accounting year is almost over as well. Are you preparing to end the year and winterize your nonprofit?

Here’s some questions to ponder as you prepare for years-end…

• Do you have this past year’s operating documents (board meeting minutes, resolutions, loan agreements, etc.) in one place for easy storage and availability? If not, make sure you get that stuff organized.  You need to be able to put your hands on critical paperwork at a moment’s notice.  If you find yourself in a state or IRS inquiry, or just trying to open a checking account at a new bank, you don’t want to be digging through boxes and file folders looking for what you need.  Check out our new Vital Document Archive™ if you need a secure, storage and retrieval system.
• Have you had budget planning meetings for next year? Don’t wait until next year is here!  Get your board together and start making plans!  So many organizations do not put the proper emphasis on planning.  Without a rudder, the boat drifts.
• Are you prepared to fill out your organization’s IRS annual reporting requirement (IRS Form 990)? Sure, it’s not due until May 15, but no time like the present to make sure your financials are in good shape.  And, if your nonprofit is like so many that rely on volunteers, your checkbook probably hasn’t been balanced since May!
• Are your volunteers organized for next year? This goes along with budget planning.  If you know that the new year brings with it the need for volunteers, start your recruiting efforts now.  People are already starting to think about the things they will commit to next year…and, most people are already over-committed.  Get them committed to your organization now or you may miss them completely!
• Are you planning a year-end solicitation push to get last minute donations? If not, you should be!  The end of the year, especially December, is the perfect time for a last minute donation appeal.  Many givers are looking to round-out their annual giving with a donation to get it in for this year’s taxes.  Make it a Christmas appeal…or, literally give potential donors the 2008 tax deduction appeal (“Get it in while you can!”).
• Do you have your “thank you” letters/receipts ready for this year’s donors? Obviously, you can’t do this until the year is over, but start thinking about it now.

Taking care of these items will go a long way toward making sure that your nonprofit is properly winterized and prepared to prosper with the start of the new year.

The word “leader” conjures up a variety of images:  your old Little League coach, a military general, your boss…even the president of the United States.  Regardless of who (or what) comes to mind, there is the common thread of someone who leads.  But what does leadership really mean?  Certainly it means more than just being in charge.  And in the setting of a nonprofit organization, is the meaning different?

I would submit that while the meaning is not so different, the goal of leadership often is.  For example, in a for-profit setting, the goal is the financial success of the company.  Sure, there are other intermediate goals and purposes.  But when you get down to brass tacks, it’s about the money.  The leaders expend their energy leading employees and influencing prospective customers in an effort to make a profit.  In politics, the goal may be the establishment of a political agenda.  Leaders attempt to influence voters to support their particular brand of government.  Just look at the current election cycle.  Not that pandering is the same as actual leadership, but I digress…

So what is the goal of nonprofit leadership?  Similar to a for-profit company, the success of the enterprise is important.  But what is more important is the accomplishment of the mission for the benefit of those for whom the organization was established.  That’s a very different equation…one that requires a very different approach to leadership.  Quite frankly, it’s often a more difficult challenge.  You see, in a for-profit setting, everything revolves around the bottom line.  Not that customers are disregarded, mind you.  It’s just that the ultimate purpose is to make money…and there’s absolutely nothing wrong with that.  Without profit-minded companies, it would be a dreary existence for most of us.  Changes to products and services are tailored around what will sell better.  The challenge for the nonprofit leader, however, is that the mission must be accomplished and the bottom line met.  And as most nonprofit leaders learn early on, it is indeed a challenge.

We will continue this discussion by exploring the particular facets of nonprofit leadership in future installments, so stay tuned.  As always, our goal is helping you accomplish your mission.  Keep on leading!

There are few topics that generate more confusion to nonprofit managers than unrelated business income (UBI).  It is also one the areas than can cause the most problems for your organization.  It can cost you money…even your tax exempt status if not properly handled.  In this issue of our newsletter, we will shed some needed light on the subject.

The technical definition of UBI is: Income from a trade or business that is regularly carried on by an exempt organization and that is not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity. Clear?  Not really.  A better way to say it is:  money generated from any on-going activity of your organization when the activity itself does not directly further the organization’s exempt purpose.  Examples are helpful:

Example #1 - A community performing arts organization charges admission to its quarterly productions.  The stated purpose of the organization is to promote the performing arts to the community and to teach performance art to the participants.  The organization conducts quarterly plays and recitals for the public, charging $10 per attendee.  The activity is considered a regularly scheduled, on-going activity.  It is also directly related to the purpose of the organization.  Therefore, the revenue generated from ticket sales is NOT considered UBI.

Example #2 - A church owns a vacant, corner lot next door to its facility.  After studying traffic patterns and demographics, the leadership determines this to be a great location for a convenience store and gas station.  It then proceeds to build one and open for business.  The store provides a much needed cash infusion to supplement the various charitable programs the church conducts.  This activity is considered a regularly scheduled, on-going activity.  It is NOT directly related to the purpose of the church and IS considered UBI.

What are the problems with UBI?  Well, the good news is that it is not illegal.  The bad news is that it is taxable…and complicated to deal with.  It can even lead to penalties or tax-exemption revocation if improperly handled.  When a nonprofit generates UBI, the law requires the activity to be financially accounted for separately from the regular, tax-exempt activities.  The nonprofit is required to report the activity on federal Form 990-T and pay corporate taxes on the net profits…even if all the net profits are used to fund tax-exempt activities.  Sounds unfair?  Well, consider this:  If a nonprofit were allowed to generate revenue tax-free from an activity usually conducted by a for-profit business, then the nonprofit has an unfair competitive advantage.  In the case of the church in example #2, the church could jeopardize its local real estate tax exemption as a result of the UBI generating activity…even if properly handled for federal tax purposes!

Our advice: Avoid UBI if you can.  If your organization determines it simply cannot turn down an opportunity to make a pile of money from unrelated activity, know what you’re getting into.  Also know that federal law generally limits UBI to 30% of total organizational income in order to maintain tax exempt status.

For more information, see IRS Publication 598.

If you wish to start up a 501c3 organization, click here.

Mark your calendars!  Sunday, September 28, 2008 has been declared “Pulpit Freedom Sunday”.  Sponsored by the Alliance Defense Fund, the Pulpit Initiative is a bold, stick-in-the-eye movement encouraging pastors to defy the ban on political endorsements by churches.

“For so long, there has been this cloud of intimidation over the church,” ADF attorney Erik Stanley said. “It is the job of the pastors of America to debate the proper role of church in society. It’s not for the government to mandate the role of church in society.”

The  IRS has mandated since 1954 that in order for churches to maintain federal tax exemption, they must not intervene in political campaigns.  The ADF says that amounts to an assault on the First Amendment.  Other groups, like the Americans United for Separation of Church and State, disagree, call it a “stunt” that is part of a larger goal of getting conservative candidates elected.

What is our opinion?  Free speech is a constitutional right, but tax exemption is not.  So, should free speech be infringed in order to qualify for tax exemption?  It shouldn’t be, but currently it is.  The First Amendment covers nearly all speech, but one of the primary motivations of the authors of the Constitution was to protect political speech.  This appears to be the approach the ADF is taking;  that is, pastors should not be prohibited from speaking freely to their congregants about an important topic…particularly if they believe the decision to vote for or against someone has religious or spiritual ramifications.  It is a bold move that could have serious ramifications to the churches participating.  Regardless, it will be interesting to see how the IRS responds.

Is there another way for pastors to speak their mind without jeopardizing their church’s tax exemption?  Rev. Maury Davis, pastor of Cornerstone Church in Nashville, Tennessee recently caused an uproar with liberals by endorsing several local school board candidates, not from the pulpit, but on a radio talk show.  Smart move by Pastor Davis.  Critics can scream all they want, but he did what any other American has the right to do…speak his mind politically, on his own time, as an individual.

Bold stands are sometimes necessary.  Our country’s history is full of important lines drawn in the sand.  This issue may well be one of those.  Stay tuned.

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As the upcoming US Presidential election gets closer, information on the IRS’s views on 501(c)(3) organizations and political activity seemed appropriate for this newsletter.

The Internal Revenue Service announced its Political Activities Compliance Initiative (PACI) once again will be in effect for the 2008 election season. The PACI program seeks to educate section 501(c)(3) organizations such as charities and churches about the federal law concerning political campaign activity and to enforce the law in this area.

By law, organizations exempt from tax under Internal Revenue Code section 501(c)(3) may not “participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”

“We take seriously our obligation to ensure that tax-exempt organizations have the information they need to make the right decisions about political campaign activities,” said Steven T. Miller, Commissioner of IRS’ Tax Exempt and Government Entities Division. “The vast majority of organizations want to do the right thing, and as in past years, we will continue our efforts to make sure they have the information they need.”

The prohibition against political campaign activity has been in effect for more than half a century and bars certain tax-exempt organizations from intervening on behalf of or in opposition to political candidates. However, these organizations can engage in advocating for or against issues and, to a limited extent, ballot initiatives or other legislative activities.

The IRS is making extensive efforts to educate 501(c)(3) organizations, political parties and candidates. Letters are being sent to the national political party committees explaining the law’s prohibition regarding charities and churches. In March, a letter was published in the Federal Election Commission’s monthly newsletter, asking candidates to ensure that their contacts with charitable organizations do not inadvertently jeopardize the tax-exempt status of any charity. The IRS has issued a news release on the subject in every presidential election year since 1992.

“As in the past, we will continue to use existing procedures, including a committee of career civil servants, to determine which cases to pursue,” Lerner said. “We will focus on cases involving allegations of egregious violations.”

“By continuing to work closely with the tax-exempt community, we can provide guidance and education to help charities and churches comply with the law,” Lerner said. “We also must continue to monitor the actions of tax-exempt organizations involving political campaigns, in order to carry out our obligation to administer the tax law with congressional intent.”

Information gathered from the IRS article at the link below:

http://www.irs.gov/newsroom/article/0,,id=181570,00.html