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Answers to Reader Questions (Dec ’08)

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 familiar 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!

Greg McRay, EA

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

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