CharityNet USA

Percentage Limitations on the Deductibility of Charitable Donations

June 10th, 2009

The tax code allows individuals a tax deduction for contributions to charitable organizations that are tax-exempt under section 501(c)(3). In general, the donor is entitled to deduct the fair market value of property donated to a 501(c)(3) organization. However, the extent of charitable contributions that can be deducted for a particular tax year is limited to a certain amount of an individual’s contribution base, essentially an amount equal to their adjusted gross income- the donor′s taxable income before claiming itemized deductions like mortgage interest or charitable contributions. The level of annual deductibility is subject to certain five percentage limitations, and is subject to several factors, including the nature of the charitable recipient and the nature of the property donated.

The first three limitations apply to gifts made to public charities and private operating foundations. First, there is a limitation of 50% of a donor’s adjusted gross income for gifts of cash and ordinary income property made to either of the aforementioned types of organizations. For example, a donor whose AGI is $100,000 for the year may deduct charitable donations up to $50,000. While the donor may give as much as they choose, they are simply limited to the amount they can claim as a write off. If the donor does choose to make contributions in excess of the 50%, the excess may generally be carried over and deducted in subsequent years.

The second percentage limitation for gifts to public charities and private operating foundations is 30% of their AGI for gifts of capital gains property (stocks, bonds, real estate, and the like). Any excess of the 30% is also subject to the carry forward rule. A donor who makes contributions of both cash and capital gains property during a single tax year is subject to a combination of these percentage limitations, so that the total deduction does not exceed the 50% limitation.

The final limitation for gifts to public charities and private operating foundations allows a donor of capital gains property to take advantage of the 50% limitation, instead of the 30% limitation, when the amount of the contribution is reduced by all of the unrealized appreciation in the value of the property. This election is typically made when the donor wants a larger deduction during the year that a gift is made of property that has not yet fully appreciated in its value.

The fourth and fifth percentage limitations apply to gifts to private foundations. Under the fourth limitation, contributions of cash and ordinary income property to private foundations may not exceed 30% of the donor’s contribution base (AGI). The carry over rule also applies to these gifts.

Finally, the fifth percentage limitation is 20% of an individual donor’s AGI on gifts of capital gains property donated to private foundations.

For corporations, different percentage limitations are in place. Deductible contributions for a corporation are limited to 10% of the tax year′s pre-tax net income. Excess may be carried over and deducted in subsequent years. For corporations, the tax laws do not differentiate between gifts to public charities and gifts to private foundations.

As you plan for charitable giving, and consider its subsequent tax benefits, it is also important to keep in mind what types of contributions are not tax deductible. These include:

•Contributions to political parties, political campaigns, or political action committees.
•Contributions given to individual people.
•Fees or dues paid to professional associations.
•Contributions to labor unions, chambers of commerce, or business associations.
•Contributions to for-profit schools and hospitals.
•Contributions to foreign governments.
•Fines or penalties paid to local or state governments.
•The value of your time for services rendered to a non-profit.

When giving to charity, it′s always a smart idea to first conduct some due diligence. Make sure the charity is a qualified, and you obtain a receipt for your donation. As a reminder, charitable donations must be made by December 31st. This is true whether you give money or donate non-cash goods.

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Tags: 501c3, 501c3 Tax Exempt Services, charitable donations, Charitable Organizations, donations, tax deductable
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Public Charity vs. Private Foundation

April 14th, 2009

Many nonprofit organizations with which you may be familiar have names that contain the word “Foundation”. However, in many cases these organizations are not foundations in the legal sense, but rather are public charities. While both private foundations and public charities are 501(c)(3) organizations, there is quite a substantial difference between the two types of entities.

Traditionally, the Internal Revenue Service classifies an organization described in Section 501(c)(3) of the Code as a private foundation unless the organization can demonstrate that it qualifies as a public charity. Because there are different rules that apply to public charities and private foundations, it is important to be able to identify whether an organization is a public charity or a private foundation.

Unlike private foundations, which normally receive substantially all of their contributions from relatively few sources, such as a wealthy individual or corporation, and often rely on investment earnings as their source of ongoing support. A public charity, on the other hand, is either “publicly supported” (deriving a substantial portion of its financial support from the public) or functions to support one or more organizations that are classified as public charities. Specifically, an organization may qualify as a “publicly supported” organization because it does one or more of the following:

•Carries on specific exempt activities, which are religious, educational, scientific, or charitable in nature

•Is supported substantially by financial support from government agencies and/or the general public.

•Is supported substantially by contributions and gross receipts from its exempt activities, and does not receive more than one-third of its support from investment income.

•Is organized and at all times thereafter operated exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified publicly supported organizations. Organizations described in this paragraph are called “supporting organizations”.

Because the private funding and private control of a private foundation increase the likelihood that the foundation will improperly benefit those who control the foundation, the Code subjects a private foundation to certain requirements and restrictions that are not applicable to public charities. For example, private foundations are subject to a tax on net investment income. In addition, private foundations are subject to excise taxes for failing to take certain required actions or for taking certain prohibited actions.

Most notably, private foundations are required to make annual distributions equal to 5 percent of the aggregate fair market value of all assets of the organization, and are prohibited from the following:

•Engaging in acts of “self-dealing” with certain persons
•Having excess business holdings
•Making jeopardizing investments
•Making certain prohibited international expenditures

Finally, the deductibility for federal income tax purposes of contributions to a private foundation is subject to certain limitations that do not apply to contributions to public charities. For example, the amount of contributions to private foundations that may be deducted for any year generally may not exceed 30 percent of an individual′s adjusted gross income for the year, while contributions to public charities may be deducted up to 50 percent of the AGI.

Since the elimination of the advance ruling period, the IRS will review annual information returns annually and make bi-annual status rulings. Thus, nonprofits will have to be extra diligent in monitoring their funding sources and activities if they wish to retain their specific classification as either a private foundation or public charity.

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Tags: 501c3, Charitable Organizations, Nonprofit, Private Foundations, Public Charity
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Avoiding Conflicts of Interest in the Nonprofit Sector

April 1st, 2009

On a day to day basis I have dealings with a variety of nonprofit organizations, and have discovered one pressing issue that seems to be faced by all organizations, startup and established, big and small-conflicts of interest. Because conflicts of interest can be a serious threat to both an organization′s reputation and their exempt status, administrators must be diligent in avoiding and addressing potential conflicts. The key for nonprofit boards is not to try to avoid all possible conflict-of-interest situations, but to identify and follow a process for handling them effectively. How an organization manages conflicts of interest and assures open and honest deliberation affects all aspects of its operations and is critical to making good decisions, avoiding legal problems and public scandals, and remaining focused on the organization′s mission.

The nonprofit sector depends on the spirit of volunteerism displayed by board members′personal and professional knowledge, experience, and community engagement. These board members can, however, face challenges in carrying out their board responsibilities because of the number and breadth of associations and connections they have. Therefore, nonprofit board members and executives must not only be able to recognize potential conflicts of interest, but they must determine when these conflicts present areas of concern and what to do about them.

While most people say they understand conflict of interest, most people cannot articulate a clear and general statement. They may be able to give extreme examples but cannot identify potential conflict in more mundane circumstances. A useful way of looking at conflict of interest is to turn it around and say that directors should avoid any self-serving conduct. If it benefits the director then the action is suspect. Most theorists allow that if the action benefits everyone in the community then it is not self-serving.

In order to help the board of directors understand and avoid conflicts of interest the board should develop or adopt a written expression of its intentions. Board members should remember that a written code serves as a guideline. It cannot replace careful consideration and an ethical approach. Each member of the Board should be required to acknowledge acceptance of the policy on an annual basis, and the policy should be reviewed at the initiation of all Board meetings. Finally, keep these things in mind to help you assure that your organization does not face potential conflict:

Full Disclosure to the board - Since when most conflict situations arise only a couple of people in an organization know, full disclosure can establish good faith among boards.
Distancing Oneself From Potential Conflicts - A Board member should excuse himself from portions of the meeting that may lead to any potential conflict, in addition to abstaining from voting on matters that may pose a conflict.
Best Interests In the Forefront - Create an arrangement that decides with out ones′ involvement in certain discussions, that the best interests of the organization, not that board member, will be emphasized.
Compensation - If a board member is compensated in any way by a nonprofit, make sure their pay is either fair market value or less, a common mistake among boards.

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Tags: board of directors, growing your nonprofit, nonprofit conflicts, nonprofits, volunteerism
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Remaining in Compliance After Obtaining 501 Status

March 17th, 2009

Your dream has become a reality. The cause that is your passion has been transformed into a functional organization. You′ve established a board, clarified your mission, adopted bylaws, incorporated, and achieved 501(c)(3) status from the Internal Revenue Service. After such exhaustive effort has been expended, it would be senseless to allow the organization to lose its exempt status or even become administratively dissolved for failure to uphold administrative compliance. Thus, knowledge is power-organizational administrators must be diligent in educating themselves on all state and federal regulations.

First and foremost, it is important to recognize that almost all forms of regulatory compliance will be difficult without the maintenance of adequate financial records. It is imperative that administrators document all sources of receipts and expenditures. A sufficient donor database is ideal. It is also critical to retain all supporting documents, such as grant applications and awards, sales slips, paid bills, deposit slips, and cancelled checks. This will allow for easy preparation of financial statements, include statements of activities (income statement) and statements of financial position (balance sheet).

A 501(c)(3) organization′s annually mandated filing with the IRS is the form 990. All organizations are now required to file, regardless of revenue; however the version of the form will differ based upon the year′s receipts. The filing is due on the 15th day of the 5th month after the fiscal year end (For example, if the fiscal year ends December 31, the 990 is due on May 15th), but it may be submitted anytime after the fiscal year end. To remain in full compliance, administrators must be aware of all forms that must be filed, i.e. the 990-T for unrelated business income, and special filing requirements for supporting organizations.

In addition to annual reporting, organizations with paid employees will be faced with additional quarterly filings. Like all employers, charities who pay wages must withhold, deposit, and pay employment taxes, including federal income tax, Social Security, and Medicare. This must be done for each individual paid more than $100 per year and reported on form 941.

In addition to IRS compliance some states, though not all, will require annual state level tax filings. Upon commencement of the activities, you′ll need to be sure to obtain state level sales and income tax exemptions, if they are available in your state. If the organization is not granted state exemption, they must file and pay taxes! In some states, even organizations exempt from state taxes must still file some sort of annual return.

In addition to state tax considerations, each year the organization must file an annual report with their state to remain an active corporation. While these forms typically require a minimal amount of information, failure to file may lead to an administrative dissolution of the organization.

A final state level compliance issue to remain abreast of is concerned with charitable solicitation registration requirements. Such laws have been implemented in most states in an effort to protect consumers, and the statutes require charitable organization to register and become licensed prior to the initiation of any solicitation activities. These registrations typically require annual renewal, and come with stiff penalties for violations. If an organization will solicit in more than one state, a valid registration must be in place in each state where representatives will seek donations.

Possibly most importantly, you must remain aware of what activities may jeopardize your exempt status. The most common offenses that lead to the revocation of a 501(c)(3) are private inurement and political campaign intervention. Private inurement occurs when an insider receives excess benefit from the existence of the organization, either in the form of direct financial gain or in more indirect means such as the provision of business to a for-profit in which an insider has an ownership interest. Excess benefit may also occur in transactions with outsiders, however the benefit in the situation must be substantial. Lobbying activities, or attempts to influence legislation, may be conducted; however these activities must be kept to a minimum.

501(c)(3) nonprofits are also strictly prohibited from undertaking any political campaign intervention. While organizations may provide voter education or a review of the issues supported by all candidates, a public charity may not, directly or indirectly, support or oppose any candidate for political office.

Finally, organizations must be diligent in filing annual returns on a timely basis each year. Not only can the IRS revoke the exempt status of any organization that fails to file returns for more than two years, it also reserves the right to impose penalties upon late filers. While an organization may not owe any taxes, the standard penalty for late filing of the annual information return is $20 per day, up to a maximum of $10,000.

Remaining in compliance after attainment of 501(c)(3) status may seem a daunting task; however with careful attention and cooperation of organizational administrators, public charities can function successfully and fulfill their missions abundantly.

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March 12th, 2009

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Don’t Wait Until the Last Minute

January 23rd, 2009

Wow! 2009 is rapidly moving along already. It seems as if I was just anticipating Christmas, and now January has almost escaped me. For those of us in the nonprofit sector, just like all those individuals out there anxiously anticipating refunds, this time of year brings with it the joys of tax season as well. While most nonprofits classified under IRC 501(c)(3) are exempt from paying any federal income taxes, barring any unrelated business income, we still must be diligent in filing our annual information returns.

As I””m sure you””re aware, the 2008 Form 990 is a highly revised document. Many who have effortless (yeah, right) filed their organization”’’s 990 each year will have to undertake new training to understand all the changes that are made to this year”’’s form. The biggest areas of revision are compensation detail and a section on organizational governance. While the new form, which consists of an 11 page core form followed by 16 schedules, can seem daunting; with a little study time or the assistance of a professional you can effortlessly make it through yet another reporting period. Keep in mind that the returns are due by the 15th day of the 5th month following your fiscal year”’’s end, and avoid those dastardly $20 per day late penalties.

Good luck!

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2008 NPO Tax Season Is Upon Us

December 12th, 2008

It’s that time again! Tax season is right around the corner! As I’m sure you’re aware, as of the 2007 fiscal year all nonprofit organization, regardless of revenue, are required to file an annual return with the Internal Revenue Service. In addition to that change, the IRS has established new filing guidelines and revised forms for this 2008 tax year. The IRS issued an updated version of Form 990, and provided transition relief so that small exempt organizations will have time to adjust to the new form.

The final form contains a redesigned format, consisting of a core form and a series of schedules. In response to public comments, the new core form allows an organization to describe its exempt accomplishments and mission up-front and provides more opportunities throughout the form for the organization to explain its activities. Other major changes were made to the form’s summary page, governance section, and various schedules, including those relating to executive compensation, related organizations, foreign activities, hospitals, non-cash contributions and tax exempt bonds. A checklist of schedules was also added.

The IRS also announced a graduated transition period for smaller organizations. These organizations will be allowed to file the Form 990-EZ instead of the Form 990. For the 2008 tax year, organizations with gross receipts over $1.0 million or total assets over $2.5 million will be required to file the Form 990. For the 2009 tax year, organizations with gross receipts over $500,000 or total assets over $1.25 million will be required to file the Form 990. The filing thresholds will be set permanently at $200,000 gross receipts and $500,000 total assets beginning with the 2010 tax year. Also, starting with the 2010 tax year, the IRS will increase the filing threshold for organizations required to file Form 990-N from $25,000 to $50,000.

The IRS also announced a phase-in of the form’s new hospital and tax exempt bond schedules. Certain identifying information will be required for the 2008 tax year, with completion of the entire schedules required for the 2009 tax year. In response to the nonprofit sector’s safety and security concerns regarding disclosure of certain foreign workers and volunteers, the IRS revised the form to permit reporting of foreign activities by region, rather than by country, until other safeguards may be implemented to protect the privacy interests of such persons.

All sound like a lot to tackle? Well, it may be. But that’s where the assistance of an experienced nonprofit accountant comes into play. If you need our help, we’re here for you.

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Web 2.0 for Nonprofits

November 18th, 2008

In times where our current economic crisis is adversely affecting charitable giving in the U.S., it is more important now than ever for nonprofit administrators to develop cost-effective methods of marketing their services, recruiting volunteers, fundraising, and cultivating donors. One such method to affordably undertake such critical activities is to become involved in Web 2.0.

As defined by TechSoup, Web 2.0 is a category of new Internet tools and technologies created around the idea that the people who consume media, access the Internet, and use the Web shouldn’t passively absorb what’s available; rather, they should be active contributors, helping customize media and technology for their own purposes, as well as those of their communities. These new tools include, but are by no means limited to, blogs, social networking applications, RSS, social networking tools, and wikis.

But Web 2.0 isn’t just the latest set of toys for geeks, it’s the beginning of a new era in technology — one that promises to help nonprofits operate more efficiently, generate more funding, and affect more lives. Websites such as Myspace, Facebook, Twitter and LinkedIn are becoming vital networking tools for nonprofits. Additionally, there are sites springing up that are geared specifically at the nonprofit audience, such as Care2 and Blue Goose. More and more nonprofit leaders are blogging to keep their constituents up to date with the organization’s activities. Overall, it is apparent that nonprofits are realizing the value of such tools, both quantitatively and qualitatively. Is your organization on board with Web 2.0?

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Charitable Gaming

November 3rd, 2008

Charitable gaming is one of the most common and successful methods of fundraising for many tax-exempt organizations. However, careful attention to regulations is imperative. Charitable gaming activities may include, but are not limited to:
• Bingo
• Beano
• Raffles
• Lotteries
• Pull-tabs
• Scratch-offs
• Pari-mutuel betting
• Calcutta wagering
• Pickle jars
• Punchboards
• Tip boards
• Tip jars
• Video games

In order for your gaming fundraiser to be successful without jeopardizing the organization’s funds or, more importantly, their exempt status, 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 all state and federal regulations concerning gaming activities.

Lawful gaming ordinarily requires a gaming license from the state that conducts it. Most states require that an organization be recognized by the IRS as exempt from federal income tax before issuing a license, and many states limit licenses to organizations recognized under specific subsections of Code section 501(c), such as 501(c)(3), 501(c)(4), and 501(c)(19). Additionally, many states make stipulations regarding the length of time an organization must be in operations and/or the specific areas and methods by which gaming sales may be conducted, thus it may be best to consult a professional nonprofit consultant to review the statutes in your area prior to commencing a gaming activity.

As far as the IRS is concerned, for almost all tax-exempt organizations, including 501(c)(3)s, gaming activities do not further an exempt purpose. This is true even if all proceeds from gaming will be used to fund exempt purposes. The result of such ruling is that the revenue generated from gaming is ordinarily subject to unrelated business income taxes. One exception is in North Dakota, where income from lawful gaming is excluded from UBI tax regulations.

An important consideration when conducting charitable gaming activities is the need for diligent recordkeeping. Organizations conducting gaming generate a substantial amount of income at each session, primarily in the form of cash. The cash passes through many hands, which could result in numerous abuses. Thus, every organization should be actively involved in overseeing and controlling each facet of the gaming activity to insure funds are not diverted to private individuals or for private purposes. Organizations conducting gaming activities must maintain records of gross income, prize payouts, and disbursements to substantiate the information submitted on the informational return, Form 990, and the income tax return, Form 990-T. Gross income from gaming activities is determined before any deduction for prizes, taxes, or any other expenses is taken. Additionally, the organization must retain and submit taxes frm the winnings. State and local laws may contain additional recordkeeping and reporting requirements for organizations conducting gaming.

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Unrelated Business Income- Benefits and Risks

October 31st, 2008

If an organization is selling goods or services to generate income, even if it is conducting the activity within a larger group of activities related to its exempt purpose, the activity is a trade or business. It is important that you file the correct return and pay taxes on this income.

Sales of merchandise, publications, and other media can generate UBI if the items sold are not substantially related to the organization’s exempt purposes. If the items do have a substantial relationship, then the sales do not generate UBI, but their relationship to the exempt purpose must be clearly identifiable.

For example, the sale of educational videos or publication subscriptions by an animal welfare group would be substantially related if the content of those videos or publications promotes the organization’s exempt purpose. If the same animal welfare group sold pet accessories and apparel, the sale of these items would generate unrelated business income.

Exceptions and Exclusions

• Volunteer Labor: Any trade or business is excluded in which substantially all the work is performed for the organization without compensation. Some fundraising activities, such as volunteer operated bake sales, may meet this exception.
• Convenience of Members: Any trade or business is excluded that is carried on by an organization described in section 501(c)(3) or by a governmental college or university primarily for the convenience of its members, students, patients, officers, or employees. A typical example of this is a school cafeteria.
• Selling Donated Merchandise: Any trade or business is excluded that consists of selling merchandise, substantially all of which the organization received as gifts or contributions. Many thrift shop operations of exempt organizations would meet this exception.

If you have questions or concerns about whether your planned activity may generate UBI and thus subject you to taxation and/or jeopardize your tax exempt status, you may want to seek consultation with a nonprofit expert.

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CharityNet USA

Percentage Limitations on the Deductibility of Charitable Donations

Public Charity vs. Private Foundation

Avoiding Conflicts of Interest in the Nonprofit Sector

Remaining in Compliance After Obtaining 501 Status

Don’t Wait Until the Last Minute

2008 NPO Tax Season Is Upon Us

Web 2.0 for Nonprofits

Charitable Gaming

Unrelated Business Income- Benefits and Risks

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