Non-profit organizations are behind some of the most empowering acts of goodwill that happen all around the world, from providing disaster relief to supporting children’s health care and providing food for people in disadvantaged communities.
Maintaining the proper functioning of these organizations is critical to the well-being of society and keeping up with the compliance of non-profit organizations is crucial to success. Managing a non-profit organization isn’t rocket science, and it’s quite simple, but shockingly few people understand the basics and end up mishandling the organization, thereby disrupting its constituents.
Many not-for-profit organizations have already foundered. Although we count the number of banks that have gone bankrupt, we don’t hear any news in the mainstream media about the failure of non-profit organizations. In all fairness, monitoring the number of non-profit shortcomings is not the problem; instead, the focus must be correctly placed on what must be done to prevent other non-profits from failing.
Non-profit organizations are subject to a high level of government regulation and public scrutiny. There are good reasons for this since 501(c) non-profits are tax-exempt from federal corporate taxes and are entitled to public funds.
These privileges are usually not open to for-profit businesses, so there are laws in effect to protect the general public and to make sure that non-profit organizations are not abusing their financial privileges. IRS and states have several requirements that non-profit organizations have to comply with.
Why Do Non-profits Still Have To Comply?
Although a 501(c) non-profit has access to a series of key financial benefits, the penalties for non-compliance with government rules can be very severe. The IRS can rescind a non-profit organization’s tax exemption and impose fees that can be amassed daily.
A state can administer the dissolution of a non-profit organization and apply substantial financial penalties. Beyond the federal and state requirements, an organization may lose a large donation or grant as a result of not keeping up. A proactive focus on compliance helps to ensure long-term success, and the expense is small when compared to the higher costs of penalties and citations.
Key Areas Of Compliance
Non-compliance penalties are not worth the risk. To avoid penalties for non-compliance or withdrawal of your organization’s tax exemption status from the Internal Revenue Service, several measures must be taken yearly for your organization. Below is a list of things you will need to conduct to ensure that your non-profit organization stays compliant with the IRS annually.
You Are Not Allowed To:
Have shareholders: A not-for-profit organization is not the same as a for-profit organization because it does NOT have shareholders who accumulate dividends. Therefore, even if a non-profit organization is famous enough that the wealthy entrepreneurs want to invest as a stakeholder, the non-profit may not.
Spend the income on any other things intended to promote any goal that isn’t your tax-exempt purpose: As an example, you can rent a part of an apartment, organize a fundraiser, or throw a movie night. Nevertheless, these proceeds should ultimately be used to foster your non-profit objective(s).
Support a political cause(s): In addition to revoking 501(c)(3) status, the Internal Revenue Service may levy special taxes when a 501(c)(3) non-profit organization supports any political campaign.
Lobby for legislation to be “substantially” affected: It is not, at first sight, clear what it means to affect legislation in a “substantial” way. Nevertheless, the IRS helps to shed light by setting a limit as to the amount a non-profit organization can lobby through “expenditure test” to 20 percentile of the first $500,000 of expenses, then 15 percent of the subsequent $500,000 of expenditures, and so forth up to $1 million in contributions. However, if a non-profit organization intends to affect the legislation, they must first do so on Form 5768.
Obtain substantial benefits from “unrelated activities” or devote substantial time to them: For instance, while a reading group of children’s classics, created to promote literacy and educational activities, may welcome a grunge rock concert, they may not get “substantial” gains from doing so.
Also, they may not devote considerable time to it. It is not immediately clear what makes a percentage of the time or income substantial; however, it is a good rule of thumb that not more than 10 percent of the time or income spent in unrelated activities related to the income from, or time spent in related activities.
Keep good records: Keeping records is imperative to filing annual returns properly with the IRS (i.e., 990, referred to below). Besides, proper records are crucial to the defense if a director, officer, member, or client claims that a non-profit organization is improper. These records are also pivotal if a non-profit organization suspects that a director, officer, or member of the organization is inappropriate.
Submit a 990 informational return when expected: Failure to promptly file an informational return to the Internal Revenue Service may lead to immediate revocation of a non-profit organization’s tax-exempt status. Access forms 990 here. (Note that this does not apply to a private corporation where you will be required to file a 990-PF.)
Act according to the Organization Bylaws: Bylaws are the laws governing a corporation or company. Deviating from those laws means the possible lawsuit, especially for any officer, director, or member affected by such infringement(s).
Conduct appropriate board meetings: A non-profit organization must have a board meeting at least once a year to monitor compliance and conduct business. It is encouraged that more regular meetings be held. It is important to note that the Bylaws usually govern board meetings.
Establish a conflict of interest policy: All directors and officers must sign a conflict of interest policy. Later, if a director or officer is inconsistent with the policy, you will have a paper trail that documents his or her consent to the conflict of interest policy.
Do not allow a paid officer to be a director as well: A non-profit organization must deter any potential conflict of interest, and there is little that could mean a conflict of interest more clearly than a director voting for his/her compensation. Where a paid officer MUST also become a director, that official must disqualify him or herself from any vote that might involve him or her.
Do not pay a director, who is also a member or officer: In the same way as above, likely, paying a director who has a different interest in the company will cause a conflict of interest.
Pay taxes on non-related activities that exceed $1,000: A non-profit organization must pay taxes on any activities that do not relate to the non-profit that exceed $1,000. However, this is not applicable when:
- All the groundwork for the event is carried out by volunteers.
- The activity is intended mainly for the benefit of members/employees, officers, or patients/students/clients (e.g., a cafeteria for school employees and students).
- The activity is the selling of commodities that are substantially acquired by donation (for example, second-hand shop).
- The activity is the exchanging of donors’ or members’ mailing lists.
- The activity is the sharing of a donation souvenir (e.g., a hat or bumper sticker).
Ensuring that your non-profit organization stays compliant is essential to its success, but it can also take a lot of work. For this reason, it’s wise to keep a compliance checklist to guide you in keeping track of all that needs to be done.
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