Top Issues Every Lawyer Needs to Know Regarding Nonprofit Law · Takin’ Care of Business or: Board and governance considerations 2. Would you like your receipt? –Substantiating

9/23/2015

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Top Issues Every Lawyer Needs to Know Regarding

Nonprofit LawOctober 12, 2015

Joshua W. Abel

© 2015 Faegre Baker Daniels LLP

These materials are intended for information only andare not to be considered legal advice.

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Agenda

►Topics of Interest

►Tips and Pointers

► IRS Particulars

► Indiana Specifics

►Best Practices

►Reminders

►Questions

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Top Ten List

► 10. It’s not one-size-fits-all or: There are many different kinds of nonprofit

organizations

► 9. Let’s Get It Started – Incorporation

► 8. To have members or not to have members?

► 7. This Is How We Roll or: Bylaws and other organizational actions

► 6. Getting exempt – Federal Tax Exemption Application

► 5. Isn’t there an easier way? …in some cases – the 1023-EZ

► 4. Staying exempt – Annual Reporting Requirements

► 3. Takin’ Care of Business or: Board and governance considerations

► 2. Would you like your receipt? – Substantiating Charitable Contributions

► 1. Just because a nonprofit organization is exempt from taxation, it does not

mean it is exempt from all laws

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Top Ten List

► 10. It’s not one-size-fits-all or: There are many different kinds of

nonprofit organizations





► 5. Isn’t there an easier way? …perhaps in some cases – the 1023-EZ






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Nonprofit organizations

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►Many different kinds

►Not all are tax-exempt

►Types of exempt orgs are

listed in § 501(c) of the

Internal Revenue Code (IRC)

►More common ones are

described in the lower-

numbered (c) subsections

►§ 501(c)(3) organizations are

the most common

501(c)(3)

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Public Charities (PC) vs. Private Foundations (PF)

► PCs receive funding from a broad range of sources

► PFs generally derive their funding from a single source or a very limited

number of sources

► PFs typically make grants while PCs tend to directly carry out charitable

activities and programs

► Presumption of PF status

► Preferential treatment for PCs

► No required annual minimum payout (§ 4942)

► Can give money to PFs without exercising expenditure responsibility(§ 4945)

► No tax on net investment income (§ 4940)

► Higher limits on charitable contribution deductions

► Greater degree of close control possible in PFs

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Agenda


organizations











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Incorporation (Indiana)

► Incorporate as an Indiana nonprofit corporation

►Through the Secretary of State

►Can be completed online

►$30 filing fee, payable to the IN SOS

►Template for Articles of Incorporation available online, but advisable to

draft your own to be sure they comply with certain IRS requirements in

the federal tax exemption application

► Purpose clause: Articles must state the org’s exempt purpose(s)

► Charitable, religious, educational, and/or scientific

► Dissolution clause: Articles must have express provision for distribution

of assets exclusively for exempt purposes

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Agenda


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Members

►Nonprofit corporations can elect whether or not to have members

►More flexibility is maintained when there are no members

► Easier to take corporate action

► Avoids need for a second layer of approvals (Board of Directors being

the other layer)

►A nonprofit can choose to have no members but can still designate

certain individuals, corporations or other associations or organizations

as “members” of the nonprofit

► Good for those who support your cause

► Board of Directors can set criteria that must be reached for “members”

► Tip: Add a clarification to the Articles that such designation as a member

does not mean “member” as defined under the Indiana Nonprofit

Corporation Act of 1991 (meaning the right to elect directors)

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Agenda


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Organizing Actions to Take

►Draft bylaws

► Tip: Include a conflict of interest policy

► Tip: Include an indemnification policy for directors

►Board of Directors holds its initial organizational meeting and:

► Adopts the bylaws

► Elects the officers

► Empowers certain individuals/officers to act on behalf of the organization

► Selects a bank

►Nonprofit also needs to obtain an employer identification number (EIN)

► Can be obtained online

► Requires a “responsible party” and that person’s SSN

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Agenda


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Form 1023 (the Federal Tax Exemption Application)

► Form 1023 is used by nonprofits applying for exemption under § 501(c)(3)

► Nonprofit corporations, unincorporated associations, trusts, and LLCs if all its

members are 501(c)(3) organizations can apply for exemption

► 12 page application form; interactive form available through IRS website

► Also has Schedules A – H, which are required if applicable

► Requires a good deal of information:

► A narrative description of the nonprofit’s activities

► Copies of the articles and bylaws

► Expected financial dealings, included projected budgets

► Authorized Representative

► Cannot sign the 1023 unless the rep is also an officer/director/trustee of the

organization

► Should complete Form 2848 – the IRS Power of Attorney form

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Form 1023 (the Federal Tax Exemption Application)

►User fee

► $850 for most organizations

► $400 for organizations whose gross receipts do not (or will not) exceed

$10,000 annually for a four-year period

► Items included in the submission package

► Checklist (which is the last two pages of the Form 1023)

► Form 1023 application and all applicable schedules

► All exhibits to the Form 1023 and copies of the Articles and Bylaws

► Form 2848 Power of Attorney

► Check or money order for user fee (payable to US Treasury)

►Then you wait – but not too long…

► Until recently, processing time was 9 months+… now, it’s about 6 weeks

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Agenda


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Form 1023-EZ

►Streamlined Application for Recognition of Exemption under § 501(c)(3)

►New form, released on July 1, 2014

►Designed for faster processing for smaller organizations

►Primary eligibility criteria to use Form 1023-EZ:

► Gross receipts have, do and will not exceed $50,000 per year for 3-year

period

► Total assets do not exceed $250,000

► Not a church, school, hospital, etc.

►Must be filed electronically

►User Fee - $400

►Some concerns with new form

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Indiana State Tax Exemption

►Upon receipt of the Determination Letter from the IRS, a nonprofit

should file an application for state sales tax exemption with the

Indiana Department of Revenue

►Application form is the NP-20A

► 1 page form

► Attach a copy of the nonprofit’s determination letter

►No filing fee

►(No need to worry about Indiana adjusted gross income – the IN

Department of Revenue accepts the IRS’s exempt status

determination)

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Agenda


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Annual Reporting Requirements

►Three levels of filings required

►1. Federal Return (IRS Form 990)

► Provides information on the nonprofit’s mission, programs, and finances

► Nonprofit’s 3 most recent returns must be made available for public inspection

► Private foundations would file 990-PF

► There is a Form 990-EZ available as well

► Can be filed by nonprofits that, at the end of their tax year, have:

► Gross receipts of less than $200,000

► Total assets of less than $500,000

► Cannot be used for group returns (must use 990)

► Due Date: 15th day of the 5th month following the end of the nonprofit’s taxable

year (May 15th for most)

► Form 990-N (e-Postcard): used by nonprofits with gross receipts less than $50,000

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►2. Indiana Return (NP-20)

► Filed with the Indiana Department of Revenue

► Only one page long

► There are a few questions to answer and then the completed Form 990

is attached

► Due Date: 15th day of the 5th month following the end of the tax year

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►3. Indiana’s Annual Business Entity Report

► Simple form – requires only: entity name and current address, entity

creation date, type of entity, name and contact of registered agent, and

name and contact of current officers

► Same form required of for-profit entities

► May be completed and submitted online through the IN SOS’s website

► May also be printed and mailed to the IN SOS

► Fees:

► $7.14 if completed online

► $10 if printed and mailed

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Beware:

►Failure to timely meet all reporting requirements can result in loss or

cancellation of the nonprofit’s exempt status!

►For the federal return:

► $20/day penalty for each day the return is late

► Same penalty is applicable for incomplete returns and returns that give

incorrect information

► IRS may specify a date that a nonprofit subject to the penalty has to

submit the return. Penalty of $10/day (to a limit of $5,000) can be

imposed on an individual within the nonprofit if return is not submitted by

that date.

► Automatic Revocation – IRS automatically revokes the tax exemption of

a nonprofit that fails to file its required return for 3 consecutive years

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Agenda


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Characteristics of a Strong Board of Directors

As articulated by the IRS…

►Composed of individuals who are informed and active in overseeing the

nonprofit’s operations and finances

►Does not tolerate secrecy or neglect

►Comprised of directors who are knowledgeable and engaged, and selected

because of their unique experiences and skills

►Composed of an appropriate number of directors

► board that is too small may not have the skills or resources to effectively govern

► board that is too big may have a hard time focusing or making decisions

► Note: Pursuant to Indiana law, nonprofits must have a minimum of three directors

►Comprised of independent members

► Not dominated by members with business or family relationships

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Governance Tips from the Form 990

► Part VI asks about relationships among directors/officers/key employees and

the number of “independent” directors

► → Try to keep a broad range of unrelated individuals involved

► Part VI asks whether Form 990 was given to Board to review and for a

description of the review process

► → Board should be involved in reviewing a draft Form 990 prior to filing, and

should adopt a procedure documenting such review

► Part VI, Line 8 inquires into whether Board contemporaneously documented

the meetings held or actions taken by the Board

► → Ensure that minutes of every Board meeting are prepared and approved.

► Part VI asks about governance and management policies

► → Adopt COI policy, whistleblower policy, and document retention policy

BOARD MEMBERS SHOULD BE AWARE OF THESE POLICIES AND PROCEDURES!

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Board Practices

Good governance practices will help manage legal risk and ensure the

organization runs efficientlySome examples include…

► Keep minutes of meetings and actions and maintain records

► Obtain directors and officers insurance

► Implement a board process to reasonably set executive compensation

► For Board actions without meetings:

► Indiana permits action by unanimous written consent

► Consent is effective when the last director has SIGNED the consent

► Consents may be distributed, signed, and returned by mail, fax, or email

► Action by email (a simple “yes” or “no” reply) is not permitted

► Know and fulfill your fiduciary duties as a board member

► Duties of care, loyalty and obedience

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Agenda


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Substantiating Charitable Contributions

► Requirement for nonprofits

► Provide written disclosure statement to donors of a quid pro quo contribution in

excess of $75 that:

► Informs the donor that the deductible amount of his/her contribution is limited to the

excess over the value of goods and services provided by the nonprofit

► Provides the donor with a good faith estimate of the value of the goods or services that

the donor received

► Disclosure can be furnished to donor at time of solicitation or time of receipt

► Penalty for failure to make disclosure: $10 per contribution (up to $5,000 per mailing

or fundraising event)

► Exceptions to disclosure requirement:

► Goods or services provided meet definition of “insubstantial value” (Rev. Proc. 90-12)

► No donative element to the contribution

► Only benefit to donor is intangible religious benefit (by a religious nonprofit)

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►Requirements for donors to claim a deduction

► 1. Donor must maintain a record of the contribution in the form of either:

► A bank record

► A written communication from the nonprofit

► 2. For donations of $250 or more:

► Donors must obtain and keep a contemporaneous written acknowledgment from

the nonprofit

► Contemporaneous ~ obtained by the donor no later than the date the donor files

his/her tax return

► Donor (not nonprofit) is responsible for requesting and obtaining the written

acknowledgment

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►Written acknowledgment from the nonprofit should include:

► Name of charity

► Date of contribution

► Amount of contribution

► Whether the nonprofit provides any goods or services

► If nonprofit provided goods or services, a good faith estimate of the

value of goods or services

►There’s no set form for the acknowledgment – can be letter, postcard,

email, etc.

►Tip: Help your donors – provide acknowledgments as a matter of

course

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Agenda


organizations









► 1. Just because a nonprofit organization is exempt from taxation, it

does not mean it is exempt from all laws

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Reminder:

►Just because a nonprofit organization is exempt from taxation, it does

not mean it is exempt from all laws

►Must adhere to reporting requirements

►Board members must fulfill their fiduciary duties

►Subject to laws and regulations just like any other for-profit corporation

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Questions?

►Thanks for your attention!

Joshua W. Abel

Faegre Baker Daniels LLP

300 N. Meridian Street, Suite 2700

Indianapolis, IN 46204

[email protected]

317-237-8208

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mailto:[email protected]

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Top Issues Every Lawyer Needs to Know Regarding Nonprofit Law · Takin’ Care of Business or: Board and governance considerations 2. Would you like your receipt? –Substantiating