Lancaster Law Blog : Lancaster PA Lawyer & Attorney : Russell Krafft & Gruber Law Firm : Pennsylvania : Lancaster's Legal Link

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Allowing a nonprofit organization to be tax exempt provides an incredible advantage by leaving the organization with more resources to accomplish its mission, especially with charitable organizations. However, the tax-exempt status can be taken away if the organization breaks the rules. Thus, it is important for the directors, officers and employees of tax-exempt organizations to know about those rules and how they interact.

One such rule is known as the "prohibition on private inurement", which states that an organization is not operated exclusively for tax-exempt purposes if its net earnings inure, in whole or in part, to the benefit of private individuals. Okay, that is admittedly dry and probably raises more questions than it answers, but the prohibition is basically meant to prevent money or other assets of the organization from going to an individual that is not in one of the charitable classes the organization is meant to benefit (otherwise known as the "public beneficiaries"). The obvious examples are directors who grossly overpay themselves or divert funds for their private use. Inurement also occurs when a private individual benefits from any transaction with the organization that does not reflect fair market value and current economic conditions.

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The tragic events recently suffered in Haiti have spurred millions of dollars in donations from American taxpayers to relief agencies devoted to helping earthquake victims. Through special legislation enacted on January 22, 2010, those taxpayers will generally be able to claim those deductions on their 2009 returns. It is hoped that the immediate benefit will spur even more current donations.

However, there are some limitations. 

• First, because donations to qualified charities are considered itemized deductions, the new provision will be unavailable to taxpayers who utilize the standard deduction. 
• Second, qualifying contributions are limited to cash and do not include property donations.  Qualifying  cash contributions can be made by text message, check, credit card or debit card. 
• Third, to qualify, donations must be made specifically for the relief of victims in areas affected by the January 12, 2010 earthquake in Haiti, and they must be made after January 11, 2010 and before March 1, 2010. 
• Fourth, the donations must be made to bona fide, qualified charities. The IRS maintains a database of such charities, but many churches and government agencies qualify even though they are not listed. 
• Please also note that donations to foreign organizations are generally not deductible. 

Finally, it is also important to keep a record of your donation. For donations by text message, the phone bill will suffice as long as the name of the charitable organization is listed.

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The Internal Revenue Service has announced a new standard mileage rate for 2010, which is generally used to estimate the costs of operating an automobile for tax purposes. The new rate, effective January 1, 2010, is 50 cents per mile, down 5 cents from last year. In addition, the standard mileage rate for medical or moving and medical expenses has been lowered to 16.5 cents per mile, and the rate for charitable purposes remains at 14 cents per mile.

While there are generally no Pennsylvania laws requiring employers to use the IRS' rate, there may be some tax advantage for doing so. The IRS will deem employers who make qualifying reimbursements up to 50 cents per mile as meeting their accounting requirements, thus no income reporting or withholding is required for those reimbursements. However, employers need to make sure that their employees have provided adequate proof that the mileage was strictly for business use. Qualifying employees who are not reimbursed for their business mileage will be able to deduct 50 cents per mile on their individual tax returns.

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Tax-exempt and nonprofit organizations can now find a marketing opportunity in an unusual place, their tax return. It's no secret that people generally hate filling out tax returns almost as much as they hate paying their actual taxes (click here to see an amusing letter sent to the IRS by a disgruntled taxpayer). So it may come as a surprise to many tax-exempt and nonprofit organizations that they can use their well prepared tax returns for an important purpose - fundraising.

Many donors use the website GuideStar.org to access the most recent Form 990, which are the annual tax returns filed by tax-exempt organizations. This can help guide donors in assessing organizations for charitable contributions. Recently the IRS has changed Form 990 enabling it to serve as a powerful public relations tool.

For example, in Part I, Line 1, the preparer is directed to,"[b]riefly describe the organization's mission or most significant activities". This gives the preparer a great opportunity to use positive, inspirational and persuasive language to sell the organization to potential donors. Also, this portion of the tax return will likely be the first entry a potential donor may read, thus it's important to utilize this properly to promote your organization's mission. The usual droll prose used to fill out most tax returns should be avoided and, because it is a tax return, don't stretch the truth.

In Part III, Line 4 the preparer must describe how the organization's three largest programs serves its tax exempt purpose. This is another great opportunity to describe and promote exactly how the organization fulfills its mission. The description of programs should be in depth and as specific as possible. Consider answering these questions when filling out Part III, Line 4:

• Who was helped? 
• How many people were helped? 
• How many volunteers were used? 
• How much money was raised and disbursed? 
• Are there any statistical results? 

Give the potential donor confidence that his money will be well used.

Also note that in Part X, Line 1, it asks for the amount of money an organization is keeping as cash in a non-interest-bearing account. If this entry reflects a large sum of money, it gives potential donors the impression that the organization is merely sitting on the money it receives instead of using it to fulfill its mission. As a practical matter, it's best to structure the organization's finances so that little or no money should appear in this portion of the tax return.

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On Monday, August 10, 2009, I had the pleasure of serving as a faculty member for a National Business Institute presentation entitled “Legal and Financial Aspects of Tax-Exempt Organizations." It was a pleasant change of pace because, unlike most continuing legal education programs that are attended solely by attorneys, this program also targeted representatives and employees of non-profit organizations.

While mingling between sessions, I was able to meet the attendees and learn about the wide array of noble missions their organizations carry out. In hearing about those accomplishments, it occurred to me how important it is for those organizations to protect themselves so that they can continue to carry out their missions. This includes not only finding qualified board members, officers and employees, but also avoiding conflicts of interest, following the rules and regulations regarding lobbying and political activities, proper financial management, and protecting the organization from a litany of potential liabilities and pitfalls. Fortunately, we were able to address many of these issues during the seminar.

In addition, I have recently posted a checklist for a healthy non-profit organization. In the near future, I will be posting information on using the IRS Form 990 as a marketing tool for donations. I invite you to check back on the blog from time to time for other postings related to effectively running a non-profit organization.

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Maintaining a healthy nonprofit organization is essential. Not only will it help to ensure the success of your organization and your mission but also serve as a way to foster trust with supporters. I have created a checklist for nonprofit entities to evaluate the health of their organizations. This is intended as a proactive measure to help nonprofits identify and address potential issues before they become serious.

In addition, the  Pennsylvania Association of Nonprofit Organizations (PANO) has developed the Standards for Excellence Program to also provide support and education to Nonprofits to ensure the success of their mission. PANO describes the mission for the program, "To assist organizations in the implementation of the Standards for Excellence Code and Program in order to expand management capacity and demonstrate credibility in the communities served. "

• Are you incorporated as a Pennsylvania nonprofit corporation?
• Do you have up-to-date bylaws?
• Do you have an up-to-date "Conflict of Interest" policy for officers and board members?
• Do you have business income unrelated to you non-profit purpose?
• If a charity, do your organizing documents:
• If a public charity, do you:
  • receive a substantial portion of your support from government sources, publically supported charities or the general public?
  • maintain a continuous, ongoing program to solicit funds?
  • limit unrelated business income?
• If a private foundation, do you:
  • have any investment income or place limits on business holdings per year?
  • prohibit self dealing between the organization and related parties?
  • require annual distributions of income?
  • limit expenditures to those that further the organization's purpose?
• Have you applied for and/or received tax-exempt recognition from the Internal Revenue Service?
• Do you file a from 990 with the PA Department of Revenue annually?
• Do you bar distributions to the founders of the organization or substantial contributors or individuals whose compensation depends on the organization's revenues?Do you enter into joint ventures with "for profit" businesses?
• Do you have money in a non-interest bearing account?

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Matthew Grosh will be on the faculty for the National Business Institute, Legal and Financial Aspects of Tax-Exempt Organizations on August 10, 2009. This seminar is an opportunity for Nonprofit business professionals such as Attorneys, Accountants, CPAs, CFOs, Presidents, Executive Directors, Vice Presidents, Officers and Trustees, Enrolled Agents, and In-House Counsel to continue their education. The seminar will cover How to become Tax-Exempt, Financial and Tax Considerations, Lobbying and Political Activities, Changing Regulatory Environment, Ethical Considerations, Advising Directors and Officers of Tax-Exempt Organizations, and Maintaining Tax-Exempt Status.

Program Summary - "Build a Comprehensive Understand of Practical Foundational Nonprofit Concepts."

7 Benefits of Attending

• Gain practical knowledge on Form 990 to ensure your client's compliance with IRS standards.
• Save your clients money: learn about special exceptions available to nonprofits.
• Make sure your client's fundraising and political activities go off without a hitch - get an insider's grasp of regulations governing lobbying and charity work.
• Don't miss any important steps in applying for exempt status - let our faculty walk you through the process.
• Ensure your clients full disclosure by crossing the T's and dotting the I's on Form 1023.
• Find out how recent legislative efforts and court decisions will affect your practice.
• Clearly outline the duties and liabilities of officers, directors, and managers to protect your clients from inadvertently breaking the law.

If you are interested in attending you can register at the National Business Institute website.