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Member of Russell Bedford International, a global network of independent professional service firms.
CPA | Manager
2024 ushers in significant regulatory relief for Illinois nonprofit organizations, thanks to Public Act 103-0121. This new legislation raises the contribution revenue thresholds that determine the filing requirements for nonprofits in Illinois, potentially reducing the financial obligation for smaller organizations.
The changes to the contribution revenue thresholds for Illinois not-for-profit organizations are as follows:
The changes brought by Public Act 103-0121 apply to organizations with an initial due date (without considering any extension) occurring after January 1, 2024. Consequently, this requirement applies to organizations with a fiscal year ending on June 16, 2023, and later.
One of the advantages of this regulatory update is the potential cost savings for nonprofits. Reviewed financial statements typically cost less than audited financial statements. This reduction in expenses could be a substantial benefit for smaller organizations operating on tight budgets.
However, nonprofits should consider the long-term implications of switching from audits to reviews. If an organization has decreased revenue in the current year but anticipates revenue growth in the future, it might be more cost-effective to continue with audits despite the immediate savings from reviews. This is especially true if grantors or financing arrangements require audited financial statements. Initial or resumed audits require more setup time and effort from both clients and auditors, so maintaining continuity with audits could lead to greater efficiency and reduced future workload.
As fiscal year-end approaches, organizations should begin to review their year-to-date activity. A proactive review will help in deciding what if any services are needed. Ensuring that books and records are in order will facilitate efficient and effective services from a CPA firm. Monthly bank reconciliations completed through the fiscal year-end date are a good starting point. These reconciliations are a good indicator to CPAs of an organization’s readiness for an audit.
If you are a nonprofit and want to learn more about how Public Act 103-0121 may impact you, please reach out to the CK nonprofit team at (630) 953-4900.
Illinois lawmakers passed a new bill (HB1197) this summer which increases the threshold requirements for obtaining an “Audited” financial statement by an independent accountant for nonprofit organizations (NFPs). The bill also sets new requirements for NFPs that sit between the old threshold and the new threshold to get “Reviewed” financial statements. The new law becomes effective for tax years beginning January 1, 2024 and currently set to expire after tax years ending December 31, 2028.
Previously, most NFPs soliciting for contributions to the general public were required to get “Audited” financial statements if their total contributions for an annual period were above $300,000. The new bill increases the Audit threshold to $500,000.
However, the bill sets a new requirement for those NFPs with total contributions between the old threshold of $300,000 and the new threshold of $500,000 to get “Reviewed” financial statements. This means that the NFPs resting in this window are not completely off the hook for getting an independent sign off on their financials. However, the accounting and administrative burden should be less expensive and less time consuming since a Review does not require as much validation or substantiation by an independent accountant as an Audit.
The new law was enacted in May of 2023 and Illinois is still ironing out the kinks. There may be additional guidance to follow as forms are reworked for the 2023/2024 filing season. CK will make sure to update you on any amendments or guidance related to the bill as it becomes finalized by Illinois lawmakers and the Attorney General’s Office.
Reminder:
For the purposes of the reviewed and audited financial statement thresholds “Contributions” include all funds raised by solicitation activities to the general public. This includes donations, pledges, program service revenue, fundraising events, etc. However, there is an exception in the law to exclude admission/ticket revenue for music or theatrical performances by nonprofits organized under 501(c)(3) with the mission/purpose of providing live public performances on a regular basis.
For more information on the increase in the Audit threshold, the new Review requirements, or understanding on what constitutes “Contributions” for the purpose of these thresholds, please contact the CK nonprofit team by calling (630) 953-4900.
This time of year may have you wondering, how much do charitable donations reduce taxes? And what opportunities are there this year due to tax law changes? The good news is, due to the pandemic, tax rules have been adjusted to enhance the tax benefits of charitable giving. Here’s what you need to know:
The most recent change was incorporated within 2020’s CARES Act, which Congress passed to provide relief to those impacted by the global pandemic. In addition to providing paycheck protection for workers and support for small businesses as they struggled to survive the economic impact of coronavirus, the CARES Act also boosted the limit on cash donations from 60% to 100% in some situations. This increase is only valid for tax year 2020 and is limited to cash contributions given to charities that are not donor-advised funds or supporting organizations. Congress also is allowing a limited (up to $300) 2020 cash charitable contribution deduction for non-itemizers.
If you’re over 70.5 and you like to make charitable contributions directly from an IRA, you are able to donate up to a maximum of $100,000 per year via a Qualified IRA Charitable Contribution (QCD). This contribution will count towards your required minimum distribution, and because the distribution goes directly to the charity, it doesn’t increase your income and it still allows the donor to take advantage of the increased standard deduction.
Speaking of the increased standard deduction, when the 2017 Tax Cuts and Jobs Act (TCJA) boosted the standard deduction to $12,400 (for 2020) for individual taxpayers and twice that for married couples filing jointly, it cut the number of people taking itemized deductions, effectively removing an incentive for charitable giving. With only 13.7% of taxpayers estimated to have itemized their 2019 taxes, we have previously written about the benefit of “bunching”. Effectively, individuals can bunch their donations into a single year, thus allowing them to continue giving to the charities that they believe in while still taking an itemized deduction.
While the TCJA’s boost in standard deduction decreased the percentage of people itemizing, at the same time it boosted the deductibility of cash contributions being made from 50% to 60% of the donor’s adjusted gross income, making it more attractive for individual donors to give cash gifts.
Finally, in late 2019 Congress passed the SECURE ACT, which made a couple of notable changes, including pushing the age at which retirement plan participants need to take required minimum distributions (RMDs) from 70½ to 72, and taking away the ability for account holders to designate non-spousal beneficiaries who could hold onto them over the course of their entire lifetimes, taking distributions at will. Under the SECURE Act, those distributions need to be completed within 10 years’ time, making it a potentially better option to making the beneficiary a lifetime-income charitable vehicle in the form of either a remainder trust or a gift annuity funded with the account proceeds.
By indicating a beneficiary who will receive income over the course of their lifetime, you get the advantage of accomplishing the initial intent of giving to the beneficiary, and then upon the beneficiary’s death, whatever is left in either an IRA or a life insurance policy structured in this way gets distributed to the original benefactor’s designated charity.
Charitable contributions are an important part of our individual legacy. And when structured properly, they can also offer tax advantages. For more information on how you can leverage the new tax laws to benefit causes you care about as well as your own personal finances, contact Cray Kaiser today.
Please note that this blog is based on tax laws effective in December 2020, and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Please note that this blog is based on laws effective in August 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
With many nonprofits beginning a new fiscal year on July 1, it’s a great time to stay up to date with the ever-changing nonprofit landscape. This year in particular has presented many challenges amidst the COVID-19 pandemic, including the administrative extension and delays for government agencies. Although deadlines in 2020 continue to be moving targets, we’d like to provide you with the most current provisions and timelines to keep you updated and allow you to be proactive in your tax preparations.
As you may already know, the IRS extended all returns with due dates falling in the April to June window to July 15, 2020. This included all 2019 calendar year nonprofits. Any extensions that were filed only extended the returns to the original extension due dates. For calendar year 990s, the extension deadline is still November 15, 2020 unless Congress makes further adjustments.
Although many organizations are already electronically filing their returns, the IRS has made it mandatory to e-file for tax years beginning July 1, 2019. This applies to all Form 990 and 990-PFs, unless you’re one of the few covered by an exception. Form 990-EZ filers have an additional year to meet the e-file mandate.
The IRS and treasury department announced proposed regulations, 85 FR 23172, under the Tax Cuts and Jobs Act (TJCA). These regulations provide guidance for tax-exempt organizations with more than one unrelated trade or business on how to calculate unrelated business taxable income (UBTI). They also provide guidance on identifying separate trades or businesses, including investment activities, as well as certain other amounts included in UBTI.
The CARES Act increased limitations on charitable contributions by individuals and corporations. Individuals were increased from 60% of AGI to 100% and corporations were increased from 10% to 25% of taxable income. For those that do not itemize, the CARES Act provided a permanent deduction which allows qualified contributions of up to $300 for individuals that normally use the standard deduction. For these purposes, donations to supporting organizations and donor advised funds are not considered qualified charitable contributions.
Unfortunately, the Illinois Attorney General’s office has been nearly dormant during the COVID-19 pandemic. Their offices remain closed to walk-ins and there are limited employees working. Therefore, process delays and response turnaround times are expected to be delayed, especially if correspondence is in paper format.
Illinois did not extend the filing deadline related to COVID-19, therefore Annual Reports are still due six months after the close of the organization’s tax year. The first 60-day extension was due by June 30, 2020 for calendar year filers. The second extension is due by August 30, 2020 and requires additional support materials, including copies of the original federal extension, draft financial statements, and a draft copy of the AG990-IL. The additional requirements encourage organizations to get their AG990 returns completed before the second extension deadline.
If you have any questions about these updates and how they impact your nonprofit organization, please don’t hesitate to contact Cray Kaiser. Our nonprofit team is ready to assist you.
The CK team gets many calls about crowdfunding and the taxability around the money raised. We recently shared a blog about the basics of crowdfunding, specifically for nonprofits, but wanted to elaborate a little more about the tax implications and tax consequences of crowdfunding.
Many crowdfunding platforms such as GoFundMe, Kickstarter and Indiegogo have fees ranging from 5% to 9%. Each platform specifies its own charges, limitations, and withdrawal processes. And in addition to those fees, funds raised may be taxable, depending on the purpose of the campaign. Here’s how each type of crowdfunding goal is taxed:
When an entity raises funds for its own benefit and the contributions are made out of detached generosity (and not because of any moral or legal duty or the incentive of anticipated economic benefit), the contributions are considered tax-free gifts to the recipient.
On the other hand, the contributor is subject to the gift tax rules if he or she contributes more than $15,000 to a particular fundraising effort that benefits one individual. In that case, the contributor is required to file a gift tax return. Unfortunately, regardless of the need, gifts to individuals are never tax deductible.
A “gift tax trap” occurs when an individual establishes a crowdfunding account to help someone else in need (the beneficiary) and takes possession of the funds before passing the money on to the beneficiary. Because the fundraiser takes possession of the funds, the contributions are treated as a tax-free gift to the fundraiser. However, when the fundraiser passes the money on to the beneficiary, the money then is treated as a gift from the fundraiser to the beneficiary; thus, if the amount is over $15,000, the fundraiser is required to file a gift tax return and reduce his or her lifetime gift and estate tax exemption. Some crowdfunding sites allow the fundraiser to designate a beneficiary so that the beneficiary has direct access to the funds which keeps the fundraiser from encountering any gift tax problems.
Gifts to specific individuals, regardless of the need, are not considered a charitable contribution under tax law (i.e. raising funds to help pay for someone’s funeral expenses). Another example, which includes a little tax twist, would be raising money to help someone pay for their medical expenses. Because it is a gift, it is not taxable to the recipient, but if the recipient itemizes their deductions, any amount of the gift the recipient spends to pay for their or a spouse’s or dependent’s medical expenses can be included as a medical expense on the recipient’s Schedule A.
Even if the funds are being raised for a qualified charity, the contributors cannot deduct the donations as charitable contributions without proper documentation. Taxpayers cannot deduct cash contributions, regardless of the amount, unless they can document the contributions in one of the following ways:
Thus, if the contributor is to claim a charitable deduction for the cash donation, some means of providing the contributor with a receipt must be provided.
When raising money for business projects, two issues must be contended with: 1) the taxability of the money raised and 2) the Security and Exchange Commission (SEC) regulations that come into play if the contributor is given an ownership interest in the venture.
Maybe. It depends on the aggregate number of backers contributing to the fundraising campaign and the total amount of funds processed through third-party transaction companies (i.e. credit card, PayPal, etc.). These third-party processors are required to issue a Form 1099-K reporting the gross amount of such transactions. There is a de minimis reporting threshold of $20,000 or 200 reportable transactions per year. It all depends on if the third party follows the de minimis rule.
If you have questions about crowdfunding-related tax issues, please contact Cray Kaiser today.
Whether you’re an established nonprofit, a concerned family member, or just someone with an idea and the drive to achieve it, crowdfunding can be an effective way to raise money and awareness. These days all it takes is a cause, an email address, and social media to start raising funds. If done properly you might find yourself meeting your goals in no time. But before you get started with your crowdfunding endeavor, especially as a nonprofit organization, there are a few tips and tax considerations to consider.
Crowdfunding allows people to raise awareness and money for an organization’s cause via online campaigns designed to attract support and donations. But it’s not exclusive to nonprofits – crowdfunding websites can be set up for start-up companies, entrepreneurs, and established businesses too. So, if you’re a nonprofit looking to crowdfund, be sure to pick an online platform that is geared toward or entirely dedicated to nonprofits. You’ll want to make sure the platform speaks to your intentions and your potential donors.
In order to create a crowdfunding page, you will need to be vetted by the sponsoring platform by describing your cause and intentions. You will also have to provide personal information so that they can hold someone accountable for the actions of the site. Many of the available crowdfunding platforms charge a basic fee and the fees vary across providers. Some platforms also share donor information with other businesses so be sure to investigate which platform fits your cause, budget, and donor needs before making a final decision.
Creating your page is only the first step. In order to increase the reach and impact of your campaign, you must also share the crowdfunding site across the multiple social media outlets you belong to such as Facebook, LinkedIn, Instagram, etc. Consider other ways that you can spread your message such as an email blast to your existing supporters or a direct mail campaign. Sharing your cause with as many people as possible will help it gain traction as your message is exposed to more and more people. You never know who may come upon your page and feel as passionate about your cause as you are!
Once donations start rolling in, you should set up a separate bank account to segregate all the money raised from the crowdfunding site. Do not comingle any of the funds with a personal or individual account. This can be construed as fraudulent and misleading by donors and potential authorities. Many crowdfunding platforms set up protocols to prevent these types of actions and deter fraudulent people. You should also note that there is normally an adjustment/waiting period for withdrawing the money raised. Sometimes crowdfunding platforms require you to reach your goal before any funds can be withdrawn.
Most states require fundraising registration for any organization or person that plans to solicit the general public for donations in their state. In Illinois, you must register with the Attorney General even if you only plan to raise $1.00. However, there are some exemptions for medical or personal funds raised on behalf of a singular individual. All other organizations soliciting donations must apply for charitable status whether raising funds in-person or online. Unfortunately, this will be the case for many states until they revise their laws for online crowdfunding.
In most cases, the funds you raised will not classify as a charitable donation. You need to go through a very formal process of registering your organization (or cause) as a tax-exempt entity with the IRS and the related state agency in order to receive charitable status. If you haven’t registered for tax exemption, then the revenue raised on the crowdfunding site will be considered gifts with no tax benefit to the donors. Also, if any one donor contributes more than the gift tax exempt threshold (currently $15,000) they will be required to file a gift tax return. This may not be an issue if you are only trying to raise a limited amount of funds. However, if your goal is to turn your cause into an established organization you may want to consider registering for tax exemption.
If you are preparing your own nonprofit crowdfunding imitative and would like assistance with registering your tax-exempt organization or making sure your crowdfunding is properly setup, please contact Cray Kaiser today. Our team would be glad to help you make your nonprofit crowdfunding efforts as impactful as possible!
Click here to read about nonprofit crowdfunding tax consequences.
As the end of the year approaches and the holiday season brings on the spirit of giving, we will all see an uptick in the number of charitable solicitations arriving in our inboxes. And since some charities sell their contributor lists to other charities, frequent contributors may find themselves besieged by requests from unfamiliar organizations.
As a result, here are three tips to keep in mind as you make charitable contributions:
Be careful. Scammers are out there pretending to be legitimate charities. And they’re looking to take advantage of your generosity for their gain.
When making a donation to a charity with which you’re unfamiliar, you should take a few extra minutes to ensure that your gifts are going to a good cause. The IRS has a search feature, the Tax Exempt Organization Search, which allows people to find legitimate, qualified charities to which donations may be tax-deductible. Note that you can always deduct gifts to churches, synagogues, temples, mosques, and government agencies — even if the Tax Exempt Organization Search tool does not list them in its database.
More and more, organizations and communities are also using crowdfunding campaigns to fundraise and connect with potential donors. While the vast majority of these campaigns are legitimate, be aware that not all crowdfunding donations are tax deductible. If a qualifying charity or religious organization is behind the campaign and receiving the funds, your donation will likely be treated as a regular tax-deductible contribution. But if an individual, business, or anything else that’s not a charity is receiving the funds, then the IRS would treat the donation as a non-deductible gift rather than a deductible contribution. Common examples of non-deductible gifts would be for campaigns to raise funds for a community members’ medical expenses, or to help local businesses recover from natural disasters. These campaigns may be worthy of support, but they are not tax deductible unless backed by a qualified charity.
Here are some other ways to ensure your contributions go to legitimate charities:
Contributions to charitable organizations are deductible if you itemize your deductions on Schedule A. Generally, the deduction is the lesser of your total contributions for the year or 50% of your adjusted gross income. However, the 50% is increased to 60% for cash contributions in years 2018 through 2025. Lower percentages may apply for non-cash contributions and contributions to certain types of organizations. Itemized deductions reduce your gross income when determining your taxable income.
However, with the increase in the standard deduction as a result of the 2017 tax reform, many taxpayers are no longer itemizing their tax deductions (because the standard deduction provides a greater tax benefit). For those in this situation, there are two possible workarounds:
Bunching Deductions: As a rule, most taxpayers just wait until tax time to add everything up and then use the higher of the standard deduction or their itemized deductions. If you want to be more proactive, you can time the payments of tax-deductible items to maximize your itemized deductions in one year and take the standard deduction in the next. Click here to learn more about bunching.
Qualified Charitable Distributions: Individuals age 70½ or older – who must withdraw annual required minimum distributions (RMDs) from their IRAs – are allowed to annually transfer up to $100,000 from their IRAs to qualified charities. Here is how this provision works, if utilized:
1) The IRA distribution is excluded from income;
2) The distribution counts toward the taxpayer’s RMD for the year; and
3) The distribution does NOT count as a charitable contribution deduction.
At first glance, this may not appear to provide a tax benefit. However, by excluding the distribution, a taxpayer lowers his or her adjusted gross income (AGI), which helps with other tax breaks (or punishments) that are pegged at AGI levels, such as medical expenses when itemizing deductions, passive losses, and taxable Social Security income. In addition, non-itemizers essentially receive the benefit of a charitable contribution to offset the IRA distribution.
Charitable contributions are not deductible if you cannot substantiate them. Forms of substantiation include a bank record (such as a cancelled check) or a written communication from the charity (such as a receipt or a letter) showing the charity’s name, the date of the contribution, and the amount of the contribution. In addition, if the contribution is worth $250 or more, the donor must also get an acknowledgment from the charity for each deductible donation.
Non-cash contributions are also deductible. Generally, contributions of this type must be in good condition, and they can include food, art, jewelry, clothing, furniture, furnishings, electronics, appliances, and linens. Items of minimal value (such as underwear and socks) are generally not deductible. The deductible amount is the fair market value of the items at the time of the donation; as with cash donations, if the value is $250 or more, you must have an acknowledgment from the charity for each deductible donation.
Note that the door hangers left by many charities after picking up a donation do not meet the acknowledgement criteria; in one court case, taxpayers were denied their charitable deduction because their acknowledgement consisted only of door hangers. When a non-cash contribution is worth $500 or more, the IRS requires Form 8283 to be included with the return, and when the donation is worth $5,000 or more, a certified appraisal is generally required.
Special rules also apply to donations of used vehicles when the claimed deduction exceeds $500. The deductible amount is based upon the charity’s use of the vehicle, and Form 8283 is required. A charity accepting used vehicles as donations must provide Form 1098-C (or an equivalent) to properly document the donation.
No matter what time of year you find yourself making charitable contributions, we encourage you to do it responsibly. Unfortunately, there are complexities when it comes to the spirit of giving and there are individuals out there who are looking to take advantage of well-intentioned people. If you have any questions related to charitable giving, please contact Cray Kaiser today. We’d be happy to help!
Please note that this blog is based on tax laws effective in December 2023, and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Each day in the life of a nonprofit is spent managing limited resources, often requiring staff members to accept responsibility for tasks both inside and outside of their areas of expertise. That means that any interruption to operations such as staff termination, illness or other unforeseen events can greatly impact the ability to achieve the organization’s mission. And in those moments, nonprofits need additional support to keep basic operations running smoothly.
That’s where Cray Kaiser comes in. Our firm has been a significant resource to nonprofits when they’ve faced an unplanned crisis. When staff responsibilities are stretched thin, it’s vital that financial operations remain uninterrupted. But that’s not always the case, especially when the single team member responsible for accounting activities is unavailable.
Below is an example of how we recently worked with a nonprofit organization on their accounting services and the positive impacts it had on their operations.
One day, a local nonprofit organization found all of their accounting and financial reporting functions come to a halt due to an unplanned staff exit. The organization relied upon this single individual to perform a substantial portion of the day-to-day accounting tasks. And then suddenly, at a moment’s notice, the ability to pay vendors, access the accounting system and prepare for the year-end audit was lost.
Vendors were becoming impatient with delayed payments. The board was left unprepared for an upcoming external audit. The ability to secure continued funding was at risk. The problem had escalated to a crisis almost immediately. That’s when CK was called in.
Our first action was to work with the executive team to develop and implement a strategy to restore all accounting functions as soon as possible. Within a few days, we were able to get the backlog of vendor payments current, a check disbursement process streamlined and authorization levels more defined.
Then, our focus and attention shifted to the financial reporting process. Through this process, we found that significant time was spent in managing charitable giving with manual spreadsheets and that the donor reporting was non-existent. We identified and recommended best practices that enabled the organization to streamline reporting, strengthen internal controls and provide donors confidence that funding was allocated to the appropriate programs and activities.
Based upon these recommendations, CK worked with a third-party software provider and the nonprofit organization to implement a new accounting system. The addition of this software helped streamline manual processes and reduce organizational resources devoted to recordkeeping. Now, key donor reports are just a click away and transactional postings are fully integrated, requiring less manual journal entries into the system.
Finally, our nonprofit client was also feeling pressure for an upcoming year-end audit. As auditors ourselves, we had a clear understanding of the work papers and disclosures that would need to be provided during the audit process. This enabled us to assist the organization in planning for the audit by meeting with the new audit firm, preparing work papers and assisting the auditors with key disclosures for the financial statements. This knowledge and experience allowed us to educate the management team on the importance of providing a well-defined audit trail for transactions including up-to-date accounting procedures. At the end of the audit, our client received an unmodified opinion despite the significant personnel change.
Our relationship with this nonprofit client continues to be strong today not just because of the work performed in their time of need, but more importantly, through our efforts of developing strong lines of communication with the management team and board of directors. Throughout the process, we were there to provide vital communications and support, whether it was a conference call or our physical presence in the board meetings.
CK takes great pride in weathering the storm with our clients and being able to share in their successes. As for this client, we continue to provide weekly onsite visits for check processing, monthly reporting and annual audit preparation services. The organization continues to receive unmodified audit opinions and we help keep them updated on new regulations and standards affecting the industry. From time to time we even step in to provide advisory services such as cash management, payroll processing and customized reporting for various committees such as in the case of fundraising efforts.
Accounting services are a growing need for many organizations, whether a nonprofit or a closely held company, and they can be customized to meet your specific goals and objectives (even as they change and evolve).
Please contact Cray Kaiser for additional information on how these services can help you or click here to learn about our Accounting Services.
If your tax-exempt nonprofit organization utilizes annual fundraising events to raise money, you’re not alone. Many nonprofits host dinner galas, golf tournaments, runs/walks, carnivals, concerts, etc. to raise awareness and funds for their cause. And for many small to mid-size nonprofits, these special events are major sources of revenue that support internal operations which deploy the organization’s mission. However, with these events comes additional recordkeeping and IRS reporting responsibilities that many organizations overlook. Here are a few ways to ensure your fundraising event is in compliance with the IRS:
Contributions received from fundraising events are different from ordinary charitable contributions received throughout the year. Ordinary contributions are made without any expected benefit in return and they are fully deductible on a donor’s income tax return.
On the other hand, event contributions are only partially deductible because attendees typically receive something in return for their donation (i.e. meal, golf greens fee, show attendance, etc.). Because of this “quid pro quo” contribution, only the portion over and above the benefit received is considered a charitable donation.
Here’s an example: Your nonprofit is hosting a gala. Tickets cost $150 per person and each attendee will receive dinner and live music. The fair market value of the dinner and music is deemed to be $50. Therefore, the attendee is purchasing a $50 meal (purchased good) and contributing $100 to your organization (charitable contribution).
Due to the infrequent nature and fundraising aspects of special events, the IRS requires them to be reported separately on the Form 990 tax return. The isolation of special events preserves the integrity of the financial information related to the organization’s program activities. This allows readers of the Form 990 to get a clear financial understanding of how the organization utilizes funds for their mission activities.
In order to facilitate this requirement, the organization needs to segregate and track all revenue and direct expenses associated with each fundraising event. In addition to segregating activities, the charitable portion of each attendee’s purchase must be determined. These contributions are then stripped from the fundraising event and shown elsewhere on the Form 990 return. Many times, this leads to the fundraising event reporting a loss on the face of their tax return.
Although uncomfortable to the organization, showing a loss from a fundraising event is a very common occurrence. When the contributions are combined with the net income from the fundraising event, it becomes clear that the events are normally very successful and raise thousands of dollars. But with that success comes added IRS compliance!
If an organization raises over $15,000 from fundraising events, there is an added responsibility of preparing Schedule G with Form 990. This schedule details the revenues and costs associated with each fundraising event.
However, tax return reporting isn’t the only compliance requirement for fundraising events. If the purchase price of a ticket for any fundraising event is greater than $75, the organization must include a statement with or on the face of the ticket stating the fair market value of the benefit received. In the case of our example, the ticket would read:
“Thank you for your cash contribution! You received goods and/or services valued at $50 with your contribution.”
This ensures the donor is aware that his or her deductible contribution is only $100 and ensures that your organization is complying with IRS rules.
If done correctly, fundraising events can be a powerful and exciting way to celebrate your nonprofit’s accomplishments or introduce your mission to new contributors. Fundraising events can also be seen as great networking opportunities or chances to give the casual donor an additional reason to support your cause.
If you would like to learn more about fundraising events or have any questions, please contact the nonprofit team at Cray, Kaiser. We can ensure your organization has the right resources in place to make your next fundraising event a success!
Click here for more nonprofit resources.
“What do you mean we have to file a tax return? I thought we were tax exempt!” Barring any unrelated business income tax and other excise taxes, nonprofit organizations normally ARE exempt from taxation. But they are NOT exempt from filing an informational return. The Form 990, Return of Organization Exempt From Taxation, and its related schedules is actually one of the most complex returns the IRS requires U.S. organizations to prepare and file.
WHY Nonprofits Have to Complete a Form 990
Completing the Form 990 is time consuming and sometimes challenging, but the IRS has valid reasons for requiring it. With the benefit of zero taxation comes dishonest applications from organizations trying to defraud the system. This leaves a huge burden on the IRS and many state agencies to create methods and filing requirements to deter and identify these fake organizations. The Form 990 and other agency registration programs like GuideStar, Tax Exempt Organization Search, and various state databases help create a stable and reliable environment for informed donors to contribute nearly $500 billion annually.
This is why filling out the Form 990 timely and accurately is critical to all nonprofit organizations trying to comply with IRS requirements, validate their exempt purpose, and attract responsible donors. Errors in filling out the form can lead to misinterpretation of your organization or worse: an assumption that you may be one of the fake organizations.
HOW to Avoid Common Mistakes
Here are 11 common errors that many 501(c)(3) organizations can make that may have unintended consequences such as notices, audits, or revocation.
1) Failure to file: Failure to file for three consecutive years results in automatic revocation of your tax-exempt organization with the IRS. This will cause you to go through the entire application process for exemption all over again! And in some states, your status will be revoked within a much smaller time frame.
2) File the right return: The IRS understands the hardship it imposes on tax exempt organizations to file and has made varying levels of returns to help smaller organizations comply. The following are the income thresholds and guidelines for which return you should file:
-990-N (Postcard) – Most small organizations with less than $50,000 of revenue can satisfy their annual reporting requirements by simply submitting an online questionnaire and updating important contact information.
-990-EZ – This is the condensed version of the cumbersome Form 990. It applies to midsize organizations with revenues greater than $50,000, but less than $200,000 and assets less than $500,000. This is a consolidated four-page return that minimizes much of the complexity of the full Form 990. However, all required schedules must still be completed in full if they pertain to the organization.
-Form 990 – For larger organizations that surpass the thresholds for filing any of the other smaller returns, this complex 12-page return covers many different areas of the organization from the annual financial data to the qualitative information regarding internal controls, board members, governance, and management.
3) Hasty Mission Statement: Would you contribute to an organization that described their mission as “charitable activities”? Most donors wouldn’t since it’s lacking description and valuable information. You may not know it, but many informed donors use IRS resources, including your 990, to vet your organization before donating. GuideStar, the IRS database for nonprofit data, publishes every 990 filed under your organization. Pretend the IRS is your biggest donor and prepare your mission statement with them in mind. Your 990 may be reaching your biggest donors!
4) Combining program service accomplishments: Part III of the Form 990 asks for descriptions of your biggest program accomplishments. Don’t fall in the trap of consolidating everything you do into one all-inclusive program. For example, if you provide training services and also provide health services at a discount, these are two separate programs. Be sure to write about them separately and use as much detail as possible (see #3).
5) Understand the checklists: Part IV through Part VI are checklists, statements, and disclosures for your organization to fill out and provide understanding to the IRS. These sections identify the proper schedules you should be filling out, your activity compliance, and how you manage your organization. When completing these questionnaires, understand that a “yes” normally signifies a supplemental schedule to be filed. And in the compliance and governance sections a “no” response may mean you have no controls on your organization. Even if your accountant is preparing the return for you, they will need your input in properly responding to these sections.
6) Compensation: Part VII requires that you show all compensation paid to directors and officers. If you pay any one person more than $150,000, you must fill out Schedule J.
7) Revenue Classification: The average for-profit business entity normally has 10 lines or fewer to report income whereas nonprofit organizations have an entire page dedicated to revenue classification. Part VIII has over 15 lines, multiple subsets, and four different categories that revenue may apply to. Be sure you’re putting the right amounts on the right lines and categories.
-Revenue derived from the activities listed in your mission statement, contributions and program services, should be categorized as “Related or Exempt Function Revenue”
-Certain investment income should be categorized as “Revenue Excluded from Tax”
-If you have revenues that are neither investment income or pertaining to your mission, they are considered “Unrelated Business Revenue”
8) Unrelated Business Taxable Income (UBTI): UBTI are revenues derived NOT in the course of your exempt activity and are subject to taxation at corporate rates. Advertising in your monthly newsletter, a coffee shop in your lobby, or even an investment in publicly traded partnerships may be triggering UBTI. If you have these revenues you may need to file and pay tax on a Form 990-T. But BE CAREFUL, if you have more than 15% of your total revenues coming from these sources, you run the risk of being seen as a business entity and losing your tax-exempt status.
9) Expense Classification: If you thought the revenue reporting was complex, Part IX, the Statement of Functional Expenses, is widely considered the toughest part of Form 990. The IRS requires all 990 filers to breakout their expenses into three categories: Program, Management & General, and Fundraising.
-Program expenses are directly related to your tax-exempt purpose (program supplies)
-Management & General expenses are related to the proper running of your organization or assets and not specifically related to your programs (accounting or filing fees)
-Fundraising expenses are related to raising revenues (mailings and solicitations)
-You may think that everything you do is related to your exempt purpose, but it is not. The bigger your organization is, the more management is required. The purpose of this part is to show the IRS, and donors, where every dollar contributed is going.
Although it would be nice to throw everything in Programing and show 100% productivity, that is actually a sign that either the Form 990 was not prepared correctly or that someone is intentionally misrepresenting their activity. Depending on your organization’s industry standard, percentage application is around 80% Program, 15% Management, and 5% Fundraising. But don’t just multiply each expense by those percentages, that too is a red flag. For each indirect expense, determine the cost driver and apply a methodology for categorizing that expense.
10) Fundraising Activities: Gala dinners, golf outings, or even a bake sale are all considered fundraising activities. These should be broken out from your normal related tax-exempt activities. There’s a special location in Part VIII to report these revenues. Consider these subsets from your normal financial activity in that they should be handled independently from your other activities. The bright side is that you don’t have to include it on Part IX, Statement of Functional Expenses. Also make sure to segregate contributions raised from these events from the actual price of tickets sold for the event. Fundraising activities generating revenues greater than $15,000 require that you fill out Schedule G.
11) Matching: Several sections of the Form 990 or Schedules should match total lines reported elsewhere on the Form 990. Having these areas show different amounts looks sloppy. Make sure the following areas match:
-Part I is a summary of all amounts coming from different areas of the 990.
-Part III, line 4e, Total Program Service Expenses should match Part IX, line 25, Column B, Total Program Service Expenses.
-Part VII, Total Compensation (Column D) should match Part IX, line 5.
-Schedule D, Part VI, Land, Buildings, and Equipment should match Part X, Line 10 of Form 990.
The Form 990 isn’t just an annual filing requirement, it can be one of your biggest marketing tools. Not filing, improperly filing, or hastily filing the Form 990 can create many unintended consequences for your organization. Remember, it’s not just the IRS looking at your Form 990, so are your potential donors! Use the Form 990 as an opportunity to tell your nonprofit’s story.
Cray Kaiser is always here as a resource for you. Please contact us today if you have any questions about filing Form 990.
