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Q&A #169 – Must a Form 1099 be issued for a scholarship payment?
Despite common misconceptions, Treasury Regulations and Internal Revenue Service (IRS) guidance provide that most scholarship payments provided by nonprofit organizations are not required to be reported by the payor on Form 1099 (or Form W-2), regardless of whether the scholarship is a “qualified scholarship” or taxable to the recipient, so long as the primary purpose is to aid the student in pursuing their studies and not as compensation for past, present, or future services.
Q&A #168 – Is a newly formed nonprofit required to file Form 990-N for its first short tax year?
Most nonprofit organizations are required to submit a federal tax filing for their first partial or short tax year even if their tax-exempt status has not yet been approved, but there is no monetary penalty for failure to file if the organization qualifies to file the Form 990-N (e-postcard). Nonetheless, it is usually prudent to file Form 990-N for the first tax year anyway.
Q&A #167 – Does the Board of Directors have a responsibility to review staff policies?
The chief executive of a nonprofit organization usually has the primary responsibility for managing staff and human resources issues, including the development and implementation of most employee handbook policies. With some exceptions, nonprofit Boards are not expected to review and approve staff policies, but the Board’s oversight role includes a duty to take reasonable steps to confirm these policies are in place and updated periodically.
Q&A #166 – Are new nonprofits required to file BOI reports under the Corporate Transparency Act?
While the Corporate Transparency Act (“CTA”) exempts most tax-exempt organizations from the requirement to file beneficial ownership information (“BOI”) reports, there has been some confusion about whether these exemptions apply to new organizations that were just recently formed. A careful reading of the CTA statute and regulations strongly suggests that most newly formed nonprofit organizations are exempt from the BOI reporting requirements, even if their tax-exempt status has not yet been formally approved by the IRS.
Q&A #165 – How often should a nonprofit CEO provide updates to the Board of Directors?
Providing monthly Board reports that include financial reporting and progress updates is an established best practice, and this is especially recommended during periods of change and for organizations whose Boards meet quarterly or less frequently. However, CEOs and Executive Directors must be thoughtful about the frequency and their method of communicating with the Board. Providing updates more often than monthly is usually only recommended in unusual situations.
Q&A #164 – What happens if all Board member terms have expired?
It is unlikely that a nonprofit organization’s entire Board of Directors would be nullified due to a failure to hold elections, since most state nonprofit corporation statutes provide that Board service generally continues past the expiration of the Board member’s term until the Board member’s successor is elected and takes office. In the unlikely event that an organization truly has few or no Board members left to take action, there are often other mechanisms available under state law to reconstitute the Board or petition a court to appoint a legal representative.
Q&A #162 – Can nonprofit volunteers deduct the value of their services as a charitable contribution?
The value of a volunteer’s time for in-kind services donated to a nonprofit organization is not tax deductible, and an organization should never state the dollar value of a volunteer’s services in an acknowledgment letter. However, it may be appropriate to provide volunteers with an acknowledgment letter that generally describes the services they provided so that volunteers can deduct certain eligible unreimbursed expenses.
Q&A #161 – Can a foreign nonprofit organization qualify for 501(c)(3) status?
Charities formed outside of the United States may qualify for 501(c)(3) status so long as they satisfy the requirements that apply to 501(c)(3) organizations under U.S. law. This status makes it easier for foreign organizations to receive grants from U.S. private foundations and mitigate or avoid U.S. income tax on revenue received from U.S. sources. However, donors generally cannot use the charitable deduction under U.S. tax law for contributions made to organizations formed outside of the U.S., so many foreign organizations form affiliated “friends of” organizations in the U.S. for this reason.
Q&A #160 – Are nonprofit organizations subject to the Fair Labor Standards Act (FLSA)?
Many nonprofits are technically not subject to federal Fair Labor Standards Act (“FLSA”) wage and hour law requirements due to rules that limit FLSA applicability to organizations that meet certain “enterprise coverage” or “individual coverage” thresholds. However, this is often a moot point since nonprofits are usually subject to state wage and hour laws, many of which are built upon federal FLSA definitions and exemptions. Consequently, most nonprofits must monitor changes in federal FLSA rules carefully as these may have state law compliance implications.
Q&A #159 – Should a nonprofit hire an investment advisor?
While nonprofit organizations are not legally required to use a professional investment advisor to help guide the organization with their investment management, most nonprofits correctly choose to work with a professional investment advisor. Delegating management of the investment portfolio to Board members is not a wise choice because this unnecessarily exposes the organization and its Board members to fiduciary risks related to potential compliance failures and performance shortfalls.
Q&A #158 – What happens if a fraudulent Form 1023-EZ is filed for my organization?
Despite what some unscrupulous service providers may tell you, there are potentially serious penalties for submitting a Form 1023-EZ application for an organization that is clearly ineligible to do so. In addition to revocation of 501(c)(3) status, this can include criminal fines and even prison pursuant to the Internal Revenue Code’s fraud and false statements provisions (26 U.S.C. § 7206). However, if a Form 1023-EZ was fraudulently filed without your knowledge, approval, or participation then these criminal sanctions very likely will not apply.
Q&A #157 – What are the legal limits of an Executive Committee’s authority?
Executive Committees are often granted wide-ranging authority to the to act on behalf of a nonprofit organization and exercise the powers of the Board of Directors in between Board meetings. Absent additional, clarifying language in the Bylaws, committee charter, or Board resolutions, there are generally few legal limitations on an Executive Committee’s authority. However, there are some explicit and implicit limits that are important to consider
Q&A #156 – Who is considered a family member under nonprofit conflict of interest rules?
Extended family members such as aunts, uncles, and cousins generally fall outside of the technical definition of “family members” under the federal tax code provisions governing conflicts of interest involving 501(c)(3) nonprofit organizations. However, these types of relationships can certainly lead to the perception that there is a conflict and should be treated as such to avoid the risk of damaging your organization’s reputation.
Q&A #155 – Can a nonprofit convert to 501(c)(3) status from another tax-exempt status?
An organization that was previously recognized as tax-exempt under another subsection of 501(c), such as 501(c)(4) or 501(c)(6), generally may convert to 501(c)(3) status by making the necessary amendments to its Articles of Incorporation and submitting a Form 1023 application to the IRS. However, there may be complications to this process if the organization’s activities have not been consistent with 501(c)(3) status.
Q&A #154 – Are nonprofits required to have a document retention and destruction policy?
Sections 802 and 1102 of the Sarbanes-Oxley Act generally prohibit all persons, including nonprofit organizations, from destroying, falsifying, or otherwise modifying records to obstruct a federal proceeding or investigation. There is no specific requirement under federal law to have a document retention and destruction policy (sometimes called a record retention policy), but having one is a recommended best practice to prevent violations of this law and to demonstrate the organization’s commitment to transparency and accountability.