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Q&A #78 – What’s the difference between a private operating foundation and a private non-operating foundation?
Private operating foundations are a special type of private foundation that generally devote most of their earnings and assets to running charitable programs directly, in contrast to standard private foundations that mainly make grants (technically referred to as “private non-operating foundations”). Private operating foundations are generally subject to more favorable rules than other types of private foundations, so this status is usually preferable if your organization qualifies.
Q&A #77 – Should every contract have indemnification language?
Whether indemnification language is desirable and appropriate depends on the specifics of each contract as well as each party’s bargaining leverage and tolerance for risk. It is important to think carefully about the risks that could arise from each contract and pay close attention to how the language is phrased. Depending on the circumstances, indemnification language may not be necessary, and, if drafted improperly, could cause more harm than good.
Q&A #76 – Is Form 990, Schedule B donor information required with my organization’s state charitable solicitation registrations?
The answer should be no, for now. This past summer, the Supreme Court invalidated California’s requirement to include unredacted Form 990, Schedule B donor information as part of its charitable solicitation registration law in Americans for Prosperity Foundation v. Bonta, No. 19-251 (July 1, 2021). Prior to this decision, California was one of a handful of states that required this donor information, along with New York, New Jersey, and Hawaii. All except for Hawaii have since explicitly suspended this requirement in response to Bonta, and Hawaii has not yet clarified its position.
Q&A #75 – Are there advantages to 501(c)(4) status compared to 501(c)(6) status?
Both 501(c)(4) and 501(c)(6) organizations are permitted to engage in unlimited amounts of lobbying so long as the lobbying is consistent with the organization’s tax-exempt purposes. The main advantage of 501(c)(4) status as compared to 501(c)(6) status is that there is more flexibility with regard to the organization’s governance structure. However, there are some downsides that should also be considered.
Q&A #74 – How does simple majority voting differ from other types of Board voting?
A “simple majority” generally means more than half of the votes cast, but can also refer to approval by more than half of the Directors present at the meeting (a subtle but meaningful distinction). This is the most common type of Board voting, and many nonprofit organizations use simple majority voting as the default for most Board decisions in their Bylaws. A key distinguishing feature of simple majority voting is that it only counts votes cast or Directors present, in contrast with decisions that require approval of a majority or more of the entire Board of Directors (regardless of whether some Board members abstain or are absent), sometimes called “absolute majority” voting.
Q&A #73 – What provisions should be included in an MOU for a joint program?
The first step is to decide whether a Memorandum of Understanding (MOU) or formal contract (agreement) is most appropriate for your situation. An MOU is a good choice if the parties are still in the exploratory phase of the relationship, since MOUs should be used as non-binding documents that lay out the framework for a more formal agreement that the parties intend to sign later. The terms of an MOU vary widely depending on the relationship and project, but there are some provisions that are typically found in an MOU of this type.
Q&A #72 – What is required to meet the 10% facts and circumstances public support test?
It is common for 501(c)(3) public charities to rely on the 10% facts and circumstances test as an alternative to maintaining 33 1/3% public support that is generally required under Internal Revenue Code sections 509(a)(1) and 170(b)(1)(A)(vi). However, there are certain requirements that must be satisfied, and the Form 990, Schedule A requires organizations to explain how they meet these requirements.
Q&A #71 – What’s the difference between Model A and Model C fiscal sponsorship?
There are many different models of fiscal sponsorship. Model A and Model C are the most common. In Model A, the charitable project is carried out directly by the fiscal sponsor and the people who operate the project are employees or volunteers of the fiscal sponsor. The closely related Model B is very similar, except the people who operate the project are independent contractors of the fiscal sponsor rather than employees. In contrast, in Model C the fiscal sponsor has a more limited management role that is generally limited to receiving and disbursing grants in furtherance of the charitable project.
Q&A #70 – How Can I Explain the Bottom-Line Budget Impact of Multi-Year Grants?
The answer is to take a two-pronged approach. First, prepare financial schedules that show the anticipated annual usage of the multi-year grant for the life of the grant. Second, using this information, be thoughtful and assertive with your messaging to your Board. Communicating in a multi-year format will help to move attention away from the impact of a multi-year grant on any single-year budget.
Q&A #69 – Can a grant from a previous grantor be treated as an unusual grant?
Large grants are usually a reason to celebrate, but some grants are so large that they pose significant problems for an organization’s public support tests. The ability to exclude “unusual grants” from the public support test can be extremely helpful in these situations. The fact that a grantor or funder has made contributions in the past is a significant factor weighing against unusual grant treatment, but this by itself is not necessarily disqualifying.
Q&A #68 – What does it mean for a business activity to be “unrelated” for UBIT purposes?
In general, an activity triggers unrelated business income tax (UBIT) if it is: (1) “unrelated” to the organization’s tax-exempt purpose; (2) a “trade or business”; and (3) “regularly carried on.” It is a common misconception that using the revenue from a business activity solely for programs in furtherance of the mission is sufficient to make the activity “related” and thereby avoid UBIT. How an organization uses the funds is irrelevant for UBIT purposes, and a business is not considered “related” unless the activity itself has a substantial causal relationship to the achievement of the organization’s tax-exempt purpose.
Q&A #67 – When does sponsorship cross the line into advertising?
The difference between sponsorship (or more precisely, acknowledgment of your corporate sponsors) and advertising is addressed in the unrelated business income tax (“UBIT”) rules. While revenue from advertising typically triggers UBIT, revenue from sponsorship is shielded from UBIT if you adhere to specific rules. The key principle is that the acknowledgment of the sponsor must generally avoid qualitative or comparative descriptions of the sponsor’s business, products, or services.
Q&A #66 – Must a charity’s donation acknowledgement letter reflect the value of a celebrity’s presence?
The Treasury Regulations related to “quid pro quo” contributions (summarized in IRS Publication 1771) generally require that charities include in the acknowledgment letter a good faith estimate of the fair market value of goods or services provided to a donor in exchange for the donation, and only the portion of the donation that exceeds this fair market value is eligible for the charitable deduction. However, these regulations provide that a celebrity’s presence generally does not need to be taken into account when determining fair market value.
Q&A #65 – Is it legal to implement a “use it or lose it” annual PTO policy?
Whether an organization is allowed to implement a “use it or lose it” policy for annual paid time off (PTO), under which employees would forfeit unused PTO by the end of each year, depends on the state laws applicable to where the employees work. This can be a difficult question with respect to PTO policies that combine vacation and sick leave, as some states have different rules for each type of leave. In general, it is usually permissible to have a limit on the carryover of unused leave or a cap on maximum leave accrual, but it is important to think through the details and carefully review the laws of all applicable states.
Q&A #64 – Is it appropriate to take an official action in executive session?
Whether it is appropriate to take an official action during executive session depends on what your organization and Board understands executive session to mean. “Executive session” generally refers to a private meeting of the Board (and perhaps select other invitees), which is intended to provide a space where Board members can hold candid discussions on sensitive or confidential matters. Executive session is a useful and appropriate format for some issues, but it is important to be clear about whether executive session is intended to be “off the record,” as official Board actions must ultimately be documented in the meeting minutes.