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Q&A #108 – Can interns be paid as independent contractors?
While nonprofit organizations are usually afforded more latitude than for-profits to have unpaid volunteer interns, the decision to pay interns a stipend in lieu of employee wages raises difficult issues. Most paid interns would not fit the criteria for independent contractor treatment under the applicable laws. This means that paid interns must generally be treated as W-2 employees subject to minimum wage laws, payroll tax and withholding laws, and other requirements applicable to employees.
Q&A #107 – Should a majority of a nonprofit’s Board members be independent?
While it is not necessarily a bad thing to have some non-independent members on the Board of Directors of a nonprofit organization, it is important for both perception and governance reasons to ensure that a majority of the Board members are “independent” as defined in Part I, Line 4 and Part VI, Line 1b of the Form 990.
Q&A #106 – Should a finance committee vote to approve monthly financial reports?
No, a nonprofit organization’s finance committee should not vote to approve interim monthly financial reports. Finance committees use information within financial reports but do not have the direct responsibility, time, or resources to check the financial reports for accuracy and compliance. Thus, while it is common for finance committees to receive and review monthly financial reports and discuss the reports with staff, it is neither proper nor a best practice for finance committees to “approve” these reports.
Q&A #105 – Can an exception to a contractual requirement be approved without signing an amendment?
Approving an exception to a contractual requirement, such as a specified deadline, essentially means that your organization is choosing not to enforce (or “waiving”) the particular requirement. It is generally not necessary to have both parties sign an amendment to the agreement every time a requirement is waived, but it may be advisable to do so if the exception is something that could repeat or impact other obligations.
Q&A #104 – Does indemnification language in a contract apply only to third party claims?
Indemnification language in a contract is traditionally understood to apply only to third party claims and not to “direct” claims between the parties themselves. Many courts will presume this interpretation unless the parties clearly express an intent for indemnification to apply to direct claims. However, courts differ on this issue, so it is important to clearly state that indemnification only applies to third party claims if that is the interpretation your organization wants.
Q&A #103 – What does an “entire agreement” clause mean in a contract?
The purpose of “entire agreement” language in a contract (sometimes called an “integration” or “merger” clause), like the example you mentioned, is to avoid misunderstandings and disputes about terms that may have been discussed during negotiations but were never included in the final agreement. When drafted properly such a provision should generally prevent one party from seeking enforcement of promises outside of the written terms of the contract.
Q&A #102 – Do in-kind contributions of property count toward the $50,000 per year limit for Form 1023-EZ eligibility?
Yes, in-kind contributions of property (such as donated supplies) should be counted when determining whether your organization is within the $50,000 per year threshold for Form 1023-EZ eligibility. While the Form 1023-EZ instructions do not say this explicitly, the instructions use language that is very similar to the Form 990, and in that context “gross receipts” clearly include contributions of supplies and other property.
Q&A #101 – What does it mean to sign a contract in counterparts?
Executing a contract in counterparts is a very common practice that simply means that each party signs their own separate duplicate copy of the agreement rather than signing together on the same page of the same document.
Q&A #100 – Must Board meeting minutes be formally approved by the Board?
State nonprofit corporation law usually does not explicitly state that Board meeting minutes must be formally approved by the Board, however this is highly recommended and is widely considered a best practice. The minutes of all meetings of the Board and any committee with Board-delegated powers should be formally approved no later than the next meeting of that governing body. Failure to do so can cause numerous compliance and governance problems and reflect poorly on the organization.
Q&A #99 – Do non-spouse romantic relationships raise conflict of interest issues?
While a non-spouse romantic relationship would ordinarily fall outside of the scope of the conflict of interest rules in the federal tax code, and may or may not be addressed by your organization’s conflict of interest policy and applicable state nonprofit corporation statute, it would be prudent to treat this situation like any other conflict of interest. Regardless of the legal formalities, 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 #98 – When should nonprofits hold their annual Board meeting?
Nonprofit Boards are generally required to meet at least once per year. However, if the Bylaws do not specify when the annual Board meeting must take place, then the organization and its Board is free to decide the timing. In my experience, the question of when to hold the annual meeting should be based on three key considerations: consistency, alignment with your organization’s governance and operational cycles, and efficiency. Applying these three factors will help to enhance the effectiveness and timing of the annual Board meeting.
Q&A #97 – What to do when the Bylaws are ambiguous?
It is nearly impossible to eliminate all ambiguity from the Bylaws of a nonprofit organization, so sometimes interpretive questions will arise that truly do not have a clear answer. Fortunately, courts will often defer to the Board’s interpretation of ambiguous Bylaws if the Board can show that the interpretation was reasonable and made in good faith. While the level of deference will vary depending on the applicable jurisdiction, this is a good standard to aim for regardless.
Q&A #96 – Must a Form 1099 be issued for a grant made to a nonprofit organization?
Grants made to nonprofit organizations are usually not subject to Form 1099 reporting because nonprofit payees typically fall within certain exceptions under the Form 1099 rules. Specifically, Form 1099 reporting is generally not required with respect to payments made to corporations or tax-exempt organizations. In this case, both exceptions probably apply.
Q&A #95 – Can nonprofit parent and subsidiary organizations have identical Boards?
There is not a cut-and-dry answer to the question of whether nonprofit parent and subsidiary organizations with different tax-exempt statuses are permitted to have identical Boards. However, too much Board overlap could potentially increase the risks that one or both organizations will be perceived by the IRS to be violating the restrictions on their tax-exempt status. In the case of a parent 501(c)(6) chamber of commerce with a subsidiary 501(c)(3) organization, it is generally advisable to have at least one or two persons on the Board of the subsidiary who are not Board members of the parent.
Q&A #94 – How is a tax gross up calculated?
Grossing up a payment to offset the taxes the employee will owe on the payment is a relatively rare practice among nonprofit organizations, but can be appropriate under certain circumstances usually involving one-time payments such as reimbursement of relocation expenses. These calculations can be confusing because when you increase a payment to cover taxes, there is also tax on that increased amount. Therefore, a formula must be used to figure out the amount that is sufficient to pay the taxes on the original (pre-gross up) amount as well as the taxes on the increased amount.