Nonprofit Corporation Compliance Issues and Checklist: Nonprofit Corporations generally file for Tax Exemption from the IRS. This exemption carries some requirements, namely: 1. Annual filing of Form 990. This is the foundation’s annual federal tax return, with detailed financial activity. If a tax deadline passes during the time you are waiting for your tax-exempt status recognition, you must file a Form 990-PF with the Internal Revenue Service (IRS) and state authorities as if your federal tax-exempt status had been granted. 2. Form 990-T. A foundation must file this form if it receives $1,000 or more in gross income from an unrelated trade or business or debt-financed income. 3. Form 8109. File this form with estimated quarterly tax payments for the excise tax on investment income (file only if paying annual tax over $500). 4. Possible Additional State Requirements. The federal Form 990-PF must be filed with the state of incorporation, as well as the state of your principal office. Many states also have additional reporting requirements. 5. Employment-Related Filings. The above does not include forms filed quarterly related to employment tax withholding, retirement fund accounts, or non-employee compensation. Adhere to the Main Rules Related to Private Foundations Sections 4940 through 4945 and 6104 of the Code contain rigorous rules regarding the governance of standard private foundations and private operating foundations. 1. Section 4940 Excise Tax Based on Investment Income: Foundations are responsible for paying an excise tax on their investment income each year. For tax returns filed after August 17, 2006, foundations must pay this excise tax on an expanded list of types of investment income. The tax is usually 2% of net investment income, though it can be reduced in certain cases to 1%. If the annual estimated tax is expected to be $500 or more, the excise tax must be paid quarterly, on dates set by the Code corresponding to your fiscal year. 2. Section 4941 Taxes on Self-Dealing The basic rule is that any direct or indirect transaction between a private foundation and a disqualified person is prohibited, unless it is permitted under a specific exception. A partial listing of disqualified persons includes: officers, directors, trustees, substantial contributors to the foundation, an owner of more than 20% of a business that is a substantial contributor to the foundation, and any member of the family of any such manager, substantial contributor, or owner, including ancestors, spouses, and direct descendents. You should check with legal counsel for a complete list of disqualified persons. Some of the direct or indirect transactions include: • Sale, exchange, or lease of property; • Lending of money or extension of credit; • Furnishing goods, services, or facilities;
• Satisfying a disqualified person’s enforceable pledge; and • Transferring the foundation’s assets or income to a disqualified person, or use for the benefit of such a person. (Exception: trustees/directors can be compensated for some services, and family members can be hired as staff, if both the services performed and compensation are necessary and reasonable.) 3. Section 4942 Taxes on Failure to Distribute Income (5% Payout) Every year private foundations must distribute an amount equal to at least 5% of their assets for qualified charitable purposes. Qualified charitable purposes include, but are not limited to, grants, reasonable administrative expenses, and direct charitable activities. Expenditures made to produce income (investment management fees, etc.) cannot be included. Legislation enacted in 2006 also prohibits private foundations from counting grants to certain supporting organizations as part of their 5% payout (supporting organizations are classified as (509)(a)(3) public charities). 4. Section 4943 Taxes on Excess Business Holdings Generally, a foundation together with its disqualified person(s) cannot collectively own more than 20% of any business enterprise, whether incorporated or unincorporated. If you can satisfy the IRS that effective control of a business enterprise is in an individual or entity other than the foundation and its disqualified persons, a 35% limit may be substituted for the 20% limit. 5. Section 4944 Taxes on Investments That Jeopardize Charitable Purpose A foundation may not invest either its income or principal in a manner that may jeopardize its ability to carry out its charitable purpose. No specific investments or investment policies are per se prohibited under this statute; trustees and directors must make prudent decisions about the foundation’s investments. 6. Section 4945 Taxes on Taxable Expenditures Foundations are liable for taxes on certain expenditures that are (1) prohibited; or (2) in an IRS specified area without following the respective IRS rules. These are called taxable expenditures. The following are prohibited: • Non-charitable expenditures; • Influencing public elections; and • Lobbying. The following grants require special steps to be compliant: • Grants to individuals; • U.S. or foreign organizations that are not public charities; • Grants to certain supporting organizations; supporting organizations are classified as (509)(a)(3) public charities; • Voter registration; and • Public policy or advocacy efforts. Note: The law allows foundations considerable leeway in this area, however.
7. Section 6104 Public Disclosure Rules Private foundations are required to make the following information accessible for public inspection upon request: • The foundation’s three most recent years’ Forms 990-PF (including names and addresses of contributors and trustees of the foundation); • The foundation’s initial IRS Form 1023 (application for tax-exempt status) and all related correspondence; and • The foundation’s 990-T (unrelated business income tax return, if any). Abstaining for all political campaigning Engaging in only limited lobbying No private benefit, particularly to members and officers of the corporation Transfer of the assets to a charitable purpose when the corporation dissolves Activities unrelated to the organization's purpose are taxable (UBIT) Many states have requirements for nonprofit organizations, including:
o o o o
Registering with the Attorney General Registering and reporting on fundraising activities Filing an annual report Reporting any significant transfer of assets out of the state of incorporation
How to Form a 501(c)(3) Nonprofit Corporation
Here's how to form a nonprofit corporation and receive a 501(c)(3) tax exemption: Forming a nonprofit corporation is much like creating a regular corporation, except that nonprofits have to take the extra steps of applying for tax-exempt status with the IRS and their state tax division. Here is what you need to do: Research goals and mission (purposes of foundation) Develop a plan and recruit board members Choose an available business name that meets the requirements of state law. Go Beyond Foundation Inc. Determine the type of Private Foundation - the (IRS) distinguishes among three different types of private foundations. Standard private foundations, also referred to as private Standard non-operating foundations, are the most common form of Private Foundations private foundation. Standard private foundations vary in
size and purpose. They typically obtain funding from a single bequest, or may receive annual contributions from an individual, group of individuals, or members of a family. The primary purpose of standard private foundations is to make grants to public charities, rather than operate any substantial programs. Standard private foundations must spend an amount equal to at least 5% of its net investment assets on qualifying grants and administrative expenditures annually. Corporate foundations follow the same regulations as standard private foundations, but the funding source of a corporate foundation is a business, rather than a family or individual. Tax Deductibility of Gifts to a Standard Private Foundation a) Cash Gifts. When a donor makes a cash gift to a standard private foundation, his or her tax deduction is limited to 30% of the donor’s adjusted gross income, with a 5-year carryover privilege for amounts in excess of the 30% limit. b) Gifts of Appreciated Property. A donor’s deduction for gifts of appreciated property, such as closely held stock and real estate, to a standard private foundation is limited to the property’s adjusted basis, which is generally the cost of the property. A donor’s contribution of most publicly traded stock to a standard private foundation, however, is deductible up to the stock’s fair market value. In addition, a donor’s deduction for all gifts of appreciated property is further limited to 20% of his or her adjusted gross income, with a 5-year carryover privilege for amounts in excess of the 20% limit.
□
Private Operating Foundations
Private operating foundations, although still usually funded primarily by one source, use the bulk of their resources to carry out their own charitable programs, rather than making grants to other charitable organizations. To qualify as an operating foundation, the organization must spend at least 85% of its annual adjusted net income or its minimum investment return for the operation of its charitable activities and meet certain tests set forth in the Internal Revenue Code of 1986, as amended (Code). Although a private operating foundation is subject to most of the excise tax rules to which a
standard private foundation is subject (further described below), a major benefit is that donors to a private operating foundation may take advantage of the more liberal income tax deduction rules generally applicable to gifts to publicly supported charities. In other words: a) Cash Gifts. A donor’s deduction is limited to 50% (rather than 30%) of his or her adjusted gross income for cash gifts to an operating foundation, with a 5-year carryover privilege for amounts in excess of the 50% limit. b) Gifts of Appreciated Property. A donor’s deduction is limited to 30% (rather than 20%) of his or her adjusted gross income for gifts of appreciated property to a private operating foundation, with a 5-year carryover privilege for amounts in excess of the 30% limit. Perhaps more importantly, contributions of appreciated property to a private operating foundation are deductible at their full fair market value, except that contributions of appreciated tangible personal property must be related to the public.
□
PassThrough or Conduit Foundations
Conduit foundations are similar to standard private foundations because they do not directly operate charitable activities. However, the key difference is that none of the donations to a pass-through foundation can be used to build an endowment. Instead, all of the gifts (plus all of the foundation’s income) must be distributed to public charities within 2-1/2 months after the end of the tax year in which the donor made the gift to the foundation. A conduit foundation offers a donor the same tax deductions as an operating foundation and a public charity: a) Cash Gifts. The donor’s tax deduction is limited to 50% of his or her adjusted gross income for cash gifts to the conduit foundation, with a 5-year carryover privilege for amounts in excess of the 50% limit. b) Gifts of Appreciated Property. The donor may deduct up to 30% of his or her adjusted gross income for property gifts of appreciated property to the conduit foundation, with a 5-year carryover privilege for amounts in excess of the 30% limit. Typically a donor would choose a conduit foundation if the donor wants to establish the foundation structure and take advantage of more liberal tax
deductions, but does not want to fully fund the foundation until his or her death.
□
Prepare and file the Articles of Incorporation (original and 1 copy) with the Florida Secretary of State and pay the filing fee. Articles generally should include the following provisions: a) Corporation Name b) Purpose of Organization c) Registered Agent and Address d) Incorporators’ and/or Initial Directors’ Names and Addresses e) Provision for Asset Distribution Upon Dissolution f) Method for Amendment of the Articles of Incorporation; and g) Clauses Prohibiting Lobbying, Political Campaigns, and Private Inurnment
□ □
Apply for Federal tax identification number once Articles of Incorporation filed and corporation is established with Secretary of State. Complete Form SS-4, “Application for an Employer Identification Number.” Create corporate "bylaws," which set out the operating rules for your nonprofit corporation. Common elements of bylaws include: a) Officers and Directors • The general powers of the board of directors; • The responsibilities, number, and length of the term of the directors, as well as the method for selecting, replacing, and removing directors; • Compensation of the directors, if any; • The number, title and duties of the officers (such as president, vicepresident, secretary, and treasurer) and terms of office, as well as the manner of electing and removing officers and filling vacancies; and • A provision indemnifying officers and directors and establishing the rights of indemnified individuals. b) Meetings of Directors • Notice requirements needed to call meetings, the meeting schedule, and definition of a quorum; • Voting requirements and the manner, if any, for taking informal actions; • Whether standing committees will be established and if so, what type of standing committees will be established; and • A provision allowing for the creation of ad hoc committees. c) Meetings of Members – N/A to a directorship foundation • A statement as to whether the foundation will have a member structure. A membership structure gives special status to certain individuals, who may or may not be directors themselves. A member usually selects the directors
and therefore has ultimate control over the foundation; • If the foundation does have members, the powers of the members, the responsibilities of the members, the number of members, and length of the term (if any) of the members, as well as the method for selecting, replacing, and removing members; and • If the corporation does have members, the date for the annual meeting and the requirements for calling special meetings. d) Other Duties • A list of the officers that have the power to handle assets and bind the foundation with respect to contracts, loans, checks, deposits, investments, and expenses; • A statement regarding the tax year of the foundation (whether a calendar or fiscal year); and • The procedures for amending the bylaws. d) Adherence to Code Sections 4941 through 4945 of the Code • Refer to page 27 of pub 557 for detailed information e) Include a Conflict of Interest Policy Some foundations appoint a task force to review the bylaws and make suggestions for revision to the whole board. After the bylaws are revised, they should be approved by the full board. The date of the board approval should be indicated on the revised bylaws.
□
Hold an Organizational Meeting After the Articles of Incorporation are filed and the bylaws are drafted, the foundation must have an organizational meeting to accomplish the following tasks: • Adopt the bylaws; • Elect directors and officers (if not specified in the Articles of Incorporation); • Adopt the corporate seal, if you have one or if required by the state; • Adopt a resolution permitting the opening of appropriate bank accounts and specifying signing authority, and sign bank signature cards; • Establish the foundation’s fiscal year, if not specified in the bylaws; • Authorize payment of initial expenses; and • Authorize officers to file for tax exemption. The secretary should take minutes of the organizational meeting as well as all future board of directors’ meetings. Minute Book The secretary should create and retain a minute book that will include the foundation’s Articles of Incorporation, bylaws, and minutes of all of the meetings. Establish financial management:
□
□
A corporate banking account
□
An accounting system adequate for: a) organizational management b) tax reporting c) grant tracking d) proving substantiation letters to contributors e) Meaningful financial oversight f) Internal controls
□
Apply for Federal 501(c)(3) Tax Exemption
□
Determine the following: • Plans for fund-raising, if any; • Contact and compensation (if any) information for directors and officers; • Potential lobbying or political activities; • Type of grant making along with any special grant making plans (such as providing scholarships, which will require detailed procedures); • Current year revenue and expenditures; • Proposed estimated budget for the next 2 years (you aren’t bound by this budget).
□ □
Complete IRS Form 8718, User Fee for Exempt Organization Determination Letter Request, and include the proper user fee.
Complete Form 1023, Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code. Form 1023 requests information about the foundation such as the following: • Purpose and activities; • Main sources of financial support; • Plans for fund-raising, if any; • Contact and compensation (if any) information for directors or officers; • Potential lobbying or political activities; • Type of grant making along with any special grant making plans (such as providing scholarships, which will require detailed procedures); • Current year revenue and expenditures; • Proposed estimated budget for the next 2 years (you aren’t
bound by this budget); and • Articles of Incorporation and bylaws. Note: If Form 1023 is submitted within 15 months of the date the foundation was formally organized (i.e., the date the Articles of Incorporation were filed), the foundation’s tax-exempt status will be retroactive to the date of incorporation of the nonprofit corporation. If Form 1023 is filed after the 15-month period (and any extensions), the foundation’s tax-exempt status will begin on the date of IRS approval. The IRS can also deny the application outright.
□ □ □ □ □ □ □ □ □ □ □ □ □ □ □
IRS Determination Letters: Once the proper documents are filed with the IRS, simply wait for the IRS determination letter which be received in approximately three to five months. You may be required to answer additional questions before it is issued. Contact the Florida Department of Revenue for information about obtaining a state tax number (if required) and see if additional information must be submitted for state tax exemption from income tax and sales tax, etc. Check with the Florida Department of Consumer Affairs or business licensing agency to obtain any required business licenses or permits. Contact the Florida Attorney General’s Office to see if registration or reporting is required. Find out about workers' compensation issues if you will have employees. Protect your trade name. Order any required notices (advertisements you have to place) of your intent to begin operating in the community. Check zoning laws. Obtain city and/or county business licenses or permits. Get adequate insurance or a rider to a homeowner's policy if necessary. Get tax information for employees, including guidelines for withholding taxes, information on hiring independent contractors, etc. Apply for a federal non-profit mailing permit. Order business cards and stationery. Get an email address. Set up your website.
□
Develop a Corporation Checklist of legal requirements for operation including: a) Board Meetings b) Tax Filings c) State Filings
□
Ongoing steps to develop the organization a) Educate and Assess the Board b) Select, educate and evaluate the Directors, Officers and Committee Members c) Develop a strategic plan: § Review vision and mission § Review programs and activities § Review financials, fundraising and legal compliance § Identify areas of growth and stagnation in the organization § Examine areas of possibilities for growth and needed services