Becoming a 501(c)(3) NonProfitPros and Cons – Benefits and Cautions

© 2012 Miriam E. Robeson

October 24, 2012Miriam Robeson, Attorney

www.lawlatte.com

Program Summary

What is a nonprofit?

Should your organization be a §501(c)(3)?

How do you become a §501(c)(3)?

How do you keep nonprofit status?

Frequently asked questions about nonprofits

Tips to get you started

Today’s topics

What is a NonProfit?

A NonProfit organization

is a corporation

organized and operated

exclusively for the public good

(In 15 words or less)

Types of NonProfitsDefined by the IRS, Nonprofits fall two categories:

Tax Exempt: The organization does not have to pay income tax on money earned or received through donations, activities, and grants.Tax Deductible: Contributions made to the organization are deductible on the donor’s income tax return.Note:You can be Tax Exempt and NOT Tax Deductible, but you cannot be Tax Deductible without being Tax Exempt.

Both are “NonProfits,” but...

Usually NOT qualified for grants

Contributions NOT Deductible

Does not pay Income Tax

501(c) (Other)

Qualifies for Grants

Contributions Deducible to Donor

Does not pay income tax

501(c)(3)

Vs.

There are 28 categories of

§501(c) nonprofits

only 1 is 501(c)(3)

Under §501(c)(3

Only §501(c)(3) organization are BOTH

Tax Exempt AND Tax Deductible:

o Charitableo Religiouso Schools/Educationo Scienceo Literatureo Testing for Public Safetyo Fostering Amateur Sports Competitiono Prevention of Cruelty to Animals and Children

Under §501(c)(3)

Generally, if your organization does not fit the tax exempt definition, it can be a nonprofit,

but not a tax exempt nonprofit:

Example: Arts organizations are NOT specifically listed as eligible for tax exempt status.

However, all is not lost!

An arts group (or other nonprofit group that does not fit the “definition”) can become nonprofit by electing one of the OTHER nonprofit types: Education, Charitable, etc.

What if my organization is not listed?

Who should be a §501(c)(3)?

Have a charitable purpose (see earlier definition)

Handle money (more than simply “dues”)

Receive more then $5,000 per year

Apply for grant funds (local, state, national)

Are part of a state/national organization (more on this, later)

Give money away (scholarships, etc.)

Are (or wish to be) publically supported (that is, receive money from general public)

You should consider §501(c)(3) status if you...

Handout: Nonprofit Basics FAQs

Who should be a §501(c)(other)?

If you are organized for a business purpose

If your primary purpose is not “charitable”

If you take in money, and are organized for one of the purposes above.

If you have a political purpose

Tax Exempt, but NOT Tax Deductible

Handout - IRS Organizational Reference Chart

Why is NonProfit Status a “good thing” for my organization?

You can apply for/receive public grant funds

Donations are tax-deductible (for §501(c)(3) only)

Your income may be exempt from tax

Purchases may be exempt from sales tax

Representation of Goals in the Community

Financial Planning and Fund Raising

Affiliation with other non profits (including state or national organizations)

Credibility, Continuity and Longevity

Why NOT be a IRS NonProfit?

If you are a small organization, the process may be more than you want to attempt ($$$, time, paperwork)

If you can use another organization as a money conduit, (to apply for grants, award scholarships, etc.)

If you are part of a larger organization, you may be under its tax exempt umbrella

If you have a political agenda as the primary purpose of your organization (political action cannot be 501(c)(3))

If you have < $5,000 per year annual income, or are a church, you do not have to have Tax Exempt Status to be a NonProfit (but you should consider it, anyway)

Official Tax Exempt status is not for everyone.

Rules of the Road for NonProfits

NonProfits CAN:

Solicit donations from individuals and corporations (which may or may not be tax-deductible)

Pursue recognition of their cause and accomplishment of their purpose in the community

NonProfits CANNOT:

Lobby for political change or legislation

Engage in a “business” for profit

Give money to members (“inure to benefit of...”)

What NonProfits can and cannot do –

Time for a Break!

How do you become a NonProfit?

1. Philosophical Step

▪Determine your purpose – what do you wish to accomplish as a NonProfit?

Handout: 7 Tips for Starting a Nonprofit

How do you become a NonProfit?2. The Mechanics

The Details of Incorporation and

Application for Tax Exempt Status

This is how you “get -er- done”

Corporate FormalitiesWhat Does the Government Want to See?

Corporate Formalities

Articles of Incorporation - Indiana

Tax ID number - from IRS

Statement of purpose

Bylaws/Governing Document

Conflict of Interest Policy

Officers/Board of Directors

Budget (3 year prior or 2 years future)

IRS Form 1023 - Tax Exempt Application

Minimum Required Documents for Tax Exempt Status:

Guided Questions

Will you have members?How will you fund your

mission?Grants, Donations, Activities, Service

Fees

Who will lead the organization?Board of Directors (Required)

Executive Director

Choosing structure for your corporation

Handout: IRS Required Language

Corporate Formalities

Board of DirectorsMinimum = 3 / Preferred = 5

Officers – President

Vice President

Secretary

Treasurer

Functional Committees

It’s all in the appearances – Typical Corporate Structure

Handout: Nonprofit Sample Bylaws

Yes, but,What does it COST to become a

NonProfit?

Incorporation Fees: $30 to IN Sec. of State

IRS Tax Exempt Application User Fee:

$400 for average annual income < $10,000

$850 for average annual income > $10,000

Attorneys’ fees: Variable, depending upon time involved and complexity of your situation. Expect to pay $1,000 - $3,000.

Handout: IRS 1023 Application for Tax Exempt Status

Okay, I’ve applied for Tax Exempt Status – Now what?

Wait for 3-9 months to hear from IRS

May need to provide more information

Receive “Determination Letter”

(aka “magic letter”)

Handout: IRS Top 10 reasons for delays in Exempt Applications

Congratulations – You’re Tax Exempt!

Act like a CorporationRegular Meetings, minutes, Board of

Directors

Financial Reports, Government Reports

Regular qualified or professional review of financial information

Good news from the IRS

A Word About Meetings

Agenda

Financial Report Current, accurate, understandable

Minutes Attendance, Votes taken (motion and second),

note “nays” and abstentions, Document resolutions, Signed by officers, approved at meetings.

Minimum Requirements for Good Meetings

Congratulations – You’re Tax Exempt!

To retain Tax Exempt Status, you must continue with government requirements...Annual Tax Returns

Indiana NP-20 every year

IRS 990EZ or 990 every year If annual income > $50,000

IRS 990N every year if annual income < $50,000

Good news from the IRS

Handout: IN NP20A – Sales Tax Exempt Application

Now you have NonProfit Status –How do you keep it?

Sales/Use Tax – You are exempt BUT you have to file the proper forms with State (NP-20A)

Property Tax – You are (mostly) exempt BUT you have to file the proper forms with County

Gaming – Yes, you can play BINGO – BUT Indiana has complicated gaming laws!

Filing Requirements – keep all state and federal forms current!

Pitfalls for NonProfits – word to the wise

Financial 990

Purpose - to give the IRS more information to verify the “true” nonprofit activities of nonprofits

More detail required for –

Officers, Directors, Highest compensated staff

Governance structure, policies, management practices

Public support, fund raising, gaming activities

More emphasis on determination of

Public charity - public support status

IRS Tax ReturnTo Verify Nonprofit Activities

Sample IRS 990-N

For Nonprofits Earning < $50,000 per year

Protecting Nonprofit Status

Improper donor acknowledgements Donations of time are not tax-deductible

Donor “influence-buying”

Improper arrangements with donors Failing to include both spouses in joint gift

paperwork

Staff/ED/Board/Volunteer accepting gifts from donors

Personal Benefit from Nonprofit Work

Ethics and Conduct – What NOT to do

A Word About Ethics

Ethical conduct of Board and Staff is essential!

No conflict of interest -- No self-dealing -- Volunteer Board

(but you can have paid staff that report to the Board)

Three areas Nonprofits Fail Ethics Issues

Failure to watch the money

Failure to watch the staff (and each other)

Failure to watch conflicts of interest

Nonprofit Corporations have the Public Trust

Charitable Donations

Watch the Rules regarding charitable donations! What can be considered a donation?

What paperwork is required?

NOTE – donations of TIME and EXPERTISE are NOT deductible!

Handout: Top 10 Rules for Charitable Donations

Is it worth it?

Weigh the costs and benefitsTalk to an attorneyTalk to your organization – what

do your members want?

A word about Charity Gaming

Rule #1 – Gaming is illegal in Indiana

Rule #2 – Licensed charity gaming is legal

Rule #3 – Failure to follow the rules can cost you!

(See Rule #1)

Fines up to $5,000 per violation

Must be a §501(c)(3) for three years to qualify

BINGO and Raffles in the State of Indiana

Handout: 7 Rules of Charity Gaming

Where to find information

Handout – Top 10 Internet Links for Nonprofits

Smart Stops on the Web

Any questions?

Thank you for your kind attention