Links to IRS Forms and Information

Regulations and interpretations regarding Nonprofit Organizations: http://www.irs.gov/irm/part7/index.html

The IRS homepage for all NPO: www.irs.gov/eo

Form SS-4 – Application for Employer Identification Number: http://www.irs.gov/pub/irs-pdf/fss4.pdf

Form 1023 – Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code: ftp://ftp.fedworld.gov/pub/irs-pdf/k1023.pdf

Form 8868 -- Application for Extension of Time to File an Exempt Organization Return, for 12 month extension before a form 1023 must be filed or 90 days for the 990 forms: http://www.irs.gov/pub/irs-pdf/f8868.pdf

Form 990 – Public charity annual form: ftp://ftp.fedworld.gov/pub/irs-pdf/f990.pdf

990 Schedule A: http://www.irs.gov/pub/irs-pdf/f990sa.pdf

990 Schedule B: http://www.irs.gov/pub/irs-tege/eotopich03.pdf

Form 990PF – Private foundation annual form: ftp://ftp.fedworld.gov/pub/irs-pdf/f990pf.pdf

Form 990EZ – Shortened annual form: ftp://ftp.fedworld.gov/pub/irs-pdf/f990ez.pdf

Form 990T – annual form filed in years with Unrelated Business Tax due: http://www.irs.gov/pub/irs-pdf/f990t.pdf

Form 990W – worksheet to determine unrelated business tax: http://www.irs.gov/pub/irs-pdf/f990w.pdf

Form 2848 – Power of Attorney and Declaration of Representative, when the chairperson or president of the board cannot sign for some reason, another officer can stand in for him or her: http://www.irs.gov/pub/irs-pdf/f2848.pdf

Form 941 – Employer’s Quarterly Federal Tax Return: http://www.irs.gov/pub/irs-pdf/f941.pdf

Form 8821 – Tax Information Authorization allows the IRS to provide information about your application to an employee other than a principal officer or director: http://www.irs.gov/pub/irs-pdf/f8821.pdf

Form 8283 – For noncash donations over $5,000: http://www.irs.gov/pub/irs-pdf/f8283.pdf

Conclusions

Non-profit organizations are unique business opportunities that allow the members to do exceptionally meaningful work. Operating a legal nonprofit means taking advantage of a program that ultimately serves the community, and being involved in one of the most rewarding business opportunities that exists today.

The present-day tax code allows nonprofits to maximize their positive potential, and for the business-savvy NPO founder, the benefits available to the public through the NPO sector are vast and varied. However, navigating through the complex laws that govern the nonprofit sector can be a tricky proposition. With the right amount of research, a good deal of preparation, and a high level of enthusiasm and energy, anyone can found and run a successful nonprofit organization.

Educational NPOs benefit the public by changing the business landscape through compassion and charity. People who are passionate about the possibilities that are made feasible by nonprofit organizations can join the industry, and reap its many benefits. It is up to each individual, as well as the structure of the nonprofit, to define not only the organization and the role each member plays within it, but also, how that organization shapes, and is shaped by, the community it serves.

Regulations Governing Dissolution

Generally, once the board moves to dissolve the NPO, it is no longer considered active by the IRS. One of the final moves an organization may make might be to finish reporting any outstanding income or expenses and file all final paperwork with the state, informing them of the organization’s non-active status.

Board members of a nonprofit are not permitted to divide up remaining assets of the NPO among themselves. All money, property and equipment must be put to charitable use. “Charitable use,” however, can take many forms. Any money that is left over can be given to another charitable organization or used to pay off any debts the NPO owes. Once all funds are allocated, the NPO must finish the process by closing its accounts.

Property may be given to another NPO or may be donated to the community, as in the formation of a park. In either case, the end use of the property must be considered charitable. Any property that is sold, traded, or otherwise disposed of within two years of receiving it as a donation must be documented to the IRS. The NPO must file Form 8282, “Donee Information Return (IRS-557, 2005).” If there is no property owned, but a space is rented or leased, the nonprofit may have to pay a fine for breaking the lease. Any remaining funds may be used to pay off any such fines associated with closure.

Ensuring a Smooth Transfer of Responsibilities

Transferring responsibility from one board member to the next must be accomplished in a timely manner. All vacant positions must be filled in a reasonable amount of time, so for the board member who is ready to leave, ha having an exit strategy can be helpful.[i] This strategy may include grooming someone to take over the post or simply keeping records in very good order.

Completing the Nonprofit’s Mission

Some nonprofits complete what they have set out to do. There may be other and perhaps even related potential missions, but if the goal of the nonprofit in question has been accomplished, then it is time to dissolve the NPO in success.

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[i] Idealist.org, online. http://www.idealist.org/en/faq/61-72/60-2

Stepping Down and Dissolution

For board members who are ready to step down, there are a few rules that need to be followed. Additionally, if the organization is ready for dissolution, then there are regulations in place that govern the distribution of the NPO’s assets.

Determining When to Step Down

For members who have expressed a desire to leave the board, there are a few pertinent questions to ask to determine if it is the right time to leave the organization.

• Does the member still feel a passion for the mission?
• Is the organization set up to get along without the member?
• Has the member accomplished what he or she specifically set out to do?
• Does the member have something to contribute as an employee?
• Is there anything that could change the member’s mind about staying?
• What is the motivation for leaving?

Honestly evaluating the motivations for leaving will ensure that the board member in question is not making a hasty decision, and that a smooth transfer of responsibilities can take place.

Audits

Nearly all NPOs request an external audit at some point in their operations. Healthy nonprofits will seek out an audit in order to ensure that the operations of the business are both legal and contributing to the primary mission of the organization.

Some states require external audits for larger NPOs to maintain nonprofit status. Almost all audits find that some number of changes should be made to an organization. Because non-interested parties are completing the inspection, it is most often best for an NPO to follow the advice of the auditing company.

Furthermore, all Form 990 filings are subject to the Freedom of Information Act (FOIA) and must be made available to anyone who requests them. Photocopies are required to be made available at “a reasonable price.” If a request for information comes in writing, the NPO has 30 days to produce the requested information. As such, pertinent financial records should always be kept on-site to deal with the occasional audit and information request.

Financial Duties

Financial Statements and Balance Sheets

Financial statements are usually given quarterly to the members of the board. These reports are typically prepared by the CFO. Generally, the statements track an opening balance that is then added to and subtracted from throughout the course of a year. Such statements also include expenditures broken down into different categories for analysis. The information from these statements appear prominently in the annual report, and keeping this information accurate is an important aspect to maintaining legal and healthy financial operations.

Chief Financial Officer Duties and Hiring Professional Accountants

Many organizations use an outside accountant to help file the annual Form 990 with the IRS. Small NPOs can often get some discount of the services of a tax accountant, though larger organizations are more likely to pay full price.

Unless the CFO of an NPO organization is an accountant who specializes in nonprofit work, it is a good idea to take advantage of a hired accountant. In order to ensure that operations are legal and that any future audits will not turn up any illicit information, even small organizations rely upon outside tax professionals.

Statements

Statement of Activities

A statement of activities is simply a report that summarizes what plans the organization has undertaken, what plans the organization has continued with, and how both serve to meet the primary goals of the NPO as outlined in the mission statement. This statement is the same as that which is prepared for the annual report and for inclusion with IRS Form 990.

Statement of Cash Flows

The statement of cash flow can be a simple list of assets on hand throughout the fiscal period. The most common type of cash-flow report separates expenditures in operations, investments (including investments in fund-raising or products), and financing (including any dealings with banking institutions).

The statement of cash flow can be given as a balance sheet of cash in and out or it can be a more indirect statement, showing the monies added and subtracted by tracking changing balance. For almost all nonprofit organizations, healthy organizations list “operations” as a very large portion of the cash-flow report.

Accounting for an Incorporated Nonprofit

Nonprofit organizations need to ensure that they have an accountant or bookkeeper who is in charge of the financial aspects of the organization’s operations. This work varies from tallying incoming donations to compiling the more complicated annual financial reports. The Chief Financial Officer (CFO), treasurer or even a third party might be required to perform this task.

Annual Reports

A nonprofit organization’s annual report is designed to keep interested parties informed as to the progress the organization is making on their stated mission. It should be widely distributed to board members, constituents, members, and the IRS (as part of annual Form 990 filings).

The form of the annual report generally follows the same template that is used by publicly traded companies.[i] It often begins with a summary of the contents of the report, and then is followed by a letter from the president or founder. A separate message from the CFO might precede the financials section. The financial segment of the report should include charts, balance sheets, and general statements. Before the current financial records are given, a brief history of the NPO’s finances should also be outlined. These historical figures may include a discussion of receipts and expenditures as well as charts and spreadsheets with data. Financial statements are an important part of most annual reports, and including opinion letters from accountants regarding the fiscal health of the organization is also considered de rigueur.

The next major section of the annual report is a summary of the fund-raising and marketing activities of the NPO, along with an outline for future activities and goals. A review of the activities of the NPO over the course of the year may be presented in report form and may or may not include the price of membership in historical and projected terms as a function of demand for the NPO’s stated charitable function. A typical report closes with a list of directors and officers, followed by a list of any feeder organizations, brands and addresses.

Nonprofits are required to make their records available to the public upon request. If a copy is available online, it is usually heavily edited, because very few organizations include financial statement information in the online version.

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[i] Tips for reporting earnings from Zpub, online. http://www.zpub.com/sf/arl/arl-tips.html

Determining the Emerging Needs of a Nonprofit’s Constituency

A nonprofit organization’s constituency can change over time, especially as the focus of the group shifts and is refined through trial and error. Every few years, an NPO should take some time to determine how it can better serve the members of its community.

Some organizations meet with focus groups of students or researchers and ask them how they feel about the services offered by the nonprofit. Public question-and-answer sessions, questionnaires, and studies of local Demographics are all effective methods that an NPO can use to help it better serve its community. By understanding the community, it can better serve those it is intended to help.

Estimating Financial Success

There are a number of accepted methods for analyzing the financial success of a particular nonprofit. Generally, some major questions to consider when deciding how well or how poorly a nonprofit is doing include:

• What is the NPO’s yearly income?
• What is the NPO’s yearly spending?
• How do these two numbers compare?
• Where is most of the NPO’s money spent?
• Where does most of the NPO’s funding come from? One person? Many sources?
• How equipped is the NPO to fund programs?
• How will this change in the future?
• How accurate are past budgets?
• How much emergency funding is available to the NPO?
• How much money is owed in loans or credit by the NPO?

Long-range funding, especially, is a gauge of a nonprofit’s marketing and fund-raising ability. Surpluses in the budget mean that an organizer’s treasurer in charge of allocating funds is doing a good job. A review of the finances of a not-for-profit gives the organization a clear idea of how the business is doing, whether it is flourishing or weakening, and how to help the organization become or remain successful.

Dedication to the Nonprofit Mission

During the course of operations, all nonprofits diverge from their original stated purpose. All nonprofits require direction from the board to ensure that they are devoted to their original or refined mission statements.

Ensuring that the NPO Remains On-mission

There are ways to evaluate whether the nonprofit remains committed to its primary purpose. Relative funding levels will give one picture of commitment, but so will a calculation of overall time spent on given tasks. For board members, talking with people who work in the nonprofit, as well as talking with constituents of the nonprofit will generate a picture of another side of the nonprofit’s situation. Overall business health is determined by its individual members, and talking to as many participants in the business plan as possible will ensure a clear idea of how the NPO is running.

Board meetings should address this topic at least once a year, though doing so more often can keep board members aware of the actual corporate situation. Many organizations even seek out second-party audits to see how their organizations stack up.

Gathering Information for Declaration

Gathering Accounting Information for Declaration

A nonprofit must gather a considerable amount of information to include with IRS Form 990, including annual financial statements. The annual financial statement of an NPO must contain clearly delineated categories of revenues and expenditures, with two-column accounting for all incoming and outgoing money for the NPO.

Any expenses that were allocated to various projects and operations should have their own section and statement, including a brief explanation and background of the project or operation. A report that outlines the expenditures on a specific program area as a percentage of the whole should be included in this section.

Lastly, a list that groups together the various sources of income for the nonprofit, as well as specifically where this income comes from is necessary. This section is called a “support schedule,” and should include all relevant financial information.

Gathering Personal Information for Declaration

Form 990 may also require personal statements of income from each of the board members of a nonprofit organization. These personal statements include the personal addresses, phone numbers, and other contact information of each board member.

Maintaining Nonprofit Status with the IRS

Once tax-exempt status is approved by the Internal Revenue Service, a nonprofit must continue annual reporting along with the yearly filing of Form 990.

Filing Form 990

For nonprofit organizations with an operational budget of less than 25,000 dollars per year, Form 990 does not have to be filed. Though an NPO’s operations may function for a long time without ever reaching this level of income, as soon as the 25,000 dollar mark is reached, the NPO must begin filing.

Private foundations are required to use the 990PF form, but the 990EZ form is available to any public charity that has a revenue (from all sources) between 25,000 and 100,000 dollars. Larger public charities that take in over 100,000 dollars must use a 990 form.

Along with financial statement information, detailed information on expenditures and income is also required. Any changes that were made to the nonprofit organization within the preceding year should be reported at this time. Unlike personal income tax returns, Form 990 is due annually on May 15^th.

Many organizations use a professional accountant to assist them with filing Form 990. It can be done, but requires good records, patience and attention to detail. For the organization that needs extra time to file, Form 8868 may be used to request a 90-day extension (IRS-557, 2005).

Marketing Tools

Print and Radio Advertisements

Print and radio advertisements are effective methods of advertising, but are typically restricted to very large or national nonprofits. Unless the marketing team of a nonprofit can procure donated ad time, this may be far out of the reach of a smaller nonprofit organization.

Print advertising is a more widely accessible method of advertisement, and can be used by any size not-for-profit organization. Ad space in local newspapers is frequently donated to NPOs, and using the contributed space for flyers or consciousness-raising can be one of the best ways to spread the word about a nonprofit.

Mailers and Direct Marketing Techniques

Nonprofit organizations should take advantage of nonprofit rate mailings. Direct mail can be an effective tool to reach one-tie members, lobby new members to join, or target particularly responsive demographics. With effective direct marketing, a nonprofit can increase its ability to talk to an open audience about its work.

Community Outreach and Events

Nonprofit organizations often organize local events to raise awareness about their missions. Community outreach can be the best way of reaching a target audience, and can go a long way in touching the hearts of the local community. An NPO can organize any event that may be appropriate to consciousness raising, and can even partner with related organizations to enhance impact.

Marketing a Nonprofit Business

Marketing may be the most important determining factor in whether or not a start-up succeeds or fails. No NPO organization should spend more than thirty percent of its budget on marketing or soliciting for funds. The percentage of the budget spent on marketing will become very apparent as part of the Form 990 filings. As a result of this informal restriction, small NPOs typically do not have very high-profile or extravagant advertisements. Smaller nonprofits must rely on human effort and interaction to make up for these funds.

The marketing director of a nonprofit may be a board member, volunteer or employee of the organization. It is not unusual to find a separate committee on marketing within the organization, because in the case of the educational and scientific nonprofits, spreading the word about the opportunities and services offered is at least as important as fund-raising, and requires its own team.

It is essential that nonprofits realize that individual donors are, by far, the largest single contributor to nonprofits in the United States. Tailoring a marketing message to a donor group is a key component of NPO success. Even most grant-issuing organizations gauge the likelihood of an NPO’s success by how well the nonprofit reaches a receptive target audience. Board members with previous demography or marketing experience will be useful for helping an organization target the proper beneficiary audience from the start.

Scheduling Regular Meetings, Business Ethics and Accountability

Reasonable care should be taken to find a time and place that is convenient for the board to meet, but meetings will have to take place at least as often as is required by the bylaws. If the board cannot physically meet, then telephone or internet conferencing is an acceptable method of resolving the problem.

If a nonprofit organization has a dedicated secretary, he or she will be responsible for keeping the minutes of a meeting as well as keeping a schedule of past and future meetings and coordinating the space where the meeting will be held. This includes planning for non-traditional meeting forms like electronic or telephonic conferencing.

Nonprofit organizations will incur both direct and indirect costs when operating their business, but how costs are described within the organization’s financial statements is a matter of business ethics. Because all filings are publicly available, it is a matter of trust and integrity that the NPO will categorize these costs in the most ethical manner possible.

Many organizations have an ethics code built into their charter that outlines exactly how this will be accomplished.[i] Ethics codes extend to disclosure of personal income for the board members, as well as conflict of interest resolutions. Activities that might be specifically prohibited include influencing an internal election or using NPO transportation or funds for personal enjoyment.

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[i]Alliance Organization, online. http://www.allianceonline.org/FAQ/financial_management/how_can_we_allocate_indirect.faq

Managing Board Operations

Managing operations of the board means allowing it to run as smoothly as possible. This can be done, in part, through careful planning at the earliest stages of nonprofit planning. Though a strong foundation and continued effort, a nonprofit’s board operations can be successful.

Elections of the Board of Directors

Provisions for board elections should be laid out in the bylaws. Generally, when a board member wants to step down an announcement is made during a board meeting with a motion to hold an election at a later date.

Elections may take several forms. Some require two candidates to be proposed and then a vote taken, though ballots may be open or secret. The outgoing member may recommend a replacement, but is not allowed to vote on the replacement.

The board may have trouble finding another candidate to take the place of a departing member. Measures must be taken to ensure such a vacancy doesn’t exist over a long period of time – the position must either be filled in a reasonable amount of time, or it will have to be written out of the bylaws and reported to the Internal Revenue Service.

Duties of a Nonprofit Treasurer and Chief Financial Officer

Nonprofit organizations commonly charge the Chief Financial Officer of the board with many of these duties, however, the specific rules are different from NPO to NPO. The expectations and rules should be spelled out in the company’s bylaws. Even if the organization employs the services of an accountant, the CFO will typically summarize and present financial information to the board at regular meetings.

Managing Financial Ledgers

All nonprofits should keep financial records. These books should be reconciled at least once a month by the person who is charged with the responsibility of recording these financial aspects of the nonprofit. It’s a good idea to produce a monthly statement report that includes a column with assets, income, and net assets that is balanced against a column including liabilities and expenses.

Petty cash

There is usually a need for a nonprofit to have a small amount of petty cash on hand to deal with incidental expenses that crop up in the course of everyday operations. The necessary amount varies greatly by location, but should always represent a very small portion of even a monthly budget. A separate ledger tracking petty cash expenses may be kept if the expenses paid for by petty cash would otherwise seem extravagant.

Basic Business Operations

All small businesses must make sure that business can run smoothly. There are a number of issues to consider in ensuring seamless business operations, but some of the more major ones are listed below.

• There should be a system by which post, voice, and electronic mail is both received and answered.
• The way that information is shared should be clear and consistent.
• The nonprofit’s organizational system should ensuring that there are designated channels for requesting funds. This should be dealt with in the organization’s bylaws.
• The appearance of the organization should be neat, clean, and professional. For ecologically-focused organizations, landscaping or being housed in a “green” building may be part of an educational mission.
• Volunteers and employees should be informed ahead of time what hours they are expected to work, have posted work schedules, and a system by which to request days off.
• Office materials like pens, paper, and computers should be available and maintained.
• There should be a system by which janitorial work is completed.

Some of the most basic aspects of everyday operations become the most contentious through time. Having a clear way of dealing with issues that arise is the best way for a nonprofit organization to remain successful, and its members to remain on amicable terms.

Organizational Maintenance in the Nonprofit Sector

Managing Cash Flow

As a nonprofit enters into the phase of everyday operations, it needs to secure continued funding, especially if it is operated as a public charity. Foundations that do not rely upon a single large grant to fund their operations should have a network of contacts with which to work. When looking for new sources of funding, it is important to remember that the primary focus of an NPO must remain the work of the mission, so efficient management of money and donations is essential.

Reporting Membership Information

If a nonprofit organization has committed to a plan that involves utilizing membership as part of a larger funding scheme, the IRS will need some evidence of this on subsequent filings of the organization.

The money collected from membership fees may be in exchange for a tangible object, such as a magazine subscription or some other type of physical “gift,” and is reported on IRS Form 990 as “membership dues.” However, membership dues for which no such items are received are reported under the heading of “gifts, grants and contributions.”

Membership Benefits and Membership Media

Nonprofit membership should have benefits that accompany it. Sometimes the financial commitment that purchases an initial membership will grant the member access to additional materials or media related to the nonprofit’s mission. Though the benefit cannot be of any significant monetary value, it certainly can and should be interesting. If it is, it can be a strong pull for new members to join.

Another benefit of membership might be the opportunity to be polled for member opinions regarding issues of importance for the nonprofit organization. Some organizations allow their members to vote on some member-specific items that come before the board.

A number of NPOs create media materials that are accessible only to members. This might be an annual report or financial summary, or it may be digital or print supplements to complement online material.

Members, like shareholders, should be kept abreast of what the nonprofit is doing. This information sharing most often takes the form of a newsletter that is produced on a monthly or yearly basis. Electronic newsletters can save time, paper, and postage, so are a good method of distributing information. Financial statements, future visions, activities information and the membership of the board are the most common inclusions in donor-member literature.

Keeping this information available to members of an NPO not only keeps the channels of information sharing open, it increases the involvement of the members themselves, as well.

Members of Nonprofit Organizations

A nonprofit can organize membership drives in order to raise funds. Instead of having shareholders, each member becomes a limited stakeholder in the organization. Decisions about how members will be treated are usually first addressed in the bylaws and articles of incorporation and then modified over time as the character and desires of the membership becomes apparent.

Membership Criteria

Many organizations limit their membership to the particular segment of the population they serve. Some NPOs require that members be adults or residents of the same city, county or state. However, an NPO may not use demographic data as criteria to deny membership.

Members may be separated into two or more tiers of membership. Such designations are often determined by how much one gives the organization as a membership contribution.

International Volunteers

Many educational facilities, especially those involved in the sciences, can use international volunteers as a valuable resource. These individuals are often interested in financing their travel from one location to another and typically accept housing and a relocation stipend as compensation for a great deal of work. Property owned by the NPO may be used to house these international volunteers.

International exchange is a wonderful opportunity to disseminate knowledge and learn from other people. Nonprofits are wise to take advantage of a system that allows international volunteers to come and work with their organization.

Volunteer Workers

Compensation and Benefits for Volunteer Workers

Volunteers may legally be allowed access to available membership or the advantages that come with it, but this cannot translate to a type of payment. Most volunteers are concerned with education, social, and experiential aspects of a job, and the benefits that come from these aspects can be stressed to potential volunteers. However, any special remuneration is forbidden under law. Very simply, volunteers cannot legally receive payment for their work.

Insurance as a Requirement for Volunteer Workers

A nonprofit organization must carry liability insurance if people work at the site of the nonprofit. This liability insurance is essential, even if the NPO relies on unpaid helpers. Additionally, a nonprofit should be familiar with OSHA requirements and make sure that the organization is compatible before any workers, paid or unpaid, start work.

Financing a Nonprofit

Money is a major concern in the establishment of a business that, by definition, will not generate a profit for the founder. Careful planning is essential for a successful business model. Most NPOs go into business with an initial budget planned for the first five years of operation. Some issues to consider at this stage include how big the organization will eventually become, what the mission of the NPO will be, how much accomplishing these goals will cost, and where the capital will come from. Important: When establishing a nonprofit, the advice of professionals is indispensable. Securing the services of a tax attorney and experienced lawyer will clarify the many cloudy financial and legal issues that await a prospective NPO founder.

For nonprofits that plan to deal with banks, banking institutions often offer assistance in preparing a proposal in accordance to its specific requirements. A bank that specializes in the needs of NPOs will likely be of great assistance to the newcomer to the nonprofit sector.

If an NPO is reliant upon a certain amount of community participation for part of its revenue stream, it will need to demonstrate what participation figures are reasonable, and how these figures were arrived at. If the NPO intends for the funds to come from donors or membership, it is the organization’s responsibility to have a concrete plan for how to accomplish this.

Labor Laws and Employment Taxes

Labor Laws and Nonprofits

For-profit businesses are subject to laws regarding working conditions, minimum wages and fair hiring practices. These same regulations apply to NPOs. Before an organization starts hiring employees, it is essential that it spends time studying the laws that govern employer and employee relations. Hiring a lawyer at this stage can help to clarify employer-employee concerns.

Employment Taxes

An NPO may not be required to pay certain employment taxes as a result of 501(c)(3) status. However, it will still be responsible for federal withholdings such as Social Security (FICA), Medicare, and Unemployment (FUTA) tax.[i] These taxes are paid on a quarterly basis.

State employment taxes are very often waived, but as with most regulations involving nonprofits, this waver varies from state to state.[ii] Local income and sales taxes are also usually waived with application, though it is important for the nonprofit to check with local regulations to ensure that it is operating within the law.

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[i] “Every employer, including an organization exempt from federal income tax, who pays wages to employees is responsible for withholding, depositing, paying and reporting federal income tax, social security and Medicare (FICA) taxes, and federal unemployment tax (FUTA), unless that employer is specifically excepted by law from those requirements of if the taxes clearly do not apply.” IRS Publications, online. http://www.irs.gov/pub/irs-pdf/p557.pdf

[ii] “Some states exempt nonprofit organizations from state tax and state employment programs such as unemployment compensation contribution.” Cornell Law School WEX, online. http://www.law.cornell.edu/wex/index.php/Non-profit_organizations#State_Statutes

Internal Employment and Family Members

Internal Employment

Nonprofit members may not actually be employed by the NPO and receive a salary during their tenure as board members. They may not charge for time or services that are donated while volunteering, because as long as a person is in a position to make decisions about an organization, he or she will not legally be able to draw a salary. However, once a person steps down from the board entirely, he or she may apply for employment with the nonprofit. As long as the jobs are advertised publicly, and no preferential treatment is shown toward the former member, he or she will be eligible for hire. Oftentimes former members make the most knowledgeable and impassioned employees.

Family Members

Family members of board members may be considered for positions within the NPO, but only if the person whose involvement would constitute a conflict of interest excuses him or herself from hiring deliberations. As long as the job is advertised publicly, if the family member is the most qualified candidate, he or she may be hired legally.

Employees

Hiring employees is a major step for a young nonprofit. The organization takes on the responsibility of filing tax information on behalf of the employee as well as the responsibilities of human resources and payroll. All employee-related expenses must be met every pay period, whether the organization has the ready funds or not, and every small company will need some type of liability insurance, especially when a new hire comes to work on company property.

Despite the fact that this is a major commitment, employees can radically improve the dynamic of an NPO and assist the organization in getting a great deal of work done. Very often, the first employees a nonprofit hires work as fund-raisers or as assistants in the operations of a feeder organization. A nonprofit with new employees should make sure that these initial hires are engaged in activities that will make their employment a worthwhile financial endeavor. Doing so will increase returns, and allow for more employees to be hired in the future.

Restrictions and Donations

The NPO should not accept financial or other gifts that they cannot utilize. Any donation far in excess of a nonprofit’s ability to utilize should be refused.

Donations over $250 from entities that refuse to be named can invite scrutiny from the Internal Revenue Service, and the special provision that allows cars to be donated for free to 501(c)(3) organizations is also under scrutiny by the agency. Nonprofits should be careful about what sort of support they accept.

Reporting and Allocating Donation Funding

Anyone donating 250 dollars or more in cash or goods must be listed with name and address on the annual filing of Schedule B of IRS Form 990.

The Quid Pro Quo donation is one in which a donation is made in the expectation of receiving a gift in return. If a donor receives such a gift, the amount reported to the IRS is the full amount of the donation(IRS-557, 2005).

A nonprofit organization may raise all of its funds at once or in small increments throughout the year. Some organizations are only remembered at certain times of the year, so the organization’s Chief Financial Officer must be sure to evenly allocate resources so that general operating expenses as well as particular expenses are covered year-round. The CFO must also be able to allocate funds to programs that will have a direct impact on the success of the primary objective of the NPO. Monies spent should ensure the program continues to directly benefit the organization’s constituents.

Accepting Donations

Upon accepting a donation, a nonprofit organization must give the donor a receipt. Until late 2006, only large-ticket donations necessitated a receipt for a taxpayer to claim it as a deduction, but it is presently the case that each and every donation, even small ones, must be proven by receipts. An acceptable receipt clearly lists the amount given or what was given, the full name and address of the nonprofit, and the fact that it is a charitable organization. The nonprofit organization should keep its own records logging each donation along with the name and address of the donor.

All money that is received by a nonprofit must be logged and recorded so as to correctly report on the Form 990 filing. Even very small donations must be tallied individually. While the Salvation Army may not give a receipt for each nickel that they receive in their emblematic red kettles, they do make sure to tally the receipts for each location and each day throughout the donor season.

Donations of items other than cash money are called “in-kind” donations. They may be directly useful as in the case of office equipment, or be useful as a sale or donation-enhancing item. NPOs must to keep records of this kind of donation, as well. Items worth more than $500 must be given a professional appraisal so as to avoid over- or under-reporting contributions.

NPOs that have a process by which to thank donors in place have an increased likelihood of securing future donations. Thank-you letters and gifts, as well as invitations to membership can be ways of recognizing donor contributions and ensuring future goodwill.

Soliciting Donations

Nonprofit organizations may solicit for donations in the same way any for-profit business would advertise, but the NPO has the advantage of being able to use volunteer labor and contributions to accomplish its goals. Advertising campaigns like these are typically similar to any marketing campaign, but the nonprofit in question may need to file a petition with the city or state to solicit for funds. These forms are usually available from the Secretary of State’s office or from the Secretary of Commerce, depending upon the state in which the nonprofit is located.

Working in Tandem

It is very common for educational nonprofits, as well, to work in tandem to create a more diversified or complete curriculum. This type of partnership can result in operational cost savings that could be significant for both involved NPOs. For nonprofits that hope to share resources, it is essential that some sort of agreement outlining the rights and responsibilities of each NPO is drafted.

There are countless innovative ways that universities or colleges can support an educational nonprofit. Formal collaboration of research can, and often does, result in a new technology. Students are also valuable resources who can perform work for an NPO that counts as work-study credit. University resources or grounds might be available for evening or weekend use. Finally, a larger organization can give access to equipment that is too large or expensive for an NPO budget.

By networking and keeping up with the operations of other nonprofits in a particular state or local area, a nonprofit organization may be able to take advantage of excess donations or resources from a fellow NPO. Monetary and intangible donations can be incredibly helpful for a cash-strapped organization.

Collaboration of Educational Nonprofit

It is very common for educational nonprofits, as well, to work in tandem to create a more diversified or complete curriculum. This type of partnership can result in operational cost savings that could be significant for both involved NPOs. For nonprofits that hope to share resources, it is essential that some sort of agreement outlining the rights and responsibilities of each NPO is drafted.

There are countless innovative ways that universities or colleges can support an educational nonprofit. Formal collaboration of research can, and often does, result in a new technology. Students are also valuable resources who can perform work for an NPO that counts as work-study credit. University resources or grounds might be available for evening or weekend use. Finally, a larger organization can give access to equipment that is too large or expensive for an NPO budget.

By networking and keeping up with the operations of other nonprofits in a particular state or local area, a nonprofit organization may be able to take advantage of excess donations or resources from a fellow NPO. Monetary and intangible donations can be incredibly helpful for a cash-strapped organization.

Support from Other Nonprofits

Sometimes, an NPO may wish to donate funds or services to other nonprofits. Organizations that have a desire to donate may share a constituency or aspect of the mission of another organization, and will often donate funds as well as intangibles.

Foundations that administer grants are a valuable source of monetary nonprofit funding. These grants can be national or local in scope, but very often come as long-standing, annual awards that are based upon the need and worthiness of each applicant.

Additionally, every state has regular meetings of nonprofit organizations and supports a number of online forums and groups geared toward the social networking of NPOs. Networking, both real and virtual, can be very helpful for soliciting information about the support of other nonprofits. It also provides a peer group with whom to discuss matters of mutual interest and importance.

Unrelated Business Income Tax

If the business arm of a nonprofit organization only serves as a source of revenue and does not further the NPO’s mission, it will be subject to something called the Unrelated Business Income tax.

The Unrelated Business Income Tax applies to or feeder businesses that have become successful but are not related to the mission of the original NPO. Because all proceeds from a feeder business must remain in the business, if an NPO cannot find a use for any extra capital received from the feeder business by the end of a fiscal year or quarter, it may become taxable income.

If an organization owes taxes in excess of 500 dollars a year on feeder business income, it will have to file Form 990T and pay a quarterly tax. However, a consulting professional who specializes in tax code will likely be able to assist a nonprofit in finding one of the many loopholes that allow NPOs to avoid this Unrelated Business Income Tax. Additionally, nonprofits with realistic expectations of likely feeder business profits and donations can incorporate these figures into a budget and avoid taxes through efficient use of received capital.

Feeder Organizations and Media Offerings

Published materials are very common offerings from NPOs. Published media includes media in the form of movies, books, compact discs or even downloadable content.

Media does not have to be published by the NPO. It does not even have to be published for the NPO, because though IRS regulations stipulate that a nonprofit must share research and information freely, this does not mean that an organization’s unique presentation of research needs to be given away. Feeder organizations can work in conjunction with an NPO to offer their information with distinctive presentation and packaging. For example, while Public Television may be a nonprofit organization, the companion books that accompany particular television series may be purchased at bookstores. The profits from these sales then go to support the station or program. These books and media materials may also be used as incentives (during pledge week, for example) to increase viewer support of the station.

A nonprofit can do many things with one article of intellectual property. It benefits an organization to retain copyright on work that it commissions for fund-raising purposes, because future revenue can be earned on these commissions.

Feeder Organizations and Sevices

Feeder organizations are also legally allowed to provide a service for a fee or donation that is then invested back into the original NPO. Car washes and festivals are common examples of services that can be arranged or performed by the members or volunteers of a nonprofit. Even the Boy Scouts of America, for example, once supplied the service of newspaper disposal. The newspapers that they collected were sold to recyclers who paid the scouts a small fee for the materials gathered.

Though such services usually target the NPO’s particular constituency and serve as marketing for the nonprofit organization, the services are permitted to seek a different audience in order to attract funding from other locations. Educational enterprises might offer related media materials, but even a café that caters to NPO staff is considered a viable “service.” Research operations may provide consulting services to fund their basic, freely available research.

Feeder Organizations and Material Goods

An NPO is legally allowed to sell goods that are related in some way to its mission or curriculum. A nonprofit can sell raw materials or finished products and target people inside or outside of its constituency. Even the development products that are a result of research conducted by an NPO are lawful options.

Souvenir items, small-ticket impulse items, and gift shop items are commonly found in museums and theaters. Catalogue items are also viable options for an NPO to raise capital.

Some not-for-profits meld their mission and their for-profit goals to obtain a high level of industrial efficiency. For instance, Goodwill Industries works as a vocational educator by hiring disadvantaged community members to sell donated goods that have been refurbished by Goodwill itself. In this way, Goodwill Industries runs a for-profit feeder organization that funds the administration of its programs that assist disadvantaged members of the community. This process allows Goodwill Industries to use a feeder business model to help it accomplish its original nonprofit mission.

Feeder Organizations

Nonprofit organizations get funding from a variety of sources. One of the most common of these is called a “feeder organization.” A feeder organization is a business that is run for the benefit of the members or the constituency of a particular NPO. In this way, it “feeds” into the activity of the main NPO.

Feeder organizations are also limited in the way that they can give money back to their parent NPO. They cannot, for example, give out grants. Instead, they must turn intact funds over to the NPO.[i] Furthermore, feeder organizations must operate in a manner that is secondary to the mission and work of their parent NPO. The IRS uses something called a “primary purpose test”[ii] to assess whether an organization is primary or secondary. Generally, this test means that if a feeder organization makes significant money with a product or service, the parent NPO must either expand to make use of those funds, or the money must be given away to another nonprofit.

Feeder organizations and parent NPOs must have separate financial records, and the transfer of funds from one business to the other must be understandable and transparent. Those who run a feeder business can be volunteers or employees, but members of the parent NPO may not expect reimbursement for work done at a feeder organization.

While running such an organization means a sizeably increased load of paperwork, the potential for creating a source of self-sustained funding can be very appealing. While running a feeder organization cannot eclipse the primary purpose of the mission of an NPO, if legally established, it can be a useful and long-lasting source of revenue.

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[i] ” Feeder organizations pay all of their profits to one or more IRC 501 organizations. An organization that directs all of its profits to research and dispenses fellowships to individuals rather than institutions is not a feeder. Edward Orton, Jr. Ceramic Foundation, 56 T.C. 147 (1971).” -- ibid.

[ii] "An organization may engage in extensive business activity and yet its charitable activity may be regarded as meeting the primary purpose test if its program of charitable contributions and grants is reasonably commensurate with its financial resources." -- Ibid.