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.
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.
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.
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.
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.
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.
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.
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.
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 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.
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.
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.
[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.
Like any other business, nonprofits may hire regular employees for necessary work, including grant writing. Having workers in full-time positions entirely dedicated to grant writing is generally only a possibility for large NPOs, as small start-ups generally do not have access to the resources necessary to hire full-time grant writers. The wage scale for nonprofit grant writing tends to be lower than comparable for-profit work, but larger organizations tend to pay closer to industry standard wages.
Finding the equilibrium between the size of the nonprofit and the amount of grants that the organization will apply for can be challenging. Generally, small start-ups may want to keep grant writing activity comparably small to ensure a steady stream of capital, not an overwhelming wave of funding.
Nonprofit organizations must be unambiguous when hiring a volunteer or freelancer to do any work, and must discuss approach, expectations, and compensation before taking on any worker. Additionally, a member of the organization should always check over any contract or volunteer work before sending it in, even if just to verify spelling or basic items. Doing so can prevent future problems with the very workers who help to secure funding for the organization.
NPOs often hire outside of their organization for grant writing work. Writers who are contracted to do grant work (or any other work to generate publishable materials) are generally paid in a lump sum with no explicit right to monies collected as a result of their work.
Grant writers are available for hire in many fields. Students or recent graduates are often willing to take on a stipend wage for the experience and resume reference. Freelance writers are another labor pool that is available to do grant writing. Finding workers to write grants can be a relatively easy task because they can be found and hired online. They don’t have to live in the same state as the NPO or be a member of its constituency to take on a job.
Grant applications are specific to the organization that offers the grant, but most require a cover letter and an attached section that is similar to a resume. The essential points to cover often include:
Always be sure to follow guidelines fully and carefully. Like any other application, check for missed lines, incomplete answers, incorrect information and inconsistencies.
A balance must be found between sending out too many applications that have not been well-crafted and sending out too few applications that have taken excessive amounts of time to complete. A smart nonprofit will concentrate on finding as many funding sources as possible and then leave the actual work of application for someone else within the organization (volunteers) or outside of it (freelancers or employees).
Among the most important sources of funding for nonprofits are grants. The federal and local government, separate individuals, and even other nonprofits and foundations might be sources of funding. Some NPOs exist with the sole purpose of finding funds for other worthy nonprofits. All nonprofits must find and apply for any and all available grants.
Grant writing is one of the most important activities for a nonprofit, and a number of resources are available to help in the application process. There are numerous guides both in book form and online that can give style and formatting assistance. People and organizations who have experience in writing grants may also be willing to look at an organization’s applications and give an honest critique.
Once the NPO is established and ready for everyday operation, the board of the organization must ensure that there is enough capital to run the business. A successful nonprofit relies upon a steady flow of funding for its operational expenses.
Making sure that the budget is actually functioning as planned is the first duty of the board and Chief Financial Officer. Paying close attention to initial financial reports will form a firm foundation to make sure that the NPO remains on target financially.
A newly established nonprofit should have projected a 5 year budget before the start of operations. If the creator of the budget was overly optimistic in his or her projections, then accessing and implementing an operational budget will be problematical, and a rethinking of the finances of the NPO must take place. Board members must allocate specific funds as they come in and subsequently adjust the planned budget. Being able to work with change and knowing how to adjust to new economic realities are some of the most important traits for members of a new nonprofit.
All new nonprofit organizations should visit a tax attorney and an accountant at least once. The most important function these professionals serve is the inspection of application paperwork before it is sent in to the IRS. They can also advise on an institution’s Charter Documents and Articles of Incorporation. Consultation can be as cursory as ensuring all sections of the paperwork are filled in, or as thorough as the actual drafting of all legal documents.
A professional who specializes in working with NPOs will be best suited for the job of advising a new nonprofit on paperwork and incorporation. Asking for recommendations from previously established nonprofits can be an effective way of finding a lawyer or attorney with the right experience and knowledge.
Professionals are sometimes interested in donating their time to a cause that is near to their hearts. Looking for an attorney or tax professional who will donate services can be a great way to save money, but even if an NPO is obliged to pay, utilizing the experience of a professional will save time and legal troubles in the future.
While it is always more favorable to start a business from available funds, a new NPO may want to consider arranging low-interest loans through an institution that specializes in funding nonprofit start-ups. This is a particularly good option for a founder who has previously started a nonprofit and has a proven track record of fundraising and operating ability, but can be helpful for those new to the nonprofit sector, as well.
Banking institutions may also be able to advise a new organization on business plans, financial issues, and strategies for fund-raising. Using this resource can help clarify some of the more confusing aspects of starting a financially successful NPO.
The money required by an NPO for ordinary operating expenses will be much reduced if the start-up costs of the organization are low, as well.
Successful start-ups often stretch the “start-up phase” of the organization over a five-year period. In doing so, the organization is allowed a slow and steady progression that is more likely to follow the progression of the NPO’s specific fund-raising ability. This slower, longer process also allows for additional input during the initial stage of development, minimizing risk by ensuring that the NPO unfolds the way intended.
In establishing an organization it is important that a desire to make big change in the world does not translate to simply founding a large organization. Small NPOs have a flexibility that large groups do not. Huge nonprofits often require vast amounts of startup capital for an unproven goal, and their size can be intimidating to some constituencies that might benefit from more individualized attention. Small NPOs have the ability to not only spend time finding out what truly works and what is genuinely required in a constituency, but also the capacity to change and adapt their mission.
An endowment is money that is left in a bulk sum, often as the result of a willed bequest that is turned into an endowment fund. The proceeds generated from this wealth usually come in the form of interest, and are used to fund a private foundation.
Some organizations solicit endowment funds (also known as “planned giving”) from the living to be received upon their death. Funds from a donor may be put into a larger endowment fund with other planned gifts, unless specified in the will that it must be kept separate.
Though not-for-profits may not enter into real estate speculation with endowment assets, if land is the endowment, the NPO may develop those lands to sell. Additionally, money collected in rents or other “use fees” can also be used as nontaxable income, but only up to a point. If the amount of money generated from the sale or use of endowment lands is more than the operational budget of a nonprofit for that year, the additional wealth will likely be taxable. As with other capital funding, if a nonprofit is given money or goods, that money or those goods must be cycled back into the organization to be used by the NPO.
Grants are a major source of funding for nonprofit industries. Thousands of available grants go unclaimed every year, so applying for funding through a variety of grants can be one of the most beneficial fundraising activities for a small nonprofit. Local sources of funding available in the form of city or county grants, and federal grants exist on the national level, as well. Grant writing is an essential skill for a new nonprofit organization.
Donations from local businesses and individuals, too, can serve the greater financial good of a not-for-profit organization, and should be considered an important aspect of the financial well-being of an NPO. Many times nonprofits are successful only because people come together and pool their resources. These resources can include anything from money to time to creativity. Depending upon the individual, he or she may wish to claim these donations as a charitable donation tax deduction. For any donations made to an NPO, there must be a receipt given to the contributor that includes the name and contact information for the NPO, as well as what was donated to the organization.
If the NPO’s application to the IRS is pending, as long as it has incorporated as an NPO in its state, it should be able to legally claim charitable donations deductions. Though it depends upon the specific laws and regulations in the state, most allow donations to NPO start-ups as deductions.
Donations can come from many sources or just one. However, when a single donor contributes a large amount of money, it is essential that the contributor does not receive any special treatment. While the donor may be recognized, as is the case when a memorial building is erected on a college campus or hospital, he or she cannot lobby the NPO in a way that is more influential or different from that of any other citizen or member of the organization.
With the requisite paperwork for establishing a nonprofit organization out of the way, the organization can start work toward the fulfillment of its mission. With an involved board and conservative financial and operational choices, the nonprofit has a good chance at success.
Some organizations are lucky enough to fall into a very lucrative source of funding, and, as in the case of a large inaugural grant from a donor, start-up funding is taken care of and financial issues are clear from the outset. More often, though, most NPOs rely on a mixture of funding sources. Having a variety of sources for capital ensures an NPO’s status as a public charity. It also has the added advantage of diversifying funding sources, decreasing the likelihood of failure as a result of reduced funding.
Once an NPO has commenced operations, it is essential to ensure that there are operational funds to keep the enterprise running. Just like any other business, operating expenses are an important aspect of a budget, and staying within that budget can mean the difference between a successful NPO and an unsuccessful one.
Once an NPO has been established within its state and has sent its IRS filings, it can petition the US Postal Service (USPS) for the right to use nonprofit-rate mailing. Very often, the Postal Service will allow an organization to begin using the lower rate postage for its materials even before the tax-exempt status paperwork has been given approval by the IRS. For nonprofits that have a business ID number registered to a nonprofit corporation as well as an EIN, it is a good idea to check with the USPS for access to these special rates.
Incorporated nonprofits are not usually required to pay county taxes, though this of course depends upon the local area. Some counties require individuals and businesses to pay a temporary county tax used to provisionally fund school bonds or county roads. Incorporation at the state level is usually all a nonprofit needs to verify that it is exempt from county taxes.
Many cities have a local sales tax, but nonprofits that incorporate generally are not liable for these taxes once the application to the IRS is in the mail. The NPO is question may keep copies of the forms sent to the IRS as proof of application. A photocopy of the dated endorsement page is typically all that is needed to corroborate city tax exemption. The local area’s city hall should be able to provide the NPO with the correct forms to file for exemption at the local level. Many towns also have this information publicly available through the internet.
A package that outlines the process and gives a step-by-step explanation of how to file as a nonprofit is available for download from the Internal Revenue Service. This bundle is called the Form 1023 package, and makes the process reasonably straightforward. Additionally, there is a practical list of specific forms and documents included at the end of this book for reference.
Additional materials that will likely be required include:
In 2005, the IRS fielded over 65,000 applications for nonprofit tax-exempt status, so once an organization has filed with the Internal Revenue Service, it will have to wait as long as three years. Trends indicate that nonprofits are being established at a higher rates every year, so this wait may increase through time. For nonprofits that require their application be looked at quickly in order to secure a particular grant, they may be able to pay an additional extenuating circumstances fee to expedite their request.
Private foundations and public charities involve separate forms and filing methods. Many organizations find themselves using an outside accountant or someone within the organization who is an accountant to help them determine what type of organization to file as. Tax professionals can give informed advice and opinion on what to file as, and how to file properly.
Filings should be reported as soon as possible, and must be filed within 90 days of any year the organization has more than 5,000 dollars in budgeted revenues. If an organization does not meet this 5,000 dollar target, the business has 15 months from the date of incorporation in its state to file Form 1023 and the requisite fee. Applications that do not have an attached fee will not be processed. Additionally, depending upon the state, there is usually a possible 12-month extension that an NPO can request. Oftentimes, even if the filings are reported late, organizations can file for retroactive exemptions. As soon as the necessary forms are filed, a prospective nonprofit is considered tax-exempt.
Filing with the federal government is one of the most challenging steps in the process of establishing a nonprofit. As soon as an organization has incorporated within its state and received its EIN, or tax ID number, it may begin the application process.
Almost all educational nonprofits are considered private foundations unless they meet the requirements that might make them a public charity.[i] The main difference between private foundations and public charities is the method by which they are funded. Those that are funded by a wide support base that is often accompanied by constant appeals to the public are considered charities, whereas those that have been set up with some sort of primary single source of private funding are considered foundations (IRS-4220, 2003). Organizations that file as public charities will have greater latitude in accepting donations, and are subject to more favorable tax rules.
[i] As per Section 509(a)(3) – IRS publications, online. http://www.irs.gov/charities/article/0,,id=137609,00.html
New nonprofits should seek the advice of tax professionals who are likely to know what forms are necessary and what further actions may need to be taken. Tax attorneys can give helpful suggestions for successful filing.
Filing fees typically run around a few hundred dollars. While this may seem to be exorbitant for an initial processing fee, the future savings in state taxes alone might equal this amount in very little time. The office of each state’s Secretary of State is likely to have further information on filing and fees, and most states have fee schedules online.
Once the incorporation process is finished, the NPO no longer belongs to the founder. Rather, it is a public group that exists for the public, by the board of directors, and with the approval of various regulatory groups. A president may retain executive powers, but the organization, in essence, belongs to the community.
Filing articles of incorporation is done at the state level according to state laws. It is now possible (as of 2005) to incorporate as a Limited Liability Corporation (LLC) and still be eligible for 501(c)(3) status (IRS-557, 2005). Each state has different laws on what constitutes an LLC, so new NPO founders should investigate this possibility. If the separate members of the board live in several states, it may be a good idea to do research to find out which state has the regulations best suited to the organization’s needs. If an NPO’s constituency is within a given state, however, the organization must apply there. Larger and international NPOs may need to file a request for a Certificate of Authority to operate in a state other than the one in which it was founded. This certification is necessary if an NPO raises a great deal of funds in a separate state, or hires members of that state as employees. If the nonprofit organization is making a significant impact in a particular state, it should file a request for this certificate.
The criteria for filing in each state is different, but will undoubtedly include downloading or picking up a copy of an official form as well as attaching supporting documentation. Some states have separate applications for nonprofits, foundations, and charities, and because the process of filling out the necessary documents can be quite arduous, it is important to ensure that the correct forms are received.
A nonprofit organization must be registered at the state, as well as the federal, level. This most often requires separate paperwork to be filed, but is an overall relatively straightforward process.
According to the previously established 5-year plan of the nonprofit organization, any NPO that will make more than 5,000 dollars per year should incorporate. Businesses that make less than this amount may continue as unincorporated foundations, though doing so may mean that they become ineligible for certain (if not most) grant opportunities. Not incorporating can also jeopardize an application to the IRS. NPOs must be recognized as an “organized group” by the Internal Revenue Service in order to be eligible to apply for 501(c)(3) status (IRS-4220 2003).
Even for companies that will not make 5,000 dollars in a given year, NPO activities like charging fees, hiring employees, owning property, and signing contracts are all protected by incorporation. Though it is not easy, incorporating may be the most reliable way to be a recognized, legally protected organization.
