More Q&A

Questions we have received recently...

Question:
Executive Director salary justification - who do we submit this report to? What are examples of how to justify the salary and is it only for the Executive Director?

Answer:
The intermediate sanctions requires that the board be able to show that they did proper research to determine that the salary of the exec is not excessive. The minutes should verify that some kind of salary survey was conducted that compared the salary being offered with organizations of similar size and type. The board needs to justify to itself that the salaries it offers top level staff, board members, contractors, etc. are not excessive.

The regulation applies to all salaries (mostly top level salaries), contracts, income paid to board members, any "insiders". More information on Intermediate Sanctions can be found here.

Question:
What is the deal with UBIT?

Answer:
From the Nonprofit Times enewsletter:

Finance...

Getting hammered with UBIT

Many nonprofit organizations embark on ventures that cross over into the for-profit world, sometimes by design and sometimes by accident.

The Internal Revenue Service (IRS) has strict regulations governing Unrelated Business Income Tax (UBIT), which can be regarded as money a nonprofit makes that is not part of its nonprofit operations.

In her book Something Ventured, Something Gained, Laura Landy offers several options for a nonprofit that has 15 percent or more of its total income that is unrelated income.

Those options are:

-- Revise the charter of the organization. Depending on the nature of the business, the nonprofit can file with the IRS to amend its charter.

-- Alter the business to make it related. Although possible, this course of action is not recommended.

-- Stabilize or reduce the income to below 15 percent. This may be counterproductive, since the point of a nonprofit and a for-profit is to raise as much money as possible.

-- Sell the business. Caution is needed here, because the income from the sale may be unrelated and thus taxable.

-- Establish another nonprofit organization in which the business activity is related. A cooperative partnership can be established under which the second nonprofit donates its profits to the parent nonprofit.

-- Establish a separate profit-making corporation. This can be complicated, but often it is the best course of action.

Also check the links to the right for more info on UBIT.

Latest Boot Camp Event Info

The latest info is on the CAN website, click the title of this post to get there.

Latest questions from a Boot Camp

Can a 501 (c) 3 donate to a 501 (c) 6?
If the missions are similar then we think yes, it should not be an issues. You said if I remember rightly that it was some old office equipment. If all the items to be passed on are fully depreciated then it really wonÂ't be a problem either way since there is technically no book value moving between the organizations.

Is a home office deductible if used for a charity?
Unfortunately no, just the cost of materials used (paper, ink, staples and such).

Have there been any changes to SFAS 116?
No new changes, it is still in effect.

Anybody have different answers?

Does the hiring of undocumented workers pose an exemption threat?

From what I have been able to find I would still say no. I have emailed others more knowledgeable than I and will let you know if they say different.

UPDATE - what they have said:
In theory, it should not be a threat to the exemption. However, this will depend on several factors, namely,

1. The type of exemption. A church will have a better stance than say a hospital.
2. The facts. Did the organization know they were employing an undocumented individual? What did they do about it when they found out?
3. How was it discovered? By the IRS, the organization, who?
4. Do they continue to break the law? Continued disregard for the law may jeopardize the exemption.
   

Contributions that are conditional

A questions was asked at a recent Boot Camp about conditional contributions. A condition is effectively a barrier that must be overcome before a promised gift becomes a contribution. A part of the definition of a contribution is that it is an unconditional promise to transfer assets to a nonprofit.

The question went along the lines of "is a contribution conditional if the promised contribution is not paid until the end of the year and the work is completed." - If I got this wrong please let me know. What you could have here is an exchange transaction, and not technically a contribution.

But assuming it is a contribution you can recognize the revenue in two ways depending on the donor/grantor's instructions. The first would be piecemeal. As you do a portion of the work a portion of the condition of the contribution is met and therefore you can count it as revenue and a receivable. So as you do the work, you recognize a bit of the grant at a time. The second would be to recognize it all at once after the work is done. Once the work is done (the condition is met) then you have a contribution and book the receivable.

When you get the actual cash does not factor into the discussion in any case, just when you get conformation from the donor that at some point you will be getting the cash.

Hope that helps

CA Attorney General

Who regulates charities in California? The state AG's office. Click the above link to find out all the resources they have to help you stay compliant. If someone wants to complain about your charity, this is where they will go.

"Publicly Supported"

"Publicly Supported"
Definition of what the IRS calls public support, important for maintaining your 501c3 status. Publication 557 (link in the article here and over to the right in the IRS section) goes into more details about this.

Some answers to questions posed at the Eureka boot camp

Q: Why is the Chart of Accounts numbered?

A: To make it easier to index and catalogue your chart items and when you had to do accounting on ledger sheets by hand it was easier to write 2010 that “accounts receivable – grants receivable” in the little green spaces.

Q: Is a PSA donated air time or contractual obligation?

A: From what I have been able to dig up it is a donation even though they are required to make the time available.

Q: Specifics for letter to a donor, what the nonprofit gives them.

A: See the link in the IRS section to the right labeled, “Contributions Guidelines for Donors.”

Q: A nonprofit gives money to a community foundation to create an endowment. Is that money permanently restricted?

A: From what I have found it all depends on how you create it. Can you revoke the “gift” to yourself? I would guess that the money would be treated as permanently restricted until the nonprofit changes the status. It is different to me than a board designated fund always being considered unrestricted because in the above question you are giving control of the money to another organization.

Q: How to book membership income when the “membership” is actually a donation?

A: If your group solicits membership as a way of soliciting donations but no real value is exchanged for the membership, that membership is considered a donation and entered on your books as such. If the “member” gets a tote bag or equivalent item with their membership the value of that is deducted from the contribution and put into the earned income section.

Q: Are volunteers reported under a nonprofit’s worker compensation insurance?

A: By law, workers' compensation benefits for volunteers are not required. A volunteer who does not receive compensation for his or her work is not entitled to workers' compensation benefits, unless the agency for which the volunteer works chooses to provide these benefits (See Labor Code Section 3363.5).

I don’t claim to have all the right answers listed, just what I have been able to find through my research. Anyone have any different ones? Post them in the comments please!

Life Cycle of a Public Charity

The IRS has a nice section on its site that details what most charities will go through and what they will have to do. Compensation issues, records retention, what does a donor get, a lot of good information can be found here.

Intermediate Sanctions

A PDF that talks about them and what constitutes excess benefits and compensation.