It can be difficult upon first glance to understand the differences between the various sets of letters and numbers used to identify nonprofit organizations. You hear a lot about 501(c)(3) organizations, but what if you come across a 501(c)(4) entity when making donations? What if you want to form a 501(c)4)? What does this type of IRS identification mean?
What is a 501(c)4?
Both 501(c)(3) and 501(c)(4) organizations are tax-exempt from federal income taxes on income earned and raised related to their exempt purposes.
501(c)4s are best categorized as civic organizations and local associations of employees. The Code of Federal Regulations, §1.501(c)(4), says: “A civic league or organization may be exempt as an organization described in section 501(c)(4) if:
It is not organized or operated for profit; and
It is operated exclusively for the promotion of social welfare.”
The most common organizations with a 501(c)(4) designations are those active in politics, lobbying, and advocacy work. Some classic examples include volunteer fire departments, Miss America Organization, and community service clubs like Kiwanis, Rotary, and Lions Clubs.
By comparison, 501(c)3 organizations are recognized by the IRS as tax-exempt because they are organized and operated for: “religious, charitable, scientific, testing for public safety, literary, or educational purposes, or for the prevention of cruelty to children or animals.”
These organizations tend toward advocacy work, political actions, lobbying, environmental purposes, homeowners’ associations, and various community associations. Interestingly, it is not uncommon to find some organizations occupying the ranks of 501(c)(4) that would normally be considered 501(c)(3) if it were not for particular activities such as substantial lobbying or political candidate endorsements…things prohibited under 501(c)(3).
To be granted 501(c)4 status, the exempt purpose of the organization is the promotion of social welfare. What does social welfare mean exactly? The Code reads (with italics added for emphasis):
An organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community. An organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements.
To achieve and retain 501(c)4 status, the organization’s must primarily engage in activities that further its exempt purpose (promotion of social welfare). However, the organization could engage in activities (like lobbying and political campaign intervention mentioned below), so long as they don’t exceed the primary actions related to social welfare. So, technically, “other activities” should not exceed 49% of the organization’s operations.
In comparison, a 501(c)(3) organization is expressly prohibited from engaging in more than an insubstantial amount of activities that do not further its exempt purpose.
Lobbying
501(c)(4) organizations may engage in unlimited lobbying so long as it is in furtherance of their social welfare purposes.
Political Activities
So long as political campaign activities are not the primary actions (meaning more than 49%) of the organization, the 501(c)(4) may engage in political campaign intervention.
By distinction, 501(c)(3) organizations are prohibited from engaging in any political campaign intervention activities.
Contribution Deductibility
Generally, donor contributions to 501(c)(4) organizations are not deductible. There are limited exceptions for certain contributions to war veterans organizations and volunteer fire companies. In fundraising solicitations, 501(c)(4) organizations must disclose to prospective donors–in an obvious and easily recognizable format–that donations to the organization are not deductible as charitable contributions for federal income tax purposes. Note well that some payments to 501(c)(4)s will be deductible as business expenses in certain situations.
How do you form a 501(c)(4)
If an organization is looking for 501(c)(4) status they may go about it one of two ways. The organization may:
Apply for formal IRS recognition of exemption by filing Form 1024; or
Declare itself as exempt under 501(c)(4).
In both cases, the entity must notify the IRS by electronically filing Form 8976 within 60 days of establishing intent to operate as a 501(c)(4) organization. (Organizations operating under any other 501(c) section should not file this notice!)
Want to learn more? Have questions which organization designation may be best for your entity? Maybe your 501(c)(3) would benefit from establishing a 501(c)(4) arm? Don’t hesitate to contact me to discuss your situation!
https://www.gordonfischerlawfirm.com/wp-content/uploads/2019/01/Screen-Shot-2019-01-30-at-11.17.49-AM.png6581037Gordon Fischerhttps://www.gordonfischerlawfirm.com/wp-content/uploads/2017/05/GFLF-logo-300x141.pngGordon Fischer2020-01-27 19:25:062020-05-18 11:28:37What is a 501(c)(4) organization?
Right now, a different sport without a net is grabbing our attention. Currently, the NHL sports fans are tuned into the NHL All-Star Game where representatives from some of the best teams like the St. Louis Blues and Boston Bruins take to the ice. So, allow me to make a Frost-ian point about nonprofits in a hockey context.
For a nonprofit to operate without having proper policies and procedures in place, is like playing the NHL All-Star Game without a net – and without sticks, skates, helmets, or a puck. Without certain policies in place, a nonprofit simply cannot run properly. Without rules, there can be no expectations. Board members, officers, staff, donors, volunteers, and other stakeholders must work to ensure they’re not skating on thin ice. Give your stars the protection they need, and the tools they require, to be a winning team.
From working with a wide range of nonprofit clients, I’ve learned that many want proper policies and procedures, but they are simply stymied or confused on where to start. That’s where an attorney well-versed in nonprofit law can come in.
Many nonprofits have to fill out an annual form, IRS Form 990. Form 990 is unique in that it not only asks about financial information but also many of its questions directly ask about policies and procedures. There are at least 10 major polices asked about on Form 990.
Special Offer!
I offer 10 major policies and procedures nonprofits definitely need for a flat fee of $990. This includes consultations and a full review round to make sure the policies and procedures fit the needs and operations of your particular nonprofit. Adopting the policies explained in this guide will ultimately save your nonprofit organization time and resources, and you can feel great about having a set of high-quality documents to guide internal operations, and present to the public.
Whether a nonprofit is large or small, new or decades-old, a mission that is narrow or multi-faceted, all nonprofits should have these policies in place. Yes, these policies are asked about on Form 990, but even if a tax-exempt organization is not required to submit a variation of the 990, the benefits are still immense. In general, having policies in place provides a framework and the expectations for an organization’s executives, employees, volunteers, and board members. Such policies can also be referenced if/when issues arise.
Another major reason to have proper policies and procedures in place is that they provide a foundation for soliciting, accepting, and facilitating charitable donations.
Additionally investing in strongly written, organization-specific policies is a practice in preparation in case of an audit. (The IRS audits tax-exempt organizations, just as it audits companies and individuals.
Policy Highlight
Among the major policies and procedures included in my special 10 for 990 offer are the following. (You can download my free guide with more extensive information and explanations regarding these policies and procedures.)
Compensation
Under IRS rules, compensation for nonprofit staff must be “reasonable and not excessive.” The IRS recommends a three-step process for determining appropriate compensation: (1) conduct a review of what similarly-sized peer organizations, (2) in the same or similar geographic location, (3) of comparable positions.
Conflict of Interest
A conflict of interest policy should do two important things: (1) require board members with a conflict (or a potential conflict) to disclose it, and (2) exclude individual board members from voting on matters in which there is a conflict. If consistently adhered to, this policy can inspire internal and external stakeholder confidence in the organization, as well as prevent potential violations of federal and state laws.
The document retention policy should specify what types of documents should be retained, how they should be filed, and for what duration. This policy should also outline proper deletion/destruction techniques.
This specifically addresses guidelines for making financial decisions, reporting the financial status of the organization, managing funds, and developing financial goals. The financial management policies and procedures should also outline the budgeting process, investment reporting, what accounts may be maintained by the nonprofit, and when scheduled auditing will take place.
Form 990 Review
Form 990 asks about . . . . Form 990! That’s about as meta as the IRS gets. Specifically, this policy covers how Form 990 was prepared and how it was approved. A written policy is incredibly useful in clarifying a specific process for distribution and procedure review by the board of directors.
Fundraising
This one may seem obvious, but almost every nonprofit needs a fundraising policy, as almost all nonprofits engage in some sort of charitable fundraising. Your organization is no exception! This policy should include provisions for compliance with local, state, and federal laws, as well as the ethical norms the organization chooses to abide by in fundraising efforts.
Gift Acceptance
If well-written and applied across the organization, the policy can help the organization to kindly reject a non-cash gift that can carry extraneous liabilities and obligations the organization is not readily able to manage.
Investment
Before investments are made on behalf of the organization, there should be a sound investment policy in place to define who is accountable for investment decisions. The policy should also offer guidance on activities of growing/protecting the investments, earning interest, and maintain access to cash if necessary.
Public Disclosure
Form 990 specifically asks the filing organization to report if certain documents are made available to the public, such as governing documents (like the bylaws), conflict of interest policy, and financial statements. Additionally, the form asks for the name, address, and phone number of the individual(s) who possesses the financial “books” and records of the organization.
Whistleblower
Nonprofits, along with all corporations, are prohibited by the federal government from retaliating against employees who call out, draw attention to, or “blow the whistle” against the employer’s practices.
If you already have some (or all) of the above-listed policies in place, seriously consider the last time they were updated. How has the organization changed since they were written? Have changes to state and federal laws impacted these policies at all? It may be high time for a new set of policies that fits your organization.
Why 10 For 990
The mission of Gordon Fischer Law Firm is to promote and maximize charitable giving in Iowa, and to that point I want to help every Iowa nonprofit be legally compliant. It’s like how the coach wants to do everything they can to help their team win on the ice. The 10 policies a part of this promotion will save you time, resources, and you can feel good about having a set of high-quality policies to guide internal operations and present to the public.
Again, for now, I’m offering these 10 policies—including needed consultations—for the low flat fee of only $990. Contact me anytime at gordon@gordonfischerlawfirm.com or give me a call at 515-371-6077. I look forward to discussing your tax-exempt organization’s needs and how we can set you up for compliance success.
https://www.gordonfischerlawfirm.com/wp-content/uploads/2018/07/alex-korolkoff-493897-unsplash.jpg28903854Gordon Fischerhttps://www.gordonfischerlawfirm.com/wp-content/uploads/2017/05/GFLF-logo-300x141.pngGordon Fischer2020-01-25 15:00:442020-05-18 11:28:37Stanley Cup Inspired: How Policies & Procedures Help Nonprofits Win the Game
Besides three parties, at least two other elements are necessary for a valid trust.
The trust instrument is the document that sets forth the terms of the trust.
The other necessary element is property. After all, the trustee must be holding something for the benefit of the beneficiary.
Property of the Trust
When laypersons use the word “property,” I believe they usually mean real estate. But, lawyers use the term “property” much, much more broadly, to mean literally any transferable interest. Sometimes trust property is also referred to as the res or corpus or assets of the trust. (Bonus words!)
Any property can be held in trust. Seriously, check out this list of 101 assets that would fit in a trust. You could likely think of literally hundreds more types or categories of property to place in your own individual trust.
How about an unfunded trust that will receive property at some point in the future? Can you even do that?
Yes, that can certainly be done. This is usually called a pour-over trust. (More bonus words!) The pour-over trust deserves its own blog post. Briefly, a pour-over trust is usually set up by language in a will. A will may validly devise property to a trust, established during the testator’s lifetime, and then funded at her death.
Example
Let’s take a very simple example. Kate has a lawyer write her will, including language that at her death all her Monster Truck memorabilia be placed in a trust for the benefit of her nieces and nephews. Only at Kate’s death will the property be transferred into the trust, not before.
Take-Aways
The important points are that property is necessary, at some point, to make a trust valid, and that literally any transferable interest in property – anything! – can be held in a trust.
https://www.gordonfischerlawfirm.com/wp-content/uploads/2017/08/Screen-Shot-2017-08-14-at-3.21.37-PM.png6841048Gordon Fischerhttps://www.gordonfischerlawfirm.com/wp-content/uploads/2017/05/GFLF-logo-300x141.pngGordon Fischer2020-01-21 08:25:442020-05-18 11:28:37(Legal) Word of the Day: Property
What is a 501(c)(4) organization?
NonprofitsIt can be difficult upon first glance to understand the differences between the various sets of letters and numbers used to identify nonprofit organizations. You hear a lot about 501(c)(3) organizations, but what if you come across a 501(c)(4) entity when making donations? What if you want to form a 501(c)4)? What does this type of IRS identification mean?
What is a 501(c)4?
Both 501(c)(3) and 501(c)(4) organizations are tax-exempt from federal income taxes on income earned and raised related to their exempt purposes.
501(c)4s are best categorized as civic organizations and local associations of employees. The Code of Federal Regulations, §1.501(c)(4), says: “A civic league or organization may be exempt as an organization described in section 501(c)(4) if:
The most common organizations with a 501(c)(4) designations are those active in politics, lobbying, and advocacy work. Some classic examples include volunteer fire departments, Miss America Organization, and community service clubs like Kiwanis, Rotary, and Lions Clubs.
By comparison, 501(c)3 organizations are recognized by the IRS as tax-exempt because they are organized and operated for: “religious, charitable, scientific, testing for public safety, literary, or educational purposes, or for the prevention of cruelty to children or animals.”
These organizations tend toward advocacy work, political actions, lobbying, environmental purposes, homeowners’ associations, and various community associations. Interestingly, it is not uncommon to find some organizations occupying the ranks of 501(c)(4) that would normally be considered 501(c)(3) if it were not for particular activities such as substantial lobbying or political candidate endorsements…things prohibited under 501(c)(3).
Exempt Purpose: Social Welfare
To be granted 501(c)4 status, the exempt purpose of the organization is the promotion of social welfare. What does social welfare mean exactly? The Code reads (with italics added for emphasis):
To achieve and retain 501(c)4 status, the organization’s must primarily engage in activities that further its exempt purpose (promotion of social welfare). However, the organization could engage in activities (like lobbying and political campaign intervention mentioned below), so long as they don’t exceed the primary actions related to social welfare. So, technically, “other activities” should not exceed 49% of the organization’s operations.
In comparison, a 501(c)(3) organization is expressly prohibited from engaging in more than an insubstantial amount of activities that do not further its exempt purpose.
Lobbying
501(c)(4) organizations may engage in unlimited lobbying so long as it is in furtherance of their social welfare purposes.
Political Activities
So long as political campaign activities are not the primary actions (meaning more than 49%) of the organization, the 501(c)(4) may engage in political campaign intervention.
By distinction, 501(c)(3) organizations are prohibited from engaging in any political campaign intervention activities.
Contribution Deductibility
Generally, donor contributions to 501(c)(4) organizations are not deductible. There are limited exceptions for certain contributions to war veterans organizations and volunteer fire companies. In fundraising solicitations, 501(c)(4) organizations must disclose to prospective donors–in an obvious and easily recognizable format–that donations to the organization are not deductible as charitable contributions for federal income tax purposes. Note well that some payments to 501(c)(4)s will be deductible as business expenses in certain situations.
How do you form a 501(c)(4)
If an organization is looking for 501(c)(4) status they may go about it one of two ways. The organization may:
In both cases, the entity must notify the IRS by electronically filing Form 8976 within 60 days of establishing intent to operate as a 501(c)(4) organization. (Organizations operating under any other 501(c) section should not file this notice!)
Want to learn more? Have questions which organization designation may be best for your entity? Maybe your 501(c)(3) would benefit from establishing a 501(c)(4) arm? Don’t hesitate to contact me to discuss your situation!
Stanley Cup Inspired: How Policies & Procedures Help Nonprofits Win the Game
NonprofitsRobert Frost famously quipped that writing poetry that doesn’t rhyme is like “playing tennis without a net.”
Right now, a different sport without a net is grabbing our attention. Currently, the NHL sports fans are tuned into the NHL All-Star Game where representatives from some of the best teams like the St. Louis Blues and Boston Bruins take to the ice. So, allow me to make a Frost-ian point about nonprofits in a hockey context.
For a nonprofit to operate without having proper policies and procedures in place, is like playing the NHL All-Star Game without a net – and without sticks, skates, helmets, or a puck. Without certain policies in place, a nonprofit simply cannot run properly. Without rules, there can be no expectations. Board members, officers, staff, donors, volunteers, and other stakeholders must work to ensure they’re not skating on thin ice. Give your stars the protection they need, and the tools they require, to be a winning team.
Where to Start?
From working with a wide range of nonprofit clients, I’ve learned that many want proper policies and procedures, but they are simply stymied or confused on where to start. That’s where an attorney well-versed in nonprofit law can come in.
Many nonprofits have to fill out an annual form, IRS Form 990. Form 990 is unique in that it not only asks about financial information but also many of its questions directly ask about policies and procedures. There are at least 10 major polices asked about on Form 990.
Special Offer!
I offer 10 major policies and procedures nonprofits definitely need for a flat fee of $990. This includes consultations and a full review round to make sure the policies and procedures fit the needs and operations of your particular nonprofit. Adopting the policies explained in this guide will ultimately save your nonprofit organization time and resources, and you can feel great about having a set of high-quality documents to guide internal operations, and present to the public.
All Nonprofits Need These 10 Policies
Whether a nonprofit is large or small, new or decades-old, a mission that is narrow or multi-faceted, all nonprofits should have these policies in place. Yes, these policies are asked about on Form 990, but even if a tax-exempt organization is not required to submit a variation of the 990, the benefits are still immense. In general, having policies in place provides a framework and the expectations for an organization’s executives, employees, volunteers, and board members. Such policies can also be referenced if/when issues arise.
Another major reason to have proper policies and procedures in place is that they provide a foundation for soliciting, accepting, and facilitating charitable donations.
Additionally investing in strongly written, organization-specific policies is a practice in preparation in case of an audit. (The IRS audits tax-exempt organizations, just as it audits companies and individuals.
Policy Highlight
Among the major policies and procedures included in my special 10 for 990 offer are the following. (You can download my free guide with more extensive information and explanations regarding these policies and procedures.)
Compensation
Under IRS rules, compensation for nonprofit staff must be “reasonable and not excessive.” The IRS recommends a three-step process for determining appropriate compensation: (1) conduct a review of what similarly-sized peer organizations, (2) in the same or similar geographic location, (3) of comparable positions.
Conflict of Interest
A conflict of interest policy should do two important things: (1) require board members with a conflict (or a potential conflict) to disclose it, and (2) exclude individual board members from voting on matters in which there is a conflict. If consistently adhered to, this policy can inspire internal and external stakeholder confidence in the organization, as well as prevent potential violations of federal and state laws.
Document Retention and Destruction
The document retention policy should specify what types of documents should be retained, how they should be filed, and for what duration. This policy should also outline proper deletion/destruction techniques.
Financial Policies & Procedures
This specifically addresses guidelines for making financial decisions, reporting the financial status of the organization, managing funds, and developing financial goals. The financial management policies and procedures should also outline the budgeting process, investment reporting, what accounts may be maintained by the nonprofit, and when scheduled auditing will take place.
Form 990 Review
Form 990 asks about . . . . Form 990! That’s about as meta as the IRS gets. Specifically, this policy covers how Form 990 was prepared and how it was approved. A written policy is incredibly useful in clarifying a specific process for distribution and procedure review by the board of directors.
Fundraising
This one may seem obvious, but almost every nonprofit needs a fundraising policy, as almost all nonprofits engage in some sort of charitable fundraising. Your organization is no exception! This policy should include provisions for compliance with local, state, and federal laws, as well as the ethical norms the organization chooses to abide by in fundraising efforts.
Gift Acceptance
If well-written and applied across the organization, the policy can help the organization to kindly reject a non-cash gift that can carry extraneous liabilities and obligations the organization is not readily able to manage.
Investment
Before investments are made on behalf of the organization, there should be a sound investment policy in place to define who is accountable for investment decisions. The policy should also offer guidance on activities of growing/protecting the investments, earning interest, and maintain access to cash if necessary.
Public Disclosure
Form 990 specifically asks the filing organization to report if certain documents are made available to the public, such as governing documents (like the bylaws), conflict of interest policy, and financial statements. Additionally, the form asks for the name, address, and phone number of the individual(s) who possesses the financial “books” and records of the organization.
Whistleblower
Nonprofits, along with all corporations, are prohibited by the federal government from retaliating against employees who call out, draw attention to, or “blow the whistle” against the employer’s practices.
Keeping Up-To-Date
If you already have some (or all) of the above-listed policies in place, seriously consider the last time they were updated. How has the organization changed since they were written? Have changes to state and federal laws impacted these policies at all? It may be high time for a new set of policies that fits your organization.
Why 10 For 990
The mission of Gordon Fischer Law Firm is to promote and maximize charitable giving in Iowa, and to that point I want to help every Iowa nonprofit be legally compliant. It’s like how the coach wants to do everything they can to help their team win on the ice. The 10 policies a part of this promotion will save you time, resources, and you can feel good about having a set of high-quality policies to guide internal operations and present to the public.
Again, for now, I’m offering these 10 policies—including needed consultations—for the low flat fee of only $990. Contact me anytime at gordon@gordonfischerlawfirm.com or give me a call at 515-371-6077. I look forward to discussing your tax-exempt organization’s needs and how we can set you up for compliance success.
(Legal) Word of the Day: Property
Legal Word of the Day, TrustsThree Parties
I’ve previously written about the three parties necessary for every trust: (1) the settlor (sometimes called the donor or grantor); (2) the trustee; and (3) the beneficiary.
Two Other Elements
Besides three parties, at least two other elements are necessary for a valid trust.
Property of the Trust
When laypersons use the word “property,” I believe they usually mean real estate. But, lawyers use the term “property” much, much more broadly, to mean literally any transferable interest. Sometimes trust property is also referred to as the res or corpus or assets of the trust. (Bonus words!)
Any property can be held in trust. Seriously, check out this list of 101 assets that would fit in a trust. You could likely think of literally hundreds more types or categories of property to place in your own individual trust.
Pour Over Trust
How about an unfunded trust that will receive property at some point in the future? Can you even do that?
Yes, that can certainly be done. This is usually called a pour-over trust. (More bonus words!) The pour-over trust deserves its own blog post. Briefly, a pour-over trust is usually set up by language in a will. A will may validly devise property to a trust, established during the testator’s lifetime, and then funded at her death.
Example
Let’s take a very simple example. Kate has a lawyer write her will, including language that at her death all her Monster Truck memorabilia be placed in a trust for the benefit of her nieces and nephews. Only at Kate’s death will the property be transferred into the trust, not before.
Take-Aways
The important points are that property is necessary, at some point, to make a trust valid, and that literally any transferable interest in property – anything! – can be held in a trust.
Let’s Talk Trusts
It can be difficult to determine on your own if a trust may be right for your personal situation. It certainly doesn’t hurt to take me up on my offer for a free one-hour consultation. Give me a call at 515-371-6077 or shoot me an email at gordon@gordonfischerlawfirm.com.