Payout Requirements for Private Foundations

Two woman at board meeting table

When forming a nonprofit organization, at some point founder have to weigh the merits of the public charity versus the private foundation. Both are classified by the IRS as 501(c)(3)s. There are indeed benefits and challenges to the structure of both nonprofits, but private foundations can be subject to stricter oversight and need to meet different requirements to retain compliance. Because all the different aspects of a private foundation can be difficult to parse out together, it’s helpful to break it down. We’ve covered self-dealing and now it’s time to explore the payout requirement for private foundations.

Qualifying Distributions

Unlike public charities, private foundations are required to spend a minimum amount—called a qualifying distribution—for grants, administration, and other charitable distributions every year, or pay a penalty. The amount of the qualifying distribution is equal to 5% of the fair market value of the foundation’s assets during that year.

Private Foundations: Avoid Self-Dealing

The following are considered permissible for qualifying distribution payments:

  • Grants
  • Costs of all direct charitable activities
  • Program-related investments and loans
  • Administrative expenses necessary for the conduct of its charitable activities
  • Asset purchases for carrying out charitable activities (such as furniture or computers)
  • Program-related investments and loans

If a private foundation fails to make a qualifying distribution, the IRS imposes a hefty penalty (a 30% excise tax) on the funds a private foundation fails to distribute.

What’s the Difference Between Public Charity & Private Foundation

The More You Know

An important caveat to the qualifying distribution requirements is that a foundation may elect to set aside funds for up to 5 years for certain major projects. Furthermore, excess qualifying distributions may be carried forward for a period of five tax years immediately following the tax year in which the excess was created.

Nonprofit Need to Know: File the Iowa Biennial Report

Leader Liability

Foundation managers should be aware that while the penalty is imposed on the foundation, individuals may also be charged penalties on the grounds s/he failed to exercise fiduciary duties.

Let a Lawyer Help

With all of that said, this is why it’s a smart (even essential) idea to enlist an attorney well-versed in the intricacies of nonprofit law to serve as a guide at different steps throughout the life cycle of a private foundation, from formation to board building, to continued compliance.

employees talking

Questions? Want to learn more about how to make certain your private foundation is set up for success from the start? Don’t hesitate to contact me for a free consultation. You can also download my free, no-obligation nonprofit formation guide!

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Nonprofit Formation: Responsibilities to Consider

two women talking about forming a nonprofit

Any good attorney worth their weight will advise you on multiple aspects of any given important action or decision. Let’s say you’re considering forming a new 501(c)(3). You may have thoroughly considered all the prospective benefits of a tax-exempt entity, but what about the responsibilities? Indeed, there are serious obligations that come along with creating and running a nonprofit. These can’t be overstated and should certainly be taken into account. Let’s dive into a few of them.

Monetary cost

Establishing a nonprofit organization does require a monetary cost including the filing fees to governmental agencies, such as the Iowa Secretary of State’s Office and the IRS. (The Iowa Secretary of State has a $20 filing fee, and the IRS 1023 Form has a current user filing fee of $600.) If you elect to hire a qualified nonprofit attorney to guide you through the formation process and draft the required forms, then that will be an additional cost.  (Although I would always argue a worthwhile one!)

Once the nonprofit is formed you’ll also want to invest in keeping your nonprofit organization on track, compliant, and successful. A major part of this is drafting and implementing quality internal and external policies and procedures. Again, a nonprofit lawyer can be a valuable asset and provide expertise here.

Reasons to Enlist an Attorney to Write your Nonprofit’s Policies

Cost of time & effort

On top of the monetary costs, there are additional costs of time and effort. It typically takes a few months to pull all the paperwork together for the formational documents—especially the lengthy Form 1023. After all the paperwork is submitted for IRS review, actual 501(c)(3) approval can vary in the time it takes. A submitted Form 1023 can take anywhere from a month or two to a year to make its way through the review process; the 1023EZ‘s turnaround time depends on the backlog of review at the time.

Even after all of the required documentation is submitted for recognition of exemption, the IRS may request additional information through follow-up questions and supporting materials. And, of course, actually operating the nonprofit will take significant, continuous time and effort which can range in extent, but can include new employee hires, nonprofit board orientations and training, and compliance with state and federal laws (like Sarbanes-Oxley, for instance).

The flip side of this is that nonprofit work is often incredibly rewarding and important, making the effort and time even more worthwhile. But, again, it’s something good to just keep in mind as you weigh all inputs to your nonprofit formation decision.

Paperwork

A nonprofit is required to keep detailed records and also submit annual filings to the state and IRS by particular deadlines to keep its active and exempt status. (Reminder: having well-written policies and procedures will make the annual filings, like Form 990, an easier process!)

Form 990 Variations: Which Annual Return Should Your Nonprofit File?

Shared control

As an incorporator of a nonprofit, you will certainly have a say in the development of the organization. Although one who creates nonprofits may want to shape his/her creation, personal control is limited. A nonprofit organization is subject to laws and regulations, including its own foundational documents such as articles of incorporation and bylaws. An Iowa nonprofit is required to have a board of directors, who have certain legal and financial fiduciary duties to uphold. The board itself also has collective responsibilities, so no one person is held solely accountable. Board orientation, trainings, and materials—like a board handbook—organized in a specific way can go a long way toward ensuring the board is set-up for success in working toward the mission you as the founder envisioned.

Man writing on white board

Scrutiny by the public

In the eyes of the government and society alike, the nonprofit must be dedicated to the public interest in one area or another. This is where it derives its tax-exempt status. It’s also why its finances are open to public inspection. For these reasons, nonprofits must be steadfastly transparent in nearly all their actions and dealings.

Interested parties may obtain copies of a nonprofit organization’s state and federal annual information filings to learn about salaries, program expenditures, and other financial information. You should be able to view copies of exempt organizations’ forms for free on the IRS’ website, or you can request a copy from the organization and they must provide it. Additionally, to make it easy for the public, many nonprofits link to these documents on their website. The information can be useful to current and prospective donors, new board members and employees, and grant-making organizations.

Nonprofit Need to Know: File the Iowa Biennial Report

I hate to sound like a broken record, but again, this is where superior policies like “public disclosure” and “Form 990 review” are paramount to the operation.

These responsibilities shouldn’t scare you off from forming your change-making organization, but rather important elements to be aware of from the beginning. Plus, if you know the big picture of what you’re getting into, you can plan by enlisting the appropriate professionals to help you with your endeavor!

Nonprofit Policy Special: 10 for Form 990

Want to discuss how to move forward with your nonprofit? Don’t hesitate to take me up on my offer for a free consult and the 10 For 990 policy special! Contact me via email or by phone (515-371-6077).

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Employee Appreciation Day: How to Show Your Nonprofit Staffers You Care

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national employee appreciation day

If you manage a nonprofit undoubtedly you recognize that the mission couldn’t be driven forward without the hard work by talented staffers. Indeed, human capital is typically a nonprofit’s greatest asset! Today is National Employee Appreciation Day and the perfect chance to remind your employees that they make a difference. This is also an optimal chance to invest in employee retention; when you find the right people that work well as a team, believe in the mission, and have an admirable work ethic, it is important to keep them happy and engaged.

The nonprofit employee turnover rate is equal to other industries at about 19%. But, unlike other industries, the good news is that 93% of nonprofit employees say they are engaged at work which is three times that of other industries. More good news? 85% of employees who made the switch from a for-profit company to a nonprofit said they planned to continue working in the nonprofit sector long term.

Build an Even Better Nonprofit in Iowa

When it comes to nonprofit employment law best practices like an updated employee handbook and quality contracts are essential. But, taking care of your business beyond legal documents is also incredibly important. Here are a few easy ways to invest in your staffers on Employee Appreciation Day and every day:

Break out the Suggestion Box

Sure it’s kind of old school and basic, but a suggestion box can still give employees a chance to share their opinions to make the workplace better. Staffers appreciate the opportunity for another avenue of communication, and acknowledging legit concerns and ideas can only help the organization improve!

employees talking

Build a Better Break Room

Everyone needs a place to take a breather throughout the workday. Whether it’s swapping stories over lunch or sharing posters for upcoming community events, the break room should be inviting, clean, and comfortable. Take a hard look at the status of the break room and determine if furniture should be replaced, decor redone, or appliances upgraded. Even fresh flowers or an improvement in the type of coffee/tea provided can give morale a boost.

When is an Employee Handbook not an Employee Handbook?

A Little Recognition Goes a Long Way

We all loved to be recognized for our achievements, big and small, so do the bragging for your team. Without a doubt, your employees are doing wonderful things outside of the office from starring in the community theater production to coaching their kid’s sports team. Whether it’s a fun, quarterly recognition “party” or a “star wall” where you post compliments/accolades, find what fits with your organization’s culture. This also shows your team you care about them as people, not just as employees.

Thanks a Million!

It may seem obvious, but a simple thank you note can go a long way. Make it handwritten on a nice friendly actual card and it will speak volumes compared to the slog of usual emails.

Smart Employment Policies for Nonprofits

Fun & Career-Based Rewards

Little rewards for a job well done like a gift card to the movie theater or providing free pizza in the break room just because. Who doesn’t love an unexpected surprise treat? You can also consider career-related rewards, like paying for an employee’s online class of choice or sending them to an industry conference/event. This illustrates your commitment to investing in their continued education and benefits the nonprofit as well!

Any questions related to smart employment practices at your nonprofit? What are your best ideas to celebrate National Employee Appreciation Day? Don’t hesitate to contact me at gordon@gordonfischerlawfirm.com or by phone at 515-371-6077.

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Tax Talk: Private Foundations and Excise Taxes

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private foundation board meeting

When you first read the headline to this blog post you might have been (rightfully) confused. A private foundation is a type of 501(c)(3), so isn’t this type of nonprofit tax-exempt from federal income tax? This is just one of the nuances of private foundations that can make forming and managing them complicated. Previously I’ve covered other aspects about the private foundation that are important for foundation leaders to understand including avoiding jeopardizing investments, prohibited grants, self-dealing, and payout requirements. Today let’s shine the learning spotlight on excise taxes.

Tax Exempt, But…

Even though private foundations are exempt from income tax, they are subject to an annual 2% excise tax on the income they earn on their net investment income. (This is often referred to as the private foundation excise tax.) The purpose of collecting this revenue is to fund IRS oversight of the nonprofit sector.

Can you Reduce the Tax?

In certain circumstances, the excise tax can be reduced to 1%. The tax is reduced in situations where a foundation’s distributions (measured as a percentage of assets) in a given tax year exceed the average payout rate of the foundation over the preceding five years, by an amount at least as much as the 1% tax savings the foundation will obtain. This is called the “maintenance of effort test” and was implemented to make certain that tax savings are being used for added charitable expenditures as opposed to being “pocketed” by the foundation.

What’s the Difference Between Public Charity & Private Foundation

Managing & Administering

Managing and administering the private foundation excise tax can be difficult and complicated, particularly because of the two-tier tax structure. This can also be challenging in decision-making because it somewhat discourages foundations to consider increasing gift for unanticipated grants, such as in the case of a natural disaster or other relief efforts. To comply with the private foundation excise tax requires staff to constantly monitor and adjust spending and savings in order to calculate the correct tax rate.

Payout Requirements for Private Foundations

How to Prepare Your Private Foundation

I highly recommend enlisting an attorney well-versed in private foundation operations in order to stay on top all requirement and avoid detrimental missteps. You may also want to consider implementing training for foundation board members. It’s also a good idea to implement sound policies and procedures and update them when necessary as the foundation evolves and circumstances change.

Nonprofit Policy Special: 10 for Form 990

Questions? Want to learn more about how to make certain your private foundation is set up for success from the start? Don’t hesitate to contact me for a free consultation. You can also download my free, no-obligation nonprofit formation guide!

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New Nonprofits: Form 990 While Waiting for Tax-Exempt Status

spiral notebook

Submitting Form 1023 for “Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code” to the IRS is cause for celebration for any organization seeking that coveted tax-exempt status. While waiting for the determination letter from the IRS regarding the application, there can be many uncertainties regarding what to tell donors about donations, and what to do about other submissions, like Form 990.

What to do with Donors While Waiting for Tax-Exempt Status

For oversight and evaluation purposes, most nonprofits need to annually file Form 990 (Return of Organization Exempt From Income Tax) instead. Beyond aspects of the organization’s finances, Form 990 collects information related to practical and operational aspects like conflicts of interest, Sarbanes-Oxley compliance, and charitable gift acceptance. Submitting an annual filing is also essential to retaining the tax-exempt status.

When is Form 990 Due?

So, when is Form 990 due exactly? It depends on the end of your organization’s taxable year; the form is due the 15th day of the fifth month after the organization’s taxable year.  For most tax-exempt organizations that follow the typical calendar year (January 1 through December 31), this means Form 990 is due on May 15th every year.

notebooks on table

What Do New Nonprofits Need to Do?

What does this mean for new nonprofits and organizations waiting on the tax-exemption determination letter? Expect to submit a variation of Form 990 in the year following the close of the first tax year. This is the case even if the organization is still waiting on the determination letter from the IRS in regard to tax-exempt status.

So, for example, let’s say a nonprofit filed articles of incorporation with the Secretary of State and adopted bylaws in March 2019. The organization subsequently submitted Form 1023 to apply for tax-exempt 501(c)(3) status. In the governing documents, the organization’s tax year is established as the typical January to December. For this organization, they should expect to file Form 990 by May 15, 2020, with information related to the receipts for the 2019 operating year.

Form 990 Variations: Which Annual Return Should Your Nonprofit File?

Plan Ahead to be Prepared to Submit

The full Form 990 is over 10 pages (not including additional schedules and written attachments), so no doubt your organization should have a jump start on the process. The best way to be prepared, year after year to avoid a failure to file, is to have updated and applicable policies asked about on the form readily available to be referenced. I’m offering a great deal that features 10 policies related to Form 990 for $990. The rate includes a comprehensive consultation to discuss your organization’s need and a round of reviews so we can make certain the documents fit your organization’s needs.

Nonprofit Formation: Responsibilities to Consider

No matter what stage of the nonprofit process you’re at—from just getting started to hiring employees to board management—don’t hesitate to contact me with questions or challenges. I’m available via email (gordon@gordonfischerlawfirm.com) and by phone (515-371-6077).

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What to do with Donors While Waiting for Tax-Exempt Status

man questioning computer
Applying for tax-exempt status from the IRS is both exciting and an anticipatory waiting game. Even if you answer every question on Form 1023 and pay the correct filing fee it can take about 180 days to get a determination letter—the official notification that the organization meets the federal tax exemption as a 501(c)(3) nonprofit.
One of the key reasons entities choose to apply for that coveted tax-exempt 501(c)(3) status in the first place is so that they can offer donors the option to claim a tax deduction on donations. So, what are you supposed to say to donors in that bureaucratic purgatory between incorporation and submitting Form 1023 and waiting for the actual green light go-ahead to say you’re a tax-exempt organization?
The good news is that while your application is pending, the entity can treat itself as exempt from federal income tax back to the date of organization. This would be when the articles of incorporation were filed with the Secretary of State’s office.
That said, there is a big however when it comes to donors. Contributions do not have assured deductibility during this in-between period.
If the applicant entity is eventually granted tax-exempt status, then any donations made during this time period would be tax-deductible for the respective donors. But, if the entity is ultimately not granted federal tax-exemption, then any contributions made during the in-between period will not be tax deductible for the donor.
In the spirit of transparency, the uncertain status of donations (whether they are tax-exempt or not) should be something leaders of organizations should share with donors during this period. If appropriate, organization leaders can indicate that they have every reason to believe the donations in the interim period will be tax-deductible after 501(c)(3) status is achieved, but cannot be guaranteed in the present. Nonprofit pros will also want to indicate they will notify current donors about any status change following the determination letter. It’s also a good idea to implement a gift acceptance policy from the start.
I’m happy to help guide interested nonprofit leaders through the application process and then assist with all of those legal uncertainties and compliance requirements on the way to successful change-making. Don’t hesitate to contact me via email (gordon@gordonfischerlawfirm.com) or phone (515-371-6077), no matter what step along the way you are.
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Private Foundations: Avoid Self-Dealing

two people at board meeting

Typically when you think of a nonprofit you generally think of a public charity. However, private foundations (and private operating foundations) are also 501(c)(3) organizations under the IRS’ classification system. Understanding the difference between the different tax-exempt organization is key because, while public charities and private foundations have much in common, there are also major differences. The most important of these differences to understand is that private foundations are subject to much stricter regulations and oversight than public charities.

Because this can get complicated in this post let’s just cover private foundations and the rules related to “self-dealing.”

Look to the Code

Section 4941 of the Internal Revenue Code (IRC) and related regulations prohibit any direct or even indirect financial transaction between a private foundation and virtually every person closely associated with it, who are known as “disqualified persons.”

Disqualified Persons

The IRS code is quite specific as to who “disqualified persons” are—and they can be individuals, as well as legal entities, trusts, and even other foundations; it’s a very wide net.

Disqualified persons include:

  • Any substantial financial contributors to the foundation
  • Officers, directors, trustees, or persons who can act on behalf of the organization
  • All family members, including spouses, children, grandchildren, and spouses of children of individuals described above
  • Controlled entities (e.g., a corporation of which disqualified persons own more than 35% of the combined voting power)
  • Certain government officials

Simply put, if a person has influence over the decisions of the private foundation or a particular relationship with it, it’s extremely likely that they are a “disqualified person.”

What is a 501(c)(4) organization?

Specifically Prohibited Self-Dealing Acts

Self-dealing occurs when a disqualified person acts in his or her own financial interest, rather than in the best interest of the private foundation he or she serves.

The IRS code lists these six (6) specific acts of prohibited self-dealing:

  • The sale, exchange, or leasing of property
  • The lending of money or other extensions of credit
  • The furnishing of goods, services, or facilities
  • Payment, compensation, or reimbursement of expenses
  • Transfer to, or use by, or for the benefit of, a disqualified person of any income or assets of the foundation
  • An agreement to pay a government official

As you can see, rules against self-dealing are quite expansive when it comes to financial transactions.

25 Days of Giving: Nonprofit Policies Your Organization Needs to Consider

Exceptions to Self-Dealing Rules

Like most areas of the law, there are exceptions to the self-dealing rules for private foundations. But great care must be taken because they are relatively narrow and require both skill and care to use.

Exceptions to self-dealing rules include:

  • A disqualified person can make a loan to a private foundation with no interest or charge if the funds are used exclusively for purposes related to the foundation’s charitable goals;
  • A disqualified person can enter into a no-rent lease with a foundation or otherwise make its facilities available free of charge;
  • Compensation and reimbursement of expenses for services provided by disqualified persons are permissible if the amount is both reasonable and necessary to carry out the foundation’s charitable goals;
  • Certain scholarship, travel, and pension payments to government officials are allowed.

Common Problem areas

There are several self-dealing hazards for private foundations. The most common include: 

Pledges
  • Allowing the foundation to satisfy a personal pledge of a disqualified person with foundation dollars is considered self-dealing.
Event tickets
  • The foundation’s purchase of event tickets for a disqualified person unless the disqualified person attends a grantee’s event in order to evaluate the charity’s activities.
Family member expenses
  • Family members of disqualified persons are considered disqualified persons, so allowing a foundation to pay their expenses is considered self-dealing if they don’t have foundation duties to justify payment of their expenses.
Shared resources
  • If a company devotes office space, staff, or other resources to a private foundation it establishes, the private foundation must keep meticulous records to avoid self-dealing.

What’s the Difference Between Public Charity & Private Foundation

Protect Your Private Foundation with a Team of Advisors

If you’re thinking about forming a private foundation, I highly recommend you see the advice of an attorney well-versed in the nuances of nonprofit law. The info in the blog is, at best, a mere outline of the complex and stringent laws governing private foundations.  That said, forming and growing a private foundation can be immensely rewarding to the communities and causes you want to serve. To best execute, it’s wise to build up a team of knowledgable professional advisors that can safely guide the way through the legal hoops.

If you want to learn more, don’t hesitate to contact me as I offer a free consultation. You can also download my free, no-obligation nonprofit formation guide.

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What is a 501(c)(4) organization?

working on paper on desk

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).

What’s the Difference Between Public Charity & Private Foundation

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):

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.

man reading paper

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:

  1. Apply for formal IRS recognition of exemption by filing Form 1024; or
  2. 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!)

Nonprofit Document Drafting: 2 Common Problems to Avoid

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!

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Stanley Cup Inspired: How Policies & Procedures Help Nonprofits Win the Game

hockey-rink-stanley-cup

Robert 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.

25 Days of Giving: Nonprofit Policies Your Organization Needs to Consider

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.

Nonprofit Policy Special: 10 for Form 990

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.

Nonprofit Policy Spotlight: Conflict of Interest

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.

Nonprofits & Sarbanes-Oxley Compliance

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.

Collective Responsibilities of Nonprofit Boards

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.

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Grantor-Grantee Policy Best Practices

puzzle pieces

 What is a Grantor-Grantee Policy?

A grantor-grantee policy outlines how the organization expects the relationship with grantees (other organizations applying for funding or grants) to be structured. (Sometimes you’ll see this type of policy called a funder-grantee policy.) A grantor-grantee policy will address details related to the beginning of the grant application process through evaluation and multiple points in between. The intended audience is both your internal board of directors and staff as well as current/prospective grantees.

This type of policy often sets forth details regarding the complicated details that should allow for a better, more transparent relationship from the get-go with grantees. The policy can be as general or as specific as needed for maximized effectiveness to the organization’s specific situation. I’ll explain some of the “common” points often included in successful grantor-grantee policies below.

Benefits of a Grantor-Grantee Policy

By outlining the process and details of grants, your organization benefits from having an approved, agreed-upon plan of action. This is a proactive step toward avoiding wasting time. A grantor-grantee policy also makes it simpler to navigate unexpected situations or complexities as an organization.

Grantees will certainly benefit from a clear-cut, candid grantor-grantee policy as well because it invites them to set realistic expectations about what a relationship with your organization will look like.

Reasons to Enlist an Attorney to Write your Nonprofit’s Policies

Common Points to Include in a Grantor-Grantee Policy

When drafting grantor-grantee policies, it’s important that provisions included are directly related to your actual current and/or intended operations. (This is why it is important to have an attorney draft your policies as opposed to using something found off the internet—it probably won’t apply!) The following are some points you’ll want to consider as a part of a useful policy.

What basics should be included in the guidelines?

Consider details regarding:

  • How you want prospective grantees to approach your organization to submit an application or express interest. Is it by online application, email, letter, visit, etc.?
  • How quickly can prospective grantees expect a response to an initial inquiry or a submitted grant application? How will that contact be made?
  • What does the decision-making process look like? How often does the board meet, and when are decisions made?
  • You can also include here what you do NOT permit in terms of contact, meeting, or presentations by prospective grantees to avoid undue influence or even the appearance of unethical decision-making.
  • Are grants generally restricted, unrestricted, or on a case-by-case basis?

Smart Employment Policies for Nonprofits

What is the timeline for funding?

  • Can applicants expect grants to be made on a rolling basis or are there specific deadlines?
  • What about the chance for grant renewals? When do those take place?

What are the types of proposals and information are you looking for?

Potential grantees will appreciate upfront information to decide whether to invest scarce resources and considerable time in an application for your organization. This invites a healthy amount of self-screening which enables you to evaluate the most appropriate applications. Consider these essential points:

  • Who is your ideal grantee? Do they need to operate in a certain location or within a specific realm of charitable purpose (such as, through work with animals, human services, or education)?
  • What are your preferred areas of funding? Some preferred funding areas can include: equipment; operating support; special programs/projects; financial stabilization; board/staff development; and capital projects. Will you accept proposals from outside your preferred areas or not at all?
  • What types of funding requests will you NEVER accept?
  • What qualifications and information will you consider in applications?
  • Do you want to give examples of previous grant applications you have funded? Do you want to list all grants made in the previous funding cycle in the policy or perhaps elsewhere (like on your website) or not at all?

What are the specifics of the grant application?

The grantor-grantee policy is not where your grant application should live, but important details about the application should be included. For instance:

  • What will you do to keep the application process reasonable? For instance, asking an applicant to make 10 copies for each individual board member may be unreasonable.
  • Where will the application be made available (online, in-person at the office, etc.) and in what formats (Word document; fillable PDF; etc.)?
  • How often will the grant application process and instructions be reviewed for inconsistencies and clarity? Once a year? Before any given application cycle?

What are the granting process logistics?

  • What is expected of grantees to confirm acceptance?
  • How will funds be distributed—at a specific check presentation event, through electronic transfer, or some other means?

hands in teamwork

How will the organization invite feedback?

Most grantees will not offer invaluable feedback unsolicited. Your organization may want to highlight how and when it will seek productive criticisms for continued growth.

You may not know an adjustment needs to be made until another organization tells you! How will you invite constructive feedback from current and prospective grantees regarding your funding application process? How will make certain it is seen as welcome and important?

What about an exit strategy?

Organizations evolve and priorities change. What does the process look like for informing grantees of a transition away from funding? Certainly, grantees should not expect support for forever, but they should expect respect and clarity when it comes to a grantor planning to pull support. Ample time and notification should be given, as well as the option for support in other ways (if applicable).

How about opportunities for collaboration?

In addition to or apart from funding, what are other ways you invite collaboration with past/current/future grantees? Beyond money, additional chances for working together can further strengthen community connections and enhance mutually beneficial partnerships.

The Ethical Nonprofit: Beneficial Policies

Drafting Your Policies

I would be happy to discuss the particulars of your organization’s needs and goals to ensure your grantor-grantee policy is tailormade to best set your organization up for granting success. Contact me at any time via email (gordon@gordonfischerlawfirm.com) or by phone (515-371-6077).

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