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When do Nonprofits Need to File Form 990 in 2020

alarm clock on table

Most people have Tax Day earmarked in their minds like a birthday or federal holiday (typically it’s April 15, although with the nationwide COVID-19 pandemic the IRS pushed the due date for filing income taxes back to July 15, 2020). Nonprofit leaders should have another day highlighted on their calendars for the next few years: when the annual reporting return, Form 990, is due.

Tax-exempt nonprofit organizations don’t pay federal taxes (obviously from the “tax-exempt” category), but the IRS still requires certain information in order to evaluate organizations on details like programs, finances, governance, and mission. It’s a way of confirming that tax-exempt entities are still qualified to operate without paying federal taxes. Form 990s are also made available to the public so there’s also accountability and transparency involved.

Due date?

man typing on computer with phone in forefront

So, when is Form 990 due exactly? It depends on the end of your organization’s taxable year; the form is usually due the 15th 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 15 every year.

However, on April 9, 2020, the IRS issued Notice 2020-23, which granted nonprofits and foundations the opportunity to extend the filing due date out to July 15, 2020. Taxes owed with Form 990-PF and Form 990-T are also due at the time of the filing. Additionally, Form 8868, “Application for Automatic Extension of Time to File an Exempt Organization Return,” can be filed to request an additional extension until November 15, 2020. Note that

What happens if there’s a failure to file?

Just like if you fail to file your income taxes there are repercussions, if an organization is required to file Form 990 and fails to for three consecutive years, the IRS will automatically revoke tax-exempt status. That’s right, no questions, no appeal process, just revocation in accordance with the law. Timely submission of Form 990 also can help your nonprofit organization avoid filing additional documents and certain user fees.

Collective Responsibilities of Nonprofit Boards

What happens if tax-exempt status is revoked?

If your nonprofit’s tax-exempt status is revoked, then the organization will have to pay corporate income tax on annual revenue. Additionally, the organization may be subject to penalties and back taxes if the revocation date was in the previous tax year. The nonprofit will then lose any state tax exemptions that were dependent on federal tax-exempt status. (Common examples of such state tax exemptions are property, income, and sales/use taxes.) Of course, the organization will no longer be able to receive tax-deductible charitable contributions and, accordingly, donors will no longer be able to receive the federal income charitable deductions for any gifts post-revocation date. Losing tax-exempt status will also disqualify the nonprofit from receiving many private foundations’ grants.

First Day of the Season: Spring Ahead with Nonprofit Success

Be prepared for the filing date!

Form 990 is over 10 pages (not including additional schedules and written attachments) so your organization should get jump start on the process. The best way to be prepared, year after year, 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 and full review round.

Any questions about when your nonprofit specifically needs to file, or want to discuss how the “10 for 990” special could work for you? Contact me at any time via email or by phone (515-371-6077).

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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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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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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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25 Days of Giving: Tax tip- Substantiation of Gifts of $250 or More per Donee

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holiday wreath with ornament

Thank you for reading the 25 Days of Giving series! In the spirit of the holiday season, I’m covering different aspects of charitable giving…perfect to get you thinking about your end-of-year giving.

I came across an article in Forbes about two tax court cases where families claimed large charitable contributions on their federal income tax and, given that they were fraudulent claims, failed to have the substantiation to back it up. As the article stated, “the IRS is NOT messing around when it comes to holding taxpayers to the substantiation requirements for charitable contributions.” The substantiation is required in exchange for the federal income charitable deduction.

Note there is, of course, a limit to the charitable deduction on your taxes. Mind this when considering maxing out your charitable deduction.

25 Days of Giving: Quick Rule-of-Thumb on Charitable Deduction Limits

Substantiation requirements

First and foremost, the donations must be made to a qualified charitable organization. You must then be able to substantiate your contribution to said qualified charitable organization. The record-keeping required by the IRS depends on the amount of your contribution. At their most basic, the IRS substantiation rules for the charitable deduction are as follows:

  • Gifts of less than $250 per donee — you need a canceled check or receipt
  • $250 or more per donee — you need a timely written acknowledgment from the donee
  • Total deductions for all property exceeds $500 — you need to file IRS Form 8283
  • Deductions exceeding $5,000 per item — you need a qualified appraisal completed by a qualified appraiser

25 Days of Giving: IRS requirements for non-cash gifts greater than $5,000

Gifts of $250 or more per donee

Let’s focus for today on gifts of $250 or more per donee. Specifically, the income tax charitable deduction is not allowed for a separate contribution of $250 or more unless the donor has written substantiation from the donee of the contribution in the form of a contemporaneous written acknowledgment.

25 Days of Giving: Basics of the Endow Iowa Tax Credit Program

The $250 threshold

Note this $250 threshold is applied to each contribution separately. So, if a donor makes multiple contributions to the same charity totaling $250 or more in a single year, but each gift is less than $250, written acknowledgment is not required. [Unless the smaller gifts are related and made to avoid the substantiation requirements].

Written acknowledgment

The written acknowledgment must indicate:

  1. the name and address of the donee;
  2. the date of the contribution;
  3. the amount of cash contributed;
  4. a description of any property contributed;
  5. whether the donee provided the donor any goods or services in exchange for the contribution; and, if so;
  6. a description, and a good faith estimate, of the value of the goods or services provided or, if the only goods or services provided were intangible religious benefits, a statement to that effect.

Contemporaneous acknowledgment

The IRS definition of contemporaneous is that the acknowledgment must be obtained by the donor on or before the earlier of:

a. the date the donor files the original return for the year the donation was made; or

b. the return’s extended due date.

A donor cannot amend a return to include contributions for which an acknowledgment is obtained after the original return was filed.

Responsibility lies with the donor

Giving Like a Rock Star: Legal Tips for Donors on Giving Tuesday

Interestingly, the responsibility for obtaining this documentation lies with the donor. The donee (the charity) is not required to record or report this information to the IRS on behalf of the donor.

If this sounds like a lot, know you don’t have to navigate these requirements just by yourself. Contact me at any time to discuss your situation and charitable giving goals. We’ll figure out the best course of action together.

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

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heart in pages of book

Welcome to the newest post in the 25 Days of Giving series. Have questions or a topic related to charitable giving you want covered as a part of the series? Contact me!

You want your favorite charity to be wildly successful. Whether you’re working for the nonprofit as staff, serving on the board of directors, or assisting as a donor or volunteer, you want your nonprofit to have every chance to reach its goals and objectives. 

The Internal Revenue Service (IRS) strongly encourages nonprofits to adopt specific governance policies to limit potential abuse, protect against vulnerabilities, and prevent activities that would go beyond permitted nonprofit activities. The IRS also audits nonprofits, just as it audits companies and individuals, and having these policies in place can only help you should you be audited. Finally, and perhaps most importantly, having solid policies and procedures in place will provide a foundation for soliciting, accepting, and facilitating charitable donations. 

Each nonprofit is unique, and accordingly policies and procedures needed will vary for each. For instance, a non-operating private foundation will likely need a different set of documents than a public charity. However, most nonprofits will want, at the very least, to consider having the following policies in place. 

Articles of Incorporation

Articles of incorporation are necessary to even form a nonprofit corporation; the document is filed with the state and accompanied by a filing fee. This policy can be known by other monikers as “certificate of incorporation,” “articles of organization,” or “charter document.” Think of this as the constitution of the organization. While it can be fairly short, there are some necessary elements in the articles that are required for federal tax-exempt status. Those elements include a statement of purpose, legal address, emphasis on not-for-profit activities, duration, names and address of director(s), and a dissolution clause, among others. You may want to check out the IRS’ sample charter.

Board Roles and Responsibilities

Nonprofit board members are generally tasked with two major responsibilities of support and governance. A board’s rules and responsibilities document should outline the requirements and responsibilities of board members. Some examples of basic components include fundraising participation, determining the organization’s mission and direction, selecting and regularly evaluating the nonprofit director/CEO, and protection of public interest. A policy regarding board roles and responsibilities should encourage nothing short of ethical and legal integrity within board members.

boardroom chairs

Bylaws

If you’ve ever been part of any board or committee, you’ve definitely heard reference to the bylaws and received a copy upon joining the organization. Nonprofit bylaws serve as the internal operating methods and rules that specify things like the election process of directors, employee roles within the nonprofit, and operational manners of meetings. Specific language in the bylaws is not required by federal tax law, but some states may require nonprofits to have written bylaws to be considered tax-exempt. This document can most often be used to resolve uncertainty between board members and takes the guesswork out of operations.

Code of Ethics

Just as it sounds, a code of ethics document puts in place a set of guiding principles for behavior, decision making, and activities of those involved in the nonprofit, including board members, employees, and volunteers. While principles innate to your organization such as honesty, equity, integrity, and transparency may be understood by all involved, this formal adoption allows those involved to make a formal commitment to ethical actions and decisions. Sometimes this document is known as a “statement of values,” or “code of conduct.” Many organizations post their code on their website to demonstrate accountability and transparency.

Compensation Policy

Competitive compensation is just as important for employees of nonprofits as it is for for-profit employees. Having a set policy in place that objectively establishes salary ranges for positions, updated job descriptions, relevant salary administration, and performance management is used to establish equality and equity in compensation practices. A statement of compensation philosophy and strategy which explains to current and potential employees and board members how compensation supports the organization’s mission can be included in the compensation policy.

Confidentiality

A nonprofit’s board members have a duty of confidentiality due to their fiduciary obligation to the organization. This duty is there regardless of any written policy or not, but it’s certainly a best practice to clarify and explain why and how confidentiality is important to the specific organization. A confidentiality policy can include elements such as the following:

  • definitions of what matters are considered confidential
  • determination to whom the policy applies
  • a statement that board members do not make any public statements to the press without authorization
  • a process by which confidential material may be authorized for disclosure

secret mouth

Conflict of Interest

This is arguably one of the more essential policies a nonprofit board should adopt. A conflict of interest policy should do two important things:

  • require board members with a conflict (or a potential conflict) to disclose it, and
  • exclude individual board members from voting on matters in which there is a conflict.

Note the IRS Form 990 asks whether the nonprofit has such a policy as well as how the organization manages and determines board members who have a conflict of interest. This policy is all too important as conflicts of interest that are not successfully and ethically managed can result in “intermediate sanctions” against both the organization and the individual with the conflicts.

Document Retention

A document retention policy doesn’t mean that EVERY piece of paper and digital report should be kept for a specific duration. But, consider if a document is unknowingly tossed by a nonprofit employee and is later needed in a legal matter. That can cause irrevocable damage. So, ensure all board members, staffers, and volunteers are trained and have a copy of the document retention policy, which should clarify 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.

Employee Handbook

An employee handbook is another one of the more common nonprofit documents. A quality handbook should clearly communicate employment policies and enforce at-will provisions to all employees. Employment laws are complicated and complex. An employee handbook written/reviewed by a licensed attorney is a good legal step toward avoiding employment disputes. (Yes, just as you need a lawyer to write your estate plan, you’ll need a lawyer to craft/review your employee handbook.) Review your employee handbook regularly, as an out-of-date or poorly written handbook can leave the organization open to employment ambiguity and conflicts.

When is an Employee Handbook not an Employee Handbook?

Financial Policies and Procedures

This document 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.

Endowment

This resolution concerns funds (and the interest from these funds) that are kept long term. It generally aids the organization’s overall operations. An endowment policy should consider the purpose of the endowment, how the endowment will benefit the mission of the nonprofit, management practices of the endowment, disbursement policies, and investment strategy. (This blog post from GuideStar offers five steps to starting an endowment.)

Gift Acceptance

Gift acceptance is yet another policy the IRS considers to be a best practice for any tax-exempt nonprofit, and the gift acceptance policy can help set acceptance policies for both donors and the board/staffers. There is no federal legal requirement, but this policy does allow you to check “Yes” on Form 990. 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.

Outstretched hand

Investments

One way a Board of Directors can fulfill their fiduciary responsibility to the organization is through investing assets to further the nonprofit’s goals. But, before investment vehicles are invested in, the organization should have an investment policy in place to define who is accountable for the investment decisions. The policy should also offer guidance on activities of growing/protecting the investments, earning interest, and maintaining access to cash if necessary. Many organizations hire a professional financial advisor or investment manager to implement investments and offer advice. This person’s role can be accounted for in the investment policy.

Legal & Financial Responsibilities of Nonprofit Board Members

Whistleblower

Nonprofits, along with all corporations, are prohibited from retaliating against employees who call out, draw attention to, or “blow the whistle” against employer practices. A whistleblower policy should set a process for complaints to be addressed and include protection for whistleblowers. Ultimately this policy can help insulate your organization from the risk of state and federal law violation and encourage sound, swift responses of investigation and solutions to complaints. Don’t just take it from me, the IRS also considers this an incredibly helpful policy:

“A whistleblower policy encourages staff and volunteers to come forward with credible information on illegal practices or violations of adopted policies of the organization, specifies that the organization will protect the individual from retaliation, and identifies those staff or board members or outside parties to whom such information can be reported. (Instructions to Form 990)”

Policies = Powerful

While these documents may sound like a lot of work, the time and energy you place into ensuring your nonprofit is set up for success will pay off in the long run by saving you legal and IRS fees, internal conflict, violations, and compliance issues. Plus, you can enlist a qualified nonprofit attorney to do the leg work for you! 

You may say, “My organization already has a great set of policies in place!” Which is great. But, you should continuously update them as needed/wanted. A policy from 2002 may have been perfect at the time but could be in dire need of updates.

I’d advise making policies the main subject of a board meeting to review what policies have been adopted, which policies need revisions, and which policies you’re missing altogether. If you’re not sure where to start, or how policies should be drafted, read, or enacted, I would be happy to offer you a free one-hour consultation. You can also take me up on my 10 for 990 policy special.

Nonprofit Policy Special: 10 for Form 990

I’m here to assist in drafting or revising your set of nonprofit policies, so don’t hesitate to contact me via email or phone (515-371-6077). We’ll schedule your free one-hour consultation and make a plan to set your organization up for success!

(Note this article is provided for general information only and not intended as legal advice for your specific nonprofit organization. Again, please contact me to discuss your organization’s unique needs.)

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Estate Planning with Cryptocurrency

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hands typing on computer

A cutting edge issue in traditional estate planning is cryptocurrency. “Cryptocurrency” (as defined by Investopedia) is “a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.”

The most common, and for now the unofficial standard for cryptocurrency (AKA altcoin) is Bitcoin. But the market is getting increasingly more crowded with others including Ripple, Dash, Litecoin, and Zcash to name just a few. (For the purposes of this article, we’ll focus on Bitcoin, but these points could be applied to cryptocurrencies in general.)

Many posts could be written about cryptocurrency, its benefits, and its challenges, but this post is focused on how to account for Bitcoin in your estate plan, as opposed to a standard currency, like the U.S. Dollar.

Acknowledge the IRS’ Perspective

The IRS has determined, at least for the time being, virtual currency is treated as personal property for federal tax purposes. So, virtual currency transactions are most definitely not the same as, say, online banking through your local community credit union. Instead, for general tax purposes, Bitcoin is treated like tangible property you own, like a painting or a car.

Establish the Existence of Bitcoin

Unlike a checking or saving account. there are no beneficiary designations on Bitcoin accounts. In fact, quite the opposite — Bitcoin is anonymous. Therefore, if you were to die without communicating that you have Bitcoin, it will die with you.

For security reasons, of course, you won’t want everyone to know about your ownership of Bitcoin. But you do need to develop a method for passing along the important details to a trusted representative such as your named trustee or executor. This is somewhat similar to accounting for digital assets in your estate plan and many of the same steps/tips apply.

Bitcoin falls into somewhat of a “grey” area outside the realm of a pure digital asset, but it also isn’t a pure financial asset. It might make sense to entrust the existence of Bitcoin to the person you assign to take care of your digital assets, especially if they have a better knowledge base of the what/why/how of cryptocurrency.

Make sure the Bitcoin is Accessible

Unlike a traditional bank account, your executor/trustee can’t just simply contact Bitcoin (as they would your community credit union or bank)  after your death. Your agent must have your private key (or username/password depending on the wallet host) in order to access and then distribute the coin as you’ve determined in your estate plan. Again, if you’re the only person who has access to your “wallet,” the Bitcoin will be forever lost in the network. If you’re comfortable with it, you could include your Bitcoin private key on a secure digital archive site like Everplans or, more traditionally, you could keep the key in a safety deposit box.

Estate Planning: On Valentine’s Day Skip the Heart Box & Go for Secure Storage

Plan for the Prudent Investor Act

Many states, including Iowa, have a version of the Prudent Investor Act. (The text of Iowa’s law can be found under the Iowa Uniform Prudent Investor Act.) Under the Act, if you die with a large reserve of Bitcoin, it could be considered an “investment” which the trusted agent could be required to sell and/or diversify. In the face of uncertainty, it’s always better to account for contingencies in your estate plan before your loved ones are faced with a bad scenario. If one of the goals of your estate plan is to grant your executor/trustee the ability to hold your Bitcoin long-term, then it’s wise to include specific language in your will or trust absolving the executor/trustee from liability if they “fail” to diversity your Bitcoin.

Top 10 Estate Planning Goals

Think About Taxes

If your executor/trustee retains your Bitcoin it would not be considered income (at least at the time of this post’s writing). However, if Bitcoin is converted to cash following your passing, it must be declared as income on an estate tax return. Additionally, if your executor were to retain Bitcoin, see it appreciate in value, and then sell it, there is the issue of the capital gains tax. (“The IRS requires American resident taxpayers to report Bitcoin trading income and losses worldwide on U.S. resident tax returns.”) Consider this in your directive of how you would like your Bitcoin to be managed in event of your death.

Fair Market Value: Step Up or Down

The fact that Bitcoin is currently considered personal property means evaluating for either a step-up or step-down in basis given the fair market value on the date of death. (I write more on this in regards to four different types of assets here.)

Let’s consider the hypothetical where Betty inherits 100 Bitcoins (BTC) from Amy. At the time of Amy’s death 1 BTC is worth $50 and when Betty goes to spend 1 BTC, it’s worth $60. That means Betty’s taxable gain on the use of the Bitcoin is $10. How much Amy initially paid for the 100 BTC is irrelevant. Again, the only relevant factor is the fair market value on the date of Amy’s death. It’s wise, as part of your estate planning, to consider your Bitcoin’s depreciation or appreciation to determine how this may affect your heirs. It’s even wiser to discuss your individual situation with professional tax and financial advisors, as well as your estate planning attorney.

Estate Planning is a Must, not an Option

It’s likely we’re going to only see more unique situations, such as that which cryptocurrency presents, in the future. While the future value of Bitcoin may be uncertain, for certain you need an estate plan, and you shouldn’t let your investment die with you. If you already have an estate plan, it’s probably a good time to revisit it to ensure it accounts for assets like Bitcoin. Email me or give me a call (515-371-6077) with questions or to discuss your digital estate planning needs.

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Final Four: 4 AMAZING Tax Breaks for Iowans on Charitable Gifts

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2019 taxes

Minneapolis, Minnesota may have the Final Four, but Iowa has such generous tax benefits for charitable gifts. In fact, in Iowa, donors can receive four amazing tax benefits for charitable gifts. Your March Madness bracket may be busted already, but these benefits are ones you can bank on.

Appreciated, long-term property

For donors and potential donors, the ideal asset for charitable donations will depend on a whole range of factors. But, when donating to charity, one type of asset to seriously consider is appreciated, long-term property. Common examples of such property would include publicly traded stock, real estate, and farmland. First, a couple of terms to be clear on:

  • Appreciated: simply means increased in value.
  • Long-term: property held for more than one year (e.g., 366 days).

Give now, rather than later

The four tax benefits I’ll outline are only available when the charitable gifts are made during a lifetime. It’s been said, “You should be giving while you are living, so you’re knowing where it’s going.” Many Iowans have philanthropic intentions to donate to their favorite causes eventually, usually at death through their estate plan, will, and testamentary trust. Why not give now? You can have more say about your charitable gifts while you are still alive, and also feel the joy that comes with helping the causes you care about most. Again, there are also lots of good tax reasons for giving now rather than later. 

fan of dollars

Benefits of gifting appreciated, long-term property

While not celebrated as much as the Final Four, there are four genuinely exciting tax benefits for charitable gifts of appreciated, long-term property. 

Double Federal Tax Benefit

When you gift appreciated, long-term property (ALTP) to a charity during lifetime, you may receive a double federal tax benefit. First, you can receive an immediate charitable deduction on your federal income tax, which is equal to the fair market value of the property. Second, assuming, of course, you have owned the property for more than one year, when you donate the property, you avoid the long-term capital gain taxes you would have owed if you sold the property.

Let’s look at a concrete example to make this clearer. Pat owns appreciated, long-term property (such as stocks, real estate, or farmland) with a fair market value of $100,000. Pat wants to use the property to help favorite causes in the local community. Which would be better for Pat–to sell the property and donate the cash, or give the property directly to favorite charities? Assume that the property was originally purchased at $20,000 (basis), Pat’s income tax rate is 35%, and the capital gains tax rate is 20%. 

ALTP table

Note: This table is for illustrative purposes only. Only your own financial or tax advisor can advise your personal situation on these matters.

Again, a gift of appreciated, long-term property, made during your lifetime, is doubly beneficial. You receive a federal income tax charitable deduction equal to the fair market value of the property. You also avoid the capital gains tax. In Iowa, there is even a greater potential benefit. You may receive a 25% state tax credit for such charitable gifts, lowering the after-tax cost of your gift even further.

25% Endow Iowa Tax Credit

Under the Endow Iowa Tax Credit program, gifts during lifetime can be eligible for a 25% tax credit. There are three requirements to qualify.

  1. The gift must be given to, or receipted by, a qualified Iowa community foundation.
  2. The gift must be made to an Iowa charity.
  3. The gift must be endowed—that is, a permanent gift. Under Endow Iowa, no more than 5% of the gift can be granted each year. The rest is held by and invested by a local community foundation.

Let’s look again at the case of Pat, who is donating appreciated, long-term property per the table above. If Pat makes an Endow Iowa qualifying gift, the tax savings are very dramatic:

donating altp

Note: This table is for illustrative purposes only. Only your own financial or tax advisor can advise your personal situation on these matters.

Pat gave a significant and generous gift to a charity of $100,000. But using the Endow Iowa Tax Credit, coupled with the federal income tax charitable deduction and capital gains savings, the after-tax cost of the gift of $100,000 is less than $20,000. Plus, because the gift was endowed, it will be invested by Pat’s local community foundation and will presumably grow through its investment. Thus, it will continue benefiting the charities Pat cares about most!

Note again Pat’s huge tax savings. In this scenario, by giving appreciated, long-term property during lifetime, Pat receives $35,000 as a federal charitable deduction, avoids $16,000 of capital gains taxes, and gains a $25,000 state tax credit, for a whopping total tax savings of $76,000.

25 Days of Giving: Basics of the Endow Iowa Tax Credit Program

Gift Tax Considerations

Yet another benefit: charitable gifts are exempt from federal gift tax. In fact, charitable contributions made to qualifying charities are not the only deductible on itemized tax returns, but you may also deduct the value of your charitable donations from any amount of gift taxes you owe.

Areas of Caution

Going back to our example, this is a great deal for Pat and a great deal for Pat’s favorite causes. But, could anything go wrong with this scenario? There are a few areas of caution.

Latest Iowa Lawyer Mag Article: Charitable Giving Strategies Under the Revised Tax law

Charitable Deduction Capped

The federal income tax charitable deduction is capped. Generally, the federal charitable deduction for gifts of an appreciated, long-term property is limited to 50% of your adjusted gross income (AGI) to public charities and 30% of AGI to private foundations. You may, however, carry forward any unused deduction amount for an additional five years.

Tax Talk: Federal & State Differences on the Charitable Deduction Limitation

Endow Iowa Capped

Endow Iowa Tax Credits are also capped both statewide and per individual. Iowa sets aside a pool of money for Endow Iowa Tax Credits and it is first come, first served. In 2018, approximately $6 million in tax credits were available annually through Endow Iowa. This means it’s not only is it important to make your gift but to fill out and return your Endow Iowa application as quickly as possible. Donors who do not receive tax credits in the year the gift is made will be first in line for the new supply of the next tax year’s credits. (Here’s the 2019 Endow Iowa Tax Credit Application.)

There is also a cap on Endow Iowa tax credit per individual. Tax credits of 25% of the gifted amount are limited to $300,000 in tax credits per individual for a gift of $1.2 million, or $600,000 in tax credits per couple for a gift of $2.4 million (if both are Iowa taxpayers). (Since the inception of the Endow Iowa Tax Credit Program, Iowa Community Foundations have leveraged more than $215 million in permanent endowment fund gifts!)

IRS Requirements for Non-Cash Gifts

Additionally, to receive a charitable deduction for non-cash gifts of more than $5,000, you need a “qualified appraisal” by a “qualified appraiser,” two terms with very specific meanings to the IRS. You need to engage the right professionals to be sure all requirements are met. A notable exception to the appraisal requirement is appreciated long-term, publicly traded stock.

Gifting Publicly Traded Stock to Charity? Here’s how to Assess Value

Advice Needs to be Individualized

Finally, all individuals, families, businesses, and farms are unique and have unique tax issues. This article is presented for informational purposes only, not as tax advice or legal advice. Make a fast break to consult a legal professional for personal advice.

All of this can be a bit confusing as you’re working out your planned giving strategy. Do not hesitate to contact me and we can work together to maximize your tax-wise giving.

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