How much is all this volunteer time worth? A lot. The organization Independent Sector estimates that the value of volunteer time for 2019 was $25.43 per hour. About 63 million Americans gave 8 billion hours of volunteer service worth $203.4 billion in 2018.
That's a lot of money. It's great that there are volunteers willing to help nonprofits free of charge. However, using volunteers does present a problem when it comes to showing the public the size and effectiveness of your nonprofit. This is because a nonprofit may not include the value of volunteers’ time when it reports its annual revenues to the IRS on Form 990 or 990-EZ. Nor can they include the value of the free use of property—for example, free office space provided by a donor.
This rule is unfortunate because its effect is to diminish the apparent size and importance of nonprofits that rely on volunteers and effectively understates their public support. This is especially significant because Form 990 and 990-EZ are used by organizations like Guidestar and Charity Navigator to report on the extent and nature of a nonprofit's activities.
What can a nonprofit that relies on volunteers do? The value of volunteer services can be mentioned in the part of Form 990 or 990-EZ where your nonprofit describes its service accomplishments. Be sure to do this.
The value of volunteer time can also be included on financial statements, including those used for grant proposals and annual reports. However, accounting rules require that the value of a volunteer's time may be counted only if he or she performs a specialized skill for a nonprofit. The general rule is that such time may be counted only if the nonprofit would have purchased the services if they had not been donated.
Independent Sector's $25.43 per hour figure for valuing volunteer time is only a rough estimate based on the average wages of non-management and non-agricultural works. Some volunteers' time is worth far more.
For good guidance on how to calculate the value of volunteer time, refer Independent Sector’s website at www.independentsector.org.
For more on complying with IRS nonprofit standards, see Nolo's book, Every Nonprofit's Tax Guide.
]]>Often, directors of a nonprofit are not paid for their services as directors so they are considered volunteers. Since they receive no compensation, there are no tax issues to be concerned about. However, if directors are paid to attend board meetings or perform other services related to their role as director, they must be classified as independent contractors for IRS purposes. Why? Because as members of the governing board, directors are responsible for the overall direction and management of the organization and would not meet the right to control test for employee status.
A nonprofit’s officers include its president, vice president, secretary, treasurer, executive director, and chief executive officer (CEO). Officers are usually classified as employees because they work under the board of directors’ direction and control. However, there is one limited exception. An officer is classified as an independent contractor if he or she receives no compensation and performs no services, or only minor services, for the nonprofit.
Example: Xavier is an accountant who serves as a nonprofit corporation’s treasurer on a volunteer basis, keeping the nonprofit’s books in order. His work as treasurer is subject to the board of directors’ control, so he should be classified as an employee for IRS purposes. As a practical matter, however, this doesn’t mean much. Because Xavier is paid no money by the nonprofit, there are no taxes to withhold or pay.
A director who also serves as an officer would be classified as an employee in his officer capacity and an independent contractor in his director capacity. Money paid to such a person for work as an officer would be subject to employment tax and withholding, while any money paid for his services as director would be as independent contractor payments.
To find out more about complying with IRS nonprofit standards, see Nolo's book, Every Nonprofit's Tax Guide.
]]>But there are some types of rewards that are tax-free: These are the type of tax-free fringe benefits that employers can give their employees. Most volunteers at nonprofits qualify as employees for tax purposes because they almost always work under someone else’s supervision or direction. So they can get these fringe benefits tax free, just like an employee. These include the following things.
Volunteers can buy goods or receive services from the nonprofit at a lower price than the price offered to the general public. For services, the amount of the discount is not taxable if it is no more than 20% of the price charged to the general public for the service. For merchandise or goods, the discount is limited to the nonprofit’s gross profit percentage on the merchandise sold times the price charged to the public for the merchandise. To figure out gross profit percentage, you calculate the total amount earned from the sale of merchandise during the year and then subtract its cost. For example, if a nonprofit sold $100,000 worth of merchandise to the public and paid $60,000 for the merchandise, its gross profit percentage would be 40% (its $40,000 gross profit is 40% of its $100,000 gross income). The nonprofit could give its volunteer-employees a tax-free discount on its merchandise of up to 40%.
Many nonprofits provide volunteers with free parking, or reimburse them or give them an allowance for parking expenses. A nonprofit may also reimburse volunteers for the cost of using mass transit or provide them with an allowance. A nonprofit may also reimburse volunteers for the cost of using van pools. There is a monthly cap on the amount of these tax-free benefits. For the current cap, see IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits.
As a result of the Tax Cuts and Jobs Act, nonprofits may be required to pay a 21% unrelated business income tax (UBIT) on parking or other transportation benefits whose value exceeds the annual cap (subject to a $1,000 annual UBIT exemption). Alternatively, the nonprofit can report the excess amount as employee compensation on which the volunteer-employee must pay income tax.
As long as they are provided for the nonprofit’s convenience, then the value of any meals or lodging provided on the nonprofit’s business premises is not taxable for volunteers. Meals provided for the nonprofit’s convenience would include, for example, where eating facilities are not close by, the meal period must be kept short, or the volunteer-employees are on call. Meals provided to improve general morale or goodwill or to attract new volunteers would not qualify for tax-free treatment.
For lodging, there is an additional requirement: It must be necessary for the volunteer to live at the nonprofit’s premises in order to perform the volunteer services. For example, volunteers who traveled to New Orleans to help a community nonprofit rebuild housing destroyed by hurricane Katrina could be provided tax-free housing while they were there performing their volunteer work.
A nonprofit that provides services to the public as part of its mission may offer the same services for free to volunteer, as long as it doesn’t impose any substantial cost on the nonprofit and the volunteer is involved in providing that service. For example, a volunteer who works at a nonprofit that provides low cost health care to the poor may obtain free health care from the clinic if it can be done without any substantial additional cost for the clinic.
Expenses for education are a tax-free working condition fringe benefit if the course (1) maintains or improves job skills, or (2) is required by the nonprofit for a bona fide business purpose, or (3) is required by law. For example, a nonprofit may pay for an accounting course for its volunteer treasurer.
Volunteer-employees can be provided with tax-free health and accident insurance, and up to $50,000 in group life insurance coverage (although few nonprofits provide these types of benefits to volunteers).
Other than what is listed above, any cash, discount, service, or benefit that a volunteer receives must be treated as taxable income and reported to the IRS. Benefits other than cash are valued according to their fair market value and then treated the same as taxable cash income.
Example: To encourage volunteers during a fundraising drive, a nonprofit offers a Hawaiian vacation to the volunteer who raises the most money. The fair market value of the vacation is taxable income. The vacation cost $2,000, so this is the amount that the nonprofit must report to the IRS and the winning volunteer must add this to his or her taxable income for the year.
If a volunteer is classified as an employee for tax purposes (which is usually the case except for directors), you need to pay attention to employee withholding requirements if he or she is paid over a minimum amount during a pay period. See IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits.
For more information on complying with the IRS' nonprofit regulations, see Nolo's book, Every Nonprofit's Tax Guide.
]]>Here are some questions and answers about when and how to bring in an attorney for help.
The total cost will depend on the services you need as well as the lawyer's fee structure. Most lawyers charge in one of these ways:
You can likely begin your relationship with the attorney with a free consultation, by phone, in person, or through a service like Skype. This could last as little as 15 to 30 minutes. A paid consultation might last an hour or more, and you'll get more in-depth information.
Your nonprofit would doubtless rather spend its limited funds on its cause rather than on legal advice. However, many lawyers won’t agree to this type of arrangement. After all, you want a lawyer who specializes in nonprofits; but if no nonprofits pay them, how is the lawyer going to earn a living?
Alternatives are available, which will allow your nonprofit to gain valuable legal services without breaking the bank. Ask about:
It can be frustrating that a lawyer won’t represent your nonprofit for free, but keep in mind the amount of time a lawyer will be spending on your legal issue, and that the lawyer is also running a business.
While many tools are available to help form a nonprofit without a using lawyer's services, every nonprofit is unique. It's all too easy to go astray, for example by:
Consider asking prospective attorneys these questions to better get to know them:
Lawyers tend to specialize, but nonprofits have a variety of legal needs. Thus, if you hire just one lawyer, who works solo rather than with a firm, that might not ultimately be enough. If your solo lawyer handle mostly contracts, for instance, and your nonprofit has a trademark dispute, you will have to find another lawyer.
A good option is to find a larger law firm that covers numerous practice areas, ideally including nonprofit and general business law, contracts, intellectual property, real estate or landlord/tenant, employment law, and litigation.
The down side to larger firms is that their rates tend to be high. You might also face hurdles getting in direct touch with the attorney who's your primary contact, as larger firms usually put receptionists, assistants, and paralegals on the front lines.
]]>As the economy suffers, so does nonprofit fundraising. Congress made two important changes in the tax law in attempt to help nonprofits get donations.
Ordinarily, charitable contributions are deductible only by taxpayers who itemize their personal deductions instead of taking the standard deduction. As a result of recent tax changes, today only about 10% of all taxpayers itemize their personal deductions. Thus, vast majority of individual taxpayers don’t get any tax benefit from charitable contributions.
To help encourage charitable contributions during the pandemic, Congress added a temporary new $300 universal charitable deduction for cash contributions by nonitemizers to tax-qualified charities during 2020. The contributions must be made in cash to 501(c)(3) public charities. Contributions to nonoperating private foundations, support organizations, and donor advised funds don’t come within the new deduction.
For 2021 only, the amount of the deduction is doubled to $600 for married couples filing jointly.
Nonprofits should let small contributors know that $300 (or $600) in contributions are deductible for 2021 and 2021 even if they don't itemize and ordinarily get no deduction for charitable contributions.
This deduction is scheduled to end after 2021, but it could be extended.
Congress also added to the tax law a new 50% penalty for taxpayers who cheat by taking this deduction without actually making the cash contributions they claim on their return.
Under regular tax rules, the amount of charitable cash contributions taxpayers can deduct as an itemized deduction is limited to 60% of the taxpayer’s adjusted gross income (AGI). For example, a taxpayer with an AGI of $1 million can deduct up to $600,000. In an effort to encourage large donations by wealthy individuals, Congress increased this deduction to 100% of AGI for cash deductions to qualified charities (not including donor advised funds). But this increase is for 2020 and 2021 only.
The Family First Coronavirus Response Act signed into law on March 18, 2020 required employers with less than 500 employees, including nonprofits, to provide employees affected by COVID-19 with paid sick leave and family leave. It also included refundable tax credits to help them pay for such leave. Nonprofits with fewer than 50 employees could apply for an exemption from the requirements.
The sick leave and family leave program was originally scheduled to expire March 31, 2021. However, it has been extended through September 30, 2021 in slightly modified form.
Employers who provide such leave are entitled to a tax credit to help defray the cost. The credit is based on employee pay (including employer health insurance costs). The sick leave credit is capped at $511 per day. Thus, the maximum credit is $5,110. The family leave credit is capped at $200 per day. Thus, the maximum credit is $12,000. This a refundable credit--your nonprofit can collect the full amount even if it owes no taxes.
Employers don’t have to wait until they file their taxes to get these credits. Instead, they can reduce the employer payroll taxes they must pay to the IRS during the year to cover the cost. Through March 31, 2021, the employer portion of Social Security payroll taxes may be reduced. Starting April 1, 2021 the employer portion of Medicare payroll taxes may be reduced.
If there are not sufficient payroll taxes to cover the cost of COVID-19 sick leave and/or emergency leave paid, employers may request for an accelerated payment from the IRS.
For more information, see the FAQs prepared by the IRS.
Previous COVID-19 relief legislation in 2020 created a new refundable employee retention credit designed to encourage employers not to lay off their employees during the pandemic. The old credit began March 13, 2020 and expired December 31, 2021. Congress created an expanded new retention credit for employees paid wages during January 1, 2021 through December 31, 2021.
A nonprofit is eligible for the new credit if it:
The new credit is equal to 70% of wages paid to each employee. Wages include health benefits. The maximum credit is $7,000 per employee per quarter. For nonprofit employers with more than 500 full-time employees in 2019, only wages paid to employees who are not working qualify for the new credit.
A nonprofit qualifies for the old credit for 2020 if it:
The old credit is equal to 50% of wages. The maximum amount for any employee is $5,000. For nonprofit employers with more than 100 full-time employees in 2019, only wages paid to employees who are not providing services qualify for the new credit.
This a refundable credit--your nonprofit can collect the full amount even if it owes no taxes.
From January 1, 2021 through June 30, 2021 nonprofit employers can deduct the amount of the new credit from the employer’s portion of the Social Security tax they pay for each employee (a 6.2% tax up to an annual ceiling). The same rule applied to the old credit for 2020. Starting July 1, 2021 the new credit may only be deducted from the employer portion of the Medicare tax paid for each employee (a 1.45% tax on wages). Any remaining credit amount will be paid the business by the IRS after it files its tax return.
A nonprofit can qualify for this credit if it receives a Paycheck Protection Program (PPP) loan from the Small Business Administration. But wages paid with PPP loan proceeds can't be used to determine the credit amount.
For more information, see the FAQs prepared by the IRS.
Low-interest loans and grants are available to help nonprofits that need a quick infusion of cash. These include SBA economic injury disaster loans (EIDL) and loans under the paycheck protection program (PPP). Any nonprofit with less than 500 employees can qualify for either or both loan programs. However, you can’t use funds from each loan for the same expenses.
Congress has added millions in additional funds to the Small Business Administration’s Economic Injury Disaster Loans program. These are loans of up to $2 million have a 2.75% interest rate when made to nonprofits. Payments can be deferred for up to four years. Nonprofits impacted by the COVID-19 pandemic can also obtain EIDL grants from the SBA. These are grants up to $10,000 targeted to nonprofits and businesses in low-income communities. The grants are tax-free. You apply for EIDL loans and grants online at the Small Business Administration.
The SBA's most popular loan program during the COVID-19 pandemic has been the Paycheck Protection Program (PPP) loan program. Nonprofits can borrow up to 2.5 times 2019 or 2020 average payroll costs for all employees earning up to $100,000. You can borrow up to $10 million.
PPP loans proved so popular, Congress expanded the program to allow two separate loans: first round PPP loans and second round loans for those who already received a PPP loan. A nonprofit is eligible for a second round PPP loan only if it experienced at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.
These are two-year loans with a 1% interest rate. However, the loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities during an eight or 24 week after the loan is received. Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.
The PPP loan program has been extended through May 31, 2021. Your nonprofit must apply directly with participating banks and other lenders. Note that your nonprofit may obtain both an EIDL and PPP loan.
For more information, see the SBA Paycheck Protection Program page.
Nonprofit live performing arts organizations and museums can qualify for an SBA shuttered venue operators grant. "Museum" includes aquariums, arboretums, botanical gardens, art museums, children’s museums, general museums, historic houses and sites, history museums, nature centers, natural history and anthropology museums, planetariums, science and technology centers, specialized museums, and zoological parks.
The grant is equal to 45% of the nonprofit's 2019 gross earnings, up to $10 million. To qualify, the nonprofit must have suffered a 25% or greater revenue loss between one quarter of 2019 and the corresponding quarter of 2020.
The SBA is building the grant program and expects to open applications in early April. Those who have suffered the greatest economic loss will be the first applications processed.
For more details, visit the SBAs Shuttered Venue Operators Grant page.
]]>You can run a nonprofit without committees—in fact, many new and small organizations handle all of the organization’s affairs at their regular meetings. But nonprofit boards have the freedom to create (or forgo creating) committees at any time. You might consider forming a committee for one or more of the following reasons:
Standing committees (also known as operating committees) are open-ended committees that address ongoing or procedural issues. Typically, the board establishes standing committees in the organization’s bylaws. As a result, creating and dissolving a standing committee takes a bit more effort than an ad hoc committee, so you should create standing committees only for long-term issues. Common standing committees include:
Nonprofits can also have ad hoc committees, also known as task forces, which the board establishes to accomplish a particular goal. After the goal is complete, the committee dissolves. Examples of ad hoc committees include:
Advisory committees, also known as advisory boards, are composed of individuals who do not serve on the board. An advisory committee is a helpful tool for nonprofits that want more input from their community, and they provide an opportunity for individuals to get involved in the organization without committing to board membership. Organizations that serve youth groups sometimes create advisory committees to get input from minors who do not qualify for board membership. Like other committees, advisory boards can be standing or ad hoc.
Committees can include board directors and non-directors, including employees and individuals from the community. Executive directors commonly serve on one or all committees, often as “ex officio” (which means they can provide input, but do not have a vote).
The board will appoint directors to serve on committees, typically based on each director’s availability, interests, and expertise. Be careful to not overwhelm directors by asking them to serve on more than one or two committees at a time, as committee work takes additional time outside of regular board meetings.
The board will decide whether committees have the power to bind the nonprofit to decisions, such as entering into a contract. Typically, committees make recommendations to the board, and only the board can approve decisions. However, standing executive committees (which include only officers and the executive director) commonly have the authority to decide on some issues but not others. For example, executive committees typically can’t amend the bylaws but could approve a new insurance policy. The board can include the rules of authority in the bylaws, the committee charter (see below), or both.
The board is responsible for creating committees and determining their purpose and structure. Review your bylaws to determine how to create a committee. If you want to create one or more standing committees, you might need to amend your bylaws (to learn how to amend your bylaws, see our article How to Amend Nonprofit Bylaws). Unless the bylaws state otherwise, the board can simply agree to create an ad hoc committee without amending the bylaws.
The board can create committee charters for all new committees. The charter can include helpful information for committees such as:
Share the committee charter with all members of the committee, and store it with your corporate records.
]]>When you take the time to attend to these matters at your annual meeting, you will encourage the growth and success of your nonprofit. Moreover, donors like to see that your board is fulfilling its duties in monitoring the organization’s progress towards its mission.
Take a look at your bylaws and formation documents to determine the date of your annual meeting and the notification requirements. Commonly, your bylaws will provide the month of the meeting, and the directors will agree on the date. If the date is not specified in your bylaws, consider having your annual meeting the month after your fiscal year ends. This will give you an opportunity to review a full fiscal year and your annual tax return.
Your nonprofit’s bylaws might provide notification requirements, including the number of days in advance the secretary (or other designated officer) must send notice to the directors (and members, for membership nonprofits), and the method of communication (typically by email, phone, or mail). If the bylaws do not specify when or how to send notifications, review the nonprofit laws of your state.
One of the main purposes of the annual meeting is to elect the directors who will serve on the board. Review your bylaws to determine term lengths and voting procedures. For more information about electing a strong board of directors, see Building Your Nonprofit's Board.
At the annual meeting, the directors might also consider the overall structure of the board. As your nonprofit grows, you might add directors to the board, change the quorum requirements (the minimum number of directors who must be present at a meeting to transact business), or create new committees (like a fundraising committee). Be sure to amend your bylaws to reflect these changes.
If your nonprofit employs an executive director (the head employee who supervises the day-to-day operations of the nonprofit), that individual likely reports to the board. Your board can take time at the annual meeting to plan for the executive’s annual performance review, or to discuss the results of the review. The board might also evaluate and revise the executive’s job description, duties, and compensation.
The treasurer should provide financial reports for the board to review, including income statements, balance sheets, and the organization’s tax return. Read more here about the types of financial reports your treasurer should prepare. Based on the financial reports and strategic plan, the board will set the budget for the upcoming year.
The board should take time to review the prior year’s activities and programs, to determine whether the organization is fulfilling its mission and meeting its goals. For example, a food bank with a mission of reducing hunger might consider the number of people served and the amount of food distributed. If the organization is not meeting its goals, the board might adjust its goals for the upcoming year, and come up with strategies to improve the organization’s impact, such as creating a volunteer recruitment plan or hiring new employees.
The annual meeting is a good time to review your organization’s plans and policies. Doing so will ensure that your board is aware of your current policies and following them, and that they reflect the organization’s mission and goals. Some of the policies and plans your board might review include:
For more information about nonprofit policies, check out Nolo’s book Starting & Building a Nonprofit: A Practical Guide, by Peri Pakroo. If your board has questions about whether your policies comply with state law and federal tax code, reach out to an attorney for review.
]]>Your board of directors should regularly review the bylaws to ensure they are following the procedures outlined in the document, and to make updates as necessary. At the minimum, the board should go over the bylaws whenever your organization undergoes a major change, such as expanding to a new state or merging with another organization. It is also good practice to review the bylaws annually. Your nonprofit might plan on reviewing and updating the bylaws at the annual meeting (when the board adds and removes members and creates the strategic plan for the upcoming year).
No matter when the review occurs, the board should take the time to carefully go over the entire document. Some of the provisions your board might update include:
Before you amend your bylaws, review your state’s nonprofit laws to ensure the updates comply. For instance, before changing the number of directors, check your state’s laws regarding the minimum number of directors. Similarly, your state’s nonprofit laws might dictate the minimum quorum requirements, required offices (such as president or secretary), or prohibit the same person from holding more than one office.
Once you confirm that the change complies with state laws, you can draft the amendment. Sometimes the process is as simple as adding a new provision to the bylaws, while other changes can affect several provisions and will require you to make updates throughout your bylaws. Be sure to review the entire document to ensure that the language is consistent. If you have any question as to the legitimacy of your proposed changes, consult with an attorney who is well-versed in nonprofit law.
For example, when you change the month of your annual meeting, you will likely update only the section on meetings. In contrast, when you add an officer position and assign duties in the bylaws, you should review the sections on other officer roles (to ensure there is no overlap in duties) and the total number of directors (to see if you have enough people fill the required roles).
Review your bylaws to determine the process for amendment, and confirm that your procedures comply with state law. Some of the rules you should check include:
If the bylaws are silent on any of the above, check your state’s nonprofit statute, and follow the minimum requirements.
Depending on the amendment and your state’s laws, you might need to update state agencies and the IRS. In many states, you can report your changes in your annual filing, such as your annual report. In other states, you must file a certificate of change or an amendment to your formation documents (such as your articles of incorporation). Check with your Secretary of State to determine the requirements for your organization.
You must notify the IRS when you’ve made a structural or operational change, which includes amendments like increasing the number of directors, adding required offices, or changing your mission statement. If you are making a non-structural change such as allowing for meeting notification by email, you likely do not need to notify the IRS. To report a change, you include the updates in your annual tax return (990). The IRS does not require a separate filing.
]]>I work for a 501(c)(3) nonprofit corporation. Are its financial statements available for public viewing -- especially regarding management salaries?
Indeed. Nonprofits are required to submit their financial statements and other information -- including the salaries of directors, officers, and key employees -- to the IRS. (For information on who is considered a key employee, see IRS Form 990 and its instructions.)
The IRS and nonprofits themselves are required to disclose the information on Form 990 to anyone who asks. Nonprofits must allow public inspection of these records during regular business hours at their principal offices. However, many people won't even need to ask -- a number of websites make Forms 990 available for the searching, including the Foundation Center at http://fdncenter.org and GuideStar at www.guidestar.org.
In addition, people can request information from the IRS by writing a letter, including the name of the organization, the year, and the type of tax return requested, and send it to:
Commissioner of Internal Revenue
Attn: Freedom of Information Reading Room
1111 Constitution Avenue, NW
Washington, DC 20224
Learn more about IRS regulations with Nolo's book, Every Nonprofit's Tax Guide.
]]>One option is for 501(c)(3) nonprofits to pay state unemployment taxes for their employees like other for-profit businesses. State unemployment taxes are based on your nonprofit’s payroll and claims history--called the “experience rating.” Employers with many claims pay higher unemployment taxes than those with few claims.
As a result of the coronavirus (COVID-19) pandemic, an unprecedented number of employees are filing for unemployment throughout the country. Congress enacted the Coronavirus Aid Relief and Economic Security Act (CARES Act) to provide employees an additional $600 per week in unemployment benefits through July 31, 2020 under the Federal Pandemic Unemployment Compensation program. These benefits are 100% funded by the federal government and will not impact employers’ experience ratings. Several states have also acted to prevent experience ratings from spiking because of increased applications for regular unemployment benefits. Nevertheless, some nonprofits could experience increases in their experience ratings.
A 501(c)(3) organization has the option of opting out of its state unemployment insurance program and choosing to self-insure. Instead of paying a set amount of unemployment tax to the state every year regardless of how many of its employees file claims, it reimburses the state only for unemployment claims the state actually pays out to its former employees. In ordinary times, this can save big money because nonprofits typically pay more in unemployment taxes than the state pays out for the nonprofit's former employees’ claims. In the past, many nonprofits have saved 30% to 40% over five to ten years.
However, these are not ordinary times. As a result of the coronavirus (COVID-19) pandemic, most nonprofits have laid off substantial staff. As a result, the unemployment costs they will have to reimburse the state will likely far exceed the unemployment taxes they would otherwise have had to pay.
Under the CARES Act, the federal government will reimburse 50% of unemployment compensation paid by self-insured 501(c)(3) nonprofits between March 13, 2020 and December 31, 2020. Reimbursement is available for all unemployment claims made during this time period, not just COVID-19 related claims. However, this means that self-insured nonprofits will still have to pay for 50% of claims. Nonprofit organizations are attempting to get the states to waive reimbursement for this 50%.
To mitigate the financial risks inherent in being self-insured, thousands of nonprofits have joined grantor trusts that pool money from many organizations to pay off future claims. It is also possible to purchase private insurance to cover claims. Due to the avalanche of claims, these trusts could be in financial difficulty. Insurance premiums for those nonprofits that have it will likely rise. For more information, see the Unemployment Services Trust website.
Nonprofits that have opted for the reimbursement option should consider whether they would be better off joining their state unemployment insurance program.
For more information on complying with IRS nonprofit regulations, see Nolo's book, Every Nonprofit's Tax Guide.
]]>To understand the role of a trustee, it is helpful to first understand the purpose and roles of trusts, foundations, and endowments. A charitable trust is a legal instrument where the donor signs over assets to a third party, known as a trustee, for the benefit of a charity and anyone else the donor specifies. This provides tax benefits for the donor, and also allows the donor to have control over how assets are distributed.
Charitable foundations serve a similar purpose. The main difference is that while a charitable trust consists of donations from a single individual, a charitable foundation can have contributions from many donors. Like a trust, a foundation offers tax benefits to the donors. The foundation may have a particular charitable project or enterprise, or they may primarily give grants to charities.
Similarly, you often find a board of trustees at universities. Instead of a charitable trust, these trustees are tasked with managing an endowment, which is a portfolio of donated assets that provides investment income for the university. In this context, the board may also serve as the governing body for the university. It is often the board of trustees that sets the annual budget and makes policy decisions for the school.
The role of a board of trustees is similar to a board of directors on a nonprofit. Like a board of directors, the board of trustees is also tasked with strategic planning, setting policies, fundraising, and oversight of the charitable project. However, there are foundations and trusts that do not deal with the operation of a nonprofit but simply manage funds to distribute to other charities. In these cases, the role of the trustee would be more limited to managing the assets and determining how to distribute funds.
In addition, trustees have the additional responsibility of managing assets. This may include receiving charitable contributions, making investment decisions, handling taxes, and distributing assets to one or more beneficiaries in accordance with the rules of the trust.
Both board directors and trustees have particular duties and responsibilities to the organization. However, trustees are regulated by state trust law, which tends to put trustees at a higher standard than board directors. For example, directors are typically only personally responsible for willful misconduct or gross negligence, while a trustee may be responsible for simple negligence, even if in made in good faith. In other words, a trustee could be held personally liable for a poor investment decision, while a director would only responsible for a reckless investment.
All board members owe fiduciary duties, including the duty of care, loyalty, and obedience. These duties mean that the individual must put the nonprofit before personal interests, take care in making decisions for the organization, and carry out the mission of the nonprofit. However, trustees are typically held to a higher standard of care.
For instance, every director must disclose to the nonprofit board if a decision would benefit the director personally, such as the nonprofit signing a contract with a business a director owns, resulting in the director receiving a financial gain. However, the other directors may decide to take on the contract, so long as it is in the best interest of the nonprofit. For a trustee, any kind of self-dealing is typically prohibited, even if the other trustees agreed to go forward with the decision.
The creation of a Board of Trustees should begin with the creation of the trust, foundation, or endowment. To avoid confusion, it is recommended that you use the appropriate terms when creating your boards, meaning that you should not create a board of trustees to manage a nonprofit, nor create a board of directors to manage a trust. However, the terminology may differ depending on the laws of your state. If in doubt, consult with an attorney in your area.
The structure of the board will be determined by the laws of the state, but also the nonprofit’s bylaws and articles of organization, and the terms of the trust or other legal instrument. State law may mandate a minimum number of trustees, and what board positions must be filled, such as the chair, secretary, or treasurer. The bylaws and trust terms may specify the board size, how individuals are appointed, and the duration of the term.
The same considerations that go into forming a board of directors should go into creating a board of trustees. You want people on the board who are committed to the mission of the organization and have a diverse background. Because of the additional responsibilities in managing the assets and the fiduciary duties, you should also consider whether candidates have the appropriate financial or legal background and experience.
]]>As long as the reimbursements are done properly, there should be no tax consequences for reimbursements for the nonprofit or its volunteers. The key to keeping them tax free is to make sure you have an accountable plan that follows IRS rules and that all reimbursements are made in accordance with that plan. If they are, these payments don’t even need to be reported to the IRS.
An accountable plan is a plan that follows IRS rules on reimbursing employees or volunteers for business-related expenses. The IRS has adopted rules about reimbursements because these types of payments can be so easily subject to abuse. For example, someone on a business trip to Seattle might try to include in their business expenses the cost for a sightseeing trip to an island. To avoid these kinds of problems, the IRS has adopted a strict set of rules that must be followed for reimbursements to be a nontaxable and nonreportable event.
To pass muster with the IRS, the accountable plan must require that:
If you have an accountable plan that complies with these rules, then any payments made under the plan are not taxable and need not be reported to the IRS.
There are different ways a volunteer might pay or seek reimbursement for expenses. In most cases, the volunteer will pay the expenses at the time they are incurred and then seek a cash reimbursement from your nonprofit. However, in some cases, the volunteer might get an advance payment to cover anticipated expenses. This is fine so long as it is not paid more than 30 days before the expense are incurred. Alternatively, a volunteer could be given a company credit card to use. There may also be instances where a volunteer handles expenses through a direct billing to the nonprofit. Using a company credit card or direct billing doesn’t involve an actual reimbursement of funds to the volunteer because the expense is paid directly by the nonprofit, but the same rules apply as for an actual reimbursement where the volunteer pays an expense out of his or her own pocket and is later repaid by the nonprofit.
This is a threshold requirement. The expenses being reimbursed must be directly related to the work or services provided by the volunteer. The IRS doesn’t want people to get reimbursed for any personal, family, or other nonbusiness expenses along with their business expenses. For example, a volunteer traveling to Las Vegas on nonprofit business cannot be reimbursed for a trip to the Grand Canyon. That is a personal expense that the volunteer must pay for out of his or her own pocket. Or, a volunteer could decide to bring a family member along on a business trip. As long as there is no added expense, that is okay. Otherwise, any expenses paid for by the nonprofit that are not business-related or are incurred on behalf of a family member or someone other than the volunteer must be included as taxable income for the volunteer and reported to the IRS.
It is crucial to have good records for expenses to be reimbursable under an accountable plan. At a minimum, every expense should be supported by documentation showing:
The documentation can consist of cancelled checks, sales receipts, account statements, credit card sales slips, invoices, or petty cash slips for small cash payments. Many nonprofits require volunteers to complete a written expense report to get reimbursed (see the sample below). For certain expenses, such as local transportation, travel, entertainment, meal, and gifts, the IRS imposes additional documentation requirements.
Obviously, a volunteer can’t be paid more than he or she actually spends on expenses. Volunteers who receive an advance or some kind of allowance for expenses must keep track of what they spend and return any excess within 120 days after the expense was paid. If any excess is not paid back within the required 120 days, the difference is gross income that the volunteer must pay income tax on.
To find out more about how you can keep your nonprofit aboveboard when it comes to the IRS, see Nolo's book, Every Nonprofit's Tax Guide.
]]>The IRS says that a key employee who works for a nonprofit can only be paid a reasonable amount. Any amount above the reasonable threshold is an excess benefit that can result in IRS sanctions. Nonprofits would love to have concrete guidelines about how much is reasonable. Unfortunately, there aren’t any. The IRS simply says that compensation is reasonable if the amount paid would ordinarily be paid for:
In other words, you have to look at what other people doing similar jobs for similar organizations are paid. Your nonprofit and a comparable organization should be competing for the same pool of talent.
Comparable compensation data. The single most important element in determining whether an employee's compensation is reasonable is comparable compensation data—that is, data about how much compensation is paid by similar organizations for people working in comparable positions.
Comparable services. In determining whether one person’s services are comparable to another’s, you should consider such factors as the type of work and skills involved, whether the job is full time or part-time, the size and scope of the organization, the number of employees managed, the budget or assets managed, and whether the person manages multiple functions or departments.
Comparable enterprises. In determining whether another nonprofit (or profit) organization is comparable to your own, you should consider whether it is similar in:
Comparable circumstances. Consider such circumstances as whether the organization is located in a similar geographic area—for example, whether it is urban or rural, and whether the cost of living is similar.
Other factors. Other factors can be considered as well. Depending on the circumstances, these may include:
A rent study of nonprofit CEO compensation by Charity Navigator, a nonprofit that evaluates and rates charities, found that, other than comparable compensation data, the most important additional factors are the nonprofit’s size, mission, and location. The study reported that:
If this all sounds pretty subjective, that’s because it is. The compensation nonprofits pay their employees for doing similar jobs can vary widely.
There are a lot of resources for compensation data reports for nonprofits compiled by geographic region, sector, budget, type of organization, and so on. You can find many options online (like Guidestar) although you will probably have to pay for the report. It's good assurance though that you have done your required compensation analysis in case the IRS ever asks.
For more information on running your nonprofit, see Nolo's book, Starting & Building a Nonprofit.
]]>Nonprofits that file IRS Form 990 must allocate their annual expenses into three categories:
Together, administrative expenses and fundraising expenses make up a nonprofit’s “overhead,” or “operating expenses.”
The IRS does not require that nonprofits spend any particular portion of their income on each category. It just wants nonprofits to report how they spend their money.
There is no single formula or ratio all nonprofits use to determine how much of their total budget should go to operating expenses. But, the commonly accepted rule most of them follow is the less spent on overhead, the better a nonprofit looks to donors.
Charity rating organizations grade nonprofits partly on how much they spend on these expense categories. For example, CharityWatch.com says that it’s reasonable for most charities to spend up to 40% of their budget on operating expenses—in other words, at least 60% should go to programs, and 40% should go to everything else. However, charities that spend less than 40% get higher grades from CharityWatch, with those spending 25% or less on operating expenses receiving the highest “A” grades. Charity Navigator, which employs a sophisticated rating system, gives bonus points to nonprofits with lower operating expenses. Most nonprofits who spend more than 30% of their budget on overhead get no bonus points. The Better Business Bureau says that no more than 35% of a nonprofit’s budget should be spent on operating expenses.
Unfortunately, the desire to keep overhead costs as low as possible has had pernicious effects on many nonprofits. One study found that the lack of overhead investment has left many with insufficient office space, nonfunctioning computers, and staff members who lack the training they need to do their jobs properly. In one case, a nonprofit had furniture so old and beaten down that the movers refused to move it.
In addition, many nonprofits engage in accounting tricks or outright dishonesty to keep their reported overhead costs as low as possible—sometimes ridiculously low. This is aided by the fact that the IRS does not require nonprofits to allocate expenses in any particular way. A study of over 220,000 nonprofits found that more than a third reported no fundraising costs at all, while one in eight reported no management or general expenses. The researchers concluded that 75% to 85% of these nonprofits were improperly allocating their expenses.
Things have gotten so bad that the heads of the three leading nonprofit rating organizations--GuideStar, Charity Navigator and BBB Wise Giving Alliance—created a website called The Overhead Myth. The website includes an open letter from the heads of these organizations denouncing the “overhead ratio” as a valid indicator of nonprofit performance.
August 2013
]]>Savvy nonprofits know that a good strategy in fundraising is to remind potential donors about tax deductions for their donations (at least for those who itemize deductions on their taxes instead of taking the federal standard deduction). But did you know that your volunteers—people who donate time rather than money—might qualify for certain tax deductions as well? Your nonprofit should make it a regular habit to remind volunteers—perhaps board or advisory council members, other regular volunteers, or those who assist at special events—about these possible deductions.
It's true that the deductions available to volunteers might not add up to big dollars, since there's no deduction for the actual hours they put in. Even highly skilled volunteers, such as graphic designers or lawyers, can't deduct the value of their time.
But volunteers will likely appreciate your efforts to help them get some dollar return for other expenses they pay in order to volunteer, as described below. And by reminding volunteers that the IRS recognizes their role, you'll also remind them that this isn't a casual commitment, and perhaps further inspire them to come back next week (or next meeting).
Here's what the IRS will allow volunteers at nonprofits to deduct from their taxable income:
Car and transportation expenses. Volunteers can deduct car and transportation expenses incurred to get back and forth from home to your office, or to meetings or other sites (such as a special event, to deliver food to a homebound patient, or to go to an animal rescue site).
Volunteers who drive can choose between deducting actual gas and oil used, or else take a mileage deduction at the rate of 14 cents per mile. Given the high cost of gasoline today, most volunteers are better off keeping track of actual driving expenses. Volunteers can also add in parking fees and tolls. However, volunteers cannot claim general car repair and maintenance expenses, depreciation, registration fees, or the costs of tires or insurance.
Those volunteers taking public transportation can deduct subway, bus, or taxi fare.
Travel expenses. The volunteer can deduct travel expenses relevant to volunteering in service of your nonprofit away from home, such as airfare and other transport, accommodations, and meals. This might include trips to attend a convention or board meeting, taking kids from families below poverty line on a camping trip, or monitoring environmental destruction.
However, there are important limitations: The volunteer cannot gain significant personal pleasure, recreation, or vacation from the travel. And the volunteer must really be working -- tagging along on an outing while performing nominal duties, or even no duties for significant parts of the trip, won't cut it.
Other out-of-pocket expenses. Volunteers may deduct other expenses they incur during the course of their volunteer work. For example, board members might deduct unreimbursed phone, postage, and copying charges associated with preparing for meetings. Volunteers at an animal shelter can deduct the treats they're asked to provide in order to help train dogs during walks. Sunday school teachers can deduct art supplies they bring in.
Uniforms. If you ask volunteers to purchase a uniform—for example, an apron identifying them as a hospital helper—they can deduct both the purchase price and any upkeep costs. However, the uniform must not be suitable for everyday use (providing a T-shirt with a logo or asking your theatre ushers to always wear black won't be enough). Also, your organization must require the volunteers to wear the uniforms while performing services.
The following limitations apply to these deductions:
Although you should alert your organization's volunteers to these potential tax deductions, don't get into the business of giving personalized tax advice. Instead, suggest that volunteers talk to a tax professional, use a tax preparation software program, or read IRS Publication 526, Charitable Contributions (at www.irs.gov, click on publications). To learn more about strategies for incorporating volunteer help into your nonprofit's fundraising and other efforts, read Effective Fundraising for Nonprofits: Real-World Strategies That Work, by Ilona Bray (Nolo).
]]>To pass muster with the IRS, the accountable plan must require that:
These strict rules are imposed to prevent directors and employees from seeking reimbursement for personal expenses (or nonexistent phony expenses) under the guise that they were work expenses. An accountable plan doesn’t need to be in writing (although it’s not a bad idea). All your nonprofit has to do is set up procedures for your employees to follow that meet the requirements.
The expenses being reimbursed must be directly related to the work or services provided by the employee or director. The IRS doesn’t want people to get reimbursed for any personal, family, or other nonbusiness expenses along with their business expenses. For example, an employee traveling to Las Vegas on nonprofit business cannot be reimbursed for a trip to the Grand Canyon. That is a personal expense that the employee must pay for out of his or her own pocket.
It is crucial to have good records for expenses to be reimbursable under an accountable plan. At a minimum, every expense should be supported by documentation showing:
The documentation can consist of cancelled checks, sales receipts, account statements, credit card sales slips, invoices, or petty cash slips for small cash payments.
Obviously, an employee or director can’t be paid more than he or she actually spends on expenses. Employees and directors who receive an advance or some kind of allowance for expenses must keep track of what they spend and return any excess within 120 days after the expense was paid. If any excess is not paid back within the required 120 days, the difference is gross income that the employee must pay income tax on.
Any payments a nonprofit make to employees for business-related expenses that do not comply with the accountable plan rule are deemed to be made under an unaccountable plan. These payments are considered to be employee wages, which means all of the following:
Payments to directors who are independent contractors made under an unaccountable plan are also taxable income to the director and must be reported to the IRS by the nonprofit if they exceed $600 per year.
The moral is clear: Don’t ever reimburse a director or employee for expenses without complying with the accountable plan requirements.
To learn more about compying with IRS nonprofit standards, see Nolo's book, Every Nonprofit's Tax Guide.
May 2013
]]>Nonprofits don’t have shareholders, but they do have other individuals who could be concerned about limited liability protection, such as staff, board members, and officers. Fear of personal liability can stop people from joining boards of directors at all—although the number who have actually been sued is quite small.
The good news is that, with certain exceptions, once your organization is incorporated, its directors or trustees, officers, employees, and volunteers usually won't be on the hook personally for the nonprofit's debts or liabilities. That includes unpaid organizational debts and unsatisfied court judgments against the nonprofit.
Let's take a closer look at the extent of nonprofit board members' protection from personal liability.
Consider, for example, a nonprofit symphony that's sued by an audience member who, during intermission, falls because of a poorly maintained staircase railing.
If the court finds in favor of the audience member, it could issue a judgment against the nonprofit for a large amount—perhaps greater than the nonprofit's insurance coverage. The amount of the judgment becomes a debt of the nonprofit corporation. But thanks to its corporate status, the nonprofit's directors, officers, and members aren’t personally responsible for paying that debt.
By contrast, if an unincorporated association of musicians owned the premises, the principals of the unincorporated group could be required to pay the judgment amount out of their own pockets—thus putting their personal assets at risk. (Some states' laws, however, offer protection to people affiliated with unincorporated associations.)
In a few situations, people involved with a nonprofit corporation can be held personally liable for its debts. Directors or officers of nonprofit corporations can be held personally liable if they:
A nonprofit's unpaid payroll taxes can raise a big risk in terms of board members' liability. A failing nonprofit might find itself unable to pay taxes, and then close its doors. After that, the IRS could turn to the board of directors for payment, and the board members might discover too late that their insurance doesn't cover unpaid taxes.
When a nonprofit fails to pay its payroll taxes, any “responsible person” can be held personally liable. In other words, responsible people are on the hook to pay the back taxes and penalties out of their own pockets. A responsible person may include not only a nonprofit’s accountant or bookkeeper, but also anyone who exercises significant control over the nonprofit’s finances. People in this situation can include not only a nonprofit’s treasurer, president, executive director, CEO, and other officers, but its board members as well.
Even someone who wasn’t directly involved in paying payroll taxes can be found liable. In the case of Verret v. U.S., the chairman of the board of directors of a nonprofit was held personally liable for nonpayment of payroll taxes, even though the organization’s in-house director and accountant were the ones who were charged by the board with the duty of seeing that the taxes were paid.
However, there’s a limited exception to the rule that responsible people can be liable for a nonprofit’s unpaid payroll taxes. Liability won’t be imposed on a volunteer director who:
This exception can apply only where volunteer a board member has absolutely no personal involvement with a nonprofit’s operations.
Reasonably priced insurance is available to protect a nonprofit and its volunteer directors and officers from some kinds of liability—it’s called “D&O insurance.” D&O policies cover claims arising from what are known as errors and omissions (E&O) by directors, officers, and other covered individuals.
Most D&O claims are employment-related, such as accusations of discrimination or wrongful termination, so be sure that your policy includes employment practices liability (EPL) coverage. Be sure to also have separate general liability insurance for other losses, such as from personal injury claims or property damage.
Read more about the types of insurance nonprofits should buy.
Director liability can be complicated. If you’re unsure of how to best protect your directors from personal liability, or if you’re wondering whether your directors might be liable for a particular obligation of your nonprofit, consult a knowledgeable nonprofit attorney.
Looking for a map that will put your nonprofit on the road to success? Get Starting & Building a Nonprofit: A Practical Guide, by Peri H. Pakroo, J.D. (Nolo).
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Although it might seem excessive to check references for a volunteer, there are many practical reasons to do so. Talking with someone who has worked with the prospective volunteer will hopefully not only yield a positive endorsement, but will help you get to know the volunteer’s strengths and weaknesses before assigning particular tasks.
If you don’t feel checking everyone’s references is worth your time, at least check references for any volunteer position that involves dealing with money, children, or other at-risk populations, or one that involves regularly driving a vehicle.
It's wise to ask the references questions like:
After checking references, you will hopefully feel even more excited about having the volunteer assisting with your nonprofit’s activities. But if something doesn’t check out, you might need to either turn the person away altogether or suggest a different project.
Unlike paid positions, people generally have no legal right to hold a volunteer position. As a result, organizations often have greater leeway in determining who is a good fit, as long as their criteria are not discriminatory or otherwise illegal.
]]>A general liability policy insures your nonprofit organization against classic slip-and-fall scenarios. (It's sometimes also called a "commercial general liability" or "CGL" policy.) Your nonprofit will be covered for damages that it's ordered to pay to someone (such as a visitor, customer, supplier, or associate) who is injured on the organization's property. These kinds of policies don't apply to the nonprofit's employees, who are covered separately by workers' compensation insurance.
Whether you own or rent the space your nonprofit occupies, consider what your organization might lose in the event of a fire, earthquake, vandalism, storm, or similar event. Then, buy property insurance that covers those risks, making sure it covers not only the building (if your organization owns it) but any:
Most basic policies will cover these items -- but at what dollar amount? Make sure the policy covers the cost to actually replace the property, instead of paying its market value as a used good immediately before the damage.
Ask your agent or broker to carefully explain your deductible (how much your organization will be out of pocket before the insurance kicks in) and what types of losses or property damage will not be covered under the policy. For example, flood insurance is usually sold separately. And your organization may have to pay extra to have theft coverage included.
If your staff or volunteers use any vehicles (including their own) for your nonprofit's activities, auto liability insurance is a must. In fact, your state may require you to purchase a minimum amount of coverage. The insurance will pay for injuries a driver causes to other people or property while carrying out your organization's business. Your state's law may also require additional auto insurance, including personal injury protection (PIP) and uninsured/underinsured motorist (UM/UIM) coverage.
If your nonprofit sells products to the public -- for example, you raise funds by selling baked goods, or your artist-clients create and sell sculptures out of recycled products -- consider buying product liability insurance. It will protect your organization from lawsuits by customers claiming they were hurt by an unsafe or defective product you provided. For example, if a customer breaks a tooth on a walnut shell baked into your cookie or slices a hand on a sharp-edged sculpture, this insurance will cover the legal defense and a sizable portion of the damages.
Your nonprofit's board of directors and officers (many of whom are volunteers) could be personally named in a lawsuit against your nonprofit alleging fraud or financial mismanagement. For example, if a board member invests the nonprofit's assets unwisely and loses everything, a creditor might sue the nonprofit as well as its directors and officers. In such a case, you'd want directors and officers (D&O) insurance to cover the cost of defending the directors and officers and pay any resulting money damages.
As with any insurance coverage, it's important to understand what kind of claims are and aren't covered by a D&O policy. Typical exclusions include damages arising from criminal or fraudulent behavior and claims brought by one director against another. But make sure your policy doesn't exclude employment-related claims, which are the most common ones filed against directors and officers.
Similar to D&O coverage, professional liability coverage (also sometimes called "errors and omissions" or "malpractice" insurance) protect against liabilities resulting from mismanagement of the organization, as well as workplace-related claims such as discrimination or sexual harassment. It covers not only directors and officers but also staff, volunteers, and the nonprofit organization itself.
For more information on evaluating your nonprofit's insurance needs and finding the right policies for your organization, see Starting & Building a Nonprofit; A Practical Guide, by Peri H. Pakroo, J.D. (Nolo).
]]>So let's look at some of the best ways to protect your organization from the most common types of lawsuits: contract disputes, employment law claims, and personal injury lawsuits.
Many of the everyday transactions your nonprofit engages in -- such as hiring a contractor to fix up your facility, buying equipment, and renting space for your office or for a special event -- require more than just an oral agreement. To prevent misunderstandings and disputes, your organization should establish exactly what's being agreed to, and put it in writing. That way, if a dispute arises -- or the other party doesn't do what was promised in the contract -- you'll have written evidence to present in court.
The agreement doesn't have to be written in tortuous legal language. What's important is that both sides understand it. If you're presented with a standard form agreement, don't feel you have to live with it as-is. You can always cross out sections or add to them by writing directly on the document (accompanying the changes with both sides' initials), or add an addendum (an additional page) to the contract.
Consider all the details carefully before signing. For example, if you were hiring a company to design a website for your organization, you'd want to make sure the contract included:
The best rule of thumb to follow may be this: Think about what could possibly go wrong, and make sure you address it in the contract.
Employment-related claims -- such as sexual harassment, wrongful termination, discrimination, and wage-and-hour disputes -- make up a significant portion of lawsuits against nonprofits (and for-profit businesses, too).
Unfortunately, the very fact that nonprofits are financially strapped often leads them to impose on their employees in ways that are quite illegal. Failing to pay someone overtime or improperly handling their vacation time might be laughed off by a happy employee, but when that person becomes disgruntled or gets laid off, those kinds of employment practices can lead to a lawsuit.
Both federal and state laws govern employment matters, so you'll need to gain some understanding of both. Start out by visiting the HR and Employment Law section of Nolo's website.
Personal injury or "tort" lawsuits are the least likely ones your nonprofit will face. But if one arises, it can be financially devastating. (There's a reason people keep advocating "tort reform.")
Tort claims can stem from a physical injury, property damage, emotional distress, or damage to a person's reputation. In general, whoever (or whatever organization) causes an injury will be financially liable for the damages suffered by the victim, even if the wrongdoer didn't mean any harm; both intentional injuries and those caused by carelessness can result in liability.
For example, if your group is located in an old building with too few electrical outlets and a visitor trips over one of many extension cords and breaks an ankle, that person might file a personal injury claim against your nonprofit, seeking compensation for medical bills plus pain and suffering.
Or, if your nonprofit posts false and damaging information about someone on its website -- say you write an article about the local art scene, accuse a gallery owner of fraudulent activity, and it turns out to be untrue -- the gallery owner could file a personal injury claim against your nonprofit based on damage to reputation.
Evaluate your most likely areas of risk -- for example, an office space that's open to the public, volunteers driving delivery vans of food to housebound people, regular camping or other trips with children, active advocacy work, or special events involving large amounts of money -- and then plan specific ways to minimize those risks and limit your exposure to legal trouble. Good management and supervision can go a long way.
For more information on personal injury law, see the Personal Injury and Accidents section of Nolo's website.
All the precautions and planning in the world won't keep your nonprofit immune from a lawsuit, so insurance may be your nonprofit's best option. To learn more, see Nolo's article, What Types of Insurance Should a Nonprofit Buy?
A more extensive discussion of nonprofit risk management can be found in Starting & Building a Nonprofit; A Practical Guide, by Peri H. Pakroo, J.D. (Nolo).
]]>While adoption of these policies is strongly encouraged by the IRS, it is not required. Indeed, the IRS lacks the authority to impose such a requirement since governance matters are largely the province of state nonprofit corporation law, not the federal tax law administered by the IRS. Nevertheless, IRS officials have indicated that nonprofits that fail to adopt certain policies have a greater chance of being audited than those who do—the rationale being that nonprofits with such policies are more likely to be in compliance with the tax law.
IRS Form 990, the annual information return field by larger nonprofits, contains a series of questions asking whether certain policies have been adopted by your nonprofit. A series of “no” answers in this section of the Form just doesn’t look good to members of the public who read the return.
That said, you don’t necessarily have to adopt all the suggested polices. The Form 990 instructions provide: “Whether a particular policy, procedure, or practice should be adopted by an organization may depend on the organization’s size, type, and culture. Accordingly, it is important that each organization consider the governance policies and practices that are most appropriate for that organization in assuring sound operations and compliance.”
Hold a board meeting to review key policies already in place at your nonprofit and discuss whether you should adopt or revise any of the following policies.
Conflict of interest policy. A conflict of interest policy is used to help all those associated with your nonprofit to identify, disclose, and deal with situations where there is a financial or other conflict. This is one policy all nonprofits, no matter how small, should have.
Expense reimbursement policy. Reimbursement or payment of expenses for nonprofit officers, directors, trustees, and key employees (ODTKEs) is a hot-button item for the IRS and the public. Form 990 contains a separate Schedule J dealing largely with this issue. The schedule specifically asks whether your nonprofit reimburses or pays ODTKEs for first-class or charter travel, companion travel, tax gross-up payments (payment of any taxes due on taxable perks such as travel), discretionary spending, housing, health or social club dues, and personal services such as use of a chauffeur. If your nonprofit reimbursed or paid an ODTKE for any of these things, you must disclose whether you have a written policy in place for such reimbursement or payment. If not, you must explain why not.
Whistleblower protection policy. A whistleblower policy encourages employees to report financial and other improprieties by establishing procedures to keep whistleblowers’ identities confidential and to protect them from retaliation. A small nonprofit without employees probably doesn’t need this.
Document retention and destruction policy. This policy provides guidance on how long records must be kept by your nonprofit before they are destroyed. This is a good policy for all nonprofits to have.
Joint venture policy. This policy requires a nonprofit to identify, disclose, and properly manage joint ventures—that is, relationships with for-profit businesses. Smaller nonprofits ordinarily are not involved in such ventures.
Gift acceptance policy. A gift acceptance policy establishes procedures for reviewing, accepting, and substantiating non-standard contributions. These are contributions of items that are difficult to sell and/or value—for example, vacation time-shares or stock in a privately owned company. If your nonprofit accepts such non-standard contributions, you should adopt such a policy.
Chapter, branch, and affiliate policies. You would need such a policy only if your nonprofit has local chapters, branches, or affiliates.
If you need to adopt one or more of the suggested governance policies, you’ll need to draft a policy and have it approved by your board of directors. There is no single way to draft any of these policies. They can be quite simple or complex. The smaller your nonprofit, the simpler they can be.
There are many places where you can find sample policies. The organization, Board Source, has numerous sample policies that can be downloaded from its website for a small fee. Other websites that have downloadable sample policies include:
For more on compying with the IRS, see Nolo's book, Every Nonprofit's Tax Guide.
May 2013