This is the second posting in a series of two-part series written by guest blogger Christine DeMarea, Partner at Husch Blackwell and Feb. 9, 2011 workshop host and presenter.
The truth is in this day and age, with donors facing considerable financial challenges; donors are scrutinizing how a nonprofit operates. Without full confidence of the public, nonprofits will be unable to raise funds and further their charitable causes.
Corporate Sponsorship versus Advertising - Issues that should be considered. The IRS will look at the payment made to a nonprofit by a corporate sponsor and decide whether the payment is a tax-free gift (charitable contribution) or a taxable advertising payment. The IRS focuses on whether the corporate sponsorship has any expectation that it will receive a "substantial return benefit" for its payment. If so, the payment is considered taxable to the nonprofit. These rules are set forth in the Internal Revenue Code, section 513(i).
1. Avoiding "Substantial Return Benefit" Classification. In order to avoid this classification, nonprofits should structure their acknowledgement of corporate sponsorships to focus on the support the corporation provides the nonprofit's mission. Acknowledgments that do not cross the line include:
• The sponsor's name, logo, general phone number, locations, and internet address in printed media, or on a nonprofit's website.
• Value-neutral displays of a sponsor's products or services, or the distribution of free samples of a sponsor's products at a nonprofit event. The nonprofit should not endorse the product/service. • A single static internet website link that takes the viewer only to the sponsor's home page - not to a page where a product or service is marketed or sold.
2. What is considered a "substantial return benefit?"
• Providing prices, indications of savings or value, providing endorsements, or inducements to buy a sponsor's product or services.
• Providing a link from a sponsor's name/logo on the nonprofit's website to the page of a sponsor's website where a product or service is sold, or listing the phone number where the product or service can be ordered.
• Providing more than token services or other privileges to the sponsor in return for its sponsorship payment, such as tickets to an event that are complimentary and not otherwise available to the public or lavish receptions.
• Accepting a payment from a corporate sponsor that is contingent upon the level of attendance at the nonprofit event.
• Providing sponsors with advertising or acknowledgments in a nonprofit's regularly scheduled and published materials, such as a eNewsletter, is considered to constitute advertising and therefore the sponsorship payment is taxable income for the nonprofit.
Nonprofit Fundraising Registration - One more thing to worry about. Registration Requirement. Thirty-nine states plus the District of Columbia require nonprofits that solicit donations in their jurisdiction to register with a state agency. They are very complicated, confusing - and unfortunately, expensive. Every state has different requirements, forms and rules. Just figuring which states a nonprofit must register can be a nightmare.
Why Worry About It?
Although these laws have been on the books for year, most nonprofits largely ignored them. For a number of reasons, a nonprofit should determine whether they are in compliance. IRS Scrutiny. In the past, the IRS did not ask for information from nonprofits about whether they were in compliance with sate registration requirements or what states they were registered in. However, this changed in 2007 when the IRS adopted new, different forms 990 and 990-EZ. The new form asks two questions relating to state registration:
1. Part VI, Line 17 - The first question must be answered by all nonprofits. This question asks "List the states with which a copy of this Form 990 is required to be filed." All but three of the 39 states that have fundraising registration require that you file a copy of Form 990. You are required to list every state - you are not allowed to say "all states".
2. Schedule G. If your nonprofit reports payments of more than $15,000 for expenses for professional fundraising services. IRS Penalties for Filing Inaccurate Forms. It is important to file to file an accurate return. Penalties can be harsh. You could be charged a penalty of $20 a day up to the lesser of $10,000 or 5% of your annual gross receipts. Nonprofits with annual gross receipts exceeding $1 million are subject to a penalty of $100 a day up to a maximum of $50,000 penalty. Responsible persons could also be held liable and if you fail to file an accurate tax return for 3 consecutive years, you could loose your tax exemption. An organization is better off explaining why or what actions you are taking to remedy the situation as opposed to trying to skirt the truth with less than honest answers. Remember - the IRS can't take action if you failed to register, it is the state that will need to take action. There is no need to have both the state and federal government pursuing you.
State Scrutiny. States are more becoming more concerned about revenue. As a result, they are becoming more active in pursuing nonprofits who have not registered. Other states are starting to collect fees and giving other states some basis for pursuing nonprofits. (In 2004, NY collected $500,000 in fines. In 2009, Washington sent letters to 39,000 nonprofits. Liability Exposure. If you are assessed a penalty for failing to register, the board members may be personally liable for the penalties. This is a surprise to many nonprofits. Unlike many other debts and liability of a nonprofit, if your organization is fined for failure to register with a state (or failed to file an accurate return with the IRS), your board of directors can be held personally liable for those fines. Many state solicitation laws provide that a nonprofit cannot reimburse its directors, officers or employees for such fines.
You might be asked by Donors/ Funders/Auditors. Many sophisticated donors know about state registration and are starting to ask. You want to be able to answer that you have complied with applicable law.
My Nonprofit is Probably Exempt. It is possible that your nonprofit will not be required to register but you want to be certain. Some facts to consider include:
• Your Website might "do you in" and trigger registration. If you have a "donate" button, this might cause you to fall within a state's registration requirements. There are steps you could take to avoid this.
Christine DeMa
rea Partner, Husch Blackwell Christine is highly regarded in business and estate planning, and charitable planned giving. She counsels clients on estate planning and tax-exempt organizations, assisting in administrative, legal, tax and compliance matters.
The truth is in this day and age, with donors facing considerable financial challenges; donors are scrutinizing how a nonprofit operates. Without full confidence of the public, nonprofits will be unable to raise funds and further their charitable causes.
Corporate Sponsorship versus Advertising - Issues that should be considered. The IRS will look at the payment made to a nonprofit by a corporate sponsor and decide whether the payment is a tax-free gift (charitable contribution) or a taxable advertising payment. The IRS focuses on whether the corporate sponsorship has any expectation that it will receive a "substantial return benefit" for its payment. If so, the payment is considered taxable to the nonprofit. These rules are set forth in the Internal Revenue Code, section 513(i).
1. Avoiding "Substantial Return Benefit" Classification. In order to avoid this classification, nonprofits should structure their acknowledgement of corporate sponsorships to focus on the support the corporation provides the nonprofit's mission. Acknowledgments that do not cross the line include:
• The sponsor's name, logo, general phone number, locations, and internet address in printed media, or on a nonprofit's website.
• Value-neutral displays of a sponsor's products or services, or the distribution of free samples of a sponsor's products at a nonprofit event. The nonprofit should not endorse the product/service. • A single static internet website link that takes the viewer only to the sponsor's home page - not to a page where a product or service is marketed or sold.
2. What is considered a "substantial return benefit?"
• Providing prices, indications of savings or value, providing endorsements, or inducements to buy a sponsor's product or services.
• Providing a link from a sponsor's name/logo on the nonprofit's website to the page of a sponsor's website where a product or service is sold, or listing the phone number where the product or service can be ordered.
• Providing more than token services or other privileges to the sponsor in return for its sponsorship payment, such as tickets to an event that are complimentary and not otherwise available to the public or lavish receptions.
• Accepting a payment from a corporate sponsor that is contingent upon the level of attendance at the nonprofit event.
• Providing sponsors with advertising or acknowledgments in a nonprofit's regularly scheduled and published materials, such as a eNewsletter, is considered to constitute advertising and therefore the sponsorship payment is taxable income for the nonprofit.
Nonprofit Fundraising Registration - One more thing to worry about. Registration Requirement. Thirty-nine states plus the District of Columbia require nonprofits that solicit donations in their jurisdiction to register with a state agency. They are very complicated, confusing - and unfortunately, expensive. Every state has different requirements, forms and rules. Just figuring which states a nonprofit must register can be a nightmare.
Why Worry About It?
Although these laws have been on the books for year, most nonprofits largely ignored them. For a number of reasons, a nonprofit should determine whether they are in compliance. IRS Scrutiny. In the past, the IRS did not ask for information from nonprofits about whether they were in compliance with sate registration requirements or what states they were registered in. However, this changed in 2007 when the IRS adopted new, different forms 990 and 990-EZ. The new form asks two questions relating to state registration:
1. Part VI, Line 17 - The first question must be answered by all nonprofits. This question asks "List the states with which a copy of this Form 990 is required to be filed." All but three of the 39 states that have fundraising registration require that you file a copy of Form 990. You are required to list every state - you are not allowed to say "all states".
2. Schedule G. If your nonprofit reports payments of more than $15,000 for expenses for professional fundraising services. IRS Penalties for Filing Inaccurate Forms. It is important to file to file an accurate return. Penalties can be harsh. You could be charged a penalty of $20 a day up to the lesser of $10,000 or 5% of your annual gross receipts. Nonprofits with annual gross receipts exceeding $1 million are subject to a penalty of $100 a day up to a maximum of $50,000 penalty. Responsible persons could also be held liable and if you fail to file an accurate tax return for 3 consecutive years, you could loose your tax exemption. An organization is better off explaining why or what actions you are taking to remedy the situation as opposed to trying to skirt the truth with less than honest answers. Remember - the IRS can't take action if you failed to register, it is the state that will need to take action. There is no need to have both the state and federal government pursuing you.
State Scrutiny. States are more becoming more concerned about revenue. As a result, they are becoming more active in pursuing nonprofits who have not registered. Other states are starting to collect fees and giving other states some basis for pursuing nonprofits. (In 2004, NY collected $500,000 in fines. In 2009, Washington sent letters to 39,000 nonprofits. Liability Exposure. If you are assessed a penalty for failing to register, the board members may be personally liable for the penalties. This is a surprise to many nonprofits. Unlike many other debts and liability of a nonprofit, if your organization is fined for failure to register with a state (or failed to file an accurate return with the IRS), your board of directors can be held personally liable for those fines. Many state solicitation laws provide that a nonprofit cannot reimburse its directors, officers or employees for such fines.
You might be asked by Donors/ Funders/Auditors. Many sophisticated donors know about state registration and are starting to ask. You want to be able to answer that you have complied with applicable law.
My Nonprofit is Probably Exempt. It is possible that your nonprofit will not be required to register but you want to be certain. Some facts to consider include:
• Your Website might "do you in" and trigger registration. If you have a "donate" button, this might cause you to fall within a state's registration requirements. There are steps you could take to avoid this.
Christine DeMa
rea Partner, Husch Blackwell Christine is highly regarded in business and estate planning, and charitable planned giving. She counsels clients on estate planning and tax-exempt organizations, assisting in administrative, legal, tax and compliance matters.
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