Back to Basics, Friedman’s series focusing on nonprofit organizations’, frequently asked questions, has previously covered nonprofit accounting and financial reporting. In this installment, we’re answering common questions addressing tax compliance concerns relating to TDOKEs, donor acknowledgements, the public support test and state charity registration.
What are TDOKEs?
This acronym, coined by the Internal Revenue Service (IRS), refers to board members and certain employees based upon position and compensation, which are required to be listed on Form 990 Part VII; specifically Trustees, Directors, Officers, Key employees and Highest compensated employees.
How do you identify and keep track of TDOKEs?
Trustees and directors are board members. Organizations should maintain records to track their terms and reflect appointments, resignations and elections contemporaneously in the meeting minutes.
By IRS definition, the title “Officer” includes the top management official such as the president, chief executive officer (“CEO”), executive director (“ED”) and chief financial officer (“CFO”). Other employees may have “officer” or “director” as part of their title, but unless they meet the requirements to be reported as Key employees or Highest compensated employees (“HCE”), they are not officers or directors based upon the IRS definition.
Furthermore, corporate by-laws define the board’s officers and corresponding titles and specifies whether the CEO or ED is a voting board member.
Key employees are classified as such based upon meeting all parts of a three-prong test:
- The employee receives compensation in excess of $150,000.
- The employee has responsibilities similar to those of an officer and has authority over a discrete activity that reflects at least 10 percent of the annual operating budget.
- The employee is one of the top 20 employees in terms of compensation.
Highest compensated employees include employees who receive compensation in excess of $100,000. The IRS requires that the top five HCEs are listed and the total number of employees receiving compensation in excess of $100,000 must be reported.
What records do I use to report compensation?
All compensation reported on Form 990, Part VII is based upon calendar-year compensation (for fiscal year-end filers, use the calendar year ending within the fiscal year-end). The organization’s payroll records, including Form W2, are the primary source for reporting compensation.
What are donor acknowledgements?
Donor acknowledgments are part of a comprehensive system of internal controls (see our Back to Basics on nonprofit accounting frequently asked questions) for recording contributions that include complying with the IRS substantiation and disclosure requirements. Be sure to record and acknowledge the donation based upon the name on the check. Donor Advised Funds (“DAFs”) are the donor, not the individual or family fund, that recommended the donation.
What are donor acknowledgement best practices?
Donors are required to obtain acknowledgements or thank you letters in order to meet IRS substantiation requirements, so it is best practice for nonprofit organizations to pre-emptively provide acknowledgements as part of a donor relations program. Donors are not required to obtain written acknowledgment from the charitable organization for contributions less than $250. Donors can substantiate individual contributions that are less than $250 with a cancelled check or other bank record. However, cash contributions of any value are not deductible without a written acknowledgement.
What information should an acknowledgement include?
Acknowledgements should include the following, at a minimum:
- The date of the donation
- The name of the donor
- The name and tax exempt status of the organization
- The donation amount
- A statement about whether the organization provided any goods or services in return for the contribution
What if the organization provides something of value to the donor?
Any quid pro quo received by the donor exceeding $75 in value should be included in the acknowledgement. The contribution is only deductible by the donor to the extent the contribution exceeds the value of the quid pro quo.
What if the donor makes a noncash contribution to the organization?
Acknowledgments for noncash contributions should include a reasonably detailed description (but not the value) of the item. The organization must complete the applicable sections of Form 8283 for noncash contributions of more than $5,000.
Public Support Test
What is the public support test?
To maintain public charity status, at least 33 1/3 percent of contributions have to come from the general public. The 33 1/3 percent threshold is required to ensure that the charity has a broad and diverse base of funding and is truly supported by the public they’re designed to serve. This requirement for broad and diverse funding for public charities contrasts with private foundations, which generally have limited sources of funding.
How do you calculate contributions that don’t qualify as public support?
The one-third support benchmark does not include aggregate donations from a single source of funding that exceeds 2 percent of a nonprofit’s total support. In other words, to the extent large donations exceed 2 percent of total donations, the excess is excluded from public support (“Excess contributions”). Contributions from certain related parties are required to be aggregated into a single funding source for this test and includes entities owned by the same donor, private foundations funded by the donor and family members of the donor. DAFs are public charities and under current law maintain that classification for the public support test, so they are not subject to the excess contributions calculation described above. Be sure to reflect donations received from DAFs as from the general public. Good record keeping is essential for complying with the public support test.
How does the Public Support test affect my Nonprofit’s exempt status?
If a nonprofit does not meet the 33 1/3 percent benchmark for public support, the organization can be automatically reclassified as a private foundation, which has different reporting and operational requirements. The importance of maintaining exempt status as a public charity comes down to an organization’s unique goals versus the restrictions imposed by the private foundation status.
If the organization has less than 33 1/3 percent of public support, what can we do?
The calculation is based upon a rolling-five-year period, and a review of the public support test should be performed annually as part of the 990 compliance preparation service.
Once a trend in decreasing general public support and increasing reliance upon a limited pool of donors is identified it is important to forecast future periods. There are various means of remedying the situation, but above all planning and communicating with donors and advisors is key.
Why does the organization need to register with the state?
Even when an organization has a determination letter from the IRS, most states require nonprofit organizations to file an application to obtain permission to solicit contributions in that state. This registration requirement is generally under the jurisdiction of the Consumer Protection department of the State Attorney General’s office.
How do I determine which states the organization should register in?
Each state has its own filing requirements; therefore, it is important to consult with your tax or legal advisor.
What annual reporting do the state charities registration require?
It is the State Charities Registration that determines whether the nonprofit needs to submit an annual financial statement and Form 990 in order to renew its license to solicit within the state. Each state also has its own benchmarks for determining what type of annual financial statement is required; compilation, review or audit. The type of annual financial statement required is determined based upon the level of revenue and, you guessed it, varies from state to state. Once the organization is registered in more than one state, it is the state with the lowest revenue threshold that will determine the type of annual financial statement required.
Whether your nonprofit is just getting off the ground or revisiting some of its policies and procedures, you may need an expert’s insight. If you have any questions about any of the topics covered in this installment of Nonprofits – Back to the Basics, contact us today.