COVID-19 and Social Justice on Non Profit Corporate Governance

Potential Impact of COVID-19 and Social Justice Issues on Non-Profit Corporate Governance

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COVID-19 and Social Justice on Non Profit Corporate Governance

The novel coronavirus (COVID-19) pandemic and the resurgence of social justice movements are likely to have lasting repercussions on how non-profit entities approach corporate governance. The very-intense national conversations about the following issues should cause non-profit boards of directors to expect certain traditional governance practices to change in response to the lessons and experiences gained from these issues:

  1. Lines of Authority
    Non-Profit boards and management traditionally work together to allocate decision making between the two parties. However, the line separating the responsibility of the board from the responsibility of management tends to blur in times of crisis.  Boards and management should analyze how they worked together during the COVID-19 crisis and social justice protests to ascertain whether work is needed to avoid future crisis-related confusion.
  1. Workforce Culture and Hiring Practices
    Special efforts should be made to address workforce culture and to have meaningful oversight of hiring practices. Improving diversity in employment is critical, but so are practices relating to recognizing culturally-significant issues and events. Board engagement in acknowledging social justice issues, regardless of the nature of the non-profit’s mission, setting realistic goals, and insisting on management focus will need to be ongoing.
  1. Focus on Risk to the Enterprise and Oversight of Business “Resiliency”
    The pandemic validates the need for strong board involvement in risk identification and disaster response. There is a heightened obligation to exercise oversight of the future business “resiliency” of the non-profit. Federal loans have helped many non-profits during the COVID-19 crisis but the next crisis may not have this resource to help the non-profit “bounce back.” Boards will need to monitor management’s plans to recover from future catastrophes or social justice activities, not only from a financial perspective but also a “brand image” perspective.
  1. Oversight of Patron Safety
    The pandemic has shown the need for enhanced focus on customer safety in many lines of for-profit business, primarily retail and restaurants. Non-Profits also have patrons/visitors whose safety must be protected. A greater board collaboration with management on the quality of patron engagement matters should result in shifts that include more awareness and increased oversight of the resources necessary for emergency preparedness, infection control, and regulatory compliance.
  1. Reliability of Key Technology
    Depending on the nature of the non-profit’s mission and business model, directors will want to exercise greater diligence on the acquisition and implementation of key technologies and more detailed contingency planning for the possibility of critical technology, equipment, or personnel being unavailable.
  1. Employee Health and Safety
    Addressing employee concerns for workplace health and safety matters is now an important element of the board’s oversight of workplace culture. Employee concerns in this regard are likely to remain a key part of business resiliency planning long after the advent of a vaccine or other treatments for the COVID-19 virus.

In short, non-profit boards should anticipate, for the foreseeable future, an increased level of engagement with their governance responsibilities. This higher level of engagement will be necessary to assure that the non-profit has, in fact, rebounded, and evaluated potentially broader changes to accomplishing its mission in light of “lessons learned.”

Scott Chase is Board Certified in Health Law by the Texas Board of Legal Specialization and has practiced health law, corporate law, and intellectual property law for more than 40 years. His primary practice focus is business transactions for physicians and healthcare facilities, as well as healthcare regulatory issues, such as the Affordable Care Act and HIPAA. Mr. Chase also handles general corporate matters and trademark/copyright issues for a variety of non-healthcare clients.

Taxpayers and Nonprofits Can Have Their Cake and Eat It Too

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The increase of the standard deduction under the Tax Cuts and Jobs Act of 2017 (the “TCJA”) is predicted to have a substantial impact on charitable giving. The TCJA doubles the standard deduction for individuals from $6,350 to $12,000, for couples from $12,700 to $24,000, and for heads of household from $9,350 to $18,000.  The increase will discourage most taxpayers from itemizing. When itemizing, taxpayers receive charitable tax deductions for donations made to nonprofits but when taxpayers choose the standard deduction, they are unable to receive any tax benefits for charitable donations. With more taxpayers choosing the standard deduction, taxpayers could be less incentivized to make donations.

The American Enterprise Institute reported there will be a $17.2 billion reduction in charitable donations this year.  The reduction in donations will hinder the ability of nonprofits to carry out their charitable missions.  However, studies like this tend to focus on more traditional charitable giving.  For those who are willing to put in a modest amount of effort, many planning opportunities remain. Taxpayers and nonprofits can still have their cake and eat it too.

Bunching

Two planning opportunities any taxpayer can explore are “bunching” and a Donor Advised Fund.  Bunching is when a taxpayer combines several years’ worth of their charitable donations and donates the collective amount in one year. For example, an individual taxpayer makes a $10,000 donation each year to a nonprofit. With the increase of the standard deduction, the taxpayer will choose the standard deduction, and not be able to realize a tax benefit from his or her $10,000 donation.  However, if the taxpayer were to bunch three years of his or her $10,000 donations into one lump sum, the taxpayer could make a $30,000 donation and exceed the new standard deduction threshold. By exceeding the new threshold, the taxpayer will be able to itemize his or her charitable donation and realize a tax benefit.

Donor Advised Fund

A Donor Advised Fund (a “DAF”) is another planning opportunity for taxpayers. A DAF is a separately identifiable account which holds irrevocable donations by a donor and is managed by a section 501(c)(3) organization. The use of a DAF is similar to bunching. With both options, a taxpayer makes a lump sum donation in one year to exceed the new standard deduction threshold and realize a tax benefit.  However, a DAF offers additional benefits. A DAF allows the donor to retain advisory privileges on how the funds should be distributed and invested.  As a result of those privileges, a donor may choose to distribute his or her donation to a nonprofit or nonprofits over several years. For example, a taxpayer makes the bunched $30,000 donation to his or her DAF account. A taxpayer can choose to advise the 501(c)(3) organization managing the account to make his or her traditional $10,000 donation to a nonprofit for the next three years. Donations in a DAF grow tax-free which means there is more money to donate to nonprofits.  Another benefit a DAF provides is that the 501(c)(3) organization handles the management of the account, reducing the administrative hassle and time commitment on the part of the donor.

Bunching and DAFs are two ways a taxpayer can realize tax benefits for charitable donations under the new tax plan.  Taxpayers wishing to explore these two opportunities or other opportunities should contact appropriate counsel to discuss their particular circumstances and identify the options that are best for them.

Amanda Brenner | Farrow-Gillespie & Heath LLP | Estate Planning

Amanda Brenner‘s primary practice areas are estate planning, business formations, and nonprofit organizations. Ms. Brenner advises clients regarding estate planning; and the formation and operation of nonprofit organizations and private foundations. She graduated from University of Pittsburgh School of Law in 2015.

Liza Farrow-Gillespie | Farrow-Gillespie & Heath LLP | Dallas, TX

Guidelines for a Nonprofit Board of Directors

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Charities are required by state and federal law to have board members, also called “directors.” The purpose of the board is to ensure integrity and accountability in the organization.  It is an honor and a privilege to be asked to serve as a director of a nonprofit, but board membership carries significant responsibilities.

 DUTIES OF THE BOARD

Directors have fiduciary duties to ensure that the organization’s mission is carried out and that its resources are used wisely in furtherance of the Organization’s charitable purposes.

Board members of a tax-exempt organization have four fiduciary duties:

  • The Duty of Care
  • The Duty of Loyalty
  • The Duty of Compliance
  • The Duty to Maintain Accounts

DUTY OF CARE

Board members have a responsibility to be active in and knowledgeable of the Organization’s activities, and to exercise reasonable care in making policy and operational decisions. To fulfill the duty of care, directors should do the following:

  • Attend board meetings.
  • Prepare for board and committee meetings by reading reports, minutes, and other materials distributed for the meeting.
  • Ensure that the Board Secretary keeps appropriate minutes of board meetings.
  • At each meeting, review and approve the minutes from the prior meeting.
  • Ask questions and obtain the information necessary to make informed decisions.
  • Obtain insurance for the organization and the board (e.g., general premises liability, Directors & Officers insurance (“D&O”), Employment Practices Liability Insurance (“EPLI”)).
  • Hire and oversee the performance of an Executive Director (sometimes called the Chief Executive Officer or President); and delegate day-to-day operational responsibilities.
  • Create committees, as necessary, to plan or oversee certain projects or operations and to report to the board.
  • Retain an accounting professional to handle the organization’s tax accounting and Form 990 reporting.
  • Review and approve leases and other major contracts.
  • Ensure that ALL of the Organization’s operations are in furtherance of the organization’s charitable mission.

DUTY OF LOYALTY

Board members have a duty of loyalty to always act fairly and in the best interest of the Organization without concern for their own interests. To fulfill the duty of loyalty, directors should do the following:

  • Approve a written conflicts of interest policy, and require directors to sign it.
  • Refrain from engaging in any transaction or making any statement that would have a negative impact on the Organization.
  • Refrain from engaging in any activity (other than fundraising for another nonprofit) that competes with the Organization’s financial interests.
  • Refrain from diverting a the Organization business opportunity for personal or family gain.
  • Assist with raising funds.
  • Ensure that no director (or member of a director’s family) benefits financially from any activity of the Organization.

Exception: The organization may conduct business with a board member or a board member’s family, if all four requirements below are met:

    • The organization may not pay more than market value for the product or service; and
    • The board must conduct due diligence that the same or similar product or service is not available elsewhere for a better cost or on more favorable terms; and
    • The board must approve the transaction by a majority vote, which must be recorded in the minutes; and
    • The board member that would benefit from the transaction must abstain from the vote.

DUTY OF COMPLIANCE

Board members have a duty to be faithful to the Organization’s purpose and mission. They must adhere to the Organization’s governing documents and to laws and regulations that apply to the Organization and its operations.  To fulfill the duty of compliance, board members should do the following:

  • Read and be familiar with the Organization’s articles of incorporation, bylaws, and policies.
  • Comply with state and federal laws applicable to nonprofit entities, fundraising, and taxation.
  • Require and approve appropriate employment law and privacy law policies.
  • Retain and consult board counsel for legal questions that arise.
  • Ensure that someone is tasked with filing the Organization’s annual Form 990 with the IRS; review and approve the Form 990 before filing.
  • Ensure that someone is tasked with filing Texas Public Information Reports as required (usually every 4 years); review and approve prior to filing.
  • Register in each state that requires the organization to register.
  • Ensure that the organization’s legal acknowledgment letters are prepared and sent for donations of more than $250.
  • Prior to conducting the following types of highly regulated fundraising activities, ensure that the activity will be conducted in compliance with applicable law:
    • Raffle
    • Charitable sales promotions with a third-party for-profit company
    • Solicitations via a paid independent fundraising agent

DUTY TO MANAGE ACCOUNTS

Board members are responsible for the Organization’s financial stability and accountability. To fulfill the duty to manage accounts, directors should do the following:

  • Develop and approve annual budgets that provide clear direction for organizational spending. Monitor, track, and revise the budget as necessary.
  • Ensure that accurate records of all income and expenditures are maintained.
  • Review current income and expenditures at each board meeting.
  • Commission an audit by a nonprofit organization financial auditor, at least once every two years.
  • Implement checks and balances, and division of financial responsibilities, so that no single staff member or volunteer has total control over finances.
  • Prudently invest assets.
  • Monitor and control fundraising activities.

LEGAL CONSEQUENCES

The legal consequences of a board’s failing to do its job can be serious, including the following:

  • An organization’s failure to follow the rules is likely to result in the loss of donor respect and support.
  • An organization can be held financially responsible by the courts for negligent or willful violation of the law.
  • A director can be held individually responsible for breach of a fiduciary duty. (The organization should purchase D&O insurance to protect its directors from liability.)
  • Transactions improperly benefitting a board member can result in monetary penalties to the organization and the board member, as well as the organization’s loss of tax-exempt status.
  • Failure to follow fundraising laws and income reporting laws can result in monetary penalties to the organization and, in willful cases, criminal penalties to the individuals involved.

Among many other legal and ethical considerations, the tax-exempt status of the organization is always at stake when board members ignore their duties.  If the organization loses its tax-exempt status, all of its donors lose the ability to deduct donations from their tax returns, sometimes for prior tax years as well as for the year in question.

CONCLUSION

Although these guidelines convey that a board member’s responsibilities are serious indeed, the responsibilities should not act as a deterrent to service. If a director follows these nine rules of thumb, he or she will do just fine:

  1. Show up.
  2. Pay attention and ask questions.
  3. Get the organization good insurance policies.
  4. Hire a good executive director, and let that person do his or her job.
  5. Watch the money very closely.
  6. Make sure your Form 990 is filed with the IRS annually, and your franchise report is filed with the state of Texas when required.
  7. Keep tabs on programs and fundraising.
  8. Consult professionals where appropriate.
  9. Absent compelling circumstances, do not allow the organization to do business with board members or their families.

For more information, contact nonprofit organizations attorney Liza Farrow-Gillespie.

Liza Farrow-Gillespie | Farrow-Gillespie & Heath LLP | Dallas, TXLiza Farrow-Gillespie serves as legal counsel to nonprofit organizations throughout North Texas. Ms. Farrow-Gillespie has been named to the list of Texas Super Lawyers (a Thomson Reuters service) and to the list of Best Lawyers in Dallas by D Magazine in every year since 2013.

Tax Cuts and Jobs Act | New Tax Law 2017

The Tax Cuts and Jobs Act: What It Means for You

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Tax Cuts and Jobs Act | New Tax Law 2017This information is current as of December 27, 2017.

At the request of our clients, we have summarized some of the more important provisions of the sweeping new tax law (“TCJA”), which was signed into effect on December 22, 2017.  Please note that all of these provisions are subject to interpretation by the Internal Revenue Service.  We will not know the true effect of the law until the IRS publishes regulations in the coming years.

These changes do not affect the tax return that you will file next year for 2017.  The changes will take effect with the tax return you file in 2019 for tax year 2018.

We cannot emphasize enough that this new tax law marks the biggest change to our tax system since the 1980s.  Your individual tax situation and your company’s tax situation may have changed dramatically.

To understand fully how the new tax law will affect your particular circumstances, you should consult your tax professionals.  In particular, everyone who owns or operates a business should make an appointment with the company’s tax professionals early in 2018 to consult on the effect of the new tax law.  To the extent those recommendations affect the company’s structure, corporate legal advice should also be sought before any changes are made.

However, here is an executive summary of a few things that you should think about doing now, meaning before December 31, 2017; or that you should think about doing very early next year.

Income Tax For Individuals

Tax Rates

The new law keeps a seven-bracket structure, but cuts tax rates in five of those brackets, and generally raises the threshold for each higher bracket. The top bracket — for individuals earning more than $500,000 per year, and married couples earning more than $600,000 per year – will be 37% in 2018, down from 39.6% in 2017.

Suggestion: To the extent possible, defer acceptance or recognition of income to 2018.

Standard Deduction

For single filers, the standard deduction has increased from $6,350 to $12,000.  For married couples filing jointly, it’s increased from $12,700 to $24,000. The net effect of that change is that fewer taxpayers will itemize their deductions, because many more taxpayers will be better off taking the standard deduction instead.

Suggestion: If you think you may not itemize next year on your personal tax return, consider making this year’s and next year’s contributions to charity by December 31, 2017, to get the itemized deduction benefit now.

Suggestion:  If you have been thinking about donating an old car or other property to charity, consider doing it by December 31, 2017 to get the itemized deduction benefit now.

Personal Exemption

Gone.  Previously, you could claim a $4,050 personal exemption for yourself, your spouse and each of your dependents.  The new law eliminates the tax savings from those personal exemptions.

Property Tax and Sales Tax

Beginning in 2018, the deduction you can claim for property taxes and sales taxes will be limited to a total of $10,000.

Suggestion: Make sure you pay 2017 and prior property taxes by December 31, 2017.  These are the property taxes for which you already have a bill from the county tax assessor-collector.

Suggestion: Consider prepaying your 2018 home property taxes by December 31, 2017, if your county allows you to do so.  These are property taxes for which you do not yet have a bill, so you would have to estimate the correct amount.  We have confirmed that Dallas County allows prepayment of an estimated amount.  The county clerk requests that taxpayers clearly indicate 2018 prepayments on the check’s memo line, along with the property account number.

NOTE on Prepaying 2018 Property Taxes:   The IRS has now come out saying it will disallow deductions for property tax 2018 pre-payments on the theory that the tax has not yet been levied.  Many  advisers are saying that the IRS’s position does not comply with the language of the new law.  The TCJA expressly disallows prepaid income tax (which of course does not apply to Texas, because Texas does not have state income tax), but does not disallow prepaid property tax.  The argument is that if Congress had intended to disallow prepaid property tax, it could have done so with the same few words it used to disallow prepaid state income tax — ergo, Congress did not intend to disallow prepaid property tax.  The short answer is that nobody knows at this time whether prepaying your 2018 property tax will save you money, or will cause you more trouble than it’s worth.

For more information, please consult the IRS advisory opinion.  Most news sources are carrying articles on this issue, including the Dallas Morning News.

Suggestion: If you are contemplating a large purchase that is subject to sales tax (such as a car, RV, boat, aircraft, etc.), consider making that purchase by December 31, 2017, to maximize the deductibility of the sales tax.

Charitable Deductions

For those who itemize, the new law allows taxpayers to deduct contributions to public charities of up to 60% of their income, rather than limiting deductions to 50% of income.

Child Tax Credit

The new law doubles the child care credit to $2,000 per child under 17, and is available at higher income levels.

Mortgage Interest Deduction

Beginning in 2018, you may deduct the interest paid on new home mortgage loans of only $750,000 or less.  If you bought your home before December 15, 2017, you will still be able to deduct the interest on up to $1M of mortgage loan.  Experts are currently in disagreement whether a taxpayer may allocate some or all of the $750,000 to a vacation home, or whether vacation home mortgage interest is no longer deductible.

HELOC Interest Deduction

Gone.  Interest paid on a home equity loan is no longer deductible.

Alternative Minimum Tax

The alternative minimum tax (AMT) remains in effect.

Student Loans

If you have student loans, you may continue to deduct up to $2,500 per year in interest.

Medical Expenses

For 2018, you may deduct medical expenses to the extent they exceed 7.5% of your income.  For 2017, that threshold was 10% for most people.  This tax break for medical expenses will expire in 2019, and the threshold will return to the current level.

Suggestion:  If you are planning to have an expensive, uninsured medical procedure, 2018 is a good year financially to do so.

Health Insurance Mandate/Penalty

The tax bill repeals the “individual mandate” to purchase health insurance, effective for the 2019 tax year.  The mandate remains for 2018, so the economic effect of the repeal will not be known for several years.  However, the Congressional Budget Office estimates that, by 2027, 13 million fewer Americans will have health insurance, and that, because fewer healthy people will apply for insurance, health insurance premiums will increase as the pool of applicants consists of sicker people.  The brunt of premium increases will be felt primarily by families of four who make more than $98,000 per year.

Electric Car Credit

Drivers of plug-in electric vehicles can still claim a credit of up to $7,500.  Just as before, the full amount is good only on the first 200,000 electric cars sold by each automaker. GM, Nissan and Tesla are expected to reach that number some time next year.

529 Savings Accounts

If you have been making contributions to a tax-free 529 savings account for the next generations, you may use that money, beginning in 2018, for elementary and secondary school costs, as well as for higher education costs.

Alimony

If you pay alimony pursuant to a divorce that is final after December 31, 2018, the amount will no longer be deductible.

Moving Expenses

Moving expenses for job relocation will no longer be deductible.

Estate Tax for Individuals

The new tax law doubles the amount of money exempt from the gift and estate tax, which in 2017 was $5.49M per person.  Each individual can now give away, during lifetime and/or at death, $11.2M without incurring the estate tax.  Amounts in excess of $11.2M that an individual gives away during lifetime or at death will be taxed at the current rate of 40%.  This increase in the exemption will expire in 8 years, at which time the exemption amounts will return to $5.6M per person.

Income Tax for Businesses

Corporate Tax Reduction

The new law cuts the tax rate for C-Corporations from 25% to 21%, starting in 2018, and eliminates the Alternative Minimum Tax for corporations.

Suggestion: To the extent possible, defer recognition of income to 2018.

Suggestion:  If you are currently an S-Corp or LLC with relatively high revenue, you should seek legal and tax advice very early in 2018 to determine whether it would be more advantageous to you to elect C-Corp taxation status.

Suggestion:  Look to see where you can save money on tax, as it is important your business is making the highest profit possible. Click here for advice on where you can save tax within your business, ensuring your business is meeting the relevant tax charges and codes.

Pass-Through Entity Tax Reduction

The new law provides a 20% deduction to owners of certain S-Corporations, LLCs, partnerships, and sole proprietorships.

Suggestion: To the extent possible, defer recognition of income to 2018.

Suggestion:  If you are currently a C-Corp with relatively low revenue, you should seek legal and tax advice very early in 2018 to determine whether it would be more advantageous to you to elect S-Corp taxation status or to convert to an LLC.

Multi-National Company Tax Breaks

The U.S. is switching to a territorial system of taxation, which means companies will not owe federal taxes on income they make offshore. To take advantage of this long-term benefit, companies will be required to pay a one-time tax on their existing overseas profits — 15.5% on cash assets and 8% on non-cash assets.

Sexual Harassment Payments

Beginning in 2018, companies can no longer deduct any settlements, payouts, or attorney’s fees related to sexual harassment claims if the payments are subject to non-disclosure agreements.

Suggestion:  If you are contemplating settlement of such a claim, consider closing the deal by December 31, 2017.

1031 “Like Kind” Exchanges

Nontaxable exchanges of appreciated property for similar property will now be limited to real estate only.  Trades of other types of property will be treated as sales and will trigger capital gains tax.

Suggestion: If you are contemplating a 1031 exchange of art or other personal or business property that has appreciated in value, consider completing that exchange by December 31, 2017 to avoid a capital gains tax in 2018.

Income Tax for Nonprofit Organizations

Standard Deduction Effect on Charitable Donations

For single filers, the standard deduction has increased from $6,350 to $12,000.  For married couples filing jointly, the standard deduction has increased from $12,700 to $24,000. The net effect of that change is that more taxpayers will take the standard deduction rather than itemize their deductions. Because a taxpayer must itemize deductions to be able to deduct charitable contributions, fewer taxpayers will be able to deduct charitable contributions from their taxes.  To the extent that a donor is motivated in whole or in part by the deductibility of his or her contribution, the donor is arguably less likely to give to nonprofit organizations.  Generally speaking, 501(c)(3) organizations may see a decrease in donations by middle-income individuals.

501(c)(3) Deduction AGI Limit Increase

For those donors who do itemize, the new law allows taxpayers to deduct contributions to public charities totaling up to 60% of their income, rather than limiting those deductions to 50% of income.

Highly Paid Executives

The new law imposes a 21% tax on certain nonprofits that pay a salary above $1M to an executive.

Unrelated Business Income (UBI)

Unrelated Business Income, or UBI, refers to certain types of income for which a nonprofit must pay taxes, even though the organization is tax-exempt.  The new law prevents nonprofits from setting off losses in one stream of UBI against gains from another stream of UBI.  To know how the various “streams” of UBI will be defined, nonprofits must wait for the IRS to issue its regulations.  Suffice to say, though, that the IRS will be looking closely at UBI in the coming years.

Suggestion:  Nonprofits should consider an organizational audit in 2018 to ensure that they are accounting for UBI correctly.

Employee Benefits

The value of certain previously nontaxable employee benefits, including parking, transportation, and on-site athletic facilities, will be subject to Unrelated Business Income Tax beginning with the first pay period of 2018.

Donations Tied to Collegiate Season Tickets

Donations to a college or university to obtain the right to buy season tickets to sporting events are no longer deductible.

Private Foundations

The new law does not significantly affect taxation of private foundations.

Nonprofit Organization Lobbying

Can my Nonprofit Organization Conduct Lobbying Activities?

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A Section 501(c)(3) tax–exempt organization may conduct limited lobbying activities without jeopardizing the organization’s tax–exempt status, so long as lobbying does not form a “substantial part” of the organization’s overall work.

An organization that intends to lobby and wants to be tax-exempt can apply either as a 501(c)(3) public charity or as a 501(c)(4) organization.  Although a Section 501(c)(4 ) organization is tax-exempt (i.e., the organization itself pays no taxes), donations to it are not tax-deductible to the donor.  So typically, the 501(c)(4) route is not as popular an option as organizing under Section 501(c)(3).

If the organization wants to lobby but does not intend for lobbying to be its primary activity, it may be possible to organize and file for tax-exempt status as a 501(c)(3) organization.  A 501(c)(3) organization is tax-exempt itself, and donations to it are tax-deductible to the donor.  Under Section 501(c)(3), an organization can do some lobbying – it just cannot devote a “substantial part” of the organization’s activities to lobbying.

Lobbying can be “direct” or “grassroots.”  Direct lobbying is defined as any communication with a legislator that expresses a view about specific legislation (or other matter on which the legislator may vote).  Grassroots lobbying is defined as any communication with the general public that (a) expresses a view about specific legislation (or a matter on which the legislature is voting) and (b) includes a call to action.

The IRS has two alternative tests for determining “substantial.”  One way is in terms of relative time spent on lobbying activities.  The other and probably best way to stay beneath the “substantial” threshold is to meet the “expenditure test.”  A complete table is below, but in general, an organization with an overall budget of less than $500K may spend only up to 20% of that budget on lobbying.  To use the expenditure test, the organization must file a form to elect to do so, and then the expenditure reporting must appear on the organization’s normal 990 annual reporting form.

 If the amount of exempt purpose expenditures is:  Lobbying nontaxable amount is:
 ≤ $500,000  20% of the exempt purpose expenditures
 >$500,00 but ≤ $1,000,000  $100,000 plus 15% of the excess of exempt purpose expenditures over $500,000
 > $1,000,000 but ≤ $1,500,000  $175,000 plus 10% of the excess of exempt purpose expenditures over $1,000,000
 >$1,500,000 but ≤ $17,000,000  $225,000 plus 5% of the exempt purpose expenditures over $1,500,000
 >$17,000,000  $1,000,000

Certain gray-area activities have been held to be “non-lobbying advocacy” as opposed to “lobbying.”  These advocacy activities can be unlimited and do not count against the lobbying expenditure test.  Examples are educating policymakers and the public about broad social issues, encouraging people to register to vote, organizing communities, educating voters about candidate positions, litigating, conducting educational meetings, preparing and distributing educational materials, considering public policy issues in an educational manner, and other activities.

If a 501c3 organization goes over the line and devotes a “substantial” part of its activities to lobbying, then the penalties are severe. Tax-exempt status is retroactively lost; deductibility of donations is retroactively lost; a 5% excise tax may apply; and a very large penalty (usually 25%) applies to the tax that will be due.  Hence, close monitoring of lobbying activities is an absolute necessity.

A political activity in which a 501(c)(3) organization may never engage is to support or oppose any candidate for public office.  This prohibition is absolute.

All organizations that conduct lobbying are subject to reporting and disclosure rules at the state and local level.

For more information about nonprofit organizations, or to find out about our fixed fees for formation of charitable organizations and family foundations, please contact us.

Angela Hunt Assists Aldredge House to Keep Doors OPen

Forming a 501c3: The “Texas Three-Step”

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Individuals and families may establish a 501c3 tax-exempt charitable organization to accomplish substantive philanthropy while receiving very favorable tax treatment. The degree of maintenance such an organization requires depends whether the organization can be classified as a public charity or is instead a private or family foundation.

Either way, forming a 501c3 is a three-step process.

Step One: Form the Organization

A charitable organization must be formed as a corporation in the state in which it is to be located. Many states, including Texas, have a special corporate form called a “nonprofit corporation,” which the organization is required to use be able to qualify for tax-exempt status. Special provisions must be included in the Articles of Formation.

Formation of a nonprofit corporation in Texas is less expensive than formation of a business corporation. To register the entity with the state, the filing fee is only $25.

Step Two: Obtain Federal Tax-Exempt Status from the IRS

Formation as a nonprofit organization does not automatically make the organization tax-exempt. For the organization’s income to be tax-free, and for donations to be tax-deductible to the donor, another step must occur. The organization must file for tax-exempt status with the IRS.  The application for tax-exempt status (Form 1023) is a comprehensive application for which legal assistance is usually desired. Small organizations may qualify for the new, simpler application (Form 2012-EZ) that was introduced in 2014. Most organizations with anticipated annual gross receipts of $50,000 or less and assets of $250,000 or less are eligible for the shorter application.

Step Three: Obtain State Tax-Exempt Status from the State of Formation

After an organization receives its tax-exemption letter from the IRS, a final step remains. The state in which the organization was incorporated must be notified of the IRS tax-exempt status. Most states, including Texas, have a streamlined process for obtaining state tax-exempt status once the IRS has approved federal tax-exempt status.

For a consultation on forming or administering a nonprofit organization or charitable foundation, contact us at (214) 361-5600 or email [email protected]. 

Liza Farrow-GIllespie | Farrow-GIllespie & Heath LLP | Dallas, TX

New Simpler 501c3 Application for Small Charities

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In July 2014, the Internal Revenue Service introduced a new, shorter application form to help small charities apply for 501(c)(3) tax-exempt status more easily.

The new Form 1023-EZ is three pages long, compared with the standard 26-page Form 1023. Most small organizations, including as many as 70 percent of all applicants, qualify to use the new streamlined form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.

Previously, all groups — regardless of size — went through the same lengthy application process regardless of size. This process created long delays for all organizations seeking to receive tax-exempt status.

According to the IRS: “The change will allow the IRS to speed the approval process for smaller groups and free up resources to review applications from larger, more complex organizations while reducing the application backlog. Currently, the IRS has more than 60,000 501(c)(3) applications in its backlog, with many of them pending for nine months. . . . We believe that many small organizations will be able to complete this form without creating major compliance risks.”

A reduced fee accompanies the streamlined application.  Whereas larger groups required to use the standard Form 1023 must pay a filing fee of $850, smaller groups entitled to use Form 1023-EZ must pay only $400. For either application, the fee is due at the time application is made.

For more information on charitable organizations, call us at 214-361-5600 or contact [email protected]