In addition to keeping corporate records, nonprofit corporations must follow some additional rules and abide by certain prohibitions in order to retain their tax-exempt status:
* Nonprofit corporations cannot contribute money to political campaigns or participate in political campaigns. If they do, the IRS can revoke their nonprofit status, and can assess a special excise tax against the organization and its managers.
* Nonprofit corporations can engage in only limited lobbying activities. Tax-exempt 501(c)(3) nonprofits that influence legislation to any “substantial degree” face the loss of their nonprofit status. However, for tax-exempt nonprofits that want to participate in lobbying, the IRS simply sets a limit on the money they can spend on political activities.
* Nonprofit corporations must not distribute profits to members, officers, or directors. A nonprofit corporation cannot be organized to financially benefit its members, officers, or directors. However, reasonable salaries and expense reimbursements are permitted.
* Nonprofit corporations must pay taxes on income from “unrelated activities.” Sometimes, a nonprofit organization will earn income through activities that aren’t directly related to its nonprofit purpose; for example, the directors of an organization dedicated to preserving open space may collect a consulting fee for advising other nonprofits. The IRS requires nonprofits to pay corporate income taxes on such unrelated income over $1,000, whether or not the group uses that money to fund its tax-exempt activities.
* Nonprofit corporations cannot make substantial profits from unrelated activities. If a nonprofit spends too much time on unrelated activities, or if the unrelated activities generate “substantial” income, the group’s nonprofit status may be jeopardized. Nonprofit corporations that plan to engage in activities that aren’t related to their tax-exempt purpose should consult a lawyer or tax expert with experience in nonprofit law.
* When a nonprofit corporation dissolves, its assets must be distributed to another tax-exempt group. Since tax-exempt organizations and their assets cannot be owned, they can never be sold. If the directors of a nonprofit decide to disband the organization, they must donate its assets to another nonprofit group. This also means that once property goes into a nonprofit corporation, it cannot later be distributed to a member or director.
Donors to your nonprofit should receive:
1) a thank you letter and
2) a receipt for their tax-deductible donation.
The IRS requires that a charity send an acknowledgement letter for any donation that is more than $250. The donor uses this letter as proof of his or her donation and right to a tax deduction. These letters should be sent immediately after the donation is received.
The minimum requirements of that acknowledgement letter are:
* Your organization’s name
* The amount of the cash contribution
* A description (but not value) of non-cash contribution (sometimes called gift-in-kind). The donor is responsible for estimating the value of non-cash contributions when they are reported to the IRS on a donor’s tax return
* A statement that no goods or services were provided by the organization, if applicable
* A description and good faith estimate of the value of goods or services, if any, that the organization provided in return for the contribution. An example of this is a benefit dinner where some of the money received pays for the actual dinner, while the rest is a donation
* A statement that goods or services, if any, that the organization provided in return for the contribution consisted entirely of intangible benefits if applicable. An example might be a small gift typically of a value under $65
Karmen A. Booker is an Attorney, Business Consultant and Owner of Compu-Perfect Professional Services, a business consulting firm specializing in Business Entity Formation (Corporations, Limited Liability Companies, and Nonprofit Corporations), Completing 501(c)(3) Federal Tax Exemption Applications, Grant Research and Writing services, and more.
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* Sample Letter of Inquiry
* Sample Corporate Donation Letter
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* Sample Board Member Agreement
* Sample Volunteer Application
* Sample Volunteer Agreement
* AND MORE
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