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Fundamentals Of Nonprofit Fundraising For Charities

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Fundamentals Of Nonprofit Fundraising For Charities

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Nonprofit Fundraising Mistakes, dos and Dont’s & Its Consequences

Nonprofit fundraising blunders are the number one cause of loss of tax exemption status of exempt organizations. Even If you have been fundraising for decades, and think that you know everything about fundraising, this article will scare the bejesus out of you and for a good reason.

If you’re reading this nonprofit fundraising guide on your phone and have one eye on your Facebook app, you need to sit upright and PAY ATTENTION. This is not some Martha Stewart guide on folding napkins for your fundraising banquet table – this fundraising legal guide is for saving your tax exemption status, preventing IRS audits and saving you from severe tax penalties. If you’re looking for ideas and help on how to fund-raise, you should read my proven nonprofit fundraising Ideas & grant writing tips article.

The following article dissects the nonprofit fundraising practices, the good, the bad, the illegal, and more importantly IRS procedures and guidelines used by federal agents to determine whether you broke the laws and limitation involved in fundraising activities. Non-compliance to these laws can result in IRS audit of the nonprofit organization, and consequently revocation of the tax-exempt status of the organization plus penalties. This article is one of many IRS Compliance Rules so be sure to read the rest as well.

what is Nonprofit Fundraising & why you should pay attention

Nonprofit fundraising is an act of soliciting contributions and donations for an exempt organization that would likely not be otherwise donated in the regular course of business. The big issue arises when these fundraising activities jeopardize the very exemptions status of the organization because of silly mistakes and misinformation. The pages of the internet is filled with nonprofit fundraising ideas, fundraising how-to guides and fundraising do’s and don’t, and almost all of them are written by marketers who don’t have a clue what fundraising is and the consequences of their ill advice.

Nonprofit fundraising best practices and related laws

The objectives of this article are to provide guidelines to ensure:

All fundraising activities conducted by section 501 exempt organizations not eligible to receive tax-deductible donations, are in compliance with the non-deductibility disclosure requirements of IRC §6113 and Notice 88-120, 1988-2 C.B. 454,

Advertisements and solicitations for “Special Event” fundraising activities are not erroneous or misleading, as to the deductibility of the payments made in connection with the event. Rev. Rul. 67-246, 1967-2 C.B. 104 (amplified by Rev. Proc. 90-12, 1990-1 C.B. 471),

The organization complies with the disclosure requirements described in IRC §6115, regarding Quid Pro Quo Contributions,

The organization pays any unrelated business income tax under IRC §511 arising from the nonprofit fundraising activities,

The organization correctly completes Form 990 returns to accurately reflect fundraising receipts and expenses, and

Organizations eligible to receive tax-deductible donations, properly handle non-cash contributions received.

Background

Many exempt organizations are commonly in need of additional funds to carry out their exempt purposes, especially in times of economic downturns. For many of these organizations, various methods of fundraisers are employed to draw in those funds that would likely not be otherwise donated in the regular course of business. Unfortunately, regardless of the amount of guidance available from the IRS, some organizations, to whom contributions are deductible, erroneously inform donors that their entire contribution is deductible, when a portion of the contribution is often not deductible.

Another common issue arises when exempt organizations, to whom contributions are not tax deductible, such as business leagues and labor unions, among others, advise the contributor that the donation is fully deductible, contrary to the law.

Nonprofits conducting fundraising activities are required to comply with specific fundraising disclosure requirements.

Disclosure of Nondeductible Contributions & Donations

IRC §6113 requires exempt organizations not eligible to receive deductible donations to disclose in all of their fundraising solicitations in a conspicuous and easily recognizable format that contributions or gifts to the organizations are not deductible as charitable contributions for federal income taxes. The following nonprofits, among others, must comply with the requirements:

Social welfare organizations, civic leagues, homeowners associations – IRC §501(c)(4),

Labor organizations – IRC §501(c)(5),

Trade associations, business leagues, chambers of commerce – IRC §501(c)(6),

Social clubs – IRC §501(c)(7),

Fraternal organizations – IRC §§501(c)(8) and (10), unless described in IRC §170(c)(4),

Political organizations – IRC §527(e),

Communist organizations

Any other tax-exempt organization not eligible to receive contributions that are tax deductible,

Any organization that was subject to the disclosure requirement during the five-year period immediately preceding the fundraising solicitation, and

Any organization that is a successor to an organization that was subject to the disclosure requirement during the five-year period preceding the solicitation.

Foreign organizations also are not qualified to receive charitable contributions, other than:

A U.S. organization that transfers funds to a charitable foreign organization if the U.S. organization controls the use of the funds or if the foreign organization is only an administrative arm of the U.S. organization, or

Certain Canadian, Israeli, or Mexican charitable nonprofits, under income tax treaties with those countries.

As outlined in Rev. Proc. 98-19, 1988-1 C.B. 547, certain tax-exempt organizations, other than IRC §501(c)(3) organizations, that pay or incur nondeductible lobbying expenditures are required by IRC §6033(e)(1) to notify their members of a reasonable estimate of the portion of their dues allocable to those expenditures and, thus not deductible. This can also apply with respect to nonprofit fundraising events held for lobbying purposes for such organizations.

IRC §6113 does not apply to fundraising solicitations by nonprofit organizations:

Described in IRC §170(c),

That have annual gross receipts that do not exceed $100,000. (The term “gross receipts” is the gross amount received by the organization during its annual accounting period from all sources without reduction for any costs or expenses. (Rev. Proc. 83-23, 1983-1 C.B. 687),

Note:

Organizations required to file Form 990-N, but not Form 990-EZ, would be among those whose annual gross receipts do not exceed $100,000. Form 990-EZ filers now include nonprofits whose gross receipts exceed $100,000, thus agents should verify the amount of gross receipts when dealing with this exception.

That solicit only tax exempt nonprofits, or

That solicit no more than ten persons during the calendar year.

IRC §6113(b)(2)(B) permits the IRS to treat a group of exempt organizations as one organization where appropriate. The purpose is to prevent the use of multiple organizations to circumvent the disclosure requirements by keeping annual gross receipts per entity below the $100,000 limitation.

A fundraising solicitation is any solicitation for a contribution or gift made in written or printed form, by television or radio, or by telephone.

Examples of situations excluded from this disclosure requirement include billing:

Advertisers in an organization’s publications,

Members and non-members for food and beverages at a social club,

Attendees of a conference conducted by an organization,

Individuals for insurance premiums where the organization sponsors or operates an insurance program,

Mandatory payments for members of a homeowners association for fire and police protection, and

Payments for members of a voluntary employees’ beneficiary association described in IRC §501(c)(9).

Nondeductible Contribution Safe Harbor Formats

Notice 88-120, 1988-2 C.B. 454, provides safe harbor guidelines as to acceptable formats for nonprofit fundraising solicitations for non-deductible contributions made in the print media, by telephone, television or radio. If an organization does not comply with the safe harbor guidelines, the examiner must use a facts and circumstances test to determine if the organization has complied with the requirements of IRC §6113.

The safe harbor holds that a fundraising solicitation will be considered to include “an express statement (in a conspicuous and easily recognizable format) that contributions or gifts to such organization are not deductible as charitable contributions for Federal income tax purposes” with respect to print media, telephone, television, and radio.

In the case of a solicitation by mail, leaflet, or advertisement in a newspaper, magazine, or other print medium, (including web pages) the following four requirements are met:

The solicitation includes whichever of the following statements the organization deems appropriate: “Contributions or gifts to [name of organization] are not deductible as charitable donations for Federal income tax purposes,” “Contributions or gifts to [name of organization] are not tax deductible,” or “Contributions or gifts to [name of organization] are not tax deductible as charitable contributions;”

The statement is in at least the same size type as the primary message stated in the body of the letter, leaflet, or ad;

The statement is included on the message side of any card or tear off section that the contributor returns with the contribution; and

The statement is either the first sentence in a paragraph or itself constitutes a paragraph.

In the case of a solicitation by telephone the following three requirements are met:

The solicitation includes whichever of the following statements the organization deems appropriate: “Contributions or gifts to [name of organization] are not deductible as charitable contributions for Federal income tax purposes,” “Contributions or gifts to [name of organization] are not tax deductible,” or “Contributions or gifts to [name of organization] are not tax deductible as charitable contributions;”

The statement is made in close proximity to the request for contributions, during the same telephone call, by the telephone solicitor; and

Any written confirmation or billing sent to a person pledging to contribute during the telephone solicitation complies with the print medium requirements, stated above.

In the case of a solicitation by television the following two requirements are met:

The solicitation includes whichever of the following statements the organization deems appropriate: “Contributions or gifts to [name of organization] are not deductible as charitable donations for Federal income tax purposes,” “Contributions or gifts to [name of organization] are not tax deductible,” or “Contributions or gifts to [name of organization] are not tax deductible as charitable contributions;” and

If the statement is spoken, it is in close proximity to the request for donations; if the statement appears on the television screen, it is in large easily readable type appearing on the screen for at least five seconds.

In the case of a solicitation by radio the following two requirements are met:

The solicitation includes whichever of the following statements the organization deems appropriate: “donations or gifts to [name of organization] are not deductible as charitable contributions for Federal income tax purposes,” “Contributions or gifts to [name of organization] are not tax deductible,” or “Contributions or gifts to [name of organization] are not tax deductible as charitable contributions;” and

The statement is made in close proximity to the request for donations during the same radio solicitation announcement.

IRS Fundraising Examination Guidelines: Nondeductible Contributions & Donations

The IRS examiner will do the following to determine how and when to audit your organization for fundraising issues:

The IRS examiner will determine if the organization is excluded from compliance under IRC §6113. See IRM 4.76.51.3(2) for a list of nonprofits excluded from IRC §6113.

Reviews the answers to the Form 990 core schedule, Part IV, Lines 14, 17, 18, and Part V, Line 6. If answered yes, then he will review the Schedules F and/or G, to see what information was reported. This information is used to modify the initial interview and internal controls questions as appropriate, and identify questionable items as part of the audit plan.

Identify all fundraising solicitation activities conducted by organizations not excluded from the disclosure requirements.

Determines if the particular activity is excluded from the disclosure requirement. See IRM 4.76.51.3(6) for examples.

Reviews all materials involving solicitation activities, which are not excluded and determine if they have met the disclosure requirements and then considers the applicability of penalties upon identification of areas of noncompliance

The IRS examiners are permitted and instructed to look into printed materials, looking at phone scripts, listening to phone recordings (if made for quality assurance purposes,) watching television recordings, and listening to radio recordings, if maintained by the organization. Copies of such materials can be obtained from the stations that aired the solicitations.

Penalties for Failure to Disclose Non-deductibility of nonprofit fundraising income

1. Nonprofits that fail to comply with IRC §6113 are liable under IRC §6710 for a penalty of $1,000 for each day on which such failure occurred not to exceed $10,000 for any calendar year.

2. Nonprofits that intentionally disregard the disclosure requirement of IRC §6113 are liable for a penalty of the greater of $1,000 or 50 percent of the aggregate cost of the solicitations that occurred on that day that did not include the required disclosure statement.

Note:

The $10,000 penalty limitation does not apply to intentional disregard of IRC §6113. For purposes of the penalty, any failure to meet the requirements of IRC §6113 with respect to a solicitation:

by television or radio, shall be treated as occurring when the solicitation was telecast or broadcast

by mail, shall be treated as occurring when the solicitation was mailed,

not by mail but in written or printed form, shall be treated as occurring when the solicitation was distributed, or

by telephone, shall be treated as occurring when the solicitation was made.

Note:

For web pages, the date that the page was first made available for viewing without the required language would be considered the date of distribution. For versions of earlier pages of web sites, IRS examiners use the internet archive www.archive.org.

IRS examiners are instructed to not assess penalties if the organization can demonstrate the failure is due to reasonable cause. See IRM 20.1.13.1 for a discussion of reasonable cause.

They should also inform taxpayers that they may request:

A review of the penalty prior to assessment (e.g. deficiency procedures),

A penalty abatement after it is assessed, and either before or after it is paid (post-assessment review), or

An abatement and refund after payment (claim for refund).

Note:

For further guidance on penalty appeals, see IRM 20.1.1.4.

Erroneous or Misleading Charitable Solicitations from Donors

Revenue Ruling 67-246, 1967-2 C.B. 104, as amplified by Revenue Procedure 90-12, 1990-1 C.B. 471, describes rules on the deductibility of payments to charities for fundraising events and gives examples illustrating how the rules apply. To avoid misleading donors, any charitable organization conducting this type of fundraising is required to:

Determine the portion of the payment attributable to the purchase of admission or other privilege and the portion solicited as a gift,

Provide separate amounts in the solicitation, and

Clearly designate these separate amounts on any ticket, receipt or other evidence of payment furnished to the contributor.

These procedures apply to those situations where organizations hold events where a donative element is expected, such as auctions, galas, benefits, tournaments, and so forth. These procedures do not apply where no donative element is expected, such as a receipt from a museum gift shop for a purchased item.

Examination Procedures: Erroneous or Misleading Charitable Solicitations

The IRS examiner will do the following to determine how and when to audit your organization for erroneos or misleading charitable solicitation by reviewing the answers to the Form 990 core schedule, Part IV. If answered yes, then they’ll review the Schedules F and/or G, to see what information was reported. In addition, they review the responses to Form 990 core schedule Part V, Line 7. This information is used to modify their initial interview and internal controls questions as appropriate, and to identify questionable items for further review.

The IRS examiner also should determine if any fundraising activities conducted were designed to solicit payments intended in part as a gift and in part as the purchase price paid for tickets or other participation in an event. Examples of these types of fundraising events are:

Charity balls

Banquets

Live and silent auctions

Tournaments (board games, card games, sports)

Bazaars

Carnivals

Shows

Sporting events (baseball, football, etc.)

Rummage sales

Car washes

Bake sales

Walkathons

They are instructed to review the nonprofit organization’s fundraising solicitation materials and activities to determine if the organization clearly designated the amount of the payment attributable to the purchase of admission or other privilege and the portion deductible as a charitable contribution.

Furthermore to inspect tickets or receipts issued to the donor to determine if the organization has clearly designated the separate amounts.

Quid Pro Quo Contributions & Donations

A quid pro quo contribution is a payment made by a donor that is partly a contribution and partly for goods or services provided to the donor by the charity.

Charities that receive a quid pro quo contribution in excess of $75, effective January 1, 1994 (IRC §6115) are required to provide a written disclosure/ acknowledgement statement that:

Informs a donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of money (and the fair market value of property other than money) contributed by the donor over the value of goods or services provided by the organization,

Provides a donor with a good-faith estimate of the fair market value of the goods or services,

In addition, the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66) established IRC §170(f)(8)(A), which requires donors to receive a written acknowledgment from organizations for any single contribution of $250 or more, regardless of whether the contribution is a quid pro quo contribution.

An organization must furnish a disclosure statement in connection with either the solicitation or the receipt of the quid pro quo contribution. The statement must be in writing and must be made in a manner that is likely to come to the attention of the donor.

Example: A disclosure in small print within a larger document might not meet this requirement.

No disclosure statement is required if any of the following are true:

where the goods or services given to a donor meet the “token exception,” the “membership benefits exception,” or the “intangible religious benefits exception.”

where there is no donative element involved in a particular transaction, such as in a typical museum gift shop sale

Payments made for tuition for an education leading to a recognized degree, travel services, or consumer goods are not considered intangible religious benefits.

The organization may use any reasonable methodology in estimating the value of goods and services, provided it applies the methodology in good faith. If the organization fails to apply the methodology in good faith, the organization is treated as not having met the requirements of IRC §6115. See Treasury Regulation §§ 1.170A-1 and 1.6115-1 for more information.

Token Exception

Treasury Regulation §1.6115-1(b) provides that disclosure of a quid pro quo contribution is not required when the goods or services provided have an insubstantial value.

Items have an insubstantial fair market value if the payment occurs in the context of a nonprofit fundraising campaign in which the organization informs donors how much of the payment is a deductible contribution, and one of the following conditions is met, as outlined by Rev. Proc. 90-12, 1990-1 C.B. 471, amplified by Rev. Proc. 92-49, 1992-26 C.B. 987.

The fair market value of all benefits received by the donor is not more than the lesser of two percent of the payment or $50 whichever is less,

The donor payment is at least $25 and the only benefits the organization provides the donor in connection with the payment are token items (bookmarks, calendars, key chains, mugs, posters, tee shirts, etc.) bearing the organization’s name or logo. The cost, not fair market value, of all items received by the donor cannot exceed the $5 limit for “low cost articles” under IRC §513(h)(2), or

The organization mails or distributes free unordered items, without the patron’s request or express consent, along with a request for a charitable contribution and a statement that the patron may retain the item whether or not the patron makes a contribution. The cost of all items provided to a single patron during a calendar year must remain within the limits of a low cost item as described in IRC §512(h)(2).

The $50, $25, and $5 limits listed in IRC §513(h)(2) and above are adjusted each year for inflation. The adjusted amounts applicable for a calendar year are published in a revenue procedure that is usually issued in November or December of the preceding year.

Membership Exception

The following membership benefits provided by an organization described in IRC §170(c) are disregarded for purposes of IRC §6115 if it is provided in exchange for an annual payment of $75 or less and consists of annual recurring rights or privileges, such as:

Free or discounted admissions to the charitable organization’s facilities or events,

Discounts on purchases from the organization’s gift shop,

Free or discounted parking,

Free or discounted admission to member-only events sponsored by an organization, where a per-person cost (not including overhead) is within the token exception limits.

Many nonprofits have donor recognition levels in excess of the $75 annual payment, and require determination by the organizations of the quid-pro-quo contributions. The $75 annual payment is not indexed for inflation.

Intangible Religious Benefits Exception

If a religious organization provides only “intangible religious benefits” to a contributor, the acknowledgment does not need to describe or value those benefits. It can simply state that the organization provided intangible religious benefits to the contributor.

Intangible religious benefits are benefits provided by a tax-exempt organization operated exclusively for religious purposes, and are not usually sold in commercial transactions outside a donative (gift) context. Examples include admission to a religious ceremony and a de minimis tangible benefit, such as wine used in a religious ceremony.

Benefits that are not intangible religious benefits include education leading to a recognized degree, travel services, and consumer goods.

IRS Examination Guidelines: Quid Pro Quo Contributions & Donations in Fundraising

The IRS examiners will review the answers to the Form 990 core schedule and Schedules F and/or G, to see what information was reported. In addition, the examiner will review the responses to Form 990 core schedule Part V, Line 7. This information is used to for interview and internal controls questions as appropriate, and to identify questionable items for further review.

They also review nonprofit fundraising solicitation materials and records to determine if the organization provided any benefits in return for contributions in excess of $75. And determine if the organization provided the disclosure notice with either the solicitation or the receipt of the quid pro quo contribution.

Note:

If the organization includes a disclosure statement with a particular solicitation, the organization is not required to include a statement with the associated receipt for the contribution.

Examiners will not aggregate separate payments of $75 or less made at different times of the year for separate fundraising events.

Examiners will consider the impact on the deductibility of the contribution to the donor. They should make a referral for taxpayers deducting large non-deductible payments for examination or make a discrepancy adjustment and send referrals to the appropriate SB/SE PSP unit.

examiners will evaluate the appropriateness of penalties upon identification of areas of noncompliance.

Failure to Disclose Quid Pro Quo Penalties

1. (1)Public Law 103-66 added IRC §6714 and is effective for quid pro quo donations made after December 31, 1993. The section provides for a penalty against organizations that do not disclose quid pro quo contributions in excess of $75 as required under IRC §6115(a).

2. The penalty is $10 for each failure to provide the required written statement to the payor (donor). The maximum penalty per nonprofit fundraising event or mailing is $5,000.

3. Do not assess the penalty if the organization can establish the failure to provide the written statement was due to reasonable cause. For reasonable cause relief guidelines, see IRM 20.1.1.4.

Non-Cash Charitable Contributions & Donations

Treasury Regulation §1.170A-13(b) sets forth that for non-cash contributions to be tax deductible if the donor maintains a receipt from the recipient organization containing:

The name of the charitable organization,

The date and location of the charitable contribution, and

A reasonably detailed description of the property.

A letter or other written communication from the charitable organization acknowledging receipt of the contribution and containing the information above will serve as a receipt.

Treasury Regulation §§1.170A-13(c) and (f) provide that non-cash donations larger than $5,000, made to an organization eligible to receive tax deductible contributions, are tax deductible if:

The donee organization supplied the donor with a contemporaneous written acknowledgement of the contribution, containing the information in both IRM 4.76.51.6(1) and IRM 4.76.51.5(2),

The donor obtained a qualified written appraisal of the property, and

The donee organization signed the appraisal summary acknowledging receipt of the property and awareness of the subsequent filing requirement, in the event they dispose of the asset within 2 years.

No penalties are imposed on the organization for failure to provide the acknowledgement. However, the donor is penalized, by losing the tax charitable deduction if the donor does not obtain the statement. A donor that loses a deduction may be deterred from making future contributions to that organization. Therefore, charities generally have procedures in place to issue a statement for non-cash contributions.

The organization should sign the appraisal summary located on the Form 8283, Non-Cash Charitable donations, to acknowledge that they received the non-cash contribution on the specified date. The organization is not agreeing or concurring with the donor’s appraised value by signing the acknowledgement, however, they are acknowledging the information reporting requirements on dispositions on donated property.

In accordance with IRC §6050L(a) if a charitable organization sells, exchanges, or otherwise disposes of charitable deduction property within 2 years after its receipt, the organization must file an information return Form 8282, Donee Information Return which contains the following information:

The name, address, and Taxpayer Identification Number (TIN) of the donor,

A description of the property,

The date of the contribution,

The amount received on the disposition, and

The date of such disposition.

In accordance with IRC §6050L(c), the organization must provide a copy of Form 8282, Donee Information Return to the donor.

An organization that fails to file Form 8282 when required, may be subject to the IRC §6721 penalties, regarding failure to file a correct information return.

In certain situations, an organization that knowingly prepares an inaccurate substantiation statement and signs the qualified appraisal summary could be subject to the penalties for aiding and abetting an understatement of tax liability. See IRC §6701.

In addition, the donor may be subject to IRC §6662 accuracy penalties if they overstate the value or adjusted basis of donated property.

The penalty is 20% of the underpayment of tax related to the overstatement if:

The value or adjusted basis claimed on the return is 200% (150% for returns filed after August 17, 2006) or more of the correct amount, and

The donor underpaid their tax by more than $5,000 because of the overstatement.

The penalty is 40%, rather than 20%, if:

The value or adjusted basis claimed on the return is 400% (200% for returns filed after August 17, 2006) or more of the correct amount, and

The donor underpaid their tax by more than $5,000 because of the overstatement.

An appraiser who prepares an incorrect appraisal may have to pay a penalty if:

The appraiser knows or should have known the appraisal would be used in connection with a return or claim for refund, and

The appraisal results in the 20% or 40% penalty for a valuation misstatement.

Under IRC §6695A, the penalty imposed on the appraiser is the smaller of:

The greater of 10% of the underpayment due to the misstatement, or $1,000, or

125% of the gross income received for the appraisal.

In addition, any appraiser who falsely or fraudulently overstates the value of property described in a qualified appraisal of a Form 8283 that the appraiser has signed may be subject to a civil penalty for aiding and abetting as understatement of tax liability, and may have his or her appraisal disregarded.

Vehicle Donations as nonprofit fundraising

How a charity operates a car donation program may have tax consequences. The car and vehicle fundraising program can:

affect a charity’s exempt status; and

impact the tax-deductibility of the donor’s contribution.

If a charity operates a car donation program in a manner that confers improper benefits on private parties, the charity’s exemption may be adversely affected. In order to be deductible, a donation must be made to a charity that has full control and discretion over the disposition or use of the donation.

In the following three situations, the program should not have an adverse impact on the charity’s tax exempt status. Donors may deduct their contributions (if all other requirements are met).

If the charity uses donated cars in its charitable program or distributes the cars to needy individuals.

If the charity sells the donated cars and uses the proceeds to fund its charitable programs.

If the charity hires a private, for-profit entity as an agent to operate its car donation program. The charity and the for-profit entity must establish an agency relationship that is valid under the applicable state law.

Generally, an agency relationship will be established where the parties agree that the for-profit entity will act on the charity’s behalf and that the for-profit entity’s activities covered by the agreement are subject to the charity’s oversight. Accordingly, the charity should actively monitor program operations and have the right to review all contracts, establish rules of conduct, choose or change program operators, approve of or change all advertising, and examine the program’s books and records.

If the charity grants a for-profit entity the right to use the charity’s name for the purpose of soliciting donations of used cars. The charity receives either a flat fee or a percentage of the proceeds from the sale of the cars to support its charitable programs. The charity has no control over the for-profit entity’s activities.

The charity has not established an agency relationship with the for-profit entity that is valid under applicable state law; therefore, this program is not the charity’s program.

Because the for-profit entity is not an agent of the charity, the donors’ contributions are made to the for-profit entity and are not treated as made to the charity.

A charity cannot license its right to receive tax-deductible contributions. The for-profit entity and the charity must not mislead the public by stating that donations may be deductible (for example, by providing a written acknowledgment that the “contribution” is deductible). Misleading the public in this regard may expose the for-profit entity and the charity to adverse tax consequences.

IRS Examination Guidelines: Non-Cash Charitable Contributions as fundraising

The IRS examiners will review Form 990 Schedules for the descriptions of the non-cash assets donated to the organization.

An exempt organization is required to determine and report the amount of its support on Form 990 and file Form 8282, when applicable. During the initial interview examiners are instructed to ask the following questions, regarding the treatment of non-cash charitable gifts:

Does the organization have a formal policy regarding non-cash contributions?

How does the organization value non-cash donated property?

Do they secure an independent appraisal?

Does the organization assign a value on the receipt provided to the donor?

What procedures are in place if the organization determines the value of the property is less than the value claimed by the donor?

Does the organization maintain copies of appraisal summaries (Form 8283) for non-cash donations?

If the organization maintains copies of Form 8283, review and determine whether:

The donee organization completed and signed the donee acknowledgement, and

An official authorized to sign tax or information returns on behalf of the organization signed Form 8283.

IRS examiners determine whether the organization sold, exchanged, transferred, consumed, or otherwise disposed of any non-cash donated property within two years of the date of receipt. They also refer to Announcement 90-25, 1990-8 I.R.B. 25, and the instructions for Form 8282, Donee Information Return, to determine if the charity is required to file Form 8282. If so, they look into whether the organization filed Form 8282, within 125 days after the disposition and provided a copy to the donor.

Then they review copies of Form 8282 which were filed and compare the amount received upon disposition to the appraised value on Form 8283, filed with the donor’s return, via RTVUE, or BRTVU and look for large, unusual, or questionable variances.

Large variances could indicate that the appraised value was excessive, thus the deduction taken by the donor was inaccurate. If the Form 8282 and Form 8283 reflect a significant discrepancy, they consider making a discrepancy adjustment, or prepare a referral Form 5666 and submit it to EO Classification who will forward it to the appropriate operating division.

Finally they assess penalties under IRC section 6723 when the organization has failed to file Form 8282, as required.

Internet & Online nonprofit fundraising

The Internet presents many new opportunities for tax-exempt nonprofits to raise revenues to finance their operations. Generally, web site or e-mail solicitations should comply with the same rules that apply to other solicitations.

Many nonprofits will have web pages on their websites set to take a donation, through Pay Pal or other online electronic funds transfer methods. Any such pages should contain the required disclosures as to deductibility. Receipts generated by electronic donations should likewise contain disclosures

Numerous for-profit (and non-profit) websites have been set up to provide ideas for fundraising activities. Many, but not all of these sites charge fees for directions as to how to conduct the activities, or are tied into selling merchandise as fund-raisers (such as magazine, and candy sales)

Examination Guidelines: Internet Fundraising

Beside reviewing Form 990 Schedule G, IRS examiners are instructed to visit the organization’s web site to identify any fundraising activities the organization conducts on the Internet.

IRS examiners determine if the organization acknowledges its sponsors/donors on its web site by displaying names, logos, or products, or creating links to the sponsor’s web site. They look for sale of advertisement, which may be taxable as unrelated business income.

They also determine the taxability of any merchandise sales on the Internet using the same principles that apply to the sale of merchandise in an organization’s gift shop or other location. Based on the facts and circumstances, the income could be unrelated business income regardless of where the organization sells the items.

Most importantly, they verify that any organization subject to the requirements of IRC §6113 includes one of the statements listed in Notice 88-120, 1988-2 C.B. 454, in any web-based fundraising solicitation. To ensure the viewer has an opportunity to see the statement before making a contribution, the statement must be:

In the same type size as the primary message,

Readily visible against the background of the page,

On the same page as, and in close proximity to, the actual request for funds

Either the first sentence in a paragraph or the statement itself constitutes a paragraph,

Presented without the viewer having to follow a link to see the statement, and

In plain view before the viewer clicks on the “submit” , “transmit” , “accept” or other button that transmits their donation information to the soliciting organization.

The penalty provisions apply to web page solicitations. IRC §6710(d)(3) provides that written or printed solicitations (other than mail) shall be treated as occurring when the solicitation was distributed. Generally, the IRS would consider a web page to be distributed when it is uploaded to a server and becomes available to the public.

Using Professional Fundraisers and its problems

The use of professional fundraisers is an area of legitimate concern in examinations or exempt organizations. Some nonprofit fundraising arrangements unduly benefit the professional fundraiser, who may or may not be an “insider” with respect to the organization seeking exemption, while providing minimal amounts of income for actual charitable uses. However, not all arrangements with professional fundraisers are suspect. Many legitimate fundraisers provide useful services to exempt nonprofits in helping them organize and conduct nonprofit fundraising campaigns. Professional fundraisers offer expertise and efficiency to both newly created nonprofit organizations whose officers are unfamiliar with resources and methods for obtaining funds, and to established nonprofits that wish to expand their support base.

In examining an exempt organization, the IRS examiner will try to get all the facts. Before advising an organization that its prior or current use of a professional fundraiser has an adverse effect on its qualifications for exemption, they are instructed to requests for additional information.

Examination Guidelines: Professional Fundraisers

When dealing with the issue of a professional fundraiser and a public charity, the examiner should determine whether the fundraiser is an insider with respect to the organization. Asserting inurement against a fundraiser requires following the procedures under IRC §4958. The Seventh Circuit in United Cancer Council v. Commissioner, 165 F.3rd 1173 (7th Cir. 1999), held against the IRS, and remanded the case to the Tax Court for a ruling on the issue of private benefit.

In 1984, United Cancer Council (UCC) had entered into a five year mail solicitation fundraising contract with Watson & Hughey (W&H). UCC had no risk under the contract if the fundraising contract went poorly, and enjoyed income if the fundraising was successful. UCC paid very high fees for the creation of the mailing lists, which the Tax Court had found were controlled by W&H during the term of the contract. Most of the expenses resulting from generation of the mailing list were paid to W&H or one of its affiliates. Funds generated by the mail solicitations were deposited into an escrow account and disbursed only on instruction from W&H. UCC was dependent on these funds to avoid insolvency. Even though the contract was amended from time to time, W&H did not, during the term of the contract, release control of the mailing lists nor of the escrowed funds. Upon expiration, the contract was not renewed by UCC.

The Seventh Circuit reversed the Tax Court’s findings that W&H was a UCC insider and its findings that the net earnings of UCC had inured to the benefit of W&H. However, the Seventh Circuit clarified that upon remand, the Tax Court may consider whether UCC had operated to confer private benefit on W&H by the board’s violation, if any, of its corporate duty of care involving the dissipation of the charity’s assets. (The Court clarified that this type of “private benefit” is different from the usual private benefit case “where charity had dual public and private goals.” )

The IRS examiner during the pre-audit phase of the examination, reviews the Form 990 core schedule Part IV, Line 17. If answered yes, the organization is required to attach Schedule G.

If professional fundraisers have been reported on the Form 990 Schedule G, they review the contracts for each fundraiser, and determine whether any contracts have been renewed or revised.

For nonprofits with inurement/private benefit clauses under the Code, the auditor prepares cases for revocation and/or IRC §4958 should inurement be identified.

Unrelated Business Income Tax and nonprofit Fundraising

The fundraising activity is not a taxable unrelated trade or business if it meets any of the following exceptions:

Not regularly carried on, IRC §512(a)(1)

Sale of merchandise, “substantially all” of which was donated, IRC §513(a)(3)

“Substantially all” of the work is done by uncompensated workers, IRC §513(a)(1)

Items sold are “low cost articles,” IRC §513(h)(2)

Payments received are “qualified sponsorship payments,” IRC §513(i)

Examination Guidelines: Unrelated Business Income in Fundraising

The IRS Analyzes fundraising activities to determine whether such income is subject to unrelated business income tax.

Example: A monthly bake sale selling donated merchandise acquires 20% of the items for sale by purchasing them from bakeries, thus failing the IRC §513(a)(3) exclusion for donated merchandise.

Example: A car wash held weekly for booster club uses supplies provided gratis by a gas station, but the students providing the labor are paid in cash for their time out of the proceeds. The organization would fail to meet the donated labor exclusion.

Income from conducting bingo and other gambling activities open to the general public may be subject to the unrelated business income tax imposed by IRC §511(a). See IRM 4.76.50.

The examiner should determine whether the organization received any donated real property subject to debt financing. If subject to IRC §514, compute the tax liability, if any.

For calculating the tax liability, they follow the guidelines in IRM 7.27.

Proper Reporting of Nonprofit Fundraising Activities on Form 990

All exempt organization must provide copies of their Form 990, when requested in person or in writing. Forms 990, 990-EZ, 990-PF, 990-BL, 1023, 1024 and (in the case of §501(d) organizations) 1065 are all available for public inspection under IRC §6104(d).

Pension Protection Act of 2006, effective August 17, 2006, further requires exempt nonprofit organizations to provide copies of the Form 990-T when requested n person or in writing.

Potential donors may inspect Form 990 Returns and review the fundraising and operations costs to identify organizations to support. Nonprofit organizations reporting low fundraising and operating costs could be perceived more favorably since these costs generally do not directly promote an organization’s mission.

For purposes of Form 990 expense reporting, “fundraising” activities relate to soliciting and receiving contributions. Special events and activities conducted primarily to solicit and receive donations and not to sell goods or services at retail are “special fundraising activities” , regardless of whether a profit is made.

All Forms 990 have required nonprofits reporting fundraising activities to separately determine and report the amounts of fundraising contributions and the revenues generated by the events. Additional information is requested of nonprofit organizations conducting fundraising activities through form 990:

Professional nonprofit fundraising and total fundraising expenses are reported on Form 990 Part I, Line 16.

All nonprofits are required to indicate whether they have filed Form 990 Schedule B, Schedule of Contributors, on the Form 990, Part IV, Line 2.

Foreign nonprofit fundraising activities are identified in answering Form 990, Part IV, Line 14.

Organizations with more than $15,000 in either fundraising contributions, event revenues, or professional fundraising expenses answer yes to Form 990, Part IV, Lines 17 or 18, and complete Form 990 Schedule G.

Any organization receiving more than $25,000 in non-cash donations now completes Form 990, Schedule M, and answers yes to Form 990, Part IV, Line 29.

Contributions of art, historical treasures or similar assets also require completion of Form 990, Schedule M, and a positive answer to Form 990, Part IV, Line 30.

Non-deductible cash solicitations are questioned at Form 990, Part V, Line 6, while deductible cash solicitations are covered at Form 990, Part V, Line 7.

Nonprofit organizations that do not meet the filing requirement thresholds for the Form 990 are required to file Form 990-EZ, or if below the Form 990-EZ threshold, the Form 990-N. While the Form 990-EZ still requests the break down of fundraising contributions and event revenues from the special events gross receipts, the additional schedules are not required of Form 990-EZ filers.

Form 990-EZ filers that are tax-exempt nonprofits recognized as publicly supported, as described in IRC §§509(a)(1) or 509(a)(2), are required to correctly allocate the gross receipts from “special events” into revenue and contributions from the public. This distinction is important in determining the private foundation status of an IRC §501(c)(3) organization.

When an organization receives more than retail value from the sale of goods and services, as in a Quid Pro Quo contribution, the organization should report both a contribution and revenue from the activity. The organization should report the retail value of the item as revenue from the activity and the additional amount received as a contribution (Public Support).

Likewise, the organization should determine the costs that directly relate to the sale (Quid Pro Quo) and report them as direct expenses of the special activity. The organization should report the remaining expense as “fundraising” expenses.

The organization should report the revenue generated from items which have insubstantial value and are not subject to the Quid Pro Quo disclosure requirements, as a contribution and all related costs as fundraising expenses.

Examination Guidelines: Proper Reporting of fundraising Activities on Form 990

For Form 990, IRS examiners review Part IV, Checklist of Required Schedules, Part V, Statements Regarding Other IRS Filings and Tax Compliance, Part VIII, Statement of Revenues, and Part IX, Statement of Functional Expenses of the core schedule, as well as Schedules G and M, if filed for information concerning the fundraising activities.

They also review the Statement of Functional Expenses (Forms 990 and 990-EZ) and verify that the organization has properly allocated expenses between program service, fundraising, and management /general.

The IRS determines whether the organization engaged in any special fundraising activities and, if so, properly reported income and expenses on Form 990. Omitting material information on a Form 990 may subject the organization to the penalties imposed by IRC §6652(c)(1)(A)(ii)

Examiners will review nonprofit fundraising programs to determine if the organization provides any benefits to contributors that would affect the deductibility of the contribution. They also:

Identify the officials responsible for soliciting and accounting for gifts. Obtain a description of their duties and responsibilities.

Interview the employees, who plan, administer, perform, and carry out the organization’s fundraising activities.

Review minutes of the governing board as well as the fundraising committees (budget and finance, or development) to identify any conditional contributions that may have questionable terms, since some nonprofits require that the governing board formally accept large contributions, especially conditional or earmarked donations.

Example: A gift to construct a building conditioned on the use of a certain architect or hiring a specific construction firm could suggest a private benefit that could jeopardize the IRC §170 deduction and the organization’s exempt status if the donor and beneficiary of the condition have less than an arms-length relationship.

Review internal reports related to gifts (Alphabetical lists of contributors, lists of donors, lists of restricted gifts, lists of in-kind gifts, etc.) to determine any contributions which may not be at arm’s length.

Review correspondence files relating to fund solicitations and any agreements concerning gifts received to identify restricted, earmarked, or conditional donations. Analyze the terms or conditions of the contributions to identify private benefit, inurement, or indications of non-exempt activities.

If it is determined that another IRC §501(c)(3) organization conducts the fundraising activities the examiner should inspect the fundraising organization’s Form 990 and determine if an examination is warranted.

Any solicitations made on behalf of the organization by an outside professional fund-raiser must meet the same requirements that a solicitation conducted directly by the organization would. In addition, nonprofit organizations must keep samples of nonprofit fundraising materials used by any outside professional fund-raiser who raises funds on their behalf.

Review contracts and agreements with professional fund-raisers to identify fees charged as a percentage of funds raised or for excessive fees. These could be indications of private benefit or inurement.

If indications of fraud are discovered during the examination, refer to fraud procedures in Internal Revenue Manuals 4.75.21, 25.1.1, 25.1.2, and 25.1.9.

NOTE: If you’d like to receive the following organizing documents:

Nonprofit Articles of Incorporation,

Nonprofit Bylaws,

Nonprofit Conflict of Interest Policy,

Conflict of Interest Policy Acknowledgment,

Form 1023 Attachment with all the answers,

Form 1023 Expedite Letter template,

and Donor Contribution Form

in Microsoft Word Document format, please consider making a donation and you’ll get to download them immediately. Not only they're worth well over $1000 in value, they will save you weeks of copy pasting and formatting as they are ready to go templates which only need changing names and addresses.

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Fundamentals of Nonprofit Fundraising for Charities

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Fundamentals of Nonprofit Fundraising for Charities is a MUST READ for all nonprofits engaging in fundraising. Don’t lose your tax exemption for a mistake!

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Nonprofits need to juggle various reports to ensure organizational success and growth.

Maintaining accurate reporting procedures is a critical aspect of tracking your performance and being IRS compliant, as well as presenting appropriate transparency.

If you want to be able to evaluate your organization in an effective way to make better decisions, you will want to ensure your reporting game is up to snuff. For example, organized and accurate data in an easy-to-follow format will help you budget, adapt to changes, and improve your nonprofit project management.

Here are the topics which we will cover:

What Is Nonprofit Reporting?

Unfortunately, there is no one definitive answer as to what nonprofit reporting entails, as it takes several forms.

In general, reporting is keeping up-to-date, detailed, and accurate data on a wide variety of different topics, from financial status (such as tax and accounting information) to the achievements your organization has performed in pursuit of your nonprofit mission statement , as well as everything in between.

Some nonprofits utilize an agile project management method , as it allows each report to be broken down into categories that are easier to maintain while ensuring that all necessary information is represented.

Nonprofit reporting is also managing logs and databases which provide written verification about funding, expenditures, income, and similar details to provide accountability and ensure transparency to the public and the IRS.

Finally, it is breaking down your nonprofit's performance with internal and external reports to create a snapshot of where you stand at any given time to make important decisions to increase your organization's impact and growth.

Pro Tip: Depending on the type of nonprofit and your geographical situation, there are most likely a few mandatory reports. Make sure you are well informed about all the federal and state-required filings, as it will help you anticipate which data you need. The National Council of Nonprofits offers links to States resources for filing requirements and the IRS has a page dedicated to charities and nonprofits.

Why Is Internal and External Reporting So Important?

Knowledge is power. Having all the data at your fingertips can help you develop your nonprofit business plan and give you the ability to take action on the fly with the assurance that you have all trends and specific information necessary to make optimum decisions.

When thinking about reporting, there are two overall categories: internal and external.

Internal

Internal reporting is not available to the public but is used within your own organization.

Internal reporting is useful for your board of directors, staff, volunteers, members, and other key personnel. These reports ensure that everyone is on the same page by providing in-depth insights on financial information as well as indicators of the health and success of your nonprofit.

Mary is having a good think on why internal and external reporting is crucial.

In addition, having detailed reports allows your team to follow your performance toward your goals and find new opportunities for growth while making educated decisions for future endeavors.

External

This type of reporting is meant for the public, funders, the IRS, state services, members, supporters, potential donors - everyone!

As this involves public information, it is crucial to make sure that everything is reported as required. For example, when filing the IRS Form 990, accuracy is paramount to ensure accountability and transparency.

Pro Tip: While the idea of laying your organization bare can be intimidating, remember that it is also a way to celebrate accomplishments. Consider reporting requirements an opportunity to show appreciation for hard work, represent the social good your organization promotes, and recruit new donors and members to your organization.

6 Beneficial Nonprofit Reports

Reports range within a diverse spectrum. We have listed the most common reports below along with each of their Key Performance Indicators (KPIs) to relay the main data points to track for each.

Here is a breakdown of some typical categories which necessitate reports.

General Annual Reporting

Annual reports are often external, intending to provide individual donors, supporters, funders, partners, and other VIPs information that enhances your nonprofit image and provides encouragement.

Remember, since this will be read by the public, take the time to apply best practices to make it accurate, attractive, and easy to digest for readers. The creation of an easy-to-read format with images and other visuals will have the best results.

Decipherable reports will build your nonprofit's reputation and encourage others to be a part of your mission!

KPIs:

Treasurer's (or Financial) Reporting

There are a few reports, some internal and some external, that are important to document the financial health of your organization. Your treasurer is responsible for a majority of these documents, including the treasurer's monthly report, as well as information provided to the IRS, members, stakeholders, and the board of directors.

As the person responsible for ensuring financial statements and other key financial reports are compiled and distributed, the Treasurer has all information needed to monitor certain KPIs.

KPIs:

Fundraising Return on Investment (ROI)

Gift growth and average

Gifts secured and average size

Membership dues total and yearly trends

Outstanding payments

Fundraising Reporting

Fundraising campaigns are a key source of income for most nonprofits, it is relevant to monitor how much you raise every month, every quarter, and every year depending on your nonprofit's needs. It's a good way to see the impact of your operations and the potential you have for the future.

KPIs:

Marketing Reporting

We recommend a monthly report that analyzes the success of your marketing campaigns. This includes self-mailers, traditional emails, newsletters, social media results, website traffic, and other outreach methods.

KPIs:

Membership Reporting

If you maintain a membership subscription program, it is useful to understand important trends to help promote your program and make decisions for it. This includes understanding the seasonality of your memberships and the impact of different operations such as marketing, events, and social media.

Trish is feeling proud about all the new reports she'll be leveraging!

This type of reporting is intended to cover the evolution of your membership, so keeping records on a monthly, quarterly, and basis is imperative, just as you would for fundraising.

KPIs:

IRS 990-Series Reporting

Required to be legally compliant for certain organizations, this category of annual filings is quite different from others. Form 990 determines eligibility for tax-exempt status and requires exceptional accuracy, detail, and transparency to meet federal legislation requirements.

To obtain your tax-exempt status and maintain it on a yearly basis, you are required to file a version of Form-990 (e-Postcard and 900-N for example).

Because this is such an important set of reports that cover a wide variety of financial data and nonprofit accomplishments, it's a good idea to examine other nonprofit and charitable organizations' public records to understand the general presentation.

There are a lot of useful resources such as the IRS website itself and a variety of templates, PDFs, and organizational software that can make serve as a guide and make it a little easier for your auditor to cover everything you need in enough detail to be legally and IRC compliant with your format.

KPIs:

Pro Tip: Whatever you decide, be careful not to go overboard. Reports must always be useful to your teams, and they must not become a burden. It is strongly recommended to make sure the reporting is relevant before you start working on it. If necessary, feel free to make adaptations or even eliminate them. To simplify report management, there are software options such as Trello for nonprofits that can ease the burden.

Springly is trusted by over 20,000 nonprofits to help them run their organizations on a daily basis. Try it, test it, love it with a 14-day free trial!

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The Ultimate Guide to Nonprofit Reporting

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Nonprofits need to juggle various reports to ensure organizational success and growth. Maintaining accurate reporting procedures is a critical aspect of tracking your performance and being IRS compliant, as well as presenting appropriate transparency. If you want to be able to evaluate your organization in an effective way to make better decisions, you will want to ensure your reporting game is up to snuff.

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Should Your Nonprofit’s Board of Directors Get a Salary?

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Should Your Nonprofit’s Board of Directors Get a Salary?

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A nonprofit board of directors often are expected to perform time consuming organizational responsibilities. In addition to their role on the board, these members usually have full-time jobs, families, and hobbies that they enjoy.

At what point, if any, does it become necessary to compensate board members for their hard work and dedication to your cause? If that is an avenue to pursue, what kind of compensation is appropriate?

Let's discuss together:

The Role of the Board of Directors

The nonprofit board structure is designed to identify people who serve as fiduciaries who steer your organization toward its mission while ensuring that the three major principles are observed: the duty of care, duty of obedience, and duty of loyalty.

By adhering to these duties, board members provide guidance by behaving in an ethical fashion while placing their personal interests aside in favor of what is best for the organization.

They also ensure all legal proprieties are observed through their nonprofit board governance while developing strategies to accomplish the organization's goals.

They must represent the nonprofit while championing its core beliefs and values, attending important events and meetings, and evaluating the nonprofit's overall performance.

While even at-large chair members have a wide range of duties, such as leading committees, for example, some roles require even more responsibility. The president (chair), vice-president (co-chair), treasurer, and secretary positions involve even more in-depth and time-consuming tasks.

Can a Nonprofit Legally Pay Its Board of Directors?

As long as there are no state prohibitions or special-case regulations, there are no federal legislation rules against compensating board members, similar to how you would for employees.

However, there are a lot of considerations to take into account before you decide to take this route, so make sure you consult the 501c3 board of directors rules before anything else.

Everyone loves getting paid - Corinne included!

After all, you have to consider how stakeholders will perceive the allocation of mission funds for the payment of officers, especially if you are a small nonprofit or charity. Donors may feel their funds are not being used 100% to further the mission. However, if the mission exists because of the time spent by the board member(s), it may be valid. It is often a delicate balance and much of it depends on how the organization promotes it.

Larger organizations often face the same scrutiny. Because complex nonprofits may require expert talents, such as the healthcare field, they can often rationalize the need to compensate their professional board members without too many complications.

If you make the decision to pay your board, let's consider some of the options at your disposal for doing so.

Different Types of Compensation

Even though most organizations employ trustees as volunteer-only, it is easy to see the great quantity of time and effort required for board positions. It is only natural for many founders and staff to want to provide some form of compensation, especially to reward them for their hard work.

There are a few different options available for those considering compensation.

Salary

While not the norm, some organizations provide some form of regular payments, whether a salary or similar method of dispensing money to board members for their time and hard work.

If your organization plans to dispense this type of restitution, you need to make sure that you have descriptions and specific guidelines outlined in your bylaws to establish the procedures and process for dispensation as well as the salary amount itself.

Just a word of warning: be sure to evaluate your state's laws and research IRS guidelines about conflict of interest in detail, as having paid staff serving on the board of directors walks a tightrope where that topic is concerned, as nonprofits are not allowed to participate in private inurement.

It should be noted that it is not uncommon for at least one member of the board to be paid staff, as the founder often serves on the board, especially in smaller nonprofits.

Expense Reimbursements

Reimbursing board members for expenses incurred while performing their roles is a much more common method of providing compensation to officers.

This kind of payment involves travel expenses, lodging for meetings, and other standard costs board members may pay out-of-pocket to fulfill their duties.

This sort of restitution is more easily understandable to stakeholders and also benefits your valuable trustees because they are not having to face expenditures in addition to the time and effort they are already putting into the mission.

You should be aware that you will have to fill out an IRS Form 1099-MISC for any board member who receives an annual total of $600 or more for tax purposes.

Pro Tip: Nonprofits that do not offer reimbursements can inform their board members that many of the expenses are tax-deductible, which can still prove beneficial to them.

Benefits of Board Member Compensation

There are many benefits to providing some type of restitution to the people in your nonprofit board member positions:

Receiving Payment Incentivizes Full-time Commitment

Your board members can accomplish so much more for your nonprofit growth when they have more time and fewer financial worries. The more payment they receive, the more time they can spend on their nonprofit board responsibilities to promote social good like attending fundraisers, events, activities, and other duties.

The Quality of Work Can Improve

People have various commitments on their time. Extrinsic motivators, like compensation, may help motivate some to shuffle their priorities around to put their board work higher on the list. Funding can incentivize board members to perform to the best of their abilities because they are being compensated for that time and work.

Simon's compensation certainly makes it a little easier to go the extra mile.

Compensation Can Attract Highly-Quality Leaders

Highly qualified leaders are hard to come by but are great for the growth of nonprofit and charitable organizations. Onboarding and retaining experienced folks to the board can lead to growth strategies that result in a significant amount of donors, new members, and other stakeholders.

Having some form of compensation attached to board positions can increase the chances of drawing productive members who bring lots of experience, great ideas, and techniques to promote your mission.

It Rewards Your Board's Hard Work

Everyone wants to be appreciated for their effort and receiving payment is a great way to show that your organization values your officers and appreciates their dedication. Even a nominal payment, or in-kind services, helps relay the organization's gratitude.

For example, a cooperative preschool that has parents performing various cleaning, maintenance, and other tasks to keep the school functioning at a reasonable cost, may provide a month of free tuition for children whose parents serve on the board. This shows an appreciation that the job they perform is more difficult and time-consuming when compared to the responsibilities of other participants.

Drawbacks of Board Member Compensation

While there are many great benefits to compensation, there are a few drawbacks that can be argued (we do love to play the devil's advocate!)

People Expect Board Members to be Volunteers

Otherwise, the organization seems to operate more as a for-profit company and people frown on this. Plus, the volunteers are working and dedicating their time to the cause, so people may question why board members are not doing the same.

People might suggest that receiving compensation falls more in line with a for-profit company by effectively turning the board members into employees.

It May Skew your Program Expenses Metrics

There is another issue related to the common sentiment that supporters often expect board members to contribute solely out of the kindness of their hearts. Because your supporters often want their donations and memberships to provide the most social good, they often want some level of transparency within the organization they are contributing to.

Funding spent for compensation are donations and dues not directly allocated to the mission itself may require some explanation to your supporters as to where their money is going.

Loss of Immunity

There are some state-specific legal statutes where board members who receive compensation are no longer granted incorporation immunity from lawsuits filed against the organization.

For example, certain nonprofit board member protections in North Carolina (some that fall under federal law as well as ) are waived when the director receives compensation above and beyond reimbursement expenses.

Boards are Responsible for Managing the Budget

Because of this aspect of their duties, many people consider it inappropriate for those tasked with managing the money to partake of that budgeting. It could potentially lead to situations where the following may arise:

Conflicts of Interest

The most important factors for providing salaries or other types of compensation to board members involve avoiding conflict of interest. As they are receiving income, it is easy to cast shadows on whether their motives and decisions are in the best interest of the organization or whether they are personal.

Eva is having a tough time navigating some conflicts of interest.

Allegations of conflict of interest must be taken seriously. The IRS can level penalties against your organization if there are suspicions that funding is being misappropriated.

These penalties can include the loss of your tax-exempt status.

Not to mention the domino effect that can have on your nonprofit's reputation, which is key to ensuring donors and members provide the necessary funding to make an impact.

The exception to this stigma of compensation is the Executive Director (ED). After all, the ED abstains from voting, so there are fewer opportunities for conflict of interest.

Pro Tip: The IRS Form 990 requires that any potential conflicts of interest are disclosed upon its submission. Therefore, it is essential to make sure that the presence of paid officers serving on the board will not cause conflicts of interest.

Deciding on a Salary

If you decide that compensation is best for your nonprofit, you may find yourself facing the dilemma of deciding upon appropriate salaries. Per the U.S. Bureau of Labor Statistics, nonprofit management, professional, and related workers are compensated $3.36/ hour less than equivalent positions at for-profit entities. Similarly, nonprofit board members make less than those at a for-profit company.

If this statistic shocks you, you are in good company. This discrepancy is thoroughly saddening to us here at Springly, as we strongly believe the world needs to appropriately value the incredible, life-changing, and necessary work nonprofits do. A big part of this is fair and equitable compensation.

Sadly, until this change happens, what we can do is to provide some tips on how to determine what is fair within the current scope.

Salma is in deep thought about her board's salaries.

First, do your research. Job search sites are a good starting point to learn what facilitates an appropriate salary for your nonprofit size and location. Exhaust your network to discover what other similar positions within your sector receive.

The ED is often granted a larger salary than other board members. This is in large part because the ED is tasked with even greater responsibilities relating to the governance of the nonprofit.

Next, consider your budget. What you would like to pay, and what is feasible for your bottom line, may not align. Be realistic and remember that you are making an effort to do something to show appreciation to your board, even if it is not at the level you would prefer.

Pro Tip: There are many online resources that can provide guidance and useful information to help you make a decision. You can use the extensive nonprofit community on Facebook and other online communities, including Springly's Nonprofit Management Circle, where you can learn valuable insights on this topic and many others. The ASAE (American Association of Association Executives) organization can also prove helpful.

Keep in mind, the IRS may dispute salaries that it feels are unreasonable! Make sure that you evaluate similar organizations to determine fair payment. Finally, size and geographical area will play a part in compensation so account for related differences in your calculations.

Pro Tip: Remember, if a board member is paid more than $600 per year, the organization must submit IRS Form 1099-MISC for tax purposes.

Springly is trusted by over 20,000 nonprofits to help them run their organizations on a daily basis. Try it, test it, love it with a 14-day free trial!

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Should Your Nonprofit's Board of Directors Get a Salary?

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A nonprofit board of directors often are expected to perform time consuming organizational responsibilities. In addition to their role on the board, these members usually have full-time jobs, families, and hobbies that they enjoy. At what point, if any, does it become necessary to compensate board members for their hard work and dedication to your cause?

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What Is the Best Structure for Your Nonprofit Board?

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What Is the Best Structure for Your Nonprofit Board?

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In any organization, the nonprofit board of directors is key for defining internal and external policies and procedures, strategies and making integral decisions to further the organization's growth.

That is why having a solid structure for your nonprofit board is critical to facilitate competence, productivity, and optimum performance within any new nonprofit corporation.

Throughout this article, we provide our best nonprofit tips on the best strategy for organizing your nonprofit board.

Let's get started!

What Is a Nonprofit Board

Nonprofits are mandated to have a board of directors to oversee proper management. They are also expected to adhere to some key 501c3 nonprofit board of directors rules. As the organization's leadership team, they fulfill the three primary legal duties of care, loyalty, and obedience by fulfilling a series of tasks including:

Designing the purpose and mission statement

Hiring and oversight of the Executive Director (equivalent of a CEO)

Ensuring compliance with all legal requirements

Managing human resources, including orientation, onboarding, and compensation

Establishing and monitoring nonprofit programs, fundraising, and activities

Creating, maintaining, and enforcing bylaws and all internal and external policies

Reviewing, analyzing, and approving budgets and reports

Holding planned board meetings following an established agenda

Representing the organization and brand through adherence to core values, ethics, policies, and professionalism

Providing staff, volunteers, and other team members with the resources they need to perform their duties

Evolving and adapting through research and reflection

As far as nonprofit board responsibilities go, the above mentioned tasks are some of the most crucial to the stability and growth of the organization. However, to ensure they are carried out in the best possible manner, it helps to have a structure in place which promotes excellence.

Who Are the Mandatory Members on a Nonprofit Board?

Legally, the IRS requires a minimum of three members, although many nonprofits utilize four or more. Common nonprofit board member positions used to fulfil this requirement include the president (also called the chairperson), vice-chair, secretary, and treasurer.

Note that you can choose to compensate these members by designing a policy around your nonprofit board of directors salary, although it is not by any means mandatory.

David has all his mandatory members in order!

Here is a brief overview of these roles that are likely to be found on your nonprofit's board structure chart:

President

The board chair presides over meetings and supervises all operations while ensuring legal compliance. They usually have signing authority and report to the board of directors.

Vice-Chair

Providing support for the president, the vice-chair is available as a substitute in the event that the board chair is unavailable. Some nonprofits groom their vice-chair as a potential replacement in the event the chair leaves the organization to ensure smooth transitioning.

Secretary

Tasked with reviewing or creating the board meeting minutes, the board secretary's job description involves keeping similar official documents or paperwork to make sure all topics and decisions are officially documented.

Treasurer

The treasurer's primary duties revolve around the financial data of the organization.

From managing the financial documentation to presenting accurate data and information on budgets, income, and expenditures to the board, the treasurer is responsible for providing the board with the information needed to make important decisions to facilitate growth and ensure funds are being allocated wisely.

Use Committees to Structure Your Nonprofit Board

An executive committee is a group dedicated to managing research, projects, and other actions relating to a specific aspect of a nonprofit organization.

Nonprofit board governance, finance, executive actions, marketing, and fundraising, are just a few of the most common board committees that exist. Other organizations divide their committee assignments into three major categories: governance, internal affairs, and external affairs.

Committees help structure an organization's board more effectively. This is because:

Board members tend to have particular subject matter expertise. Committees allow the organization to utilize this knowledge to drive specific actions within the organization e.g., folks with marketing or accounting backgrounds.

Committees are very specific in their goals and specify responsibilities for those involved.

Individual committees that include other staff, members, and volunteers help to ensure that board members are not spread too thin. A group of three or four people attempting to "boil the ocean" is not sustainable for the long term.

By augmenting the skills on the board, members do not need to learn skills outside of their zone of expertise. For example, instead of a career marketer trying to learn the legal intricacies of nonprofit management, they can ensure people with the right expertise are on the right committees.

However you decide to assign your committees, they can prove an efficient manner to evenly divide the organization's workload throughout the board without putting undue pressure on specific members.

As they are already generously providing their time to serve on your board, you want to make the process of project management to be as smooth and simple as possible.

Emily knows the value of specialized committees!

Since each member will have their own knowledge of these projects and how well tasks are accomplished within the committee, it gives each an opportunity to present useful information at board meetings and serve as consultants for any issues relating to their subject matter.

The rest of the board can then provide feedback and suggestions for guidance and have a better understanding of each committee's topic.

The structure of the committees themselves is important. Take the time to consider talents and personalities and place staff together which will create an atmosphere that is positive, motivated, and conducive to a great working atmosphere.

As the board reviews each committee's reports and accomplishments adapt accordingly. If one committee is not meeting expectations, perform an evaluation of the staff and projects to determine possible reasons.

If there are staff relationship conflicts, make alterations to improve productivity. If you sense strife, consider meeting with each committee member separately to get their interpretation of what the issues are. Oftentimes, conflicts crop up because of a lack of, or inefficient, communication. Understanding the root of the problem from different points of view can give you a more well-rounded view and help you determine what course of action would be most effective at improving the situation for all involved.

Pro Tip: Take the time to celebrate hard-working individuals, as well as team accomplishments and well-managed projects. This will increase motivation and make your team feel appreciated. Sharing how their efforts have made a difference in your mission and the role they have played in the grand scheme can increase productivity.

Adapting the Structure of Your Board Over Time

Remember that modifying and adapting to seek improvement is a natural part of the leadership process. That includes dealing with your board structure.

One major duty of the board is to reflect on its own performance and realistically consider how well the leadership team is managing the nonprofit. Find the strengths first as a springboard for successful action, then locate areas of opportunity.

One option is to include a standing "lessons learned" agenda item for monthly board meetings where board members can discuss both what is working well and where improvements should be made. This gives everyone a safe space. If the team builds the expectation that they want to hear where there are issues, and offers a regular time to do so, folks will feel more comfortable airing their grievances in a productive way.

Oliver is calculating the best way to adapt his board for the upcoming year.

Those are the areas you want to spend the most time contemplating. Have frank discussions with your board about what you all as a team can do better to make a greater impact for your mission, the nonprofit, and all the volunteers, staff, trustees, members, donors, funders, and other supporters who believe in your journey.

Sometimes that may mean performing an overhaul of the board structure and reallocating committees and responsibilities.

Always make these reflections with the end goal in mind and work backward. Determine what your organization needs to be, figure out where you presently stand, and work in reverse to plot the steps which can lead you there. Working with the end goal in mind is a research-proven method to help your organization realize its potential.

For example, let's assume that in your last board meeting, during the lessons learned agenda item, you received feedback that your most recent fundraiser was well received by your member base. The fundraising team held a trivia night at a local fire hall. Current and past members attended and everyone had a blast and the organization raised more money than they had anticipated. One area for improvement is there were a number of people who couldn't attend but asked if there was another way they could support the organization.

During the board discussion, the team brainstormed and decided that an accompanying silent auction would have been beneficial. That way, people who didn't win any trivia prizes would have a second chance to take something home and members who couldn't attend in person could still potentially participate online. The team could work backwards from the goal of having a successful silent auction to identify the steps needed to achieve the goal and then determine whether they have the bandwidth and expertise to complete each or need to develop a sub-committee to address.

Remember that all-inclusive software packages, internet templates, the IRS website, and internet resources such as Boardsource and the Springly blog, offer additional expertise on board of director strategies such as these.

If you ever find yourself in need of external help with leadership topics, there are coaches made just for this! Sometimes an outside, objective view of your organization's leadership, project management, accounting, or other features is just what you need.

Pro Tip: To make sure your structure is always useful and up-to-date, you can set annual meetings to assess your results and adjust for upcoming years. This is also a good strategy for ensuring your committee members are still motivated to meet their mission goals and, if necessary, seek replacements for those who are struggling to perform.

Springly is trusted by over 20,000 nonprofits to help them run their organizations on a daily basis. Try it, test it, love it with a 14-day free trial!

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What Is the Best Structure for Your Nonprofit Board?

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In any organization, the nonprofit board of directors is key for defining internal and external policies and procedures, strategies and making integral decisions to further the organization's growth. That is why having a solid structure for your nonprofit board is critical to facilitate competence, productivity, and optimum performance within any new nonprofit corporation.

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What You Need To Know: Understanding And Avoiding Excess Benefit Transactions

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What You Need To Know: Understanding And Avoiding Excess Benefit Transactions

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Intermediate sanctions legislation was passed in 1996; however, in recent years, the Internal Revenue Service (IRS) has renewed its focus on enforcement of the private inurement rule as it relates to relevant not-for-profit (NFP) organizations: 501(c)(3), 501(c)(4), and 501(c)(29) organizations that are tax-exempt under section 501(a).

Specifically, the IRS is looking for whether tax-exempt organizations are overcompensating individuals who might be able to influence activities within those organizations.

Consequences of noncompliance begin with intermediate sanctions on any disqualified person who partakes in an excess benefit transaction and can ultimately lead to the revocation of an organization's exempt status in some circumstances.

NFP organizations must be aware of the IRS's authority to impose such financial penalties and take action to ensure their activities are within set regulations.

The intermediate sanctions section of the Internal Revenue Code (IRC), Section 4958, defines a disqualified person as an individual or an entity who, within five years prior to the date of the transaction, was in a position to exercise substantial influence over the affairs of an exempt organization.

Only payments made to disqualified persons are subject to the excess benefit rules; therefore, it is important for NFPs to understand the full definition so they may avoid providing excess benefits to these persons. There are three broad classes:

Any person in a position to exercise substantial influence (voting members, implementing decisions, supervision of management, or responsibility for managing finances) over the affairs of the NFP organization;

The family members of such persons, including spouses, children, grandchildren, or their respective spouses;

Any entity in which the above two classes of persons hold more than a 35% interest.

IRC Section 4958 defines an excess benefit transaction as any transaction in which the value of the economic benefit provided by the tax-exempt organization to a disqualified person exceeds the fair market value of the consideration received by the organization in return.

Determining Excess Benefit Transactions

Excess benefits are often assumed to revolve strictly around compensation (i.e. salaries). However, the definition of excess benefit transactions encompasses many financial transactions other than executive compensation. Payments can be in the form of cash, providing services, transfers of property, or any other benefit that has economic value to the disqualified person. An excess benefit transaction can also occur when a disqualified person embezzles from the exempt organization. Excess benefit transactions are considered to have occurred on the date the disqualified person receives the benefit. If a series of transactions stems from one contractual arrangement, the benefit is considered to occur on the last day of the person's tax year.

To determine whether an excess benefit transaction has occurred, an organization must consider all benefits exchanged, for all entities it controls. Reasonable compensation is the standard that is used to determine if excess benefits have occurred. To determine the reasonableness of compensation, all items of compensation provided by an organization in exchange for the performance of services are taken into account for consideration (such as all forms of compensation, payment of insurance premiums, and nontaxable fringe benefits). Certain economic benefits are disregarded, such as payment of reasonable expenses for board members to attend meetings, or payment for memberships for volunteers of the organization if they are normally $75 or less.

Steps to Avoid Excess Benefit Transactions

Given the complexities of excess benefit transactions as noted above, and the stiff penalties in place, there are several steps an organization should consider to mitigate its risk:

The board of directors should review all benefit decisions carefully with the regulations as noted above in mind, specifically considering all benefits for a disqualified person;

In determining the value of an economic benefit, an organization should consider other similar arrangements for comparability (similar services or property, similar geographic location, and within the same industry);

The organization should consider obtaining professional guidance when reviewing any potential excess benefit transactions (i.e. attorneys or certified public accountants);

The organization should attempt to qualify for the "safe harbor" rules (documenting its reasoning behind benefit payments or transfers of property through compensation agreements);

The organization should carefully document the reasoning behind benefit transactions, including records of any comparability data used and maintain detailed minutes of any decisions approved by the board;

The organization should be mindful to accurately present all information on its tax forms to avoid any automatic excess benefit transactions.

The organization should include excess benefit transactions as a consideration during its annual risk assessment review overall.

The above information is intended to provide a basic understanding of the issues surrounding excess benefit transactions. If you have questions or would like to talk about your organization, please give us a call.

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What You Need To Know: Understanding And Avoiding Excess Benefit Transactions

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Intermediate sanctions legislation was passed in 1996; however, in recent years, the Internal Revenue Service (IRS) has renewed its focus on enforcement of the private inurement rule as it relates to relevant not-for-profit (NFP) organizations: 501(c)(3), 501(c)(4), and 501(c)(29) organizations that are tax-exempt under section 501(a).

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Principles for Good Governance and Ethical Practice

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Principles for Good Governance and Ethical Practice

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Publication and dissemination of the Principles was made possible through the generous support of:

The Andrew W. Mellon Foundation

Hogan Lovells

The James Irvine Foundation

Lilly Endowment, Inc.

Patterson Belknap Webb & Tyler LLP

Open Society Foundations

Otto Bremmer Foundation

The Wallace Foundation

Independent Sector works in collaboration with state nonprofit and philanthropic organizations to distribute co-branded versions of Principles across the country. Current co-branding partners include:

Florida Philanthropic Network

Hawaii Alliance of Nonprofit Organizations

Idaho Nonprofit Center

Michigan Nonprofit Association

Nonprofit Association of Oregon

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Principles for Good Governance and Ethical Practice — Independent Sector

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The board should establish an effective, systematic process for educating and communicating with board members to ensure they are aware of their legal and ethical responsibilities, are knowledgeable about the programs and activities of the organization, and can carry out their oversight functions effectively.

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The board should establish an effective, systematic process for educating and communicating with board members to ensure they are aware of their legal and ethical responsibilities, are knowledgeable about the programs and activities of the organization, and can carry out their oversight functions effectively.

Regardless of their prior board experience or training, every board member should receive a copy of the organization’s governing instruments with an orientation to the organization’s governing policies and practices, finances, and program activities. Every member should be made aware of the broad oversight responsibilities of the board and of the specific legal and ethical responsibilities of individual members. The board should establish and include in the orientation process clear guidelines for the duties and responsibilities of each member, including meeting attendance, preparation and participation; committee charters and assignments; and the kinds of expertise board members are expected to have or develop in order to provide effective governance. Every member should receive information and training in any specific protocols the board follows for conducting meetings, such as Robert’s Rules of Orders. The board should establish and approve charters for each of its standing committees. These should outline the responsibilities, length of service, and authority granted to the committee. The board should also clearly communicate the duties and authority of any ad hoc committees or other convening vehicles they appoint to provide advice or reach decisions o organizational matters, although a full charter may not be necessary for these entities.

Members should be made aware of the need for their active preparation and participation in board meetings and their personal liability for the board’s actions — or for its failure to take action — and of the protections available to them. Charitable organizations, if needed and funds permit, should provide opportunities for board members to obtain special training or advice on legal and financial issues and responsibilities. It is also advisable for an attorney or insurance expert who is knowledgeable about board liability to explain the legal protections available to board members, as well as the options for insurance.

The ongoing process of board education includes ensuring that members have received and reviewed sufficient information on the issues to be addressed at each board meeting. Agendas and background materials should be distributed far enough in advance of all board meetings so that all members can reasonably be expected to read and consider the issues prior to attending the meeting.

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The board should establish an effective, systematic process for educating and communicating with board members to ensure they are aware of their legal and ethical responsibilities, are knowledgeable about the programs and activities of the organization, and can carry out their oversight functions effectively.

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Comprehensive change: Building an equity focus into
the whole foundation both internally in its operations and
culture and externally through its grantmaking. Ef orts focus
on re-engineering many aspects of how a foundation works,
with the goal of reflecting principles of equity in policies,
practices, procedures, and people.
Systems change: Addressing the systemic barriers that
create inequities. Grantmaking focused on systems change
commonly supports advocacy, community organizing,
and civic engagement, supporting power building among
communities so that they can better shape the systems that
af ect them.
Targeted equity: Choosing a specific population or
aspect of inequity as the programmatic focus (e.g, income
inequality, racial inequities; Latinos, Native Americans,
African Americans). approaches or locations).
Diversity and inclusion: Aiming for greater diversity and
inclusion in stai ng, funding, or decision making. Some
foundations emphasize expanding the proportion of people
of color among foundation leaders, board members, staf ,
and grantees. Others focus on how funding decisions are
made and who makes them (e.g., sharing decision making
power with af ected communities).
Equality: Improving access to, or quality of, systems or
services for all populations. This “rising tide raises all
boats” approach is based on the expectation that improved
systems or services for everyone will improve outcomes for
those experiencing inequities.

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A substantial majority of the board of a public charity, usually meaning at least two-thirds of its members, should be independent. Independent members should not: (1) be compensated by the organization as employees or independent contractors; (2) have their compensation determined by individuals who are compensated by the organization; (3) receive, directly or indirectly, material financial benefits from the organization except as a member of the charitable class served by the organization; or (4) be related to anyone described above (as a spouse, sibling, parent or child), or reside with any person so described.

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A substantial majority of the board of a public charity, usually meaning at least two-thirds of its members, should be independent. Independent members should not: (1) be compensated by the organization as employees or independent contractors; (2) have their compensation determined by individuals who are compensated by the organization; (3) receive, directly or indirectly, material financial benefits from the organization except as a member of the charitable class served by the organization; or (4) be related to anyone described above (as a spouse, sibling, parent or child), or reside with any person so described.
Board members who are not encumbered by having a personal financial interest in the organizations they oversee will generally find it easier to exercise their "duty of loyalty" that requires that they put the interests of the organization above their personal interests and make decisions they believe are in the best interest of the organization. Organizations are expected to make a reasonable effort to determine which of their board members are "independent" based on the IRS definition, and to report the number of such members on the annual information returns they file with the IRS. In addition, most nonprofits are required to report whether any of their officers, directors, trustees, or key employees had a family or business relationship with another individual in one of those leadership positions. The IRS does not consider board members to lack independence simply because they contribute to the organization, receive financial benefits from the organization as a member of the class served by the organization, are reimbursed for expenses associated with fulfilling their board responsibilities, or are compensated for their work as a board member. (For a more complete discussion of board compensation, see principle 20.)

The founders of a nonprofit corporation sometimes initially turn to family members and business partners to serve on its board of directors, but interlocking financial relationships can increase the difficulty of exercising the independent judgment required of all board members. It is therefore important to the long-term success and accountability of charitable organizations that a sizeable majority of the individuals on their boards be free of financial conflicts of interest. Some states laws establish a minimum number of independent members for nonprofit organizations boards.

Some charitable organizations may not find it appropriate or feasible to adopt this principle. This includes private foundations, certain medical research institutions, and certain institutions that operate under specific legal restrictions regarding self-dealing transactions, and other charitable organizations whose articles of incorporation or trust instruments include special stipulations regarding board composition. For example, an organization established under the auspices of a religious institution may be required to include clergy or other paid representatives of that institution on its board. A supporting organization may be required to have representatives of its supported organizations on its board.

When a charitable organization determines that having a majority of independent board members is not appropriate, the board and staff should evaluate their procedures and meeting formats to ensure that board members are able to fulfill their responsibilities to provide independent, objective oversight of management and organizational performance.

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A substantial majority of the board of a public charity, usually meaning at least two-thirds of its members, should be independent.

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SAMPLE Policy for Board Approval of Compensation

CEO Evaluation and Compensation

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What should a nonprofit pay its chief executive?

The board of directors is responsible for hiring, and establishing the compensation (salary and benefits) of the executive director/CEO by identifying compensation that is "reasonable and not excessive," but that also is attractive enough to retain the best possible talent to lead the organization. The recommended process for determining the appropriate compensation is to conduct a review of what similarly-sized peer organizations, in the same geographic location, offer their senior leaders. This three-step process is referred to as the " rebuttable presumption" used to establish reasonableness (and also used by boards to reduce the risk of penalties). Nonprofits filing IRS Form 990 must describe the process they use to approve executive compensation as part of the nonprofit's responses on the annual return, IRS Form 990, Section VI, Part B, line 15.

What is "reasonable" compensation according to the IRS?

The IRS recommends that charitable nonprofits follow its three-step process to determine that compensation is reasonable and not excessive. (See also Treas. Reg. § 53.4958-6(a))

1. The board should arrange for an "independent body" (which means that the person receiving the compensation should not be part of the review process) to conduct a "comparability review." Many nonprofits task a "compensation committee," or use their executive committee, or another sub-group/task force of board members, for this purpose.

2. The independent body should take a look at "comparable" salary and benefits data, such as data available from salary and benefit surveys, to learn what nonprofit employers with similar missions, and of a similar budget size, that are located in the same, or a similar geographic region, pay their senior leaders.

3. The board/independent body that is conducting the review should document who was involved, (and their "independence" i.e., that they do not receive compensation from the nonprofit) and the process used to conduct the review, as well as the disposition of the full board's decision to approve the executive director's compensation (minutes of a meeting are fine for this). The documentation should demonstrate that the board took the comparable data into consideration when it approved the compensation.

Practice Pointers

Ensuring that the board has approved "reasonable and not excessive" compensation for the executive director/CEO is one of the fiduciary responsibilities of every nonprofit board. ("Are the assets of this nonprofit being used prudently and to advance the mission?") Boards that engage in an annual process of reviewing and approving the compensation of the executive director/CEO and that document this process in the minutes of board meeting(s), will be protecting their nonprofit (and themselves).

Adopting a written policy that requires the full board to approve the compensation (salary AND benefits) is a recommended practice.

The process boards should use to review comparability data and approve the compensation and benefits of the executive director/CEO is explained in more detail in the instructions to the IRS Form 990 (see pages 23-34, specifically the explanation for Line 15). Nonprofits filing the Form 990 must describe the process on Schedule O.

Having a robust conflict of interest policy is another important aspect of ensuring fair and reasonable compensation, as well as transparency in financial transactions.

Compensation includes salary and benefits, such as insurance, a car, housing allowance, or other fringe benefits, that should be included in the calculation of total annual compensation. See instructions to IRS Form 990, pages 31-32.

The instructions to Form 990 include a glossary of terms and a table that shows precisely how and where to report the many types of "other compensation" that should be included in total compensation.

During the process of board approval of the compensation of the executive director/CEO it is essential to have comparable data in order to comply with the expectations for good governance reflected on the Form 990 (see Part VI, Section B, line 15).

Comparable data is compensation data from "similarly qualified," "functionally comparable," and similarly situated nonprofits (in the same or a nearby geographic area, of similar budget size, and in a similiar or the same sub-sector).

Example: it would not be comparable to compare the compensation of a CEO of a large urban hospital or university to the CEO of a rural day care center.

Sources for comparable data include survey reports or studies from state associations of nonprofits or other sources, including outside compensation consultants. The Internal Revenue Service will look to the independence of any compensation consultant used, and the quality of any study, survey, or other data used to establish executive compensation.

Tools for Boards

Resources

Charities should generally not compensate persons for service on the board of directors except to reimburse direct expenses of such service. ... Charities may pay reasonable compensation for services provided by officers and staff. In determining reasonable compensation, a charity may wish to rely on the rebuttable presumption test of section 4958 of the Internal Revenue Code and Treasury Regulation section of 53.4958-6.

Source: IRS publication Governance and Related Topics - 501(c)(3) Organizations (2008)

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What should a nonprofit pay its chief executive? The board of directors is responsible for hiring, and establishing the compensation (salary and benefits) of the executive director/CEO by identifying compensation that is "reasonable and not excessive," but that also is attractive enough to retain the best possible talent to lead the organization.

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How to Talk About Finances So Non-Financial Folks Will Listen

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How to Talk About Finances So Non-Financial Folks Will Listen

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The matrix map is an accessible framework that combines financial and programmatic goals into an integrated strategy.

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The matrix map is an accessible framework that combines financial and programmatic goals into an integrated strategy.

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Nonprofit sustainability lies at the intersection of exceptional impact and financial viability. The Sustainability Mindset offers nonprofit professionals and board members a step-by-step guide to move your organization towards this intersection. The matrix map is an accessible framework that combines financial and programmatic goals into an integrated strategy. In this next-step resource, the authors detail a rigorous process to develop a meaningful matrix map and engage leadership in setting an organization's strategy.

Our intent is that you can use this guide to self-administer the matrix map. The following links provide all of the templates that are available in the book, including sample meeting agendas and templates for key moments in the matrix map process.

Download the Workbook (PDF)

View separated templates by chapter

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Using the Matrix Map to make Strategic Decisions
The Matrix Map-a powerful tool for nonprofit strategic decision-making
Nonprofit sustainability lies at the intersection of exceptional impact and financial viability. The Sustainability Mindset offers nonprofit professionals and board members a step-by-step guide to move your organization towards this intersection. As outlined in the bestselling book Nonprofit Sustainability, " The Matrix Map" is an accessible framework that combines financial and programmatic goals into an integrated strategy. In this next-step resource, the authors detail a rigorous process to develop a meaningful Matrix Map and engage leadership in setting an organization's strategy.

Nonprofits that thrive in today's environment are adaptable with a clear understanding of their impact and business model. This book offers nonprofit boards and staff a framework to do so. Drawing on their in-depth experience, the authors provide an easy-to-follow process complete with tools and templates to help organizations visualize their business model and engage in strategic inquiry. The book provides a variety of illustrative examples to show how the Matrix Map works for all types of organizations. Nonprofit executives and board member are sure to benefit from The Matrix Map analysis.

Offers step-by-step guidance for creating a Matrix-Map, a visual representation of an organization's business model

Helps organizations assess how each of their programs contributes toward their desired impact and their financial bottom-line.

Filled with compelling examples of how The Matrix Map helps nonprofits with strategic decision-making

Written by the coauthors of the groundbreaking book Nonprofit Sustainability

This comprehensive resource will give any nonprofit the framework they need to make decisions for sustainability and the templates and tools to implement it and help leaders address the challenges inherent in balancing mission impact with financial viability.

From the authors of the best selling Nonprofit Sustainability: Making Strategic Decisions for Financial Vitality, authors Jeanne Bell and Steve Zimmerman present a field guide to the matrix map-a powerful tool for nonprofit strategic decision-making.

Nonprofit sustainability lies at the intersection of exceptional impact and financial viability. The Sustainability Mindset offers nonprofit professionals and board members a step-by-step guide to move your organization towards this intersection. The matrix map is an accessible framework that combines financial and programmatic goals into an integrated strategy. In this next-step resource, the authors detail a rigorous process to develop a meaningful matrix map and engage leadership in setting an organization's strategy.

Our intent is that you can use this guide to self-administer the matrix map. The following links provide all of the templates that are available in the book, including sample meeting agendas and templates for key moments in the matrix map process.

Download the Workbook (PDF)
View separated templates by chapter

Jeanne Bell, MNA, is the CEO of CompassPoint Nonprofit Services, one of the country's leading providers of leadership and organizational development services to nonprofit organizations, based in the San Francisco Bay Area with a national presence.

Steve Zimmerman, CPA, MBA, is the Principal of Spectrum Nonprofit Services, a national nonprofit consulting firm based in Milwaukee, Wisconsin. Spectrum partners with community -based organizations to achieve maximum impact through nimble and sustainable strategies.

For more information about our work

Learn more about what we do with CompassPoint and Spectrum by visiting our websites at the links below.

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The Matrix Map-a powerful tool for nonprofit strategic decision-making Nonprofit sustainability lies at the intersection of exceptional impact and financial viability. The Sustainability Mindset offers nonprofit professionals and board members a step-by-step guide to move your organization towards this intersection.

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Nonprofit Sustainability: Making Strategic Choices for Financial Viability

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Nonprofit Sustainability: Making Strategic Choices for Financial Viability

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How to make a Matrix Map of your organization

To create a Matrix Map there are four steps:

Identify your “lines of business” or activities

Assess relative mission impact

Determine profitability and

Map the results!

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by Steve Zimmerman on March 25, 2013

Categories: Topic Tags: Finance| Strategic Planning Leadership and Management

You may have heard of the Dual Bottom Line: the idea that strategic choices must serve both mission impact and financial viability. But how do you turn this idea into a quantitative decision-making tool? Blue Avocado columnist Steve Zimmerman summarizes the Matrix Map approach in part one of this two-part article adapted from the book he co-wrote with Jeanne Bell and Jan Masaoka: Nonprofit Sustainability: Making Strategic Choices for Financial Viability.

It's easy to embrace the concept of the Dual Bottom Line, but harder to apply it in a real-world board setting. For example, board members - and many staff - are seldom familiar with all of the programs and activities of the organization. While there may be a strong sense that "all our programs are great," there may not have been any discussion about which programs are, in fact, those with the greatest or most important impacts. Even people with financial expertise may feel uncertain about how to make decisions that are more nuanced than "stick to the budget and at least break even."

Board meetings unintentionally support this kind of fragmentation. They take each subject on its own: first the financial report, then the program report, and then the fundraising report. The Matrix Map aims to change that.

The Matrix Map is a visual tool that plots all of the organization's activities - not just its programs - into a single, compelling image. By illustrating the organization's business model - through a picture of all activities and the financial and mission impact of each one - it supports genuinely strategic discussions.

Below is an example of a Matrix Map for a community center. Each circle represents a business line. You can see that circles higher on the map have higher impact than those lower on the map. You can see the relative size of each activity, and which ones make money, which break even, and which require subsidy from the organization's unrestricted funds.

The resulting image often provides an "Aha!" moment for board members. After years of hearing about seemingly unrelated programs, they can now understand how they all work together to support the impact and viability of the organization they care about.
How to make a Matrix Map of your organization
To create a Matrix Map there are four steps:

Identify your "lines of business" or activities

Assess relative mission impact

Determine profitability and

Map the results!

Here is a more thorough explanation of each step:

1. Identify your business lines - all of them: A business line is a programmatic or fundraising activity in your organization that requires effort. Counseling, dance performances, citizenship classes, and forest restoration are all business lines. A fundraising phone-a-thon is a line of business, as is a special event or major donor solicitation.

2. Assess relative mission impact: In many nonprofits, there's an implicit assumption that all programs are effective and important - and that's typically true. But everyone also realizes - yet seldom says - that some programs have higher impact than others. We may not discuss impact levels in order not to sound as if we are criticizing a worthwhile program (or its director), but it's precisely these judgments - about which programs have the highest impact - that the management team and the board should discuss as strategic choices are made.

Each organization will have different criteria for impact - after all, impact is defined by each nonprofit differently. And remember, this is an informed self-assessment, not an evaluation. We suggest a survey or discussion with the management team and the board that asks individuals or the group to rate each business line on a scale of 1 to 4 using four criteria. Organizations can identify their own criteria for impact; here are a few we've found useful:

Alignment with core mission: How closely does this program align with our core goals? Some programs may be excellent, but not as central to our mission.

Excellence in execution: Organizations are simply better at delivering some activities than others. A business line may be important to our mission, but we may not have the right skills or financial resources to implement it with excellence. This is a nice way of separating planning from execution.

Scale: How many people does each business line affect?

Depth: How deep an intervention or contact does each business line provide?

Building community or constituency: How does this business line contribute to building, for example, the environmental movement or the Hillside Neighborhood (not just our organization)?

Fills an Important Gap (FIG): If a business line were to go away, would your constituents be able to go across the street to another agency or would they have nowhere to go?

Remember, you only need to choose four or five criteria and you don't need to use any of these suggestions. After you've rated all of the business lines, take an average of the scores each line receives across the criteria and that will be its mission impact score. For example, if tutoring were to receive the following scores:

Alignment with Impact: 4

Excellence in Execution: 3

Fills an Important Gap: 3

Building Community or Constituency: 2

The mission impact score would be the average: 3.0.

3. Determine the profitability of each business line: Look at how much a business line is contributing financially (profit) or how much it needs subsidy from the organization's unrestricted funds (loss). (Unrestricted revenue should be attributed to the fundraising vehicle [business line] that was used to raise it, such as major donors or direct mail.)

4. Map the results: Once these steps are done, you can map each business line on a grid. We put impact on the vertical axis (x axis) and profitability on the horizontal axis (y axis).

Here you see the Excel worksheet:

Then using Excel's chart function, select "Bubble Chart" to create the Matrix Map seen at the beginning of this article.

More than just a picture, though, the Matrix Map can help engage board members in strategic discussions about how to strengthen the organization's business model - understanding that the implications of their decisions will affect both impact and finances. And staff can see the whole organization at a glance in a way that focuses attention on activities and impact rather than as an organization chart.

In the next issue of Blue Avocado, we'll cover part two of this Matrix Map discussion: "Strategic imperatives" for each business line.

Steve Zimmerman, CPA, MBA, is principal at Spectrum Nonprofit Services, a finance and strategy consulting firm based in Milwaukee. With Jeanne Bell and Jan Masaoka, he co-authored Nonprofit Sustainability: Making Strategic Decisions for Financial Viability, published by Jossey-Bass in 2011. In addition to writing the Finance & Strategy column for Blue Avocado and consulting to nonprofits across the country, Steve conducts train-the-consultant sessions how to use the book's framework with nonprofits in strategic and/or business planning. His site includes templates and other materials based on the book.

See also in Blue Avocado:

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The Matrix Map Approach Part One: How to Create the Matrix Map - Blue Avocado

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You may have heard of the Dual Bottom Line: the idea that strategic choices must serve both mission impact and financial viability. But how do you turn this idea into a quantitative decision-making tool? Blue Avocado columnist Steve Zimmerman summarizes the Matrix Map approach in part one of this two-part article adapted from the [...]

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April is financial literacy month, so in the nonprofit community it's the right time of year to ask this question: " We've got some board members who don't want to serve on the finance committee and claim not to understand financial reports. How can we help them become more comfortable with our nonprofit's finances?" Hmm. Without meaning to be flippant, I submit that helping board members with this is as simple as showing them a cute puppy and asking them how much it costs. They might not be familiar with cost allocations for programs, or restricted funds, but they can understand that the cost of the puppy is not just the initial cost, but also the direct costs of food, treats, vet bills, plus the real, yet indirect costs of washing towels (muddy paws!), and just in case - " Oops - the puppy just swallowed its leash!" (this actually happened to a neighbor of mine) - funds set aside for emergencies.

So the puppy provides us with some important but pretty basic concepts in nonprofit finance: calculating full costs, annual budgeting, and reserves. Another very important concept for board members to understand, that I confess I couldn't figure out how to fit into the cute puppy analogy, is donor restricted funding. Why not take ten-minutes at the next board meeting to make sure everyone is on the same page with these basic concepts?

If you're still asking: "What's with the puppy?" I admit that nonprofit accounting is not THAT simple, but how about opening your next board meeting with some cute puppy pictures and then introducing your board to one of these options?

1. Take a "video coffee break" - Balance Sheet Basics - What we have, what we owe, and what we're worth (Nonprofits Assistance Fund);

2. Energize the board with a group project: The authors of Nonprofit Sustainability designed a way for board and staff members to analyze, visualize, and recognize the relative costs and return on investments for a nonprofit's various activities using their "matrix map;"

3. For those who like checklists: Ask your board to complete a short Financial Management Self-Assessment Tool developed by the Nonprofit Association of Oregon that will give you a starting point for what to focus on first when building up your board's financial literacy.

4. For readers: Share these how-to publications: Understanding Nonprofit Financial Statements, Third Edition (BoardSource) which can help your board members understand underlying financial concepts so that they are equipped to perform their fiduciary responsibilities, set realistic financial goals, evaluate your organization's performance, and make informed decisions, or the Budgeting guidebook for small nonprofits (a free resource provided by the Virginia Society of CPAs);

5. For board members who take the DIY route: Affordable software tool for building a budget with proper cost allocations and managing cash flow: Cash Flow and Budget Toolkit (New York Council of Nonprofits); and finally,

6. The OD approach: Share and discuss: How to talk about finances so nonfinancial folks will listen (Bridgespan).

Happy Financial Literacy Month from all of us at the National Council of Nonprofits.

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April is financial literacy month, so in the nonprofit community it's the right time of year to ask this question: "We've got some board members who don't want to serve on the finance committee and claim not to understand financial reports. How can we help them become more comfortable with our nonprofit's finances?"

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In this age of data visualization, it's useful to have a few good dashboards in your nonprofit's toolbox!

Dashboards can help boards and staff of nonprofits get a handle on large amounts of data and see the significance of the data quickly. Dashboards can also be shared with donors and grantmakers to help familiarize them with a nonprofit's impact, scope of programs, or finances.

Some dashboards illustrate performance over time, such as numbers of people served; others offer a snap shot view of a situation, such as the current status of a nonprofit's cash flow. Nonprofit staff can use dashboards to monitor a nonprofit's social media influence, or to show board members financial indicators, or to illustrate how much progress has been made towards various goals. An effective dashboard illustrates rather than tells the audience about needed actions or decisions. The uses are varied, and the results are usually an "ah ha!" moment.

Measuring success with dashboards

A dashboard can chart the progress made towards achieving specific goals, and also illustrate who is accountable, making them terrific tools for performance measurement.

Dashboard Tools

Resources About Dashboards

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In this age of data visualization, it's useful to have a few good dashboards in your nonprofit's toolbox! Dashboards can help boards and staff of nonprofits get a handle on large amounts of data and see the significance of the data quickly.

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StrongNonprofits ToolkitResources to strengthen your nonprofit financial management

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StrongNonprofits ToolkitResources to strengthen your nonprofit financial management

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Authors in this Nonprofit Quarterly article describe the Matrix Map approach to understanding the financial as well as the mission-related impact of a nonprofit's programs and activities.

Based on their book, The Sustainability Mindset: Using the Matrix Map to Make Strategic Decisions, the authors explain how to create a Matrix Map and what strategic decisions are implied by the positions in the matrix.

Watch the authors discuss the framework and how to use it in this webinar.

​

​This article the Stanford Social Innovation Review proposes 10 nonprofit business models that describe the range of funding strategies available, arguing that leaders should understand and work within their particular funding model in order to maximize financial sustainability.

This article from the Bridgespan Group includes an overview of nonprofit business planning, breaking the process down into four distinct components: strategic clarity; strategic priorities; resource implications; and performance measures. It also explains how to use the plan both internally and externally.​​

This resource on the Propel Nonprofits website outlines the sections in a nonprofit business plan for social enterprise or earned income ventures.​​

Overview of concepts and strategies for developing financial reserves, including a discussion of types of reserves, tips on developing and managing reserves, and sample policies and worksheets.​

The Board's Financial Leadership

How to Talk About Finances So Non-Financial Folks Will Listen

An Executive Director's Guide to Financial Leadership

Funding Opportunity Assessment Tool

Budgeting​ is the way your organization's strategy is expressed in dollars. Once you have set strategic goals and priorities, be sure that this gets translated into the budget that guides your activities each year.

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Authors in this Nonprofit Quarterly article describe the Matrix Map approach to understanding the financial as well as the mission-related impact of a nonprofit's programs and activities. Based on their book, The Sustainability Mindset: Using the Matrix Map to Make Strategic Decisions, the authors explain how to create a Matrix Map and what strategic decisions are implied by the positions in the matrix.

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Here are some questions to ask before you finalize the financial materials in the board packet: (Courtesy of Tate & Tryon)

Is the information communicated as briefly as possible but still comprehensively enough to deliver the necessary message?

Is the information timely? (not older than a few months?)

Is the information presented in the best possible manner for the intended audience? Is is easy to read?

Resources

Having fun with nonprofit financial literacy (National Council of Nonprofits)

Build a better budget (National Council of Nonprofits)

Bravo board members who ask questions about financial reports (National Council of Nonprofits)

The authors of Nonprofit Sustainability designed a way for board and staff members to analyze, visualize, and recognize the relative costs and return on investments for a nonprofit’s various activities using a “matrix map,” explained further in the very-readable sequel, Sustainability Mindset: Using the Matrix Map to Make Strategic Decisions  (free downloadable templates)

How to talk about finances so non-financial folks will listen (Bridgespan)

Nonprofit Audit Guide (National Council of Nonprofits)

What is the role of the audit committee? (National Council of Nonprofits)

What makes a great board treasurer? (Nonprofits Assistance Fund)

Eight key responsibilities of treasurers of all-volunteer organizations (Blue Avocado)

Governance resources for financial management (Wallace Foundation)

Brush up on 5 financial topics (BoardSource)

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Create a new document and edit with others at the same time -- from your computer, phone or tablet. Get stuff done with or without an internet connection. Use Docs to edit Word files. Free from Google.

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https://docs.google.com/document/d/16QOBdO9gEfaKkSYyoxKCPzKY80oCzB6K/edit

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Create a new document and edit with others at the same time -- from your computer, phone or tablet. Get stuff done with or without an internet connection. Use Docs to edit Word files. Free from Google.

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2022 DRAFT_ACA Division of Labor Samples

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2022 DRAFT_ACA Division of Labor Samples

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https://docs.google.com/document/d/1QwKzNWX-HGG0rdckHtXoyBslhY5cRwecqrlhMKezPrc/edit#heading=h.2vdagh4hwk8m

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Create a new document and edit with others at the same time -- from your computer, phone or tablet. Get stuff done with or without an internet connection. Use Docs to edit Word files. Free from Google.

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Who do we serve?
Communities that have been excluded  systematically  from access to health care, including BIPOC, immigrant, language minority, gender/sexual minority, and disability communities.

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https://docs.google.com/document/d/11KfQIMouMIktBQcYlpR1mtGTbsFu8SvY/edit

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Create a new document and edit with others at the same time -- from your computer, phone or tablet. Get stuff done with or without an internet connection. Use Docs to edit Word files. Free from Google.

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Targeted Universalism

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Advocacy, Organizing, & Policy Change

Community Impact

Culture

Development / Fundraising

Information Technology

Office Administration / Finance

Operations / HR

Staff Recruitment, Retention, & Experience

Strategic Communications & Digital Strategy

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Budgeting properly and analyzing the financial health of nonprofits is important, both for fundraising requests, and for managing general operations. Budgeting can help by:

Helping you analyze and track organizational health

Planning crowdfunding and fundraising campaign

Identifying funding needs and how crowdfunding can play a role in filling those gaps

Applying for grants

Providing updated financial data to funders.

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As a startup nonprofit, there are many priorities to tackle on your to-do list. Planning your budget for the myriad of activities, especially when you're just getting started, can fall by the wayside.

This would be a mistake! Creating a budget, planning finances for the future, and analyzing financial data will set you apart early on as an organization to funders and partners, and make daily and strategic planning easier.

And whether you're the CEO of your nonprofit or a new staff member, it's important to understand how your organization's budget is structured and contributes to the nonprofit's operations.

Budgeting properly and analyzing the financial health of nonprofits is important, both for fundraising requests and for managing general operations. Budgeting can help by:

Helping you analyze and track organizational health

Planning crowdfunding and fundraising campaign

Identifying funding needs and how crowdfunding can play a role in filling those gaps

Applying for grants

Providing updated financial data to funders.

Purpose Of This Guide

This guide will provide startup nonprofits with an overview of budgeting - what information to track and how, and how to analyze your organization's financial health. We'll also discuss framework and tools to set-up, adjust, and analyze your own budget and financial planning, at any level of the organization.

For the purposes of this guide, we will use the example of an after-school educational program. This fictional nonprofit provides extracurricular activities, such as sports, to kids in their community.

We'll call the nonprofit "After School Fun." After School Fun (ASF) has been operating informally with support from two generous donors but now they are running a crowdfunding campaign to scale and start offering their extracurricular activities at five new schools. They charge a small fee for their programs, and the remainder is covered by their generous donors and partners.

What To Track In Your Budget

That pile of receipts and jotted notes won't cut it when it comes to budgeting. Startup nonprofits should keep track of their expenses and revenues (fundraising donations or service fees) in a spreadsheet or other bookkeeping system. This makes the data accessible to individuals at all levels of the organization with flexibility for adjusting the data as budgeting needs change.

Startup Costs / Upfront Investments

As a startup nonprofit, you're already aware that you have initial expenses before you have your real operational expenses. These startup expenses might include the costs involved in crowdfunding, or what you're hoping the crowdfunding will cover. Other startup costs might include initial costs for branding and logo, equipment, and first staff member salaries.

It's important to differentiate between what might be a startup and one-time initial costs and regular costs. Some startup costs might transfer over to the regular budget, while others may not need to be included in future budgets.

In our example, let's say ASF needs startup investments to cover costs for the crowdfunding campaign and video and hopes the campaign and a generous corporate partner will cover the staff and supplies required to offer programs in two schools. While staff salaries and initial supplies will need to be included in ASF's regular budget, the branding and logo design costs for starting the crowdfunding campaign are one-time costs that won't be included in future budgets.

Regular Budget

Regular nonprofit budgets should be split between expenses and revenues, with expenses split between program, and general and administrative expenses.

It's important to differentiate between the program and other expenses because many donors like to understand the difference between administrative and program costs. It shows donors and partners how many dollars are spent on the nonprofit's mission versus executing the mission.

There is a misconception in the nonprofit space that healthy and good nonprofits have low administrative and fundraising costs, and spend the majority of their funding on program costs.

While this is not a strong policy for running a strong nonprofit, it is still widespread. It's important to separate program, administrative, and fundraising expenses. Separating these costs also serve as checks against how your organization is distributing its funds.

Program Expenses

Program expenses are the costs that are directly related to running your programs. For ASF, that includes anything related to running the extracurricular programs, including staff and supplies (i.e. soccer balls). The salaries for staff facilitating activities are program expenses. Their program expenses also include program advertising and staff training and travel costs.

General and Administrative Expenses

These expenses include salaries for administrative, support, and fundraising staff. Also included in this section might be rent, utilities, and technology for office space, and legal and other miscellaneous expenses. Notably, all fundraising costs are tracked in this category.

ASF has one full-time fundraiser, and their salary falls under this category. They also rent a small office space. Their program director and activities staff salaries and program budget are tracked in program expenses.

Fixed And Variable Costs

It's important to keep in mind the difference between fixed and variable costs when you are tracking expenses. Fixed costs could include staff salaries and building rent. Variable costs are those that vary based on need or market prices.

For example, for ASF, the price of renting field space for soccer practice could fluctuate throughout the year or based on need (seasonal need or programmatic changes). It's important to understand which costs are fixed and which are variable-as fixed costs are more static throughout the year and may need to be funded no matter what, whereas variable costs can change and can possibly be adjusted with program changes or substitutions.

Revenue And Profit

Revenue is the money you receive as an organization. This includes donations and fees for service, and any other products sold.

For example, ASF charges $5 per student per session, so their revenue would be the total number of students served multiplied by $5 each. They also have individual donors and crowdfunding donations that are counted as revenue.

It's important to track your nonprofit's revenues because combined with looking at your expenses, it helps you understand your profits and whether you have enough money to sustain operations or whether donations need to increase or expenses decrease.

Just because you are "nonprofit" doesn't mean you can't, or shouldn't, make a profit. Your profit is the total revenue-donations and other sources-minus the total costs to run the organization. Nonprofits, just like any other business, should aim to make a profit to maintain a healthy organization, allow for scaling, and have emergency funds as needed.

Cash Flow

Another method for tracking your budget is to track and project cash flow for the year. The best way to do this is to track cash inflow-revenues and donations-and cash outflow-expenses. This helps you better understand when you have revenue coming in and expenses going out, on a monthly and yearly basis.

For example, maybe your main donor only sends you one big check a year in January. While that check supports a large portion of your expenses, you have to make sure you evenly distribute it throughout the year, or you might not have enough cash to cover expenses at the end of the year.

For ASF, they know they have one donor that contributes a large amount in February, and another high-level donor in July. They have monthly expenses and know that they have increased expenses for a fundraising event they host every June. They have to allocate their cash from their big and small donors and program fees accordingly. By creating a monthly cash flow, they can better predict their funding needs.

Restricted And Unrestricted

It's also important to track restricted and unrestricted funds, and how you are spending them. When you are running a fundraising campaign and say that all donations will go directly to program expenses, those are restricted funds that you need to use to support programs.

Fees for service could also be considered restricted funds. If you are running a general fundraising campaign and don't specify direct funding, those donations are unrestricted and you can use them at your discretion. This distinction, and maintaining an even balance of both types of funds, is critical for organizational health. If you only have restricted funds, you won't have enough money to support your overhead costs.

Nonprofit staff members should be aware of the difference between restricted and unrestricted funds so that they can understand the differences between program budgets.

For ASF, the tee soccer program has restricted funding from a donor with a special interest in soccer, but the basketball program is supported by unrestricted funds, which are more limited.

Assumptions and Other

When setting up a budget, it's important to layout your assumptions, on the spreadsheet or an accompanying document. This not only helps you remember how you came up with certain figures, but it helps any staff member, potential donor, or an advisor looking at the budget understand it better.

Your assumptions could include the number of beneficiaries you are working with, the number of staff, amount of supplies or equipment. When making a budget, it's also important to track inflation and fringe benefits, especially if you are building a projected budget over several years.

Inflation accounts for slight increases in cost over time, and fringe benefits are the non-salary costs for employees if you offer (or plan to offer) benefits to your staff as you grow as an organization.

Analyzing Your Budget

Once you're up and running and keeping track of your budget, you can analyze your budget by looking at your ratios. Ratios help you understand how you are doing financially and can be used in a number of ways:

Help you identify changes over the years

Included in strategic planning and performance metrics

Shared with staff, donors, and advisors for both successes and benchmarks for improvements

Help staff members understand where and how they can improve their own department's budgeting, and how their work contributes to the overall organizational health

Here are a few ratios that might be helpful, especially in the startup stage.

Fundraising Efficiency: Total Donations/Total Fundraising Expenses

This tracks the average amount of money raised per dollar spent on fundraising and shows how efficient your fundraising efforts are.

Reliance Ratio: Largest type of revenue/Total Revenue

This ratio shows the potential risk of a major reduction in funding if this source is reduced or stops.

Programs Expense Ratio: Program Expenses/Total Expenses

This is how much money you are spending on program expenses. A benchmark is 80%, but it's not a hard and fast rule, and depends on your organizational needs.

Overhead Ratio: Management, Administrative, and Fundraising Expenses/Total Expenses

This is how much money you are spending on non-program expenses. A benchmark is 20%, but it's not a hard and fast rule, and depends on your organizational needs.

Days Cash on Hand: Total Available Cash/(Expenses/365)

This is how many days your organization could operate if all income suddenly became unavailable (all donors stop supporting you, or you spent all your money). 90 days of cash on hand is a good benchmark.

Restricted Funds Ratio: Restricted Funds/(Restricted + Unrestricted Funds)

This ratio tells you if you have a healthy balance of funds to support both overhead and programs. You can also use this to compare to your program and overhead needs to understand if you have enough in each type of fund to support your expenses.

Actionable Next Steps

Now that you understand the basics of nonprofit financial planning better, meet with your team, and create a budget and cash flow.

As your organization grows, or if you're already operational, analyze your budget using the suggested ratios, and assess whether you can make improvements in your budget-perhaps you can be more efficient at fundraising, or you should adjust expenses to have more days cash on hand.

Check out these other resources to set you up for strong financial health and success:

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As a startup nonprofit, there are many priorities to tackle on your to-do list. Planning your budget for the myriad of activities, especially when you're just getting started, can fall by the wayside. This would be a mistake!

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https://drive.google.com/file/d/12nC-1wIOB5CzRXjaT7HyvNarEji3PjWa/view

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Get access to files anywhere through secure cloud storage and file backup for your photos, videos, files and more with Google Drive.

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A Framework for Evidence-Based Systems-Level Change

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A Framework for Evidence-Based Systems-Level Change

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https://drive.google.com/file/d/1H6z-B-sp7Llzmib-iyuLzwXTXb3KyS-s/view

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Get access to files anywhere through secure cloud storage and file backup for your photos, videos, files and more with Google Drive.

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Statutes and Rules Governing Oregon Nonprofits

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Statutes and Rules Governing Oregon Nonprofits

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Oregon Nonprofit Corporation Law

Oregon Revised Statutes Chapter 65 »

Registration and Reporting Requirements for Charitable Corporations

Oregon Revised Statute Chapter 128 » – Scroll to 128.610 through 128.750 for statutes governing registration and reporting.

Oregon Administrative Rules Section 137, Division 10 »

Charitable Solicitation Requirements

Oregon Revised Statutes Chapter 128 » – Scroll to 128.801 through 128.891 for statutes governing charitable solicitations.

Oregon Administrative Rules Section 137, Division 10 » – Scroll to 137-10-0043 through 137-10-0055 for rules governing charitable solicitations.

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Statutes and Rules Governing Oregon Nonprofits - Oregon Department of Justice

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Oregon Nonprofit Corporation Law Oregon Revised Statutes Chapter 65 " Registration and Reporting Requirements for Charitable Corporations Oregon Revised Statute Chapter 128 " - Scroll to 128.610 through 128.750 for statutes governing registration and reporting. Oregon Administrative Rules Section 137, Division 10 " Charitable Solicitation Requirements Oregon Revised Statutes Chapter 128 " - Scroll to...

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Board of Directors: Moves Management Tool

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Board of Directors: Moves Management Tool

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https://docs.google.com/document/d/1WlJnSUWF3SoWz8VaICdogLuWst8bdZ4v/edit

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Create a new document and edit with others at the same time -- from your computer, phone or tablet. Get stuff done with or without an internet connection. Use Docs to edit Word files. Free from Google.