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Top 10 Ways to Lose Your Tax Exempt Status

Mike Hamblin
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Federal tax exemption can be a crucial element with regard to a nonprofit organization’s fundraising capabilities. Losing tax exempt status can have a devastating impact on the lifecycle of a nonprofit. It is important for officers and administrators of nonprofit organizations to have a basic understanding of the most common ways in which nonprofits can lose their tax exempt status. This presentation will take attendees through the 10 most common ways nonprofits can lose their tax exempt status and provide guidance on how these potentially disastrous scenarios can be avoided.


Mike Hamblin is a Michigan attorney with a boutique business law practice focused on representing businesses, entrepreneurs, and nonprofit organizations in business and commercial litigation cases, as well as a wide variety of transactional and contract matters. Mr. Hamblin is a graduate of Andrews University and earned his law degree from Wayne State University in Detroit, Michigan.



  • August 8, 2013
    3:30 PM
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him I will bless on here this afternoon unless you speak well that will be able to hear what you are saying and how it applies to individual ministries he was was here with using this thank you for this opportunity to learn and grow your grace Jesus precious well everyone thanks for coming planning with my cam one attorney practice law in Michigan and I have a general business practice includes helping nonprofits with various legal issues today's topic is going to be ten ways to lose your tax-exempt status and this is a very important topic if you're working with nonprofits or have a nonprofit there are a number of different ways and you can circuit trips when you're doing your administration work and wind up being a position where he can lose your nonprofit exemption for federal tax exemption and a lot of these ways are much easier than you might think some of them are inadvertently may be some of them can just arise from maybe being careless or not being fully informed about what the requirements are out once it happens in which a very difficult position and so on that are running over this and hopefully getting some good information the one thing that I want you to remember to go through the rest of point and my hope for this presentation is not the driven walk out of here and have you know the knowledge of tax law was a lot of this says to you now run your own not proper from a tax standpoint I'm good I just try to give you some basic issues to think about some things to think about so that we go back to your place of work he'll have some some elementary knowledge that you can use to sort confront these issues if you recognize any of these issues right now we are sitting here and say hey that was something revealing that the last thing I would want you to do or have revised this to try handling yourself what you wanted he recognizes either today or would you go back home you say all this reminder something we talk about how seminar the most important thing you can do is go get professional help these are not things that you want to try to handle on your own you want to find a tax professional if your CPA or tax attorney in your local jurisdiction our claim I mean by that if you're in California and you're having a nonprofit issue you need to hire somebody who is either a licensed CPA or a licensed attorney in California because a lot of these issues as will see an federal tax aspects of them but they also have state law aspects of them some of them many of them do and so if you hire somebody that is an end licensed in your state where you live or do business you could run the risk they are not give the best advice me they just don't know what your local requirements are and then you have even more problems so what I'd like to do it I'm hoping they don't get enough information you can take this sort of spot issues and if you think that you have an issue to go and hopefully users to have an intelligent conversation with whoever is advising you to resolve going on and then the only thing I say before I I'll get into the presentation 's office there is we have a little bit of a snafu I had some outlines still you've got to follow along with my PowerPoint presentation for whatever reason they haven't come through but if you would like to have a copy of my outline I'll be happy to get it you either by e-mail or mail or whatever is most convenient for you using just like now after the presentation I'll take on your contact info and send you an outline if you would like so let's go and get ready to leave got a lot of ground to cover so I think I would prefer to do is if you have a question immediately just know it and then outright deletion time and the end of the presentation of the questions if we don't have enough time for her to meet my hands I'll commit to staying later and just yell having a word with you that will work out but I think for the flow of the presentation is probably best if we just wait to the end and then have all the questions at that point so let's get into it here we have to go on and ask my talk about this is why is this important I have a little nonprofit the IRS doesn't care about me why am I worried about this union through the IRS does care about you there is no nonprofit that's too small to escape scrutiny of the IRS and they are the main organization that oversees the clients of nonprofits with attacks on the tax and so in the United States there are approximately two million and exempt organizations that seems like a lot in a dad and every year a hundred organizations and nine the McCollum 501(c)(3) organizations the most common nonprofit organization that you see registered under the tax code approximately hundred of those organizations loser tax-exempt status every year and it's kind of like a lightning strike or a shark attacking Alejandra Salinas never happened to me but if it happens to you then it becomes important and it can't happen depending on how you written this year nonprofit and the reason why becomes so important as your lots of exemption can be deadly for your nonprofit if you lose your exemption Juergen have to file some tax forms but that's the least of your word him to mail the file our regular corporate tax forms because the RS is treaty was not being a for-profit entities are considered a beautiful are nonprofit and government consider you to be a for-profit entity so you may file a corporate income tax return or if you're in a trust you may have to file a different form for trust bought the worst part of it as you may have to pay companies excise taxes income cash it can add up very quickly and even worsen matters if you lose your exemption order to create problems for your donor because number one and doesn't make for very good PR and your donor base if all of a sudden you have your nonprofit status revoked by the IRS it's very bad PR and it can also cause some practical problems through donors and radio well because if your donor as well I'm getting ahead of myself if you do your taxes and status obviously you can't receive taxes operable donations of vacuuming a hard throat for you if you can solicit tax-deductible donations meager donor base is going to be as willing to donate your not to be able to be identified in the IRS master file extract is able to receive tax-deductible contribution so you're going to be publicly identified as not being able to receive the sort of deductions for deductible contributions and then you're not been able to be included in publication seventy eight which is basically a list of all nonprofits are able to receive tax-deductible donations you can then try to hear tax-exempt status that but that can be very difficult because you have to refile your original tax exempt application which is called the form ten twenty three and I don't know if anybody here is ever filled out one of those forms summary not if you've ever had to work on one of those forms they're not easy they're very time-consuming there can be somewhat expensive to have a professional help you it's kind of a pain in the Mac it's something you really only want six you have to you have to refile their form and go through that process all over again you can ask for right career a retroactively in statement when you file your new application but younger so they have to deal with the IRS and maybe again and maybe you don't what I facility to earlier is with problems with your donor base sometimes you may have a timing issue where somebody writes a check in Cincinnati thinking that they're going to your tax-deductible contribution and maybe you haven't been able to advise every body that you're no longer able to accept them so you might have hard feelings of solutions and attraction things that they're getting a tax adoption later told her not vicious kind of bad PR and it doesn't matter if they are unaware of your donors on where you have your exempt status with all the inkling that adoption only until the IRS publishes an announcement in its auto revocation list so they get it in before then they can still think that I can buy if they get it and after some public hearings are not going to be able to claim a deduction so again why is this important basically on our charities and nonprofit organizations are coming under increased scrutiny by the IRS and so from two thousand and nine or in year two thousand and nine they had a thirty percent increase in clients of charities and nonprofits two thousand ten they haven't an additional twelve percent increase so it wasn't as big as a knife and installed a double-digit increase in since two thousand and eight the IRS has hired an additional hundred and lawyers to handle these increases are and are not to see news lately and how we the scandal with the IRS targeting certain organizations in a list administration 's targeted certain organizations if you have a different administration in a different political party different organizations get target has happened throughout the years but the fact is you always have to be vigilant about getting caught up in some of the stock because they've increased staffing fist to monitor charitable organizations and I can still over a number of different areas of online visit the Iris has increased during an nonprofit there's a lot of fraud out there people set up nonprofits and then trying to use a naturally what the IRS is trying to tackle and so the increase in scrutiny is basically to try to prevent that sort of thing happening so there are certain areas that are being scrutinized more than others and one of the areas of Garrison very closely is your executive compensation and loans an Army officer saw how much you pay your officers are running the nonprofits comes under a lot of scrutiny by the IRS they want to make sure that you're not enriching your officers or workers in a way that a for-profit corporation with you you want to make sure that your paying sufficient employment taxes something that I don't think really would be too much of a concern process consumer credit counseling agencies are missing those on TV they're proliferating the economy continues to struggle IRS is looking at those right closely organizations that may be relevant to the ASI group would be supporting organizations another cherries are typically collected channel money to a specific nonprofit so maybe there are ministries and family are supporting organizations the IRS is very closely and those kinds of organizations and educational organizations also are scrutinized very closely we have on your him alive for profit education enterprises and so the IRS wants to make sure that you aren't disguising a for-profit education enterprise and nonprofit select the overview of why this is important and will and what cannot you know the level of attention that the IRS is paying to nonprofits and again the biggest mistake is to think while I'm a little nonprofit knows that annoys me out here it's just not true some of the biggest legal fights that you read about in the legal journals start and in very small organizations in very small issues and often they can snowball into something that everybody can be reading about eventually so the first thing I've got ten things to go over really the most common ways of people losers on status so the first way is probably the simplest one but is the most common one and it never ceases to amaze me the first one is your failure to file IRS form nine ninety venture annual tax return so you would be surprised how many organizations either forget or just don't plan on filing their annual tax return so individuals we have Mark ten forty nonprofits have been nine nineteen hundred have to file even though you're not earning a profit you still need to account for your income and expenses another activities to the IRS form nine ninety and so again need be surprised to look at sunspot number zero how many realizations recently have not filed their nine ninety and it's a special circumstance when you show you but it's still kind of amazing that so many people gone into that jam so for my ninety 's the fifteenth day of the fifth month after your taxable year ends and here's the kicker failure to file your tax return three years in a wrong earns you an automatic application process no questions asked you don't file for three years in a row your dog have to go back and start over now here's the interesting number in two thousand and eleven approximately two hundred and seventy five thousand organizations in US hands are tax exempt status revoked for failing to file form nine ninety four three six consecutive years that's a large number that's that's a crazy number does not happen again probably but here's what happened prior to two thousand and seven if you had I think was less than fifty thousand dollars in income through your accident organization didn't have to file a form nine ninety and then he changed the line now free much every nonprofit has to file this form bought a lot of smaller nonprofits apparently didn't get the word didn't check in Madera County and sell from two thousand and eight hundred two thousand eleven on us for years they didn't file their tax returns as a talking and have to as in the olden days while Outlook all around role two thousand and eleven and almost three hundred thousand organizations in the US hadn't complied with the law for the last three years and the IRS yank their tax-exempt status and that there wasn't any no prior warning and it just is gone you that letter and that's it you're done so you want to be very careful again like I said prior to the two thousand seven or two thousand and eight if you have a very small nonprofit you probably didn't have to file your return but now pretty much it's now flat free lunch everybody has to file a return if you have a tax-exempt organizations is the plan filing your return the only ones that don't really have to file returns our churches and state institutions private foundations have to regardless of how much money they bring in in their article I'll elaborate on some of the organizations and all but that don't have the file is so if you have not received a tax-exempt letter from the IRS numbers if you're not an official fact that we exempt organization then you don't have to file in my ninety by thing you have other problems that are supposed to be filing for profit tax forms database organizations you may see or talk to people is able faith-based organizations don't have to file tax returns but again that's more of a church so that's pretty important over work hours because I believe a lot of the nonprofits and then are ASI members are somewhat faith-based in some aspect but you don't want to think that you have to file your return because your faith-based is accepting really is for churches so using your getting close to a true religious or are almost charged type nonprofit you and you don't want to file taxes and got a consult with your tax professional again in your local jurisdiction to make sure that your and price category for not having a filing state institutions don't have to this is one also might apply to ANSI members a subsidiary of subsidiary organizations are covered under a group return filed by the parent organizations of your sons were supporting entity to a larger nonprofit may not have to file a return for you again want to check before you make the decision not to and so in an ice I have handouts I apologize this is a kind of a long web address it has more information the IRS has actually very helpful website for a lot of these issues and that was in Anderson I was in heaven handouts again I can get that few of you like to see that at some too long indirectly complicated and we're looking but the IRS has like a website and they have a section for charitable organizations tax exempt organizations and a lot of information so if you follow that link you can get to a page that gives you more information on its I want to belabor this but there are different kinds of tax forms is sellout different kinds of my nineties so for example on nine ninety p.m. would be for private foundation nine ninety and is for really small nonprofits and it's not even really consider the tax return by the IRS is something that you do online is he postcards and if you have and calm all last and fifty thousand dollars then you can file this in this real simple in twenty ten fifteen twenty minutes to do it it's not that complicated so that's the thing is that group of nonprofits used to not have to file a return but now you have to do the post enemy Henry nine ninety easy if you fall within a certain range of income and assets as you can see and then you have your regular nine ninety if you're over if your income is equal or greater to two hundred thousand each year and assets are equal warrior asked three or greater to five thousand now the other thing to remember is your nine ninety one recently want to be very careful when you're filling out this form after nine ninety is a public document so you have to provide this to any member of the public to request and out of anybody's ears heard of them organization called guide star guide star maintains a database of nine nineties are filed with the IRS and so somebody can go to guide stars while and get your nine ninety so there is an artist selling us out and that's one reason why he also one half somehow with your nine ninety because I sometimes watchdog groups local one nine nine do not take certain stuff on a contact send you know create travel and journal articles in newspapers give written so you just want to be very aware of what you're putting in your nine ninety so that you may get a positive portrayal as positive as possible on your organization and the work that you're doing dear row are making sorry I'm throwing my ninety the first one and the most common one the second thing rented talk about is engaging in what's called private indoor private benefit so privately Norman is a tax term and it basically means enrich private enrichment of somebody who is connected to the tax-exempt organization and having benefits that should be going for public use because I thought public charities are for the benefit of public having those benefits instead of being diverted to an insider of the organization that really what private environment of Sullivan or someone with significant influence or over the organization enters into an arrangement with the nonprofit and receives benefits are greater than he or she provides in return this is a great way to lose your exemptions because again the IRS is on the hunt organizations artists have been set off the disguise either an ranchland so that they don't have to pay taxes and they can sort of abuse the system there was very much on the lookout for the soil you have an insider who gives a benefit greater than what they're getting into the IRR to the exempt organization you may have what's what's called a private environment problem the thing you remember as private Norman is prohibited in all nonprofits regardless of the kind that nonprofit that they are and it's also an absolute term there's no way they called the minimus exception any little amount of private environment that slows to an insider is going to be grounds to have your exemption revolve and it also will it also applies to disqualify people who may not be currently involved in nonprofit but any at all disqualified person is first five years prior to the transaction was in a position factor size substantial influence over the organization 's affairs so I disqualified person can be high-level managers board members founder 's major donors I highest paid employees family members of any of these people and businesses were listed persons on more than thirty five percent interest and so you have to look back five years and you have to examine whether you're giving somebody a private benefit nonprofit and talking about a benefit that's all of them when you're exempt purposes so if you have to exempt purpose of providing our chefs on-site providing scholarship isn't going to be private that's what your setup to do but if your answer if an insider like a manager on board members receiving financial asset through the organization asking the term private environment and that's what I'm definitely just entitled Private Norman is an absolute term there is no diminishing note the minimus exception and the authority for is actually in the iris called where you have the authorization for charitable organizations in the first place this is no part of the net earnings of the exempt organization indoors overflows to the benefit of any private shareholder or individual and so that's a whole basis of setting up a nonprofit entity and if you don't follow that the IRS is finished saving your engaging in private and more than all the other hard part of this is kind of benefit there's a difference between two of these and put between the two of these so private environment focuses on the insiders but private benefit can be inferred on people outside the organization so if you're providing a sense of some kind of financial tie to somebody outside of your organization a disinterested third party then that may trigger this whole problem with the Iraq him difference between the private benefit primary Norman as a private benefit does have what they call it the menace exception so you can give online are private and sent to the outsider and not trigger IRS action and unfortunately in this drive people crazy it's there's no bright line so you have to just sort of being to let the idea that if you're giving an outsider private benefit that sort of software from your exempt purpose that you greatly strain into dangerous territory and that's anyone get professional involved to make sure that you're not doing something improper the third way that you can lose your taxes status is improper lot a lot of folks are surprised to find out the private nonprofit organizations can lot behind talking about political lobbying but that but the truth is they can subject to certain restrictions so the federal law allows public charities to lobby so long as they don't devote what's called a substantial part of their activities to attempting to influence legislation and I went to come back to the slide and will make more sense after we talk about the definition of lobbying will come back so to understand what lobbying as you just look at this definition is kind of privacy attempt to influence the passage the fee introduction or amendment of legislation including bills introduced by a state federal or local legislative body or town Council in your city hall state legislature on their shoes wrap around constitutional amendments in Senate confirmation votes on executive branch nominees it's pretty much any intent to influence the political process in terms of legislation now we have to further divided between direct lobbying and grassroot I is in reference for how much you can start on your lobbying activities so direct lobbying is any attempt to influence any legislation through communication with the lightest lay our an employee of a legislative body or other government officials were talking about your state legislator or Congress and neck communication refers to specific legislation and reflexively long nap legislation that direct line grassroots lobbying is a little bit more complicated and basically any attempt to affect public opinion in general but the definition is more complicated so any attempt to influence legislation through an attempt to affect the opinions of the general public the communication that constitutes grassroots lobbying refers to specific legislation and reflects a view on that legislation and it encourages the person who's hearing that communication to take action and one of four ways by directly urging them to contact legislators or other government officials in order to influence legislation by including the contact information of a legislator or government official providing a petitioner postcard or other prepared message to send to a government official or legislator that's designed to influence the legislation or by identifying one or more legislators will vote on the legislation is opposing your view being undecided being on the receipt of the person who hears the message their representatives in the legislature or being a member of the committee that will consider the legislation and just a disclaimer encouraging semantic action doesn't include in main sponsors of legislation so that grassroots lobbying and the reason why the difference is important on the fact that previous slide here is how much it can stand on your lobbying activities and therefore how where he are in line with alive in your lobbying activities that had summary are doing grassroots lobbying or direct lobbying so this is what's called a five oh one H expenditures test there is also another task called a substantial part test basically and says if you're lobbying activities don't constitute a substantial part of your overall activities that will be fine you can do that it's a little bit okay and it causes also to problems almost no organization tries to follow that test anymore and Congress after years of problems with that said you were going to give you a specific grid that you can follow silly and active what's called the expenditures task and now everybody almost almost everybody follows that just because it's so easy and the information included in the tax return is a lot more if you follow best so for example if you have annual expenditures in furtherance of your exempt purposes of five hundred thousand or less than twenty percent of activists online and that's a hard and fast rule as easy as you go down this grad different numbers of expenditures and then how about the percentage of that at least on lobbying and and I won't belabor that point to remember is that at the bottom of the campus a million dollars in us will suspend more than a million dollars on lobbying activities in total every year and then grassroots lobbying expenditures can never be more than twenty five percent of an organization 's total allowable lobbying ceiling so you can spend more on direct lobbying you can run grassroots lobbying by if you go outside of those guidelines I mean either one of those in your Indian territory again that you're going to run the risk of having your exempt status revoked for improper lobbying now the other thing to remember as if you're if your organization is going to try to influence the political process through lobbying there all sorts of lobbying registration requirements and again this is why you have a professional 's license in your jurisdiction to be doing at because there are federal requirements and state requirements the Pentium if you're in the Israeli lobby for example the federal government he have to register and be lining a member of Congress have to register with the clerk of the House of Representatives then you have to register with the secretary of the Senate in Michigan where I practice of you state legislature you have to register with the Michigan Department of State and comply with the election Bureau law so they're all sort of thing and then he walked by the requirements that you have to do reporting requirement so there is a big deal if you try to get into that and you would definitely want professional help one thing to say about private foundations are coming from private foundations are here but the private foundations are essentially prohibited from lobbying there is the tax burden on them the excise taxes of the IRS puts on private foundations for lobbing this is so great that it basically amounts to a prohibition against it but your 501(c)(3) charitable organizations public charities can do it within those parameters of interest is so a close cousin of lobbying this political campaign activity and this is a completely different matter 501(c)(3) organizations are expressly prohibited from intervening in political campaigns for any candidate for public office or from engaging in partisan activity that's it that's an absolute prohibition and it's pretty strongly enforced however you may have noticed during various political campaign seasons and I always know this is there are churches and religious organizations seem to get very involved in the campaign process and this is especially cannot find stones in a way that this is especially true among the evangelical church world lot of involvement trying to rally support for certain candidates and issues are and people units in every campaign season and turn on CNN or wherever you know why are these folks allowed to enter the political processor a nonprofit organization and there's kind of a kind of exception that they weren't under which shares voter education so as you are doing voter education you're allowed to engage in lyrical process in that way you can also educate the government officials but it's a fine line and every year Arizona Hmong people who object to another organization 's activities during the political season complaints to file the amount people trying to organizations disqualified and so again it's just another case where there is there supposed to be a bright line but then it turns gray and the administration of things so technically if you're ever in engage in voter education then there may be a way that you can get involved in the political campaign area we have to be very careful you wouldn't want to try to do that without expert help because if you cross that line you're going to get hammered pretty bad one thing I hear often is wildlife you know we have the First Amendment how can the government keep me from keep my organization from expressing his opinion on political topics as un-American while the courts don't agree the courts of sad taxes and status is a privilege not a right and it is not unconstitutional to impose conditions on exempt organizations to achieve their status and one of those his blood okay I'll call political campaign prohibition and Celeste is an example of a case of branch ministries to soothe to be able to engage in political campaign activity and still keep their nonprofit status of court in Washington DC at the Supreme Court by the circuit court Court of Appeal said that now this is permissible Juergen have to work around now the fifth thing everyone to talk about is what's call accumulating access business are accessed unrelated business income so a lot of folks understandably are under the impression that nonprofits can make a profit and that's not technically true because all a profit as is retaining earnings after you have paid all of your expenses whatever is left over is technically a profit and there are one nonprofits that are actually very profitable and if you have that problem it's a good problem to have but you are actually earning profit and now your string into an area that can cause you to lose your exemption if you're not careful and it's not handled correctly accumulating access unrelated business income so let's give an example of what I'm talking about here I can't claim that this example originated for me I took it off the Internet what if I was a good example was a you have the friends of the public library and is a 501(c)(3) organization is set up to encourage education level literature and support for the local library and let's say that they have a lecture series and they have a lobster boat driver burner members comment on a box and sell the blocks and the money from the lecture series and book sale volunteer book sale goes to support the friends of the public library that's all directly related to purpose of furthering your purpose they cannot all money they want from them and it's not reattached that's related business and have that and take you hope lingers much as you can from that sort of activity for your exempt purpose what he do with that money if you have money left over you can distributed Sears Board of Directors are your exact it is your workers like bonuses stuff like that that's that with the private environment that we talked about or private benefit if you give it to somebody outside the organization but as long as you're using that net income to further his purpose in a legitimate way the IRS doesn't care and it's not going to catch on what would be unrelated business income in our example is as after the sale is over you have a bunch of books that are left over and use Al Qaeda was trying to remove these blood to put me Craig 's list and your tremendous responsibility of some rare blocks and pretty soon you've got people coming to you to buy and sell rare box and you're making a tremendous amount Amani that's unrelated business income because that's not really related to your promotion of literature I'm directly related to stop promotion to a sharp related to your promotion library level of the library and the IRS is going to consider that as unrelated business income it's not illegal to do that live charities support their activities through and unrelated business activities industries things like that why if you have that situation you have to be aware that if you have access unrelated business income you cannot get into the target sites of the IRS for accumulating too much of it so and come one-of-a-kind about than his income from regular trade or business it is not substantially related to the charitable educational or other purpose that is the basis for your tax-exempt from so you have to be on again it's not illegal to have that income but you have to be careful how much you accumulate and its is not a right line so there's some gray areas here but essentially what happens is you want to be careful about when you get into the window the territory of your unrelated business income matching or exceeding your income that you get from your regular nonprofit activities that we are starting to get into danger and accumulating excess income so if you for example and our example and they have this book salesman starts to go back and have to hire extra staff you know they start taking a lot of time away from the normal charitable activities of the receptor due to run this book business the book business start bringing in more money than the regular charity of South does they're starting to get into the territory of accumulating excess unrelated business income and they need to be very careful about how they proceed from there on out and that would be a very definitely want to get a local accountant who specializes in this area to help you with because the consequences can be devastating if you view across alignment so that it indexing again is kind of a close cousin to the accumulating access business income and that affinity not paying taxes on your unrelated business income so again are you going to things worrying about if you get too much of that income you're going possibly get into trouble but even if you don't have too much of their income you still pay taxes on it because it's not charitable income so that the whole process is to have to go through just like a regular business would have to go through to pay taxes on and to comply with that you have to determine their future shifted her determine if you have unrelated trade or business if you decide what you're being what activity are him really are replaced or charitable purpose if you think it does not relay and you have to calculate the income and deductions from their unrelated trade or business just like you what if you're running a regular business and then have to prepare and file your tax return for unrelated business income and it's called the form nine ninety C prayer and in addition to the nine ninety form that we talk about beginning this is a different form it has to be filed and then the kicker is you have to pay your estimated taxes just like a regular business work and have to pay those on a quarterly basis and I think Dion I think it's if you have more than a thousand dollars of unrelated business income the first thousand dollars free energy law about that you have to start the process and we just talked about now this is a really good Irish publication of you think you're in this new in this area publication five ninety eight and you can Google at her neck she done this you just type in Google IRS publication five ninety eight and their goal is a PDF document and has lots of good information on how to pay your taxes for unrelated business income if you're having a situation the other waiting you can get more information on this is by contacting the IRS exempt organizations division directly and they have theirs there is the web address IRS oh three EL for exempt organizations and then there is an eight hundred number and again I can get that you have read if you want to believe it or not the IRS in addition to its enforcement laptop is also trying to be more customer friendly and eventually call these numbers are I call this number and another number for a different manner and there are very helpful and very friendly and they in a layer there is always recorded for customer service purposes and so they can very all so if you have questions don't hesitate to get in touch with the folks at these contact points because it can be very helpful in resolving or giving you more information pointing you in the right direction so again you file your form nine nineties heat which is separate in your regular form you can get an extension and here's a thousand dollars I talked about if you have more than a thousand dollars of gross income from unrelated business anxiety have to file form areas you have the file in addition to filing a regular one day I went to see the extension will appoint a second but this bit of trivia as filed with a certain service in Utah and seventy filed after the fifth month after the end of your organization 's taxable year there's a particular place you want to file it and if you interview date falls on the nonbusiness day is due on the next business day you can do there is worse I get to watch or you can request an automatic six-month extension just like economic tax sinners like me or personal taxes you your your corporate tax you can get a six-month extension by filing a certain form form eighty eight sixty eight so that's a lasting remembrance and most important and remembers payer estimated taxes that's a great way to get into trouble if you have unrelated business income and you're not paying quarterly estimated taxes if you have income that exceeds five hundred dollars and that's what you expect more than five hundred dollars then you have to go ahead and pay her quarterly estimated taxes in addition to your federal obligations you need to find out if you have any state law obligations for your taxes if you have unrelated business income and diseases is an example I'm from Michigan sewing machine we had the Michigan business tax women to affect a few years ago and filing threshold is different from the federal threshold so you just want make sure that your covering both of those bases again I say is important in a local professional balls will be able to advise you about your state requirements so faulty corporate finance faulty corporate financial record-keeping can be a killer and if you have bad record-keeping alternately you can need to have in your tax exempt status we will so this is kind of state law letters probably somewhere throughout pretty much every state in America this is from Michigan law but again I think it's it's can be as a general in vitro wherever you are corporations and most nonprofit 501(c)(3) organizations are corporations corporations are required to maintain three types of books and records books of account shareholder records for membership records and minutes of shareholder or director proceedings board of director proceedings those are the three major categories of information that Corporation needs to maintain now there are different requirements about how long different sorts of documents have to be maintained and some rackers only have to mean maintain certain period of time other records have to be maintained longer but in the context of a nonprofit there are certain records it should be maintained indefinitely so these would be your articles of incorporation your determination letter from the IRS which is what tells you that your taxation organization insurance policy should be maintained indefinitely minutes of your meeting ceiling your Board of Directors meeting served committee meeting should be maintained indefinitely corporate resolution should be maintained indefinitely in Michigan again under these Michigan is him or might be the same your statement might be different Michigan requires nonprofit records to be maintained by articles of incorporation menace I can sense of incorporators were talking our initial business connected with incorporating the businesslike selecting your born adopting bylaws bylaws have to be maintained and Board of Directors actions and I have to be made reflected in minutes or concerns on information regarding your nonprofit corporations registered agent which is just your representative before the state it doesn't have to be like a legal professional but anybody who is on record as getting notices from state appropriate documents reflecting the kind of nonprofit that you are like whether your membership organization when your Board of Directors organization on documents regarding organization meetings again minutes and sends notices all those good things have to be maintained and in Michigan you require then to maintain certain financial records like in Michigan as a member of a nonprofit request the balance sheet it has to be mailed to them when he requested and then of course business records I contracts loans guarantees sales of your assets Michigan requires you to maintain those kinds of records as well again it might be different in your jurisdiction or might be the same you'd be surprised at how similar some of these requirements are across different state lines tax records have to be maintained I like I said before form nine ninety is a public document so there all kinds of requirements associated with how you have to produce a depending on how the class is made we won't get into that today that the SNR of us out they just needed knowledge economy tenure form nine nineties because you have to turn them over to member the public if there requested one thing I'll say is I don't know how many of you of heard of the Sarbanes-Oxley inside the common act it was passed in response to the corporate scandals of the late nineteen nineties and two thousand two thousand Enron WorldCom those types of companies so the Sarbanes-Oxley act is designed that corporate fraud most of its provisions apply to publicly held company but some of the provisions apply to any kind of corporate entity or private entity or public entity or nonprofit entity one of the things it applies to even nonprofits the smallest nonprofit this is a federal law is that you cannot destroy a document that is the subject of a proceeding or investigation that's what happened in an they were shredding just massive amounts of documents when they heard there was an investigation into the company trying to destroy all the apparatus so now they've created the federal government create a lot of things you can do that while you often don't know if your organization is the subject of an investigation because the government doesn't always tell you it doesn't always seem fair that you might have to keep track of a document that you don't know your investigators about that that essentially is what happens so high you can combat this is why having a document retention policy and our sample policy that had brought when I this is what this guy had to think my outline example document retention policy the document retention policy makers I'll be happy to give you a copy that if you'd like it is from the American psyche American Institute of accountants or something we'll see on screen but it's a very important than even the smallest nonprofit have some sort of document retention policy is implemented everybody's educated about the minutes following the cause if you are investigated and it comes out that you destroy the document even if you didn't know we were being investigated but the timing of was suspicious the third person or third party down there that claim to the media Danielle and they destroyed it to avoid investigation on liability so if you have a document retention policy you can say now we were just following our normal policy ureters and writing here's how we do it in a much better chance of escaping that sort of allegation so developing a document retention policy laws accomplished after a few steps actually so you want to identify what kind of paperwork that your nonprofit generates every nonprofit generates a different level of paperwork different kinds of paperwork so you want to figure out and get get a handle on what paperwork you are generating and then you want to determine the appropriate and legal length of time you have to retain papers again have federal rules you have state rules and you have to go through for each kind of paperwork that you're generating figure out what those are that's where a local professional can help you and then you want to record those retention times on his calendar and you want to have a calendar ironclad and follow so that you written scheduler calendar and that's how you jam general terms at how you record for your retained documents and develop a policy that will help you avoid the allegation here have faulty record-keeping or worsen your trying to destroy something nation and so I have up here I have a handout is a sample document retention policy that was created by the American Institute of certified public accountant I can pass on effort but the thing to remember about this or any other sample document is presented a you can't you shouldn't just adopt that wholeheartedly without making the changes and say what here's my policy I sample prepared by an accountant I know it needs to be customized to your organization what you're doing I know that in my own practice one mile office we had a client who came in was having all sorts of problems in recent where is your document retention policy and the guy civilian when we are one of those hats off your nutshell here's some respect for designers we had prepared as outlined in her summer and we all just the largest culinary counter and no that's not policy doesn't work if you have a policy that even judgmental minor threat I shall give policy here it's the same as having policies and you're not using so you want to have a policy against crafted specifically for you and you want to use it not just put it up on Michelle and done for him so we party talked about the laws and rules that govern document retention policies generally speaking is an important area it just takes one disc lungful employee or volunteer to make an allegation and then you can trip on a banana peel by destroying the documentation have even if it's MSN and can look fat and then you're in the suit as they say the never talk about them are getting to the end soon mismanaging files that seems very basic and it is basic it wasn't as basic as filing your tax return but you and don't be surprised how many people get tripped up on trying to give you an example of how this can happen even when you're trying to do the right thing so my example is assisted in again I didn't originate this I got this from some website I thought it was a good example let's say you have a suggestion and the soup kitchen has a building fund and there a couple years away from actually been breaking ground getting donations and contributions of further building and let's say it's approaching holiday season might say they have any know Christmas dinner for the homeless they got while minor building find they've got no money in their annual dinner for the homeless fund so the directors has likely ally minor building fund is just share some of that over something cover I am no better for the homeless be good to go and that's what they do and so the question is did they mismanage their funds that they possibly commit a crime and the answer is maybe they may not happen they may happen this is this is why bring this up because it's an example of somebody who is not trying to be shakier DVS by Disney have violated a technical role so I could appear solicited designations and unsolicited designations if you have a campaign like a building fund and you send outliers and safely zoning for building financial reasons and attract a donation for that you have to use their contribution for the thing that you solicit a so you can't just switch out funds from your building funded humane specific appeals for that building fun people are relying on them when they're contributing their funds in a legal obligation to use that money for the building that's a solicited designation now this is kind of surprising a lot of people are surprised about an unsolicited designation is where somebody sends an contribution rights announced as I'd like this money is for the building fund and a question as you have to use that for the building fun and surprisingly technically you don't because it is an unsolicited designation even asked to contribute to the building fund they just loaded that unsolicited and designated those funds were building technically are allowed to use those funds for your annual dinner from home now you comply with the legal requirements for you you could have a PR problem that point because of your donors here they are using a font that they send them for the building fund for your they were for the homeless you could have a little bit of an issue you can have people of science so while your legally entitled to do that you may not want to do that without going if you're in a jam one go to the person and now Hassan is okay if I use your contribution I'm running short on the homeless dinner fund this year that's one way you can handle it by this is an example of how somebody with a good intent wanting to do a program that's perfectly while all five switches money around in a way that's not allow and you know if you got brought to the IRS's attention you could be in a situation where the leader mismanaging your funds not behaving appropriately in the administration of your tax-exempt organization and you have a problem with your tax-exempt status something to be very careful sure you can you can edit as long as a person gives you permission that's what you're looking for but a few have a solicited fund and you go to that person you say can we switch over your desert on your designation saying no to God and God lifetime that's the thing to remember okay so the ninth reason policy before you were working pretty good okay the ninth reason is providing support to their people or organizations and again whenever I bring this up people often say to me now what are we talking about wanting on terrorism could be very black people say Mike I will never support terrorism that's crazy slashing and happiness setting it's easier than you might think the kind of get across the line here and explain how that is so you have two times two kinds of terrorism domestic terrorism and foreign terrorists so I put a little live definition of domestic terrorism as unlawful use of force or violence committed by a group or groups of two or more individuals against persons or property to intimidate or coerce a government the civilian population or any segment thereof in furtherance of a political political or social objectives the overall definition of domestic terrorism we've all heard of the patriot act we all know that we've heard of the NSA surveillance program in all there is a real renewed emphasis on surveillance in combating terrorism as a result of the stage of history that line so the US a patriot act has a definition of domestic terrorism as well which is basically kind of what I put in my definition I have and the previous slide it involves acts dangerous to human life that are a violation of criminal laws of the United States or any state and that they appear to be intended to intimidate coerce Sarah influence policy intimidation affect the conduct of a government by fast destruction assassination kidnapping that occur within the territorial jurisdiction of the United States federal agencies maintain terrorism watch lists so for example the FBI has a domestic terrorist watch list and there and sort of tie this together here in a moment about how you can stumble into this the FBI has a terrorist watch list it's a secret list as far as the folks estimated to about half a million entries on the list no one 's really entirely sure who all is on the list but proximally half a million people some examples of designated terrorist groups they both knew the authorities to designate terrorist groups of Earth liberation front it's an ego terrorist group animal animal liberation this is the primary example in the second Psalm brings folks back into it but animal liberation front which is an animal rights group of the Jewish Defense league is a terrorist group clucks clan Aryan Nations Black liberation Army this is the kind of kind of examples of the help of domestic terrorist groups within designated by the federal government as and domestic terrorist so in addition to that of course we have the US Department of State that was foreign terrorist organizations are starting out a few that might sound familiar Hamas Al Qaeda ballroom that at colleges and ask separatist group in Spain Shining Path Shining Path exist anymore I think I read in the paper that there pretty much put down in Peru Bolivia but maybe who knows I'll be there still active but that's one you may remember from news doors long time no Shining Path and here's why it matters with terrorist groups on the me give you a case from two thousand and two Peter and we all heard appeals the animal-rights group in two thousand and two I gave a fifteen hundred dollar and I'm not here to defend PR nerve not this is that just a good example of what can happen on this and often controversial group up to say the least gave out fifteen hundred dollar contribution to the back was the human animal is the animal liberation front it's either the Earth liberation front or the animal liberation front is the animal liberation front they gave a fifteen hundred dollars contribution and in their report to the IRS they said it was the contributions for program activities and that's what they listed all of their contributions as being for program activities not terribly helpful social learning God nine ninety watch the selling peanut for the nine ninety and saw that they made a donation of fifteen hundred dollars to the animal liberation front only animal liberation front is a designated terrorist organization flowing things off people terrorism and that sort of thing and so we filed a complaint with the federal government St. Peter donated fifteen hundred dollars to the animal liberation front it should have its tax-exempt status revolt so there were hearings there was a lot of press on a lot of bad press because Peter did something comment on they gave inconsistent reasons for why they do this donation I think the first reason why is I don't know for sure but there is little they had looked for opportunities explained so there's functioning gave reason acts the next day simply appeared on CNN and given differently two weeks later the president the organization said it was for and not something else and so it is in everybody's interest what was his fifty dollars for and companies are getting monitoring Peter 's tax-exempt status revoked and was headed by nonbusiness groups that oppose their their agenda and some other groups like Chamber of Commerce I was enough and so eventually whether the patient they settled on why is it they gave the fifteen hundred dollars to pay legal fees for a number of the animal liberation front that has been charged with a crime in connection with the terrorist activity that they had been accused so I hope you had gone out of the soup is because this is what we were contributing to the terrorist organization we were contributing to paint somebody's legal fees and much more American napkins on the crime etc. died down and standing when away but it was kind of the good example of what can happen if you're not careful about who you're giving your money to or who your Association and as an exam why we family you have organizations have national component a lot of a lot of our brothers and sisters here work and international projects humanitarian projects you have to be very careful about who we are and who you are financially linked with because I know for example in the Middle East there are designated terrorist groups every Center designated by the US government who also provide clinics to build schools who do health care who do also to charitable activities and if you get mixed up financially with some of these organizations I think Hamas is an organization that conducts a search of activities you can then have an issue of whether you have contributed fine so financial resources to a terrorist and so in it can be very easy if you don't check out your dealing with to make a contribution even a small one like fifteen hundred dollars at somebody for your nine ninety F their apostle to what you're trying to accomplish and boom you've got online and accusation that you have funded terrorism and in this environment that were in it's not something anyone have to face and people have real hairtrigger is no pun intended the people are very concerned about terrorism they don't want people funding terrorism and so it's very easy especially in an organization like ASI members here when there's in the international component and you may have you may not know necessarily all the background of the people that you're dealing with you want to be very careful and check people out because it doesn't take much to be accused in today's day and age of supporting terrorism and down that's why I included down the lesson that's a really great way in today's environment for a fast-track revocation of your tax-exempt status so the final reason that I'm going to give you and this is kind of a boring reason but will finish up with it Anaheim from the solving of closing on your nonprofit organization correctly and you might think that when you're done with your nonprofit organization you're anything to do to shut your doors and your dog you have to weigh myself but it's not true because if you don't shut it down correctly the IRS could assess penalties excise taxes income taxes so you want to make sure that he lingered on figure really gone he shot it down correctly so you make your decision to dissolve you have to comply with IRS oversight typically what you do understand it is a general overview of this you have to thought your final form nine nineties track certain information you have to support you have to provide supporting documents with that final document tax return that the Iris recover our requires any have to make sure that it's done correctly otherwise you could trigger action by the IRS that cost you money and the IRS has published the fact sheet its publication four seven seven nine million images Google IRS publication four seven seven nine this is is four five pages PDF document online that use user requirements and you have to go through to Winder your IRS tax exempt organization in the appropriate way now I'm in a given example from Michigan and it may be different in different states by not undergone with the IRS it have to get your state approval to wind on your tax-exempt organization is nonprofit so in Michigan you have to apply to the Michigan Attorney General for permission your approval to wind on your organization that I almost everything I have a still have to get and you have to submit a dissolution questionnaire with required attachments and you can find at least for the Michigan attorney general on its website and get in Michigan in file and corporate dissolution certificate and you then have to file that document with your Michigan Attorney General 's approval letter with the Michigan Department of licensing Corporation division you also have your tax clearance for Michigan Department of treasury and so you can see that there are a number of steps on the state level is actually can be a little more complicated on the state level to do something is on the federal level at least in Michigan may be different in your state and that's when you went if you go to check on your nonprofit Hamlin accountant help you with accurate tax attorney licensed in your state because you don't want to mess us up because it's not as serious as some of the other things we talked about by the ten cost you money if you don't do it correctly and who wants to pay money when you're done with your agent organization and that stand for great poster so if you have any questions I'd be happy to work pretty much I think it's not worth it also I'm happy to answer questions if you need to go on offense taken a is yes and determine what is great okay so the question must provide an environment how do you determine what is reasonable compensation if I had the answer to that it's ASIS there is no bright line it's obvious there is a recently what they call a fact and circumstances test and that's why I work with a professional on that because the IRS knows and sees and there are certain obvious cases if you want like a local animal shelter and your paying yourself and nine dollars a year pretty good chance you have been seen to have a reasonable compensation sites it can be difficult that's forty one not all will while idea there are there are an you had a not necessarily bright line restrictions necessarily in their arduous blog guidelines that are way beyond the scope of this summer here by you you can do the entity of the takeaways you can do them but you just have to be very careful in terms of like the repayment terms the interest rate for a God-given example of how he actually the question was about loans to executives and so what will what are the guidelines for making loans to officers of the organization so like for example given interest-free loan that may be a problem and might not be but you're starting to feel a few the more of a sweetheart deal you gab the more you're getting into the territory where it may be inappropriate and it does depend on your fast particular facts and circumstances I can tell you while you always do this and you'll be okay it just depends and that's why you want to work with somebody whose license in your jurisdiction because there is state law aspects of this as well as federal law aspects to see why you have somebody's license for eleven more who can educate on you I will write on all wow okay that's America and that's a good question so your your primary business is okay and is your concert series your concert run by volunteers okay so you might be able to begin this is again in all facts and circumstances I think but depending on how to minister you might be able to say that your concert is part of your exempt activity raise high by anytime you have an activity like that where it's not really right in line necessarily with your exempt purpose that's where you got to be careful about accumulating income from the activity and that's the kind of thing where were you spotted an issue and you would want to take all the facts to an advisor in the local jurisdictions and to make sure that you are in compliance because while you but it also depends on whether it is on activity is generated is just how there uses how they generated sources generated by an activity that is not in furtherance of your primary mission even if the funds are used to are hereby miscellaneous generates a consultant the problem I don't know there is a specific threshold like that it's just it's more again as you trend off words hang in music yet to the point where your unrelated business activity is starting to generate money that is equal to as you start approaching amounts are equal to your primary purpose activities and generate funds and even that of your projects are necessarily a problem you just want to be aware that a huge friend off words you're getting into the territory where they could be scrutinized and determined to be on me laying out access and again is it it's even that even added meaning of the impression there's a hard and fast rule fifty percent hundred percent it is you take all the circumstances and you look at everything and totality and then you can't make this adjustment column where this is going to be determined the access business unrelated business income but the general rule is the more that to proportion to your regular activities that are change and have been deemed gone off the reservation so you want on it here if you generate the general rule as you know if you if you're devoting staff that isolated business activity of its


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