Nonprofit Tax and Governance Duties Checklist – Part II
A Checklist of Duties with Tax and Governance Implications – Part 2
Documentation and accountability are important aspects of nonprofit operations because of the unique challenges and responsibilities these organizations face: a mission-driven nature, reliance on donors, and a commitment to serving the community.
The following chart can help you stay organized and more easily track processes. For information, contact your Brady Ware nonprofit advisor.
Maintain “Who’s Who” Lists
It’s essential for exempt organizations to maintain complete lists of relationships of persons connected with them. Such lists can be critical for tax and governance compliance.
Disqualified Persons
Disqualified persons who receive economic benefits from a Section 501(c)(3) public charity or (c)(4) organization in excess of the value of the consideration for such benefits are subject to an excise tax of 25% of the excess benefit received. Under certain circumstances, organization managers are subject to a 10% tax, not to exceed $20,000, with respect to any single transaction.
A disqualified person is any individual who could have significantly influenced the organization’s affairs in the five years before an excess benefit transaction, even if they didn’t actually do so. Also included are members of that person’s family and any entity (corporation, partnership, LLC, trust, or estate) in which the disqualified persons and family members have more than a 35% ownership interest.
Family members are a person’s spouse, ancestors, direct descendants, (including legal adopted children), and the spouses of these descendants, foundation managers, and 20% owners. Ownership of an entity also includes constructive ownership. In other words, the indirect holdings of family members are considered.
Investment advisors are also disqualified persons for organizations that sponsor donor-advised funds. In addition, if the nonprofit is a supported organization under IRC Sec. 509(a)(3), the disqualified persons of the supporting organization are also disqualified persons for the supported organization.
Note: The previous discussion is not a complete definition of disqualified persons but is intended to indicate the complexity of identifying them.
Related Organizations
Individuals aren’t the only persons of concern to an exempt organization. Transactions with related organizations require risk management to identify excess benefit transactions, and to recognize potential unrelated business income and nonexempt activities. Therefore, you must identify all related organizations to ensure that you’ve documented applicable transactions and disclosed them on Form 990.
Related organizations (in addition to a parent or subsidiary) include:
- A Brother/Sister organization. This is controlled by the same person or persons who control the filing organization.
- A Supporting/Supported organization. This is (or claims to be), at any time during the organization’s tax year either a supporting organization of the filing organization or a supported organization.
Control can be established through either influence over the governing board or ownership of the organization. Control can be direct or indirect. For example, the filing organization controls Entity A, which in turn controls Entity B, therefore, the filing organization is deemed to control Entity B.
Donor Advised Funds
A distribution from a donor advised fund that results in “more than an incidental benefit” to certain persons can trigger an excise tax on the recipient and, in certain instances, the fund manager. People who can benefit include a donor or any person designated by the donor who has advisory privileges; family members of these persons; and entities in which the preceding individuals have more than a 35% interest. In this instance, the definition of family members is the same as the definition for disqualified persons.
Observations
Identifying changes in the identity of family members and their businesses and investments is the biggest challenge in maintaining current lists of relationships. Organizations should communicate with key persons at regular intervals (no less frequently than annually) to update the appropriate lists.
Actions to Consider:
Maintaining accurate lists is the best way to minimize the likelihood of undesirable tax consequences. If you haven’t updated your lists in the last six months, you should consider doing so now.
Brady Ware Nonprofit Advisors want to help you fulfill your mission with financial health and compliance services and a network of nonprofit consultants who specialize in strategic decision-making.
Questions?
Dylan manages a variety of accounting and auditing engagements for the firm’s Dayton, Ohio, clients in numerous industries, including construction, manufacturing, and technology. He has an extensive background in auditing nonprofit organizations, including those that are recipients of federal funding, as well as experience in auditing employee benefit plans.