Quick Question: What actions endanger nonprofit status?

Nonprofit organizations live and die by active 501(c)(3) status. Knowing the list of ‘don’ts’ and ‘watch outs’ keeps an organization thriving and serving its primary mission.

Here’s the IRS list of activities nonprofits should avoid:

  1. Inurement and private benefit – Inurement means receiving more benefit than you provide. This applies to employees, board members and significant donors. A private benefit is a special privilege not offered to the general majority and specifically to individuals that “control” the organization.
  2. Substantial lobbying activity – Organizations must be careful to ‘make the mission the mission.’ Lobbying can distract from a nonprofit’s primary objective, and the IRS disallows inordinate amounts of lobbying for a cause with legislators.
  3. Political campaign activity (endorsing a candidate) – Similar to lobbying, nonprofit organizations must not be overt in endorsing a political candidate for office, even when the candidate aligns with the organization’s mission.

Other areas that the IRS scrutinizes for integrity include:

  1. Significant revenue from unrelated activities – For example, receiving rents from investment properties could be considered income from an activity unrelated to the mission.
  2. Compliance with tax filings (employment taxes, sales and excise taxes, Form 990) – Failure to comply can cause a nonprofit organization to forfeit 501(c)(3) status and often results in significant penalties and interest.
  3. Recordkeeping requirements – Know what records you need to keep, and for how long. Certain expenses require additional substantiation of “who, what, when, where, and exempt purpose”.
  4. Employee business expenses – Nonprofit organizations must have transparency in use of funds because the funding source comes from donors or grants, not from for-profit business.
  5. Governance policies – Nonprofit organizations are required to comply with certain laws created from the Sarbanes Oxley regulations. These include a whistle-blower policy and a records retention/destruction policy.  Another policy that we believe is critical for a healthy board is a conflict of interest policy.

If you have questions about nonprofit activities or compliance requirements, contact Rebecca DaVee, CPA or Christina Nichols, Tax Senior at Salmon Sims Thomas & Associates.