Even if current donations are your not-for-profit’s bread and butter, you can’t afford to neglect planned, legacy or deferred gifts. These gifts, generally made through wills and living trusts, often are much larger. Your employees don’t need to be directly involved when donors establish gifts through their estate plans. But your development staff should know how the process works and how to encourage such contributions.

How the process works

In addition to will and trust gifts, planned donations can be made with beneficiary designations on retirement accounts, such as 401(k) plans and IRAs, and life insurance policies. However, charitable annuities and other more complex estate planning instruments, such as charitable remainder trusts, may come into play.

Donors need to indicate in a legally binding document (such as a will) your nonprofit’s full name and address. Although your organization’s tax ID number is helpful, it isn’t required. The legal document also must describe the donation and state any restrictions on its use by your nonprofit.

Making your case

You can’t just be reactive and accept windfalls that come your way. You need to proactively pursue planned gifts. For example, feature information on planned giving in prominent locations on your website, in your newsletter and in brochures and other promotional materials. Don’t assume that only older, long-time donors might be interested. Many people may not even consider making a planned gift unless you educate them about the option.

Recognize that sometimes even wealthy individuals fail to make proper estate plans. They may promise to leave something to your organization, but if they don’t put it in writing, state intestacy laws can lead to unintended results. Use subtle and sensitive messages to get the point across.

You might also emphasize the tax benefits of acting quickly. Unless Congress acts, the current generous estate tax exemption, $13.61 million in 2024, is scheduled to revert to an inflation-adjusted $5 million in 2026. Supporters whose estates wouldn’t be subject to estate taxes now but could be after 2025 may want to incorporate a planned gift into their estate plans before then.

It’s also helpful to show how you can put planned gifts to work. Many donors expect planned gifts to go toward special projects or programs rather than day-to-day expenses. You can help provide ideas for potential special uses, but you may want to make the case for contributing to your general operating fund.

Gaining an edge

Donors are less likely to leave gifts to young or financially insecure organizations. So if your nonprofit already has a long track record and strong reputation, you probably have an edge. However, it’s never too soon to start building relationships with financial and legal advisors in your community who might help individuals prepare estate plans. Also, try to secure planned gifts from such committed stakeholders as board members. Contact us with questions.

© 2024

Economic, social and political events in 2024 have the potential to negatively influence your not-for-profit’s budget. So if you generally prepare static budgets well in advance of each fiscal year, you may want to switch things up. Rolling budgets can provide your organization with greater flexibility. And in the event of major changes, you may even want to consider reforecasting your current budget.

Rolling budgets

Rather than leaving a budget in place for the year, organizations with rolling budgets set periodic dates to adjust the numbers. For example, you might budget four quarters ahead. At the end of each quarter, you would update the budgets for the next three quarters and add a new fourth quarter.

The rolling approach anticipates changes and encourages your organization’s leaders to take a forward-looking perspective. It works well for nonprofits dealing with shifting ground and evolving strategies. Plus, it provides more useful information for decision making than a backward-looking static budget.

Reforecasting

Some nonprofits may require an even more dramatic budget fix. Reforecasting your entire budget could boost your nonprofit’s odds of survival in tough times. This option generally makes sense if you’ve undergone a major change that has implications for overall operations, such as securing or losing a large grant. Reforecasting also typically makes sense if it becomes clear your existing budget is materially inaccurate.

This process begins by identifying costs and revenues that are variable (for example, supplies and program revenue) and the effect that a trigger event might have on them. For example, during the COVID-19 pandemic, the fixed expenses (such as payroll or rent) of many organizations changed dramatically. You should reforecast any items that are likely to differ substantially from your original estimates.

You may also find it worthwhile to apply budget modeling with different scenarios. For instance, what would happen if a major revenue source were cut by half? Or if it disappeared altogether? Would you seek a loan, cancel a capital project or trim staff? The final reforecasted budget is a fully revised document, not simply a handful of line-item adjustments.

Going forward

Even if this isn’t your nonprofit’s budget season and you already have a budget in place for the year, think about how you might change the process in the future. Contact us for budgeting help.

© 2024

Charlotte thought she knew everything about running a not-for-profit community hospital. So the CEO was shocked when the IRS contacted her hospital about potentially losing its tax-exempt status. The IRS mentioned several issues, including the hospital’s increasingly wide operating margins and its extensive use of advertising. As the dispute proceeded to litigation, Charlotte learned that the hospital had tripped over the commerciality doctrine.

This is a fictitious example. But the commerciality doctrine can be all too real.

Exception to the rule

The commerciality doctrine, along with the operational test, was created to address concerns over nonprofits competing at an unfair tax advantage with for-profit businesses. The operational test generally requires nonprofits to be both organized and operating exclusively to accomplish their exempt purpose. The test also mandates that no more than an “insubstantial part” of an organization’s activities further a nonexempt purpose.

What this means for your nonprofit is that you can operate a business as a substantial part of your activities so long as the business furthers your exempt purpose. However, under the commerciality doctrine, courts have ruled that the otherwise exempt activities of some organizations are substantially the same as those of commercial entities. As a result, the entities are not tax exempt.

Don’t operate like a business

No single factor is decisive, but courts and the IRS consider several issues when evaluating whether an organization fails the commerciality doctrine. In general, you risk your exempt status if you operate like a for-profit business. So, for example, has your nonprofit set prices to maximize profits or has it accumulated unreasonable reserves?

Other potential pitfalls include providing fewer lower cost services than your nonprofit peers and advertising your services to the general public. Also consider the extent to which your organization relies on charitable gifts. Donations should be a significant percentage of your nonprofit’s total support.

The UBIT threat

There’s another risk for nonprofits operating a business. Even if you pass muster under the commerciality doctrine and retain your tax-exempt status, your organization could end up liable for unrelated business income tax (UBIT). Revenue generated from a regularly conducted trade or business that isn’t substantially related to furthering an organization’s tax-exempt purpose often is subject to this tax.

Determining UBIT liability or, worse, whether you could lose your exempt status under the commerciality doctrine, can be complex. Contact us to discuss the many factors that go into these determinations and for help avoiding missteps.

© 2023

Even when they’re nonprofits, trade associations and chambers of commerce generally qualify for a tax exemption under Section 501(c)(6) of the Internal Revenue Code, not Sec. 501(c)(3). And these “business leagues” (as the IRS terms them) must adhere to a different set of rules. In fact, if you haven’t looked at the rules recently, your organization may not be in compliance and could be risking its exempt status.

Potential business league violations

Business leagues exist to promote their members’ common interests and improve business conditions of “one or more lines of interest.” Typically, these groups get into trouble if they interpret terms such as “promote common interests” and “improve business conditions” too broadly. For example, your organization might provide customized sales training for only some of its members. That’s generally a no-no.

Another potential violation is engaging in business that’s normally carried out on a for-profit basis. And groups that are primarily social or that exist to promote a hobby usually don’t qualify for 501(c)(6) status.

Group vs. individuals

To avoid IRS scrutiny, you must be able to differentiate between qualified and nonqualified activities. For example, you’re typically allowed to attempt to influence legislation relating to the common business interests of your members. You can also test and certify products, establish industry standards and publish statistics on industry conditions to promote your group’s line of business. In addition, you’re allowed to research effective business practices to share with your members.

But you should limit activities that benefit specific members rather than your industry or profession as a whole. These might include:

• Selling advertising in member publications,
• Facilitating the purchase of supplies for members, and
• Providing workers’ compensation insurance to members.

The key is your association’s “primary purpose.” Most 501(c)(6) groups perform some activities that don’t primarily serve common interests. But these activities should be limited in scope and number.

Even when certain activities don’t threaten your exempt status, performing services for members can trigger unrelated business income tax (UBIT). Typically, members pay for such services directly, instead of through dues or other common assessments. Depending on the services your association provides and the revenues raised, additional reporting may be required and you may owe UBIT.

When to consider a for-profit offshoot

If you find your organization is performing more (or more substantial) services for individual members than is “safe,” you might consider forming a separate for-profit organization. Then any services that benefit individuals can be shifted under this taxable umbrella and you can preserve your association’s not-for-profit status. Contact us for information about how to establish a for-profit offshoot.

© 2023

Relatively high interest rates and tight lending standards are making it difficult for even for-profit businesses to apply and qualify for bank loans. But not-for-profits, which may lack adequate collateral or steady cash flow, generally face a greater uphill battle when it comes to obtaining financing.

If you’ve ruled out finding a grant or launching a capital campaign to fund your expansion or cover the cost of a large project, one of the following financing options may work for you.

Traditional lenders and products

Bank financing generally comes in two basic forms:

1. Line of credit. This is a negotiated amount that you can draw against as needed. If your goal is to smooth out cash flows over the year, it’s usually the best option. A maximum amount is available to you, but you use only what you need. Required monthly payments may be limited to interest expense and principal payments can be made any time. So you have flexibility in how much you repay each month.

2. Term loan. Here, you receive a lump sum, usually for a specific purchase. The application process is usually more complicated, and approval typically takes more time. Repayment is in installments, which means you’d make equal monthly payments consisting of interest and principal throughout the entire loan term.

Bank lenders usually look at an applicant’s financial statements, cash-flow predictability, management and governance, collateral, and repayment plan. But even if your nonprofit is approved for a loan, the interest rate may be prohibitive. Banks almost always charge higher rates for what they perceive as higher risk loans.

Credit unions may be more likely than traditional banks to take a chance on nonprofits. Because they’re also nonprofit entities and don’t pay income tax, they may extend loans with lower interest rates.

Other possibilities

Although credit cards usually are much easier to obtain than a loan, avoid using them to finance any large amount you can’t repay quickly because the interest will add up fast. If your project is relatively small, a crowdfunding campaign through GoFundMe, Donorbox or a similar online platform, may be a less expensive way to go — particularly if you already have a large online following.

Also take a look at nonprofit loan funds — such as the Nonprofit Finance Fund or Propel Nonprofits — that specialize in servicing charities. They may offer a range of products (including lines of credit and emergency and mortgage loans) at low to no interest and favorable terms.

A tax-exempt bond issued by your municipality, county or state government is another possible option. Tax-exempt interest rates generally are two to three percentage points lower than on loans from other sources and the Internal Revenue Code generally allows nonprofits to use the proceeds of a bond issue to further their stated charitable purpose.

However, the process can be lengthy, complicated and expensive. Bond issues usually involve stringent financial disclosure requirements and tighter overall scrutiny. A line of credit or term loan can be approved in a matter of weeks, but bond financing can take six months to a year before funds are received.

Don’t despair

If none of these options seem viable, don’t despair. We can help your nonprofit by preparing financial documentation for lender scrutiny and suggesting the best possible approaches for obtaining the financing you need.

© 2023