There are many reasons why a 501(c) tax-exempt organization might consider restructuring. For example, a financially struggling nonprofit might decide to join forces with another organization to cut costs and share resources. Or a nonprofit might decide to change its state of organization. Such changes generally qualify for a simplified restructuring process. However, it’s important to follow certain steps.

An easier process

Tax-exempt organizations making certain changes to their structure used to be required to file a new exemption application — and create a new legal entity. But IRS Revenue Procedure 2018-15 changed the rules regarding nonprofit restructuring. Now, in many cases, nonprofits can simply report a restructuring on their Form 990. To be eligible for this simpler process, your restructuring must satisfy certain conditions:

First, your organization must be a U.S. corporation or an unincorporated association; be tax exempt as a 501(c) organization; and be in good standing in the jurisdiction where it was incorporated (or, in the case of an unincorporated association, where it was formed).

Second, your restructuring must involve one of the following:

1. Changing from an unincorporated association to a corporation,
2. Reincorporating a corporation under the laws of another state after dissolving in the original state,
3. Filing articles of domestication to transfer a corporation to a new state without dissolving in the original state, or
4. Merging a corporation with or into another corporation.

Your “surviving” organization is required to carry out the same exempt purpose that the original did. Its new articles of incorporation must continue to satisfy the IRS’s organizational test.

When the rules don’t apply

There are some additional limitations to using Form 990 to report a restructuring. For example, the new rules don’t apply if your surviving organization is a “disregarded entity,” limited liability company (LLC), partnership or foreign business entity.

Also, surviving organizations still have reporting obligations — for instance, to report the restructuring on any required Form 990 for the applicable tax year. And these rules apply only to federal income tax exemptions. Your state’s laws could require you to file a new exemption application.

Will you qualify?

Even though nonprofit restructuring can be straightforward, you should talk to your tax advisors before making a move. It’s possible your plans won’t qualify under Rev. Proc. 2018-15 and that you’ll need to apply for a new exemption and clear other hurdles. Contact us for guidance.

© 2024

When’s the last time you evaluated your not-for-profit’s social media strategy? Are you using the right platforms in the most effective way, given your mission, audience and staffing resources? Do you have controls to protect your nonprofit from reputation-damaging content?

These are important questions — and it’s critical you review them regularly. At the very least, you need a social media policy that sets some ground rules.

Annual reviews

As you know, the social media landscape changes quickly. The platform that’s hot today may be decidedly not hot tomorrow. So review your online presence at least once a year to help ensure you’re dedicating resources to the right spaces. Most nonprofits maintain a presence on Facebook and LinkedIn because that’s where likely donors tend to be. But if you’re an arts nonprofit or visually oriented, Instagram may be a better venue. And if your constituents are teenagers or young adults, you’re most likely to find them on TikTok.

In general, fresher, frequently updated accounts get more traffic and engagement. So try not to overextend your organization by posting on multiple platforms with only limited staff resources. Determine where you’ll get the most bang for your buck by surveying supporters and observing where peer nonprofits post.

Content monitoring

Social media is 24/7, and incidents can escalate quickly. So closely monitor your accounts, as well as conversations that refer to your nonprofit. A “social listening” tool that scans the web for your nonprofit’s name can be extremely helpful.

But the best defense against reputation-busting events is a formal social media policy. Your policy should set clear boundaries about the types of material that are and aren’t permissible on your nonprofit’s official accounts and those of staffers.

For example, it should prohibit employees, board members and volunteers from discussing nonpublic information about your organization on their personal accounts. With organizational accounts, limit access to passwords and regularly check posts and comments. Content from your feeds can easily go viral and create controversy. Make sure your staff knows when to engage with visitors, particularly difficult ones, and maintains a zero-tolerance policy for offensive comments.

Crisis plan

Mistakes, or even intentionally damaging posts, can occur despite comprehensive policies. Create a formal response plan so you’ll be able to weather such events. The plan should assign responsibilities and include contact information for multiple spokespersons, such as your executive director and board president. Identify specific triggers and a menu of potential responses, such as issuing a press release or bringing in a crisis management expert. Be sure to include IP staffers or consultants on your list.

Hopefully, a crisis won’t occur. But if it does, you’ll want to sit down and review your plan’s effectiveness after the situation has been resolved.

Select and protect

These days, no nonprofit can afford to ignore social media. Just make sure you’re applying your time and effort to the right platforms and protecting your accounts from those who would harm your organization.

© 2024

Some provisions of 2022’s SECURE Act 2.0 (a follow-up to the SECURE Act of 2019) have been in force for over a year — including several that affect 403(b) retirement plans. If your not-for-profit offers staffers a 403(b) plan, you likely made some minor changes in 2023 and may have made more significant ones on January 1, 2024. A few additional provisions are scheduled to become effective in 2025 and 2026. To help ensure you’re adhering to the applicable rules and implementing enhancements where they make sense, review these significant SECURE Act 2.0 provisions.

Effective January 1, 2024

1. Pension-linked emergency savings accounts (PLESAs). Nonprofit employers may allow workers to contribute to a PLESA linked to their 403(b) plans. Contributions to these accounts are made on an after-tax basis, and the account balance attributable to employee contributions can’t exceed $2,500 (which will be indexed for inflation). Workers generally may make withdrawals from a PLESA much more easily than they can obtain a 403(b) plan hardship distribution or loan.

2. Student loan match. Employers can elect to make matching contributions to employees’ 403(b) accounts based on their student loan payments. This provision is intended to help build workers’ retirement savings even if their student loan payment obligations are preventing them from contributing.

Effective January 1, 2025

3. Automatic enrollment. For new plans adopted after 2024, nonprofits must provide automatic enrollment. Employees can then choose to opt out if they don’t want to participate. One exception: Organizations with 10 or fewer employees or that have been in operation for less than three years aren’t required to meet this mandate.

4. Catch-up contributions for some older employees. Generally, taxpayers age 50 or older are allowed to make additional “catch-up” contributions to their 403(b) plans. SECURE 2.0 will allow employees age 60 to 63 to make even larger catch-up contributions of $10,000 (indexed for inflation) or 150% of the regular catch-up limit, whichever is greater.

5. Part-time worker participation. Under the first SECURE Act, part-time workers are eligible to participate in their employers’ 403(b) plan if they have 500 hours of service each year for three consecutive years. Starting in 2025, the eligibility requirement will fall from three years to two years.

Effective January 1, 2026

6. Catch-up contributions for higher-paid employees. Changes to 403(b) catch-up contribution rules originally were scheduled to go into effect in 2024. But, in 2023, the IRS announced a two-year transition to help nonprofits comply with the new rules. Beginning in 2026, employees who earned more than $145,000 in the prior year (indexed for inflation) will be allowed to make catch-up contributions only to a Roth 403(b) account.

Another Roth 403(b)-related provision went into effect in 2022: Employees can elect that their employer makes matching contributions to their Roth 403(b) — if the nonprofit offers one. (Previously, matching contributions could be made only to an employee’s traditional account, even if the employee contributed to a Roth account.)

What stays the same (for now)

As always, traditional 403(b) plan contributions grow tax-deferred in participants’ accounts and withdrawals are taxed — generally when participants are retired and in a lower income tax bracket. Employee contributions are deducted from paychecks pre-tax.

The 403(b) contribution limit for 2024 is $23,000, and participants age 50 or older can make catch-up contributions of an additional $7,500. Also, participants who have been employed by your nonprofit for more than 15 years may be eligible to contribute an extra $3,000 a year, if you’ve included this provision in your plan. Contact us if you have questions about 403(b) limits or any changes under the SECURE Act 2.0.

© 2024

Not-for-profits aren’t required to produce audited financial statements. But audited statements are more likely to reassure big donors and grant makers about your financial stability and generally will be required if your organization applies for a bank loan. When you hire a CPA to audit your statements, the auditor is responsible for expressing an opinion on them and obtaining reasonable assurance that they’re free of material misstatements. Here are three tips for making the process as smooth as possible.

1. Understand roles

You’ll need to prepare estimates (such as an allowance for bad debts), adopt sound accounting policies, and establish, maintain and monitor internal controls. Auditors may make suggestions about these items, but it isn’t their responsibility to implement them.

Your auditor is required to evaluate whether internal controls, accounting policies and estimates are adequate to prevent or detect errors or fraud that could result in material misstatements. But remember, all decision making is strictly your nonprofit’s responsibility.

2. Involve your board

Sometimes nonprofits overlook their board’s role in annual financial statement preparation. That’s a mistake. Your board should have a strategic and oversight role in the process, which is part of its overall fiduciary duty. The board also can be a good resource for certain technical matters, depending on the members’ professional backgrounds.

3. Understand statement formats

Financial statement items — such as debt ratios, program vs. administrative expense ratios and restricted vs. unrestricted resources — can help tell you how your nonprofit is doing. So when your organization’s financial team is preparing them, make sure statements are as user-friendly as possible.

One of the best ways to see the big financial picture is to compare your budget, your year-end internally generated financial statements and the financial statements generated during an annual audit. This task can be completed more easily if the format of your annual audited statements is similar to that of your internal financial statements and budgets. If audited financial statements are formatted differently than internally generated reports, you may need to develop a bridge between them, perhaps in the form of an internal memo.

When reviewing internal vs. audited statements, look for any large differences in individual accounts resulting from audit correcting adjustments. These often are an indication of an internal accounting deficiency. You’ll also be able to spot any significant discrepancies between what was budgeted for the year and the actual outcome.

First timers

If you’re engaging an auditor to prepare financial statements for the first time, don’t be anxious. Just provide your auditor with every requested document and keep the lines of communication open. Your auditor will let you know if there’s anything you should be concerned about.

© 2024

Sponsorship and advertising dollars can provide a real boost to your not-for-profit organization’s income. However, if sponsors or advertisers receive a “substantial benefit” or if providing benefits isn’t a related business activity, you may owe unrelated business income tax (UBIT) on the payments. Here’s a quick look at what is and isn’t taxable.

UBIT typically doesn’t apply to sponsorships

Sponsorship dollars generally aren’t taxed. Qualified sponsorship payments are made by a person engaged in a trade or business with no arrangement to receive — or expectation of receiving — a substantial benefit from the nonprofit in return for the payment. The IRS allows exempt organizations to use information that’s an established part of a sponsor’s identity, such as logos, slogans, locations, phone numbers and URLs.

There are exceptions. For example, if a payment amount is contingent upon the level of attendance at an event, broadcast ratings or other factors indicating the quantity of public exposure received, the IRS doesn’t consider it a sponsorship. Therefore, the payment would likely trigger UBIT.

Providing facilities, services or other privileges to a sponsor (such as complimentary tickets to a concert or admission to a golf tournament) doesn’t automatically disallow a payment from being considered qualified. If the privileges provided aren’t what the IRS considers a “substantial benefit” or if providing them is a related business activity, the payments won’t be subject to UBIT. But when services or privileges provided by an exempt organization to a sponsor are deemed to be substantial, part or all of the sponsorship payment may be taxable.

UBIT usually does apply to advertising

Payment for advertising a sponsor’s products or services is generally considered unrelated business income, so it’s subject to UBIT. According to the IRS, advertising includes endorsements, inducements to buy, sell or use products, and messages containing qualitative or comparative language, price information, or other indications of value.

Some activities often are misclassified as advertising. Using logos or slogans that are an established part of a sponsor’s identity is not, by itself, advertising. And if your nonprofit distributes or displays a sponsor’s product at an event, whether for free or remuneration, it’s considered use or acknowledgment, not advertising.

Contact us

Recognizing the difference between taxable and nontaxable payments can be challenging. Be sure to contact us if you’re soliciting support from possible sponsors and advertisers and aren’t sure what crosses the tax line.

© 2023