Because of their business and
financial acumen, CPAs are often asked to serve as
board members or officers of nonprofit
organizations. While this can be a satisfying
experience, they should be aware of the numerous
requirements applicable to nonprofits. Failure to
adhere to these rules can subject officers and
board members to penalties, and may even
jeopardize an organization’s tax exemption.
Numerous nonprofits qualify for an exemption
from federal income taxes; many are also eligible
to receive deductible contributions. This status
is crucial. If lost, the nonprofit’s income would
be subject to federal income tax, donors would be
unable to deduct contributions (making fundraising
difficult, if not impossible) and state and local
tax exemptions (especially for property tax) would
A CPA looking to work with
a nonprofit should take special care to assess the
organization’s records (articles of incorporation,
bylaws, etc.) and operations, to ensure that the
entity has properly established its exempt status
and continues to maintain it.
ESTABLISHING EXEMPT STATUS
A nonprofit’s articles of organization must
limit its activities to tax-exempt purposes
. It cannot be empowered to carry out any
substantial nonexempt activities.
should check the entity’s exempt status paperwork.
Application for exemption is generally made by
filing IRS form 1023; some small nonprofits (and
churches) need not file this form.
practitioner should also review the IRS
determination letter the organization received.
Often, the service will grant public charity
status under an advance ruling, in which the
organization will be deemed a public charity for
five years; at the end of this period, it will
need to show that it has truly been publicly
MAINTAINING EXEMPT STATUS
In addition to being created properly, an
entity must be operated exclusively in accordance
with its exempt purposes.
Although it must
be primarily engaged in its exempt mission,
insubstantial other activities should not
jeopardize exempt status.
No private inurement. No
part of the organization’s net earnings (or
operations) can accrue to the benefit of private
shareholders or individuals. This area poses the
greatest risk of inadvertent noncompliance.
Technically, any inurement, regardless of
amount, can trigger the loss of exempt status.
However, because such a punishment is drastic,
intermediate sanctions (excise taxes) were created
to penalize those specifically responsible, yet
allow the organization to keep exempt status.
These sanctions apply to excess benefits
provided to disqualified persons. Generally, these
are persons in a position to exert substantial
influence over the organization.
benefits are economic benefits provided by a
nonprofit to a disqualified person, in excess of
the value of the services provided by such person.
In addition, organization managers who knowingly
participate in providing a disqualified person
with an excess benefit may also be subject to
For a discussion of the tax
risks and issues facing nonprofits, see “A Tax
Primer for CPAs Volunteering at Nonprofit
Organizations,” by Mark Cowan, J.D., CPA, and
Denise English, Ph.D., CPA, CIA, in the March 2007
issue of The Tax Adviser.
—Lesli S. Laffie, editor
The Tax Adviser