Besides having your past three Form 990s available to the public, you should also check all state and local government regulations to determine what other documents you are required to have available to donors and other stakeholders.
You will need to be financially accountable and be able to show that income is related to the purposes of the organization. If, for example, the IRS determines that income is unrelated to the purpose of your nonprofit organization, you may be liable for taxes even if you have tax-exempt status. One charity dedicated to raising money for the treatment of a serious illness also owns a building from which it performs its administrative activities. It utilizes only two of the three floors in the building and rents the third floor to another company. This rental income is taxable because it does not relate to the organization's main function. If, however, the floors were rented to a research team that was working on medical issues relating to the same illness, this could possibly be considered related income.
Organizations that maintain nonprofit status as public charities typically obtain less than 33 percent of their backing from gross investment earnings and more than 33 percent of their funding from membership fees, contributions, and gross receipts from purists that are an integral part of their tax-exempt function.
What is and is not considered advertising is also a question that has many answers. If, for example, Bob's Meat Market purchased uniforms for a Little League team, the value of the uniforms would not be considered unrelated income, but an advertising expense. However, if Bob took out an ad in a journal for his meat market, it would depend on the organization and the content of the ad as to whether this was or was not considered advertising and thus unrelated income. Journal ads can be a gray area. Talk with a tax specialist and don't be surprised if she needs to refer to her tax books to give you answers.
Unrelated business income can be tricky, and it is advisable to sit down with an accountant and review what falls under that classification and is considered taxable income. When you pay taxes in this situation you will pay under the corporate rate if you incorporated prior to receiving your 501(c)(3) status.
Being financially accountable for a nonprofit organization means maintaining integrity and making sure all income and expenses are clearly accounted for. It also means upholding the nonprofit status of the organization and being accountable to the IRS in the case of an audit or review of the tax-exempt status. You will maintain your nonprofit status, provided your organization:
Does not engage in for-profit business activities
Does not have board members or other nonstaff individuals benefiting monetarily from the activities of the organization
Is not conducting any kind of income-generating activity that is not in keeping with the purposes of the organization
With the rapid increase in nonprofit groups in recent years, the government is now watching very closely to make sure such groups follow the IRS guidelines.
Substantiation and Disclosure Requirements
According to the IRS, a donor is responsible for obtaining a written acknowledgment from a charity for any single contribution of $250 or more before he can claim a charitable contribution on his federal income tax return. This means you are required to provide such written acknowledgment.
You are also required to provide a written disclosure to a donor who receives goods or services in exchange for any single payment of $75 or more. This includes buying tickets to a fundraising dinner or auction. The fair market value of the ticket must be determined and provided to the contributor so he can deduct this amount from the amount spent to purchase the ticket. The remaining total can then be deducted on his income tax return. Keep in mind, just because your organization may have received a discount on tickets that were $25 each, does not affect the fair market value, which may be $50 each.
While you are required to provide the fair market value of goods or services greater than $75, you are not required to advise the donor how she should deduct this amount from her taxes. Do not provide financial advice that can get your organization into trouble.
Sometimes it is difficult to gauge fair market value, but you need to come up with a system and a number you can justify should the IRS ask you to do so. An estimated amount can be printed on the ticket or provided on a separate document, such as a thank-you letter.
Statement of Acknowledgment
A simple statement of acknowledgement requires only the name of the organization, amount of the contribution, description of a noncash contribution or statement of goods or services provided, and a good faith estimate of the value of such goods or services. Avoid using a small font because the type should be large enough to come to the attention of the donor. Also, make sure the date is included. This can be sent in a letter, computer printout, or any other clear manner. You should send these acknowledgments out by mid-January (no later than January 31) of the following year so people have them for their tax returns. Save a copy for your organization's files.
Be diligent about sending out statements acknowledging donations. When people do their income tax returns, they generally look for tax deductions. If you have 501(c)(3) status, they are anxious to receive a letter from you.