CPAs volunteering at nonprofits.

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.

TAX-EXEMPT STATUS

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 be unavailable.

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.

The CPA 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.

The 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 supported.

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. Excess 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 sanction.

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