Tax-exempt organizations enjoy the benefit of not paying income tax on net income generated as a result of their exempt purpose, but not without stipulation. Having internal policies is not unique to tax-exempt organizations, but they must ensure they have implemented robust policies, are adhering to them, and are periodically reviewing them. Such policies include:
Quid Pro Quo Contributions: Tax-exempt organizations often have fundraising activities. Members of the public may purchase tickets to an event—often a meal, entertainment, golf, or gaming activities—where the cost of the ticket exceeds fair market value. Due to donative intent, individuals are willing to pay a price that is greater than the cost of the benefits received. If the cost of a ticket exceeds $75, the tax-exempt organization is required to provide documentation to the donor stating both the cost of the benefit received and the overage that is eligible for deduction as a charitable contribution. The tax-exempt organization should have a clear policy that outlines procedures to provide such documentation completely and timely.
Board Review of Form 990: Though it is not specifically required, it is recommended that the Board of Directors of a tax-exempt organization review Form 990 prior to filing with the Internal Revenue Service (IRS). To avoid a last-minute scramble, an organization should have policies and procedures in place describing whether the Board will review and in what medium (e.g., paper, electronic, verbal presentation). Some organizations have a committee of the Board that reviews, rather than the full Board. This approach should be incorporated within the written policy to avoid confusion.
Conflict of Interest Policy: Tax-exempt organizations should have a conflict of interest policy to mitigate the risk of an interested person (generally defined as an officer, key employee, or board member) gaining personal financial benefit from his or her affiliation with the tax-exempt organization (other than receiving fair market value compensation for his or her service to the organization). The IRS recommends that the conflict of interest policy includes each of the following:
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- Definition of conflicts.
- Identification of the classes of individuals covered by the policy.
- A method to facilitate disclosure to help identify potential conflicts of interest.
- An outline of procedures for managing identified conflicts of interest.
Whistleblower Policy, Document Retention Policy, Document Destruction Policy: Often these three policies go hand-in-hand. A whistleblower policy encourages employees to report credible information on violations of policy or law and protects from retaliation employees who file reports in good faith. In some jurisdictions, state and local laws also protect whistleblowers, so it is important that a tax-exempt organization maintain a whistleblower policy that complies with all applicable laws. In addition, there should be a document retention and destruction policy such that records are maintained for an appropriate time. At such time as it is acceptable to destroy documents, they should be destroyed securely, and the policy should clearly outline acceptable procedures for destruction.
Joint Ventures Policy: An organization’s joint venture policy will include many aspects, but the organization should be sure to include language that safeguards its tax-exempt status. As specifically detailed within the instructions for completing Form 990, the IRS recommends that a tax-exempt organization’s joint venture policy includes language requiring that organizational documents and operational practices “ensure that the organization’s tax-exempt status is protected.”
Lobbying Policy: An organization exempt from income tax under Internal Revenue Code Section 501(c)(3) is strictly prohibited from engaging in lobbying activities that advocate for or against any individual candidate for public office. Doing so could result in the organization losing its tax-exempt status. However, there is not a prohibition against general lobbying for a cause that is in furtherance of the organization’s tax-exempt purpose. As an example, a children’s hospital is permitted to advocate for legislation that requires children to wear bicycle helmets, but it may not support a specific candidate who wants to enact legislation to ensure children wear bicycle helmets. For this reason, the organization should have a clear policy for employees to follow so that no violations occur—with the risk of losing tax-exempt status, the organization should pay extremely close attention to all lobbying activities.
Tax-exempt organizations may already have some or all of these policies in place. One concern, however, is how often the organizations are reviewing and updating these policies. There is not a specific IRS provision for timing, but best practice is to review each policy annually. With rapidly changing technology and access to resources, last year’s policy may be outdated faster than the organization anticipated.
If you have questions about organizational policies or would like assistance with any matter involving tax preparation and accounting, contact a PYA executive below at (800) 270-9629.
