This past year has been difficult for many businesses in the U.S. due to the COVID-19 pandemic. Nonprofits and charities have been hit especially hard. Much of their work involves community organizing and fundraising, which the pandemic has made it very difficult. As we move into year two of the pandemic and virtual events, we wanted to take a look at:
- The difficulties nonprofits are facing.
- Spending plans that can help designated tax-exempt organizations.
- How to maintain tax-exempt status.
- What the next year might involve for nonprofits to stay in business.
We’re looking at nonprofits and how you can ensure your charitable organization comes out of COVID-19 in a strong position.
The Difficulties Facing Non-Profits
This past year has been difficult for businesses, customers, and employees. 83 percent of non-profits have experienced a reduction in revenue. But that does not mean your group can stop working. Instead, now is the time to do three important things:
- Reach out to employees to make sure they have what they need to be successful while they work from home.
- Check in with constituents to see if they need aid.
- Meet with your board members and senior employees to discuss the health of the group.
We’re going to be focusing primarily on the last point. There are a few parts of the COVID-19 economic stimulus bills that are designed to help nonprofit and tax-exempt organizations. There are also other funding opportunities available. Even in this difficult year, you have bills and employees to pay, so you need to make sure you’re generating cash flow.
The Paycheck Protection Program
The Paycheck Protection Program (PPP) is a federally funded loan program. The guidelines released by the SBA after the Economic Aid Act specified which not-for-profit businesses are eligible:
- Non-profit and charitable organizations.
- tax-exempt veterans organizations 501(c)(19)s
- tribal businesses 31(b)(2)(C)s
- professional organizations
- chambers of commerce
- charitable religious organizations
- housing cooperatives
- eligible destination marketing organizations
- 501(c)(4)s are excluded from the PPP.
- The company cannot employ more than 500 people. All employees must be based in the United States.
- The non-profit was founded before February 15, 2020.
The American Rescue Plan Act expanded eligibility to entities who
- employ 300 or fewer employees per physical location.
- do not derive more than 15 percent of receipts or devote more than 15 percent of activities to lobbying activities.
More information on the PPP, including loan amounts, covered periods, and forgiveness can be found on our website.
Other Funding Programs
There are three other funding programs to check out:
- Federal grants
- State and local funding
- Private sector grants and loans
Targeted Economic Injury Disaster Loan (EIDL) Advances. Forgivable federal grants from the SBA. Businesses can receive up to $10,000. The SBA portal has more information.
States and local governments have relief programs to help small businesses and nonprofits. The National Council of Nonprofits set up a website make funding easier to find.
Start Small Think Big created a list of private sector grants and loan opportunities. It’s not a comprehensive list but provides a lot of resources for small business owners and nonprofit organizations.
The CARES Act, passed in March 2020, incentivized charitable giving and donation by
- providing a tax deduction for giving up to $300.
- raising the cap for individual annual contributions to 100 percent of adjusted gross income.
- allowing corporations to claim 25 percent of deductions.
Marketing campaigns emphasizing these new pandemic changes can help raise money for your nonprofit. Donations can help individuals lower their taxable income on their income tax return.
This year it is important to keep track of cash flow in and out of your nonprofit organization. Record keeping software can be particularly useful to track your organization’s:
- gross receipts.
- tax deductions.
- taxable income.
Keeping track of all donations and receipts will make tax filing easier. It will also ensure that you have the documents necessary to maintain your nonprofit and tax-exempt status under federal tax law and state tax codes.
Tax Exempt Status During COVID-19
Charitable organizations are generally both nonprofit and tax-exempt entities. Nonprofit status is from the group’s incorporation under state law while tax-exempt status is a federal income tax exemption.
It’s easy for a charity to face revocation of its tax-exempt status. This year that could be a blow to a non-profit. Luckily, the Internal Revenue Service (IRS) has a helpful guide with FAQs for how to maintain tax-exempt and nonprofit status. We’re going to run through some of the main points here.
What is Tax Exempt Status?
The IRS recognizes certain groups as exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code. This includes:
- private foundations,
- educational institutions,
- other public charities.
Specifically, these groups cannot be organized for the benefit of private interests or shareholders. An organization must also adhere to at least one of the exempt purposes outlined in Section 501(c)(3).
How to Keep Tax Exempt Status
There are six things to keep in mind:
- The foundation cannot “serve the private interests, or private benefit, of any individual or organization more than insubstantially.” It also cannot have its “income or assets benefit insiders” through inurement.
- The organization is allowed to lobby members of a legislative body. However, lobbying cannot be a major part of the organization.
- There cannot be any “political campaign activity” for a candidate or party running for public office.
- Income from “unrelated activities” can jeopardize tax-exempt status.
- The organization must file a Form 990 return annually to continue qualifying for exempt status.
- The originally stated purpose of the organization must be maintained. This is outlined in the IRS application for tax exemption.
What Forms Does the Organization Need to File?
A Form 990 return is required for tax-exempt organizations, but there are three different types offered by the IRS.
- Form 990-EZ is allowed for “tax-exempt organizations, nonexempt charitable trusts, and section 527 political organizations.”
- Exempt groups can use Form 990-T to:
- Report unrelated business income.
- Request a credit for certain federal excise taxes paid or for small employer health insurance premiums paid.
- Report unrelated business income tax on reinsurance entities.
- If the organization’s “annual gross receipts are normally $50,000 or less,” then you can file Form 990-N.
- Gross receipt are the total amounts received during the tax year.
The IRS form you need will depend on gross receipts and total assets. It’s important to check the IRS website to ensure you have the most up-to-date information.
When your nonprofit corporation formed, articles of incorporation had the basic information to qualify for tax-exempt status. After that, bylaws served as an “operating manual.” The bylaws protect you from breaking state laws in your business activities.
Now, it is important now to:
- brush up on these documents.
- meet with your board of directors.
- consult the annual report.
- ensure your nonprofit group is still mission focused.
Maintaining non-profit status and keeping the organization running is integral. If you have any questions, consult an attorney for legal advice.
What the Next Year Could Entail
Nonprofits and charitable groups are needed more than ever before as we begin to recover from a global pandemic and economic crisis. Fundraisers in the coming year will be essential.
Back in August, Chris Budnik, the executive director of Healing Transitions, wrote: “My encouragement to you and your team is to stay the course. Don’t give up just yet.” He urged organizations to follow their mission statement. “I believe you’ll find that when you remain true to yourself,” he said, “your donors will remain true to you.”
Nonprofits and charitable groups are integral to the lives of millions of people. They provide life saving services and connect people together. Many non-profits have been at the forefront of the pandemic response while struggling to stay afloat. The past year has highlighted our need for these organizations and the work they do.
As we begin to emerge from the pandemic, nonprofits and charitable organizations are needed more than ever before and can be the light at the end of the tunnel.