Nonprofit organizations can be thankful for legal standards that benefit charitable organizations or make compliance with the relevant laws more straightforward, including in the following five areas:
1. Donors and the Tax Deduction for Charitable Contributions. Tax-exempt organizations are thankful for their donors, and the increased ability of donors to make charitable gifts as the economy is improving. The tax deductions for contributions to section 501(c)(3) organizations is a basic idea, but important for encouraging donations to tax-exempt charitable organizations. This significant element of the federal tax law is threatened from time to time by lawmakers (including a proposal in President Obama’s April budget request to cap the value of charitable deductions at 28 percent for high-income taxpayers), but organizations can be thankful now that the tax law permits these deductions. (Note that the phaseout of itemized deductions may impact certain taxpayers who make charitable contributions, such as high-income taxpayers with no other itemized deductions.)
2. Boards of Directors. Nonprofit organizations appreciate their voluntary board members. The members of many Boards of Directors could use training to provide the basics of state and federal laws that impact their role as directors. Directors should have a basic understanding of state law regarding fiduciary duties and conflicts of interest, and the federal law requirements for their nonprofit (such as the Form 990 filing requirement and the prohibition against private inurement). The IRS currently has a focus on corporate governance issues, objecting in some situations to boards of directors based on their size (e.g., too small) and composition (e.g., all family members).
3. Flexibility in Structuring. A tax-exempt organization may use a corporate structure that corresponds to its specific activities. The recent IRS guidance that donations to single-member limited liability companies (SMLLCs) of charitable organization are deductible (see Notice 2012-52) is important for allowing tax-exempt organizations to use SMLLCs. Nonprofits may use a group of affiliated organizations, tax-exempt and taxable, to house their various activities. For example, a tax-exempt charitable organization may have a tax-exempt supporting organization that conducts fundraising activities, a taxable subsidiary that houses an unrelated trade or business activity, and a single member limited liability company that operates a related activity to protect the exempt organization parent from potential liabilities of operating the activity.
4. Rebuttable Presumption of Reasonableness for Compensation. The treasury regulations contain a method for a public charity to establish a rebuttable presumption that the compensation that it pays is reasonable. Treas. Regs. § 53.4958-6(c)(2). Tax-exempt organizations other than public charities also can follow the rebuttable presumption procedure as a best practices method for setting compensation.
5. Uniform Prudent Management of Investment Funds Laws. Charitable organizations appreciate the certainty provided by state laws regarding the organization’s management and use of its investment funds. These state laws also provide a method for modifying restrictions on an organization’s endowment funds.
And, the government is open!
The preceding is a guest post by Jane D. Callahan, a shareholder of the Orlando, Fla.-based law firm of Dean, Mead, Egerton, Bloodworth, Capouano & Bozarth, P.A. With more than 25 years of experience as a tax attorney, she represents a wide range of charities and other tax-exempt organizations, from their inception to handling tax and corporate issues. For more information, contact firstname.lastname@example.org. Callahan regularly contributes to Dean Mead’s Tax Law blog.