5 Nonprofit “No-Nos”

5 Nonprofit “No-Nos”

There are lots of rules that are unique to nonprofits. Keeping them all in mind can be a challenge. This post is about 5 very important nonprofit “no-nos” that are really important. Sometimes people forget these basic rules because they aren’t paying much attention to the 990 tax return. Many charities forget these rules because they also just believe “If I am doing good work in the world but accidentally cross a line, we can address it then.” or “Perhaps the powers that be will be lenient since we are doing good work.”

Well, that’s not how it works. Below are my 5 Nonprofit No-Nos for 501(c)(3) public charities – not foundations. I am not an attorney, so this is not legal advice. Please speak to an attorney familiar with nonprofit law in your state to get clarity.

  • No Self-Dealing.

Nonprofit organizations should NOT be used to benefit people personally, especially not financially. Nonprofits can pay their contractors and staff. They can reimburse board members for expenses involved in attending board meetings too.  Some foundations even compensate board members. Boards can provide services at a cost to the organizations they serve on, but it should be at a reduced rate, and ideally should go through a bidding process. Also, the board should be able to speak about the matter frankly by asking the board member involved in the deal to leave the room for some of the conversation. And of course, that board member should not vote on the measure.

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But no one should be using a nonprofit organization to line their pockets, build their business, or for personal gain. Steering contracts or business leads to board or staff members is a NO-NO. Try to avoid all conflicts of interest. If you have a conflict, bring it to the attention of the board and find a remedy. 

  • No Electioneering.

501 (c) (3) organizations are largely prohibited from trying to influence the outcome of candidate-centered elections. Charities have some abilities to educate voters, register voters, and work on ballot measures, but anything that could be perceived as supporting or opposing a candidate or party or political committee is a NO-NO. Don’t shy away from advocacy, policy, or civic engagement. Just know the rules. www.BolderAdvocacy.org 

  • No Excessive Lobbying.

Luckily, nonprofits can spend a portion of their budget trying to influence legislation, including ballot measures. There are rules, filing considerations, and other things to consider. Nonprofits should be involved in shaping policy, just don’t go over the limits. I strongly suggest you file the 1 page “H election” with the IRS which allows you to measure your lobbying work easily. (you only need to file this once) www.BolderAdvocacy.org

  • No Relying on One Family.

Most nonprofits don’t know about this rule, but it’s right there in your 990 being measured. Nonprofits must adhere to the Public Support Test, which means you must demonstrate adequate public support. If your public charity gets a very disproportionate amount of money from 1 or 2 families or family foundations, it will look like your organization is acting as a tax avoidance vehicle for a rich family that gets to control your work. If this outsized funding continues for too long, there may be fines or the IRS may force you to become a foundation, which has all sorts of other rules. Many charities would love to get a huge gift from a family, but it has complications. There is a lot to know about this, so speak with counsel.

  • No Forgetting to File.

Forgetting to file your 990 is a NO-NO. Forgetting to do it three years in a row can get your tax exemption revoked. Also, don’t forget to comply with your annual state filings. Most states have annual filing requirements for registration, fundraising, soliciting, lobbying, or possibly unemployment insurance, etc. Put key dates in your calendar so you don’t forget to file.

If you can avoid these 5 “No-Nos” then you will most likely stay out of hot water.
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