Most non-profit organizations, regardless of size, couldn’t operate successfully without volunteers. Sure, some of the larger ones have paid employees too, but many have governing bodies made up entirely of volunteers. Without relying on these individuals, many organizations simply could not afford to present programs, raise funds or properly serve their members or community in a way that serves the intended purpose or mission. According to the IRS, 85% of all charities operate with no paid employees and rely solely on volunteers.
Are there downsides to drawing from this well of free labor? Unfortunately, yes. Charities are often victims of theft, fraud, and improper governance due to the acts of dishonest, careless or unqualified volunteers. So it’s very important to be selective and maintain a responsible governing body.
Even the best volunteers have limited availability. Life happens. People are contributing their spare time, which is sometimes scarce when also managing a job or family. Because of this, we often see issues arise during periods of Board transition. Lack of communication between incoming and outgoing members coupled with the possibility of key positions being left vacant can cause gaps in proper governance.
Non-profit organizations are often left scrambling to pick up the pieces after the IRS has notified them of a revoked charitable status, improperly classified employee, non-deductible expense, or taxable income resulting from an unrelated business activity. While some non-profit organizations are blessed with volunteers who are well suited to navigate the necessary applications, filing requirements and ongoing compliance required to keep their non-profit status with the IRS, many are not.
Are you currently a volunteer? Here are some specific areas of concern regarding the governance of non-profit organizations that you should be aware of when serving as a volunteer or on a Board:
Maintain your compliance
Each state has different filing requirements to maintain non-profit status. Ohio requires that all charitable organizations file the Articles of Incorporation with the Ohio Secretary of State along with a code of regulations under which the organization will govern. After the initial filing, a Statement of Continued Existence must be filed with the Ohio Secretary of State every 5 years to avoid cancellation of the Articles of Organization. Many Ohio charities are also required to file an annual report with the Ohio Attorney General to ensure their compliance with various requirements.
Keep on file all organization documents of the non-profit, including the Articles of Organization, Charter, application for tax-exempt status with the IRS (Form 1023 or 1024) and the Determination Letter from the IRS. For many public charities, these items must be available for public inspection.
Be aware of Form 990
Form 990 (990-EZ, 990-N, 990-PF, etc.) is the annual Return of Organizations Exempt from Income Tax. The return is due the 15th day of the 5th month following the end of the organization’s taxable year. If the organization fails to file Form 990 for three consecutive years, the IRS will revoke the tax-exempt status.
Keep your records
Proper recordkeeping should be maintained for all activities of the non-profit organization. This includes detail for all funds travelling into and out of the non-profit, along with any employment records, donor information and amounts, etc. Especially important are receipts for reimbursed expenses to volunteers and employees. Improper recordkeeping could lead to the IRS disallowing the deductions and treating the reimbursement as taxable compensation to the volunteer. These records should be kept for a minimum of 3 years following the filing of the Form 990 return with the IRS.
Understand taxable income
Although a group is deemed a non-profit organization by the IRS, this does not mean it avoids paying income tax altogether. Income earned by the organization not substantially related to its exempt purpose may be taxable to the organization as unrelated business taxable income. There are additional filing requirements to the IRS and the entity could be required to make estimated tax payments.
Know volunteer tax deductions
Expenses not reimbursed by the non-profit organization to its volunteers may be deductible on the volunteer’s personal income tax return as a charitable donation. The value of the volunteer’s time and services is not deductible, but other non-reimbursed expenses, such as mileage and other travel/meal costs could be deductible. Careful consideration must be given to ensure gifts/reimbursements to volunteers do not constitute compensation.
Both the Ohio Attorney General and the IRS have resources available on their websites to assist non-profit organizations and their board members to adopt sound governing practices to maintain their tax-exempt status and continue providing their charitable purpose in the most effective manner.
Navigating the rules of operating a non-profit organization can be a daunting task. Our team of experts can work with you if you require any of the following:
- Financial recordkeeping assistance
- Help maintaining (or reinstating) non-profit status with the IRS or Ohio Attorney General
- Guidance determining what expenses are deductible
- How to determine an employee from a volunteer or what constitutes unrelated business taxable income
Contact us at 216.524.8900 or firstname.lastname@example.org to set up a time to discuss your group’s situation.