Can your nonprofit apply for grants?

To most of the public, the definition of a nonprofit or charity  is the one used to describe 501(c)(3) organizations. In other words, organizations that solicit and spend tax-exempt and  tax deductible funds "for the public good."

Actually there are several subsections of section 501, and how you file your initial paperwork can substantially change the funding landscape for you.

For some of the differences, check out this chart.

Lately, I have run into several organizations self-described as foundations and approved as 501(c)(4) entities that want to apply for grants from other foundations.

In most cases, I don't quite understand why they chose that subsection to file under, but that's a topic for another post.

If you are wondering "what's the difference, we are still a charity " then you might not understand why foundations reject your grant applications and donors don't support you.

 One major difference is that donations to a (c)4 are not tax deductible, and you are legally required to state that fact prominently on all your publications asking for support.

While tax deductibility in and of itself is not the major reason people donate, the lack of that component can lead casual donors to question whether their money will be used for charitable purposes or political lobbying.

As far as major foundation and corporate donors are concerned, the (c)4 can legally only access funds from other charitable organizations under certain well-defined conditions.

That means that (c)4's are far more dependent on developing their donor base one-on-one than their (c)3 counterparts, meaning that grants are usually not part of the fund-raising equation.

Fundraising for a (c)4 may involve more donor education to attract individual donors.

Particularly since the flap about the IRS targeting (c)4's for their political activities, donors need to be told why your foundation is problem-centered rather than politically centered, assuming of course that is the case.

Other types of fundraising that are typically more productive are things like black-tie events, one-on-one donor meetings, social media campaigns, website donation capability, direct mail, phone campaigns  and email solicitations.

You can combine events with a (c)3, as long as the donations are clearly separated. You can rent an email-list from (c)3's, but it must be rented at fair market value (typically .10 to .40 cents per name).

If your mission and that of a public charity are aligned in some way (for instance a research mission to find a cure for cancer could combine with a public charity seeking funds for respite care for cancer victim caretakers),  the (c)3 might welcome your participation.

A major donor cultivation program is essential to access larger lump-sum donations. Just be aware that currently donors are limited to a $13,000 a year limit.

It is absolutely essential that your board participate in fundraising efforts. Even more than usual, (c)4 fundraising is more about who you know than what you know.

Some (c)4's are spin-offs from(c)3's and vice versa. If your organization is having a lot of trouble fundraising, you might want to consider converting to or adding a (c)3, again assuming that your primary mission is not political. 

Fundraising – Multi-state registration answers

Lately, my mail has been loaded with questions about nonprofits having to register to solicit funds in various states. These questions reflect a lot of confusion about the requirements. Since this blog reaches so many people, I thought it was worth the time to try to clarify the out-of-state registration issue.

The bare bones explanation

First, these are charitable solicitation laws. They do not require you to create a new corporation  in all 50 states. You simply register the one you already have.

They are intended to control, legitimize, and in most cases account for revenue raised within a state. In many cases the laws are intended to protect the charity from having to pay state taxes on the money raised and they allow would-be donors some protection from fraud as well as the right to deduct donations on their state returns. And, as you might expect, they also allow states to generate some revenue from the registration fees.

Second, there is no all-encompassing Federal law that requires states to have a uniform application process, or that limits states in the amount of registration fees they charge.

Every state has different requirements and fee structures for registration. Some require the IRS determination letter and some do not. Some require an annual renewal and some do not.

It is not a given that you have to register in all the states with such laws. It depends on the specific state guidelines.

Interestingly, many start-ups are of the opinion that if they are only making a general online appeal, such as on their own website or Facebook page, they don't have to register in any state but their own.

Not necessarily true! Depending on your particular situation, you may or may not need to register in a given state.

Where did all these regulations come from?

Back in 2001, a document called the Charleston Principles was approved to provide advisory guidelines by NASCO (National Association of State Charity Officials) to curb fraud in the charitable giving arena, particularly through online campaigns.

If you fundraise in a state other than the one you incorporated in, even via an online donation page, Giving Day or Twitter account, you may need to register as a charitable organization in all the states that require it.

 A fairly comprehensive explanation is found on the GuideStar website at: http://www.guidestar.org/rxa/news/articles/2014/state-registration-requirements-for-fundraising.aspx and http://counsel.cua.edu/nacuanote-reqs-for-charitable-orgs.cfm

If this all sounds confusing, expensive and cumbersome, it's because it is. However, the penalties for soliciting without registering can be substantial, so ignoring the laws is not an option. As of this posting, several more states have been reported as considering or adopting registration regulations, but currently the list includes 40 states and the District of Columbia.

Laws change, so be sure that your information is current. For instance, as of 2010, California removed the exemption from registration for out-of-state charities. You may also be required to file an annual statement of revenues obtained from state residents.

While many people think that educational institutions and churches are exempt from registration, this is not always the case, particularly if you hire a professional fundraising firm.

Arising from the aforementioned Charleston Principles, and in an apparent attempt to standardize the application process, a form was created known as the Universal Registration Statement (URS).

It is the name of this document that I think creates the idea that there is some over-arching Federal control of the process. Again, it doesn't do that, and it isn't even universally accepted by the states.

Since the states still require a varying amount of additional independent documentation, the form is becoming somewhat obsolete, although a few states do still require it. For more info see: http://www.multistatefiling.org/

How do you do it?

Private firms such as mine, or your attorney or accountant offer fee-based registration assistance, or you can do it yourself.

A source citing a synopsis of the various state regulations as of 2013 and the governing state agency can be found at: http://www.nacua.org/nacualert/docs/CharitableSolicitation/2013_JurisdictionalRequirementsCharitableSolicitation.pdf. The URS form is included at the end of the state listings and is worth looking at, including the additional forms required.

What about costs? Fees vary from state to state, with some states having a flat fee and others tying the cost to the nonprofit's revenue, even going as low as zero for many small charities. Some states require registration no matter how little you raise, while others may not require registration until in-state donations reach a set amount.

In some cases, the registration of an aggregating or sponsorship agency (such as the United Way for instance) may provide sufficient legal protection, since these organizations usually require proof of legitimacy as a condition of use.

     

Also, many of the documents that start-ups typically may not have (such as the IRS determination letter and a financial statement or 990) are often required to file with the states, so before you spend a lot of time and money, be sure that you have everything on hand.

Given that fraud in the charity world remains an ongoing problem, it is unlikely that these requirements are going to go away. Some organizations are seeking to update the Charleston Principles to reflect the realities of a world where everyone carries a tiny computer cleverly disguised as a phone, but to date that hasn't happened.

If you are saying "all of this sounds time-consuming and a good way to eat up scarce start-up revenues", you are right.

Nevertheless, if you are contemplating starting a charity, this is information you can't afford to ignore. The costs in both time and money need to be a part of your advance planning.

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When the 1023EZ may not work for you

Ever since the IRS released the new short form application for filing for charitable status, my inbox has overflowed with requests to help people file it.

The first thing I have to say to all of you is:

READ THE INSTRUCTIONS FIRST.

There are some specific areas that may require you to file the long form application instead, and there are some implied drawbacks.

The two areas that sentence applies to are organizations already incorporated as LLCs and organizations that envision grants as a primary income stream.

Part II of the instructions specifically prohibits LLCs from filing using a 1023EZ, although they can apply using the long form. Sole proprietorships, partnerships and "loosely affiliated groups of individuals" are excluded as well.

Of perhaps greater importance to most of the people contacting me is the $50,000 annual revenue restriction for the first three years

For organizations hoping to access grant funding, the 1023EZ simply doesn't indicate or require enough basic verified data that is available in the public domain to satisfy the background checks required by most grantors or institutional funding sources. (The EZ does not require any sort of verification of your claim that you will not exceed the 50K threshold, such as the financial projection worksheet in the standard 1023.)  Just remember that when you file, you are "attesting", i.e. making a legally binding statement that you are not going to exceed the revenue cap.

While it is probably true that nearly all new organizations will not exceed the revenue cap in their first three years, and thus are only required to file the 990-N (postcard) report, that document is not accepted by grantors, again because it doesn't require or report enough data to make a determination about your effectiveness or financial integrity.

If you exceed the cap and have filed a long form 1023, no  harm, no foul. If you have applied and been approved using the EZ, the IRS might have a problem, or more accurately, you might have a problem with them.

There are also certain mission categories that require more information to be submitted to the IRS than is contained in the short form application. These include, but are not limited to, charitable risk pools, credit or financial education or assistance, schools, colleges and universities, organizations with donor advised funds and churches or church associations.

Having said that, some organizations are quite well-qualified to use the short form. One that comes to mind is a group that wanted to provide cross-translated children's books to ESL students, i.e. have the child's native language story books contain the English translation displayed under the native language text, and make those books available as videos or PowerPoint presentations to any bona fide community organization, library or educational institution that needed them. The translations were all being done by qualified volunteers, so their initial capital needs were quite low.

Of course after the three year qualifying period, should your organization suddenly come into significant funding, you can file the long form 990 and provide the appropriate reporting to satisfy the IRS as well as donors.

I do provide an initial feasibility study that can help you decide if your organization should file the EZ, as well as a review of your prospects for survival through those first critical three years.  For more information visit http://www.cloudlancerwriting.com and click on the consulting link.

IRS opens comment period on new 1023 application

On September 4, 2013, the United States Internal Revenue Service released its new online interactive version of the nonprofit application, form 1023 for public comment.  The comment period will be open until September 20, 2013.  You can access the form here. This version cannot be printed or submitted. Even when the new form is deemed ready for prime time, you will still have submit the application as a paper copy. According to the IRS, the new form will offer links to relevant forms and explanatory information within the body of the application. Supposedly, at some point the application will transition to a fully online format, but there is no timeline given for when that might occur.

The website also states that the IRS has updated two of its educational courses, "Applying for 501(c)(3) Status"and "Maintaining Tax-Exempt Status", available via a link on the home page of the same website.