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Best Practices, Old and New, for Non-Profit Organizations

Here are some best practices – old and new – that non-profit organizations may want to consider implementing regarding governance and tax matters.

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Here are some best practices – old and new – that non-profit organizations may want to consider implementing regarding governance and tax matters.

Here are some best practices – old and new – that non-profit organizations may want to consider implementing regarding governance and tax matters. 

Conflict of interest policy

This first one is new – regarding the new tax law on unrelated business income (UBI) silos. The Internal Revenue Service (IRS) has issued favorable interim guidance that allows exempt organizations to aggregate their investment partnerships in certain circumstances for UBI purposes. Otherwise, what an administrative nightmare it would be to account for silos of different types of investment partnership UBI! Non-profit organizations with alternative investments may aggregate their investment partnership interests that meet either the de minimis ownership test (up to 2%) or the control test (up to 20% with no control or influence over the partnership), when combined with ownership by any disqualified persons, such as board members, officers and others with substantial influence over the non-profit. Board members, particularly investment committee members, and substantial donors are more likely the ones, if any, who would have the same investments as the organization. As part of the conflict of interest questionnaire, non-profits may want to consider providing a list of investment partnerships and request board members represent if they have any common ownership.

Documentation/logs/diaries 

Documentation for any entertainment done by presidents, advancement officers and other non-profit executives should be rock solid. Organizations should make sure they follow the accountable plan rules, which is doubly important for executives of tax-exempt organizations. This means the documentation of all meals, entertainment, social club use, travel expenses, etc. should include the amount, place, date/time, business purpose and business relationship of the guest(s) entertained. Best practice is to have expense reports reviewed periodically by someone at a higher level than the employee, which in some cases, could be a board member. If the documentation is not adequate, the IRS can treat reimbursements as taxable income to the employee, (even if they are truly for business purposes). Even more risky, the entire accountable plan can be disregarded. Other possible negative effects of inadequate documentation, in addition to taxation to the executives, include sanctions to the exempt organization – which should be deterrents. Best practice may be to document using logs or diaries.

Maintain lists  

This old best practice is refresh of the recommendation for exempt organizations to keep a list of their former disqualified persons – to capture and disclose any reportable transactions with formers. This is a longstanding requirement – former disqualified person is considered a disqualified person for five years. Therefore, non-profits should keep a running fiveyear list of disqualified persons in their records to review for any transactions with these formers. Then drop off the sixth year and add in disqualified persons from the latest former year annually.

The new best practice is regarding a “covered employees” list – that’s a new term relating to the new 21% excess executive compensation tax on remuneration over $1 million and on certain excess parachute payments. This new 21% excise tax is imposed on the exempt organization. Covered employees are the five highest compensated employees – including officers and key employees (which is a different definition than five highest for Form 990, who are in addition to the officers and key employees). This term “covered employees” is an evergreen determination. So once someone is a covered employee, he or she is always a covered employee and stays on the watch list.

Governance is not one-size-fits-all. But here are some best practices, old and new, for non-profit organizations to consider to stay in compliance, out of the headlines and ahead of the ever-changing curve.

 

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law. 

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