Nonprofit Basics
True or False: Nonprofits cannot earn a profit.
False. They can, but profits must be reinvested in the mission
What is one major financial benefit of 501(c)(3) status?
Tax-exempt status. Receiving tax deductible donations
What sources does the IRS use for the Organizational Test?
Proper purpose statement + dissolution clause consistent with IRS rules.
What are the two tests that must be performed to achieve 501(c)(3) status?
Organizational Test and Operational Test
What is the name of the act that sums up the duties under which non-profit leaders must operate?
Model Act
Who typically controls a nonprofit organization?
Its governing board
What activities are prohibited for 501(c)(3) orgs?
Private inurement, partisan politics; lobbying only limited
What does the Operational Test focus on?
Whether activities primarily advance exempt purposes.
What is the purpose of the Organizational Test?
Determine that an organization is organized EXCLUSIVELY for one or more exempt purposes as listed in 501(c)(3)
If annual revenue is under $X, then there is no need to apply for IRS recognition as a 501(c)(3)
$5,000
What is the key legal rule that separates nonprofits from for-profits?
The nondistribution constraint (no private inurement)
Name one proposed reform to charitable deductions.
cap, floor, flat tax credit
What does “primarily” mean in the operational test?
Nonexempt activities must be insubstantial, not the main focus.
What is the concept of dissolution as it relates to 501(c)(3) entities?
After an entity is dissolved, assets from a 501(c)(3) will be distributed to a government agency or another entity with a purpose
What governs US domestic nonprofit’s foreign activities?
Foreign Corrupt Practices Act of 1977
Name one type of nonprofit besides a corporation.
Trust, unincorporated association, or LLC.
Why are tax deductions criticized as inequitable?
High-income donors save more than low-income donors while donating the same amount
What is the Community Conscience Test (class emphasis)?
Must serve the public good, not insiders, with transparency and equitable benefit.
What does the designation of “action organization” mean?
The entity has failed to meet operational test requirements. Cannot obtain 501(c)(3) status
What act protects volunteers of non-profits for being liable for harm caused by the act or omission of the volunteer?
Volunteer Protection Act of 1997 (VPA)
What document legally creates a nonprofit corporation?
What are the three fiduciary duties of nonprofit board members?
Care, loyalty, obedience
What does the Commensurate Test check?
If program activity is proportional to the organization’s financial resources.
What status can an action organization obtain instead of a 501(c)(3)?
501(c)(4) tax exempt status
What document shows that an entity will engage in activities exempted from taxation in section 501(c)(3)?
Statement of purpose (articles of organization)