All of these non-profits will have the opportunity to reinstate their status.  This will cost a fee and will require additional paperwork responsibilities. If an organization is small, the fees will be reduced.  relief allows eligible small organizations with annual gross receipts of $50,000 or less to regain their tax-exempt status retroactive to the date of revocation and pay a reduced application fee of $100 rather than the typical $400 or $850 fee.

Many of the organizations that were found to be breaking this regulation were not able to be reached.  It’s assumed that many organizations have gone out of business without notifying the IRS. Others have been alerted and have begun the steps needed to reinstate their tax exempt status.

In order for an organization to keep its tax exemption, it’s important to make sure that all documentation is filed legally and that all rules are met.  Not following the regulations could have a negative impact on the organization’s future.

So, what is a ‘non-compliant’ activity with a Non-Profit?

Let’s start at the beginning…

When any non-profit applies for its tax exemption, the organization is required to specify the activities it plans to conduct and to make the case that their mission qualifies for charitable, tax-exempt status. Upon review, the IRS either grants or denies the application and issues its ‘exemption letter’.

If your planned activity falls outside of the specified mission of your non-profit, then the activity may be non-compliant. Non-compliant? With what? Your IRS-approved exemption! How do you know, for sure, if your planned activity is within your compliance parameters? Easy…just ask! Who? The IRS (your regulatory reference)!

Please ponder the following hypothetical example: a local community Food Bank is deciding whether or not to purchase a national fast-food chain restaurant adjacent to its main food bank facility.

It sounds like a great idea when presented to the board for approval:

* the fast-food restaurant brings in lots of customers who would learn that the food bank is located right next door; * the profitability of the restaurant could subsidize the operations of the food bank

Good idea? Bad idea? How would you vote if you were on the board?

This is a good example of the challenges of a non-profit board. Let’s take this scenario a step further before we try to deal with the dilemma.

This Food Bank was organized 30 years ago and received its IRS approval as a charitable, tax-exempt organization serving the public good. The founding executive director (ED) led the organization for 20 years until he retired.

Following the retirement of the founding ED, the board conducted a search and hired a replacement ED. Unfortunately, their new ED left after just one year, accepting an opportunity at a larger food bank. Since that time, the organization has suffered rapid turnover among four EDs, but the board believes the tide has turned: the current ED is an experienced manager, who was looking for a career change, and is committed to remaining in this position for quite a few years.

The idea for the purchase of a fast-food restaurant took shape during a scheduled fund-raising call between the new Executive Director and the owner of the fast-food chain. The owner, a former board member of the Food Bank, suggested the purchase as a mechanism for alleviating the ongoing financial challenges of the Food Bank and as part of his estate planning. The deal was a gracious opportunity; the owner would even provide the financing. To answer any questions, the owner offered to attend the board meeting with the ED.

Okay.

An opportunity presents itself: a former board member offers to be unbeliveably philanthropic and an excited ED presents the idea to the board at its regular meeting. You are a board member. You hear the presentation. The opportunity sounds great! What should the board do?

(We could spend quite a bit of time strategizing, but that is beyond the scope of this post.)

Question #1: Yes, you are a board member; however, are you qualified to analyze the deal and make an informed decision? Would you be willing to be that ‘lone voice in the wilderness’ that dares question the deal? Are you willing to admit your lack of knowledge?

Question #2: Did your ED research the language in your original IRS determination letter as a guide for what your scope of services can be? Did your ED consult with legal and accounting counsel?

Question #3: Are you familiar with ‘unrelated business income’ – whereby income-producing activities can result in taxable revenues (even for a non-profit)?

Question #4: Do you understand ‘noncompliant activity’? Has your ED mentioned that issue in the board presentation?

Per usual, a lot is happening at this (hypothetical) non-profit board meeting. This seemingly good idea of purchasing a fast food restaurant is almost certainly outside the description of the activities of the food bank. The IRS could approve the deal; but, failing to request a definitive ruling would be irresponsible on the part of the board and would literally jeopardize the charitable status of the Food Bank.

A lot to worry about? Nope. Not really. Just remember to ask the right questions. If you do not know the right questions, you are probably on the wrong board.

PRIs are more than Foundations Investing with a Social Conscience…
PRIs should not be confused with Mission Related Investing (MRI) or Socially Responsible Investing (SRI), where a foundation invests in businesses with products or services that happen to align with their mission, but they fully expect their ROI to equal investments which are not mission related.  Instead, PRIs are basically loans (or other methods of accessing capital such as loan guaranties, lines of credit, equity investments, etc.) offered by a foundation at below market rates that follow IRS guidelines (based on the Tax Reform Act of 1969).

These loans are made with the understanding that the expected rate of return will not be comparable to the traditional investments, such as stocks and bonds, that are meant to grow a foundation’s endowment and earnings.  Organizations receiving these loans may be for-profit or nonprofit, but they must provide or serve a charitable program tied to the foundation’s exempt purpose.

Attractive Loan Terms
The loss of profit is that allows below market rates is offset by the knowledge that this investment not only supports a program fulfilling the foundation’s mission, but that the funds will be returned sometime in the future and can be used again to assist another program.  There is some risk involved this investment, but historically, unless the foundation is deliberately selecting the highest risk programs, the default rate is less than 5% according to FSG Social Impact Advisors’ study that examined PRIs loans made over the past forty years.

Be aware that a broad range of program categories are suitable for PRIs–they can be educational, environmental, or focus on economic development.  Housing for low income residents is a common application of PRIs.  The main restriction from the IRS is that the PRIs can not influence legislation or be involved in political campaigns on behalf of candidates.

To the Mutual Benefit of a Foundation and a Nonprofit
Given the tight economy, utilizing PRIs is a win-win situation for both nonprofits and foundations (who can be tentative about embracing PRIs due to some legal and tax ramifications, if they are not set up correctly).  The best part about PRIs is that they count towards a foundation’s 5% annual distribution requirement by the IRS.  Foundations can further extend their resources to achieve their mission goals, while nonprofits, dealing with temporary funding problems, can move forward.

Resources
A recent news story about successful PRIs, The Buffalo News, “Foundations offer loans as a way to help nonprofits,” by Jay Tokasz, May 24, 2010.

PRI Success Stories posted by the David & Lucile Packard Foundation.

IRS guidelines on PRIs.

FSG Social Impact Advisors has several extremely comprehensive studies on PRIs that can be downloaded upon free registration, especially recommend ‘Compounding Impact:  Mission Investing by U.S. Foundations,’ 2007.

An article that is an excerpt of Christie Baxter’s book, “Program Related Investments:  A Technical Manual for Foundations,” Jossey-Bass, 1997, that provides an overview of PRIs.

Photo Credit:  Mild Mannered Photographer

Photo Credit:   The Truth About…

Be Like Bill
First, the Bill & Melinda Gates Foundation announced the funding of Program Related Investments, PRIs with $400 million (1% of their total capital) last year.  PRIs are a foundation investment made to create specific program benefits while earning a below-market return.  The Gates Foundation’s stated goal with the PRIs is to seed innovation and build sustainability through the programs selected.

Melinda French Gates and Bill Gates speak during the ‘Gates Foundation’ press conference at the Annual Meeting 2009 of the World Economic Forum in Davos, Switzerland, January 30, 2009.

Second, representatives of the Gates Foundation, along with foundation partner Root Capital, are scheduled to present on the topic of setting up and running PRIs at the up-coming Social Capital Markets 2010 (SOCAP10) this October 4th, 5th, and 6th at the Fort Mason Center, San Francisco, California.

Hopefully, the Gates Foundation funding and publicizing PRIs is a move that will encourage other foundations to do likewise, i.e. ‘Be Like Bill.’

The Big Three
The Gates Foundation is a relative newcomer, there have been three other large foundations on the forefront of PRIs funding.  The Ford Foundation actually pioneered the PRIs concept, and they are joined by the David and Lucile Packard Foundation and the Catherine T. MacArthur Foundation as funding the most PRIs over the past forty years.  The big three, except for rare exceptions, generally only fund PRIs from past grantees.

Good Things Come in Small Packages
While the big three were the largest PRIs providers, there has been steady growth from smaller foundations in recent years, so that small private foundations are now providing double the number of PRIs than the big three combined.  Locating the small foundation interested in your 501c3 nonprofit organization as a PRI is the issue that most NPOs will face…

One good avenue is to visit the More for Mission site and check out the foundations that are listed as mission investors (they are open to Mission Related Investing, MRI, where profit is a consideration, as well as Program Related Investments, PRIs).  Visit the site’s About Us page and click on the Founders Circle, Leaders Circle, and Affiliates Circle tabs for direct links to these foundation’s sites.  Foundation participants at More for Mission are attempting to dedicate 2% of their capital to mission investing.

Many smaller foundations also prefer to work through intermediaries, a third party or partner, who vets applicants for PRIs.  A listing of intermediaries who can connect PRI opportunities with investors can be found online at PRIMakers Network.

Photo Credit:   ndevilTV

Photo Credit:  Copyright by World Economic Forum, swiss-image.ch/Photo by Remy Steinegger

The investment committee evaluating your NPO’s application would like to see at least two years of the organization running in the black.  The amount of the loan is typically based upon the size of an organization’s assets, also indicative of a more mature organization.  While collateral is not usually requested, the committee would like your nonprofit to possess assets which could repay the loan several times over.  Audited financial statements will be required for at least the past three years.

A cover letter detailing the amount and proposed use of the loan should be included with the financial paperwork you submit.  The intended use of the loan is extremely important.  As with a grant, it must be aligned to the foundation’s mission.

The most recent Annual Report for your nonprofit, of course, is the final piece.  This will provide the investment committee with an overview of your organization and its programs in order to judge if the loan will be ‘mission-related.’  In some instances, it may be necessary to obtain a letter from the IRS confirming that your NPO’s loan will, in fact, qualify as a PRI for the foundation, before the final loan decision will be made.

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For 501c3 organizations interested in investigating whether mobile donations are a good fit, there are some excellent articles online to start this process.  These articles explain all the steps involved in setting up a campaign, provide a few marketing and advertising tips, and compare and contrast the numerous service providers who supply the mobile donation platforms.

First, A Little History
About.com’s nonprofit guide, Joanne Fritz, has been promoting mobile donations almost from the advent of this new technology.  In 2008, she reported on the largest mobile donation success at that time, Alicia Keys’ appearance on American Idol on behalf of her charity, Keep a Child Alive, and suggested some basic mobile giving guidelines in Mobile Giving – How to Make it Work for Your Nonprofit.

Joanne wrote a follow up article after Haiti happened, Text-to-Give Fundraising Campaigns Take Off, where she presented her take of what led to the unprecedented generosity of mobile giving in response to the Haiti earthquake.

Can History Repeat Itself?
Every nonprofit would like to know what was unique and special about the Haiti mobile campaign, in order to not reinvent the wheel.  So far, no other mobile campaign has touched Haiti in terms of results (including the Red Cross’ next mobile campaign for disaster relief in Chili), but several writers have attempted to examine what works and what doesn’t work, when planning a campaign.

Matt Hamblen of Computerworld magazine cited the low cap set on donations allowed ($10) as being a roadblock for other nonprofits in his article, Text Donations for Haiti Relief Spur Nonprofit to Follow Suit, while Geoff Livingston expressed concern about cost, restrictions involved in setting up campaigns, limitations of the current platform (long delay in receiving donations and the lack of ability to identify donors for future campaigns), in his Mashable.com article titled 5 Real Challenges for Nonprofit Texting Campaigns.

What You Need to Know
The most comprehensive article on the subject would be Texting for Charitable Dollars:  The Definitive Guide to Mobile Fundraising posted on MobileActive.org, written by Jesse Feiler and edited by Katrin Verclas.  If you only read one article on mobile donation, this would be the one to read.

I’d also recommend Carrie Green’s two part article, from BeyondNines.com, that discusses the Haiti campaign from a marketing perspective, Inside Scoop on Mobile Donations – Part One, and then provides a chart comparing the pricing and features offered by all of the vendors who supply mobile giving platforms, Inside Scoop on Mobile Donations – Part Two.  This article’s chart will save a bit of research, if your organization determines that they are serious about pursuing mobile giving.

Photo Credit: ydhsu

Although there is no penalty for late filing, organizations that do not file will automatically lose their federal tax exempt status.  Losing exempt status will result in an organization being required to file income tax returns, pay income tax, and its supporters will not be able to deduct their donations.

Organizations that failed to file by the deadline should take reassurance in IRS Commissioner Doug Shulman’s recent statement, posted May 18th, that the IRS will strive to assist these NPOs who were unaware of the deadline despite the IRS’ efforts.  He advises them to still file, even if they are late, in order to retain their tax exempt status.  Read the Commissioner’s full statement.   Be aware that an earlier press release stated that income generated between the deadline date and a late filing date may be taxable.  Don’t delay, file immediately.

Commission Shulman further shares that it is not as difficult, as most people imagine, for these organizations to file.  They simply need to complete and submit the Form 990-N (e-Postcard).  To learn more about the annual electronic filing of Form 99-N (e-Postcard), visit the IRS site.

Photo Credit:  laffy4k