It seems these days as though there’s a policy or some fine print for everything. As I grow older, I find myself more and more ensconced in reading the fine print on things—be it a food ingredient label, a contract, or the Apple user agreement (ok, maybe I just skim that one). Just last week, I went to return some school clothes my son had already grown out of and was asked if I had reviewed the store’s return/refund policy (I hadn’t). There’s no question that a review of applicable policies is a best practice for everyone—including exempt organizations.
If it’s been a while since your nonprofit organization last conducted a review of its governing documents and policies, worry not, you’re not alone! This article will highlight a few of the most critical documents applicable to nonprofits to ensure you remain in compliance and good standing.
Conflict of interest policy
If I were playing a rather nerdy version of nonprofit Family Feud, and the category was “Most Important Policies,” I would be shocked if the conflict of interest policy wasn’t the number one answer. It is vital that any potential conflict, either real or perceived, be identified and addressed in a manner consistent with the organization’s policy.
This policy is so important the IRS devotes several questions to it on the Form 990, including a required written narrative detailing how the organization consistently monitors and enforces compliance with said policy. Further, there is a requirement for potential disclosure of certain transactions with “interested persons” on Schedule L of Form 990. Transactions include loans as well as business transactions over a specified dollar threshold. It’s important to note that for Form 990 disclosure, the term “interested persons” includes family members of any officers, directors, trustees, or key employees of the organization, as well as any business entity more than 35% owned or controlled by any of the folks mentioned above.
For these reasons, distribution of a questionnaire to applicable organizational members on an annual basis is a baseline standard.
Gift acceptance policy
The gift acceptance policy is one that often goes overlooked or underappreciated until it’s needed; but when it is needed, it can be a lifesaver. This policy can help to navigate and dictate a myriad of issues, including what sort of gifts the organization is willing to accept and how long the organization is required to retain the gift, as well as provide guidance for board or staff members who are on either the asking or receiving end of contributions. And, perhaps most importantly, the policy can help manage the expectations of donors while maintaining a level of courtesy and respect.
The policy most comes into play when it comes to gifts of something other than cash. For example, if a donor wishes to gift the organization with their interest in a partnership, there could be all sorts of potential tax impacts and complications, including unrelated business income and foreign filing compliance. Another more recent example is the proliferation of cryptocurrency. Having a policy in place that addresses these sorts of non-standard contributions can help mitigate potentially awkward or difficult conversations with donors.
Written whistleblower and document retention and destruction policies
Like the aforementioned conflict of interest policy, the whistleblower and document retention/destruction policies have dedicated questions on the Form 990 asking if the organization has these in place. The key word for both policies is "written." Often times, we will hear that a client follows a policy, but it’s not in writing. Unfortunately, this would warrant a “no” response on the Form 990. Potential donors, members of the media, regulators, and careful job seekers will have greater confidence when you respond “yes” to the policy questions on the Form 990.
While there have not been any sweeping changes or recent regulations on either, it is still a good idea to review these policies on an annual basis to ensure they are still in lockstep with the organization. The IRS does consider these policies to be best practices for any organization (large or small) to have in place.
In addition to reviewing policies of the organization, we also recommend reviewing the governing documents of the organization on a regular basis, especially as IRS guidance or tax laws change.
Dissolution clause
It’s a sad reality that all things must come to an end, including business entities. Historically, nonprofit organizations were able to rely upon Revenue Procedure 82-2. This procedure identified states where a Section 501(c)(3) charity could rely on state law to satisfy the requirement that its organizing documents require that, upon dissolution, the charity must distribute all of its assets for IRC Section 501(c) tax-exempt purposes. However, the IRS recently issued Revenue Procedure 2024-22, which now makes Rev. Proc. 82-2 obsolete. Said in simpler terms, organizations can no longer simply rely upon applicable state law to satisfy dissolution requirements at the federal level.
For this reason, we strongly encourage all organizations to review this particular clause and consult with legal counsel as needed to ensure the wording and procedures followed are in line with current law. It may be necessary in some cases to amend governing documents and/or bylaws to add the required dissolution wording to remain in compliance.
Sample policies for nonprofits
Policies and governing documents are critical in ensuring the organization and its decision-makers protect themselves from wrongdoing and criticism that could undermine the ability to promote the organization’s mission. Organizations will be better protected if there are sound policies and procedures in place that can be adequately followed. There are a number of various outlets that provide sample policies, including the Internal Revenue Service, among others. Links to sample policies and additional guidance can be found below:
If you have any questions about the applicability of certain policies, we are here to help! Please do not hesitate to contact a member of your tax engagement team for further guidance.
Now, what to do with these undersized school clothes… perhaps I can donate them to charity? I better check their gift acceptance policy first!
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