The following policies intend to provide guidance to a charity’s board of directors in accepting gifts in setting standards in evaluating various kinds of gifts. The types of gifts, the limitation/restrictions placed on the gifts and the charity’s administration of the gifts should be considered in accepting gifts.
The members of the board of directors, officers and staff should determine how these points apply to the charity, make changes as needed and operate within these guidelines to best deal with donors and protect the charity.
Gifts should only be accepted if the donor intends to benefit the charity and not seek personal financial gain from the gift.
Gift acceptance policies may be used to preserve relationships with donors, a valuable asset of a charity. Established written policies provide a means for the contact person of the charity to defect the rejection of an offered gift on the policy, not a personal choice. The donor may observe the charity is professional in its operations and maintains a high level of integrity. A gift acceptance policy provides a means of consistency and communication with donors.
The mission statement should be stated to remind everyone of the purposes of gifts must conform to the purposes of the charity.
The charity should primarily only accept unrestricted gifts so the donated items may be used as the organization wishes for its purposes. Donor imposed restrictions should conform to the mission of the charity. One of the recognized restrictions may be endowment for board established purposes. Restrictions that are beyond the mission of the donor or for the private benefit of the donor should be declined.
Donors must retain no control over the gifts. Any offers of gifts, where the donors retain any degree of control should be rejected. The organization must accept only gifts when they have free and unencumbered control to the gifts.
The board of directors should base the policy on the following types of gifts:
Cash – Cash, Certificates of Deposits, money market accounts, payments by credit card or internet.
Publically Traded Securities – Stocks and bonds listed on major exchanges and over-the-counter markets may be accepted as the donor understands the securities will be sold immediately and the proceeds will be invested as the board of director determines in line with the organization’s invested policy. The donor can’t require how the investments are to be made, of the organization may not have full control the donation.
Closely-Held Securities – Interest in Partnership – The board of directors should only accept closely held stock or an interest in a partnership that a full understanding is given in writing that the securities or partnership interest may be sold and the means of the sale in agreed before the items is accepted and that no liability will accompany the items.
Life Insurance – Life insurance policies, with the charity listed as the beneficiary, may be accepted with an understanding that a policy will not be purchased by the charity on the life of the donor or potential beneficiaries of donors.
Real Estate – The board of directors must accept gifts of real estate in writing after securing a qualified appraisal by a licensed appraiser, who is not related by family or business to the donor, and an environmental clearance letter from the Environmental Protection Agency. These documents are to be secured by the donor at their expense. The board of directors should determine that the property may be used for the purposes of the charity.
In-Kind Contributions – Offers of in-kind contributions should only be accepted if the items can be used in the programs of the charity or an agreement is made with the donor the items may be sold to provide cash for the operation of the charity. Acknowledgements of the conations should describe the item, explain how it will benefit the programs of the charity and not state any fair market value of the property. The acknowledgement must contain the clause, “No goods or services were exchanged in receipt of the donations.”
If the in-kind gifts require a substantial carry cost, as a boat, plane or car, for storage, maintenance or insurance, the gift should be evaluated to ensure it is can be marketed promptly.
Donors should be advised to consult with their legal, accounting or other advisers for advice as to how the proposed gift will meets and promotes their charitable and financial planning purposes. The advice should describe that the charity operates within its gift acceptance policy to promote the purposes of the charity.
Here are the Top Ten Tips to shorten the tax-exempt application process that has just been released by the IRS.
Following these simple tips can save time and effort
10. Provide the required information on the principal officers
and board of directors. List the following information for the principal
officers and board of directors:
a) Names; b) Mailing addresses; c) Titles and Positions; d) Annual compensation
9. Ensure a director, trustee, principal officer or other authorized individual signs the Form 1023.
Generally, a principal officer is the president, vice president, secretary or treasurer. The person
signing the application must indicate his or her title or other authority to
sign. A taxpayer's representative may not sign the application. An original
signature is required. Neither a stamped signature nor a faxed signature is
8. Don't forget to submit a copy of adopted by-laws, code of regulations or any other document that sets out the organization's rules of operation, but only if adopted.
7. Include all of the necessary financial data. See the instructions to Form 1023 to determine how much
information you need to provide, based on how long your organization has existed.
6. Include the month the organization's annual accounting period ends. The accounting period ending date on the application should match the date stated in your by-laws, on financial statements, and on
any prior returns filed.
5. Attach all required schedules. Some lines require supporting schedules. Check all line items on financial statements.
4. Complete all required pages. The information contained on each page and schedule of Form 1023 and Form 1024 is necessary for the IRS to make a determination about your tax-exempt status. Form 1023 has various schedules and pages that must be filled out for churches, schools, hospitals, scholarships, supporting organizations and certain other organizations.
3. Provide enough information about the organization's activities to show us how it will achieve the exempt purpose. Please don't restate the purpose. Explain the specific activities that will achieve that purpose. Consider a "who, what, when, where, why and how" approach. Explain past,
present, and planned activities. If you haven't started activity yet, develop plans that provide a clear understanding of how your organization will operate. It is not necessary to describe activities that are speculative at this time.
2. Attach a complete copy of the organizing document and all amendments.
If the applicant is a corporation, include a complete copy of the articles of incorporation that shows it has been filed with and approved by the state. If the applicant is not incorporated, include a similar organizing document such as a constitution, articles of association, or by-laws. At a minimum, it should state the legal name, the purposes and the date of adoption. At least two members of the organization should sign the document. A trust document must be signed by the trustees and show the date of formation. For section 501(c)(3) applicants, the organizing document must comply with the organizational test for exemption.
1. The Number 1 tip to reduce delays in processing
exempt organization applications is . . .
INCLUDE THE CORRECT USER FEE!
Ensure the application includes a cashiers check or money order made payable to the United States Treasury for the appropriate user fee. Form 1023 $600
Following these ten tips can help shorten the time it takes to process an application for tax-exempt status. A correctly completed application, sent with all required documents and schedules has a good chance of being accepted with no further contact. If contact is necessary, the IRS agent can address the technical issues that need resolution without taking up time to get a completed application.
Page Last Reviewed or Updated: January 2, 2020.
When or Do I Get to Throw It Away???
The Sarbanes-Oxley Act addresses the destruction of business
records and documents and turns intentional document destruction into a process
that must be carefully monitored.
Nonprofit organizations should have a written, mandatory
document retention and periodic destruction policy. Policies such as this will
eliminate accidental or innocent destruction. In addition, it is important for
administrative personnel to know the length of time records should be retained
to be in compliance.
The following table provides the minimum requirements.
This information is provided as guidance in determining
your organization’s document retention policy.
Type of Document Minimum Requirement
Accounts payable ledgers and schedules 7 years
Audit reports Permanently
Bank Reconciliations 2 years
Bank statements 3 years
Checks (for important payments and purchases) Permanently
mortgages, notes and leases (expired) 7 years
Contracts (still in effect) Permanently
Correspondence (general) 2 years
(legal and important matters) Permanently
(with customers and vendors) 2 years
Deeds, mortgages, and bills of sale Permanently
Depreciation Schedules Permanently
Duplicate deposit slips 2 years
Employment applications 3 years
Expense Analyses/expense distribution schedules 7 years
Year End Financial Statements Permanently
Insurance Policies (expired) 3 years
Insurance records, current accident
reports, claims, policies, etc. Permanently
Internal audit reports 3 years
of products, materials, and supplies 7 years
(to customers, from vendors) 7 years
Minute books, bylaws and charter Permanently
Patents and related Papers Permanently
Payroll records and summaries 7 years
Personnel files (terminated employees) 7 years
Retirement and pension records Permanently
Tax returns and worksheets Permanently
Timesheets 7 years
registrations and copyrights Permanently
Withholding tax statements 7 years
©2004 National Council of Nonprofit Associations, www.ncna.org
May be duplicated for non-commercial use, with attribution, by
The National Council of Nonprofit Associations (NCNA) is the network of state and
regional nonprofit associations serving over 22,000 members in 46 states and the
District of Columbia. NCNA links local organizations to a national
audience through state associations and helps small and mid-sized nonprofits:
manage and lead more effectively; collaborate and exchange solutions; save money
through group buying opportunities; engage in critical policy issues affecting
the sector; and achieve greater impact in their communities.
GIFT ACCEPTANCE POLICIES
By Larry C. Howlett CPA
The following policies intend to provide
guidance to a charity in accepting gifts in setting standards in evaluating
various kinds of gifts. The types
of gifts, the limitation/restrictions placed on the gifts and the charity’s
administration of the gifts should be considered in accepting
The members of the board of directors,
officers and staff should determine how these points apply to the charity, make
changes as needed and operate within these guidelines to best deal with donors
and protect the charity.
Gifts should only be accepted if the donor
intends to benefit the charity and not seek personal financial gain from the
Gift acceptance policies may be used to
preserve relationships with donors, a valuable asset of a charity.
Established written policies provide a means for the contact person of
the charity to defect the rejection of an offered gift on the policy, not a
personal choice. The donor may
observe the charity is professional in its operations and maintains a high level
of integrity. A gift acceptance
policy provides a means of consistency and communication with
The mission statement should be stated to
remind everyone of the purposes of gifts must conform to the purposes of the
The charity should primarily only accept
unrestricted gifts so the donated items may be used as the organization wishes
for its purposes. Donor imposed
restrictions should conform to the mission of the charity.
One of the recognized restrictions may be endowment for board established
purposes. Restrictions that are
beyond the mission of the donor or for the private benefit of the donor should
Donors must retain no control over the
gifts. Any offers of gifts, where
the donors retain any degree of control should be rejected.
The organization must accept only gifts when they have free and
unencumbered control to the gifts.
In evaluating if the charity should accept
real estate gifts, it must request the donor secures an environmental clearance
of the property. The organization
should also consider if it can manage the property or dispose of it properly if
Steps to Start a Public Charity
A public charity should start with plans to
benefit the public. The recognition
of exemption by the Internal Revenue Service is given for the public charity to
conduct activities benefiting the general public and does not violate the public
trust the charity operates.
NAME SELECTION – A unique name should be chosen. Go
to the website of the Secretary of State and use their name search system to see
if the proposed name is available. The name should not be close to the name of another corporation, either
non-profit or for-profit.
BUSINESS PLAN - The first step is to create a business plan. A public charity has all of the characteristics of a for- profit business, as mission statement, a code of ethics, productive services, management, marketing, revenue generation, expenditure controls, financial record keeping, internal controls, employment tax
record keeping and reporting, etc. A business plan is an assessment of the business environment.
A business plan assists the founders in knowing where the organization is going and it helps the officers to build relationships with board of directors, clients, the public and funding sources. The motivation for operating the charity is to be making a difference in the lives of individuals. The dynamics and competitive edge of the organization should be emphasized in the business plan.
A business plan may have the following suggested structure:
A. Mission Statement – Describe the purpose of the charity. The mission purpose should be brief and to the point. It should be catchy to get the reader’s attention and to encourage her/him to read the rest of the business plan. The charity is doing more than just existing. It is responsible for making changes in people’s lives and changing society. This statement will the beginning block of the story of the organization and should be inspiring. The story will involve the staff, board members, donors, participants, and stakeholders to
tell others about the charity.
B. Code of Ethics – A public charity should have a formally adopted, written code of ethics, that the members of the board of directors, staff and volunteers are familiar and which they see are enforced. The values the public charity embraces should be explained. The code should detail how the individuals who carry out their duties related to the organization will conduct themselves. The business plan will list and explain each value and how its meaning applies to the charity. Some of the values may include integrity, honesty, accountability, confidentiality, respect of clients, staff, directors, donors, safeguarding the public trust, etc.
C. Conflict of interest Policy – A conflict of interest policy should be adopted and be actively involved in the decision making process of the board of directors. A model policy is available on the Internal Revenue Service website as part of the instructions for Form 1023. During the first meeting of the board of directors each year the members of the board should complete a statement of their awareness of the conflict policy and what family and business interest they have. These statements by the board members should be reviewed by each board member. As transactions develop between the family or business interest of members, the transaction should be reviewed by the board members, with the person having the interest being reclused from the meeting during the discussion. Only transactions that benefit the charity should be approved. A conflict of interest policy reveals the board of director’s exhibition of loyalty and full disclosure on behalf of the organization.
D. Descriptions of Activities – Each activity should be described as to the background of the need being served, who will be the clients, who will perform the services, where will the activities take place, what are the expected changes from the services.
E. Governing Body – List the names, street addresses, board titles and business occupations of the recruited board members. The membership of the board of directors should include individuals of diverse backgrounds, experience, business and organizational skills and fund raising knowledge. They should be willing and able to operate with due diligence, due loyalty, and confidentiality. There should be a majority of the board members who are independent of the founders, their family or business associates. Explain the plans to recruit additional members, have orientation sessions for new board members and have evaluations of performance of the board members each year. The number of directors should be sufficient to properly oversee the operations of the charity. A small board may run the risk of not sufficiently represent the public interest and lack the skills and resources to effectively oversee the activities of the organization.
F. Governance and Management Policies – The board of directors should adopt policies related to (1) a whistleblower resource person and (2) procedures and record retention policies as required by Sarbanes-Oxley
G. Marketing Strategies – Describe the plans to market the programs of the organization to the individuals and organizations needing these services and to potential donors. Always be conscious of opportunities to tell the story of the organization, as before civic clubs, church groups, corporations, private foundations and government agencies in requesting grants, when acknowledging charitable contributions and preparing tax returns.
H. Fund Raising – Charities are encouraged to adopt and monitor charitable donation policies to ensure Federal and state law requirements are met. Charitable solicitation activities should be registered in appropriate state agencies. The board of directors should assure themselves the solicitation materials are truthful, truthful and appropriate. As part of the donation acceptance policy, if a donor offers real estate, the organization should request the donor provide an environmental clearance related to the property. The governing board may determine that the organization is adequately issuing acknowledgement of donations, including the statement, “No goods or services were exchanged in receipt of these donations.”
I. Financial Planning – Anticipate the sources and amounts of charitable contributions, membership fees, service fees and investment income and the nature and amounts of expenditures to operate the programs of the organization.
J. Compensation Determination – The method the board of directors uses to determine the reasonable compensation of chief executives should be described. Compensation should include all expenditures that benefit the individuals, as salary, health care insurance, pension, or unaccountable reimbursement programs as applicable. Any payments for personal benefit in excess of the board of director approved compensation will result in “intermediate sanctions” by the Internal Revenue Service. Compensation should be determined by some comparative method using compensation of similar organizations or from a compensation consulting firm. Compensation of similar firms should be determined by contacting the organization directly or by reviewing the Forms 990 as secured from www.guidestar.org website. Once the charity has used a comparable method of determining reasonable compensation, the Internal Revenue Service has a rebuttable presumption test whereby it has to substantiate the compensation was not computed appropriately.
K. Financial Record Maintenance – The organization should describe the system of protecting and
recording revenue as it is received and paying expenditures that benefit the charitable purposes of the charity.
Financial statements should be prepared monthly and reviewed by the governing board. When state law
requires an audit by a Certified Public Accountant, the board of directors should have an independent audit committee to select the auditor and to receive the report of the CPA firm. Policies and procedures should be adopted to ensure the property and financial resources are properly protected using internal control procedures.
L. Transparency and Accountability – The business plan should describe how the charitable organization will make full and accurate information about its mission, values, activities, governance and finances available to the public. The charity should maintain a disclosure file containing (1) Form 1023, Application for Recognition of Exemption and all attachments and letters during the application process with the Internal Revenue Service, (2) Form 990, Return of Organization Exempt from Taxes and Form 990-T, Exempt Organization Business Income Tax Return for the last three years. Also, the file may contain any news articles, brochures or other information telling the story of the organization. This file should be available to the public upon request.
ARTICLES OF INCORPORATION
The Internal Revenue Service analyzes the application for exemption to determine if the organization is organized and operating in the manner required of a charitable organization. The initial test is if the public charity is organized as required by the Internal Revenue Regulations. This test is met if the organization’s Articles of Incorporation and bylaws conform to the requirements of the regulations. After the business plan is prepared, the organization should prepare an Articles of Incorporation to create the legal entity for the charity to function.
The Internal Revenue Service requires two clauses for limited purposes and dissolution as follows:
A. Purpose of the Corporation- The corporation is formed exclusively for charitable purposes, including the making of distributions to organizations that qualify as exempt organizations under section 501(c)(3) of the Internal Revenue Code of 1986 or the corresponding provisions of any future tax code or laws.
B. Dissolution Clause- Upon the dissolution of the corporation, its assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future Federal tax code. Any such assets not so disposed of shall be disposed of by a court of competent jurisdiction of the county in which the principle office of the corporation is located, exclusively for such exempt or public purposes or to such organization or organizations, as such court shall determine, which are organized exclusively for such purposes.
The Articles of Incorporation should be filed with the state’s Secretary of State. Many state’s Secretary of State have forms to use for the registration of the Articles of Incorporation. Be certain the required clauses are included in the form or create a separate attachment to the form to have adequate Articles of Incorporation. Our firm has a model Articles of Incorporation what can be used in place of the Secretary of State’s form in some
states or as an attachment to the form in other states.
The Internal Revenue Service prefers public charities adopt a conflict of interest policy, which was discussed above, as part of the Articles of Incorporation. It may also be a policy adopted by the board of directors. By having the conflict of interest as part of the Articles of Incorporation, it is more legally binding; whereas, when it is merely a motion of the board of directors it can be changed anytime.
The board of directors should adopt Bylaws describing the formal positions (president, secretary and treasurer), election and duties of the members of the board, the meeting requirement, committees, executive officers, means of adoption of amendments, and the indemnity of the directors. The board of directors should have meetings as needed to gauge the operations of the public charity. Committees should only be appointed and operated for a specific need to the time the need exists. There should not be any permanent committees.
APPLICATION FOR RECOGNITION OF EXEMPTION – FORM 1023
Form 1023, Application for Recognition of Exemption, should be prepared to file with the Internal
Revenue Service. The application should include the Form 1023, a narrative describing the answers to the
questions on Form 1023, and an exhibit file containing copies of the Articles of Incorporation, the Bylaws, a hardcopy of the organization’s website and any paper items that tells the story, philosophy, or procedures of the public charity, as new articles, brochures or similar documents.
Most “yes” answers to questions of the Form 1023 should be explained in more detail as part of the narrative.
Form 1023 must be filed within 27 months of the date of the registration of the Articles of Incorporation for the effective date of the recognition of exemption in the Internal Revenue Service’s determination letter.
The Internal Revenue Service prefers the application for recognition of exemption be for organizations that are
operating, rather than proposed organizations, which will begin operating when the determination letter is approved by the Internal Revenue Service. Once a public charity has registered their Articles of Incorporation, it is entitled to operate in every way, including accepting charitable donations. The determination letter can be given to the donors later.
Part IV – Narrative Description of Your Activities – Each activity of the organization should be explained as to the reason it was started, who will be the clients, what need will you be serving, how will the need be met, who will conduct the activity, where will the activity be conducted, what will be the results of the activity, how is the activity funded, and what is the percentage of this activity’s time to the organization’s total time will be dedicated to this activity.
Part VIII – Your Specific Activities – Question 4 Fund Raising – The methods of raising funds (donations, membership fees, program service charges, investment income) should be explained. Any agreement with professional fund raisers should be explained and the contract with them should be included as an exhibit.
Part IX Financial Data – The application should contain a financial statement with the sources of revenue detailed and the nature of expenses listed. The descriptions shown on the lines of page 9 do not meet the
requirements of generally accepted accounting principles. Prepare a financial statement based on generally accepted accounting principle showing the line items with the breakdowns that make up the line items. An illustration of this principle is line 1 is as follows:
Line 1 – Gifts, grants, and contributions: Public contributions 100,000
Government levees 50,000
Government Grants 27,000
Total Line 1 177,000
Enter the amount of the total for the year involved on page 9 on line 1.
Enter the financial statement as the sheet behind page 9 and note on page 9 a “Schedule of the financial information is included as the next page.”
Primarily, many of the expenses will be included in line 23 – “any expenses not otherwise classified.”
Part X – Public Charity Status - Every organization that recognized as tax-exempt under Section 501(c)(3) of
the IRC is a private foundation unless it qualifies as under one of the exception of organization as described under some part of Section 509(a) and 170(b)(1)(A)(i) through 170(b)(1)(A)(iii) of IRC. Organizations, that are statutorily classified as public charities under Section 509)(a) of the IRS, are (1) churches, (2) schools, (3) hospitals, (4) organizations which receive a substantial part of their support from general public donations, government grants, and organizations and (5) organizations that normally receive more than one-third of their support from contributions, membership fees, and gross receipts from activities related to their exempt function.
If the organization requests public charity classification, because it is receiving support from the public, it must
continue to seek significant and diversified public support in future years. All fund raising efforts must be aimed at bringing funds from a significant number of individuals, private foundations, corporations or government sources. This test for public support is measured using Form 990 Schedule A as the tax returns are filed.
Part IX Financial Date Section B Balance Sheet- Include the amounts of the balance sheet of the organizations for the end of the last month a statement may have been prepared. Many charities may only have a bank
account and should enter the reconciled balance of the last date the bank statement was issued on lines 1, 11, 17 and 18. If there isn’t a bank account, enter a statement on lines 1 and 2, “No bank account is opened.”
Part X – Public Charity Status – Questions 6 – All of the section for question 6 is not applicable any longer.
Form 1023 has not been revised to remove this section.
Part XI –User Fee Information - The user fee for organizations with annual gross receipts of $10,000 or more, during the three period is $850, while the user fee for organizations with gross receipts less than $10,000 is
$400. Check irs.gov/charities for changes to the fees.
Pages 27 and 28 – Checklist – Use these pages to assemble the application for recognition of exemption before it goes to the IRS.
Annual Filing Requirements
Annual Report with Secretary of State - Each year the organization should file and annual report with their Secretary of State. Be sure to go the website of your Secretary of State and determine this requirement.
Form 990 with Internal Revenue Service – Each organization recognized as exempt from Federal income taxes, except churches and integrated auxiliaries of churches, are required to file one of the Forms 990. If the gross receipts is $200,000 or more or the net assets or $500,000 or more, the organization is
required to file Form 990 and its schedules. If the gross receipts of the organization is $50,000 or more or the net assets of $250,000 or more, the organization is required to file Form 990-EZ. It the gross receipts is less than $50,000 the organization must file a Form 990-N on the computer.
If the organization does not file a Form 990 for three (3) years, the Internal Revenue Service will revoke the
recognition of exemption of the organization. The organization will have to file another Form 1023 and request reinstatement of their recognition of exemption as a Section 501(c)(3) public charity and pay the user fee again.
From the date of the revocation of exemption to the date of reinstatement, the donations the organization receives cannot be claimed as charitable contributions on individual or corporate tax returns.