4Thought Blog

Your nonprofit organization is probably assisted by volunteers who aren't financially compensated. But your staff — including executives — are almost certainly paid a commensurate salary and benefits for their work.

Compensation issues are always tricky, but they're made more so by tax and legal requirements for nonprofits. Setting executive pay is particularly fraught because if your nonprofit isn't careful, it could be penalized or even lose its tax-exempt status.

If your nonprofit focuses most of its fundraising energy on donors who can contribute to your mission and programs now, you may have neglected legacy gifts.

Such gifts represent a portion of wealthy donors' estates that go to your organization on their death. Legacy gifts can help position your nonprofit for sustained growth well into the future.

Let's take a closer look at the hows and the whys.

If your organization has met the IRS qualifications to be considered tax-exempt, the income you receive — such as donor contributions — is exempt from federal income tax.

However, it's still possible for nonprofits to follow the rules and experience adverse tax consequences. Here are five potential tax traps that could catch you off guard.

Nonprofit organizations have been navigating change in almost every aspect of their operations over the past two years, including shifting priorities, a new employment landscape, and changes in fundraising and hosting programs and events.

As organizations continue to reimagine what their futures will look like, donor engagement strategies should be reevaluated and refined to ensure they keep up with these other changes.

Consider the following steps to support strong donor engagement:

Unlike some fishing enthusiasts, nonprofits don't usually "throw back" contributions from the small fry in its donor base. Modest donations, after all, add up. But landing some big fish can make a whale of a difference to an organization's financial security.

Unfortunately, major donors don't usually knock on a charity's door and hand over millions of dollars. You have to work to find them and then earn their trust and confidence. Here are seven practical suggestions:

Revenue generated by 501(c)(3) organizations is generally exempt from federal income tax. But in some cases, your nonprofit may incur unrelated business income tax (UBIT) on revenue.

 The good news is your annual tax return may offer some relief in the form of deductions. The list isn't as long as the "ordinary and necessary business expenses" for-profit entities can deduct, but here are six common nonprofit deductions to know about:

In the face of the “Great Resignation” and rising inflation, organizations are taking a second look at the size of their salary increase budgets.

For the last decade, budgets for merit increases have hovered around 3%. Now, salary increase budgets are on the rise to levels not seen in years, according to BDO’s first-quarter 2022 Salary Increase Budget Pulse Survey.

The average 2022 merit budget set in Q3 2021 was estimated to be around 3%, in line with previous years.

However, as 2022 approached, the talent shortage persisted, and it became clear that salary increase budgets needed to be higher. Merit budget predictions in Q4 2021 increased to just under 4%.

If your nonprofit organization operates on a calendar-year tax basis, the deadline for filing your 2021 Form 990 (Form 990 EZ for certain small organizations) is right around the corner — May 15, 2022.

Besides filing on time, you must ensure the information provided on your form is accurate. Pay particular attention to the following eight issues that commonly trip up nonprofits:

Suppose the founder or long-time executive director of your nonprofit organization is scaling back on her workload and making plans to retire. What will her departure mean for your organization?

If your nonprofit has a well-crafted succession plan, it's likely to survive any leadership transition. But if you don't have a plan, your organization could endure a rocky period, and possibly close.

Even if your top leader intends to remain in the job for years, illness or another unanticipated event could disrupt plans. For these reasons, every nonprofit needs a formal succession plan.

New nonprofits must apply to the IRS to be approved as a 501(c)(3) or tax-exempt organization. There are a few hurdles to clear.

First, nonprofits must be organized and operated exclusively for tax-exempt purposes — which means they aren't trying to make a profit. Also, none of their earnings can inure to the benefit of private shareholders or individuals. And they can't attempt to influence legislation as a substantial part of their activities or participate in political candidates' campaigns.

If your nonprofit meets all those conditions (and possibly others), congratulations! Now, what form should you use to apply? Traditionally, organizations only had the option to use Form 1023. But the IRS introduced Form 1023-EZ in 2014 and you may want to choose this streamlined version.