Chapter 13 – Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues
CHAPTER 13: NOT-FOR-PROFIT ORGANIZATIONS—
Chapter 13 – Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues
13-2
CHAPTER 13: NOT-FOR-PROFIT ORGANIZATIONS—
REGULATORY, TAXATION, AND PERFORMANCE
ISSUES
13-1. Not-for-profit organizations differ in nature and purpose from for-profit organizations. In
general, characteristics that distinguish not-for-profit organizations from for-profit
organizations are as follows:
• There is a lack of defined ownership.
13-2 States regulate charities in several ways. States give charities their legal life in the form
of a not-for-profit corporation, limited liability company, or in the state’s recognition of a
charitable trust. In addition, many states require NFP organizations to obtain a license to
13-3
13-3 A 501(c)(3) tax-exempt organization is considered a public charity. As such,
contributions a donor makes to a 501(c)(3) NFP are tax deductible on federal income tax
returns. A 501(c)(7) is a social or recreational NFP. Although it is a tax-exempt
13-4. The purpose of the Form 990 is to provide information to the government and the public
concerning the activities of the NFP organizations receiving tax-exempt status. The
and (3) a Form 990 is filed by NFPs with receipts and assets too large to qualify for filing
the Form 990-EZ. It should be noted that generally all NFP organizations must file some
type of Form 990 with the IRS; some exceptions include religious organizations and
13-5. Public charities are broadly supported by the general public in the form of contributions,
dues, or charges for services, which is why the adjective “public” is appropriate. Private
Chapter 13 – Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues
13-4
Ch. 13, Answers, Question 13-5 (Cont’d)
A public support test calculates how much of a charity’s total support comes from the
13-6. At the state level the type and amount of political activity an NFP can undertake will
vary. However, excessive political activity can result in state sanctions. At the federal
level a charitable NFP organization is prohibited from campaigning on behalf of any
candidate for public office. However, NFP organizations do have limited ability to
13-5
13-7. A gift shop that is considered unrelated to the tax-exempt mission of the museum and
regularly carries on business activities will be subject to the unrelated business income
tax (UBIT) if its net income is greater than $1,000. The UBIT rate is equal to corporate
income tax rates. In order to ensure that the museum does not incur a UBIT liability, the
13-8. IRC Sec. 527 includes such organizations as political action committees, political parties
and political campaigns. Sec. 527 organizations are considered tax-exempt under the
IRC. Campaign finance laws typically have an impact on Sec. 527 organizations. As a
result of such laws, organizations that meet the definition of a political organization are
13-6
13-9. Excessive benefits refer to amounts or “deals” received by an NFP organization’s officers
(i.e., disqualified persons) that are deemed to be unreasonable when compared to similar
transactions received by those in comparable positions. Examples of excessive benefits
would include excessive compensation, sale of assets to an officer at a bargain price, or
entering into leasing arrangements with an officer that would provide the officer with an
13-10. The articles of incorporation for an NFP state the charitable purpose of the organization.
The purpose and mission identified in the articles of incorporation are important for
regulatory purposes and the request for federal tax-exempt status. In addition to the
charitable purpose the articles will include information such as name of the organization,
13-7
13-11 Note: The answers provided to this case are based on the 2016 annual report of the
American Institute of Certified Public Accountants.
a. In the summary of significant accounting policies note you will find that the
American Institute of Certified Public Accountants (AICPA) receives its exempt
status under IRC Sec. 501(c)(6). Illustration 13-4 identifies this code section as
c. Yes. A review of the AICPA’s statement of cash flow reveals that this tax-exempt
organization has paid income taxes, indicating unrelated business income (UBIT).
Additionally, a review of the footnotes indicates that the AICPA is subject to
UBIT. The AICPA has two for-profit entities, one of which is a limited liability
company (LLC). NorthStar Conferences, LLC, provided professional
The answer to whether the AICPA should be as effective will vary by student.
AICPA members pay dues in the expectation that they are receiving value for the
dollars paid. Some may argue that because the AICPA is a business league
administrative costs should be higher due to higher salaries and the perquisites of
office. Others will argue that members do not pay dues for such non-value added
Chapter 13 – Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues
13-8
Ch. 13, Solutions, Case 13-11 (Cont’d)
As a caution, effectiveness of any organization should be based on factors other
than a single ratio. For example, membership in the AICPA is voluntary;
• The audit committee is made up of independent directors.
• The audit committee meets separately with the internal auditor.
• The AICPA applies the COSO framework to internal control.
• Management provides an internal control assurance.
• The auditor provides an opinion on management’s internal control
13-9
13-12. a. The following are questions the executive director of the association should be
prepared to answer:
• Would the net income derived from the sale of exhibit space be large
enough to subject the NFP to UBIT?
• Does the activity meet any of the exclusions under UBIT, such as
volunteer workforce, qualified sponsorship activities, selling donated
materials, etc?
• Does the sale of exhibit space contribute importantly to promoting the
human resources industry or educating attendees about products, services,
and/or rules and regulations affecting the human resources industry?
• Does the sale of the exhibit space help achieve the purpose of promoting
and educating about the industry through the design and character of the
products displayed?
• Is the association classified as one of the qualifying organizations under
the IRC codes?
• Does the net income meet the threshold for reporting UBIT (over $1,000)?
Chapter 13 – Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues
13-10
Ch. 13, Solutions, Case 13-12 (Cont’d)
13-13. a. Students will choose different sets of charities. Web sites for the organizations
listed on Illustration 13-8 can be readily obtained through a search engine such as
Google.
13-7 from the audited annual financial statements and IRS Form 990. For
example, donors can calculate the organization’s fund-raising ratio by looking at
the statement of activities to see if the dollars from contributions and support
adjusted for fund-raising costs, divided by total contributions and support, is close
Chapter 13 – Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues
13-11
Ch. 13, Solutions, Case 13-13 (Cont’d)
d. Students could present information in this manner:
Students should be cautioned that using ratios for a single year is just a first step
in assessing the efficiency and effectiveness of an organization. Certainly trend
information is important, as well as other economic, financial, and program
13-14. a. The Tampa Bay Times used program effectiveness (program expenses / total
expenses) and fund-raising efficiency (fund-raising expenses / total contributions)
Performance
measures:
Charity
1
Charity
2
Charity
3
Charity
4
Charity
5
Comments:
Liquidity
Going concern
Capital structure
Program
effectiveness
Efficiency
Leverage and debt
coverage
Fund-raising ratio
Investment
performance
Chapter 13 – Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues
13-12
Ch. 13, Solutions, Case 13-14 (Cont’d)
(2) CharityWatch uses an organization’s Form 990 and, when available, its annual
report and audited financial statements. CharityWatch publishes a Charity Rating
(3) Guidestar is the source for Forms 990 filed by not-for-profit organizations. It
offers images of Forms 990, as well as digitized data from Forms 990. Free
(4) Better Business Bureau Wise Giving Alliance has 20 standards that it uses to
evaluate charities. Many of the standards are qualitative or relate to the amount
and quality of information provided by the charity. There are three financial
measures included in the standards. Standard 8 is that the organization’s program