Chapter 13 – Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues
13-1
CHAPTER 13: NOT-FOR-PROFIT ORGANIZATIONS—
REGULATORY, TAXATION, AND PERFORMANCE
ISSUES
OUTLINE
Number
Topic
Type/Task
Status
(re: 18/e)
Questions:
13-1
Characteristics of not-for-profits
Compare
Same
13-2
State regulation
Identify
Same
13-3
Differences in tax-exempt
categories
Explain
New
13-4
Filing Form 990
Explain
New
13-5
Public charities and private
foundations
Explain
Same
13-6
Political activity
Explain
Same
13-7
Unrelated business income tax
Discuss
Same
13-8
Political action committees
Define, identify
Same
13-9
Excessive benefits
Explain
Same
13-10
Governing documents
Explain
Same
13-11
Performance measures
Explain
New
Cases:
13-12
Research Case—Analyzing a NFP
Analyze
New
13-13
Research Case—Unrelated
Business Income Tax
Evaluate
13-12
13-14
Research Case—Performance
measures
Apply, evaluate
Revised 13-13
13-15
Research Case—Evaluating charity
organizations
Evaluate
New
13-16
Research Case—
Performance evaluation of a NFP
Analyze
Revised 13-15
13-17
Research Case—
Evaluating the accountability and
transparency of a NFP
Analyze
13-16
Exercises/Problems:
13-18
Various
Multiple Choice
Items 1 and 8
revised. Items 2
and 11 new.
13-19
Public charity
Apply
Revised
13-20
Identifying tax-exempt status
Identify
Revised
13-21
UBIT
Categorize
Same
13-22
Intermediate sanctions
Evaluate
Same
Chapter 13 – Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues
13-2
CHAPTER 13: NOT-FOR-PROFIT ORGANIZATIONS—
REGULATORY, TAXATION, AND PERFORMANCE
ISSUES
Answers to Questions
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.
General Problem Information: Characteristics of not-for-profits
Learning Objective: 13-1
Topic: Defining the Not-for-profit Sector
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry
Level of Difficulty: Easy
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
solicit charitable contributions. Finally, states regulate the lobbying and political
activities of NFPs. Illustration 13-2 provides a more exhaustive list of not-for-profit
activities that may be regulated by the states.
13-3 The types of organizations classified as 501(c)(3) are those that operate for philanthropic,
educational, or similar purposes. As such, contributions a donor makes to a 501(c)(3)
NFP are generally tax deductible on federal income tax returns. A major difference
General Problem Information: Differences in tax-exempt categories
Learning Objective: 13-3
Topic: Federal Regulation
Bloom’s Taxonomy: Understand
Chapter 13 – Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues
13-3
Ch. 13, Answers, Question 13-3 (Cont’d)
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Legal
Level of Difficulty: Medium
13-4. The Form 990 provides information to the government and the public concerning the
activities of the NFP organizations receiving tax-exempt status. The Form 990 contains
financial information (e.g., Balance Sheet, Statement of Revenue, and Statement of
Functional Expenses) as well as information on governance and compensation. The NFP
would know which form to file based on its size. The filing requirements by size are: (1)
Form 990-N or “e–postcard” is filed by NFPs with gross receipts of $50,000 or less per
General Problem Information: Filing Form 990
Learning Objective: 13-3
Topic: Federal Regulation
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Legal
Level of Difficulty: Medium
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
foundations are funded by gifts from a small set of donors, usually a family or
corporation. A private foundation makes grants to public charities, which then operate
programs. Both are tax-exempt under IRC Sec. 501(c)(3), but public charities receive the
most preferred tax treatment because it is assumed that the public, both donors and
beneficiaries of the programs, will monitor the actions of the organization.
General Problem Information: Public charities and private foundations
Learning Objective: 13-3
Topic: Federal Regulation
Chapter 13 – Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues
13-4
Ch. 13, Answers, Question 13-5 (Cont’d)
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Legal
Level of Difficulty: Medium
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
engage in lobbying activity. Examples of allowable limited lobbying activity would
include testifying at hearings, corresponding with elected officials, publishing documents
that advocate for a specific legislative action, and direct appeals to the general public to
contact legislators or take other action on a legislative matter. If an organization chooses
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
managers should carefully review the incorporating documents to determine if the tax-
Topic: Federal Regulation
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Legal
Level of Difficulty: Medium
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
required to notify the IRS that they wish to be considered a Sec. 527 tax-exempt
Chapter 13 – Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues
13-5
Ch. 13, Answers, Question 13-8 (Cont’d)
organization. Additionally, Sec. 527 NFPs must periodically complete Form 8872,
notifying the IRS of the names and addresses of persons contributing more than $200 to
the NFP, and those persons receiving more than $500 on an annual basis from the NFP.
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
unreasonable lease benefit.
General Problem Information: Excessive benefits
Learning Objective: 13-3
Topic: Federal Regulation
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Legal
Level of Difficulty: Medium
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,
address, and the board of directors.
Chapter 13 – Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues
13-6
Ch. 13, Answers, Question 13-10 (Cont’d)
General Problem Information: Governing documents
Learning Objective: 13-4
Topic: Governance
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Legal
Level of Difficulty: Medium
13-11. There are several ways donors can evaluate the performance of NFP organizations. In the
past, most publicly accessible data focused on not-for-profit financial information.
Donors could calculate financial performance ratios utilizing the Form 990 or the audited
financial statement. Examples of financial performances ratios can be found on
Illustration 13-7. Donors could then compare the financial ratios over time and to peer
organizations to assess the financial strength of the NFP organization.
General Problem Information: Performance measures
Learning Objective: 13-5
Topic: Benchmarking and Performance Measures
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Legal
Level of Difficulty: Easy
Chapter 13 – Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues
13-7
Solutions to Cases
13-12 Note: The answers provided to this case are based on the 2018 integrated annual report of
the Association of International Certified Professional Accountants (Association).
a. In the “Top accomplishments” section of the annual report, the Association
reports having over 657,000 members and students living in 179 countries and
territories.
c. The Association reported four key performance indicators (KPIs): members and
students, net promoter score, total revenue, and net income (loss). Based on the
reported 2018 numbers, they were not able to achieve their targeted KPIs. The
number of members and students was below its targeted level of 676,000. The
Association also missed its target for the net promoter score. Finally, it failed to
achieve its total revenue target of $339 million and its net income target of $6
million.
The answer to whether the Association should be as efficient will vary by student.
Association members pay dues in the expectation that they are receiving value for
the dollars paid. Some may argue that because the Association is a membership
organization, its 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 services and that the Association efficiency should be similar to
other NFPs.
Chapter 13 – Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues
13-8
Ch. 13, Solutions, Case 13-12, d. (Cont’d)
As a caution, the assessment of the performance of any organization should be
based on factors other than a single ratio. For example, membership in the
Association is voluntary; therefore, much as with for-profit entities, members
have the option of not purchasing the services (i.e., not paying dues) offered by
the Association if they do not believe they are receiving value for their money.
The fact that members continue to pay dues indicates they are at least somewhat
satisfied with the services provided by the Association.
13-13. 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 sale of exhibit space contribute importantly to promoting the
human resources industry or educating attendees about products, services,
• Does the net income meet the threshold for reporting UBIT (over $1,000)?
Derived from IRS Pub. 598, (February 2019, p. 7). See answer to part b.
b. The IRS Publication 598 “Tax on Unrelated Business Income of Exempt
Organizations” will help students identify whether this activity is considered
Chapter 13 – Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues
13-9
Ch. 13, Solutions, Case 13-13, b. (Cont’d)
information on “Convention or trade show activity” that can be used to answer the
questions of Phyllis Gene.
c. The memo students prepare should incorporate the questions identified in part a
taken from the IRS Publication described in part b and any other guidance
students can find on the Internet or from other resources. Emphasize to students
that, as a board member, Ms. Gene will use their analysis and memo to help her
speak to the board as a whole so the board can deliberate how to structure the
General Problem Information: UBIT and advertising
Leaning Objective: 13-3
Topic: Federal Regulation
Bloom’s Taxonomy: Evaluate
Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Research
Level of Difficulty: Hard
13-14. a. Students will choose different sets of charities. Websites for the organizations
listed on Illustration 13-8 can be readily obtained through a search engine such as
Google.
and 90%. The availability of data for calculating ratios will vary by the NFP.
Comparing to the 2019 ratios provided in Illustration 13-8, students will probably
observe that NFP organizations try to maintain fairly high efficiency ratios.
b. Readers of financial statements can calculate the ratios presented in Illustration
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
c. If the organizations provide financial reports or the Form 990 on their websites,
they are generally also providing the reports or forms for several years. The
Chapter 13 – Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues
13–10
Ch. 13, Solutions, Case 13-14, c. (Cont’d)
advantage of having several years of data is that it allows for benchmarking.
Donors and others are able to see if an organization’s performance has improved,
remained stable, or declined over time. Using one metric at one point in time does
not give a perspective on the organization’s performance.
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 performance of an organization. A more thorough analysis would
include trend information, as well as more comprehensive benchmark data.
e. In addition to assessing financial performance, donors and others are often
concerned about the effectiveness of the not-for-profit’s programs. Utilizing
nonfinancial metrics such as the number of clients served, or the number of health
General Problem Information: Performance measures of NFPs
Leaning Objective: 13-5
Topic: Benchmarking and Performance Measures
Performance
measures:
Charity
1
Charity
2
Charity
3
Charity
4
Charity
5
Comments:
Liquidity
Going concern
Leverage
Program expense
efficiency
Debt coverage
Fund-raising
efficiency
Investment
performance
Chapter 13 – Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues
13-15. Note: Answers to case 13-15 are based on Internet access dated 1/14/2020 and will likely
differ at the time the case is assigned.
a. Students will need to visit the Guidestar homepage (www.guidestar.org) and
register for a free account. Note: Guidestar merged with the Foundation
Center to form Candid. The Guidestar website is now referenced as “Guidestar by
b. Students’ answers for this part will vary depending on the organizations they use. As
an example, one organization students could choose is Thriive. Thriive lists its
mission on its Guidestar profile page as: “Thriive’s mission is building prosperity in
vulnerable global communities. At Thriive we inspire a culture of philanthropy in
challenged communities and offer a sustainable way out of poverty by helping to
create new jobs. As we help small businesses grow with needed capital, they pay
forward this assistance by donating products, services, and job training to the most
vulnerable in their communities. The majority of entrepreneurs are so inspired by the
impact their gifts have on others that they continue to give, transforming themselves
c. Students’ answers for this part will vary depending on the organizations and measures
they use. In reference to Thriive’s profile page, five nonfinancial performance
indicators are listed: number of people receiving products and/or services donations,
number of jobs created and maintained, number of unskilled individuals who received
job training, number of individuals who received training to increase their income,
and number of borrowers served through the not-for-profit’s programs. Thriive
assesses the trend of four of the five metrics as “holding steady,” while noting the
metric “number of jobs created and maintained” is “increasing.”
General Problem Information: Evaluating charity organizations
Leaning Objective: 13-5
Topic: Benchmarking and Performance Measures