Tax Issues and Challenges Surrounding Innovative Fundraising April 25, 2017

Transcription

1 Tax Issues and Challenges Surrounding Innovative Fundraising April 25, 2017 BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company BDO KNOWLEDGE limited by guarantee, Webinar Series and forms Tax part Issues of the and Challenges Surrounding Innovative Fundraising international BDO network of independent member firms. Page 1 /

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3 WITH YOU TODAY Rebekuh Eley, CPA, MST Tax Managing Director Nonprofit Practice Leader BDO USA, LLP 330 N. Wabash Chicago, IL Direct: (312) Annette Hoelzer Tax Partner BDO USA, LLP 300 Spruce Street, Suite 100 Columbus, Ohio Direct: (614) Page 3

4 LEARNING OBJECTIVES Learn about the variety of methods used to drive revenue through innovative fundraising. Understand the tax and reporting requirements related to various fundraising activities. Identify best practices and processes associated with innovative fundraising activities. Page 4

5 AGENDA Fundamentals of Fundraising Ideas for New Revenue Streams Fundraising Alternatives - Description of each - Tax implications - Advantages/disadvantages/risks Page 5

6 Setting the Table u Let s Recap the Fundamentals Public Support Test Earned Revenue Contributions Program Service Government Grants Mixed Purpose (Yours or Counterparty) Investment Income Page 6

7 Public Support Test Revenue 509(a)(1) 509(a)(2) Contributed Revenue Included Included Earned/Program Revenue Excluded Included Excess Contributions Excess Earned Revenue Passive Investment Income Unrelated Business Income Excluded everything over 2% of 5 year aggregate of total N/A Only limited on general terms and must meet overall public support test Denominator includes Net UBI whether or not regularly carried on Exclude everything from a 4946 Disqualified Person Exclude everything over 1% of each year s total from a single customer May not exceed 33 1/3 of total support in 5 year aggregate Denominator includes Net UBI whether or not regularly carried on Page 7

8 Ideas for New Revenue Streams u Younger Board Members u Funds Needed for Special Projects u Image/Brand building by Corporations/Individuals u Competition u Creative Employees u Vendors Page 8

9 Qualified Corporate Sponsorships u Charity conducts an event or names a building u Business makes their name associated with the event/building u Business typically deducts the payment as advertising dollars (IRC 162) u Charity wishes to book the payment as a charitable contribution u With proper planning, this is the ultimate result Page 9

10 Qualified Corporate Sponsorships u Treasury Reg. Sec defines a Qualified Corporate Sponsorship u Failing to qualify doesn t make payments taxable. Perform UBI Analysis u The lynch pin is to determine if the sponsor receives no substantial return benefit for the payment u Use of the payer s name, logo, goods or services that have no qualitative or comparative descriptions is not a substantial return benefit. Business may be the exclusive sponsor. They may display sample products and provide listings of products, locations and internet addresses u Payments that are contingent upon a level of attendance or broadcast ratings are not excluded as Qualified Corporate Sponsorships Page 10

11 Qualified Corporate Sponsorships u Advantage Contribution Revenue u Disadvantage - Limited as to what the charity can offer to their business sponsor u Risk If the charity fails to meet the test, it runs the risk of the revenue being UBI, usually as advertising revenue u Best Practice Have tax professionals review the contract prior to execution. Do not add contract provisions that the corporate sponsor may not really care about that could trigger the UBI. Remember, the business is deducting the payment as advertising Page 11

12 Social Media u In 2014, the Ice Bucket Challenge raised over $115M by 2.5 million people nationally and $220M globally u Barbara Newhouse, ALS CEO and the ALS Association were honored by the Washington Business Journal at its CEO of the Year Awards, for having one of the best marketing campaigns of 2014 Page 12

13 Social Media We re quite small, yet we re able to have a really big impact because of these technologies." -- Bart Skorupa, Executive Director, Groundwork Opportunities Page 13

14 Social Media Page 14

15 Crowd Based Funding u What is it? A website that facilitates the exchange of money A personal gift, if you are not a public charity Peer-to-Peer fundraising. It is NOT a bank, a charity nor is it regulated!!! u Benefits Charities can use these to facilitate online giving u Costs Depends upon the website some base fees on the fundraising goal u Risks Anyone can set up a site and say they are you. Celebrities are constant targets Gift taxes can apply to personal gifts over $14,000 a year Be cautious of when online fundraisers turn into online raffles. Online raffles can be considered interstate gambling u Warnings UBI is not a big concern if you are just soliciting contributions Print and READ the legal fine print (minimums, goals, taxes, hidden fees, etc.) Page 15

16 Crowd Based Funding - Comparisons Company Giveforward.com Gofundme.com Fundly.com Crowdrise.com Fundrazr.com Fees* 7.9% + $0.50/per donation 7.9% + $0.30/per donation 7.9% + $0.30/per donation up to $50K 7.4% + $0.30/per donation $50,001 - $500K 6.9% + $0.30/per donation $500,001 - $1M 5.9% + $0.30/per donation over $1M Reduced fees for larger campaigns $50/month + 5.9% + $0.30/per donation Free + 7.9% + $0.30/per donation Reduced fees for less services Increased for individuals and corporate accounts 7.9% + $0.30/per donation *For US transactions, as of April 15, 2016 Page 16

17 Online Auctions or Sweepstakes/Raffles u A valuable item is donated to a charity u Charity wishes to maximize the cash it received for the item u Options Hold an online charity auction which closes at a specific date and time using an ebay type technology Sell chances to win the specified item in an online sweepstake in order to avoid the sweepstake being viewed as a raffle. u Benefits Ability to reach a large audience Page 17

18 Online Auctions or Sweepstakes/Raffles u Costs May require registration in some states if you are specifically targeting donors in states or accepting donations or bids from donors in specific states u Risks If the sweepstake is a raffle, a multistate raffle is going to be considered multistate gambling and would be in direct violation of gaming laws for state and federal law. It may be less lucrative, but the online auction is most likely the less risky of the two options u UBI Considerations Activity is typically not regularly carried on and the item is donated so the income is most likely going to be considered UBI u Warnings Online raffles are a very risky idea and the social media sites are not going to caution you in any way. Contracts are very clear that all legal and tax issues are your responsibility Page 18

19 Cause-Related Marketing/Commercial Co-Venture u What is it? An agreement between a for-profit business and a charity. That agreement typically stipulates that the for-profit and the charity work together and represent the public, so when they purchase the for-profit s product or service, some amount of the proceeds will go to the charitable organization The purpose is that both the charity and the for-profit participate in the marketing of the campaign to the mutual benefit of both organizations u Benefits The for-profit company anticipates increased sales, perhaps increased reputation from association with the charitable organization, and perhaps decreased marketing expense due to the charitable organization s spend on public awareness from association with the for-profit company The charity anticipates increased contribution revenue from the campaign and potentially increased brand awareness from association with the for-profit company Page 19

20 Cause-Related Marketing/Commercial Co-Venture u Costs Depends upon the agreement but could include marketing expenses Many states regulate commercial co-ventures and many more states along with DC have charitable solicitation laws. You may have to search a bit for the consumer protection authority in each state under which the commercial co-venture is regulated (Commercial co-venture; charitable sales promotion; charitable advertising campaign, etc.) u Benefits Reputation Timing of campaign Communication with the public and limitation of the agreement Timing of remittance State regulations and oversight requirements u UBI Considerations Regularly carried on? Do not forget to check state tax rules. If charity provides marketing services, there could be UBI Page 20

21 Best Practices in Cause Marketing 1. Written Agreement 2. Comply with state requirements of registration and bonding to the extent applicable 3. Using a per-unit standard in the marketing campaign 4. Consider alternatives to a per-unit donation standard in an effort to avoid Commercial Co-Venture ( CCV ) laws 5. Develop a standard set of disclosures that must appear in all advertising 6. Ensure that consumers can clearly see all of the material terms on point-ofpurchase materials and packaging before they purchase the product. 7. Ensure that advertisements do not mislead, deceive or confuse the public about the effect of the consumer's purchase on charitable contributions or otherwise Page 21

22 Best Practices in Cause Marketing 8. Avoid increasing the price of the product or service that is the subject of the marketing campaign during the campaign period 9. Ensure that the charitable organization's share of the proceeds are promptly paid to it and in the amount committed 10.Set up verifiable accounting and inventory tracking systems to maintain accurate, up-to-date records of applicable sales 11.Retain a copy of the final accounting 12.Avoid advertisements that represent that the charitable organization has endorsed the advertised product or service. If the charitable organization has not made an endorsement, the advertisement should clearly disclose this fact 13. Have the marketing department (or whatever operational unit is running the cause marketing campaign) obtain internal clearance for the particular promotion and consult counsel for legal advice as needed Page 22

23 Third-party Professional Fundraisers u What is it? Outside professional fundraisers are soliciting contributions on behalf of your organization Depending on the contract, the contributions are either flowing directly to your organization or the contributions are flowing to the professional fundraiser and they are remitting a net amount to the charity There is a definition in the Form 990 Instructions for Professional Fundraising Services u Examples Direct solicitors of contributions who are not employees of the organization Advisors hired to assist with major gift or capital campaigns Grant writers Page 23

24 Third-party Professional Fundraisers u Benefits Increases capacity of the organization to reach potential donors Brings in additional contributions the organization would not otherwise have received u Costs Sometimes very high relative to the donations received u Risks Reputation u Warnings Make sure any professional fundraiser is properly registered with the Secretary of State or Attorney General s office and properly bonded, if required Have a written agreement with a term, fixed fees, payment dates, ability to audit records, agreements as to responsibilities for issuing donor acknowledgment letters, and stipulating that all donor information is the property of the specific charity Page 24

25 Special Events and Ticket Add-ons u What is it? A way for performing artists to contribute to local charities as well as a means for them to fund their foundations without having them be classified as public charities Special events designed for a non-profit or a regular concert that has a charitable component added on to the regular price u Examples Charity concerts You find a band or performing artist who is willing to put on a special charity concert. You set the ticket price at $350. The quid pro quo component is $200 and the ticket is $140. The proceeds of the concert go to the charity that is sponsoring the charitable event You have a band that is touring this summer and they have a $5 ticket add-on to every show. If a ticket purchaser does not want to make the $5 contribution, they can mail in after and get a refund of the $5. Over the course of the summer, two people mail in and the band refunds them their $5. The proceeds of the concerts go to the band s foundation and are distributed to local charities in each of the cities in which the band is touring over the summer Page 25

26 Special Events and Ticket Add-ons u Benefits Celebrities can lend their name and personas to their foundations. They hold charitable events and raise large sums of money, but their foundations are actually public charities u UBI Considerations Need to perform the normal three part test to determine that it is not a regularly carried on trade or business u Warnings Be careful of the assignment of income rules Also be careful of state and local tax rules about what is subject to tax. Bifurcation of ticket prices between the charitable and quid pro quo portion is a very limited carve out for charitable fundraising events Page 26

27 Social Enterprise or Joint Venture u What is it? You have a board member who has a great idea for a for-profit enterprise that would be perfect for your organization. Can be on your own, in conjunction with another non-profit or with a for-profit organization. Often with a great guy they know u Examples Collecting the used grease from local restaurants and selling it to recycling centers Collecting and shredding confidential documents Landscaping services Dog walking services Day services for adults with disabilities Make some underutilized resource of your organization available to the public in exchange for money Page 27

28 Social Enterprise or Joint Venture u First question: If it is such a great idea, why isn t someone already doing it? u Benefits May further the mission of the organization May create additional resources for the organization May provide opportunities that the organization would not otherwise be able to take advantage of on its own May create efficiencies in operating costs u Costs There is usually some sort of initial capital investment Legal fees and due diligence costs If it is a new program, there may be additional up front costs Look at the agreement to make sure there are stop-loss provisions to protect the assets of the organization, especially if the other investors are for-profit organizations Page 28

29 Social Enterprise or Joint Venture u Risks Unexpected capital calls If the exempt organization is not in control, unrelated business income tax risks may arise Reputational risk Inability to exit or divest from the investment u UBI Considerations If the exempt organization is not in control and the primary purpose of the joint venture is not exempt, there is a high likelihood the activity is going to be treated as unrelated business income, if the activity is ordinary business income, regularly carries on in a commercial manner u Warnings Review agreements for control Exempt purpose Potential capital calls, indemnification and warranty provisions Page 29

30 Royalty or Licensing Charitable Assets u What is it? Licensing the use of the organization s name or assets, such as mailing lists Making intellectual property available to another for a licensing fee u Examples Museum collections available online (free or for a fee) Library collections and books available online (free or for a fee) Licensing mailing lists Licensing name and/or recognizable logo Page 30

31 Royalty or Licensing Charitable Assets u Benefits Tax free income, if structured properly Royalty or Program income u Costs Legal fees Website development Potential of federal or state taxes u Risks Make sure you are licensing to an organization you can trust Licenses should be for limited use consistent with exempt purpose Licensee cannot-re-distribute or use asset for other purpose u UBI Considerations If passive royalty agreement, organization may not provide additional services which would cause the income to be subject to UBIT, such as sorting or manipulating lists, or recommending or promoting the licensee of the list Page 31

32 QUESTIONS? Page 32

33 CONCLUSION Thank you for your participation! Certificate Availability If you participated the entire time and responded to at least 75% of the polling questions, click the Participation tab to access the print certificate button. Please exit the interface by clicking the red X in the upper right hand corner of your screen. Page 33

34 SPEAKER BIOGRAPHIES / Page 34

35 BIOGRAPHY Rebekuh Eley, CPA, MST Tax Managing Director, Nonprofit & Education Practice Leader Direct: Rebekuh has spent her entire career as a consultant to tax exempt organizations specializing in private foundations, public charities, hospitals, higher education institutions, trade associations, and membership organizations. She concentrates on the tax issues facing nonprofit organizations and their for-profit affiliates, including the myriad of special tax rules that apply to tax-exempt organizations, such as the rules governing excise taxes, unrelated business taxable income, intermediate sanctions, private inurement, lobbying and political activities, information reporting, alternative investments, and charitable gifts. Rebekuh is a national speaker at various forums where she speaks on topics impacting exempt organizations including the AICPA, Illinois CPA Society and Foundation Financial Officers Group. Rebekuh also serves as a member on the IL CPA Society Not-for-Profit Committee and Women s Executive Committee, TE/GE Council, and AICPA Tax Division Exempt Organizations Technical Resource Panel. Page 35

36 BIOGRAPHY Annette Hoelzer, CPA, MT Tax Partner, Nonprofit & Education Direct: Annette is a partner in the Tax practice at BDO s Columbus office and has been in public accounting since Annette is experienced in tax matters of nonprofit organizations, overseeing professional services, including social service organizations, private and public foundations, private schools, and trade associations. She regularly conducts extensive research on issues affecting nonprofits and frequently writes articles and delivers presentations on various nonprofit topics, such as the advantages of a separate subsidiary, tax issues with charitable contributions, and unrelated business income tax issues. Annette has presented seminars for The Ohio Society of CPAs, Ohio CLE Institute, Columbus Metropolitan Club, and various other organizations. Page 36

37 CONTENT CONTRIBUTOR / Page 37

38 BIOGRAPHY Jeff Schragg, J.D., CPA Partner Direct: Jeff Schragg is a Tax Partner at BDO USA, LLP where he is the McLean Office Nonprofit Industry Team Leader. For over 30 years, he has counseled clients on highly complex tax and business matters. Jeff provides his clients a broad and deep knowledge of all areas of state, federal and international taxation. He has coordinated several voluntary compliance projects for tax-exempt organizations with regard to sales tax, unrelated business income and other unreported taxes. Jeff brings a results-driven approach to closely held businesses and high net-worth individuals. Jeff brings sophisticated tax planning and advice to Fortune 500 companies, S corporations, trade associations and charities. Jeff was recognized as a 2011 SmartCPA by SmartCEO magazine. He has served on the Board of Directors of several nonprofit organizations, including roles as Board Chair and Treasurer. Page 38

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