The Charity CFO

Why You Shouldn’t Start a Nonprofit

January 12, 2024/in CharityCFO, Nonprofit/by Paul Cook

If you dream of devoting more time to a cause you believe in and taking it to the next level, you might ponder starting a nonprofit.

Discovering The Tax Implications of Nonprofits Owning For-Profit Businesses

December 27, 2023/in CharityCFO, Nonprofit, Taxes/by Paul Cook

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Does your nonprofit have ownership of a for-profit entity? Whether your organization owns a for-profit company outright or has limited ownership, a for-profit subsidiary can have serious tax implications for your nonprofit.

Let’s work through some of the most pressing tax implications you might face as a nonprofit with ownership in a for-profit company.

Tax Implications of Nonprofits Owning For-Profit Businesses

Unrelated Business Income Tax (UBIT)

Recognized nonprofits generally receive tax-exempt status from the federal government. Tax-exempt status makes it easier for your organization to retain nonprofit revenue and meet the goals of your mission.

However, your nonprofit may engage in revenue-generating activities that don’t relate to the purpose of your organization. The money that comes from these activities is known as unrelated business income because it’s earned from activities that are unrelated to your exempt mission.

The IRS can potentially charge your organization federal income taxes on your unrelated earnings. Known as unrelated business income tax (UBIT), you may face this tax liability if your nonprofit regularly carries on a trade or business that doesn’t substantially relate to your exempt mission or purpose.

UBIT Exclusions and Exceptions

Not all unrelated business income is subject to federal income tax. The IRS provides UBIT exceptions and exclusions to account for situations where a nonprofit uses for-profit activities to advance its exempt purpose.

Common nonprofit income that could be excluded from UBIT includes:

Dividends and Other Investment Income
Interest Earnings
Royalties
Certain Rental Income
Gains or Losses from the Disposition of Property

Additionally, income generated using a majority volunteer labor force may qualify for an exception. For example, hosting a fundraising auction operated by volunteers may not require UBIT payment.

Tax On Excess Business Holdings

The IRS uses taxes on excess business holdings to limit how much ownership a nonprofit can have in a for-profit company without paying federal taxes. Taxing excess business holdings helps reduce conflicts of interest and limits the power a tax-exempt entity has over a business.

Excess business holdings are shares or interests a nonprofit holds in a for-profit company that exceeds the IRS’s limits. Generally, any ownership share over 20% of voting stock in a company is considered an excess business holding. Nonprofits with excess holdings may face an excise tax on the value of shares over the limit.

Joint Ventures and Tax Implications

Many nonprofits partner with for-profit entities to help advance their mission with the financial backing of their partner. For example, a mental health organization might create a joint venture with a for-profit healthcare system to establish mental health facilities in underserved areas.

Depending on the nature of the joint venture, nonprofits could jeopardize their tax-exempt status if they don’t follow certain limitations, including:

The joint venture must seek to further the nonprofit’s charitable purpose.
Any benefits to the for-profit entity must be insubstantial compared to the public benefit of the partnership.
The nonprofit must have control over the charitable activities of the venture.

You may want to work with a nonprofit financial advisor or accountant to set up a joint venture with a for-profit entity. Your advisor can help you avoid pitfalls that could affect your tax-exempt status.

Impact on Charitable Contributions

Donors to nonprofits often receive tax benefits for their charitable giving. In most cases, a donor may be able to deduct certain charitable donations from their taxes. Many donors use nonprofit donations to lower their taxable income for the year.

Giving money to a nonprofit with for-profit business ownership could limit the donor’s ability to deduct donations, however. If your nonprofit engages in for-profit activities, you’ll need to communicate with donors to let them know. Proper communication helps donors understand the tax implications of their gifts and improves your organization’s transparency.

Maintaining Separate Accounting

Any nonprofit with for-profit ownership needs to maintain separate accounting for each area of business. This includes keeping separate financial statements, revenue records, and bank accounts.

Separating business activity is essential for maintaining accurate records of income, expenses, and activities associated with each business. Properly-recorded books can help reduce your chance of noncompliance in a nonprofit audit.

State Tax Considerations

The tax implications we’ve already covered mostly relate to federal tax-exempt status.

However, state tax agencies may also have rules for nonprofits that operate for-profit businesses. You’ll need to check your state’s tax laws and regulations to see how they might affect your organization.

Seek Professional Guidance for More on the Tax Implications of Nonprofits Owning For-Profit Businesses

Few parts of nonprofit accounting are as complicated as a nonprofit owning a for-profit business. Your organization may be liable for certain taxes on excess business holdings or income from unrelated business activities. In some cases, operating a for-profit entity could put your nonprofit at risk of losing its tax-exempt status.

Nonprofit leaders like you don’t have to navigate tricky tax implications on your own. Working with a trusted nonprofit tax advisor, like The Charity CFO, gives you the resources to avoid unwanted tax implications.

Our team of dedicated nonprofit accountants and financial advisors is ready to put our specialized knowledge to work for your organization. Reach out to us today to get started!

Employee Benefits to Offer as a Small Nonprofit

December 27, 2023/in CharityCFO, Nonprofit/by Paul Cook

Employee benefits packages play a big role in attracting and retaining top talent.

How to Properly Record Revenue for Nonprofits

December 15, 2023/in CharityCFO, Nonprofit/by Paul Cook

While the nature of a nonprofit means you’re focusing more on your mission than making money, bringing in revenue is still essential.

Volunteer Management: What Every Nonprofit Needs to Know

November 28, 2023/in CharityCFO, Nonprofit/by Paul Cook

Volunteering is an essential piece of any nonprofit. Some nonprofits can’t function without the help of their volunteers.

Should Your Nonprofit Have Debt?

November 15, 2023/in CharityCFO, Nonprofit/by Paul Cook

If you’re like most nonprofit leaders, you probably have questions — and possibly mixed feelings — about nonprofit debt.

What is a W-9 and Why is it Important?

October 23, 2023/in Nonprofit, Operations, Reporting, Trending/by Paul Cook

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Keeping your taxes in order is vital for any nonprofit. Unfortunately, it can get complicated and confusing when it comes to employees, especially if you’re hiring both traditional staff and regular contractors or freelancers.

The W-9 is among the most crucial forms to help keep everything straight, but many don’t know much about it or when it’s used.

Let’s take a closer look at the document and why it’s so important for nonprofits.

What is a W-9 Form?

A W-9 form (officially titled “Request for Taxpayer Identification Number and Certification”) is a simple, standardized federal form that allows employers to collect the necessary tax and personal information from those who work for them.

The titular Taxpayer Identification Number is the most critical element of the form. In most cases, this will be an employee’s social security number, but it can also be a business’s EIN or less common identifiers like Individual Taxpayer Identification Number (ITIN) and Preparer Taxpayer Identification Number (PTIN).

The payee also certifies that they’re not subject to any backup withholding, which would typically only be the case if they failed to provide information to previous employers or were caught underreporting income by the IRS.

In addition, the W-9 requires details like the type of entity (individual, C corporation, S corporation, etc.) and an official address.

Why is the W-9 Form Important for Nonprofits?

Anyone who’s helped lead a nonprofit knows that keeping the organization’s tax-exempt status is the most critical factor to its survival. A crucial part of that is abiding by tax reporting and compliance requirements. This includes filing the appropriate tax forms with the feds, which, for contractors or freelancers, would be a 1099-NEC or 1099-MISC.

The W-9 is designed to collect the information necessary to fulfill these requirements. Aside from legal requirements, diligently collecting W-9 information from contractors or vendors shows a commitment to transparency and fully documenting its work. Insisting on complete W-9s can also help avoid doing business with potentially unsavory partners who may not want to complete one for various reasons.

No matter which reason applies most to your organization, they all show why getting this form completed should be a priority when working with contractors, freelancers, and vendors.

When Would a Nonprofit Need a W-9 Form?

There are three primary situations where an organization should typically get a W-9 completed by outside parties.

The first, as we’ve mentioned, involves paying independent contractors and consultants. While 1099s must be issued to any person or business that receives more than $600 from your organization during the year, it’s good practice to require completed W-9s from every payee to avoid the need to track down the information later.

In addition, W-9s are required for any vendors or companies that are engaged for outside services. On the flip side, your organization may occasionally need to fill out a W-9 itself. This generally happens if you’re contracted out by another organization to do some sort of limited work on their behalf. Large donors or grant givers may also request your organization fill out a W-9 to confirm relevant tax details.

Tips for Completing the W-9 Form

Tax forms can always feel a bit intimidating, but the W-9 is quite simple to fill out.

First, identify who’s requesting the form and ensure it’s necessary.
Then, collect your own information, like your organization’s TIN/EIN and official business name. Before you start, double-check to make sure you have the correct and most up-to-date version of the W-9 as well.
Then, simply provide the information where indicated, including any exemptions if they’re applicable.
Finally, complete the form by signing and dating it before returning it to the individual or organization requesting it. As with all pertinent tax records, you should keep a record and copy for yourself as well, just in case.

Reach Out to The Charity CFO for Help with the W-9

The W-9 is one of the most crucial tax forms to understand, whether your organization is soliciting them from freelancers and contractors or filling them out itself. But it’s relatively simple once you’ve looked over the particulars.

While it might just seem like extra paperwork, it ensures all parties have the tax information they need to meet their reporting requirements.

Still, amid all the other tasks and requirements of running a nonprofit, it’s easy to allow things like prompt W-9 collecting, completing, and processing to fall through the cracks or end up delayed by everyday issues. That’s where The Charity CFO comes in. Our experienced team can help you stay diligent about your tax reporting and filing requirements, from W-9s to the many other tax forms and deadlines that always seem to be looming.

Contact us today to learn more about how we can help your nonprofit and get started.

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How Nonprofits Can Choose the Right Banking Partner

October 16, 2023/in Accounting, Fundraising, Nonprofit, Trending/by Paul Cook

The right nonprofit banking partner may not be the first thought that comes to mind, but is very important for the organization.

How Accounting Setup Can Affect an Organization Long-Term

October 9, 2023/in Accounting, Nonprofit, Operations/by Paul Cook

The long term effects of improper accounting setup in your nonprofit may take a while to discover, but are very important.

Donation vs. Loan: Can a Foundation Give Money to a Nonprofit?

October 2, 2023/in Accounting, Fundraising, Nonprofit/by Paul Cook

Donation vs. Loan: What’s the difference? In a nonprofit knowing how these two differ can be an important distinction.

Working as a Team: Forming your advisory financial committee

August 28, 2023/in Accounting, Nonprofit, Operations/by Paul Cook

Forming your advisory financial committee is a big step in your nonprofit’s financial success. Learn how to work as a team in this post.

Nonprofit Communications: Navigating Donor Conversations

August 21, 2023/in Leadership, Nonprofit, Operations/by Paul Cook

Nonprofit communications do not have to be difficult, even when explaining things to donors. Check out this post for some strategies.

Provide a ‘WOW’ Experience in your Nonprofit Marketing

August 16, 2023/in Nonprofit/by Paul Cook

About David

Welcome everyone to A Modern Nonprofit Podcast. Today, we explored the importance of websites, nonprofit marketing, and how to bridge the gaps between departments to achieve digital success.

When we think marketing, we think of getting the word out and expressing the mission behind the help non-profit organizations (NPOs) provide. In 2023, this goes much deeper than we could imagine. There are many tools and resources that can be utilized to enhance NPOs, especially online.

We invited David Pisarek of Wow Digital, Inc. to give us a behind the scenes look at SEOs, attracting and retaining visits to websites, digital marketing and much more!

David started Wow Digital Inc. with the goal of providing effective websites, branding and design for Canadian based charity organizations. With over 20 years in the nonprofit sector, passionately working to revolutionize it one website at a time. An expert in design and programming, he’s also an educator at the college level. With a track record of 240+ complete projects since 2016, David and his team are the go-to experts.

We welcome David to the show!

Continuous Improvement

We engaged in an in-depth conversation with David, where we unraveled a series of questions regarding nonprofit website redesign and the importance of web analytics.

When should nonprofits consider a full redesign on their website?
What does that process look like?
What should it include?
How often should a NPO consider a redesign?

Of course, there is much to learn about in each of the posed questions. David stresses that websites are not something that are sat and forgotten about. Or ‘one and done’ as he calls them.

They need constant love and care. A part of that care comes from measuring analytics. A free tool that can help organizations achieve this is Google Analytics. It’s important to note that Google Analytics 3 is the system that has been used for years. And as of July 20th, 2023, this was updated to GA4. So, if analytics are the next move for business, make sure GA4 is the system used.

GA isn’t just for tech-nerds; it’s a great tool that can help businesses identify what consumers, donors, or website searchers are looking for and take them back to the website over and over again. Keep an eye on:

What keywords are being used?
Which call to actions are listed?
Where are consumers landing on the business website?
Are they navigating 3 to 4 pages in order to find what they are looking for?

All of these are key questions that businesses should be asking when it comes to analyzing their web traffic.

David makes a great point regarding website analytics. The word ‘conversion’ is a data point that can be measured. So for example, on a for-profit’s page this may mean that a conversion leads to an eventual sale. This has a different definition for NPOs. A conversion data point may indicate converted volunteers, donations, or simply subscribing to an email or newsletter.

Not only is it important to understand what data points to pay attention to, but also how they differ from business to business.

Revamping a Website

Before Tosha and David take a deeper dive into the topic of SEOs, David compliments Tosha’s question about a website revamp.

He and his team did an audit that lead to 5 indicators for revamping a website:

Is the page layout unique or common in comparison to other websites?
How old does the site look?
1. Building more off of this point, how does the website look on a smartphone? Is it compatible? Google will rank the site lower if it isn’t mobile friendly – certainly something to consider.
Is your mission and purpose clear as day on the website?
Is the website accessible?
1. World Wide Web Consortium (W3C) is a website that creates accessibility guidelines. For example, when defining accessibility is the website accessible for an individual that may be physically impaired? The tiny detail that goes into naming a photo on a website could play a huge role in this consideration.
Finally, how identifiable is the business contact information?

Number 5 may seem like a small task in the big scheme of things, but this is actually a great segway into the SEO conversation. Even if your organization is completely remote, putting a PO Box on your website can do wonders. Why? When people search for things near them (like volunteer opportunities), Google uses their location to find the best match.

In most cases, each device holds an IP address that gives Google some idea of your location. Because of this, when searching for ‘volunteering opportunities’ while the IP is in, let’s say the St. Louis, MO region, then Google can direct individuals to a website associated with that area.

Measuring Frequency

Piecing the conversation together, NPOs are a different breed than for profit businesses. They still require constant measurement and effort, but the data points that are studied are much different. How this plays into the website traffic and SEO conversation, is what makes all the impact.

For example, revenue may increase in the winter months because of a historically associated ‘giving season’. Therefore, measuring data on a quarterly basis may be more effective when it comes to the NPO’s website as opposed to week over week or month over month analytics.

NPOs also work on a conservative budget basis, meaning that they can stretch a dollar.

With this, they may not be able to pay an individual, group, or department to only analyze data points for their website development. Looking at the numbers on a quarterly basis can help whomever lands this task a better window for analysis and time management.

Want to connect with David and his team? Email him at [email protected] or check out their website, wowdigital.com. His team also works with NPOs and website development by providing templates and website management through a website called, Mighty NPO. By using the coupon code charitycfo, this may qualify your business for a lifetime discount up to 70%.

To hear the full story, listen to our podcast here.

You can also find Tosha and The Charity CFO team on Youtube or our website, thecharitycfo.com!