Most 501 (c) (3) nonprofits depend on public support for a significant portion of their annual income. For any organization, a comprehensive and well-planned fundraising strategy is essential for acquiring and renewing commitments from individuals, businesses and foundations.
Charitable solicitation activity is regulated independently in each state. Most states require annual registration, donor disclosures, independently prepared financial statements, or a combination of all three. As the requirements of each state vary, nonprofits and their accounting firms are tasked with navigating a complex regulatory landscape.
Despite the logistical challenges, charity solicitation compliance should underpin any organization’s fundraising strategy and be seen as a way to maintain public confidence in the sector.
State registration and declaration
Forty-one states require nonprofit organizations register and report annually with a charitable official, usually the attorney general or the secretary of state. Upon registration, an organization submits a detailed application describing its mission, program and fundraising activities. In the majority of states, the organization will be required to submit additional documents, including:
- Form 990, 990-EZ, 990-PF or 990-N;
- Annex B not redacted, if applicable;
- Financial statements, which may need to be audited, reviewed or compiled;
- Charter documents, such as articles of incorporation and bylaws;
- Copies of Federal Statute of Determination;
- Copies of contracts with paid fundraising professionals and joint ventures; and,
- Application fees, generally based on the organization’s annual income.
Additionally, the non-profit organization may be required to qualify overseas and appoint a registered agent for service.
In all states except California, it is the act of soliciting, not necessarily receiving funds, that typically triggers the registration requirement. The term “solicitation” is defined at the state level, but it generally refers to any variety of direct or indirect appeals. In the modern age, the definition has broadened to include online methods such as “Donate Now” buttons on websites, emails, and social media.
As part of their fundraising strategies, nonprofits use a wide range of canvassing methods, including high-profile technology to solicit and manage donors. As a result, organizations should be aware of triggering registration requirements in multiple jurisdictions, and potentially nationwide.
Registrations must be renewed on an annual basis, with the exception of the District of Columbia and Georgia, which have a two-year renewal period. Upon renewal, organizations can expect to submit an updated application, recent financial statements and their Form 990, and to pay a filing fee based on annual income.
State reporting deadlines vary widely, but are often based on the organization’s initial registration date or the end of the tax year. Organizations that register in multiple states are responsible for managing filing deadlines throughout the year, especially if filing deadline extensions are needed.
Exemption from registration
Exemptions or exclusions from registration exist for certain types of organizations, such as bona fide religious organizations, educational institutions and hospitals. Exemptions may also be available for organizations that fall below a modest income threshold and have no fundraisers or paid staff.
Like registration, exemptions are issued independently and must be maintained in each state. An organization can benefit from an exemption in one state, but not in another. In addition, if the organization grows or undergoes a change in its federal exempt status or operations, it may no longer meet the exemption requirement and may need to register.
However, most 501 (c) (3) public charities – especially those with the ability to solicit on a broad basis – will not be exempt in most states and should plan to register.
Donor Disclosure Statements
Twenty-five states require nonprofit organizations to include disclosure statements on their solicitation materials. These statements serve to inform potential donors about the organizations requesting them, often requiring the organization to provide contact details for an agent or even a state registration authority.
State disclosure requirements are separate from any IRS Required Disclosures. Fundraising, marketing, and development staff in any organization should work closely with the legal and compliance teams to ensure that all solicitation materials meet state and federal disclosure requirements.
Requirements for government financial statements
State financial statement requirements present a unique area of complexity for not-for-profit organizations and their partner accounting and CPA firms. In order to register and report successfully, organizations must submit both annual financial statements and their Form 990 in most states. Once an organization reaches a certain income level, it should expect to submit returns that have been reviewed or audited by an independent CPA.
An organization that does not submit the correct financial statements will have its registration request rejected. In addition, the head of the state charity may attempt to require the organization to have appropriate returns prepared on a retroactive basis, thus creating a significant unanticipated expense.
Therefore, organizations should carefully plan the type of financial statements needed to register and report on an annual basis. CPAs and accountants play an important role in advising their clients what statements are needed to comply.
the thresholds for the reviewed and audited financial statements are set independently by each state. However, the threshold is usually based on annual contributions or total income reported on the organization’s annual IRS Form 990.
Government financial statement thresholds are not based on any of the following:
- Contributions or income from a particular state; or,
- The number of transactions in a given year.
Organizations looking to register in multiple states for the first time should first review their income and, along with their CPA, expect to produce financial statements that meet individual requirements.
Upon subsequent reporting, the organization will be required to submit financial statements that again meet the income threshold from the previous tax year. Nonprofits that experience year-over-year growth can expect to need financial statements with increasing levels of assurance. Boards and executive management should closely monitor their requirements and, together with their auditor, budget for additional expenses. cost of preparing financial statements.
Derogations from financial statement requirements
Organizations that have not met the requirement for verified or reviewed statements frequently ask if a waiver is possible. Since the requirements are set by law, deviations are highly unlikely and, in many cases, not possible.
A waiver can be granted by a single state for a single tax year, and usually only in extenuating circumstances. In particular, no State grants an exemption on the basis of ignorance of a requirement or of the cost of an auditor’s assignment. In some states, such as New Jersey, exemptions are not permitted under any circumstances. Organizations must submit the required declarations upon registration or be perpetually in non-compliance until they do.
For this reason, organizations should seek the advice of their accountants and endeavor to prepare all required financial statements before attempting to register.
Strategies to comply
Modern nonprofits face the prospect of registration, disclosure and financial statement requirements in multiple states and even nationwide. Understandably, the expense and administrative work involved in complying with individual state requirements can be daunting. While every nonprofit is different, they can consider a basic framework to inform their compliance strategy:
- Review the “Fundraising Footprint”. Organizations should first consider where their solicitation activities take place. Remember, this is not limited to just the places from which donations are received.
- Determine registration, exemption and financial statement requirements. In states where the organization is applying, it should assess where registration should take place, where exemptions apply and what financial statements are needed.
- Take action. The organization should work with its external accountant to prepare the necessary financial statements and then submit registration requests to representatives of state charities. Many nonprofits may also wish to forward their state registrations to a qualified service provider. Once registered, the organization must ensure that all solicitation documents include the necessary state disclosure statements.
- Regularly review the strategy. As an organization grows and its fundraising activities evolve, it becomes necessary to revisit its compliance program. For example, an organization that plans to solicit in more states may need to pursue additional registrations. If the organization’s annual revenue exceeds the threshold for the reviewed or audited financial statements, it must be prepared to meet the new requirement.
Accountants play a vital role in helping their client organizations navigate today’s regulatory landscape. Along with nonprofit leadership, they ensure that organizations comply with state laws and adhere to their duty of care. In doing so, they foster a sector of transparency and trust.