CNC Nonprofit Organization Management 3 — Questions and Answers
Question 1: Under IRS regulations, what is the maximum percentage of a 501(c)(3) public charity's activities that can be devoted to lobbying without jeopardizing its tax-exempt status under the substantial part test?
- 5%
- No specific percentage — 'insubstantial' is the standard (Correct answer)
- 25%
- 10%
Correct answer: No specific percentage — 'insubstantial' is the standard
The IRS uses a facts-and-circumstances 'substantial part' test with no bright-line percentage, though organizations can elect the 501(h) expenditure test for clearer limits.
Question 2: A nonprofit is planning to lay off 20% of its staff due to budget cuts. Which stakeholder group should the executive director consult FIRST?
- Major donors
- The board of directors (Correct answer)
- Program beneficiaries
- The state attorney general
Correct answer: The board of directors
Major staffing decisions require board approval or at minimum board notification, as the board holds fiduciary responsibility for the organization's operations.
Question 3: What is the term for a nonprofit's policy that allows the board to access restricted reserves only under predefined financial hardship conditions?
- Operating reserve policy (Correct answer)
- Spending policy
- Restricted fund release procedure
- Board-designated reserve rule
Correct answer: Operating reserve policy
An operating reserve policy defines the target reserve level and the conditions under which reserves may be drawn down to cover operational shortfalls.
Question 4: Which board committee is typically responsible for recommending the executive director's compensation package?
- Finance committee
- Executive committee
- Compensation or HR committee (Correct answer)
- Audit committee
Correct answer: Compensation or HR committee
A compensation or HR committee reviews benchmarking data and recommends executive pay to ensure it is reasonable and defensible against IRS private benefit scrutiny.
Question 5: A nonprofit merges two programs into one to reduce redundancy and cut costs. This is an example of which organizational management strategy?
- Mission drift
- Program consolidation (Correct answer)
- Strategic restructuring
- Capacity building
Correct answer: Program consolidation
Program consolidation combines overlapping services to improve efficiency and reduce administrative overhead while maintaining mission delivery.
Question 6: Which financial metric best indicates a nonprofit's ability to pay its short-term obligations?
- Net asset ratio
- Current ratio (Correct answer)
- Debt-to-equity ratio
- Program expense ratio
Correct answer: Current ratio
The current ratio (current assets divided by current liabilities) measures an organization's liquidity and ability to meet near-term financial obligations.
Question 7: When a board member consistently misses meetings and fails to engage in governance duties, what is the most appropriate first response from the board chair?
- Immediately vote to remove the board member
- Have a private conversation with the member about their commitment and engagement (Correct answer)
- Report the board member to the state attorney general
- Assign additional committee work to re-engage the member
Correct answer: Have a private conversation with the member about their commitment and engagement
A direct, private conversation is the appropriate first step to understand the situation and allow the board member to recommit or gracefully resign.
CNC Nonprofit Organization Management 3
Under IRS regulations, what is the maximum percentage of a 501(c)(3) public charity's activities that can be devoted to lobbying without jeopardizing its tax-exempt status under the substantial part test?