CNE Nonprofit Tax & Legal Requirements 2 — Questions and Answers
Question 1: A nonprofit receives a $50,000 gift with the donor specifying it must fund a specific program. How should this be classified on financial statements?
- Unrestricted net assets
- Temporarily restricted net assets (Correct answer)
- Permanently restricted net assets
- Deferred revenue
Correct answer: Temporarily restricted net assets
Donor-imposed conditions or restrictions that limit use to a specific program create temporarily restricted net assets until the restriction is met.
Question 2: Under IRC Section 4958, 'excess benefit transactions' primarily concern which type of person?
- Major donors
- Disqualified persons such as officers and directors (Correct answer)
- Vendors under contract
- Government grant officers
Correct answer: Disqualified persons such as officers and directors
Section 4958 intermediate sanctions apply to excess benefit transactions between a public charity and disqualified persons, including officers, directors, and key employees.
Question 3: Which IRS form must a tax-exempt organization with gross receipts of $50,000 or less file annually?
- Form 990
- Form 990-EZ
- Form 990-N (e-Postcard) (Correct answer)
- Form 1023
Correct answer: Form 990-N (e-Postcard)
Organizations with gross receipts normally $50,000 or less must file the Form 990-N electronic notice (e-Postcard) to maintain exempt status.
Question 4: A nonprofit lobbying expenditure is considered 'direct lobbying' when it:
- Contacts the general public about legislation
- Communicates directly with legislators about specific legislation (Correct answer)
- Educates members about a policy issue without urging action
- Distributes a nonpartisan voter guide
Correct answer: Communicates directly with legislators about specific legislation
Direct lobbying involves communicating with legislators or their staff to influence specific legislation, as defined under IRS rules.
Question 5: What is the primary purpose of the Uniform Prudent Management of Institutional Funds Act (UPMIFA)?
- To regulate nonprofit payroll tax obligations
- To govern how nonprofits invest and spend endowment funds (Correct answer)
- To set federal lobbying limits for charities
- To establish Form 990 disclosure requirements
Correct answer: To govern how nonprofits invest and spend endowment funds
UPMIFA provides a legal framework for the prudent investment and expenditure of nonprofit endowment funds, adopted by most U.S. states.
Question 6: Which of the following activities would jeopardize a nonprofit's tax-exempt status under the 'private benefit' doctrine?
- Paying staff market-rate salaries
- Allowing a board member's company to receive contracts at above-market rates (Correct answer)
- Operating a gift shop where proceeds fund programs
- Charging program fees on a sliding scale
Correct answer: Allowing a board member's company to receive contracts at above-market rates
The private benefit doctrine prohibits nonprofits from allowing organizational resources to unduly benefit private individuals, especially insiders receiving above-market compensation.
Question 7: A 501(c)(3) organization that fails to file its annual Form 990 for three consecutive years automatically:
- Receives a penalty notice but retains exempt status
- Must reapply using Form 1024
- Has its tax-exempt status revoked by the IRS (Correct answer)
- Is reclassified as a 501(c)(4)
Correct answer: Has its tax-exempt status revoked by the IRS
Under the Pension Protection Act of 2006, a nonprofit that fails to file required annual returns for three consecutive years has its federal tax-exempt status automatically revoked.
CNE Nonprofit Tax & Legal Requirements 2
A nonprofit receives a $50,000 gift with the donor specifying it must fund a specific program.
How should this be classified on financial statements?