CNE Nonprofit Tax & Legal Requirements 3 — Questions and Answers
Question 1: A nonprofit runs a thrift store where all net proceeds support its homeless shelter programs. The thrift store income is most likely:
- Unrelated business income subject to UBIT
- Related business income exempt from tax (Correct answer)
- Subject to the private foundation excise tax
- Required to be reported on Schedule B
Correct answer: Related business income exempt from tax
A thrift store operated primarily by volunteers where substantially all work is performed without compensation is exempt from UBIT under a specific IRS exception.
Question 2: When must a nonprofit provide a written acknowledgment to a donor for a cash contribution?
- For any donation regardless of amount
- For contributions of $250 or more (Correct answer)
- For contributions of $500 or more
- Only for non-cash contributions
Correct answer: For contributions of $250 or more
Donors must receive a contemporaneous written acknowledgment from the charity for any single cash contribution of $250 or more to claim a tax deduction.
Question 3: A private foundation that fails to distribute at least 5% of its net investment assets annually faces:
- Loss of 501(c)(3) status
- An excise tax on the undistributed amount (Correct answer)
- Mandatory conversion to a public charity
- A UBIT penalty on investment income
Correct answer: An excise tax on the undistributed amount
Private foundations must distribute at least 5% of their net investment assets annually for charitable purposes; failure results in a 30% excise tax on the shortfall.
Question 4: What is a 'conflict of interest policy' primarily designed to protect in a nonprofit?
- The organization from competitor nonprofits
- The organization's interests when board members have personal financial stakes in decisions (Correct answer)
- Donor privacy under HIPAA
- Staff from workplace discrimination
Correct answer: The organization's interests when board members have personal financial stakes in decisions
A conflict of interest policy requires board members and officers to disclose personal interests that could conflict with the nonprofit's best interests and recuse themselves from related decisions.
Question 5: Under the quid pro quo contribution rules, a nonprofit must provide a written disclosure when a donor pays more than:
- $75 and the goods or services provided are worth less than the payment (Correct answer)
- The goods or services are worth $25 or more
- $250 total regardless of goods received
- $500 only for gala ticket purchases
Correct answer: $75 and the goods or services provided are worth less than the payment
A nonprofit must provide a written disclosure for quid pro quo contributions exceeding $75, stating the deductible portion (excess of payment over fair market value of goods/services received).
Question 6: Which statement accurately describes the difference between a 509(a)(1) and a 509(a)(2) public charity?
- 509(a)(1) receives support from government/public, 509(a)(2) earns revenue from exempt function activities (Correct answer)
- 509(a)(1) is a church, 509(a)(2) is a school
- 509(a)(1) requires a 5% distribution, 509(a)(2) does not
- 509(a)(1) files Form 990-PF, 509(a)(2) files Form 990
Correct answer: 509(a)(1) receives support from government/public, 509(a)(2) earns revenue from exempt function activities
A 509(a)(1) public charity typically receives broad public support from donations and government grants, while a 509(a)(2) organization derives its support primarily from fees charged for exempt function services.
Question 7: A nonprofit's board treasurer discovers the executive director has been personally borrowing from operating funds. This most directly violates:
- The inurement prohibition under IRC Section 501(c)(3) (Correct answer)
- The unrelated business income tax rules
- The minimum distribution requirement
- State charitable solicitation registration
Correct answer: The inurement prohibition under IRC Section 501(c)(3)
The inurement prohibition forbids net earnings of a 501(c)(3) from benefiting private individuals, including organizational insiders such as executives, directors, or founders.
CNE Nonprofit Tax & Legal Requirements 3
A nonprofit runs a thrift store where all net proceeds support its homeless shelter programs.
The thrift store income is most likely: