Deck 14: Not-For-Profit Organizations-Regulatory, Taxation, and Performance Issues

Question 1

Board members of a not-for-profit organization have a fiduciary responsibility to provide fiscal guidance and ongoing governance over the not-for-profit organization to ensure that its exempt mission is carried out as described in the incorporating documents and exempt application.

Answer 1

True
Explanation: Not all board members may understand their fiduciary responsibility. It is advised that board members carry errors and omissions insurance to protect them from harm in lawsuits.

Question 2

Not-for-profit organizations are so diverse in nature that it is not feasible to find benchmarks with which to compare their financial and operating performance.

Answer 2

False
Explanation: It is difficult, but important that not-for-profit organizations be compared to either their own record over time, or to other organizations providing similar services. There are several classification schemes, such as the National Taxonomy of Exempt Entities (NTEE), used to group not-for-profit organizations providing similar services or having similar missions.

Question 3

Intermediate sanctions are often imposed by the Internal Revenue Service,in addition to revoking the tax-exempt status for organizations that confer excessive economic benefits on officers of the organization.

Answer 3

False
Explanation: Intermediate sanctions are a tool the IRS may use in curbing excess benefit transactions favoring certain people related to an NFP so that the NFP does not have to lose its tax-exempt status. Loss of tax-exempt status is considered unduly harsh, but the only sanction that the IRS had before the Taxpayer Bill of Rights 2 in 1996.

Question 4

All officers of a not-for-profit organization have the same responsibilities to the organization and its constituents.

Question 5

Not-for-profit organizations risk loss of their tax-exempt status if they engage in any political activity.

Question 6

The unrelated business income tax could be a significant cost and therefore should be of concern to tax-exempt organizations.

Question 7

One of the limitations of financial ratio analysis for not-for-profit organizations is that donors may incorrectly assume that there are federal or state laws that govern the percentage of annual revenues that a charity must spend on its programs.

Question 8

The federal government's primary objective in regulating not-for-profit organizations through the income tax laws is to limit the number of exempt organizations that operate at any one point in time.

Question 9

"Excess benefit transactions" are those in which persons who have substantial influence over the not-for-profit organization engage in transactions that result in economic benefits to them that are excessive,such as unreasonable compensation,sale of assets at bargain prices,and lease arrangements.

Question 10

Which of the following not-for-profit organizations is most likely to be tax-exempt under IRC Sec.501(c) (3)?

A) Beta Kappa Alpha Sorority.
B) Peaceful Dreams Cemetery Association.
C) Regional Association of Tree Trimmers.
D) Survivors of Breast Cancer Club.

Question 11

The ratio unrestricted net assets as a percent of operating expenses is helpful in determining if the not-for-profit organization can cover its debt service expense.

Question 12

Which of the following is a reason why an not-for-profit organization might fail to qualify for tax-exempt status?

A) It is operated primarily for the benefit of its members.
B) Its officers are paid excessive wages.
C) Its primary purpose is to promote the passage of legislation favorable to institutions of higher education.
D) It has unrelated business income.

Question 13

Tax-exempt organizations must complete a Form 990 and send it to the Internal Revenue Service

A) Only if they have unrelated business income.
B) If they are nongovernmental and not a church.
C) Whether they are governmental or nongovernmental.
D) Only if they are a private foundation,not a public charity.

Question 14

A state has the obligation to monitor and regulate a not-for-profit (NFP)organization because it granted the NFP tax-exempt status through the not-for-profit corporation laws.

Question 15

If a tax-exempt organization dissolves and goes out of business,it must distribute its assets to another tax-exempt organization or a governmental entity.

Question 16

A 501(c) (3 )organization must provide donors with a written disclosure of the amount of the donation if the donation is $1,000 or more.

Question 17

Which of the following is a not a true statement about tax-exempt organizations?

A) They must be organized to serve the charitable needs of the public at large.
B) They must first become a not-for-profit corporation or charitable trust.
C) They are permitted to do some political lobbying if guidelines are met.
D) Their unrelated business income is taxed at corporate income tax rates.

Question 18

The not-for-profit organization applying for tax-exempt status determines the appropriate subsection under IRC Sec.501 for which it wants to be considered and the Internal Revenue Service then approves or does not approve the application.

Question 19

Not-for-profit corporations cannot lobby or attempt to influence legislation or politicians.

Question 20

Only 501(c) (3)organizations receiving at least 50 percent of their support from the public at large rather than a few individual donors can be considered public charities.

Question 21

Political parties and campaign committees can qualify for tax-exempt status.

Question 22

A good measure of whether a not-for-profit organization is efficient in its fund-raising efforts is

A) Fund-raising expenses as a percentage of public support.
B) The ratio of program expenses to number of clients served.
C) Total revenues divided by total expenses.
D) Percentage of total expenses spent on the program function as opposed to support function.

Question 23

The term that means information skewed toward a particular belief with a tendency to have little or no factual basis is

A) Political influence.
B) Legislation.
C) Propaganda.
D) Lobbying.

Question 24

Why do states and the federal government exercise oversight responsibility over not-for-profit,tax-exempt corporations? How do states and the federal government differ in the way they exercise this responsibility?

Question 25

The income most likely to be considered unrelated business income of a human service organization that provides immunizations to children in the community is

A) Rental of extra space in the building.
B) Regular sale of sweatshirts with the organization's logo on it at a price considerably above cost.
C) Interest and dividend income on investments.
D) Gain on the sale of equipment no longer needed by the organization.

Question 26

The Internal Revenue Service requires that information from the audited financial statements be used to complete the Form 990.

Question 27

Your client is a nongovernmental not-for-profit museum that operates a gift shop.Explain the unrelated business income tax to your client and suggest ways to avoid this tax.

Question 28

All of the following are reasons why the Internal Revenue Service (IRS)overhauled the Form 990 for tax years beginning in 2008 except

A) To minimize the burden of filing on tax-exempt organizations.
B) To shorten the time it takes to complete a return for large not-for-profit organizations.
C) To enhance transparency about the organization.
D) To allow the IRS to efficiently assess noncompliance.

Question 29

The organization Shelter the Needy is completing its Form 990 and it is trying to determine if it has unrelated business income on which it must pay taxes.Which of the following would be subject to unrelated business income taxes?

A) The Shelter sold art work it had received as a donation.
B) Volunteers raised several thousand dollars in a marathon sponsored for the benefit of the Shelter.
C) The Shelter earned revenues from the self-service laundry facilities it provides in two of its low-income temporary housing facilities.
D) None of the items listed would be subject to unrelated business income taxes.

Question 30

Public disclosure rules require that a tax-exempt not-for-profit organization

A) Make available a copy of its Form 990 to the public for a period of up to three years.
B) Post a copy of its articles of incorporation and by-laws on its Web site.
C) Provide a copy of the minutes to all board meetings to any person who requests the minutes within 90 days of the board meeting.
D) Make available a copy of its Form 990-T,but not its Form 990,to the public for a period of up to two years.

Question 31

The Internal Revenue Service may impose intermediate sanctions on all of the following transactions between a not-for-profit organization and its executive officer except

A) Excessive compensation.
B) More than the fair rental value for property owned by the officer.
C) A bargain on the sale of assets.
D) Fringe benefits comparable to those given to all employees.

Question 32

Explain the purpose of "intermediate sanctions."

Question 33

A good measure of whether a not-for-profit organization is spending too much on overhead,such as general and administrative expenses,is

A) Percentage of unrestricted net assets to operating expenses.
B) Current ratio.
C) Total revenues divided by total expenses.
D) Percentage of total expenses spent on the program function as opposed to supporting the programs.

Question 34

A good measure of whether a not-for-profit organization is operating its programs efficiently is

A) Fund-raising expenses as a percentage of public support.
B) The ratio of program expenses to number of clients served.
C) Total revenues divided by total expenses.
D) Percentage of total expenses spent on the program function as opposed to support function.

Question 35

All not-for-profit organizations are required to file some type of Form 990 with the Internal Revenue Service.

Question 36

Describe the difficulty in comparing the financial performance of a not-for-profit organization to other similar organizations.What benchmarks are available to assist in this task?

Question 37

A tax-exempt organization that receives its support primarily from a large number of individuals or corporations and a relatively small amount from investment income is called a

A) Public charity.
B) Private foundation.
C) Public foundation.
D) Voluntary health and welfare organization.

Question 38

Describe the process for becoming a tax-exempt organization.Why do you believe it is important for an accountant to understand this process?

Question 39

A good measure of whether a not-for-profit organization is a "going concern" and can sustain its operations into the future is

A) Total revenues divided by assets.
B) Percentage of unrestricted net assets to operating expenses.
C) Percentage of total expenses spent on the program function as opposed to support function.
D) Fund-raising expenses as a percentage of public support.

Question 40

A good measure of whether a not-for-profit organization is "liquid" and can meet its short-term obligations is

A) Percentage of total expenses spent on the program function as opposed to support function.
B) Total revenues divided by total expenses.
C) Current assets divided by current liabilities.
D) Percentage of unrestricted net assets to operating expenses.

Question 41

The local Kennel Club is a not-for-profit organization with gross receipts of $23,500 for the current tax year.Under the Internal Revenue Service Code,the Kennel Club would be required to file which of the following forms for the tax year?

A) Form 990-N.
B) Form 990-EZ.
C) Form 990-PF.
D) Since its gross receipts are less that $25,000 it need not file with the Internal Revenue Service.

Question 42

The Form 990 consists of 12 parts (core form)and several schedules.Which of the following would not be included as one of the parts of the core form of the Form 990?

A) Statement of program services and accomplishments.
B) Management analysis of the financial condition of the organization.
C) Balance sheet.
D) A checklist of required schedules.

Question 43

A measure of program effectiveness frequently used to assess not-for-profit organizations is the ratio of program expenses to total expenses.