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

Question 1

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

Answer 1

False

Question 2

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.

Answer 2

False

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

Question 4

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.

Question 5

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 6

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.

Question 7

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

Question 8

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 denies the application.

Question 9

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

Question 10

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 11

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 12

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 13

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 14

The Charleston Principles provide guidance to state governments in setting registration requirements for not-for-profits wanting to raise funds over the Internet.

Question 15

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 16

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

Question 17

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

Question 18

"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 19

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

Question 20

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

Question 21

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

A) Percentage of program expenses to total expenses.
B) Total revenues divided by total expenses.
C) Current assets divided by current liabilities.
D) Percentage of unrestricted net assets to operating expenses.

Question 22

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 for the benefit of tenants of its low-income temporary housing facilities.
D) None of the items listed would be subject to unrelated business income taxes.

Question 23

Income a not-for-profit organization earns from a rental property on which it has a mortgage is subject to unrelated business income tax.

Question 24

A nongovernmental tax-exempt organization 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 not a religious organization, and have gross receipts of $5,000 or more each year.
C) If they have gross receipts of $1,000 or more each year.
D) Only if they are a private foundation, not a public charity.

Question 25

A not-for-profit typically has gross receipts of $4,500 or less each year.According to the IRS it would not have to file with the IRS to be considered tax-exempt under Sec.501(c)(3).

Question 26

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 27

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 28

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 29

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 30

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 program expenses to total expenses.

Question 31

A program effectiveness ratio is helpful in assessing whether a not-for-profit is using its resources to accomplish its mission or goals.

Question 32

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 program expenses to total expenses.
D) Fund-raising expenses as a percentage of public support.

Question 33

Which of the following is a reason why a 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 election of a senate candidate.
D) It has unrelated business income.

Question 34

A large not-for-profit organization expended $1,250,000 in direct lobbying during the current year.As long as the $1,250,000 did not exceed 2 percent of the organization's exempt purpose expenditures,the amount is allowable according to the Internal Revenue Code.

Question 35

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 36

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 37

Which of the following is not a 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 38

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 39

A disqualified person is a person who has violated and been sanctioned under the Internal Revenue Code.

Question 40

A good measure that can be used to help assess 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 program expenses to total expenses.

Question 41

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

Question 42

A not-for-profit organization is granted its legal status by which of the following?

A) Federal government.
B) State government.
C) The city or county in which it resides.
D) The courts.

Question 43

The following are types of ratios described in Chapter 14 that can be used to assess the financial performance of not-for-profit organizations:
A.Liquidity
B.Going concern
C.Capital structure
D.Program effectiveness
E.Efficiency
F.Leverage and debt coverage
G.Fund-raising ratio
H.Fund-raising efficiency
I.Investment performance
For each of the following performance indicators,indicate the type of ratio from the list above that best matches by placing the appropriate letter in the blank space next to the phrase.
_____1.Are earnings on investments on target?
_____ 2.What percentage of contributions remains after deducting the cost of raising the contributions?
_____ 3.Does the organization rely more on debt or net assets to finance its operations?
_____ 4.Is an appropriate amount spent on accomplishing the organization's program goals?
_____ 5.Are revenues sufficient to cover expenses?
A. Liquidity
B. Going concern
C. Capital structure
D. Program effectiveness
E. Efficiency

Question 44

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 45

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 program expenses to total expenses.

Question 46

Which of the following would not be required under not-for-profit incorporation laws?

A) Appointment of a board of directors.
B) Establishment of by-laws.
C) A clearly stated purpose for the organization.
D) Application for 501(c)(3) status.

Question 47

Which of the following defines an appeal to the public to take action on a legislative matter?

A) Grass-roots lobbying.
B) Propaganda.
C) Lobbying.
D) Political influence.

Question 48

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 than $25,000 it need not file with the Internal Revenue Service.

Question 49

Which of the following is the incorporating document of a not-for-profit organization that describes the purpose or mission of the organization?

A) By-laws.
B) IRS Form 1023 request for tax-exempt status.
C) Articles of incorporation.
D) Charter.

Question 50

The following are key terms in Chapter 14 that relate to regulatory and taxation issues of not-for-profit organizations:
A.Unrelated business income
B.Public charity
C.Charitable solicitation
D.Lobbying
E.Debt financed income
F.Private foundation
G.Propaganda
For each of the following definitions,indicate the key term from the list above that best matches by placing the appropriate letter in the blank space next to the definition.
_____1.A not-for-profit exempt under IRC Sec.501(c)(3)that receives most of its support from a small number of donors or investment income than it does from the public at large.
_____ 2.A direct request for credit or financial assistance that will be used for the 501(c)(3)'s mission.
_____ 3.Information that is skewed toward a particular belief with little basis in fact.
_____ 4.Gross income from a trade or business regularly carried on by a tax-exempt organization.
_____ 5.Contacting elected officials to encourage specific legislative action.

Question 51

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 52

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 53

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 service accomplishments.
B) Management analysis of the financial condition of the organization.
C) Balance sheet.
D) A checklist of required schedules.

Question 54

Explain the purpose of "intermediate sanctions".