Deck 13: Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

Question 1

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 1

False

Question 2

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.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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 6

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 7

Unrelated business income tax is reported on the Form 990.

Question 8

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 9

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

Question 10

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 11

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 12

Intermediate sanctions can be 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.

Question 13

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

Question 14

Not-for-profit organizations risk loss of their tax-exempt status if they participate in a political campaign on behalf of a candidate for public office.

Question 15

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 16

"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 17

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

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 denies the application.

Question 19

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

Question 20

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 21

Not-for-profit organizations are required to file audited financial statements with all states in which they solicit contributions.

Question 22

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 23

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 24

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 25

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

Question 26

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 27

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 28

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 29

The success of a not-for-profit organization is measured primarily by the amount of profits generated by the organization's activities.

Question 30

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 31

The lack of defined ownership for not-for-profit organizations creates control and reporting problems for not-for-profit managers.

Question 32

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 website.
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 33

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 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 gross receipts, the amount is allowable according to the Internal Revenue Code.

Question 35

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

Question 36

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 37

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 38

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 39

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 40

Which of the following is 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 41

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 42

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 43

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 44

For each of the following performance indicators, select the type of ratio from the list that best matches by placing the appropriate ratios.
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
________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?

Question 45

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 46

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 47

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 48

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 49

Explain the purpose of "intermediate sanctions."

Question 50

For each of the following definitions, select the key term from the list that best matches by placing the appropriate terms.
A. Unrelated business income
B. Public charity
C. Charitable solicitation
D. Lobbying
E. Debt financed income
F. Private foundation
G. Propaganda
________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

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 52

An individual can generally receive a tax deduction for contributions to which type of not-for-profit organization?

A) 501(c)(1) organization.
B) 501(c)(3) organization.
C) 527 organization.
D) Any not-for-profit organization granted tax exemption by the IRS.

Question 53

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 54

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

Question 55

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 56

All of the following organizations may be not-for-profit except:

A) Colleges and universities.
B) Hospitals.
C) Privately held partnerships.
D) Human service organizations.

Question 57

Not-for-profit organizations can take which of the following organizational forms?

A) Nongovernmental.
B) Governmental.
C) Business.
D) Both governmental and nongovernmental are acceptable organizational forms.

Question 58

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 59

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.