As the end of the year approaches, nonprofit corporations find themselves in a crucial period for financial and compliance matters. Properly navigating these tasks is essential to maintaining tax-exempt status and ensuring your organization’s continued success. In this blog post, we’ll explore eleven things that nonprofit leaders should prioritize before the new year.
1. Conduct Corporate Due Diligence.
Nonprofits should always be meeting the minimum requirements under the laws of their state of incorporation and any other state where they are authorized to do business. Ongoing compliance requires the Board of Directors to stay on top of maintaining annual reports in their home state and any other state where the nonprofit does business. It also means securing or maintaining statutory agents in relevant jurisdictions.
The end of the year is a great time to ensure your organization’s Bylaws and corporate governance policies are up to date. Changes in leadership or activities may necessitate amendments. Specifically, the nonprofit’s Conflict of Interest, Whistleblower, and Compensation policies should be reviewed at least annually, and certain policies, such as the Signature Authority Policy, may need to be updated if there have been staff changes. The end of the year is also the perfect time to review the nonprofit’s Document Retention Policy to see what items can be discarded.
Annual corporate due diligence ensures that the nonprofit operates following its legal framework. Regular due diligence also shields leadership from liability for ultra vires acts.
2. Convene for the Annual Meeting.
Most states require nonprofits to hold an annual meeting each year. In December, many nonprofits hold annual meetings where director and officer vacancies are filled and the budget for the upcoming year is reviewed and approved. The annual meeting is also the appropriate time to remind Board members about expectations for them to participate in fundraising and their other responsibilities as members of the Board.
3. Prepare for Tax Reporting.
Each year, most tax-exempt organizations are responsible for reporting certain information to the IRS. The end of the year is an excellent time to make sure federal tax information is up to date and the nonprofit is prepared to meet its annual reporting requirements in the next year.
Because most nonprofits’ fiscal years align with the calendar year, a critical year-end activity should be finalizing finances, reconciling accounts, and assembling documentation in preparation for filing Form 990. Form 990 contains several specific questions about the nonprofit’s board, governance policies, and critical transactions. The 990 presents an opportunity for nonprofits to showcase their accomplishments and the strength of their internal controls.
Timely filing 990s is crucial as failing to file for three years will result in automatic revocation of exemption. Nonprofits can make this process easier by keeping their CPAs informed throughout the year and maintaining accurate and complete records.
4. Renew Solicitation Registrations.
Nonprofits soliciting donations should confirm that their solicitation registrations are up to date in each state where they solicit funds (or from which they receive substantial or ongoing contributions). Most jurisdictions require annual renewals making year-end an ideal time to determine whether the nonprofit’s registrations are up to date in all the jurisdictions where it plans to fundraise during the upcoming year.
Failing to register can result in harsh penalties, including fines, audits, and possibly jail time for the nonprofit’s leaders.
Read more about our blog post on strategies for registration.
5. Review Contracts and Renewals.
Every nonprofit, regardless of size, must be diligent in tracking contract expiration dates and terms such as automatic renewals, terminations, and notice requirements. The nonprofit should have a designated corporate officer or board member responsible for calendaring and keeping track of contract expiration dates and termination windows. The nonprofit must also be aware well in advance of any critical deliverables and deadlines to follow through on actions necessary to comply with its contracts.
6. Perform Grant Reporting.
All too often, organizations successfully receive grant funding but fail to track their expenditures and timely report to the grantmaking agency. Failing to follow through with grant reporting jeopardizes future funding and, in some cases, can even result in funds being clawed back. Most funders require reporting before or shortly after the end of the year. In-house or outsourced bookkeeping tasks should include tracking grant funds upon receipt as well as assigning and categorizing grant-related expenditures to make grant reporting easier.
7. Conduct Performance Evaluations.
Many nonprofits adopt a Compensation Policy requiring annual performance evaluations of key employees. These evaluations are commonly overlooked or forgotten. However, regardless of whether the nonprofit compensates key employees, each year executive officers should undergo a performance evaluation. December is an excellent time for the Board of Directors to assess the CEO and other key employees’ performance throughout the year. The Board should review potential conflicts of interest and adjust any compensation annually. Evaluations allow the executive to report on their goals and invite the Board of Directors to assess the nonprofit’s overall performance under the executive’s leadership.
8. Renew Insurance Coverage.
Most insurance policies must be renewed by the end of the year. Accordingly, nonprofits should make sure renewal applications are submitted in time to extend insurance coverage before their policies expire. Consider also meeting with the nonprofit’s insurance broker to discuss any changes to programs or assets that could alter the nonprofit’s risk profile and coverage needs.
9. Plan for End-of-Year Contributions and Donor Acknowledgments.
Nonprofits should remind donors of the cutoff for receipt of year-end donations. Tax law requires that contributions be postmarked or delivered by December 31st to be counted as received during that year.
Nonprofits that receive donations of $250 or more must send written acknowledgments to donors. Organizations can send these acknowledgments upon receipt of the contribution or at the end of the year. The acknowledgment must indicate:
- the full legal name of the origination and its EIN;
- a confirmation of its status under 501(c)(3);
- a recital of the amount given or items donated; and
- whether any benefits were provided in return for the donation and, if so, the amount of the gift that is deductible.
10. Create a Yearly Report.
The nonprofit should draft an internal and public version of the yearly report. The internal version can address staffing challenges, financial updates, and internal barriers and goals, whereas the public version should provide a more high-level overview of operations, goals, and achievements.
A yearly report is a great way to update donors, partners, and other stakeholders on the work done by the organization during the year. The report should reflect the most recent year as well as identify and discuss trends in the organization’s industry and area of focus.
Yearly reports should be disseminated to donors, grant funders, contract partners, and key stakeholders in the nonprofit’s service area. The nonprofit’s Board of Directors and key staff members should be asked to comment before publication.
11. Strategize for the Upcoming Year.
The end of the year is a great time for nonprofit leadership to gather and discuss a cohesive strategy for achieving the organization’s goals and objectives for the upcoming year. This process should involve key stakeholders and address potential challenges and opportunities to ensure the nonprofit has a clear framework for navigating the next twelve months.
Preparing for the next year may also include board governance training. Board members should be educated on their fiduciary duties, responsibilities, and expectations as members of the board of directors. Well-trained board members are in the best position to make informed decisions for the nonprofit and having an educated Board strengthens overall governance.
The end of the year is a busy time for all organizations. Accordingly, we often see important obligations slip through the cracks. Acting proactively ensures your nonprofit will start the new year on solid footing. If you are unsure of where to start, engaging a lawyer to conduct a comprehensive legal audit can provide helpful insight and a jumping-off point.
Kyler Mejia is an attorney (bar pending) with Caritas Law Group, P.C. Kyler advises nonprofit and socially responsible businesses on corporate, trademark, tax, and fundraising regulations nationwide as well as donors concerning major gifts. To schedule a consultation, call 602-456-0071 or email us through our contact form.