You will know when you’ve sat through either a good, productive board meeting or a bad, unproductive meeting. The last thing organizations want to do is waste the precious hours that board members donate. Good organization plus sensitivity to the people and issues involved can ensure productive meetings.

Here are ten suggestions for before, during, and after board meetings:

The Before

1. Agenda prep.

The board president or chair and executive director (ED) typically plan the agenda together. Many boards now use consent agendas to streamline meetings and allow the focus to be on substantive issues. A consent agenda groups the routine, procedural, informational, and self explanatory non-controversial items typically found in an agenda. These items are then presented to the board in a single motion for an up or down vote after allowing anyone to request that a specific item be moved to the full agenda for individual attention. Other items, particularly those requiring strategic thought, decision-making, or action, are handled on the full agenda.

In preparing the full agenda, don’t try to cover every issue your nonprofit is facing in every meeting. Make certain items a priority. Discuss your most important agenda items early in the meeting when members are most engaged. Make sure time-sensitive, critical items requiring board action have ample agenda time.

2. Documents and information. Supply the board with the information it needs to make informed decisions, particularly if you are asking them to vote or take action at this meeting. Include relevant reports and financial statements. Encourage board members to review the agenda and meeting documents before the meeting.

Gone are the days of the three-inch board binder. Most boards have begun using board management software that saves time and provides for better governance—and improves collaboration both before and during the meeting. Some board training may be required for those members who are less tech-savvy.

3. Financial facts. Provide your board with good financial information in a format that doesn’t overwhelm them. Consider using a dashboard-type presentation rather than columns and rows of data.

Think seriously about the amount of detailed financial data you distribute to the full board. First, will they understand it? Second, will it be meaningful in terms of a decision they are making? Many boards use dashboards and leave the more detailed reporting to their finance committee. Be wary of what is distributed and discussed, particularly if you allow the public to join your meeting.

4. Sensitivity to controversial issues. Be aware of issues that might prompt a strong difference of opinion, and never begin or end a meeting with one. Good boards can weather heated discussions, and the best results often follow a better understanding of both sides of an issue. But you need to foster unity at the start and the end of your gatherings. Consider if certain items require a “closed session” where invited guests and the public are asked to leave the meeting.

Boards typically don’t understand Robert’s Rules of Order until there is a contentious meeting. Every board should have a parliamentarian, official, or “unofficial” to bring contentious meetings back on track.

5. Two-way communication. Don’t let communications from the ED, staff, or board committees be dictatorial. For example, if the ED presents a monthly report, solicit board opinion and allot time for member response. If a response isn’t needed, simply put a copy of the report in the preliminary board materials.

6. Ongoing education. Use some of the meeting time to educate board members. For example, a staff member could present “how to read a financial statement” one month, and the ED could present a summary of the board’s legal responsibilities another time. Be sure to allow some time for questions and answers.

7. Ongoing programs and activities. Board members want to know about programs and activities, so allocate time to showcase a different program at each meeting. Let the staff make presentations and be proud of their accomplishments!

8. “Dumb” questions are permitted. Board members need to feel safe asking relevant questions to get the information they need for intelligent decision-making. Some questions about how the organization works and its history may be necessary.

9. No shrinking violets. Make sure that each board member talks at least once during the meeting. Example: “Audrey, at the last meeting, you mentioned you were going to talk to your friend at Mega Compute Corporation about program sponsorship. How did that go? Do you have any other suggestions for potential sponsors?”

10. Follow-up. Follow up on the meeting with a summary of the key matters discussed, the conclusions, and action items. Include individual assignments and the next scheduled meeting date. A short debrief with the ED or Executive Committee may be a good idea.

The After

Minutes of board meetings are more than a parliamentary formality; they’re a legal record of your nonprofit’s activity. It’s important that board members ensure the minutes adequately detail matters of importance.

Why do minutes matter?

If your nonprofit is audited by the IRS or another authority, such as a state attorney general, board meeting minutes are likely to be one of the first things reviewed. Therefore, always prepare them in a manner that would withstand official scrutiny.

For example, if the IRS reviews your organization’s executive compensation policies, it will review board minutes to understand the process the board used to set compensation. If no reference is made to any discussion of compensation issues, the IRS would have to assume that decisions were made arbitrarily.

The minutes represent the actions of the board, and it’s often said that if something isn’t mentioned in the minutes, it never happened.

What should you include?

The board secretary is usually responsible for recording minutes during meetings and preparing them for the board’s review. The board then approves or amends the minutes. A final copy should be distributed to every member and retained in the board member manual and your organization’s official records.

At a minimum, your board minutes should include:

• Meeting date, and start and end times
• A roll call of board members
• Voting results, i.e., actions taken, and the names of abstainers and dissenters
• A general narrative of proceedings, including mentions of presentations, reports or documents introduced, and a summary of major discussions or debates
• Future action steps
• Signatures of the secretary and board chair

Also, make notations such as whether a quorum exists and guests who were present.

How much is too much?

Considering the pressure nonprofits face to be as transparent as possible in their operations, your organization may want to highlight certain types of information that are of interest to regulatory groups and stakeholders.

Areas of interest include:

• Acknowledgment of significant gifts or contributions
• Approval of funding contracts
• Approval of annual budgets or proposed budget changes during the year
• Authorization of banking institutions
• Board approval or acceptance for investment, conflict-of-interest and other policies
• Approval for purchases of equipment or other major items
• Board designations for the use of certain funds
• Recognition of restrictions on monies received
• Salary adjustment approvals
• Review and approval of the executive director’s salary

It is absolutely not necessary to capture every single word uttered at the meeting; documenting the key discussions and decisions should be the priority.

Read the full Winter issue of Insights, the HBK Nonprofit Solutions quarterly newsletter.

The HBK Nonprofit Solutions Group is often approached by individuals who wish to establish a charitable organization. In our first meeting, we try to understand their ultimate goals, what they hope to accomplish with their charitable organization. Sometimes it involves tax planning. They wish to make annual contributions that will provide them an income tax deduction, and they wish to then use those funds to support local organizations in their community. Other times, the individuals are engaged in an activity that significantly benefits their community, and they wish to formalize the activity in a charitable organization. The latter of these two situations generally provides the greatest flexibility in how the charitable organization can apply for its exempt status.

How a charitable organization applies for exemption, specifically under Internal Revenue Code (IRC) § 501(c)(3) as an organization that benefits the general public, can have a significant impact on how the organization ultimately approaches fundraising and overall operations. And because often there are several categories of exemption that an organization qualifies for, we often consult with similar organizations subject to vastly different reporting requirements. This article will review some of the ways an organization can claim an exemption under IRC § 501(c) (3) and walk through an example demonstrating the differences in reporting requirements and the impact on the organization’s operations.

Exemption under Internal Revenue Code (IRC) § 501(c)(3)

In order to qualify for exemption under IRC § 501(c)(3), an entity must be organized and operated exclusively for one or more exempt purposes:

• The organizational portion of this requirement focuses on the entity’s governing documents: how it is organized, the exempt purpose, and what happens to the entity’s assets if it were to terminate. Some types of organizations, like churches, are considered tax-exempt without needing to apply for the exemption, though in most instances, an organization that is organized as a charitable entity for state purposes will still need to apply for tax-exempt status with the Internal Revenue Service.
• The operational portion focuses on the activities of the entity and whether they are performed to further the exempt purpose.

Private Foundation vs. Public Charity

When an entity applies for exemption under IRC § 501(c)(3), it will generally be considered a private foundation unless it meets one of the exceptions qualifying it as a public charity. Private foundations normally receive their support from one individual or family, are generally subject to an excise tax on net investment income, and may be required to make annual distributions if they are not considered operating foundations. In addition, private foundations are generally subject to greater restrictions on self-dealing, business holdings, and noncharitable expenditures. Most organizations look to avoid private foundation status through the following exceptions:

• Public Charity Status based on the Nature of the Exempt Activities: Organizations that have exempt activities that meet the requirements of the following categories will generally be considered a public charity:

  -Churches

  -Schools, colleges, universities, and their supporting organizations

  -Hospitals

  -Medical research organizations

  -Governmental units

  -Testing for public safety

• Public Charity Status: Publicly Supported: To be considered publicly supported, a charitable organization generally must pass one of two support tests:

  One test applies to organizations that receive a substantial portion of their support from governmental units and direct or indirect contributions from the general public. The organization does not need to generate revenue from the performance of its exempt activities.

  The second support test applies to organizations that receive at least one-third of their support from gifts, grants, contributions, membership fees, and exempt function income. Investment income and unrelated business income cannot make up more than one-third of the organization’s total support.

Same Activities, Different Classification

When an entity completes its application for exemption under IRC § 501(c)(3), it will need to explain its exempt purpose, its activities, and what its projected financials will be. In addition, the application asks whether the entity will be classified as a private foundation or a public charity and, if a public charity, how it qualifies as a public charity. It is how these questions are answered and how the exempt purpose and activities are framed that will ultimately dictate what the annual reporting requirements will be for the charitable organization and what restrictions the organization will be subject to. Because there are organizations that inherently qualify as both a private foundation and a public charity, it is vitally important that the organization understands the distinction when applying for exemption.

Example: Dolly’s Jazz Studio

Dolly’s Jazz Studio teaches jazz to children and adults, and its students perform in local jazz competitions. Its exempt purpose is to promote the art of jazz. While it will rely on tuition payments as support, it will also be receiving substantial annual contributions from Dolly, a wealthy patron who sits on the board and has dedicated her life to the arts. Dolly’s Jazz Studio has three options for claiming exemption:

• Private Foundation: Because Dolly’s Jazz Studio will be funded primarily by Dolly, it is possible that the organization will not meet one of the two support tests. Contributions received by Dolly will be subtracted from total support, which may mean that the organization cannot meet the “substantial portion” requirement of the first support test, or the “one-third” requirement of the second support test.
• Public Charity – School: If Dolly’s Jazz Studio has established a curriculum and classes, it is possible that the organization could meet the requirements of a school. The Internal Revenue Service has recognized that a cultural organization devoted to the promotion of the arts may qualify as an educational organization and therefore qualify as a public charity.
• Public Charity – Publicly Supported: Depending on the level of tuition charged and any additional contributions received from the general public, Dolly’s Jazz Studio may meet the requirements of one of the two public support tests.

As the example demonstrates, there is often some crossover in aspects of the different categories of exemption an organization can claim under IRC § 501(c) (3). This crossover means that similar organizations could claim exemption differently, which means they may be operating differently, and subject to different reporting requirements.

For example, suppose Dolly’s Jazz Studio decides to claim exemption as a private foundation. In that case, it will not need to focus on fundraising activities unless Dolly’s financial contributions and the tuition charged are insufficient to pay the ongoing operating costs. However, it will also be subject to increased regulation, in-depth annual reporting on Form 990- PF, and potential excise tax and distribution requirements if it does not qualify for an exception.

In contrast, if Dolly’s Jazz Studio instead chooses to be a publicly supported organization, it will need to put significant emphasis on tuition levels and additional fundraising activities to ensure it meets one of the public support tests.

Finally, if Dolly’s Jazz Studio meets the requirements of a school, less emphasis is placed on the source of funds, but it will be subject to nondiscrimination requirements and reporting. The annual reporting requirements for a public charity relate to the level of revenue and assets, so it is possible that Dolly’s Jazz Studio would only be required to file the more simplified Form 990-EZ or postcard, Form 990-N, instead of Form 990 each year.

If you are looking to establish a charitable organization—even if you have been operating a charitable organization for years— it is vitally important that you understand the exempt purpose and the activities that are or will be performed to determine how the organization should apply for exemption—or whether your existing organization would benefit from a change in how it is exempt. The HBK Nonprofit Solutions Group is skilled at consulting on these topics, and we encourage you to reach out to us to see how we can support you in your charitable endeavors.

On November 15, 2021, President Joe Biden signed The Infrastructure Investment and Jobs Act. The new law includes significant changes to the Employee Retention Credit (ERC) for the fourth calendar quarter of 2021.

The ERC has been eliminated for wages paid after October 1, 2021. For employers that were anticipating a credit for the fourth quarter of 2021 and have been holding payroll tax deposits should begin making deposits again immediately. We will continue to monitor if the IRS grants any relief for deposits that were not made timely.

An employer can still claim an ERC of up to $50,000 if they qualify under the recovery startup business rules for the fourth calendar quarter of 2021. This opportunity applies to businesses starting after February 15, 2020 and having annual gross receipts of less than $1 million. If the employer owns multiple businesses, there are additional test that will need to be met before determining eligibility.

While the ERC is eliminated, there is still opportunity to claim credits related to 2020 and the first three quarters of 2021. To see if you may qualify, refer to our July 27th Webinar to learn more about the credit. We’re here to help. Please reach out to HBK to discuss your situation.

The CARES Act, passed in March 2020, included the Employee Retention Credit (ERC) and Paycheck Protection Program (PPP) both intended to support employers with payroll expenses during the COVID-19 Pandemic. Initially, businesses were forced to choose between the two programs, as they could only use one. However, when Congress passed the Consolidated Appropriations Act (CAA) in December 2020, eligible organizations were offered more support as they could benefit from both programs, even retroactively. Paycheck Protection Program: first and second draw loans With the enactment of the CAA and American Rescue Plan Act (ARPA), eligibility was expanded to allow certain previously excluded nonprofit entities to apply for a first-draw PPP loan while others who received the first-draw loan could apply for a second-draw loan. This expansion provided many nonprofit organizations additional relief from the COVID-19 pandemic. The program was scheduled to close on March 31; then Congress extended the deadline to May 31. However, on May 5, the Small Business Administration (SBA) announced that lender funding was depleted, closing the application opportunity for most organizations. PPP forgiveness update Borrowers should be aware that any “excess loan amount” received will not be entitled to forgiveness. An excess loan amount is defined as a “borrower or lender error made in good faith that caused a borrower to receive a PPP loan amount that exceeds the borrower’s correct maximum loan amount under the CARES Act and the Economic Aid Act.” Excess loan amounts do not include a knowing misstatement, which could result in fraud charges. The CAA made several changes to PPP loan forgiveness, including making additional nonpayroll costs—certain supplier costs, worker protection expenditures, operations costs, and property damage costs—eligible for forgiveness; permitting borrowers with loans under $150,000 to use a simplified forgiveness application, and giving all borrowers the option to choose a covered period of between 8 and 24 weeks. Borrowers who have not applied for forgiveness for the first-draw PPP loans may want to prepare to apply. The SBA states that “If the borrower does not apply for loan forgiveness within ten months after the last day of the maximum covered period of 24 weeks, or if SBA determines that the loan is not eligible for forgiveness (in whole or in part), the PPP loan is no longer deferred and the borrower must begin paying principal and interest.” Borrowers should review guidance and forgiveness instructions carefully before beginning the application process. They should also consider benefits applied for and received from other COVID-19 relief programs, such as the Employee Retention Credit (ERC) and Families First Coronavirus Response Act (FFCRA) COVID-19 sick and expanded family leave, to ensure programs are used properly in relationship to one another. 2020 Employee Retention Credit The ERC is a 50 percent refundable payroll tax credit for eligible employers on up to $10,000 of qualified wages paid to employees between March 12 and December 31, 2020. The credit can be broken into two steps: • Determining Eligible Employers: Eligible employers are certain organizations that experienced either of the following during a calendar quarter of 2020: – The organization’s operations were fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings for commercial, social, religious, or other purposes due to COVID-19 – A significant decline in gross receipts during a calendar quarter as compared to the same quarter of 2019. The first eligible quarter is the quarter in which gross receipts are less than 50 percent of the gross receipts for the same quarter in the prior year. Each succeeding quarter is eligible until the following quarter, in which gross receipts exceed 80 percent of the gross receipts for the same quarter in the prior year. For nonprofit employers, the definition of gross receipts has been modified solely for purposes of the ERC to include all operations, investment income, rents, royalties, gross amounts received as contributions, gifts, grants, and similar amounts. • Determining Qualified Wages: Qualifying wages are wages and allocable healthcare costs. For employers eligible under the first scenario above, only wages paid during the period in which operations were suspended qualify. For employers eligible under the second scenario, all wages paid during the quarter fall within the qualifying period. Employers that did not pay wages but covered healthcare costs are eligible for a credit. Qualified wages are further distinguished based on the number of full-time equivalent employees (FTE) during 2019: – For employers with more than 100 FTEs, qualified wages are wages paid to employees not providing services during the qualifying period. – For employers with 100 FTEs or fewer, qualified wages are any wages paid to employees during the qualifying period. Claiming both ERC and PPP loan forgiveness PPP loan borrowers should understand how the PPP interacts with the ERC. The CAA explains: • Wages and health care costs used to substantiate the ERC cannot be used for PPP loan forgiveness (no double-dipping). • Wages must be used first to claim the ERC. • Employers can elect not to include certain wage and healthcare costs in the computation of the ERC, to maximize PPP forgiveness. • Eligible employers may recalculate the ERC in the event the PPP loan is not forgiven. In Notice 2021-20, the IRS provided updated guidance and examples of maximizing the ERC while satisfying PPP loan forgiveness. Generally, the guidance allows taxpayers to take the minimal amount of wages required to satisfy PPP loan forgiveness while potentially increasing their ERC. To claim the ERC for the 2020 tax year, the taxpayer will need to amend their quarterly payroll tax form 941 by filing form 941X for the applicable quarters. If a shutdown impacted the eligible organization in the first quarter of 2020, claim the credit by filing a 941X for the second quarter. 2021 Employee Retention Credit   In addition to permitting organizations that received PPP loans to be eligible for the ERC, the CAA enhanced the ERC through the first two quarters of 2021 as follows: • The credit was increased from 50 to 70 percent of qualified wages. • Qualifying wages were increased from $10,000 per employee per year to $10,000 per employee per quarter. • The “significant decline” in gross receipts was changed from 50 to 80 percent for either quarter as compared to 2019. • Employers can elect to use the immediately preceding quarter and the matching quarter from the prior year to satisfy the gross receipts test. • The number of FTEs was increased from 100 to 500 for determining qualified wages. • The cap on qualified wages using the equivalent duration during the 30-day period immediately before the eligible quarter in which wages were paid was removed. • Businesses can receive the credit in advance. American Rescue Plan Act (ARPA)   On March 11, 2021, ARPA became law, creating additional modifications to the ERC for 2021: • Extends the availability of the credit through December 31, 2021. The ERC and PPP have been modified with multiple changes since their introduction. Employers should consider their options and the relationship between COVID-19 relief programs to maximize their benefits. • Removes the alternative method allowing employers to use the immediately preceding quarter and the matching quarter from the prior year to satisfy the gross receipts test. • Adds Recovery Startup Businesses (RSB) to the list of eligible employers. To qualify as an RSB, the business must have been started after February 15, 2020; have less than $1 million in gross receipts; not be subject to a shutdown order, and not have a significant decrease in gross receipts. RSBs are eligible for and limited to a $50,000 credit for the ERC in the third and fourth quarters of 2021. • Allows “severely financially distressed” employers, those whose quarterly gross receipts declined 90 percent or more compared to the same calendar quarter in 2019, to treat all wages (up to the $10,000 limitation) paid during those quarters as qualified wages. The rule allows an employer with over 500 employees under severe financial distress to treat those wages as qualified wages whether or not its employees actually provide services for the third and fourth quarter of 2021. Eligible employers have three options for claiming the ERC for the 2021 tax year: • Report the ERC on quarterly Form 941, and request a refund or apply it as a credit to the following quarter. • Reduce federal employment tax deposits based on the anticipation of the ERC for the quarter. • File Form 7200 to request the refund in advance based on a projected credit amount that exceeds the amounts that can be withheld from federal employment tax deposits. Use Form 941 to reconcile the actual amount of the credit to the projected amount to correct any balance due or overpayment. The ERC and PPP have been modified with multiple changes since their introduction. Employers should consider their options and the relationship between COVID-19 relief programs to maximize their benefits. We’re here to help. Please reach out to HBK to discuss your situation. Read the full Summer issue of HBK Nonprofit Solutions quarterly newsletter.