Best Practices: Financial Basics

Handling funds, taxes and insurance

These are the areas most often asked about by club leaders. Regional staff and the Associate Executive Director, Jerry Sigler, are available for general discussion of these matters with club officers. We recommend that clubs consult with their own legal, insurance and accounting professionals to address specific club business issues. You also may wish to consult http://www.nonprofitbasics.org/.

I. CLUB FINANCES

A. Budgeting

B. Financial Resources

Usually, a club has two types of financial resources: operating funds and scholarship funds:

1. Operating Funds

Operating funds for most clubs come primarily from AAUM funding. They are used for club mailings, meetings, deposits, etc., related to operating a club.

We recommend that you keep operating funds in a bank account under the club's own taxpayer identification number. Use federal tax form SS-4 to obtain a taxpayer ID number: http://www.irs.gov/pub/irs-fill/fss4.pdf. Obtaining a taxpayer ID number has NO EFFECT on the club's tax status.

Club funds and individual club officer funds should NEVER be co-mingled. Keeping them separate reduces the potential for liability of individual members and provides a mechanism for clearly tracking club income and expenses.

Set up club checking and savings (if appropriate) accounts with two authorized check signers. Require two signatures for larger checks (most clubs have this threshold between $100-$500). Officers should include their titles when signing checks to reduce personal liability.

Bank accounts should be reconciled promptly and the officer reviewing the statements should share a copy of them with the other signer and/or another officer. This is another good control mechanism and also allows for early detection of problems.

2. Scholarship Funds

Scholarship funds are those designated for student support. They should be maintained separately from Operating Funds, either in a separate bank account or with the University (see below). All of the other guidance provided above regarding Operating Funds applies to Scholarship Funds.

II. TAXES AND DEDUCTIBILITY OF DONATIONS

A. Tax-Exempt Status

1. What is it?

To be tax-exempt, an organization must be organized and operated exclusively for one or more of the purposes set forth in Section 501(c)(3) of the Internal Revenue Code and none of the earnings of the organization may inure to any private shareholder or individual. In addition, it may not attempt to influence legislation as a substantial part of its activities and it may not participate at all in campaign activity for or against political candidates. http://www.irs.gov/charities/article/0,,id=96099,00.html.

There are several 501(c) recognition categories. Section 501(c)(3) status is the only one that allows an organization to receive contributions that are tax-deductible to the donor. Clubs likely can qualify as tax-exempt under section 501(c)(7) as a social club, but that means the club doesn't have to pay taxes. It doesn't mean it can receive tax-deductible gifts.

2. How do you get tax-exempt status?

Affiliated clubs can take advantage of AAUM 's 501(c)(3) tax-exempt status when circumstances warrant. If a club wishes to apply for its own exemption under section 501(c)(3), it should file IRS Form 1023: http://www.irs.gov/pub/irs-fill/k1023.pdf. However, it will be necessary to prove that the club is "organized and operated exclusively" for educational purposes. Typically, tax-exempt status is useful when a club handles large sums on an annual and ongoing basis because it allows gifts to the club (as opposed to AAUM or the University) to be tax-deductible for the giver. Of course, it also requires that clubs keep detailed records, issue receipts for contributor income tax purposes, and file annual federal income tax returns. As there is a cost to filing for federal tax-exempt status ($150), and as some clubs have had their requests turned down, we do not encourage clubs to make such a request without careful research by their professional advisors.

3. When are donations tax-deductible?

Unless a club has secured its own 501(c)(3) status, all donations to club scholarship funds must be made to "The University of Michigan" in order to be deductible for the donor. Donors should designate the club scholarship name or account number on the memo line. Clubs should forward individual checks to the University's Gift Processing Office, where a gift receipt is prepared and sent to each donor. It is not acceptable for a club to collect from various donors and send just one club check to AAUM or the University.

Arrangements can be made for a similar process if the club wishes to solicit tax-deductible gifts for its Operating Funds. Arrangements can also be made to accept credit card gifts.

If an individual receives anything in return for her/his scholarship contribution — hors' oeuvres or a t-shirt, for example — the value of the contribution must be reduced by the market value of the item given to the donor. For example, if a donor gives $50 in exchange for a $10 shirt, the donor may deduct $40.

4. Filing tax returns

MICHIGAN law does not require clubs to file an annual state income tax return, unless the club offers goods for sale (see discussion of "unrelated business income"). Laws in other states may differ and you should consult your professional advisors for the rules in your state.

All clubs earning unrelated business income of $1,000 or more must file IRS Form 990T annually: http://www.irs.gov/pub/irs-fill/f990t.pdf. "Unrelated business income" is defined as income from a trade or business, regularly carried on, that is not substantially related to the performance by the organization of its exempt purpose or function (e.g., selling ads in a regularly published magazine): http://www.irs.gov/charities/article/0,,id=96104,00.html.

5. Unique Michigan tax issues

In MICHIGAN, you must collect sales tax on items sold for fund-raising purposes. Clubs conducting a single "sale" per year must file a concessionaire sales tax return with the tax collected. Clubs conducting two or more "sales" per year must get a sales tax license, report sales tax monthly or quarterly and pay the tax collected.

In MICHIGAN, all incorporated groups must file a Michigan Annual Report ($10 fee; Corporation and Securities Bureau Form 2000). (See discussion under "Insurance" regarding incorporation.)

In MICHIGAN, clubs eligible to use AAUM's tax-exempt status need not pay sales tax on purchases and vendor-provided services (such as meals in a country club). Show the proof of insurance and letter of affiliation, enclosed with the annual club allocation check, to vendors and merchants for a waiver of sales tax. If necessary, a copy of AAUM's exemption letter can be provided.

Laws in other states may differ and you should consult your professional advisors for the rules in your state.

6. Raffles

In MICHIGAN, all raffles require a license, detailed financial records of all activities and a financial report after the raffle. Laws in other states may differ and you should consult your professional advisors for the rules in your state.

II. INSURANCE

A. Extension of University coverage to clubs

The University's insurance extends to clubs that are recognized as affiliates of AAUM. The evidence of insurance document enclosed with the annual allocation check outlines general coverage, including director and officer ("D&O") coverage and is effective until such time as the University determines coverage is no longer applicable (such determination to be made annually) or until the club no longer meets the qualifications and requirements for recognition as an affiliate of AAUM.

B. Benefits from incorporating

Clubs are encouraged to incorporate under the laws of their own states. Doing may limit the liability of a club's officers and directors. State laws providing liability protection to volunteer leaders vary widely but are worth investigating.

The national Volunteer Protection Act adds another layer of protection for volunteer leaders under certain conditions if they are a 501(c)(3) or 501(c)(6) organization or "any not-for-profit organization which is organized and conducted for public benefit and operated primarily for charitable, civic, educational, religious, welfare or heath purposes." For more information, see http://www.eriskcenter.org/knowledge/normac/protection.html.