Sep 18, 2020

Solicitation Rules Compliance for Nonprofit Charities

James GilmerBy James Gilmer

James Gilmer co-presented with Sharon Cody at PICPA’s Not-for-Profit & Government Accounting Conference in July 2020 on Ethical Considerations of Charitable Registrations and Reporting Requirements. That session is now available on-demand.

Forty-five states have laws regulating nonprofit charitable solicitation to protect both consumers and legitimate charities from misleading and fraudulent solicitation activity. In as many as 41 of those states, nonprofits are required to register and annually report with state charity officials prior to soliciting donations from residents.

Because charitable solicitation is regulated at the state level, nonprofit organizations of all sizes face a patchwork of requirements. Everything from determining where to register to the mechanics of submitting registration materials presents a challenge. In particular, state requirements for audits and reviews of financial statements can lead to unexpected costs for nonprofits unaware of their obligations.

Registration and Reporting

Handing over required financial statements to comply with state requirementsIn most states, the act of soliciting triggers registration requirements – not the receipt of funds. “Solicitation” is uniquely defined in each state, but may refer to a variety of online or traditional methods. Most public charities in the United States use a number of solicitation methods in combination to reach existing and potential donors. As a result, nonprofits should be aware of, and routinely reexamine, how their activity triggers registration requirements.

Though it varies by state, in general, nonprofits can expect to submit the following on an annual basis:

  • State-specific application describing the organization and fundraising activities
  • Current list of board and executive leadership
  • Copies of corporate records
  • Form 990 and financial statements
  • Contracts with professional fundraisers, fundraising counsel, or commercial coventures
  • Registered agents for service of process
  • Government filing fee, often based on annual income

Much of the information to be reported is related to annual financial data, so the statutory deadline in many states falls on the federal deadline for Form 990. CPAs and tax preparers should be aware of the logistical strain this places on nonprofits that file in multiple states. Wherever possible, the proactive completion of Form 990 will help the organization submit state charitable registration reports on time and minimize the consequences of late or lapsed registrations.

Financial Statement Requirements

In a majority of states, organizations are required to file both Form 990 and financial statements for the recently concluded tax year. The type of financial statements required is based on either the organization’s annual total contributions or gross revenue. Organizations that plan to register in each state must be aware of the varying thresholds in each state before attempting the registration process.

Organizations must ensure that they comply with financial statements, not only on a state-by-state basis, but also each year that it registers. Organizations that experience growth in annual revenues may be eligible to submit internal financial statements from its accounting software in one year, but need to engage a CPA in the following year to prepare reviewed or audited financial statements.

Failure to submit the proper financial statements with annual charitable registration materials may result in the denial of the right to solicit until the proper statements are produced. Waivers are highly conditional, and in some states (such as New Jersey) they are outright impermissible. Nonprofits and their CPAs should review state requirements and jointly determine what type of financial statements allow the organization to comply on an annual basis in all states where it is required to register.

Compliance in the Digital Age

In a technological era, nonprofits have quickly adopted online platforms to reach donors and raise funds relatively inexpensively. COVID-19 has only quickened this pace of adoption. Whether the nonprofit leverages email, social media, peer-to-peer fundraising, crowdfunding, or a “Donate Now” button on its website, boards and executive leadership should be aware that these activities can trigger registration requirements in additional states, if not nationwide.

Organizations generally have two strategies to comply when fundraising online. For groups with the budgetary means, nationwide registration is often the easiest way to ensure compliance with state requirements. Smaller organizations may consider registration in strategic states, then exclude the balance of the states from their solicitation activities. In either case, organizations should consult legal counsel for advice on their specific situation.

The CPA plays an important role in the success of their nonprofit clients. Under their guidance, nonprofits can confidently submit the required financial statements needed to comply with varying state registration requirements. As a result, organizations benefit from legal registration status and the increased public trust it garners. And that is a ticket to fundraising success.

James Gilmer is a compliance specialist with Harbor Compliance, a provider of compliance solutions for companies of all types and sizes. He is also a cofounder of Berks Sinfonietta Inc., a nonprofit chamber orchestra in Reading, Pa. Gilmer was a presenter at PICPA’s Not-for-Profit & Government Accounting Conference on July 13-14, 2020. He can be reached at jgilmer@harborcompliance.com.

Harbor Compliance does not provide tax, financial, or legal advice. Use of its services does not create an attorney-client relationship. Harbor Compliance does not review information provided for legal accuracy or sufficiency.

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.