Question 1

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.

Accepted Answer

Unrestricted net assets divided by operating expenses can be used to assess whether the not-for-profit organization is a going concern, but a better measure to determine if the not-for-profit organization's debt service expense is adequately covered by income is revenue, support, gain plus interest and depreciation expense divided by annual debt service expense.

Question 2

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.

Accepted Answer

Survivors of Breast Cancer Club. 501(c)(3) organizations are typically charitable, religious, educational, scientific, or literary in nature. The Survivors of Breast Cancer Club would likely fall under the "charitable" category. The other options do not fit into any of these categories.

Question 3

A state has the obligation to monitor and regulate a not-for-profit (NPO)organization because it granted the NPO tax-exempt status through the not-for-profit corporation laws.

Accepted Answer

States grant a not-for-profit organization its legal life, separate from the incorporators, just as commercial businesses apply to the state to become corporations. It is the federal government, through tax laws and the Internal Revenue Service that grants not-for-profit organizations tax-exempt status.

Question 4

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.

Accepted Answer

A common ratio "program expenses as a percent of total expenses" is often misinterpreted as a way to gauge whether the not-for-profit organization is spending what it is legally required to do.

Question 5

"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.

Accepted Answer

This is the definition of excess benefit transactions given in Chapter 15 and described in the Taxpayer Bill of Rights 2 in 1996.

Question 6

The purpose of the Internal Revenue Service's 2008 revision of the Form 990 is to simplify and shorten the form so that it takes less time for not-for-profit organizations to complete.

Accepted Answer

The purpose of the IRS overhauling the Form 990 is threefold: (1) to enhance transparency about the organization, (2) allow the IRS to efficiently assess noncompliance, and (3) minimize the burden of filing on tax-exempt organizations. Although many smaller organizations will be able to prepare the postcard Form 990-N, it is likely that other not-for-profit organizations will find that the revised form takes more time as it incorporates governance and executive compensation questions.

Question 7

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

Accepted Answer

This statement is too strong. At both the state and federal level, it is important that a not-for-profit organization not be organized primarily for the purposes of carrying on a political agenda, unless it is tax-exempt under IRC Sec. 527. Some lobbying and political activity is allowed if the organization registers with the state, properly discloses this activity on appropriate annual reports (including the Form 990 to the federal government), and makes sure the amount is not significant or excessive.

Question 8

Many states have worked closely to have uniform policies relating to not-for-profit organizations in the areas of not-for-profit incorporation,charitable solicitation,investing funds,and protecting volunteers.

Accepted Answer

States' attorneys general and the American Bar Association have generated several "uniform" acts and models designed to standardize the processes of operating a not-for-profit organization.

Question 9

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

Accepted Answer

The unrelated business income (UBI) is taxed at corporate tax rates that can be significant (ranging from 15% to the highest rate imposed on for-profit corporations). Most exempt organizations will manage their affairs so as to avoid or minimize this cost.

Question 10

Performance measures that can be used to evaluate not-for-profit organizations include percentage of total expenses spent on the programs versus on supporting the programs and total dollars raised for fund-raising dollars spent.

Accepted Answer

These are two measures that are tracked by watchdog groups, such as the American Institute of Philanthropy and the BBB Wise Giving Alliance.

Question 11

If a tax-exempt organization dissolves and goes out of business,it must distribute its assets to another tax-exempt organization.

Accepted Answer

State laws, IRS regulations, and most likely the governing documents (i.e., articles of incorporation and by-laws) of the NPO require that the assets of an exempt organization be distributed to other exempt organizations upon the dissolution of the exempt organization.

Question 12

Tax-exempt organizations 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 nongovernmental and not a church.
C)Whether they are governmental or nongovernmental.
D)Only if they are a private foundation,not a public charity.

Accepted Answer

The answer of Tax-exempt organizations must complete a Form 990...

Question 13

Not-for-profit organizations risk loss of their tax-exempt status if they engage in any political activity.

Accepted Answer

Although state and federal regulations are somewhat different with respect to political activities, both allow some level of participation in legislative efforts and lobbying as long as it is not a material amount or directed toward influencing legislation or participating in a political campaign of a particular candidate for office.

Question 14

Which of the following is a 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.

Accepted Answer

The answer of Which of the following is a not...

Question 15

Intermediate sanctions are often imposed by the Internal Revenue Service,in addition to revoking the tax-exempt status for organizations that confer excessive economic benefits on persons with substantial influence over the organization.

Accepted Answer

Intermediate sanctions, introduced in 1996, are a tool the IRS may use in curbing excess benefit transactions favoring certain people related to an NPO so that the NPO does not have to lose its tax-exempt status. Loss of tax-exempt status is considered unduly harsh, but the only sanction that the IRS had before the Taxpayer Bill of Rights 2 in 1996.

Question 16

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.

Accepted Answer

Not all board members may understand their fiduciary responsibility. It is advised that board members carry errors and omissions insurance to protect them from harm in lawsuits.

Question 17

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 does not approve the application.

Accepted Answer

It is the not-for-profit organization that determines under which subsection of IRC Sec. 501 it wants to be considered for tax-exempt status.

Question 18

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

Accepted Answer

The treasurer of the board has specific responsibilities to the NPO in the area of financial management, in particular to safeguard the assets and approve all disbursements, a level of responsibility that goes beyond that expected of the president, vice-president, and secretary.

Question 19

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.

Accepted Answer

Congress has always encouraged not-for-profit associations and charitable contributions to these organizations. The primary purpose in regulating exempt organizations at the federal level is to ensure that the public is being served by relieving public charities of the liability for income taxes.

Question 20

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.

Accepted Answer

It is difficult, but important that not-for-profit organizations be compared to either their own record over time, or to other organizations providing similar services. There are several classification schemes, such as the National Taxonomy of Exempt Entities (NTEE), used to group not-for-profit organizations providing similar services or having similar missions.

Quiz 15: Accounting for Colleges and Universities