Protect Your Volunteers
JAMES QUAID, CPA
For many not-for-profit organizations, volunteers rank among their most valuable assets. These individuals contribute critical services, which frees up employees to work on other vital matters. This blog outlines steps to minimize the risk of tax or legal liabilities that could be associated with volunteer work.
An organization could inadvertently create taxable income for your volunteers if the organization provides the volunteers with any benefits, services or compensation beyond reimbursements for out-of-pocket expenses incurred while performing their volunteer services. Reimbursements that exceed actual expenses are taxable.
If your volunteers need to cover some costs on occasion with their own money, for example picking up supplies for an event, please remind them beforehand that they must provide records and receipts of their spending on the organization’s behalf. This may seem burdensome to people just trying to do good deeds, so explain that it is for their own protection.
Volunteers also may face a risk of being sued for their actions (or inactions) while performing services for your organization. The risk is particularly significant with organizations that provide medical services or work with vulnerable populations. Even tasks such as driving can result in litigation.
The federal Volunteer Protection Act of 1997 offers some degree of defense for volunteers acting within the scope of their responsibilities. Similarly, many states have passed laws to shield volunteers. However, the limitations on liability can vary significantly from across states, such as different limits, conditions and exceptions.
The volunteer protection laws do not exempt an organization’s need for appropriate insurance coverage. In fact, some of the laws explicitly require an organization to carry insurance to limit volunteer liability.
To minimize risk, it is prudent to carry comprehensive general liability insurance that specifically covers volunteers, as well as directors and officers liability insurance. If volunteers will operate vehicles for your organization, check whether your auto insurance will cover them. Add them as additional insureds if necessary. Larger organizations may consider amending their bylaws to include a broad indemnification clause for volunteers when the claims against them exceed insurance limits.
Make sure your organization has implemented processes and procedures to help control the risks of harm or injury caused by volunteers. For example, make sure to devote time up front to screen and train volunteers appropriately and to restrict certain client-facing activities to employees of the organization.
Retain and protect
Volunteer retention is just as important as employee retention. But, volunteers who feel that the risks associated with helping your organization outweigh the benefits probably will direct their time and energy elsewhere. Consult with your legal and insurance advisors to make sure your organization is doing all it can to protect your volunteers.
Do You Know How to Avoid UBIT?
Exempt organizations, both large and small, are relying more on a variety of corporate sponsorships to provide much needed support for events and programs. Property structured sponsorships can benefit both sponsors and organizations, while avoiding or minimizing tax on unrelated business income (UBI).
Qualified Sponsorship Payments
IRC Reg. §1.513-4 created a safe harbor for corporate sponsorships to help exempt organizations distinguish between taxable advertising and mere acknowledgment of sponsors. To ensure this favorable tax treatment, it is important that the sponsorship is structured so that it is a qualified sponsorship payment, rather than taxable advertising. The IRS exempts payments that fit within the safe harbor, known as “qualified sponsorship payments” from unrelated business income tax (UBIT). These regulations define a qualified sponsorship payment as a payment for which the sponsor receives no substantial return benefit other than mere acknowledgment by the organization. Your organization’s use or acknowledgment (as opposed to promotion, marketing or endorsement) can include:
- The display of the sponsor’s brand or trade names and product or service listings;
- Listing of the sponsor’s locations, telephone numbers or website address;
- Logos and slogans that contain no qualitative or comparative descriptions of the sponsor’s products, services, facilities or company, such as “the best product money can buy;” and
- Display or distribution of the product itself (free or for remuneration) at the sponsored event, if there is no agreement to provide the sponsor’s product exclusively.
Substantial Return Benefit
To be considered substantial by the IRS, the aggregate fair market value (FMV) of all benefits given to the sponsor during the year must exceed 2% of the amount of the sponsor’s payment to the not-for-profit. If the total benefit exceeds 2% of the payment, the entire FMV of the benefits (not just the excess amount) is a substantial return benefit.
Keep in mind that payments made in connection with a trade show or convention are not qualified sponsorship payments, nor are contingent payments. If a sponsor’s payment is contingent on event attendance, broadcast ratings or other measures of public exposure to the sponsored activity, the payment falls outside the exception.
Additionally, an exclusive provider arrangement as part of a sponsorship agreement will generally be a taxable return benefit. However, an agreement that makes the sponsor the exclusive sponsor of an event does not, of itself, make the sponsorship a return of benefit.
When a sponsorship comes with a substantial return benefit, only the part of the sponsor’s payment that exceeds the substantial return benefit is considered a qualified sponsorship payment. The remainder is UBI.
Consider, for instance, a not-for-profit that receives $50,000 from a sponsor to help fund an event. The organization recognizes the support by using the sponsor’s name and logo in promotional materials. It also hosts a dinner for the sponsor’s executives, and the FMV of the dinner is $1,500, exceeding 2% of the sponsor’s payment.
The use of the sponsor’s name and logo constitutes permissible acknowledgment of the sponsorship, but the dinner is a substantial return benefit. As a result, only the portion of the sponsorship payment that exceeds the dinner’s FMV, or $48,500, is an exempt qualified sponsorship payment.
Follow the Rules
If you are considering corporate sponsorship programs (or you are already involved with them), it is important to be aware of the rules. It is fairly easy to avoid or minimize taxes if these rules are considered when the program is developed. But, if your not-for-profit organization does not follow the rules for the IRS exception carefully, a sponsorship can be deemed paid advertising and your organization could end up liable for UBIT.