The commerciality doctrine was created along with the operational test to address concerns over not-for-profits competing at an unfair tax advantage with for-profit businesses. But even business activities related to your exempt purpose could fall prey to the commerciality doctrine, resulting in the potential loss of your organization’s exempt status.

Several Factors Considered
The operational test generally requires that a not-for-profit be both organized and operating exclusively to accomplish its exempt purpose. It also requires that no more than an “insubstantial part” of its activities further a nonexempt purpose. Your organization can operate a business as a substantial part of its activities as long as the business furthers your exempt purpose.

But under the commerciality doctrine, courts have ruled that some organizations’ otherwise exempt activities are substantially the same as those of commercial entities. They consider several factors when evaluating commerciality, including:

  • Whether an organization has set prices to maximize profits,
  • The degree to which it provides below-cost services,
  • Whether it accumulates unreasonable reserves,
  • The use of commercial promotional methods such as advertising,
  • Whether the business is staffed by volunteers or paid employees,
  • Whether it sells to the general public, and
  • The extent to which the not-for-profit relies on charitable donations. (They should be a significant percentage of total support.)

No single factor is decisive for courts or the IRS.

Possible UBIT Issues
There’s another risk for not-for-profits operating a business. You could pass muster under the commerciality doctrine but end up liable for unrelated business income tax (UBIT).

Revenue that a not-for-profit generates from a regularly conducted trade or business that isn’t substantially related to furthering the organization’s tax-exempt purpose may be subject to UBIT. Much depends on how significant the business activities are to your organization as a whole. There are also several exceptions.

Seek Advice First
If you’re thinking about launching a new business to drum up additional revenues, consult your advisors first. They can help reduce the risk that your organization will run into potential exemption or UBIT issues.

Done well, delegation allows not-for-profit executives to focus on their most important tasks, helps to build bench strength and gets staffers out of the office before midnight. But done poorly, it can create more burdens than it eases. Here are five practices all not-for-profit leaders should adopt.

1. Choose Tasks Wisely
Always try to devote your time to the projects that are the most valuable to your organization and can best benefit from your talents. On the other hand, delegate tasks that frequently reoccur, such as sending membership renewal notices, or tasks that require a specific skill in which you have minimal or no expertise, such as reconciling bank accounts.

2. Pick the Right Person
Before you delegate a task, consider the person’s main job responsibilities and experience and how those correlate with the project. However, keep in mind that employees may welcome opportunities to test their wings in a new area or take on greater responsibility. Be sure to consider staffers’ schedules and whether they actually have time to do the job well.

3. Perfect the Handoff
When handing off a task, be clear about the goals, expectations, deadlines and details. Explain why you chose the individual and what the project means to the organization as a whole. Also let the employee know if he or she has any latitude to bring his or her own methods and processes to the task. A fresh pair of eyes might see a new and better way of accomplishing it.

4. Keep in Touch — to an Extent
Delegation doesn’t mean dumping a project on someone else and then washing your hands of it. Ultimately, you’re responsible for the task’s completion, even if you assign it to someone else. So stay involved by monitoring the employee’s progress and providing coaching and feedback as necessary. Remember, however, there’s a fine line between remaining available for questions and micromanaging.

5. Acknowledge the Help
A good delegator never takes credit for someone else’s work. Be sure you generously — and publicly — give credit where credit is due. This could mean verbal praise in a meeting, a note of thanks in a newsletter or a letter to the person’s manager. If the project’s size and scope warrant it, consider offering extra time off or a special gift.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Annjeanette Yglesias, one of our tax managers and a member of the PKF Texas Not-for-Profit team. Annjeanette, welcome back to the Playbook.

Annjeanette: Hey, Jen. It’s nice to be here.

Jen: So, I’ve heard about this thing called a Donor Bill of Rights. Can you tell me what that is, and what people need to know about it?

Annjeanette: Sure. The Donor Bill of Rights was created by the Association of Fund Raising Professionals about 25 years ago. Basically, it’s a blueprint – a set of best practices that organizations can use to maintain their donor relationships.

Jen: So, what are some key things that are in the Donor Bill of Rights?

Annjeanette: The Donor Bill of Rights actually is made up of 10 tenants, so to speak, and they all center around transparency. For example, the Donor Bill of Rights states that donors have the right to know who the organization’s leadership is and have access to them to ask any questions that they would like and also receive prompt, transparent responses from those in leadership positions. Also, the Donor Bill of Rights states that donors have the right to know their resources are being used.

Jen: That’s key.

Annjeanette: Exactly – to fund the mission and also that donors have a right to see financial information. Some of that financial information is already made available to the public via Form 1099, the annual tax filing that a nonprofit organization would have out there anyway, but also with other financial information. So really the Donor Bill of Rights centers around transparency and around what the nonprofit organizations – what kind of information they should be giving their donors to give them confidence that their funds are being stewarded properly.

Jen: Well, it sounds like this is something that pretty much all not-for-profits should adhere to.

Annjeanette: Right. It’s definitely – the Bill of Rights is definitely something that every organization should consider. However, it should be noted that the Donor Bill of Rights is not an enforceable set of rules.

Jen: It’s not like a legal requirement.

Annjeanette: Exactly. There’s no regulatory agency out there making sure that all nonprofits adhere to it. But each organization should definitely consider what the tenants are and should implement it in its own way. Organizations have to consider their tradable mission, their resources and especially their donor base in considering what facets of the Bill of Rights they want to embrace.

Jen: That makes a lot of sense. Well, great. We’ll get you back to talk about some more not-for-profit topics soon.

Annjeanette: That sounds good.

Jen: To learn more about how PKF Texas can help your not-for-profit organization, visit PKFTexas.com/notforprofit. This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.