Nonprofit Charitable Solicitation and Financial Statement Requirements

Approximately 45 states have independent laws regulating charitable solicitation activity. In as many as 41 of those states, nonprofits are generally required to register with the charity official prior to soliciting contributions from the public. On an annual basis, nonprofits are then required to renew their registrations and submit copies of the recent tax year’s Form 990 and financial statements.

This has created a patchwork of diverse and at times complex reporting requirements for nonprofits of all sizes. In particular, statutory thresholds for audited and reviewed financial statements not only vary greatly by state, but also can cause unanticipated consequences for organizations unaware of the requirements.

Nonprofits should make proactive efforts to meet state registration requirements. The CPA serves a vital role in this process. These accounting professionals help nonprofit clients navigate statutory requirements and prepare the appropriate financial statements needed to comply. Their role consists of advising clients as to the proper financial statements needed for both operating and charitable solicitation purposes.

Charitable Solicitation Registration and Reporting 101

State charitable solicitation laws serve to protect donors from unregistered, misleading, and outright fraudulent activity. To keep tabs on nonprofits operating within their borders, most states currently require charitable organizations to register and annually report with the Attorney General, Department of Consumer Protection, or other charity official. While the process of registration varies in each state, nonprofits can broadly expect to submit the following on an annual basis:

● State-specific application detailing contact information, charitable programs, and descriptions of solicitation activity

● Copies of organizational records, such as formation documents and IRS exemption determination

● A current list of officers, directors, and key executives

● Form 990 and all schedules, including unredacted Schedule B

● Financial statements, which may need to be audited, reviewed, or compiled

● In some states, proof of foreign qualification and the appointment of a r egistered agent for service of process.

● Filing fee, usually based on annual contributions or gross revenue

Tip: In most states, the act of solicitation generally triggers registration requirements, not the receipt of funds.

“Solicitation” is broadly defined. It can refer to traditional methods, such as sending direct mail, making phone calls, and any variety of in-person, corporate, or foundation activities. In a tech-driven era, many states now consider electronic media to be soliciting as well, including email, “Donate Now” buttons on websites, crowdfunding, and social media. Organizations that leverage these low-cost, high-reach platforms – especially in light of COVID-19 – must be aware of triggering registration requirements outside their home state and possibly nationwide.

Most states do not penalize organizations for registering in good faith. Therefore, nonprofits should make proactive efforts to comply with state registration requirements.

Financial Statement Requirements for Charitable Solicitation Requirements

A majority of states require nonprofits to submit financial statements of some kind along with their annual charitable registration materials in addition to Form 990. As many as 25 states specifically require financial statements that have been audited or reviewed by an independent CPA. Several states enforce that the statements be prepared according to GAAP, in other words on an accrual basis.

These requirements are triggered once the organization’s annual income surpasses the statutory threshold. State thresholds for audited or reviewed statements are usually based on one of the following:

● Total contributions, gifts, and grants (Form 990, Part VIII, Line 1h)

● Total gross revenue (Form 990, Part VIII, Line 12)

● Occasionally, program service revenue (Form 990, Part VIII, Line 2g) is considered in addition to annual contributions

State thresholds are generally not based on:

● The number of transactions in a particular year (such as a small number of large contributors)

● Income from a particular state

Tip: Nonprofits and practitioners must jointly understand the impact the prospect of registration has on the type of financial statements needed.

Even taken at a glance, state requirements are highly variable. For example, an organization in California is generally not required to have audited financial statements prepared until it reaches $2 million in gross revenue (at least for state registration purposes). The same organization planning to register in Illinois must submit audited financial statements when gross contributions exceed $300,000 (or $25,000 if it uses a professional solicitor).

Even neighboring states do not share requirements or offer reciprocity. An organization registering in Oklahoma currently does not submit statements of any kind, but may need audited financial statements when registering in Arkansas, Kansas, or New Mexico.

Requirements don’t only vary state-by-state. They also vary year over year.

● Some states, like Minnesota and New York, require no financial statements with initial registration materials, but may for each subsequent annual report.

● Organizations that experience annual growth in income may be able to submit internally prepared profit/loss and balance sheet statements in one year, but need a CPA engagement for reviewed or audited statements in the next.

● New organizations with sizable startup funding may be immediately required to produce audited or reviewed financial statements when registering to solicit. Remember, the factor is generally the organization’s total income, not the number of transactions.

Tip: CPAs should lead the conversation about the type of financial statements their nonprofit clients require. Boards and leadership should budget for the cost of auditory and assurance work on an annual basis.

Waivers from Financial Statement Requirements

Audited and reviewed financial statements must be included in order for registration and annual renewal to happen successfully. In general, failure to submit all of the required materials means that the organization is not compliant and therefore cannot solicit.

Organizations that do not have the requisite statements available frequently inquire whether a waiver of state requirements is possible. Because the requirements are set by statute, requests to waive these requirements are highly unusual, if not outright impermissible.

State criteria for granting a waiver, if they exist at all, are highly conditional. For example:

● Illinois permits a “once-in-a-lifetime” waiver, which means the organization may request a waiver one time, but may not ever again do so in its term of existence.

● Pennsylvania requires a presentation of “special facts and circumstances,” which notably does not include ignorance of the requirements or the cost of a CPA engagement.

● Wisconsin offers a waiver only to organizations that see large year-over-year growth.

Even if a particular state publication or examiner represents that a waiver is possible, all requests are reviewed individually and may be denied.

Some states do not offer any waiver from their statutory requirements. New Jersey, for example, considers applicants that file without the requisite statements perpetually delinquent until they do.

Tip: In general, organizations should be aware of and, with their CPA, plan to meet statutory financial statement requirements before submitting registration materials to avoid unanticipated delays or costs.

Strategies for Complying

Nonprofit leadership and boards should be aware of the broad requirement to register. Taking steps to comply requires an internal review of the organization’s operating and fundraising activities. Depending on the mission of the organization and its solicitation methods, this may occur in multiple states.

Because state thresholds vary, organizations must understand what type of financial statements are required in each state where they plan to register. The CPA plays a key role in helping their client understand minimum thresholds, advising, and preparing the requisite documents.

Annually, nonprofits should review their activities and income, which may trigger additional registration and financial statement requirements. When an independent CPA engagement is needed, the board is responsible for selecting an experienced firm, approving the budget line item, and ensuring the proper statements are prepared and approved.

Ultimately, compliance is a collaborative effort. CPAs, legal counsel, and state registration preparers work jointly with nonprofit leadership to ensure the organization’s program and fundraising activities are robustly delivered and fully within the public eye. The key to success is a proactive mindset. It’s time to start the conversation, seek additional resources, develop a plan, and take action!

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James Gilmer is a compliance specialist with Harbor Compliance, a provider of compliance solutions for businesses and nonprofits of all types and sizes. Since 2012, the company has helped more than 25,000 organizations apply for, secure, and maintain licensing across all industries. Harbor Compliance offers generous affiliate and referral partnership programs to qualifying CPA, accounting, and law firms.