On June 4, 2013, HB 2060 was signed into law by Governor Kitzhaber. HB 2060 affects charities that spend less than 30% of their functional expenses on the charitable programs and services to which donors contributed. Under this new law, such organizations will be disqualified from eligibility for tax deductible donations for Oregon income tax purposes. This legislation will soon become part of Oregon Revised Statutes. This means that:
- An organization that fails to meet the 30% floor over the course of three years will be disqualified from receiving tax deductible donations for Oregon income tax purposes and will be required to notify its Oregon donors in writing of this fact before they make their giving decision. Such organizations to the extent they have Oregon property may also lose their property tax exemption.
- Donations made to an organization that has been disqualified in Oregon will not be tax deductible for Oregon income tax purposes, but will remain tax deductible for federal income tax purposes. However, this legislation will help to inform donors that the disqualified charity is one they may not wish to support and many prospective donors upon receiving this information will chose to make their donations to more effective organizations.
The Oregon Department of Justice's (DOJ) Charitable Activities Section anticipates that relatively few Oregon charities will be impacted by this legislation; rather, it will only affect organizations that rely heavily on professional fundraising companies that keep most of the donations. Small nonprofits (generally those making less than $200,000) are exempt from HB 2060, and additional exemptions take into account circumstances that can lead to high management and fundraising costs among organizations that are otherwise dedicated to their charitable missions.
Contact DOJ's Charitable Activities Section with any questions or concerns regarding this legislation through the Section's email address, which is email@example.com.
Frequently Asked Questions
If organizations are raising funds and not spending them on their missions, what do they spend the funds on?
The majority of nonprofits that would fall afoul of this law use the funding for marketing and fundraising. Unfortunately, numerous telemarketing companies have realized that they can set up or become associated with a nonprofit, raise funds under contract, and then give only a small portion of those funds to the nonprofit. This bill was designed to weed out that kind of organization. Each organization on the annual Oregon Attorney General's Twenty Worst Charities List falls below the 30% mark and all are located outside of Oregon. These bad apples tarnish the nonprofit sector and cause us all to look bad. Take a look at this recently released major investigative report into the type of charities impacted by HB 2060.
How is the 30% program expenditure threshold calculated?
The program expenditure calculation is based on the full IRS Form 990 Part IX Statement of Functional Expenses, using a three-year average.
Does this legislation impose any new record keeping or accounting requirements on organizations with budgets over $200,000?
No. Currently, organizations with gross receipts exceeding $200,000 are already required to file the full IRS Form 990—which includes the Part IX Statement of Functional Expenses—and register with the Attorney General.
In order to complete the Part IX Statement of Functional Expenses, organizations must already have a reasonable method of allocating their expenses between program, management, and fundraising. In addition, organizations must maintain documentation that supports the information contained in their returns. Accordingly, an organization documents compliance with this legislation the same way it documents compliance with existing 990 requirements.
Even before and apart from this legislation, the Charitable Activities Section of DOJ has recommended that organizations be cognizant that the 990 is a public document. The public and the media often look to the 990's Statement of Functional Expenses for an understanding of how the organization is utilizing the funding it receives. An organization consistently reporting that it spends less than 30% on program services should be prepared to explain why that is the case and may want to incorporate that explanation into Schedule O.
Will nonprofits with budgets under $200,000 now have to keep records that document functional versus other expenses?
No. One goal of this legislation was to avoid imposing any additional obligations on nonprofits beyond their current reporting requirements. Small nonprofits—990N and 990EZ filers—are not required to complete the full 990 and therefore are not affected by this legislation.
What general steps can organizations take to avoid falling below the 30% mark?
It is highly unlikely that nonprofits filing the full IRS Form 990 will fall below the 30% program expenditure threshold as long as such organizations make some effort to reasonably allocate expenses. Many types of expenses can be properly allocated to charitable programs as opposed to management and administration.
Example 1: An organization with a small paid administrative staff, unpaid Board members, and program volunteers that rents a facility and uses part of that facility to provide program services should allocate a portion of the rent to program services. Similarly, if any of the paid staff's time is spent engaged in program services, then a portion of that person's salary can be allocated to program services.
Example 2: The salary of a single staff person that performs only management functions for a nonprofit that has annual expenditures in the vicinity of $200,000 would have to be fairly high (i.e. around 70% of its expenditures or $140,000) to be impacted by this legislation. That seems like an unlikely situation.
Organizations that have reviewed the 990 Part IX Statement of Functional Expenses and still believe they will be unfairly impacted by the legislation because of exceptional circumstances are encouraged to contact the Charitable Activities Section for assistance: firstname.lastname@example.org.
How will organizations and the public be informed of their disqualified status?
The Charitable Activities Section is in the process of developing additional guidelines related to this new law, but the law requires that the charity be given advance notice of the disqualification determination. The charity will then have the ability to challenge that determination under the framework provided by the Oregon Administrative Procedures Act. Assuming the determination is upheld, the disqualification order will become effective and remain in effect until the charity demonstrates that its program services expenditures meet the 30% threshold requirement.
The listing of disqualified organizations will be posted on the Department's website. Donors will not be able to claim a tax deduction for contributions made more than 30 days after the charity's disqualified status was posted to the Department's website, unless the donor has a receipt from that charity that did not include information about the charity's disqualified status.