Checklist · Nonprofit

Serving on a Board and Keeping a Tax Exemption: A Practical Checklist

26 U.S.C. § 6104

Type
Checklist
Jurisdiction
National
Date
2025-12-21
Topic
Nonprofit

This checklist covers board service and the annual compliance cycle for a tax-exempt organization. It begins with what a new director should obtain and ask before the first meeting. It then covers the three fiduciary duties in operational terms and the conflict procedures that make insider transactions defensible. Separate sections cover compensation approval, the annual return review, restricted funds, and state registrations. Later sections cover private foundation rules, unrelated business activity, and the warning signs that call for immediate action. The final sections cover transactions, dissolution, and the annual calendar.

Serving on a Board and Keeping a Tax Exemption: A Practical Checklist

Nonprofit > Governance, Board Duties, and Tax-Exempt Compliance | Published 21 December 2025 - Updated 25 February 2026 | UpLaw - uplaw.us

Before your first meeting

☐ Obtain the articles of incorporation and bylaws, and read the purposes clause and the dissolution clause. ☐ Obtain the determination letter and confirm the classification — public charity or private foundation. ☐ Obtain the last three annual returns, which are public under 26 U.S.C. § 6104, and read the governance and compensation sections. ☐ Obtain the audited financial statements, or year-end statements if there is no audit. ☐ Obtain the conflict-of-interest policy and the most recent disclosures. ☐ Obtain the current budget with year-to-date actuals. ☐ Obtain the directors and officers insurance policy — the policy, not the certificate — and read the exclusions. ☐ Obtain the schedule of restricted funds with their terms. ☐ Ask three questions at the first meeting: how many months of cash does the organization have; how much of net assets is restricted and by whom; and when was the executive last evaluated in writing.

The duty of care, operationally

☐ Attend and prepare. Read the materials before the meeting. ☐ Ask questions and have them minuted. The minutes are the evidence that the board deliberated. ☐ Insist on financial reporting a non-accountant can use: statement of activities, balance sheet, cash and runway, budget comparison, and a restricted funds note. ☐ Review the audit or review, and meet the accountant without management present. ☐ Monitor rather than manage, and evaluate the executive annually in writing. ☐ Rely on information only from sources you reasonably believe reliable, and ask when the basis is unclear. ☐ Do not delegate without oversight, and confirm that delegated tasks were actually performed. ☐ ⚠️ Non-attendance, non-reading, and rubber-stamping are the recurring forms of breach.

The duty of loyalty and conflict procedures

☐ Complete an annual written conflict disclosure covering financial interests, family relationships, and competing organizational loyalties. ☐ Disclose any conflict arising during the year, promptly and in writing. ☐ Recuse from discussion and vote, remaining available to answer questions and then leaving the room. ☐ For every insider transaction, run the three-part process: approval by a body without conflicts, reliance on comparability data, and contemporaneous documentation. ☐ Record the alternatives considered and the reasoning, not merely the resolution. ☐ Use the policy every time, including for small transactions, because the practice is what makes the policy credible. ☐ Know the exposure: 26 U.S.C. § 4958 taxes the insider on an excess benefit and taxes organization managers who knowingly approved it. ☐ For a private foundation, understand that self-dealing under 26 U.S.C. § 4941 prohibits most insider transactions regardless of fairness.

The duty of obedience

☐ Read the purposes clause and confirm that programs fall within it. ☐ Maintain a restricted funds schedule identifying each restriction, its source, and its terms. ☐ Account for restricted funds separately so commingling is operationally impossible. ☐ Distinguish donor-restricted funds from board-designated funds, which may be redirected by board action. ☐ Never spend restricted funds for operations. Seek donor consent, use board-designated funds, or borrow against unrestricted assets. ☐ Document any decision about a restriction, including a decision to seek donor consent or court modification. ☐ Confirm compliance with the state's prudent management of institutional funds act for endowment spending.

Compensation approval

☐ Constitute an authorized body without conflicts — no executive, no person whose own compensation the executive influences. ☐ Obtain comparability data: surveys for functionally comparable positions at similarly situated organizations by size, budget, geography, and field; a consultant's report; or documented offers. ☐ Value the entire package: salary, bonus, deferred compensation, retirement contributions, severance, housing, vehicles, memberships, companion travel, insurance, loans, and personal use of organizational property. ☐ Document contemporaneously — by the later of the next meeting or sixty days — recording the terms, the data considered, who recused, and the basis for the reasonableness conclusion. ☐ Repeat at least annually and whenever terms change. ☐ Check the excise tax on high remuneration under 26 U.S.C. § 4960, which applies without regard to reasonableness. ☐ Ensure all benefits are reported, because unreported benefits are automatic excess benefits regardless of amount. ☐ Assume the figures will be public on the annual return required by 26 U.S.C. § 6033.

The annual return

☐ Calendar the filing deadline with a named primary and backup owner. ☐ Confirm each year that the return was actually filed, not merely assigned. ☐ ⚠️ Three consecutive years of non-filing revokes exemption automatically — the leading cause of lost exempt status. Penalties appear at 26 U.S.C. § 6652. ☐ Review the return in draft at a board meeting, and minute the review. ☐ Read the governance section and confirm that the policies reported as adopted are actually followed. ☐ Read the compensation section and confirm it matches the approved terms. ☐ Read the related-party transactions section and confirm every disclosed transaction went through the conflict process. ☐ Check the public support computation and whether classification is at risk. ☐ Confirm the program accomplishments section describes what the organization actually did. ☐ Note that declaratory relief on status is available under 26 U.S.C. § 7428 if classification is disputed.

Classification and foundation rules

☐ Monitor the public support test under 26 U.S.C. § 509 annually. ☐ Analyze any unusually large gift before accepting it, because one gift can shift classification. ☐ If a private foundation, calendar the excise tax obligations: net investment income at 26 U.S.C. § 4940; self-dealing at 26 U.S.C. § 4941; minimum distributions at 26 U.S.C. § 4942; excess business holdings at 26 U.S.C. § 4943; jeopardizing investments at 26 U.S.C. § 4944; and taxable expenditures at 26 U.S.C. § 4945. Regulations at 26 C.F.R. Part 53. ☐ Exercise expenditure responsibility for grants to non-public charities. ☐ For donor advised funds, observe 26 U.S.C. § 4966 and 26 U.S.C. § 4967. ☐ Check termination and notice provisions at 26 U.S.C. § 507 and 26 U.S.C. § 508 if status will change.

Unrelated business activity

☐ Identify every revenue stream and test it against 26 U.S.C. § 513: regularly carried on, a trade or business, and not substantially related to exempt purposes. ☐ Check the exceptions: volunteer labor, donated goods, convenience of members, and qualified sponsorship payments. ☐ Compute the tax under 26 U.S.C. § 511 with the modifications at 26 U.S.C. § 512, separately by activity. ☐ Watch debt-financed income under 26 U.S.C. § 514, which converts otherwise excluded investment income. ☐ Distinguish sponsorship from advertising, which turns on qualitative or comparative claims about the sponsor's products. ☐ ⚠️ Monitor the exemption risk, not merely the tax. Substantial unrelated activity can threaten exempt status under 26 U.S.C. § 501, and a taxable subsidiary should be considered as the activity grows.

State obligations

☐ Maintain corporate good standing: registered agent, annual report, and address updates. ☐ Register for charitable solicitation in every state where the organization solicits, and renew on schedule. An organization with a website and a donate button may solicit in many states. ☐ Use compliant professional fundraiser contracts with the required terms and filings. ☐ Include required solicitation disclosure statements on written appeals. ☐ Apply separately for property and sales tax exemptions, which are frequently narrower than the federal exemption. ☐ Give attorney general notice for mergers, substantial asset transfers, conversions, and dissolution. ☐ Meet employment obligations identical to any employer, including workers' compensation. ☐ ⚠️ Pay payroll taxes first, always. Personal liability attaches to responsible persons and survives the organization. ☐ Note the constitutional limits on fundraising regulation — Village of Schaumburg v. Citizens for a Better Environment, Riley v. National Federation of the Blind of North Carolina, Inc., and Illinois ex rel. Madigan v. Telemarketing Associates, Inc. — and the donor privacy interest in National Association for the Advancement of Colored People v. Alabama.

Advocacy limits

☐ Track lobbying and consider the expenditure-based election, which replaces a vague substantiality standard with a measurable limit. ☐ Prohibit political campaign intervention absolutely, and adopt a written policy covering candidate appearances, voter guides, and staff activity. ☐ Train staff and volunteers on the line between issue advocacy and campaign intervention, which is genuinely difficult near an election. ☐ Note the doctrinal background — Regan v. Taxation With Representation of Washington upheld the lobbying limitation, and Bob Jones University v. United States confirms that practices violating fundamental public policy defeat exemption. ☐ For religious organizations, review the distinctive rules and the treatment in Walz v. Tax Commission of the City of New York and Hernandez v. Commissioner.

Warning signs requiring immediate action

☐ The return has not been filed for one or more years. ☐ Compensation was increased without documented comparability data or by a body including an interested person. ☐ An insider transaction occurred without the conflict process. ☐ Restricted funds were used for operations. ☐ Payroll taxes are behind. ☐ The conflict policy has never been used and no disclosures are on file. ☐ No written executive evaluation in several years. ☐ Programs have drifted beyond the purposes in the articles. ☐ Solicitation registrations have lapsed in states where the organization actively fundraises. ☐ The board learned of a significant problem from outside the organization. ☐ An unusually large gift arrived without a classification analysis. ☐ Unrelated revenue has grown substantially without a structuring review.

📌 Each of these is administrative to remediate and expensive to leave. Self-correction with documentation is treated far better than later discovery.

Transactions and dissolution

☐ Give attorney general notice for mergers, asset transfers, and conversions. ☐ Preserve charitable value in any conversion, typically through a conversion foundation. ☐ Structure joint ventures with control safeguards so participation furthers exempt purposes. ☐ Document fiscal sponsorship with clear fund ownership, variance power, and reporting. ☐ On dissolution, follow the dissolution clause in the articles, obtain required approvals, distribute restricted funds consistent with their restrictions, file the final return, arrange record custody, and meet employee obligations.

The annual calendar

Month Item Owner
[ ] Federal return prepared, reviewed by the board, and filed [ ]
[ ] State annual report filed [ ]
[ ] Charitable solicitation registrations renewed, all states [ ]
[ ] Conflict-of-interest disclosures collected and reviewed [ ]
[ ] Executive compensation reviewed using the three-part process [ ]
[ ] Written executive evaluation completed [ ]
[ ] Audit or review completed; accountant met without management [ ]
[ ] Restricted funds schedule updated and reconciled [ ]
[ ] Public support computation reviewed [ ]
[ ] Unrelated business activity reviewed [ ]
[ ] Insurance renewed and coverage reviewed [ ]
[ ] Policies reviewed: conflict, whistleblower, retention, reimbursement, gift acceptance, investment [ ]
[ ] Budget approved for the coming year [ ]
[ ] Board recruitment and succession review [ ]
[ ] Cybersecurity and donor data review [ ]

⚠️ Assign a named owner and a backup to every row. The failures in this sector are almost never conceptual; they are rows in this table that nobody owned.

Working notes

On minutes. They are the single most important governance artifact. Minutes that record only resolutions provide no evidence that the board deliberated, which forfeits both the business judgment rule's practical protection and the presumption of reasonableness for compensation. Record what information the board considered, what questions were asked, who recused, and the basis for the decision — not verbatim discussion, but enough that a reader two years later understands the board actually engaged.

On the conflict policy. Its value lies entirely in use. A policy adopted and never applied is affirmatively harmful: the annual return reports that the organization has one, and the absence of disclosures and recusals in the record then contradicts the disclosure.

On restricted funds. The pressure to use them arrives exactly when the organization can least afford the consequences. Make the decision explicitly, with advice, and record it. A documented decision to seek donor consent is governance; an undocumented transfer is a breach that will appear on the return and in the audit.

On payroll taxes. No exempt status, indemnification provision, or insurance policy protects a responsible person from liability for withheld taxes that were not paid over. In a cash crisis, payroll taxes are paid before anything else, including payroll itself.

On the executive relationship. Boards are frequently recruited by the executive they are meant to oversee, which makes the annual written evaluation uncomfortable and therefore skipped. It is the most consistently neglected board function and the one most often identified in governance failures.

On resignation. If the board will not obtain financial reporting, evaluate the executive, follow its conflict policy, or honor restrictions, a director's remaining obligations are to object in writing, have the objection minuted, and — if nothing changes — resign with a letter stating the reason. That letter is both a fiduciary act and the only protection remaining at that point.

Committee structure

☐ Executive committee — authority defined narrowly in the bylaws, with a requirement to report all actions to the full board at the next meeting. An executive committee that governs while the board ratifies is a governance failure with a formal appearance. ☐ Audit or finance committee — reviews the financial statements and the audit, meets the accountant without management present, oversees internal controls, and reviews the annual return before filing. ☐ Governance or nominating committee — recruitment, orientation, board evaluation, succession, and policy review. ☐ Compensation committee — constituted without conflicts, obtains comparability data, and documents the determination contemporaneously. ☐ Investment committee — adopts and monitors an investment policy statement, oversees endowment spending under the state prudent management act, and reviews fees. ☐ Program committees — evaluate outcomes rather than administer programs. ☐ Charter every committee in writing, stating its authority, whether it may act for the board, and its reporting obligation. ☐ Minute committee meetings on the same standard as board meetings, because committee decisions carry the same exposure.

Onboarding a new director

☐ Governing documents, determination letter, and organizational chart ☐ The last three annual returns and the most recent financial statements ☐ Current budget and year-to-date financials ☐ Strategic plan and program descriptions ☐ All adopted policies, with the conflict disclosure form for immediate completion ☐ Board and committee rosters with terms and committee charters ☐ Minutes for the preceding year ☐ Restricted funds schedule ☐ Insurance summary and the directors and officers policy itself ☐ A written statement of fiduciary duties and personal exposure, including the limits of volunteer protection under 42 U.S.C. § 14503 ☐ A meeting with the executive and with the board chair ☐ Confirmation of the meeting calendar and expectations for attendance and preparation

📌 A director who receives that packet and completes the disclosure in the first month is far more likely to govern well than one who is welcomed with a mission statement and a seat.

Six things to confirm every year

☐ The return was filed — confirmed, not assigned. ☐ Conflict disclosures were collected from every director, officer, and key employee. ☐ Compensation was approved by a disinterested body, with comparability data, documented contemporaneously. ☐ Restrictions were honored, with a current schedule reconciled to the accounting. ☐ The executive was evaluated in writing. ☐ The minutes record deliberation, not merely resolutions.

Those six items are the whole program. Organizations that can demonstrate all six rarely encounter regulators; organizations that cannot demonstrate any of them are the ones that appear in enforcement summaries — and almost never because anyone intended wrongdoing.

And if only one of the six can be added this year, add the minutes standard. It costs nothing, it improves every other item by forcing the board to record what it actually considered, and it is the document a regulator, a funder, an auditor, and a court will all read first.

It is also the item a board can adopt without any professional assistance: a template with four headings — information considered, questions raised, recusals, and basis for decision — attached to the agenda and completed by the secretary during the meeting rather than reconstructed afterward.

Boards that adopt it report that meetings improve as well, because a record that must show what was considered creates pressure to consider something.

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