Nonprofit developments during the COVID-19 pandemic

It goes without saying that the current COVID-19 pandemic has impacted nonprofits, and the communities they serve, in countless and fundamental ways. Although it's easy to think of the many hardships nonprofits are facing as a result of the current situation, I've also heard so many encouraging stories of the inventive, inspired, tireless efforts of nonprofits to ensure that the positive impact they have continues (or in some cases, expands) during this most challenging time. I've never been more proud to support the sector that does so much to support all of us. While it's not possible to cover all of the legal issues that nonprofits are currently facing in this one column, I'm focusing this month on a few of the key issues I'm seeing.

Providing Assistance to Individuals

Many nonprofits that have not historically provided assistance directly to individuals are now wondering if they can do so. The short answer is yes, 501(c)(3) public charities generally can provide in-kind or financial assistance directly to individuals, subject to certain requirements. First of all, any such giving must be consistent with the stated exempt purposes of the organization. It must also be provided to members of a sufficiently large charitable class. IRS Publication 3833 addresses providing charitable aid to individuals who are disaster victims or facing emergency hardship situations and states "[o]rganizations may provide assistance in the form of funds, services, or goods to ensure that victims have the basic necessities, such as food, clothing, housing (including repairs), transportation, and medical assistance (including psychological counseling). The type of aid that is appropriate depends on the individual's needs and resources.... For example, immediately following a devastating flood, a family may be in need of food, clothing, and shelter, regardless of their financial resources. However, they may not require long-term assistance if they have adequate financial resources. Individuals who are financially needy or otherwise distressed are appropriate recipients of charity."

A nonprofit providing assistance directly to individuals must also keep detailed records of such assistance, including to demonstrate how it furthers the organization's exempt purposes and that distributions were made to individuals in need. Generally, for distributions other than short-term emergency aid, such documentation should include a description of the type of assistance provided; the costs associated with providing it; the purpose for which it was given; the objective criteria used to establish eligibility; how recipients were selected; the name, address, and amount distributed to each recipient; any relationship between a recipient and certain insiders of the organization; and the composition of the selection committee approving the distributions. A 501(c)(3) will also need to report any assistance provided to individuals on its relevant Form 990 series return, including on Schedule I, and would be wise to confer with its return preparer or CPA in advance of beginning such activities.

Continuity of Governance Considerations

With social distancing and stay at home orders, many nonprofits have been forced to cancel in-person events, including board of directors meetings and membership meetings. As a result, I have seen a lot of questions about how nonprofit boards can continue to meet and take action during this period. While an organization's bylaws should set forth appropriate procedures for board meetings, the California Corporations Code also includes specific requirements for California nonprofits formed as corporations. Because there is so much confusion on this issue, it is worth noting at the outset that boards of California nonprofits typically may not vote by email.

Rather, there are two ways in which a board may generally take action: (1) at a duly held board meeting at which a quorum is present by the approval of the required threshold of directors or (2) by the unanimous written consent of each of the directors (subject to certain limited exclusions). It may be possible for a director to transmit their consent for purposes of an action by unanimous written consent by email, but the action is not considered approved by the board until the last required director provides their written consent to the action, making this different than a vote by email (see Cal. Corp. Code Section 5211(b) with respect to nonprofit public benefit corporations).

The Corporations Code also provides that a board meeting may be held partially or entirely by telephone, video screen communication, or other means of electronic transmission, subject to certain requirements. Cal. Corp. Code Section 5211(a)(6) states that participation in a board meeting by telephone or electronic video screen communication constitutes presence in person so long as all directors participating in the meeting are able to hear one another. Participation in a meeting by electronic transmission other than telephone or video constitutes presence in person at the meeting as long as each director participating can communicate with all of the other directors concurrently and each director has available a means of participating in all matters before the board, including the ability to propose, or state an objection to, a specific action to be taken by the organization. However, because the terms "electronic transmission by the corporation" and "electronic transmission to the corporation" are defined in the Corporations Code, a nonprofit corporation holding a board meeting by electronic means other than telephone or video screen must also comply with the requirements of Sections 20 and 21, respectively. That includes the requirement under Section 20 that the corporation have on file an unrevoked consent to the use of electronic transmission for organizational communications from each director in advance.

The Corporations Code contains additional specific requirements with respect to member meetings not held in person, as well as limited provisions regarding board governance during an emergency specifically. Given the somewhat nuanced requirements, nonprofits should consult their Bylaws and the relevant provisions of the California Corporations Code before noticing or holding a board or member meeting virtually, even under the current circumstances.

Changes to Charitable Giving

Much of the discussion related to the Coronavirus Aid, Relief, and Economic Security (CARES) Act has centered around the small business loans made available through the Paycheck Protection Program, which are forgivable under certain circumstances, and many nonprofits have successfully been able to access such funds. However, the CARES Act also put into effect several changes intended to increase charitable giving. First, the act created a new above-the-line deduction for the year 2020 only for charitable cash contributions of up to $300 made to certain qualifying 501(c)(3)s, excluding supporting organizations and donor-advised funds. With the recent Tax Cuts and Jobs Act, and the increase in the standard deduction, we have seen a significant drop in the number of taxpayers that are able to itemize their deductions, meaning that there's currently no tax benefit to making charitable contributions for the vast majority of taxpayers that claim the standard deduction. The new above-the-line deduction means that every non-itemizing taxpayer will be able to claim up to a $300 charitable contribution deduction regardless.

Second, the CARES Act also suspended the caps on the charitable giving deduction for 2020. For gifts made to public charities, the annual deduction is usually capped at 50% of the taxpayer's adjusted gross income (AGI) for gifts of any kind, or 60% for cash gifts. However, for one year only, the 60% cap will be lifted for itemizers, who will be able to deduct up to 100% of their AGI for cash contributions made in 2020. Similarly, the cap on corporate charitable giving deductions has been increased from 10% to 25% of the corporation's taxable income for this year. While these measures have received some criticism for not doing enough to incentivize meaningful increases in charitable giving, hopefully struggling nonprofits will see some bump as a result. 