NFP Tax Alert: The New York Nonprofit Revitalization Act of 2013

For the first time in more than 40 years, the laws governing not-for-profit organizations in New York state have been overhauled and modernized. On Dec. 18, 2013, Gov. Andrew M. Cuomo signed into law the New York Nonprofit Revitalization Act of 2013 (the Act) which attempts the following:
  • Update and modernize reporting requirements for charities registered under Article 7-A
  • Simplify and improve the efficiency of administrative procedures
  • Embolden public trust in New York charities by strengthening not-for-profit governance and oversight
Provisions of the Act apply to all not-for-profit organizations that are (1) incorporated in the state of New York, (2), operate in the state of New York, or (3) solicit charitable contributions in the state of New York. Most provisions will take effect on July 1, 2014, while others will be rolled out in future years (as noted below).

In 2008, the IRS completed a fundamental transformation of the exempt organization world by modernizing and revising the federal Form 990, Annual Information Return of Organization Exempt from Income Tax. The goal of that transformative project was to make not-for-profits more transparent to the public, to enforce and encourage good governance practices and to streamline and reduce the reporting burdens of tax-exempt organizations. This project has been largely successful and is clearly an impetus for the state of New York to update and revitalize policies and procedures that had long ago become stale. A discussion of the major provisions of the Act is summarized below: 

1. Annual reporting requirements changes

For those organizations that intend to solicit contributions from individuals or agencies in the state of New York, the requirement to register with the attorney general still exists; however, the threshold revenue levels for obtaining an independent CPA audit report will change beginning July 1, 2014.

Gross revenues

Unaudited report

Independent CPA review report

Independent CPA audit report

Current thresholds

$100,000 or less

More than $100,000 but not more than $250,000

More than $250,000

Effective 07/01/2014

$250,000 or less

More than $250,000 but not more than $500,000

More than $500,000

Effective 07/01/2017

$250,000 or less

More than $250,000 but not more than $750,000

More than $750,000

Effective 07/02/2021

$250,000 or less

More than $250,000 but not more than $1 million

More than $1 million

2. Simplification of administrative procedures

a. Elimination of corporation “types”

Ask an executive at a not-for-profit organization what “type” of not-for-profit it is (under the New York State Nonprofit Corporation Law) and few will have any idea of what you are referring to. Under the current law, each not-for-profit formed under the Nonprofit Corporation Law is required to be categorized as a Type A, B, C or D corporation. That is no longer the case. The Act has replaced that confusing construct with a simpler analysis: Is your corporation a charitable organization or a noncharitable organization? A charitable organization is essentially a Section 501(c)(3) public charity that engages in educational, religious, scientific, literary or other cultural purposes; all other not-for-profit corporations formed under the Nonprofit Corporation Law will be deemed to be noncharitable.

Fortunately, an existing organization does not have to amend its governing documents to clarify whether the organization is charitable or noncharitable.

b. Promoting efficiency

The Act embraces the digital era in which we now live and acknowledges that many board activities may be conducted via digital platforms, such as email, Skype and other technological tools. The Act permits the electronic delivery (e.g., email) of notices, consents, waivers, authorizations, proxies, and financial statements, and permits the signature of such via electronic signature. Additional improvements authorized by the Act include the following:
  • Board members may participate in meetings by video conference, Skype or other formats. 
  • Corporation dissolutions, mergers and consolidations can be done through the attorney general rather than through the courts. 
  • Board committee structures are simplified.
  • Filing of articles of incorporation are streamlined and simplified.
3. Enhanced governance procedures, policies and prohibitions

Most large not-for-profits have confronted stricter governance policies and procedures through the federal Form 990; they have already implemented conflict-of-interest and whistleblower policies (among others). Smaller New York not-for-profits that do not meet the requirements for filing a full Form 990 are now required to follow suit and enhance their governance procedures and policies. Chief among these requirements are the following:
  • Audit oversight requirements — Oversight of the not-for-profit’s accounting and financial reporting processes, as well as the audit of its financial statements, must be by a designated audit committee of the board, composed of at least three independent directors. Only independent directors may participate in deliberations or voting by the audit committee relating to financial oversight or audit matters. Independence is generally measured by the receipt of compensation; if an individual (or a family member) is compensated in any capacity (in excess of $10,000), he or she is deemed to be nonindependent. The audit committee of a not-for-profit that has annual gross revenue and support in excess of $1 million will be required to review with the independent auditor the scope of the audit before its commencement and, upon its completion, discuss any material risks and weaknesses in internal controls identified by the auditor. 
  • Mandatory whistleblower policy — The Act requires every not-for-profit with 20 or more employees and annual revenue in excess of $1 million in the prior fiscal year to adopt a whistleblower policy. The whistleblower policy should be designed to protect directors, officers, employees and volunteers whot report potentially improper conduct from retaliation. 
  • Mandatory conflict-of-interest policy — The Act mandates every not-for-profit to adopt a conflict-of-interest policy to ensure that its directors, officers and key employees act in the organization’s best interest. The Act defines what constitutes a conflict of interest as well as the procedures for disclosing, documenting and preventing future transactions. Most importantly, the Act requires (as the IRS recommends via the Form 990) that every officer, director and trustee annually disclose potential conflicts of interest (via an annual questionnaire).
  • Limitation on employees serving as chair — Effective Jan. 1, 2015, no compensated employee may serve as chairman of the board (or equivalent position). 
  • Compensation decisions — The Act requires compensated individuals to be recused from any committee meetings where their own compensation is being set. 
  • Related-party transactions — All related-party transactions must be fair, reasonable and in the not-for-profit’s best interest; all officers, directors and key employees who have a direct or indirect interest in a related-party transaction must disclose such interest to the board. 
Many of the best practices and good governance procedures advocated by the Act have already been instituted by not-for-profits in response to the redesigned Form 990. To the extent that a New York not-for-profit organization has been dilatory in implementing procedures recommended by the IRS (but not legally required), the Act now compels compliance. Not-for-profits will need to review existing internal controls, bylaws, policies and committee procedures to ensure that the changes introduced by the Act are complied with.