Over the next few weeks, we will be addressing issues related to handling of funds through various Cooperative Extension organizations.    

What changed to bring this issue to the forefront?

  • Federal laws changed.  Beginning in 2007, ALL tax exempt entities (not just those with gross income over $25,000) were required to begin filing annual tax forms to the IRS.
  • 4-H National Headquarters decided to cease serving in the role of parent organization for a group tax exemption for 4-H entities across the country.  (July 2010)
  • Kentucky Cooperative Extension Service needs to demonstrate accountability for funds received/raised in the name of CES/CES’s organizations.

As Kentucky Cooperative Extension Service began to look into the implications of these changes for Extension organizations across the state, it was apparent that the new IRS regulations were applicable to all Extension organizations that have income.  Income usually involves a bank account and employer identification number (EIN).  As the situation was assessed, we became aware of the need to put a structure in place that provides financial and program oversight for all Extension funds in the county.   

Guiding Principles for Solution

  • Provide financial accountability and transparency
  • Be accountable yet minimally disruptive
  • Establish a tax exempt basis for UK CES
  • Provide options rather that dictate actions 

Possible Exemption Paths

  • Governmental Exemption—Extension District Boards are governmental subdivisions of the Commonwealth (KRS 164.620).  Extension organizations may derive tax exemption through the Extension District. 
  •  501 (c) (3) Tax Exempt Status—An Extension organization may apply for exempt status.  This status is required for the group to be eligible to apply for some grants or to raise funds through gaming and raffles.

Assumptions

Each of the county’s program areas will:

  • Have a functioning council (4-H, ANR, FCS, horticulture, or fine arts) with elected officers and bylaws OR at a minimum, the county will have an informal group with a written purpose which has a chairperson and treasurer. 
  • Have an active membership that reviews financial documents.  
  • Develop a budget, conduct an annual audit, and complete an annual financial statement. 
  • Have financial records on file at the County Extension Office.  

Options for Handling of Funds Locally

Each Extension entity will need to choose one of the four plans for handling funds described as Option A, Option B, Option C, or Option D. 

All options must provide:

  • Financial accountability
  • Budget transparency
  • Group  oversight
  • Adherence to UK money handling and financial  procedures
  • Electronic recordkeeping for any group with annual income greater than $250

Option A: Governmental Exemption/Multiple Checkbooks

The county program councils and their related sub-groups which choose this option will maintain control and have autonomy over their own funds and maintain an individual bank account with general oversight by the County Program Council and the appropriate county agent.

Each entity will: 

  • Maintain a bank account using own EIN.
  • Prepare an annual budget, annual financial report, and annual audit and maintain files of these according to “Financial Guidelines for Kentucky Cooperative Extension Service County Groups.”  (See sample forms)
  • Follow procedures for money handling, reimbursement and payment of bills as outlined in “Financial Guidelines for Kentucky Cooperative Extension Service County Groups.” (See sample forms)

Each County Program Council will:

  • Maintain their own bank account with their own EIN separate from the entities above.
  • Prepare an annual budget, annual financial report, and annual audit and maintain files of these according to “Financial Guidelines for Kentucky Cooperative Extension Service County Groups” for the council’s own funds.
  • Follow procedures for money handling, reimbursement and payment of bills as outlined in “Financial Guidelines for Kentucky Cooperative Extension Service County Groups.”
  • Request that donor letters and documentation affirming tax exempt status be provided by the local Extension District Board, with wording that is inclusive of the county program council. Those without an Extension District Board may request that the county fiscal court provide these documents.

Option B: Governmental Exemption/One Checkbook per Program Council

All funds related to a program area in the county will be handled centrally by the county program council, with separate accounts established within Quicken, QuickBooks or similar electronic bookkeeping system for each related entity’s (club/group/etc.) funds.  Oversight for adherence to procedures will be the responsibility of the appropriate agent and officers.  

Each Entity will:

  • Maintain control, have autonomy over, and make decisions related to their account.
  • Develop a budget for their account and provide copies to the program council and the appropriate county Extension agent.
  • Submit appropriate documentation including vouchers, receipts, and deposit information to the county program council treasurer following money handling procedures outlined in “Financial Guidelines for Kentucky Cooperative Extension Service County Groups.” (See sample forms)

The County Program Council will:

  • Maintain a bank account with own EIN.
  • Prepare an annual budget, annual financial report, and annual audit and maintain files of these according to “Financial Guidelines for Kentucky Cooperative Extension Service County Groups.”
  • Follow procedures for money handling, reimbursement and payment of bills as outlined in “Financial Guidelines for Kentucky Cooperative Extension Service County Groups.”
  • Request that donor letters and documentation affirming tax exempt status be provided by the local Extension District Board, with wording that is inclusive of the county program council. Those without an Extension District Board may request that the county fiscal court provide these documents.

Option C: Governmental Exemption/District Board Checkbook

All program council funds and funds of related sub-groups will be handled centrally by the county Extension District Board with a separate account established in a Quicken, QuickBooks or similar electronic bookkeeping system for each county program council and sub-group handled by the council. Oversight for adherence to procedures will be the responsibility of the appropriate agent.    

Each county program council will:

  • Have control of, have autonomy over, and make decisions related to the account of the program council’s funds.
  • Will not have a bank account or EIN.
  • Develop a budget for their account and provide copies to the Extension District Board and the appropriate county Extension agent. 
  • Submit appropriate documentation including vouchers, receipts, and deposit information to the Extension district treasurer.  (See sample forms)
  • Follow procedures for money handling, reimbursement and payment of bills for expenses as outlined in the “County Extension District Guidelines” section of the “County Extension Office Procedure Manual.” 

The Extension District Board will:

  • Generate and provide financial reports to the County Program Council for oversight and informational purposes at least quarterly or upon written request.
  • Audit the County Program Council accounts as a part of the County Extension Board audit requirements.
  • Provide donor letters and documentation affirming tax exempt status with wording that is inclusive of the County Program Council.

Option D: Form 501(c) Organizations

County Program Councils and/or related entities may apply for tax exempt status as a 501(c)(3) organization.  The councils/entities are a program of the Land Grant institution and will function through a Memorandum of Understanding with Kentucky Cooperative Extension Service. 

There are at least two situations where it may be desirable for County Program Councils/entities to pursue 501(c)(3) tax exempt status:

  • If the group conducts raffles, lotteries, or other forms of gaming as fund-raising activities.**
  • If the group depends on grant funds that are awarded only to 501(c)(3) entities.** 

To help with decision making, look at pages 1-2 of the IRS Form 1023 Instructions at:http://www.irs.gov/pub/irs-pdf/i1023.pdf and look at gaming information for Kentucky on the internet.

Once an entity decides to pursue 501(c)(3) tax status, an IRS Form 1023 Application for Recognition of Exemption must be completed and submitted to the IRS.

The 501(c)(3) exempt entity will:

  • Maintain own bank account and EIN.
  • Sign a Memorandum of Understanding with the Director of Cooperative Extension Service.
  • Prepare an annual budget, annual financial report, and annual audit and maintain files of these according to “Financial Guidelines for Kentucky Cooperative Extension Service County Groups.”
  • Follow procedures for money handling, reimbursement and payment of bills as outlined in “Financial Guidelines for Kentucky Cooperative Extension Service County Groups.”
  • Submit the appropriate IRS 990-series tax form according to IRS requirements annually.  Failure to file may result in penalties, fines or revocation of tax exempt status.  
  • File copies of the IRS 990 series form according to the “Financial Guidelines for Kentucky Cooperative Extension Service County Groups.”
  • File copies of the IRS letter of determination of 501(c)(3) status with the county program council, county Extension council, and Extension District Board and send a copy to the Director of  Extension’s Office.
  • For financial accountability, see “Financial Guidelines for Kentucky Cooperative Extension Service County Groups.”
  • Provide letters to donors acknowledging contributions and/or provide documentation affirming tax exempt status as requested.

Note:  Building Foundations:  Some counties have a 501(c)(25) organization formed for the specific purpose of Extension building construction.  Although a 501(c)(3) is not the same as a 501(c)(25), when the building foundation is reported through the online registration form, register it as Option D.

** 4-H entities: If a 4-H entity wants to pursue grants that require 501(c)(3) status, the Kentucky 4-H Foundation is willing to accept grants on behalf of a county 4-H entity, making individual pursuit of 501(c)(3) status unnecessary.  There will be a fee, currently 5%, for this service by the foundation. If a 4-H entity plans to handle grant funds through the foundation, choose Options A, B, or C. 

** Extension Homemaker organizations: Homemaker Clubs may choose from Option A, B, C, or D.  If Option D is chosen, the clubs may continue operating as non-profit organizations by pursuing 501(c)(3) status and follow the steps outlined in documents distributed by KEHA in April 2010.  Extension Homemaker organizations (clubs, counties or areas) that conduct numerous raffles or any other type of charitable gaming or receive grants awarded only to 501(c)(3) entities will need to choose Option D. To be sure of which option is adequate for its normal activities, each entity must review the Kentucky Department of Charitable Gaming Guidelines.

 

Additional 4-H Information: 

About multi-county and district 4-H entities:

4-H entities at multi-county and district levels may:

  • Link with the Kentucky 4-H Foundation
  • Link with an appropriate County 4-H Council for government exemption and follow their guidelines.
  • Form a 501(c)(3) and follow “Financial Guidelines for Kentucky Cooperative Extension Service County Groups.”

About state-wide 4-H entities:

  • The funds of state level 4-H entities will be handled through the Kentucky 4-H Foundation.

4-H Decisions Needed:

  • By March 15, 2011, each 4-H club/council or entity with and EIN/Checkbook will declare the option chosen. (Plan A, B, C, or D)
  • State 4-H Office will be surveying each county to verify which plan is chosen. 

February 2011