The ReUse People reduces the solid waste stream and changes the way the built environment is renewed by salvaging building materials and distributing them for reuse.
Important Lessons Learned from IRS Audit
In 2008, the Internal Revenue Service recognized "Deconstruction" as a discrete program. This allowed its offices to begin auditing nonprofit organizations that accept tax-deductible donations of materials salvaged from deconstruction operations. The ReUse People is one of the most prominent organizations in the industry, so it was no surprise when TRP received an audit letter in January 2009.
I experienced several stressful days before the audit commenced, but soon realized that the audit would either show us what we were doing wrong, or validate the donation process that we have carefully crafted over the years.
The audit took about a year to complete. It covered our nonprofit status (with a focus on IRS forms 1023 and 8283), the tax deductible donations provided to donors, inventory procedures, appraiser relationships, the activities of TRP's own deconstruction crews and those of TRP-certified deconstruction contractors, and a thorough review of our client and donor files.
The auditor also reviewed our general business practices, including reporting of income and expenses, payroll expenses and employee reimbursements, inventory control and tax returns.
I'd been through audits of for-profit companies, both public and private, but never a nonprofit. Since many of our e-letter subscribers are nonprofit organizations, or donors to nonprofits, I'll describe what we experienced and what we learned. Disclaimer: I am not an attorney, CPA or professional tax preparer, so this is NOT tax advice.
The IRS auditor began by explaining in detail what the audit would consist of, what documents he would ask for, and the time period to be covered. He also explained our rights. He spent the next three hours reading TRP's Form 1023, all board minutes from the founding of the corporation to the present, articles of incorporation and by laws. Form 1023 was critical to our obtaining nonprofit status. In it we described TRP's purpose (mission), and how we expected to achieve it, in excruciating detail.
In the afternoon he sampled every document for the month of August, 2007, that related to accounts payable and receivable, bank statements and checks, payroll records, project and donation files, expense reports and contracts.
On subsequent days he questioned me on our donation procedures, including which appraisers were used to determine fair market value of donated materials, how appraisers were selected by the donor, and the nature of our relationship with TRP-certified deconstruction contractors. He wanted to know when donated materials were inventoried and by whom, and what happened to the materials once they were removed from the project site. We were also asked for a list of all donors and the name and contact information of the appraiser in each case.
Besides ensuring that we were operating within the limits of the law and our stated mission, the audit sought to discover and collect any additional taxes that might be due. Practices that can result in additional taxes include inflating the value of donated materials, giving donation receipts while failing to use the donated materials in direct pursuit of the organization's mission, failing to report unrelated income, lack of withholding or reporting employee compensation, or reimbursement of improper expenses.
When all was said and done, the audit validated TRP procedures and helped us to strengthen our position, particularly in contrast to appraisers and contractors who do not operate in the best interests of donors.
I learned several important things during the audit:
- Not only are our procedures correct, they may be used as a benchmark in the audits of other organizations.
- The recipient nonprofit must conduct and produce the inventory of donated materials. Inventories cannot be conducted by appraisers, homeowners or consultants.
- Only the nonprofit may determine which materials can and cannot be donated.
- Only the donor may select the nonprofit to receive the donation.
- To avoid recapture, or a reduction in the donation value, donations should be made only to nonprofit organizations that use the donation in direct pursuit of their mission. When materials are donated to organizations that sell the materials to support their mission, the donee must file IRS Form 8282, stating the selling price of materials, and the donor may have their donation reduced to that value.
As stated in our Form 1023, the purpose of TRP is to salvage reusable building materials and provide them for reuse. Therefore donors can be assured that their donation will not be reduced, since TRP uses the materials to satisfy its mission.
2011 Reuse Contest
If you manage a California store that sells reusable building materials and would like to reward and incentivize your customers (while having fun), be sure to join our statewide Reuse Contest. The winner from your store will automatically be entered in the statewide competition. There, a jury will select first, second and third-place winners who will receive valuable (new, not used) building products and be featured at green-building shows around the state. Contact Mike Yurish and see our website flyer for information and contest details.