Josh Wagner, Principal
413 Western Drive #15
Santa Cruz, CA 95060-3078
ph 831-423-two-3-two-3
fax 831-401-one-zero-eight-two
joshwagner@aol.com

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    Thursday
    Sep122013

    09.12.2013 How Can I Show Activity if I've Been Inactive?

    How Can My Organization Show Activity
    When It’s Been Inactive?

    I periodically assist California organizations that, after they incorporate, delay several years in both launching their exempt-purpose activities and applying for California state tax exemption.

    The problem is that the Calif. Franchise Tax Board requires that for an organization to be tax-exempt it must be active. (Furthermore, the state imposes a minimum annual corporate tax of $800 unless an organization is exempt.)

    Additionally, if an organization shows zero fiscal activity, Franchise assumes that “no-money-in-or-out” means the organization is inactive.

    So, what can you do if you incorporated several years ago and: 1) you’ve not begun conducting your exempt-purpose activities, and 2) you’ve not opened a corporate bank account and thus have no proof of money-in/money-out?

    I’ll address those questions separately. First . . .

    What kinds of activities can I show if I haven’t begun my “real” activities?

    First of all, every organization requires a Board of Directors, therefore it may take some time for you to recruit Board members and officers.

    Secondly, you formed your organization in order to offer programs that benefit society. But all programs require planning before you can carry them out.

    Additionally, you require funds to conduct your programs, so you must strategize on how you’ll raise funds.

    And you’ll probably want to set up a Website, which takes planning as well.

    You get my drift: There are many activities you can document over the course of several years that are legitimate precursors to conducting your exempt-purpose activities.

    And if you can demonstrate that you engaged in these or similar activities, Franchise will consider you active even though you haven’t opened a bank account or begun your exempt-purpose activities.

    Therefore, if you’re in this situation, as part of your application to the Franchise Tax Board, I suggest providing a simple year-by-year synopsis of activities. Here’s an example:


    Activities 2008 – 2013

    2008

    • Co-founders met on three occasions in order to discuss recruiting additional Board members
    • Co-founders conducted two conference calls to discuss the design and content of their Website

    2009

    • Met with six potential candidates for our Board of Directors
    • Selected three of those candidates, who were then appointed to the Board by the co-founders
    • Continued to develop plans for our Website; held three conference calls with Board members to discuss possible Web designs

    2010

    • Held two conference calls with Board members to discuss plans for raising funds
    • Conducted three conference calls with the Board to discuss strategies and timetables for carrying out our exempt-purpose activities

    2011

    • Conducted four conference calls with the Board to discuss strategies and timetables for carrying out our exempt-purpose activities
    • Continued to develop plans for our Website; discussed various designs in three conference calls with Board members; called four different Web designers to get their input and ideas
    • Met with two fund-raising specialists and one grant-writer

    2012

    • Conducted five conference calls with Board members to discuss strategies and timetables for carrying out our exempt-purpose activities
    • Identified a Web designer whose designs and fee structure fit our preferences and budget
    • Met with two grant-writers

    2013

    • Conducted two conference calls with Board members to discuss strategies and timetables for carrying out our exempt-purpose activities
    • Met with a fund-raising specialist and a grant-writer


    Past similar submissions to the Franchise Tax Board have resulted in their recognizing the tax exemption of an organization that had delayed many years in launching its exempt-purpose activities.


    Now let’s address the second issue I raised, namely . . .

    How can I show income and expenditures if I haven't opened a corporate bank account?

    You’ve already spent plenty of money on behalf of your organization. You just didn’t go through the formality of opening a corporate account, depositing funds in that account, and then writing checks.

    For example, you spent money to incorporate your organization and file your biennial Statement of Information . . . thus: Filing fees.

    You’ve probably used your personal vehicle to drive places on behalf of your organization. That’s called: Mileage reimbursement.

    Have you made any phone calls, sent any letters, purchased any supplies or photocopied anything on behalf of your organization? Probably so, thus: Telephone, Postage, Supplies, Printing . . . all legitimate corporate expenses.

    So this is how your Revenue and Expense Statement might look (don’t be concerned that these numbers are small – with the Franchise Tax Board, size does NOT matter).

    Since you're looking back at small expenditures of several years ago, the most you can hope to do is reconstruct them from memory. (Obviously, if you've kept some receipts, that's more accurate than memory.) However, since we're dealing with such small figures, in my experience not only has this kind of reconstruction worked to secure state tax exemption, but (so far anyway) the Franchise Tax Board has never asked for proof or substantiation.