“Covid-19 is poised to become an extinction-level event for America’s nonprofits.”
That was the alarm sounded in the earliest days of the pandemic from many quarters. The only hope for avoiding this devastating result would be massive and ongoing aid from the government and from philanthropy. We’ve written in many posts since March 2020 about the mixed record on that front.
In the first surveys, there were results showing that about “a third of nonprofits expect to close within a year.” In reports continuing through the summer of 2020, that same estimate was mentioned; namely, that “one-third of organizations may not survive” the pandemic and recession.
Compare, though, a somewhat less dooms-day viewpoint, though, see About Those Never-ending Projections of Nonprofit Failure (August 4, 2020) Ruth McCambridge, The Nonprofit Quarterly (NPQ). In the winter months well before the pandemic slammed into America in mid-March 2020, NPQ had decided to do a “retrospective roundup” on “what the effects of the last recession [2008-09] actually were on nonprofits.” The purpose was either to confirm or dispel some of the urban myths about what was then considered the most catastrophic outside force in many decades to have endangered the nonprofit community.
That research and analysis was scheduled to be the focus of NPQ’s spring quarterly 2020 issue and were published in mid-March 2020 just when – for instance – California went into lockdown (March 19, 2020). See, e.g., On COVID-19, the Recession, and Nonprofits: A Special Series (March 17, 2020) The Editors, NPQ; Deconstructing the (Not-So-Great) Nonprofit Recession (March 18, 2020) Jon Pratt & Kari Aanestad, NPQ; Nonprofits in Recession: Winners and Losers (March 19, 2020) Ruth McCambridge & Nathan Dietz, NPQ; “Four Futures” of the Great Recession Revisited: Nonprofits’ Hopes, Fears, and What Really Happened (March 24, 2020) Ruth McCambridge & Cassandra Heliczer, NPQ.
Are There Alternatives?
For the rest of 2020, as the COVID-19 pandemic raged on and the all-important federal recovery aid was held up unnecessarily for many months, we heard more and more about organizations “shutting down,” “going out of existence” or “dissolving.”
It is widely believed there has been and will continue to be, at least through the first half of 2021, a “significant “‘contraction” of the nonprofit sector.”
Of course, this is not a one-size-fits-all matter. For many categories of organizations, there has been a sharp uptick in demand for services and at least enough band-aid funding to keep them afloat. For other groups – the arts sector, for instance – the prognosis is grim.
So what are individual nonprofits (particularly in the large segment of the nonprofit world that has been most catastrophically affected) to do?
Are these organizations facing a simple and stark binary choice? Must a nonprofit: either (1) limp along – intact but battered – until America emerges on the other side of the pandemic; or (2) close up shop for good right now?
No. It’s not a one-or-the-other, black and white, choice.
And now is not the time in any event to make unalterable, no-turning-back decisions. We’re almost a full year into the pandemic, but there are still too many uncertainties. The FDA emergency-use approvals of two vaccines so far (and others coming soon) are game-changers, of course, but many variables remain including vaccine hesitancy and disease mutations. And certainly the level of funding from the new Congress and new Administration will make a huge impact on how this all plays out sector-wide and for individual nonprofits.
The “Snooze” Alternative
For now, we’re not discussing the formal requirements and procedures at the state and federal level for ending an organization’s legal existence or tax exempt status.
It’s a “…difficult and emotional process” governed primarily by state law, but with federal procedures as well. The actual “winding down” of the organization “takes time, and … is likely to continue for several months after operations have ceased.” And some of the board members – “at least the minimum number … required by the bylaws” will have to “remain in place to help with the dissolution process. For a useful summary and overview, the National Council of Nonprofits’ Dissolving a Nonprofit Organization.
In Our Sputtering Engine Of Impact: Your Nonprofit Must Focus On Mere Survival (July 29, 2020), Forbes, William F. Meehan III notes: “In usual times, nonprofits don’t die, they linger.” But, he adds: “These are very unusual times.”
So let’s not talk about “dissolving” or even “lingering.” Let’s talk about “suspending temporarily” or “snoozing.”
Bear in mind that, particularly during the first lockdown, much of the economy was ordered by the government to suspend temporarily for emergency health reasons. The shutdowns were mandatory. Even the Internal Revenue Service largely shut down from March 2020 through at least June 30, 2020. And then there were subsequent lockdowns or orders to operate at reduced levels only.
Early hard data shows that the pandemic’s impact was significant almost right away. See Nearly a Third of Nonprofits Have Cut Staff or Suspended Operations (May 9, 2020) philanthropynewsdigest.org. There are at least 1.5 million tax-exempt organizations in the U.S.; almost ⅔ of those are 501(c)(3)s. That’s a lot of nonprofits in the same boat or – using an analogy from our last post – on a flooding submarine in the open ocean.
Early in the pandemic, Don Kramer, Esq., whose Nonprofit Issues newsletter each week fields and answers nuts-and-bolts topics tackled this question: “If we suspend operations, do we file a special form with IRS?” His answer: “No. The IRS has no special reporting requirements for organizations that temporarily suspend their operations.” Indeed, if there were, then – based on the statistics we’ve cited – the IRS mailroom would have been hopelessly overwhelmed by the avalanche of “suspended operations” notices the moment it reopened last July 1st.
Attorney Kramer points out, of course, that the annual information return, Form 990, has a question 3 in Section III that asks “about whether the organization ceased conducting or made any significant changes in how it conducts any program services.” (It doesn’t specifically ask about “suspension” of services.) The due date for the calendar year 2020 is May 15, 2021.
All organizations should continue to make all required federal and state filings. The directors should continue to hold (virtual) meetings in which there are at least scenario-planning exercises or other contingency discussions and planning.
Next up, in Part Two, we’ll move on to ideas and examples of how some nonprofits around the nation are creatively reimagining their missions, operations, and formal structures including – in some cases – exploring innovative collaborations, formal and informal, for the upcoming months and beyond.
— Linda J. Rosenthal, J.D., FPLG Information & Research Director
The post Nonprofits in Crisis: Alternatives to Closing (Part One) appeared first on For Purpose Law Group.