Last week’s homework: The 501(c)3 type business organization and more

I found a great load of information in only a few minutes of Googling and spent a few hours analyzing it. Research isn’t always about finding important information, but understanding and applying it. Hit the jump to read my current findings on the 501(c)3.

Some people have criticized my project and my goals as being two different paths and having no focus. Those same people apparently aren’t familiar with either industry. It is entirely plausible to have fun and save the world, because a non-profit production company isn’t a new idea at all. One of the companies I found in my current research is Toy Gun Films, founded in 2009.

Amongst their credits, the film En Tus Manos is a short narrative feature that was inspired by true stories about issues surrounding violence in Colombia. This for me is a sign that reaffirms how education and storytelling do not have to be separate from one another, so I could hypothetically write a story inspired by my experience with losing my friend in a church bombing in Pakistan or how I survived a mall bombing in the Philippines, and it would allow me to be creative and share a message–so long as it is not propaganda.

Taken from the current Wikipedia page on 501(c) organizations as of 6 August 2011:

501(c)(3) exemptions apply to corporations, and any community chest, fund, cooperating association or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, to foster national or international amateur sports competition, to promote the arts, or for the prevention of cruelty to children or animals.[7][8]. These bodies are often referred to in shorthand form as “Friends of” organizations[9][10][11][12][13].

Another provision, 26 U.S.C. § 170, provides a deduction, for federal income tax purposes, for some donors who make charitable contributions to most types of 501(c)(3) organizations, among others. Regulations specify which such deductions must be verifiable to be allowed (e.g., receipts for donations over $250). Due to the tax deductions associated with donations, loss of 501(c)(3) status can be highly challenging to a charity’s continued operation, as many foundations and corporate matching programs do not grant funds to a charity without such status, and individual donors often do not donate to such a charity due to the unavailability of the deduction.

Testing for public safety is described under section 509(a)(4) of the code, which makes the organization a public charity and not a private foundation,[14] but contributions to 509(a)(4) organizations are not deductible by the donor for federal income, estate, or gift tax purposes.

The two exempt classifications of 501(c)(3) organizations are as follows:[15]

A public charity, identified by the Internal Revenue Service (IRS) as “not a private foundation,” normally receives a substantial part of its income, directly or indirectly, from the general public or from the government. The public support must be fairly broad, not limited to a few individuals or families. Public charities are defined in the Internal Revenue Code under sections 509(a)(1) through 509(a)(4).

A private foundation, sometimes called a non-operating foundation, receives most of its income from investments and endowments. This income is used to make grants to other organizations, rather than being dispersed directly for charitable activities. Private foundations are defined in the Internal Revenue Code under section 509(a) as 501(c)(3) organizations, which do not qualify as public charities.

Before donating to a 501(c)(3) organization, a donor may wish to review IRS Publication 78, which lists organizations currently exempt under 501(c)(3).[16] Donors may also verify 501(c)(3) organizations on the web-based, searchable IRS list of charitable organizations[17] as well as on lists maintained by the states, typically on states’ Departments of Justice websites. Churches, however, have specific requirements to obtain and maintain tax exempt status; these are outlined in IRS Publication 1828: Tax guide for churches and religious organizations. [18] This guide clearly outlines activities allowed and not allowed by churches under the 501(c)(3) designation. A private, nonprofit organization, GuideStar, also provides reputable and detailed results for web-based searching to verify information on 501(c)(3) organizations.[19].

Consumers may file IRS Form 13909 with documentation to complain about inappropriate or fradulent (i.e., fundraising, political campaigning, lobbying) activities by any 501(c)(3) tax-exempt organization.[20].

Obtaining status

Most organizations acquire 501(c)(3) tax exemption by filing IRS Form 1023. The form must be accompanied by a $850 filing fee if the yearly gross receipts for the organization are expected to average $10,000 or more.[21][22] If yearly gross receipts are expected to average less than $10,000, the filing fee is reduced to $400.[21][22] There are some classes of organizations that automatically are treated as tax exempt under 501(c)(3), without the need to file Form 1023:

  • Churches, their integrated auxiliaries, and conventions or associations of churches[23]
  • Organizations that are not private foundations and that have gross receipts that normally are not more than $5,000[24]

The IRS also expects to release a software tool called Cyber Assistant, which will assist with preparation of the application for tax exemption.

Another site which is a non-profit community theater in Seattle, Washington, had a great breakdown here.


Given this IRS scrutiny, why be a non profit?

The first and best known reason is that non profit organizations can be exempted from paying Federal Income Tax, but there are many other benefits that may vary by state. Non profits can receive reduced postal rates. In some states non profits are exempted from certain sales and property taxes. Most states take the IRS 501(c)(3) finding as proof of non profit status.

Many grants are available only to organizations with a 501(c)(3) status. Some significant donors will only donate to 501(c)(3) organizations to insure that their donation will go to the public good and to eliminate any potential problems with deductibility on their tax return.

Performances or copies of certain specific material made by nonprofit entities may be exempt from federal copyright regulation. This is a very narrow exemption so talk to someone who knows about this before you try it!

While there are many types of non profit organizations recognized by the IRS, only organizations which receive 501(c)(3) status may receive donations for which the donors are allowed to deduct the donation from their income when filing their federal income tax return.

Here are a couple of important issues to remember about tax deductible donations.

  • A person making a donation may receive a deduction on their income tax PROVIDED they did not receive any benefit from the donation. Someone who makes a $20 donation to their favorite community theater and receives two $10 tickets to a performance in return is not allowed to deduct the $20 donation. Someone who pays $50 for a fund raising dinner worth about $15 can only deduct $35 from their taxes. Most organizations give you a special receipt meeting IRS rules that clearly states the value of goods and services you received in return for your donation.
  • If you charge $1,000 for that $15 dollar dinner, the entire $1,000 might be deductible because the $15 is not considered significant in terms of the donation.

As a taxpayer, you can also receive a tax deduction if you make a charitable donation to an organization which does not have its 501(c)(3) classification from the IRS. If an organization has its 501(c)(3) classification from the IRS, you, as a donor, may rely on that classification and deduct your donation from your income on your tax return.

Even if the organization does not have a 501(c)(3) approval, you may deduct your donation provided YOU (the donor) can show that your donation was expended for a purpose which is permitted under Section 501(c)(3). Remember, it is up to you to show how your money was spent by the organization. Suppose your favorite organization does many things, some of which are permitted under 501(c)(3) (like theatrical productions) and some things that are not permitted (like making campaign contributions). If you make a $50 donation to this organization and they put it in their usual bank account, you have no way to prove how your money was spent. On the other hand, if you directly pay the royalties for a production of a play that you have no financial benefit from, your expenditure is most likely tax deductible.

So given that there are organizations out there like Toy Gun Films that are non-profit production companies, there is no real issue about whether or not I can produce media and be a non-profit. In other words, the only things stopping me at the moment are 1) me, if I don’t work to achieve this goal, 2) money, because I’ll need funding for it, as with many things in life.

Given that being a 501(c)3 company allows donors to get a tax deduction, I could theoretically have an easier time raising funds. Some food for thought.


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