Paper Trail: A Taxing Question

PAPER TRAIL

A Taxing Question

How many times have we heard someone say, 'Let's just become a 501(c)3'? It's not that easy.

by Jim Abbott

T o be or not to be a 501(c)3, that is the perennial question that cycles through the NIE E-Forum at least once a month. While I am not a tax attorney and this is not to be taken as tax advice, this column is intended to answer some of the questions about becoming a tax-exempt organization.

Many NIE programs have become interested in obtaining 501(c)3 status so they can receive grants and donations from other foundations and larger corporations. The question asked often is, “Is it easy to get this tax designation?” The simple answer is no. There are many strict rules that you must follow if you want to become a not-for-profit entity.

If you are seriously considering this route, I encourage you to consult your tax advisor. You can go to the Internal Revenue Service site and download two publications, #4220(PDF file) and #4221. The information provided in this column comes from those two publications.

First, 501(c)3 is an IRS designation. It has nothing to do with ABC rules. Before you even apply to become a 501(c)3, the IRS says you need to take three specific steps:

1. Be organized
2. Operate under rules
3. Define your exempt purpose

To be organized means you need to be established as an independent corporation, trust or unincorporated association that is operated exclusively for one or more exempt purposes. This includes organizing documents to include articles of incorporation, trust documents or articles of association. Your organization will need to be independent of control from the newspaper and need to include a board of directors or board of trustees that meet regularly, keep minutes, set policy and review your financial operations.

To be operated as a not-for-profit organization, you need bylaws that govern your operation and review by the board of directors/trustees. Your operation must abide by a series of regulations including but not limited to:

• You may not participate in any political campaigns
• You may not lobby as any substantial part of your activities
• You must ensure that earnings do not benefit any shareholder or member. (Is your newspaper a shareholder?)
• You must not operate for the benefit of private interests. (If you are counting paid circulation as part of the income of your newspaper, this could cause you a major problem.)
• You must not participate in activities that are not related to the exempt purpose of the organization
• You may not participate in activities that are illegal

There are three types of exempt purposes covered under the IRS guidelines for 501(c)3: Charitable organizations; educational organizations; and religious organizations.

In addition to these preliminary steps, there are other responsibilities of 501(c)3 organizations. You must have an independent, financial, record-keeping system. It is generally ruled that donated funds to your foundation cannot be co-mingled with newspaper funds. You will need to file tax returns for the foundation each year. You must make available to the public at reasonable times and places your application materials and your three most recent tax returns. You must provide written acknowledgement for any single donation of $250 or more and you must provide a written disclosure to any donor who makes a payment in excess of $75 partly as a contribution and partly for goods or services received. (This would clearly cover things like registration fees for golf tournaments where part of the money is a donation and part is greens fees. Remember, these are IRS guidelines; you also have to clear ABC rules on this type of donation.)

The true test of whether or not you qualify for the coveted exempt status is who controls your program. If your newspaper sets your goals or directs how the program will operate, you may well not qualify. It is your board of directors/trustees that set your direction, and they must be independent of outside influence. Is your publisher interested in having you become a separate organization that is not controlled by the newspaper?

Before you embark on an attempt to gain 501(c)3 status, you should consult a tax attorney, preferably one who specializes in not-for-profit tax law. There can be significant penalties for an organization that obtains this tax designation but does not operate accordingly.

You can now agree that the answer to the question, “Is it easy to become a 501(c)3?” is clearly no.