Every business would love to avoid income tax, and every customer would love to deduct their day-to-day donations and purchases on their tax return. Savvy to this, the IRS has specific guidelines in place to ensure that only organizations formed for accepted religious, charitable, scientific, public safety, literary, educational, athletic competition, or cruelty prevention purposes operate exempt from taxes.
However, since not all purposes fall cleanly within these lines, the application process has an element of subjectivity to it—you must explain your purpose in detail to the IRS so that they can make a judgment call based on your specific circumstances. The more firmly and clearly your purpose falls in one of the above categories, the more inarguable your explanation.
While we at Click Industries are not legal advisors, we wanted to share with you a few proposed purposes that have come across our desks that ended up not meeting the criteria for 501(c)(3) status. It is our hope that these cases will give you something to think about while developing your business plan so that you can keep your eyes on the prize.
1. Organizing for the purpose of donating to a specific political candidate’s campaign because that candidate plans to push legislation in favor of expanding the country’s alternate energy program
Contribution of funds to scientific research on alternative energy, or to raise pubic awareness of the benefits of switching from foreign oil to solar power, would probably qualify. However, filtering these noble intentions through a political candidate will disqualify an organization from receiving tax-exempt status. In fact, any show of partisan support, whether financial or otherwise, is usually a no-no.
2. An extended family organizing under a corporation for the purpose of collecting monthly donations by each family member for use, by the family, in case of emergency
The IRS has specific prohibitions on “payment of unreasonable compensation to an insider”—someone who has influence over the organization and how it conducts its business. If a small group of people, such as a family, forms a business for the sole purpose of benefiting themselves, the IRS will consider this purpose “private benefit and inurement” and will not allow 501(c)(3) status.
3. Organizing for the purpose of contacting lawmakers directly (or urging the public to contact lawmakers directly) to support or speak out against specific legislation
Similar to the first example, “substantial” lobbing activities are not permitted. However, there are certain tests to determine whether your nonprofit’s political activity is substantial or not, based either on all of the facts of your particular case or by completing a form designed to calculate exactly how much lobbying is acceptable.
Above all, fight the temptation to artificially skew your purpose statement so that it aligns with a known-to-be-accepted 501(c)(3) purpose. The 501(c)(3) application process is the first of many times the IRS is going to review your business. If you manage to clear this first hurdle when you shouldn’t have been able to, and the IRS later decides to revoke your status based on your financial reports and other future documentation, they can always go back after the fact and tax you retroactively—don’t let this happen to you.
Think your nonprofit organization’s purpose is up to snuff? Let Click&Inc help you form a nonprofit corporation!