Before we jump into today’s post, I want to touch on a few things that seem to have occurred over the weekend. Over the past week, I’ve been subjected to conversations with the dregs of humanity. These are people with absolutely no moral fiber, no education, and no future. I can’t believe how many of them have retweeted me since Friday evening, and frankly I’m ashamed that they follow me.
I’m speaking, of course, of Ohioans (What? What did you think I was talking about? Bigot…).
A second order of business before I go into today’s topic is a disclaimer: I’M NOT A FUCKING TAX LAWYER. There is a very specific sub-set of very boring attorneys that handle things like “tax codes” and “Tax Court.” I’m not one of them. I’m your general civil litigator with a bad fucking attitude and a bottle of whiskey in my desk, so don’t come running to me if you try to form a church and get your ass audited. It’s your own damn fault. You shouldn’t be taking tax advice from an inebriated asshole with a website just because the furries really like him at the moment.
In fact, you probably shouldn’t be making your life decisions based solely on what the furries like. That just…That seems like a bad idea to me. Great people, but think of the optics of justifying your decisions with “And it’s all because a six foot badger told me to do it.”
ALRIGHT! So, now that we’ve got all of that shit out of the way, let’s move on to talking about motherfucking non-profits! Yeah! Can you feel the excitement? We’re about to get all 26 U.S.C. 501(c) up in this bitch!
Alright, so if you went to that link you’re going to see that there are about 29 different types of organizations that are tax-exempt, meaning they are exempt from federal tax under the Internal Revenue Code on all of their activities that are related to the charitable or exempt purpose of the organization. If you look through there, you’re going to see that a whole fucking lot of those exemption types are for very fucking specific types of organizations, which have a very fucking specific purpose. We’re talking shit like “cemetery organizations” and “fraternal lodges.” That’s right, the motherfucking Shriners are tax-exempt (which is awesome when you think of what it means for buying those tiny fucking cars. I want one of those).
So, for the purposes of today’s post we’re going to look at only two types of tax-exempt organizations, the ones that most people think about when they say “tax-exempt organization,” and that’s the 501(c)(3) “charitable organization” and the 501(c)(7) social and recreational clubs.
What’s all that mean?
Good question, and fuck you. You should know the damn law if you’re interested in doing this shit in the first place.
A 501(c)(3) organization is an incorporated entity (this means it is a fucking corporation formed as a fucking corporation) that is “organized and operated” for a tax exempt purpose. For the purposes of a 501(c)(3), this purpose must be “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.” It cannot be operated for a profit, it cannot operate in a manner that gives an inordinate benefit to one person, and it cannot engage in political activity or lobbying activities as any substantial part of its operations. It requires significant financial oversight to make sure that all the fuckin’ money goes to the designated exempt purpose of the organization, and a failure to provide that oversight can lead to the loss of the organization’s exempt status.
A 501(c)(7) is a “social or recreational club” that is organized for “pleasure, recreation, and other similar purposes.” The basic concept for this is that the organization subsists almost completely on the income derived from membership dues, and does not subsist on “unrelated business activities.” We’ll get to that shit in a moment. It’s almost a “zero sum” game idea: the members are paying for the services, the dues paid allow for the members to receive the services, and therefore they should not be taxed.
What’s an “exempt purpose?”
Read the fucking Code. Or don’t, because you guys will misread it and start trying to form tax-exempt organizations for every damn thing you want to do, won’t you? Yeah, you will.
What an “exempt purpose” is varies depending on what type of organization you’re looking at. For the 501(c)(3), there are those “general purposes” we gave you before. That’s the first level…but then you gotta say “okay, now what are we specifically going to be doing?” That’s where the NTEE codes come into play. NTEE codes are very specific codes used by the IRS to determine what your organization is under the general tax-exempt classification. There are literally hundreds of sub-classifications under the NTEE codes for the 501(c)(3), and you have to choose the right fucking one. Want to know how hard that can be? Here are the IRS instructions for the 1023-EZ form, the form most 501(c)(3) organizations use. Scroll down to page 19. That’s where the NTEE list starts.
As for a 501(c)(7), you generally don’t mess around with NTEE codes. That’s because the IRS wants to know fucking everything before you damn well get that recognition. Seriously. This isn’t facetious. The goddamn application, Form 1024, is roughly 17 pages long and requires substantial documentation to be submitted with it. I’m only surprised the IRS doesn’t ask you to bend over while pulling on a rubber glove.
What’s required to apply?
Well, that fucking depends, doesn’t it? I mean, are you a 501(c)(3) or a 501(c)(7)? The requirements are different for both, but generally:
- You have to be incorporated correctly under state law;
- Your bylaws must include the appropriate language limiting the activities and purposes of the organization, and;
- You must be able to establish and continue to establish the non-profit purpose.
This is where a motherfucking lawyer comes in. Unless you have someone with substantial legal or tax training, you need a goddamn lawyer to help you draft these documents correctly, prepare everything for the state and the IRS, and submit these documents to the IRS and the state for organization purposes. You’ll also need a lawyer to run you through how to not fucking lose your non-profit status.
Wait, we can lose this shit?
Yep, you sure as fuck can. See, even being tax-exempt, you’ll need to file certain documents to the IRS every damn year, starting no more than three years from the date of your formation (at least as a 501(c)(3)) and continue to do so every year after that. Now, this won’t be a Form 1040, but rather a Form 990 so long as you don’t actually owe any fucking tax. This is why you need an accountant. Failure to file will result in the revocation of non-profit status.
Also, here’s a big deal: When a tax-exempt organization mismanages their funds, they will fucking lose their tax-exempt status. It is the absolute duty of the board of a non-profit to be sure that income goes only to furthering the exempt purpose of the organization. This doesn’t mean you can’t pay salaries and shit, but it does mean that the organization can’t be treated like a piggy bank. EVERY fucking expenditure of any significance needs to be brought before the Board for a vote and approval, and the records have to be well kept.
Which leads to another point: Hire a fucking lawyer AND a fucking accountant. A lawyer will be able to help you negotiate the questions regarding how funds can or should be used, and an accountant, especially one who isn’t part of the non-profit, is much more likely to catch “accounting errors” like a reverend buying a new Hummer while the church falls into disrepair.
Wait, what’s this shit about paying taxes?
Oh, wait, you thought being a 501(c) organization meant you never fucking had to pay taxes again? Wrong, shithead. Income derived from and being applied to the tax exempt purpose of the organization, and donations for that purpose, are tax-exempt. However, any business activities or activities not strictly within the exempt purpose can and will be taxed. You can run a theater group and have the ticket sales be tax-exempt, for example, but concession sales can still be taxed because they aren’t part of the tax-exempt purpose.
Likewise, sales tax is a state tax, not a federal tax. If you’re looking to be considered exempt from state tax, that’s a whole fucking different process which needs to be followed in accordance with your state law. You can have a state non-profit that still won’t meet the requirements for a federal exemption. Once again, hire a fucking lawyer.
Oh, and if your tax-exempt status is revoked, the organization may be liable for all those taxes it should have fucking paid in the past.
So…how do we protect ourselves?
Good question. I’m astonished. Did both of your brain cells just wake up?
- Hire a fucking lawyer;
- Observe all legal formalities in formation and administration;
- Watch your money like a hawk;
- Hire a fucking lawyer;
- Create a Board of Directors so no one person has too much control;
- Staff the Board impartially, not with “friends of” fucking anyone;
- Hire a fucking lawyer;
- File your goddamn taxes;
- Make sure the person controlling the money is trustworthy;
- Hire an outside accountant to keep your books motherfucking pristine;
- Hire a fucking lawyer.
This…seems like a lot of work.
No shit? Non-profits can do great things, but they can also be abused for the benefit of a very small group of people and cause great damage. There’s a reason this shit is complicated, and that’s because it fucking should be complicated.
At the end of the day, you don’t fuck with the IRS. They’ll get their goddamn money, one way or the other.
Also, you know, if you haven’t filed your personal taxes yet…go ahead and do that.
I got shit to do.