Tuesday, June 11, 2013

The Good and Bad of 501's

Recently in Time magazine, there was an opinion piece about the proliferation of 501 tax-free organizations. Claiming to be non-profit, 501(c)(3) charitable organizations and 501(c)(4) 'social welfare organizations' like foundations and political education groups, like those associated with the Tea Party that some at the IRS wanted to validate. The article suggests that if these groups are really non-profit, they wouldn't be paying taxes anyway, and shouldn't need tax exempt status.

I've been on non-profit boards. In order to distribute donations in keeping with the charter of the organization, we often asked that the receiving groups have some legitimate status like 501(c)(3). It gave us some assurance that they were legit and that someone else had looked at their documentation. We could review each group's, but that would have taken a lot of our volunteer time and paid staff time, diverting needed resources for the mission of our organization. It also meant that each organization needed to report their 'profit' status to the IRS. We didn't need to review that documentation either.

Perhaps without tax-exempt status, foundations could show their donations and investment earnings, less administrative expenses, as profit...and have to describe the rest of their expenditures in terms of compliance with their mission. There are oversight agencies, but they don't necessarily dig into the detail. Some just look at the self-disclosures and calculate the proportion of overhead expenses to total expenses. Less than 15% is usually acceptable.

There are over 1.6 million such tax-exempt organizations in the US, according to the article. Some, I'm sure, are abusing the system, as is true for any tax system. (There are plenty of court cases around employee-owner organizations because some are abusing the tax loopholes; in general, they are a good thing.) However, let's not throw out the baby with the bathwater.

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