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A Friendly Discussion on 501c3 Business Practices-

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  • A Friendly Discussion on 501c3 Business Practices-

    As many of you know within this community, I provide assistance to many horse rescue organizations (both private and federal non profit 501c3's). Most times it is in relation to saving a horse from an at risk situation or transitioning a needy horse into a new home. But there are many aspects to horse rescue- and since many are federal non profit 501c3's, I thought it beneficial to communicate to others (the general public as well as rescues themselves), to educate on exactly the ins/outs of operating a federal 501c3 non profit charity. While the IRS does govern specific aspects of acceptable practices in operating a non profit charitable org. I believe that there are many that may not fully understand day to day operations from a business decisions aspect.

    While I realize that there may be non profit rescues that participate within this community, this discussion is meant to serve as an educational tool and is not directed at any rescue org. or individual (nor is it meant to offend any private). Of course for those rescues that participate here it would be beneficial to jump in and discuss/disclose how your org. goes about it's daily business operations. Some topics and issues specifically of interest are:
    • Donors/donations and tax receipts
    • Acceptable practices in relation to giving (goods/services/monies)
    • Adoption fees
    • Seperating private interests from public interest (personal vs. org.)
    • Issues that could cause loss of non profit status (violations)
    • Public Disclosure
    I'm also hoping that perhaps there are few members that are knowledgeable to some of these specific areas of interest (lawyers/accountants, etc.) that could chime in with useful and helpful information. I would also encourage those with questions to chime in. Hopefully this discussion can serve to be beneficial for everyone.

    Thank you.


  • #2
    It is my opinion as a lawyer that the 501(c)(3) charity organization is the most misused and abused racket since the tax shelters of the pre 1980's.
    Visit Sonesta Farms website at www.sonestafarms.com or our FaceBook page at www.facebook.com/sonestafarms. Also showing & breeding Cavalier King Charles Spaniels.

    Comment

    • Original Poster

      #3
      Hi Sonesta, thank you for your observation.

      I have also been doing some in depth reading and I could see where the status allows options for mis-use.

      Could you expand a little on your knowledge?

      Comment


      • #4
        Originally posted by Sonesta View Post
        It is my opinion as a lawyer that the 501(c)(3) charity organization is the most misused and abused racket since the tax shelters of the pre 1980's.
        I'm not a lawyer - I run a rescue - and sadly agree with you. I work hard to make sure our organization is a well-respected, well-run organization. But I've seen far too many 501c3s that aren't - AND I've ended up seizing horses from people claiming to run 501c3s, getting donations and such while not actually BEING a 501c3. Nothing happened to them. *sigh*
        Visit us at Bluebonnet Equine Humane Society - www.bluebonnetequine.org

        Want to get involved in rescue or start your own? Check out How to Start a Horse Rescue - www.howtostartarescue.com

        Comment


        • #5
          Originally posted by Marli View Post
          • Donors/donations and tax receipts
          • Acceptable practices in relation to giving (goods/services/monies)
          • Adoption fees
          • Seperating private interests from public interest (personal vs. org.)
          • Issues that could cause loss of non profit status (violations)
          • Public Disclosure
          I don't think I have enough time right now to respond on all of these topics, so I'll pick and choose. And can respond to more later..

          Donations/tax receipts - Our treasurer sends a letter including a thank you and donation info for any donation she receives. NOW since she's a volunteer, sometimes she gets behind and these aren't done as promptly as I would prefer.

          Adoption fees - Ours are set based on the horse's abilities, training, etc. And we set them lower than 'fair market value' (or as close as we can find). And they're set by a committee - generally I'll propose a fee and see if anyone has any comments. If not, that's the fee. If they do, we'll discuss. If a horse is up for adoption for a month or so and we've had no adoption interest, we'll lower his/her fee. We try to periodically re-evaluate.

          This means on some horses we "make" money - the amount we spend is less than the fee. This is RARE. On most horses, we end up in the hole. That's why we beg, fundraise, etc. - to make up the difference.

          Ok, back to work - will try to answer more later.
          Visit us at Bluebonnet Equine Humane Society - www.bluebonnetequine.org

          Want to get involved in rescue or start your own? Check out How to Start a Horse Rescue - www.howtostartarescue.com

          Comment


          • #6
            Originally posted by cowgirljenn View Post
            I'm not a lawyer - I run a rescue - and sadly agree with you. I work hard to make sure our organization is a well-respected, well-run organization. But I've seen far too many 501c3s that aren't - AND I've ended up seizing horses from people claiming to run 501c3s, getting donations and such while not actually BEING a 501c3. Nothing happened to them. *sigh*
            My farrier told me of one such "rescue" here in Georgia. They offer people tax write-offs, but they aren't 501(c)3.

            Comment

            • Original Poster

              #7
              IRS Master File

              I have found this to be a very helpful portion of the IRS site

              http://www.irs.gov/taxstats/charitab...=97186,00.html

              This is the IRS Master File of all federal non profit charities. If you scroll down on the page, you will see that states are listed alphabetically and indexed by sections of the alphabet. Also, for any new non profit, per a phone conversation with an IRS representative, I was told that the master file is updated frequently to reflect all new charities. I have come to use this portion of the IRS site to verify non profit status and the Guidestar.org site if I'm interested in viewing any 990 returns (they provide more detailed info). I would not recommend, however- using Guidestar.org to confirm charity status (for that reason only).

              Comment

              • Original Poster

                #8
                Another Great Site-

                This is also another great site for information

                http://www.stayexempt.org/faq.html#3 [scroll down as the answers to the questions are readily available]

                From the same site-

                http://www.stayexempt.org/resource_library/index.html

                Covers a lot of the territory and more specific questions. I would highly recommend this as reading material for anyone trying to understand more clearly how 501c3 can or cannot operate.

                Comment


                • #9
                  I've worked with many 501c3s of varying types and I continue to run into people who say "we can't earn a profit or we will lose our status" - and this is an excuse for poor and unsustainable business practices. Yes, you *can* earn more than you spend, but you can't pay out these profits to people involved in running and overseeing the organization - the organization keeps earnings and uses it for the organization's nonprofit purpose. (A lawyer would have to say whether moving salaries to comparable market level would be ok, but I would tend to say yes). Seriously, I have had people tell me we can't do certain fundraisers because we'd "earn too much money."

                  Have I been sadly mistaken or was I on the the right track?

                  Comment


                  • #10
                    501(c)(3) can and should make a profit. The IRS provides the non-profit designation because the work the organization does is for the public good. The designation relieves the 501(c)(3) of paying income taxes that a for-profit organization would pay. It does NOT relieve the 501(c)(3) of filing annual tax returns (see IRS threshold for income levels and forms) or being subject to penalties when not filing on a timely basis.

                    I definitely advocate that every 501(c)(3) should aim to make a profit in order to have reserves for lean times.

                    And you know, I really miss Evalee Hunter right now. She would know EVERYTHING about this subject.
                    Where Fjeral Norwegian Fjords Rule
                    http://www.ironwood-farm.com

                    Comment


                    • #11
                      Originally posted by avicia View Post
                      I've worked with many 501c3s of varying types and I continue to run into people who say "we can't earn a profit or we will lose our status" - and this is an excuse for poor and unsustainable business practices. Yes, you *can* earn more than you spend, but you can't pay out these profits to people involved in running and overseeing the organization - the organization keeps earnings and uses it for the organization's nonprofit purpose. (A lawyer would have to say whether moving salaries to comparable market level would be ok, but I would tend to say yes). Seriously, I have had people tell me we can't do certain fundraisers because we'd "earn too much money."

                      Have I been sadly mistaken or was I on the the right track?
                      Hmm.. how come we keep hearing about "charities" that fly their folks around the world in private jets? I guess if you don't pay them cash, just give them other benefits, that should be ok?

                      Comment


                      • #12
                        I read a previous conversation where a 501c3 was helping a private person raising funds both thru a fundraiser and asking for donations for the purpose of a sick horse and his immediate medical needs. The horse was not part of this rescue, but had been re rescued from a bad situation, but owned by either a private rescue or private person, none of which is really clear. I still can not grasp how a 501 can do that legally.

                        Comment


                        • #13
                          All the rigmarole is why I do my "rescuing" on my own time with my own money and sell or free adopt at my own risk of profit or loss!

                          I have rescued and rehabilitated 43 horses in the last 4 years. The thought of doing this under federal guidelines with a board of directors would end my private philanthropy.

                          I have thought about it. People have wanted to make donations, but I am afraid it would just complicate this to no end

                          However, lucky the horse or pony that makes it to my place for they will never want for anything again!
                          "If you don't know where you are going, any road will take you there"

                          Comment


                          • #14
                            Originally posted by avicia View Post
                            I've worked with many 501c3s of varying types and I continue to run into people who say "we can't earn a profit or we will lose our status" - and this is an excuse for poor and unsustainable business practices. Yes, you *can* earn more than you spend, but you can't pay out these profits to people involved in running and overseeing the organization - the organization keeps earnings and uses it for the organization's nonprofit purpose. (A lawyer would have to say whether moving salaries to comparable market level would be ok, but I would tend to say yes). Seriously, I have had people tell me we can't do certain fundraisers because we'd "earn too much money."

                            Have I been sadly mistaken or was I on the the right track?
                            Those people are wrong. You can, and should, make a profit as a non-profit. Like all businesses, some years you may make money, some years you may break even, and some years you may lose a bit. BUT your goal should be to bring in more money than you spend - and either re-invest that money into your non-profit (expand your programs) or save it for future emergencies/tight times.

                            As to paying people - you can have competitive salaries for people who work in non-profits. You CANNOT base that salary on a percentage of the income. So say you run a non-profit. You can make $40K/year (if that's competitive), but your salary cannot be 10% of the organizations' proceeds.

                            Again, I'm not an accountant or tax-attorney. this is my understanding from research, seminars, and tax professionals I've spoken to. If you are running a nonprofit and have questions, I suggest you discuss with an accountant or the IRS.
                            Visit us at Bluebonnet Equine Humane Society - www.bluebonnetequine.org

                            Want to get involved in rescue or start your own? Check out How to Start a Horse Rescue - www.howtostartarescue.com

                            Comment

                            • Original Poster

                              #15
                              Originally posted by avicia View Post
                              I've worked with many 501c3s of varying types and I continue to run into people who say "we can't earn a profit or we will lose our status" - and this is an excuse for poor and unsustainable business practices. Yes, you *can* earn more than you spend, but you can't pay out these profits to people involved in running and overseeing the organization - the organization keeps earnings and uses it for the organization's nonprofit purpose. (A lawyer would have to say whether moving salaries to comparable market level would be ok, but I would tend to say yes). Seriously, I have had people tell me we can't do certain fundraisers because we'd "earn too much money."

                              Have I been sadly mistaken or was I on the the right track?
                              I would agree with the the others, although 501c3 operates as a not for profit entity (tax exempt) it does not mean that the operation itself cannot profit, and it should. There are many ways non profits can raise money via fundraisers, educational seminars, adoption fees, etc.

                              Comment

                              • Original Poster

                                #16
                                Originally posted by Woodland View Post
                                All the rigmarole is why I do my "rescuing" on my own time with my own money and sell or free adopt at my own risk of profit or loss!

                                I have rescued and rehabilitated 43 horses in the last 4 years. The thought of doing this under federal guidelines with a board of directors would end my private philanthropy.

                                I have thought about it. People have wanted to make donations, but I am afraid it would just complicate this to no end

                                However, lucky the horse or pony that makes it to my place for they will never want for anything again!
                                Yes Woodland, I've heard this frequently from private individuals that do rescue. Many don't want to be so involved with all the paperwork, documents, it can be time consuming. It is a choice. Of course the benefit of becoming 501c3, if one desires, is that operation becomes tax exempt and solicitations from the public can be done.

                                Comment

                                • Original Poster

                                  #17
                                  Originally posted by Floridarider View Post
                                  I read a previous conversation where a 501c3 was helping a private person raising funds both thru a fundraiser and asking for donations for the purpose of a sick horse and his immediate medical needs. The horse was not part of this rescue, but had been re rescued from a bad situation, but owned by either a private rescue or private person, none of which is really clear. I still can not grasp how a 501 can do that legally.
                                  So far as I can tell, based on the information available on the IRS website and the Treasury site, a 501c3 is not able to give monies/goods/services to a private entity (person/private rescue). The info below is from the Treasury site and details what activities a 501c3 needs to avoid at the risk of losing their tax exemption. If anyone else has a better understanding, please chime in.

                                  From the IRS: http://www.irs.gov/charities/charita...123297,00.html

                                  From StayExempt.org (Treasury site)

                                  What activities can jeopardize tax-exempt status?
                                  For 501(c)(3)s, the four main activities that can jeopardize the organization’s tax-exempt status are:
                                  • activity that results in private benefit or inurement;
                                  • lobbying activity, if it constitutes a substantial part of the organization’s overall activities or if it exceeds a predetermined dollar amount;
                                  • any political campaign activity; and
                                  • unrelated business activity that is substantial when compared with the organization’s exempt-function activities.
                                  From what you described, this would fall under the first bullet and has to do with private benefit or inurement. To understand both, read below:

                                  What is private benefit?
                                  Private benefit occurs when an individual or organization receives a benefit—monetary or nonmonetary—from a 501(c)(3) organization. A tax-exempt organization that provides a substantial amount of private benefit may risk losing its tax-exempt status. (This does not include paying reasonable salaries or providing services to individuals as part of an organization’s exempt-function activities.)

                                  What is inurement?
                                  Inurement occurs when an “insider” of an exempt organization receives any of an organization’s net income or inappropriately uses any of its assets for personal gain. An insider is a person who has a personal and private interest in the activities of an organization. Examples are officers, directors, and key employees. Any amount of inurement, no matter how small, can jeopardize an organization’s tax-exempt status. (This does not include paying reasonable salaries or providing services to individuals as part of an organization’s exempt-function activities.)

                                  What is the difference between private benefit and inurement?
                                  Inurement is a subset of private benefit and deals specifically with insiders, while private benefit can be to both insiders and outsiders. Both terms describe situations in which an exempt organization’s income or assets are inappropriately diverted for private gain rather than used for a public purpose.

                                  Comment


                                  • #18
                                    Originally posted by Floridarider View Post
                                    I read a previous conversation where a 501c3 was helping a private person raising funds both thru a fundraiser and asking for donations for the purpose of a sick horse and his immediate medical needs. The horse was not part of this rescue, but had been re rescued from a bad situation, but owned by either a private rescue or private person, none of which is really clear. I still can not grasp how a 501 can do that legally.
                                    I am certainly no expert on this matter, but it's my understanding that the IRS frowns on a 501(c)3 directly or indirectly giving money to a private entity/person. Therefore, fundraising with a 501(c)3 rescue and then handing the money to a private individual for his/her private horse (whether that horse was originally from a rescue or not) is a no-no. That's how I interpret it at least.
                                    The horse I bet on was so slow, the jockey kept a diary of the trip.
                                    Henny Youngman

                                    Comment


                                    • #19
                                      Originally posted by cowgirljenn View Post
                                      Those people are wrong. You can, and should, make a profit as a non-profit. Like all businesses, some years you may make money, some years you may break even, and some years you may lose a bit. BUT your goal should be to bring in more money than you spend - and either re-invest that money into your non-profit (expand your programs) or save it for future emergencies/tight times.

                                      As to paying people - you can have competitive salaries for people who work in non-profits. You CANNOT base that salary on a percentage of the income. So say you run a non-profit. You can make $40K/year (if that's competitive), but your salary cannot be 10% of the organizations' proceeds.

                                      Again, I'm not an accountant or tax-attorney. this is my understanding from research, seminars, and tax professionals I've spoken to. If you are running a nonprofit and have questions, I suggest you discuss with an accountant or the IRS.
                                      Right, witness the HSUS, the president declared a salary of $200,400.- a year or two ago, don't remember exactly which year it was, plus benefits, for what I read was reported in several articles.
                                      Here are some of their financial statistics:

                                      http://www.activistcash.com/organiza...ls.cfm/oid/136

                                      I have donated money to some rescue operations, getting a thank you card from some, a receipt from others and more times nothing.
                                      At times, knowing the personal situation of the one running the rescue, I do tell her the money is, to her discretion, for personal use, a gift and don't expect any kind of recognition for it.

                                      Having worked with some such groups in the office, filing out of shoe boxes, I know how sometimes that part of taking care of business gets forgotten, but in today's times, it is more important that ever.

                                      Comment

                                      • Original Poster

                                        #20
                                        Originally posted by Bluey View Post
                                        Right, witness the HSUS, the president declared a salary of $200,400.- a year or two ago, don't remember exactly which year it was, plus benefits, for what I read was reported in several articles.
                                        Here are some of their financial statistics:

                                        http://www.activistcash.com/organiza...ls.cfm/oid/136

                                        I have donated money to some rescue operations, getting a thank you card from some, a receipt from others and more times nothing.
                                        At times, knowing the personal situation of the one running the rescue, I do tell her the money is, to her discretion, for personal use, a gift and don't expect any kind of recognition for it.

                                        Having worked with some such groups in the office, filing out of shoe boxes, I know how sometimes that part of taking care of business gets forgotten, but in today's times, it is more important that ever.
                                        Very good info Bluey, and very true. Many of the large non profit orgs. (speaking of animal charities solely) do have members taking salaries, and some get paid well, imo.

                                        It's also the reason why when considering giving to any horse related charity, if you want to know how you're money is being used it's wise to take a look at the 990. A rescues 990 lists the officers and positions of the charity, as well as hours worked and any salary they may take. It isn't too often I run across a horse rescue that lists it's officer(s) getting paid. There are a few. It is a personal decision at the time of giving whether it's an important aspect or not. I also agree that a thank you is more important than ever now with the tough economic times, no matter what the amount.

                                        Comment

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