501(c)(3) FAQs

"If they aren't splits, records or intervals, I don't care." But, it is important for every coach and program director to understand his or her finances. Are we a nonprofit? Should we become a nonprofit? What the heck does nonprofit mean anyway?!

Jeanne Ensign, CPA and member of the U.S. Masters Swimming Board of Directors, answers a few questions to help us better understand 501(c)(3) status.

Question: What is a nonprofit organization?

Jeanne: It is an organization that exists to provide programs and services that are of public benefit. While a nonprofit may earn a profit and pay employees, such as coaches, the earnings are retained by the organization to support the organization's mission. Earnings are not paid out to shareholders or owners, and may not benefit individuals. The assets are permanently dedicated to your exempt purpose.

Question: What does 501(c)(3) mean?

Jeanne: An organization with 501(c)(3) status is exempt from federal income taxation under that section of the Internal Revenue Code. The exemption does not apply to other federal taxes such as employment taxes, or income tax on income unrelated to the exempt purpose.

Question: Who should apply for 501(c)(3) status? What will it do for me?

Jeanne: With 501(c)(3) status you will not pay income tax on income related to your exempt purpose. Also, exempt status allows your organization to receive donations that are tax-deductible to the donor.

Question: Should a swim club apply for 501(c)(3) status? Why or why not?

Jeanne: Two questions to ask yourself before you go through the process: 1) Will you have enough taxable income (gross receipts less expenses) to make avoiding taxes a concern? If you are a corporation, the first $50,000 of income is taxed at 15 percent. For example, if your net profit for the year is $1,000 your tax would be $150. You can weigh this against the time and expense needed to go through the process of applying. 2) Do you want to attract contributions or grants? Foundations and other sources usually only award grants to tax-exempt organizations. Individuals who give small amounts may not care, but it's an added benefit to them to be able to deduct their donation for tax purposes.

Question: How do I go about getting this sort of status? Do I need an accountant?

Jeanne: An organization is eligible to file Form 1023 to obtain recognition of exemption if it is 1) organized as a corporation, trust or unincorporated association under state law and 2) operated to perform the exempt purpose(s) stated in its organizing documents.

Examples of exempt purposes are charitable or educational, or to foster national or international amateur sports competition. IRS will review the application to ensure the organization meets the conditions such as purpose, limitations on spending and internal safeguards then issue a determination letter.

I wouldn't say unequivocally you need an accountant, but I recommend it. Form 1023 is nearly 30 pages long. Information requested includes mission and goals, historical and projected financial information and activity, whether you are a membership organization or publicly supported and reasons why your organization qualifies for exempt status. IRS thoroughly reviews the applications and nearly always requests additional information. IRS charges a user fee of $300 to apply.

Consulting with an accountant on a regular basis for business advice about your operations and planning is advisable. That person can help you with the regular responsibilities of maintaining your 501(c)(3) status including recordkeeping and filing requirements.

Question: If I am tax exempt do I need to file a tax return?

Jeanne: Yes, you will need to file a tax return annually. Depending on your level of income you will file Form 990, Form 990-EZ or the new 990-N for small organizations not previously required to file.

Thank you, Jeanne.  For more information visit http://www.irs.gov/charities/index.html.