An article yesterday in the NY Times raises some very interesting questions about just what should be the standard for tax exemption at the state level - e.g. for property, sales and local income tax purposes.
The Minnesota Supreme Court’s ruling that a day care agency had to pay taxes because it essentially gave nothing away has alarmed nonprofit groups.
To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.
Being an entrepreneur I focus on two of the factors - exempt purposes and whether the “value” of the entity inures to the principals or shareholders. People start for-profit companies so the earnings and value of their businesses will benefit (inure to) them. Not everybody strives to be Google, but all of us want to change the world in some way while sharing in the rewards with our investors, teammates and partners.
Exempt purpose seems to be the area of confusion in the article. Under Minnesota law, if I read the article correctly, the standard is that an organization has to be a “purely public charity.” A local food bank in Duluth is easy. Most churches are too, at least as long as they are fairly narrow in their revenue-generating activities and the pastor is not either (a) getting rich, or (b) using the pulpit to advocate for a politician or law. The case in question was a day care facility and that they charged the same for all of the children in their care regardless of income or where the fees were coming from (e.g. the government).
Educational institutions are typically an automatic exemption for the IRS as long as the income is not inuring to the founders or officers. “Day care center” is actually one of the IRS-approved exempt activity codes (574). So, the day care in question is probably clean on the IRS front, but not on the state?
One of the arguments there is that since 95% of the organization’s revenue comes from enrollment fees, and little if any comes from donations from the public (a big IRS requirement for “public charity” status is public support), they cannot be a “purely public charity” even if they are exempt from IRS income tax. It’s very confusing - you could argue that the day care facility should pay property taxes given it’s mission and sources of revenue.
What about an organization that charges fees to all for treating drug addiction? They are not for-profit in the tradition sense, but don’t receive widespread “public support” (e.g. donations) for their revenue. Clearly they provide a public good. Should they pay local taxes on property, sales and income? Some tough issues and no easy answers…
Filed under: Uncategorized | Tagged: exemption, irs, nonprofit, tax
