Here's a simple summary of three statuses for nonprofit organizations:
501(c)(3): Income related to their mission is not taxable. Donations are tax deductible by the donor. Donors are not disclosed.
501(c)(4): Income related to their mission is not taxable. Donations are not tax deductible. Donors are not disclosed.
527: Income related to their mission is not taxable. Donations are not tax deductible. Donors are disclosed.
Of course, I realize it is more complicated than the simple summary. Part of the complication involves political speech.
Many of us in this country are worried that excessive money will corrupt politicians and elections. Therefore, we have rules in place for governing how much money can be spent on something that might corrupt a politician or an election. To help track the "how much" part of it, rules regarding political speech for nonprofits were established. If an organization wishes to engage in the most political speech, then of the three options mentioned above, the 527 should be chosen.
If your organization wants donations to its group to be tax deductible, then the organization needs to agree to the rules for a 501(c)(3). By being a member of such a group, you don't give up your personal right to speak out. You simply can't use money from the group to promote a candidate. To be clear, you can't use a pulpit or podium (paid by tax deductible donations) to endorse a candidate. That's the current rule, and I strongly agree with it.
The rules for nonprofits are complex. Clearly, 501(c)(3) money can't be used to endorse a candidate. I think perhaps the group can use tax-deductible money to speak out on issues related to its tax-exempt status as long as the group stays within the expenditure limitations. What about a church displaying a sign on church property that advocates for a national sales tax? I saw that sign on the property of a church on Old St. Augustine Road. If it's a violation, I still wouldn't recommend they lose their exempt status unless they've been warned and they still flaunt abuse.
Based on the recent IRS scandal, I'm questioning whether or not the IRS should be the agency approving the applications for nonprofit status. I'm thinking an independent agency should be created — with its own budget — to review these applications. Certainly such an agency should be insulated from political maneuvering. I realize insulation from political maneuvering will be viewed by many readers as an impossible task, but it should be a key goal. The agency should create transparent rules for each nonprofit category.
Congress would need to adequately fund the agency so the approval process could be swift and fair. Congress would also need to adequately fund the enforcement branch of the agency. As 17th-century English philosopher Thomas Hobbes explained in "The Leviathan" and as Jonathan Haidt explained in his recent book "The Righteous Mind," enforcement keeps everyone obeying the rules. Once bad apples are allowed to break the rules, others are less motivated to play by the rules. Most of us dislike unfairness. We need enforcement of fair rules.
The IRS is in charge of collecting taxes. One way to disengage the IRS with any involvement regarding the approval process of nonprofit organizations would be to restrict a nonprofit organization from generating taxable income. I propose that to be eligible as a nonprofit, you can't generate taxable income. Period. I propose that approval of nonprofits and enforcement of rules for nonprofits be moved out of IRS jurisdiction. If the nonprofit loses its nonprofit status, then it would be moved back into IRS jurisdiction.
To emphasize, the IRS's task is to collect taxes based on the laws passed by Congress. If nonprofits aren't generating taxable income, there is no need for them to be investigated by the IRS. If it is determined that the organization has broken the rules for a nonprofit or if it has generated taxable income, then the new agency would indeed report the organization to the IRS for collection of unpaid taxes. The people involved should be given the opportunity to correct the problem and/or set up a separate organization to do the profit-making activities.
Under my proposal, the IRS would no longer be required to make decisions about free speech. Wasn't that the issue in the latest scandal? People were worried the IRS was trying to silence groups that were advocating a certain agenda? Certainly approving a Little League sports team is easier than approving a community group that wants to abolish all taxes. Should that decision be in the hands of the underfunded IRS? I propose that it should not. It makes more sense to me to create a separate agency whose sole task is to approve applications and enforce the rules of nonprofits.
I think that the income (donations) of nonprofits should be exempt from taxation. Nonprofits are simply a group of community-minded people banding together to do some sort of community activity. I ambivalently feel it's OK to make donations to nonprofits that do charitable work tax deductible by the donor.
The reason I'm ambivalent about the tax-deductible part is the idea of tax simplification. If we truly want to simplify the tax code, then we need to get away from the idea of using the tax code to incentivize behavior. Simplification would entail no non-business deductions. If you only had a W-2, interest and dividends, you would put that on the form and apply the rate. Simple. Done. Of course, I love the exemption I get for my 401K contribution and my HSA contribution … and so you can see how easy it is to move away from simplification.
Ignoring the simplification problem, it seems that incentivizing people to donate would benefit society. Donations to nonprofits that do not engage in charitable work should not be tax deductible by the donor. That is the current rule, and I agree with it. Of course, we can enter into a long debate about what is charitable activity — and those definitions are part of the approval process for nonprofits.
Your group doesn't have to be a religious organization to qualify as a 501(c)(3) organization. Currently, to take advantage of that tax deduction as an individual donor, you need to itemize. I think it would be fine to make charitable donations above-the-line deductions and require that 501(c)(3) organizations issue forms like W-2s, which would be attached to one's tax return.
I am strongly against taxpayer money being used to directly fund churches. But I don't have a problem with an individual contributing to a church or other 501(c)(3) organization and getting a tax deduction. Incentivize good behavior — and being charitable is good behavior.
I know many of us love our tax deductions for our donations to our churches. But we need rules so the lawbreakers don't abuse the system.
Based on the articles I read about the latest IRS scandal, I don't think IRS personnel acted in an egregious manner — but it is a public relations nightmare. If you move approval and enforcement out of IRS jurisdiction, then the headline will read "Agency in charge of monitoring nonprofits asks extra questions of Tea Party groups." From a public relations standpoint, that just doesn't sound as bad as when you have the IRS asking the questions.
Aertker, a resident of Jacksonville since 1984, passed the CPA exam in 1976.