Everyday people want to know if they can to turn an activity they enjoy into a tax-exempt charity. Probably the most common reason people want to create a tax-exempt charity is to receive tax deductible donations. To receive tax deductible donations, the organization would have to be exempt under Internal Revenue Code Section 501(c)(3). For an organization to be exempt under Section 501(c)(3), the organization has to meet certain basic requirements.
First, the organization has to be organized exclusively for a permitted purpose such as a charitable, religious or educational purpose. Being properly organized means the documentation filed, for our purposes, with Ohio must include certain required language.
Second, the organization has to operate exclusively for that permitted purpose. As part of the process, the IRS will review the organization's planned activities to determine if the purpose is permissible. Here are a few examples of activities for which the IRS has recently denied tax-exempt status:
- Activities that Violate Federal Law. Just because marijuana may be legal in some form under a state's law, it is still illegal under federal law. An organization applied for tax-exempt status for the purpose of growing and delivering medical marijuana to qualified patients. As part of the delivery process, the organization said that it would provide information about the medication and help patients understand directions that the doctor provided. The organization stated that its plans were consistent with guidelines that the state attorney general had provided. The IRS said that a tax-exempt organization cannot be created for an illegal purpose and denied the organization tax-exempt status.
- Activities that are Disguises for Operating a Business. Sprinkling a few charitable, educational or religious words over activities that are really commercial businesses will not hide the true nature of the activity. The IRS recently denied tax-exempt status for an organization that claimed to be providing a religious transportation service. The main activity of the organization was to plan trips that varied from retreats to sightseeing. The IRS found that no substantial religious activities were provided and concluded that the purpose of the organization was effectively a for-profit charter bus company.
Another organization claimed that it provided pet therapy for animal rescues. The therapist had operated as a sole proprietorship for several years and had operated at a loss for the last few years. Because people were willing to make donations, the therapist wanted to start a tax-exempt charity. However, she was selling the same services for the same fees through the organization. Also, the organization was selling a book that the therapist co-authored on the website and linking to her personal jewelry business. The IRS found that the therapist was just operating for commercial purposes.
Applying for tax-exempt status can be an expensive and time consuming process. Be sure before starting that the planned purpose is actually permissible. If you have questions about tax-exempt organizations, please contact Edie Crump (937-449-5530).