Filed your IRS Form 8976 Yet?

If you are or intend to be a 501(c)(4) organization, have not previously sought or gotten an IRS Letter of Determination, and have never filed an information return in the 990 series, this form is a new requirement for you and for what the IRS calls local associations of employees.

       

No other 501 C-section entity needs to be concerned with this new filing requirement.

 

However, failure to comply now can cost a qualifying organization and its key officers penalties totaling $5,000, assessed at $20 per day.

   

More information can be obtained at IRS.gov, at this link.

What is a 501(c)(4)?

The IRS broadly defines C4's as social welfare organizations or associations operating in the interests of the common public good, without intending to or accruing profit to the members, as stated here:

Reg. 1. 501(c)(4)-1(a)(2)(i) provides that:

[A]n organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the community.

The IRS offers further examples here, but note the use of the word "community." This differs from a C3 entity in that it does not support one identifiable group, i.e. low-income children or unwed mothers, while excluding others.

However, "community" does not have to mean a whole city or town. For instance a local homeowners association's "community" might be just the entire group of homeowners it represents.

Thus, a local improvement district might be a 501(c)(4) if it seeks to improve city parks or establish a lending library. A rural  homeowners association that seeks to buy snow removal equipment to be made available to the entire neighborhood could also qualify.

The main attraction for people seeking to form a C4 is that these organizations may engage in some forms of general lobbying or political discourse, where a 501(c)(3) cannot.

Note that the new Form 8976 is NOT equivalent to a Letter of Determination. It is, as it states, simply a notice of intent.  There is a $50 filing fee attached to it.

The IRS apparently believes that there are a lot of organizations operating as C4 entities that have never registered as such but are still engaging in prohibited political activities.

The problem with that is all of the money donated to or collected by unregistered or disqualified entities is taxable as ordinary business income.  There may also be criminal penalties if the money was collected and/or spent under false pretenses.

If you have any other questions or are trying to determine what type of charitable identity your new organization should apply for, contact me and we can discuss it.

How much overhead is NOT enough?

The matter of overhead, i.e. administrative costs,  is still and will probably always be a big deal for nonprofits.

   

The idea of keeping overhead really low is baked into the psyche of nonprofit organizations, the public and donors alike.

Still, it does cost money to be in business.

Thankfully, more donors are beginning to recognize that for a charity to serve the community, it has to stay in existence.

The standard for overhead spending right now seems to be in the 20% to 25% range, certainly no more than 35%.

Truthfully, there is no single "right" ratio.

Some charities have substantial indirect costs. Others can and do survive nicely on 15% or less.

The right amount is the no-frills amount that you need to keep your doors open.

For instance, food-based charities may spend quite bit on utilities, storage space, racking and material handling equipment.

Another that is based on volunteer staffed community outreach regarding education might need no more than a phone and a website.

Recently I had a nonprofit that wanted a press release written to tell the community that they were shutting down. Their main source of income was fees for services, but they simply didn't have enough clients to cover their operating costs.

One fact  I learned was that they had kept overhead to 7.5% of donations. There was no set budget for non-program costs.

One of the casualties of that approach was that they did not advertise beyond having a  website.

I did the press release and two weeks later, I got another call.  Could I do a press release retracting the closing?

When the first press release ran, they got over 70 calls wanting their services.

Up to that point, it seems hardly anyone knew they existed.

I'm happy to report that they remained in business, and have since created a budget for marketing.

Don't get hung up on meeting some artificial figure that doesn't work for your business or charity.

Sit down, develop a realistic organizational budget and stick to it.

To serve others, you first have to survive.