Why do some Incorporate???

[MysticCat]

Originally Posted by Titchou

They are not tax ecempt. They have to pay sales taxes and income taxes. There are ways to "set aside" funds over $1000 in non member income in order to avoid taxes on that money. And contributions to them are not tax deductible. Trust me on this. I was the chairman of the board of an NPC 501 C 7.

501(c)(7) non-profits are tax-exempt. 501(c)(7) refers to a section of the Internal Revenue Code, and whether an organization is tax-exempt under the IRC refers to whether the organization has to pay federal income taxes. (It has nothing to do with deductability of contributions; that's a separate thing.) If an organization qualifies as a 501(c)(7) organization, it generally speaking does not have to pay federal income taxes unless other factors kick in, such as receiving income from non-member sources above a threshhold amount.

Sales taxes are state and local taxes, so the degree to which a 501(c)(7) org will be exempt from them (or exempt from state income tax) depends completely on the degree to which state law or local ordinance provides that.

[Titchou]

That's what I said. The threshold for non member income is $1000. That includes any donations from non members, rental income from non members, investment income, etc. However, if the board votes to "set aside" that income for qualifying items such as mortgage principal payments, building repairs (future roof, boiler, etc)etc, then that income can be exempt from federal taxes. Since each state has varying requirements for such organizations, I am not addressing that...only federal, which really is the more testy mine field. And I am addressing only NPC organizations, not BGLOs, NIC, or others....as I do realize that some of them are organized differently. And getting into HCs, some are 501 C 2's which opens another can of worms since the IRS has some interesting limitations on year end surplus (not profit as they are "non" profits) and some are 501 C 3's, which are the few who have historical houses and open part of them to the public, which is also a very interesting way to go. I spent a great deal of time one cogitating on how to do that with our most historical house and never could get past the idea of having random people going thru a sorority house. Too many bad vibes there so we just dismissed that idea! That particular house really didn't need the money anyway.

[MysticCat]

Originally Posted by Titchou

That's what I said. The threshold for non member income is $1000. That includes any donations from non members, rental income from non members, investment income, etc. However, if the board votes to "set aside" that income for qualifying items such as mortgage principal payments, building repairs (future roof, boiler, etc)etc, then that income can be exempt from federal taxes. Since each state has varying requirements for such organizations, I am not addressing that...only federal, which really is the more testy mine field.

Well, you did address state (and local) by noting that orgs have to pay sales tax. That's why I addressed that.

As for non-member income, I think the current IRS rules are that no more than 35% of income can come from non-member sources, and no more than 15% can come from non-member use of facilities. These are the "safe harbors" -- a 501(c)(7)'s tax-exempt status is safe if its non-member income doesn't exceed these percentages. Also, the safe harbor doesn't apply if the non-member income is unrelated to regular organization activities that further the organization's purpose (e.g., if the org basically has a business on the side).

The bottom line is that 501(c)(7) orgs are tax-exempt within the meaning of the Internal Revenue Code. As with any tax-exempt organization under any provision of the IRC, there may be limits or exceptions to that general tax exempt status.

[Senusret I]

Originally Posted by MysticCat

The bottom line is that 501(c)(7) orgs are tax-exempt within the meaning of the Internal Revenue Code. As with any tax-exempt organization under any provision of the IRC, there may be limits or exceptions to that general tax exempt status.

I love you like black loves old gold.

[MysticCat]

Originally Posted by Senusret I

I love you like black loves old gold.

Can I add a little red to that black and (old) gold?

[Senusret I]

I suppose

[Titchou]

Originally Posted by MysticCat

Well, you did address state (and local) by noting that orgs have to pay sales tax. That's why I addressed that.

As for non-member income, I think the current IRS rules are that no more than 35% of income can come from non-member sources, and no more than 15% can come from non-member use of facilities. These are the "safe harbors" -- a 501(c)(7)'s tax-exempt status is safe if its non-member income doesn't exceed these percentages. Also, the safe harbor doesn't apply if the non-member income is unrelated to regular organization activities that further the organization's purpose (e.g., if the org basically has a business on the side).

The bottom line is that 501(c)(7) orgs are tax-exempt within the meaning of the Internal Revenue Code. As with any tax-exempt organization under any provision of the IRC, there may be limits or exceptions to that general tax exempt status.

True, there are limits on where the income can flow from. But the line on the 990 for exemption is $1000 of ALL non member income, no matter the mix. It's the ratio of income that can also get you in hot water, which is what the 35%, etc is for. Which has nothing to do with the amount that can be "set aside" as all such income over $1000 can be as ong as it meets the qualifications for same.

And we all do pay sales tax on purchases. Unfortunately, many HCs think "nonprofit" means they don't have to pay sales tax on the rug they bought. The 501 C code is confusing to the general public because the only ones most people hear about are C 3's which are charitable. None of the other are. And tax exempt and tax deductible do not reside with all.

[DrPhil]

This is all Greek to me.

Get it? Greek...Greek.

*drops mic*

[kddani]

This is the nerdiest thread on GC that I can think of...

[Titchou]

I get it. We did up a chart for C 2, C 3 and C 7 that showed the limits and main points so we could explain it better. Makes much more sense to see it laid out that way!

[Titchou]

Originally Posted by kddani

This is the nerdiest thread on GC that I can think of...

Yes, and the sad thing is some of us actually enjoy this!

[MysticCat]

Originally Posted by Titchou

True, there are limits on where the income can flow from. But the line on the 990 for exemption is $1000 of ALL non member income, no matter the mix.

The only line on the 990 that I see that makes mention of $1,000 is Part V, 3a, which asks: "Did the organization have unrelated business gross income of $1,000 or more during the year?" That seems to be a different question than whether the org had income from non-members, as unrelated business income (income from a business unrelated to the org's purpose) is subject to income tax. Is there another line on there that I'm missing?

FWIW, I'm looking at this from the IRS website:

A social club may receive up to 35 percent of its gross receipts from nonmember sources, including investment income. No more than 15 percent of gross receipts may be derived from nonmember use of club facilities and services. Where the permitted levels of nonmember income are exceeded, all facts and circumstances will be taken into account in determining whether the club continues to qualify for exemption. Thus, the 15 percent and 35 percent are safe harbors.

These rules apply to income from traditional club activities that would further the club's exempt purposes if conducted with members. A club may not receive income from nontraditional business activities, consistent with the requirement that it be organized exclusively to further exempt purposes.

Income from nonmember sources is also subject to unrelated business income tax.

And looking at that, I may see the connection between what each of us is saying.

But yes, people definitely misunderstand what tax-exempt means. And sad as it may be about both of us, I'm glad you're enjoying this nerdy detour too!

[AGDee]

In Michigan, our chapters and house associations can apply for tax-exempt status from the state too and then get a letter from the state to give to merchants so that they do not have to pay sales tax. It is pretty much automatically granted, if the paperwork is done correctly, to any federally tax exempt organization. So, saying that "all of us" pay sales tax is a little off.

All this nerd talk makes me swoon, I have to admit.

And Dr Phil is cracking me up too.

[Titchou]

Well, AGDee, that has been a source of consternation for us, to say the least! We finally caved into it though it isn't the case any where else that I recall.

MysticCat,that's what I am talking about. It is really not the same issue but the 990 only takes into account non member income over $1000 for taxable purposes. The problem begins when audited. We had a smaller HC that had somehow ended up with a nice sized portfolio that was doing quite well. As a result, the interest/divident income was becoming problematic. However, the HC was reluctant to set aside any of that in order to safeguard it as they looked at it as locking them into things they might not want to do down the road. So the question was whether they wanted to pay taxes on it. Once they finally understood the overall picture (and we had to do mock ups of 990s for them to look over), they went along with our recommendations. Somehow, they all think they'll never get audited so why bother! OMG!