What is meant by "Not-For-Profit"

[Japher]

I'm helping a friend determine if his website should incorporate and apply for 501C3 income tax exemption. The website makes money through advertising and it makes more than he wants or needs. He would like to donate the proceeds to people who need help paying their medical bills, via a grant or charitable allocation program with local hospitals.

While it sounds like a headache I think he would be able to increase his revenue streams by doing the extra leg work and would make a greater difference then just donating the money and writing it off.

What do you think?

Also, is there any stipulation that you know of that would prevent a website collecting money through advertising from becoming not-for-profit?

[duke o' york]

It's what you do with the surplus cash that counts. In the UK, not-for-profit organisations are allowed to keep a small surplus, but the majority must be re-invested in the company or donated to charitable causes. Check with a US accountant what the limit for retained surplus is, and stick to it! You can get tax breaks as a NFP organisation, but ideally you'd never need to use them, because you won't be making taxable profits ever. VAT will be the biggest issue, if your friend qualifies for it. NFPs get VAT relief, but of course it will depend on what the VAT is spent on/incurred in.

In the UK, I don't think there is a stipulation as you mentioned, but you'd need to ensure that the 'profits' from advertising are donated away, ideally many times a year, so you have an absolute minimum of taxable profit each year. The trouble is that much internet advertising income is from click-throughs: so it's really tough to calculate how much you'll make each month, and then donate the surplus to charities. I don't think the charities will get much the first year, because the cash paid for incorporation will lessen the potential donations, but if this business is large enough then it makes sense to declare it as NFP as soon as possible, and the charities will benefit more in the long run.

Good luck to your friend, and the charities he'll be supporting.

[Japher]

Thanks Duke. If you are a NFP do you need to follow the GAAP or whatever other accounting practices? Because that would also be an added expense. I don't know the numbers for his company yet but feasibility will definitely depend on the size of the cash flows. Basically, he wants to just run the company, not get paid, and feed all the money out of it. I think it's really humanitarian of him, which is good to know since I am debating helping him start a disease research facility/lab.

[duke o' york]

You will have to follow GAAP, but conveniently you won't need to go overboard if the company is small or medium-sized. Many of the GAAP conventions are only optional for SMEs (small/medium-sized enterprises), so he won't need to have a zillion auditors going through the books each year-end, but I'd advise taking advice from his accountant, or employing one if he hasn't already. They will know the US accounting laws better than I do, and be able to give appropriate advice (that he can then write off against tax ) for his situation. A company of that size shouldn't be too worried about the Sarbanes-Oxley act, or anything like that, but get professional advice: a single hour with his local accountant could/should save him a fortune in the long run.

I used to work for an NFP, and my previous job was with a company who were looking to apply for charitable status, and I'd say that your friend should be a shoo-in for the status.

[Japher]

Awesome. That's sound advice.

[duke o' york]

No problem. I wish your friend much success with his business.

[Solomwi]

Here's the text of 501(c)(3):

(3) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

If it (the activity, not the use of income) fits into one of those descriptions, doesn't issue dividends and isn't political, it should be fine. One sticking point is that the income is from advertising. Even if the website is designed completely within one of the above purposes, the advertising income is probably going to be considered "unrelated business income," which is taxable even for a 501(c)(3). If most or all his income is UBI, the purpose of seeking nonprofit status is pretty well thwarted.

[duke o' york]

But since it seems to be the sole source of income for this business, then it is inextricably linked to the business. I'm guessing that the advertisers who pay this site are there because they want to be associated with the charitable donations, rather than just wanting to have themselves linked to rudepics.com, or whatever. Now I'm not suggesting that Japher's friend is hosting images that would not be welcome at everyone's favourite Civ-based family site, but that as long as there is a tangible link between the site's content and the charitable donations (ie, the advertisers know what they are paying for), then it would be very difficult to argue against NFP status.

[Japher]

I would think that since the soul purpose of the site is to educate people on health related issues any form of advertising that is related to the subject would count as education material? I know, that's a question for the accountant.

Here's his website, by-the-way: http://www.highlighthealth.net/

I'm thinking he might want to change the setup if he's wanting it to be non-profit.

[Solomwi]

But since it seems to be the sole source of income for this business, then it is inextricably linked to the business. I'm guessing that the advertisers who pay this site are there because they want to be associated with the charitable donations, rather than just wanting to have themselves linked to rudepics.com, or whatever. Now I'm not suggesting that Japher's friend is hosting images that would not be welcome at everyone's favourite Civ-based family site, but that as long as there is a tangible link between the site's content and the charitable donations (ie, the advertisers know what they are paying for), then it would be very difficult to argue against NFP status.

That was my first thought, too, and the line isn't very bright, but a regularly conducted trade or business, which selling of online advertising definitely is, that generates income must fit the IRS's definition of "substantially related" to the exempt purpose, quoted below:

To determine if a business activity is substantially related requires examining the relationship between the activities that generate income and the accomplishment of the organization's exempt purpose. Trade or business is related to exempt purposes, in the statutory sense, only when the conduct of the business activities has causal relationship to achieving exempt purposes (other than through the production of income). The causal relationship must be substantial. The activities that generate the income must contribute importantly to accomplishing the organization's exempt purposes to be substantially related.

It will turn on the nature of the ads, rather than the website (though, to be sure, the nature of the website matters, too). I didn't see any ads other than the "Ads by Google" links in my perfunctory check of the site, and what I saw of the Google ads probably won't make the cut (one was for supplements at GNC, e.g.). If I just overlooked them, though, and they're more of an educational than commercial type, there's a decent chance they'll work.

[duke o' york]

I didn't see any ads at all, and the Google link wanted me to advertise, or to advertise on my site. A little confused, but maybe it's only ads for US viewers. Regardless, get the opinion of an accountant, ideally one who has experience in these areas. Ringing round local practices should get you someone who knows the finer points of the law on NFPs.

[Wiglaf]

A not for profit means you make no money or if you do, you do not want it. Priests, churches, and the government fall into this category but things like McDonalds or Dell do not

[duke o' york]

I don't think the government do, or should. With budget deficits and government borrowing at a high across the Western world, then the government should be trying to claw back and keep all they can.

[Solomwi]

I didn't see any ads at all, and the Google link wanted me to advertise, or to advertise on my site. A little confused, but maybe it's only ads for US viewers. Regardless, get the opinion of an accountant, ideally one who has experience in these areas. Ringing round local practices should get you someone who knows the finer points of the law on NFPs.

Once I turned off AdBlock Plus, I had the Google link and a few out next to it, which I presume are ads Google is placing there (they have the right look for it, if nothing else). Click on one of those and you should get a list of specific ads. I fully agree on getting advice from an accountant (or tax attorney).