Patricia A. O'Malley
Social Policy & Programs Consulting
Training and Services for agencies working toward social and economic justice
Patricia A. O'Malley
Social Policy & Programs Consulting ~ Community Matters
P.O. Box 97803 ~ Pittsburgh, PA 15227 ~ 412-310-4886 ~ info@patomalley-consulting.com
Copyright Patricia A. O'Malley ~ All rights reserved
Established 1993
Nonprofit Organizations Should be Tax Exempt
We Can’t Afford to Tax Them.
July 14, 2015
For several years, the etherverse has been aflutter with calls to revoke tax exemptions for churches and other nonprofits engaged in political activity. Many people claim that such activity is illegal. It is not. Abolishing the nonprofit tax exemption would be a disaster.
Tax-exempt status doesn’t come easily. You don’t register a nonprofit as you register a car or a dog. The Internal Revenue Service maintains a long, expensive, and rigorous process to ensure that an organization deserves that status.
Definition of nonprofit
In 2012, there were 1,521,052 tax-exempt organizations in the United States, including 1,050,318 charities.(1)
A nonprofit organization is a corporation, just like any other. Once established in its home state, it obtains tax-exempt status from the IRS. Churches and charities are only two of the 57 types of nonprofits recognized by federal law. The others include chambers of commerce, trade associations, labor unions, credit unions, community associations, volunteer fire companies, political organizations, social and recreation clubs, and the like.
A nonprofit is not anyone's private domain. No one, even the founders, "owns" a nonprofit. The board of directors controls the organization. They delegate the daily operations to employees led by someone with the title of president, chief executive officer, executive director, or some such thing. But the primary power and responsibility always belong to the board.
Because our Constitution guarantees freedom of religion in the First Amendment, churches and other faith-based nonprofits aren’t required to register with the IRS. But they still have to follow all of the requirements to maintain their tax exemptions.
Tax Exemption and Deductions
Some donations to churches and charities are deductible on personal federal income tax returns, but only if the donor itemizes deductions on Schedule A. And that deduction does not result in a dollar-for-dollar reduction in the donor’s tax bill.
Nonprofit corporations are exempt from paying taxes on most of their revenue. Most state and local governments also issue exemptions from property and sales taxes as well.
Churches, charities, and other nonprofits are exempt from most taxes because they provide essential services to the public. If those organizations didn’t exist, the government would have to provide those services, and we can barely afford the government services that we already have. The organizations also couldn’t afford to do their work if they had to spend scarce dollars paying taxes.
Regulation and Oversight
Nonprofits are regulated much more strictly than for-profit businesses. They must meet the same legal and financial requirements as for-profit businesses. They must obey wage and hour, payroll withholding, workplace health and safety, union organizing, and other laws. While they don’t pay taxes, they do have to file financial information documents with the IRS annually, on Form 990. States also oversee nonprofits through their Revenue and State Departments.
All government agencies, and most corporations and foundations that fund nonprofits, require that the nonprofits have annual financial audits by licensed, experienced Certified Public Accountants.
If you believe that a tax-exempt organization has violated federal law, you can file a complaint with the IRS on form 13909.
Who Should Provide Social Services?
There are three opinions on the role of nonprofits in society. One holds that the government should perform all of the social services necessary for society. Another maintains that nonprofits should do all of that work and the government should stay out of the social service business. Really, we need both.
American nonprofits can’t possibly provide all of the social services that Americans need. The system is overwhelmed now. Government agencies operate more efficiently on a large scale. They follow a uniform set of rules and procedures, maintaining fairness to all. However, because of its size, government moves slowly and it can take years to make major changes in those rules. Smaller nonprofits can be more flexible when unusual things happen – such as natural or economic disasters (Hurricane Katrina or the collapsing steel industry). They can adjust their rules and procedures more quickly and effectively to help those in need.
Charitable nonprofits provide food, clothing, shelter, health care, education, legal, employment, childcare, parental, financial, community development, and other crucial services to our neighbors in need – to those who simply won’t survive without this help.
Churches would suffer the most under a new tax policy because they own almost all of the real estate that they occupy. However, churches provide much more than just religious services. They provide vital social services to the public, extending beyond their own congregations and throughout their communities. Churches operate most of the homeless shelters, soup kitchens, and food pantries, along with many childcare and health care facilities and more than 80 percent of private schools(1) in the U.S.
Tell me. Which one of those things can you do without?
Political Activity
Since recent Supreme Court rulings, there’s been a lot of public noise about churches’ political activity. Again, there’s a lot of false propaganda about what is permitted.
Churches, and all charities, are free to preach, promote, and advocate any political positions they want on any issue. They can do some limited lobbying. They may not support or oppose any candidate for any political office. That is their only restriction. I’ve been a volunteer, staff, manager, board member, board president, lobbyist, and consultant for charities for more than 30 years. I know what I'm talking about.
Nonprofits which are not charities, such as business organizations and labor unions, may support or oppose political candidates.
If you don’t like an organization’s political activity, then support – with your time and money – the organizations whose activities you do like.
If Nonprofits Were Taxed
Specific numbers are impossible to calculate or locate, but it would surely cost the government more money to replace the lost nonprofit services than the amount of tax dollars that it would collect.
For example, churches and nonprofit organizations maintain 30,861 schools serving 5,268,000 students(2). America’s 14,000 public school districts(3) could never handle an influx of that size, even with the additional taxes that the nonprofits might pay, if they were still open. Our public schools spend an average of $12,401 per student, per year(4). This increase would require an extra $65,328,468,000 per year. Where do you think our schools would get that money?
Many donors would stop contributing because they don’t want their money going directly to pay taxes.
Nonprofits can’t raise their prices to cover the cost of taxes, as businesses do, because most of their services are free.
They would have to curtail or eliminate services.
Many would go out of business.
We would be taking food, shelter, health care, and other vital services directly away from destitute people who have nowhere else to turn.
Government agencies would have to take up the slack.
And all of our taxes would increase.
Taxing nonprofits is such a bad idea that even Congressional Republicans haven’t attempted it. Yet.
If you don’t like these rules, you are free to lobby Congress to change them.
Our schools should teach this stuff, but they don’t want you to know it.
For more information:
Nonprofit Organizations: Myths and Facts
Why We Need More Lobbyists
IRS: Tax Information for Charities & Other Non-Profits
Guidestar.org: Forms 990 for all U.S. Nonprofit Organizations
Charity Navigator: General and Specific Information on U.S. Charities
Sources
- National Center for Charitable Statistics
- Council for American Private Education
- U.S. Census Bureau
- National Center for Education Statistics
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