Exam 2 Flashcards
Corporate Income Tax
paid on profit, the amount of money paid after expenses
Unprofitable Business
If you don’t make a profit, you don’t pay income taxes, functionally tax-exempt
Untaxed profit goes to
Expand - programs, products, and services
Invest - in infrastructure improvements, human capital, hiring the best people
Save - for future risks and opportunities
Why Governments allow for tax-exemption
Government expects nonprofits to do more good with that extra money, reach more people, accomplish their missions without the burden of tax
501(c)3
tax exempt, contributions are deductible, insubstantial lobbying, no political campaigns
501(c)4
tax-exempt, no deductions, lots of lobbying, political campaigning (SuperPACS) don’t have to disclose where they get money
501(c)6
tax-exempt, no deductions, allowed to lobby, allowed to campaign, industries, trade associations
Donations
Not a normal good, price-inelastic, income-elastic
Price-inelastic
As cost of donations go down, consumption stays the same
Income-elastic
As income goes up, consumption goes up (people donate more)
Inferior policy
donations are not treated equally, gives preferential treatment to wealthy, home-owners and residents of high tax citities. Regressive tax policy
Organizational Test
What you say
Organizational Test - Dissolution Clause
If charity is dissolved, funds go back to the community or other charitable organizations
Organizational Test
Inurement Clause
No private benefit
Organizational Test
Purpose Clause
limited to charitable activity
Organizational Test
Political Activity
insubstantial lobbying, no campaigning
Operational Test
what you do
Operational Test
Charitable Class
charitable cause, no specific people (no GoFundMe’s)
Operational Test
Commensurate Test
spend money the way you should (don’t spend it all in one place, i.e fundraising)
Operational Test
Business Activities
UBI (unrelated business income) is insignificant, income earned is for a charitable purpose
Public Charities
1/2 of support comes from the public, inherently public activity (church, school, hospital) Expenditures charitable purpose, no excise taxes, lower private benefit
Supporting Organizations
mission to support a public charity, activities are limited, organizational test required, in support of a public charity, no excise taxes, lower private benefit
Private Foundations
charitable vehicle for families and companies that give money to others, 5% of assets given away per year, Excise tax of 2%, higher self-dealing limits
Private Operating foundations
Private foundations that do charitable activity, stated mission of a few donors, 3.33% of assets, 2 % of investment income, higher self-dealing
Private Benefit
Codes says “operated exclusively” for a charitable purpose, insubstantial activity - IRS doesn’t define substantiality, benefits not charity count as private benefit
Private Inurement
considered in the context of insiders, “Is there a way that the organization’s profits are guaranteed to go to an individual”, anything analogous to ownership will cause trouble with the IRS, cap on earnings
Intermediate Sanctions
excise tax on excess benefit transactions, called intermediate because it is not as bad as revoking tax exemption, must involve a DQP in order to be considered an intermediate sanction
DQP
Directors, Officers, managers, substantial donors, family (spouse, siblings, ancestors, and descendants, companies with 35% held by DQP
Avoiding intermediate sanctions
Identify all DQPs, Negotiate at arms-length, document and secure any loans, have and follow a conflict of interest policy
Self-dealing
Forbids certain transactions with DQPs
include: sale, exchange, or lease of property, loans, furnishing goods or services, paying compensation to a DQP - except services that are necessary to the charitable purpose
