Reflections on What It Means to Be a Tax Exempt Organization

[1] I hadn’t thought much about tax exemption and its implications for our organization and our society until asked to do this reflection. I had basically taken it for granted, even though in recent years our organization has joined others in protesting what seemed like assaults on this status from the IRS and Congress.

[2] First I thought of the many ways that tax exemption is a benefit to us, a Lutheran related, faith based community development corporation/social ministry organization. Probably the greatest impact is on our donors. Under current regulations, their donations to a tax-exempt organization are tax deductible. This is a major incentive for donations from individuals and corporations, and without this incentive, we would undoubtedly experience diminished contributions. Futhermore, we don’t have to pay income taxes to the Internal Revenue Service (IRS)…even though we now spend quite a lot of money doing the extra things to prove to the IRS we are good stewards of our resources, and this tax exemption. We undergo the A-133 additional audit (an IRS requirement of not-for-profit corporations who receive a certain amount of federal funds), and experience the now special scrutiny of auditors to meet the requirements of the more recent IRS mandates that are looking for possible fraud or irregularities. We have been careful to set up for-profit related corporations to conduct those activities that IRS deems “profit” activities (such as property management) so as to avoid the need for additional scrutiny.

[3] Federal tax exemption also gives us access to certain federal funds, where the enabling legislation has restricted the funds to not-for-profit corporations. We benefit not only from the federal tax exemption, but from a related variety of exemptions that come out of that. It’s sort of like a senior citizens discount that one can get with tax exempt status. Exemptions include things such as property tax exemptions (from the County), sales tax exemptions (from the State) which we use on consumable purchases, as well as purchases of building materials for our construction projects, and to pass on to sub-contractors who are purchasing materials for construction projects, and water bill exemptions (from the City). In this era of fewer and fewer dollars (so much has been slashed from federal budgets in regards to services for the poor and these cuts impact already limited State funds as well), these exemptions are part of careful stewardship of limited dollars to respond to ever increasing needs.

[4] We can no longer take tax-exempt status for granted. The Internal Revenue Service has been scrutinizing returns and following up on this scrutiny with action and threats. The IRS has published new forms that underscore their concern for greater accountability for the tax-exempt status, and these incremental revisions are just the beginning. They promise a more comprehensive overhaul is in the works. The tax-exempt status is hardly a bias in favor of religiously based organizations. Any organization that can demonstrate it is doing a “community good” is eligible to apply for tax exempt status.

[5] Congress manifests ever-increasing concern over accountability in the current tax reform efforts. Congress is exploring what reforms for tax-exempt organizations will be included in the Tax Relief Act of 2005 (HR 4297). The Independent Sector organization (a coalition of corporations, foundations and private voluntary organizations that works to strengthen non-profit organizations) has responded to Congress in support of some of the tax incentives that would be included for contributors (which we need) and in concern over some of the provisions that would harm the ability of not-for-profits to provide much needed services. Some of the concerns include costly certification requirements on unrelated business income. We want the tax code changes that would make it easier for people to make tax deductible donations to our efforts (there are even threats to make this harder, or not exempt at all, rather than easier) but we are concerned about the ever greater restriction and red tape involved in demonstrating compliance.

[6] It is always abuse by a few that triggers the clamping down for accountability that seems to come out of the IRS and Congress, and many times how they choose to “clamp down” doesn’t stop the cheaters, or people who use this tax exempt status to do harm to the community (those separate segregated schools, or hate groups) but simply puts added burden and cost on those of us who seek to comply.

[7] Of even greater concern to those of us who are scrambling in the trenches are recent efforts to curtail/deny federal funds (and pass this restriction on to the States) that go to tax-exempt corporations who engage in voter registration and voter turn-out activities. This, it seems to me, is the heavy hand of government seeking to curtail activities of a democracy, and it smacks of a political bias against “the people.”

[8] Another “threat” to the work of our tax exempt organizations is the apparent belief of some that government should get out of the habit of funding mercy towards the poor. Certainly the current budget proposals that include massive cuts and elimination of many of the programs that help the poor while giving additional tax breaks to the wealthy (90% of the proposed additional tax cuts go to families with incomes over $200,000) give some basis for my impression. Tax cuts passed and proposed have virtually dried up available funds for human services, and those of us in this business are fighting over the crumbs. Most of the current proposed budget goes to national debt payments, the wars in Iraq and Afghanistan, and national security. The budget is a moral document and reflects our values and priorities; the current budgets don’t reflect the values that come out of God’s call for justice and fairness.

[9] America is grounded on the commitment of government to ensure “life, liberty and the pursuit of happiness” not just to a few, but to all its citizens. We cannot let government off the hook in providing this, nor is it feasible for the not-for-profit organizations to bear the major responsibility for those left behind the mainstream.