LPFMs must give on-air acknowledgement of all business donations, including non-cash gifts.  Failure to do so is a violation of the Payola law.



IRS and State Regulations for Non-Profit Organizations
By Bill Golden, Wm. R. Golden & Co, LLC, CPAs, Roswell, New Mexico BillGolden@dfn.com

Federal Non-Profit Regulations
At the federal level, becoming a non-profit is a bit more complicated than state recognition.  First, no one, except churches (and now there are some limitations with respect to churches), are automatically recognized as a non-profit.  If you are not a church you do not apply for non-profit, 501(c) status within the prescribed time period (15 months), the IRS will tax your organization a as corporation or unincorporated association.  As a practical matter IRS rarely assesses tax on small organizations that are obviously a non-profit organization.  However the mere interface with the IRS generally yields an application for non-profits status.  (Unfortunately the application is somewhat lengthy and no model of clarity.)

In order for donations by individuals, partnerships, LLCs, corporations and other non-profits to be considered deductible for federal (and generally state) income tax purposes, your organization has to be a 501(c) something.  Indeed there are about 30 different 501(c) classifications. However, most organizations fall under IRC 501(c)(3) which is defined as: 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

However, be careful about two (2) areas that can get your organization into real trouble.  First, from the IRS itself:  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) of IRC 503), 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.

Secondly, do not discriminate.  Any restrictions on membership must not be based on race, creed, color, religious affiliation, etc.  You can have all sorts of membership requirements (touching heads and spitting in a cup, etc.) but those requirements cannot be discriminatory. 

You must file the application (IRS Form 1023) to become a non-profit within fifteen (15) months after then end of the month you incorporated, organized, etc. in order for your non-profit to be considered a non-profit from the day it incorporated, organized, etc. 

Once you get a determination letter from the IRS, you can receive contributions which the donor can deduct for federal income tax purposes.  If you do not file an application to become a non-profit within fifteen (15) months, until you file the application and receive a determination letter, contributions are not deductible and the organization may well have to file an income tax return, claim the contributions as income and pay income tax on the net of contributions in excess of operating expenses

As a practical matter, if you donít file the application for non-profit status within fifteen (15) months and you receive substantial amounts of contributions, you can have some really mad donors who end up not being able to deduct their contribution, not to mention the tax problems you and your organization can face.

Well, getting there was just half the fun!  Once you are classified as a 501(c)(3) entity, you have some reporting requirements to deal with.  First, all non-profit organizations (except for churches and those entities to whom the IRS has told they do not have to) must file an annual information return (IRS Form 990).  This return is similar to a tax return except you must disclose some information about where you money comes from, where it goes, your financial status, officers and directors and how much they receive as compensation and the purpose of your ongoing projects.  As with Form 1023, IRS Form 990 is no model of clarity partially because it is designed to facilitate filing by all of those other 501(c) organizations that exist (Black Lung associations, Voluntary Employee Benefit Associations, etc.) 

If you do not receive over $25,000 in a year, you do not have to file Form 990!  If you receive less the $100,000 a year and your assets are less than $250,000, your can file Form 990-EZ which is considerably easier (as the name indicates)! 

The bottom line on IRS Form 990 Ė the IRS wants to know what you are up to.  There has been increased scrutiny by the Service over the last several years for four (4) reasons.  
1.
for profit entities have complained about non-profit organizations (who pay little or no income tax and have significant tax breaks) getting in to so many businesses, competing with for profit corporations. 
2.
Second, a few years ago two large non-profits (and I donít remember which ones) were both found to be paying some sort of hush money to someone who got pregnant or some such scandal!  Congress was shocked that non-profits would even consider such a thing.  Congress then decided the IRS should know a lot more about what non-profits were doing. 
3.
Non-profits began to turn to bingo and other forms of gambling (pull tabs, etc.) to generate income.  I am aware of a fraternal organization that, in five (5) years amassed over $1,000,000 into a permanent fund from having bingo games twice a week.  (More importantly, for one hour before, during and one hour after the bingo games, they sold lots of pull tabs which is the really easy money!)  The Service is paranoid about these bingo operations and think organized crime is invading this area.  Seems a little chintzy for organized crime, but maybe so!
4.
the explosion in non-profit credit counseling organizations has alarmed Congress.  Partially because so many have scammed people who were already in trouble with their credit.  In some cases, the non-profits have turned out to be nothing more than shells to pass money through to the officers and directors.  Because of these abuses, Congress has stiffened the reporting of 501(c)(3).  The form due out in 2007 for year 2006.

 Filing the annual 990 return is important.  The failure to file is $100 a day up to a maximum and $10,000.  The IRS has become somewhat reluctant to forgive late filing penalties on 990s.  Better have a good reason for filing late.  Failure to file three (3) years in a row and the IRS can revoke your non-profit status.  Filing a 990 is a pain and can be expensive.  However, it is has been my experience that non-profits save more on software than the cost of filing a 990 return.  (The non-profits I am familiar with pay $8 for XP, $20 for full versions of Microsoft Office Professional, $40 for Windows Server 2003 and $6 for each workstation, etc.  Similar savings on Adobe, Intuit, Lotus and Norton products just to mention a few.  www.techsoup. org (check it out). 

I am not going to go into the ins and outs of how non-profits have to account for their money.  With LPFMs and NCEs here is the rub.  You need to be very careful about the purpose clause of your non-profit (as stated in your Articles of Incorporation on file with the Secretary of State) so as to prevent the IRS from determining your operation of a radio station is beyond the scope of the purpose clause of your organizationí s articles on incorporation.  Should the IRS determine the operation of your LPFM or NCE is outside the organizationí s basic purpose, the income (less expenses) generated by the LPFM or NCE is subject to UBIT (Unrelated Business Income Tax) which is tax on the net income at for profit corporate tax rates.  

If you can show the LPFM or NCE fulfills an educational aspect of your non-profit or is necessary (financially) to carry on the basic purpose of the non-profit, you should be fine.  Be cognizant of this area, keep minutes of board meetings where these matters are discussed and decisions are made.  To me, a non-profit who is five (5) years behind in keeping their corporate record book up to date is worse than a for profit corporation in the shape.  People often begin to operate non-profits as their own and that can get you into real trouble should the IRS take an interest in your non-profit. 

I donít mean to alarm anyone about these issues but the Serviceís determination that your LPFM or NCE is an unrelated business entity for tax purposes can create quite a hassle.  But if you document and plan accordingly, it is a hassle you can avoid. 

Businesses may give non-cash donations to non-profit organizations, but cannot claim a deduction greater than the "fair and normal" value of the donation.  In most cases, donation of time is non deductible. For example, a volunteer DJ cannot claim a donation based on the value of his personal time. 

State Regulations -
In the past states have recognized virtually anyone who filed under non-profit statutes (which vary by state) and said "we are a non-profit."  Some states require only a one-time filing (Articles of Incorporation) and a very modest filing fee ($10 - $25). However, recently various stateís attorney generals have become concerned about non-profits, their autonomous operations and various conflicts of interest issues.  (The sudden interest by state authorities has also been fueled by the belief (and probably rightly so) that many so-called ďnon-profitsĒ a really created so that its owner/operators can sidestep paying sales or gross receipts tax.)

Some non-profits operate as unincorporated associations such as PTAs, etc.  The primary purpose of incorporation is to shield officers and directors from personal liability.  Remember, if you are not incorporated (or an LLC) your officers and directors can be held personally liable for most every action you, your employees and in some cases your volunteers perform.  Something to think about!

Given the fact that becoming a non-profit is relatively simple (at the state level) I always advise clients against becoming officers or board members of organizations that are not incorporated.  In other words, if the organization is not incorporated, insist they do so before going on their board.  There are numerous sites on the internet that will do it for you but generally it is very simple and the Secretary of State (generally responsible for corporations) often provides non-profits a simple form to file.

Many states give non-profits a break or a full pass when it comes to property taxes, especially on tangible personal property (transmitters, towers, computers, etc.).  In some states, like Texas where the property tax is astronomical (since they have no income tax), the savings can be substantial.

Gifts to Non-Profits
A landlord cannot take a deduction for furnishing space at no charge to non-profit.  Remember, no one ever said U.S. Tax laws were designed to be fair. 
Here is a summary of the IRS's explanation of the law:
 
1. A taxpayer owns a 10 story building.  He allows a charitable organization to use one floor and pay no rent.  HE DOES NOT GET A TAX DEDUCTION FOR THE VALUE OF THE RENT.
 
2. A taxpayers owns a 10 story building.  He gives a charitable organization a undivided 10% interest in the property.  He will be allowed a charitable contribution of the value of the gift. 
 
There are some very complex charitable remainder trusts that can be utilized to make gifts of future interests that I am not going to attempt to elaborate on here.  They are considerably complex and not like the scenario under discussion here.
 
Second, the BIG WARNING!
 
Charitable organizations ARE NOT to value non-cash gifts.  In very limited circumstances a charitable organization may value a gift if the organization is professionally involved in dealing with the specific type of article.  For example, lets say the organization routinely sells art works and has on staff or members who are qualified to value the gift.  Then, and only then, can the organization offer an opinion as to the value of a gift.  In other cases, if an independent third party values the gift, then the liability for making an erroneous valuation falls to the third party.   
 
Our local humane society, of which I am treasurer, operates a thrift store.  It is open Monday through Saturday and is one of the largest, if not the largest, thrift store in the community.  We receive all sorts of gifts - clothing, dishes, furniture, appliances, computers, book and even some artwork.  Obviously the staff is not competent to value all of these gifts.  We do provide acknowledgement receipts detailing what items were received.  There is a book available regarding the average value of used clothing prepared by a couple of CPAs from Kansas City (I think) and their values, which the IRS seems to readily accept, are quite liberal.  If memory serves me correct these two guys do some sort of annual survey of gift stores around the country to determine approximate values.  We but there book each year and generally attach copies of their values to used clothing to the receipts. 
 
With appliances and furniture, we sometimes will indicate the price we intend to ask for the items.  Of course that is in no way controlling as to value but does give the taxpayer some reference point to assist them in arriving at their own values.  Basically, you are on your own in valuing these types of gifts.  Recently, the IRS has now tried to simplify the issue (to some extent).  After April 17, 2006 a taxpayer MUST attach to their tax return a qualified appraisal of any single item of clothing or any household item this is not in good used condition or better for which they intend to deduct more than $500.  (Of course we will now argue about what is the measure of "good used condition.")
 
If the deduction is a non-cash deduction of more than $5,000, you must have a qualified appraisal, with a very limited number of exceptions. (One exception - stock and bonds.  In such cases all we do is attach a copy of Yahoo's Morningstar closing quote as of the date of the gift.)   
 
From IRS Publication 1771 - Charitable Contributions - Substantiation and Disclosure Requirements: 
 
Written Acknowledgment

RequirementA donor cannot claim a tax deduction for any single contribution of $250 or more unless the donor obtains a contemporaneous, written acknowledgment of the contribution from the recipient organization. An organization that does not acknowledge a contribution incurs no penalty; but, without a written acknowledgment, the donor cannot claim the tax deduction. Although it is a donorís responsibility to obtain a written acknowledgment, an organization can assist a donor by providing a timely, written statement containing the following information:

1. name of organization
2. amount of cash contribution
3. description (but not the value) of non-cash contribution
4. statement that no goods or services were provided by the organization in return for the contribution, if that
was the case
5. description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution
6. statement that goods or services, if any, that an organization provided in return for the contribution consisted entirely of intangible religious benefits (described later in this publication) , if that was the case It is not necessary to include either the donorís social security number or tax identification number on the acknowledgment.

 

 

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NOTES

Commercial "For Profit" vs. Non-Profit NCE Additional Notes.  NCEs must be non-profit; not necessarily 501(c)3  Why LPFM should not be Commercial

Translators should have more than 100 watts ....

More power may not fit for many ....  Most NCEs are not PBS and do not receive government funding / grants

You can be a state recognized non-profit without being a 501(c)(3). In addition, there are other classifications of non-profits recognized at the federal level by the IRS.  This is incorrect. The FCC recognizes non-profit organizations that are merely state recognized. 501(c)3 status with the IRS is an option but the FCC doesn't require it.  Every state is different, but there is a difference between being a state recognized non-profit organization, and an IRS tax-exempt 501(c)(3)

You can incorporate as a non-profit organization in your own state.  In NH you do it at the Sec. of State office and pay $75. It can be done in one day. That's all you need to be an eligible LPFM licensee with the FCC. That, or be a school, a government entity, or a church.

The IRS tax-exempt status is something different all together! You have to file a lengthy application with the IRS to get that status.  The fact you are a state-recognized non-profit corp means nothing.  One does not ensure the other.

Having IRS tax-exempt status IS required to be a licensee of an NCE LPFM.

It is easy in most states to incorporate as a nonprofit.  Churches rarely even need to do that.  The law varies from state to state, so it is best to consult a tax attorney, but as far as I know if your state recognizes you as a nonprofit, that's good enough for the FCC.  Of course, it is easier if you can attach a copy of your IRS Determination Letter as an exhibit to your application. 

Can LPFM be a viable biz like full power? Do you mean can it be as viable as an NCE? Given the right conditions, yes. Can it "turn a profit?" No.

How are you reporting your Income 990 Form with the IRS. If you make more than $5000 you have to do a 990 Form.

Congress by law requires any licenses for commercial frequencies to be awarded to the highest bidder. Thus if the FCC decided they would permit commercial LPFM stations, those applying for a commercial LPFM would be subject to competitive bidding.

The 'auction' requirement for LPFMs if commercial operation was allowed, is not certain if the entity was still required to be a non-profit licensee. The argument I have is it is legal for a non-
profit to operate a newspaper, magazine, etc., as a commercial entity but an FCC licensed facility (yes I know non-profits run commercial stations). It would seem to me commercial or non-
commercial operation should be allowed non-profit licensees without auctions as the entities are non-profit, educational (got to have that mission statement) entities.

The qualifier, as I see it, between commercial and non-commercial is that a commercial station is a for-profit entity and a non-commercial owned by a non-profit. If NCE stations were allowed to
be commercial, they'd still be non-profits and qualify for a frequency without an auction or filing fee. Remember, commercial is just a funding option. True, non-profits do enter auctions for
commercial frequencies, but this is done because the non-profit really wants that area and has deep pockets or they want a commercial frequency they can sell for fair market value at some
point in the future.

I admit, we'd really have to make a case for why non-profit LPFMs would need to be had without auction if they were commercial. One argument is such income would be taxable in the eyes of the IRS, under most circumstances. Thus, the Government would get money in the coffers from LPFM continually, not just upfront.

I was told that we had to be a 501(c) 3 for the individual supporters to be able to deduct their support to our station. Business underwriters can deduct it because it is considered a legitimate business expense. Also, being a 501(c)3 entity gives us tax exempt for not having to pay sales tax on our purchases. If our purchases are small, I usually don't go through all the paperwork to discount the sales tax. It's just not work it!

I was told that we had to be a 501(c) 3 for the individual supporters to be able to deduct their support to our station.  To my knowledge, that is true.  That is also correct, even if you are not a 501(c)(3).  They can write it off as advertising or promotion.

In some state a 501(c)3 entity is tax exempt for not having to pay sales tax on our purchases but required a lot of paperwork to document.