Posted tagged ‘taxes financial’

What’s in a Name: Non-Profit or Not-for-Profit Organizations?

February 1, 2014

For some time I have wanted to clarify: what is a Non-Profit organization?  Without fail during the year organizations and alma maters send me requests for donations pleading for funds in essence to colloquially “make ends meet” or otherwise raise funds.  They often cite difficult economic times and a need to promote their vision and contribute to society.  There are not insignificant differences between the various social groups, fraternal orders,  religious institutions, charities, politically orientated groups, social welfare organizations, and others that are lumped together as “non-profit” organizations.  (Not to mention those that are hybrids that sometimes aggressively, illegally,  or unethically blur the lines).  Yet is that the best way to describe them?  I believe not.

It is common to hear someone refer to an organization that engages in social causes as a non-profit organization (also a non-profit corporation).  What is imprecisely called a non-profit organization is more accurately called a not-for-profit organization. This recognizes two very important facts:

  1. An organization that does not generate a profit–essentially taking in more funds than expended–will not survive.
  1. This correctly identifies that the primary organizational mission is strikingly different from a commercial entity whose primary purpose is the generation of wealth for its owners.

The belief that a not-for-profit organization is “not making a profit” is strikingly misleading.  An organization must receive more funds than it expends or it becomes financially insolvent.  The key point I believe is: How sustainable is the organization’s funding strategy?

In the corporate world this has long been referred to as a “sustainable business model.”  Annually requesting donations and contributions because an organization cannot meet expenditures may indicate an organization is living-beyond-its-means.  If once could not responsibly run their personal finances in this manner, why would an organization?

The uncomfortable, question that makes some squirm is: Should not-for-profit organizations make a profit? Making a profit or pursuing wealth is not inherently evil.  For some the word profit is associated with nameless cold corporations with mirrored-windowed high-rise office buildings and not a warm fuzzy good-for-humanity organization staffed primarily with volunteers provided by social groups.  What is interesting and important to ask is: where does that profit go?

The US Government, through the Internal Revenue Service, has deemed that organizations committed to purposes of common good are exempt from federal income tax as stated in Section 501(c)(3) of the Internal Revenue Code.  These purposes per the IRS include:

“charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.  The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency. (1)

In essence, the US Government permits these organizations to uses monies for their cause that would otherwise be sent to the US Treasury as taxes.  These are called tax-exempt organizations.  These organizations are legally compelled, beyond reasonable reserves or saving accounts, to spend any profits within three years of earning them on their primary purpose.

All of these organizations, with the exception of religious institutions, are required to file IRS form 990 each year.  This document is the organization’s equilivient to an individual’s annual form 1040.  These annual returns are public documents and provide insight into the organization’s revenue and expenses.  This permits an important degree of transparency to the citizenry to examine if an organization truly is focused on purposes of common good.

Further the US Government encourages individuals to contribute to an organization of their choice by not taxing monies donated.  This signals that an individual can, at times, better decide than the government what specific programs or organizations should receive funding.  It encourages private organization to fulfill a social need without the intervention of a federal or state government.  This is a blending of democracy and with the capitalistic (or Darwinian) virtues of free market economic theory:  only the organizations that fill the societal needs deemed most important by those that contribute will survive.

(Or they just have the better marketing departments; that is a different story.)

References

1.  Internal Revenue Service, “Exempt Purposes – Internal Revenue Code Section 501(c)(3)” Retrieved March 4, 2013,   http://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Exempt-Purposes-Internal-Revenue-Code-Section-501%28c%29%283%29

Conflict of Interest: Do Congressmen’s Compensation Exceed the $250,000 Being Discussed For Tax Cut Renewal?

December 29, 2012

Today’s financial cliff drama and sound bytes focuses on the amount of annual income below which the current tax rate is not increased.

Income levels of $250,000, $400,000 and $1million have been floated around.  My question is: do our Congressmen have a conflict of interest given their annual compensation of at least $174,000?  Per a January 2012 Congressional Research Service report:

“Since January 1, 2009, the compensation for most Representatives and Senators has been $174,000. Compensation for the Speaker of the House is $223,500, while the President pro tempore of the Senate and the majority and minority leaders in the House and Senate receive a salary of $193,400.1

I wonder what is the average annual income for a Congressman?  Those that are married are probably filing jointly with a spouse so that income is included as well as is any other revenue from business interests.  There may be other income sources from investments (The median net worth for a Congressmen – $878,500 for Democrats, $957,500 for Republicans – far exceeds the country’s medium household net worth of $96,000 in 2009.2)

That at least some members of Congress jointly file federal income taxes each year in excess of $250,000 is not an unreasonable hypothesis.  It appears there is an actual or perceived conflict of interest among Congressmen on this matter as they debate an income level of $250,000 vs. $400,000.  As a responsible constituency, we are compelled to ask: “Who specifically is benefiting?” and “Is that a meaningful percentage of Congress?”  These have the appearance of having ramifications beyond “the interests of small business owners.”

This takes on a new perception when the US poverty level for 2011 is defined as total family yearly income of <$22,350 (for a family of four)3  and the average median household income in the United States from 2007-2011 was $52,762.4.  This begs the question, if we pay our politicians more than three times the medium household income in the country and we get the dysfunctional results we have today, how do we change compensation to reflect the value received by the US people?  Just as the commercial sector cannot always police themselves and requests outside intervention, Congress’s recent actions suggests its members cannot responsibly govern themselves.  Given the country’s financial stress, the politician’s themselves should share the financial burden and should renew the tax cuts on incomes below $250,000.

References

1. Burdnick Ida A, Congressional Research Service Report for Congress (4 January 2012), Congressional Salaries and Allowances. Page 1.  Retrieved from: http://library.clerk.house.gov/reference-files/112_20120104.pdf

2. Luhby, Tami, The One Percenters In Congress (8 May 2012) CNN Money.  Retrieved from: http://money.cnn.com/2012/05/08/news/economy/congress-net-worth/index.htm

3. U.S. Department of Health & Human Services (20 January 2011). Annual Update of the HHS Poverty Guidelines (Federal Registry Notice). Retrieved from http://aspe.hhs.gov/poverty/11fedreg.shtml

4. U.S Census Bureau, People Quick Facts (2011).  Retrieved from: http://quickfacts.census.gov/qfd/states/00000.html