Don’t assume yours does
According to Kids Non Profits USA, 75 percent of all youth sports organizations qualify for Internal Revenue Service 501(c)(3) status, but fail to apply for it as required by federal law. Unfortunately, many sports organizations have been under the mistaken belief for many years that they were tax exempt under federal law.
Below are the most common reasons that many sports organizations mistakenly believe that they are 501(c)(3) tax exempt:
- On their application for a Federal Employer Identification Number, they indicate that they were a nonprofit and thought that this was all that was required.
- They received state nonprofit corporation status, but they neglected to apply for federal 501(c)(3) status as a tax exempt organization.
- The assumed that they were automatically tax exempt as a volunteer-run organization.
- They assumed that the prior administrators properly applied for tax-exempt status many years ago.
The benefits of 501(c)(3) tax-exempt status are as follows:
- Exempts the sports organization from paying federal income taxes
- Allow a federal tax deduction for donors of cash, property, or equipment.
The risk of not properly applying for 501(c)(3) tax exempt status are as follows:
- Sports organization is responsible for filing and paying federal and state income taxes as a taxable business.
- The sports organization is subject to federal and state penalties as well as back taxes.
- Donors may have taken improper tax deductions on their personal tax returns thinking that the sports organization was tax-exempt.
In addition, the IRS revoked the tax-exempt status of some 250,000 organizations in 2010 for failure to file an annual information return for the three prior years. Such organizations are required to refile for tax-exempt status.
Directors & Officers liability policies may cover certain lawsuits alleging that managerial negligence led to loss of tax-exempt status and resulting damages. However, such insurance should not be relied upon due to common policy exclusions for knowing violation of the law.
Kids Non Profits USA offers a special 501(c)(3) application package starting at $399 (plus an IRS application fee).