So, you think nonprofits should be taxed

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[Image description: A stack of nine shiny gold coins on grey background. Image obtained from Pixabay.com. Wait, on second look, these might actually be chocolate coins!]

Every once a while, I encounter people who think nonprofits are getting it easy and should be paying taxes. “Rabble rabble,” they rabble, “why should only businesses pay taxes! Especially when most charities are scams, with the majority of their money going to their fat-cat CEOs’ pockets. Rabble!”

Here’s a comment someone made on one of my posts: “If nonprofit is an industry sector, then it is time to start taxing it.” (They also added, in response for my call for the sector to pay our people better: “If you own your own company, and you control the finances, go ahead, pay people more just because. On the other hand in the real world, you sound like a fool on this point.”)

From the tiresome memes and ignorant, bizsplainy blog posts and comments out there, I think some members of the public have this image of nonprofit folks as mustache-twirling con artists sitting at our desks counting piles of gold coins while starving children with trembling eyes beg us in fear for more gruel. “Mooooore?!! Only 2 cents of every dollar is available to purchase gruel, and we’ve spent it all this month!”

On a tangential note, can someone—maybe a trendy food truck—reinvent gruel? It feels like gruel has been given a bad rap. Maybe if we add some hemp hearts and goji berries…

The people calling for nonprofits to be taxed usually have no experience or understanding of the nonprofit sector. Or government. Or tax structures. Or irony. There are not many of them, thank goodness, but they seem to be increasing in numbers lately, so I maybe we nonprofits need to do a better job preparing counter-arguments. Heavens knows what sort of destructive ideas will catch on fire next in this political climate. Next time someone makes this irritating and clueless declaration about how we scammy nonprofits need to be taxed, bring up these points:

Oh really? What should we be taxed on? How about to be fair, we get taxed the way for-profits are taxed? Our tax laws are complicated, but to simplify things, most for-profits are taxed on their net profits; that is, the amount they make after expenses are deducted. Well, nonprofits usually spend most of their revenues to run programs. According to this report by Urban Institute, in 2012 the entire nonprofit sector got about $2.26 trillion dollars in revenues, and spent $2.10 trillion in expenses. So what exactly are you taxing us on, when we are spending almost all our money to provide housing to people experiencing homelessness, counseling to veterans, food for hungry kids, etc., and anything we have after expenses just carries over to pay for services in the next fiscal year? Sure, there are a few rare nonprofits, especially larger institutions like hospitals, as a colleague pointed out, that seem to be making a ton of revenues, and we might need to look at regulations and laws to incentivize those larger orgs to spend those revenues to benefit the community. (And, as other colleagues mentioned, foundations–which are also nonprofits–need to increase their annual payout beyond 5%, but this needs its own separate post for the future). Still, the vast majority of us are barely breaking even while doing critical work.

Nonprofits already pay all sorts of taxes: We pay a bunch in payroll taxes just like for-profits. And most of us pay sales taxes for all the supplies and stuff we use to do our work. Says a colleague: “There often is a misperception that we don’t pay sales tax when we purchase all the supplies and equipment that we need to operate our organizations, but we do and I have the sales receipts to prove it.” Yes, nonprofit organizations in some states can get a sales tax exemption, but these states are rare, so overall, we still pay a lot of taxes already.

Being taxed would reduce critical services: It would reduce the amount of money nonprofits have to spend on services, meaning there will be fewer people who will be helped, less food for hungry families, fewer beds at homeless shelters, fewer arts programs, less advocacy to change inequitable laws, etc. These things all require money. And the more money you take away from nonprofits, the less stuff we can do. And if you think only the poor and unfortunate benefit from our services, you are wrong. You benefit from the work nonprofits do, in ways you don’t even realize. If you want a strong, safe, vibrant community, you want to make sure nonprofits are strong and doing their jobs.

Being taxed would cause instability: If nonprofits know they’re going to be taxed on their left-over funds, we’ll likely just spend all of it before the year is over in order to enhance programs and services and avoid paying taxes. Think of a food pantry. If it has money left and knows it’ll be taxed, it will likely spend it on purchasing food to give out the next year. An after-school program may preemptively spend on supplies, etc. This, however, will have grave consequences, since nonprofits need that leftover money to serve as a flexible cushion to ensure programs continue without interruption. If they have zero funds to start with each year, it greatly jeopardizes the quality and continuity of desperately needed programs and services.

We are doing the work the government should be doing: OK, so let’s say for some reason a nonprofit decides not to spend all its leftover funds in order to avoid paying taxes. So it pays taxes. What happens with this money? It would go to the government, which would be ironic, since so much of the work of the nonprofit sector is in response to the failures of government and market forces to effectively address societal issues. We are filling in gaps that the government especially sucks at doing. And sometimes the government provides us funding in the form of grants and contract to do this work, though it is never enough to cover all the expenses. To then ask us to pay money back in taxes is bonkers. Imagine if your friend has a car that broke down. They try everything to fix it, but they still can’t. So they call you, and they give you $8, which is 10% of what you need to actually buy the parts and fix the car, so you have to go ask other people for the rest of the money. Then, when you fix the car, your friend says, “Uh, since you collected all that money from other people to fix my car, you owe me $12 in taxes.” That’s what taxing most nonprofits would be like.

Honestly, many of us would love it if the government were more efficient and effective in taking care of its people, and then we’d be put out of business. In fact, many of us would loooooooove to be put out of business. Imagine if our government took great care of our veterans, providing them with housing and mental health services, etc. And it solves education inequity. And it tackles environmental degradation. Wouldn’t that be awesome? All of us would be able to do other things we are good at, like wedding photography, or beatboxing, or making adorable little stuffed animals out of felt to sell at a farmer’s market or crafts fair.

For these and other reasons, taxing nonprofits for the most part makes no sense. We are not for-profits. We are doing critical work that other sectors can’t or won’t do, while dealing with ridiculous barriers like restricted funding. The work is hard enough. The least society could do is give us a break on taxes so we can have money to do our work! Gah!!! This topic makes me and colleagues wonder at some other underlying issues that we need to tackle as a sector:

The public has a skewed image of nonprofits: Most nonprofits are not anywhere near the scale of hospitals and universities. 66.4% of nonprofits are less than $500,000 in budget size, according to the report by Urban Institute. But for some reason, there’s this perception among the vocal detractors that we’re all large and greedy. It’s like basing the perception of small businesses on the corruption of Enron. It seems we have a lot to do to inform the public about what we actually do. Because if people are not informed, they’ll vote for inane and destructive laws designed to regulate the orgs they think are representative of our sector, but what will end up happening is punishing the rest of us and screwing over the people we serve.

The designation of “nonprofit” being too loose: Says a colleague, “Keep in mind that the NFL was a nonprofit until 2015. And faith-based groups that own tons of property that isn’t used for faith-based purposes. The real issue is whether we need to crack down on requirements to be a tax-exempt nonprofit. (This also gets into Trump’s desire to allow churches to endorse political candidates, in violation of the Johnson Amendment.)” We need to be more vocal and protective as a sector on who gets nonprofit status. “Please, sir, may I have nonprofit status?” “Nonprofit status?! You want nonprofit status?!”

We need tax reform: This is for a future post, but seriously, we should talk about increasing taxes in general and having the government take care of societal issues. We do amazing work, but we cannot keep handling so much of the burden that our government and society should be shouldering. Read this article for thoughts on this important topic from the legendary Kim Klein.

So, there you go. If you encounter anyone who says that nonprofits should be taxed, just forward them this post. Who the heck knows, maybe this is not an issue at all, and I just wasted an entire post rambling about this instead of more important stuff, such as a sequel to this post on nonprofit cocktail recipes. But if I hear another person say something like “The nonprofit industry should be taxed like any other industry” or “nonprofits need to act more like for-profits,” I will roll my eyes so hard they might go into warp speed and enter a parallel universe where people understand and value nonprofits, instead of trying to make our work harder so that some of us end up daydreaming about quitting our work and opening an organic, artisanal gruel shop called “Cool Gruel.” (I’ve been stocking up on dried goji berries, just in case).

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  • Angie Sanders Wierzbicki

    Very good article, as usual! I especially appreciate the “designation of ‘nonprofit’ being too loose.” I’ve heard people more than once casually comment about applying or starting nonprofits that really have nothing to do with the greater good. It’s a tax status that is appealing to them and they think will be easy. Unfortunately, it waters down the true value of what a nonprofit is or should be.

    • S NV Nonprofit Info Ctr

      People here in Las Vegas believe the myth that starting a non-profit will reduce personal income taxes. When I tell them the truth (about the taxes AND how hard/long it is), they look like I’ve just punched them in the face. I’d rather they find out sooner, rather than later.

  • Rachel Watts
  • Lucinda Stroud

    Agreed on most of this, particularly tightening up which entities receive tax-exempt status.

    That being said, I’d love for foundations to either be subject to some tax OR for the minimum amount that they must spend per year to be raised dramatically. I don’t know the exact figure, but I believe that currently foundations are only required to spend 5% of their value annually to retain tax-exempt status, and that they can include their own operating expenses within that 5%. This allows foundations to operate essentially as tax shelters, with the money not going either to the government for essential services in the form of tax, or to nonprofits to stopgap the government’s inability to provide those essential services in the form of grants.

  • What about gruel on toast? Seems to be all the rage these days.

    In all seriousness – these are all valid arguments and I’m glad to have a well thought out roadmap for telling people what I think of their off the cuff ideas.

  • Tsiporah Nephesh

    Great article. Nonprofits in New Mexico recently had to defend their tax exempt status at the state level. Legislators were looking for new sources of revenue to help with the budget crisis. Thankfully, both bills were defeated.

    In a broader conversation about taxes, the real question is “what are we getting for the taxes we pay?” Some of the countries with the highest standard of living, also have the highest tax rate. Coincidence?

  • Jessica

    I love this blog. It’s like you’re in my head. Luckily, this is the one point no one has ever tried to pull on me in my dozen years of non-profit accounting.

    Wanted to make this point as well; the state of Missouri is one that will issue sales tax exemptions. BUT, merchants do NOT have to accept them. I learned this a couple of years ago when an employee told me they paid tax because the merchant wouldn’t accept the exemption. I put in a call to the state to clarify and was told that the state doesn’t require merchants to.

    This was a blow to me as I had just started as the accountant for a formerly free health clinic and was trying to wrap my head around all the sales taxes we were paying because staff just weren’t submitting the certificate when purchasing. Now I had to contend with, “They don’t have to accept it anyway, why bother?”

  • Jim

    Great post. You left out the most important argument against would-be taxers — most for-profit companies aren’t taxed either! At least, not double taxed in the way that large corporations are. All owners and shareholders at for-profit businesses are subject to income tax once they receive their share of profits (dividends), but only C-Corporations pay taxes before shareholders get to take their cut.

    By definition, nonprofits can’t have any shareholders — all the organization’s assets can be understood as owned by the community and governed by a board of directors. That’s the whole reason nonprofits exist — no one owns the company, so it can do business delivering a social good without needing to pay dividends to shareholders. There are no investors who can buy a percentage of the company and claim that much of the company’s extra money. Instead, there’s just donors, grantmakers, customers, insurers and lenders. Nonprofits still pay sales, property, and payroll taxes just like for-profit companies must, unless there are local tax breaks — just like the ones some for-profit companies sometimes receive. Nonprofit leaders still must pay income tax on their compensation like everyone else, and they must answer to a board of directors who determines who gets to run the company and how much they are paid.

  • JamesWestCA

    When you say “…having the government take care of societal issues” my observation is that conservatives hear “The Government” as if it’s some detached entity unrelated to the American people (including themselves) that is wasting their money. Perhaps at times using a phrase like “we as a society” or “society at large” rather than the word government might help. Or trying to reclaim the positive connotations of the word government. Also I would hope that if society at large started providing more of these necessary services that some from the non-profit community would go to work for the government or government funded entities, certainly their hard working attitude and ethics would be needed.

  • Roy Gathercoal

    Very good. I am a disabled/retired not-for-profit (more accurate term) ED so I have time to be picky and obnoxious. Time was I had to behave. . . something to which to look forward!

    (1) “so I maybe we nonprofits need to do a better job”
    any real not-for-profit ED knows that if you write this, you will receive a wave of complaints. If you are lucky. If you hear nothing, probably nobody is bothering to read your publication. (Like, how would you even know?)

    (2) organizations are not “non-profit.” They may organize a group into a corporation that is established for some reason other than making money for its shareholders, but ultimately the only thing the State of registration cares about is whether the organization is really doing what it said it was going to do in its statement of purpose. In fact, for-profit corporations are endangering their organizational status (and risking shareholder lawsuits) if they do something nice and needed if they cannot make the argument that it is ultimately increasing the value of the company.

    not-for-profit organizations are organized to do a specific good thing, and if they do some other good thing that is not covered under their (hopefully ambiguous) Articles of Incorporation, they too may be sued by anyone in the public. Not-for-profits, as with for-profits, must do what they say they are going to do.

    (3) Tax status is a separate issue. That is not obtained by organizing as a not-for-profit, but rather by applying to the IRS, which either grants or does not grant exemption from Federal Tax. Most states grant tax exemption –but they are not required, because State taxation is not governed by the IRS– to any 503(c)3 corporation (number refers to the IRS rule, not to federal law), or any 503(c)4 or 503(c)7 or (I think I recall) any 503(a,b,c) or any 504 corporation, among others.

    Come to Oregon, where there is no regressive sales tax. . .

    Organizations may be not-for-profit without tax exemption, and (theoretically) for-profit organizations could have tax exemption [for large corporations this doesn’t seem to matter–they don’t pay taxes anyway]. The two are very different, granted by different bodies at different levels of government.

    (4) Not-for-profit officers really need to exorcise the we/they language. As an ED, I am still a citizen like everyone else. And the work I do benefits everyone in society–if it were to benefit me primarily, my organization would not be not-for-profit! So the work not-for-profits do is OUR work, not the property of those who happen to be employed. This is the same as saying that someone working in a car factory doesn’t talk about automobiles as “my cars”. They belong to whomever buys them. The work of not-for-profits benefits whomever needs our service–and ultimately our entire society.

    After all, 503(c)3 organizations are granted tax exemption exactly because their work benefits we the people instead of just we the shareholders.

    (5) I believe funding necessary social services through private gifts is evil, although a necessary evil. Everything every not-for-profit does ought to be done by our government. For our government is we the people, and federal dollars are our dollars directed towards a specific purpose.

    As voters in a representative democracy we have control over how government money is spent through the voting process. If everyone started to believe that basketball is always just a waste of time, and if we elected people who said they also believed this, it wouldn’t take long until no not-for-profit organization did not include basketball.

    Conflicts come because individuals don’t agree with the will of the people–either directly or through the Constitution. I may grouse because I think basketball is evil (I don’t really, this is just a hypothetical example) and some not-for-profit uses basketball to accomplish its mission (as stated in its articles of incorporation), but basketball is allowed, and even encouraged, because the will of the people allows it.

    People in the public might have a gripe if an organization is not doing what it says in its articles of incorporation, but they have no basis to gripe about not liking the way someone is trying to accomplish their stated mission. These facts have not ever, to my knowledge, dissuaded even a single jerk from griping about a not-for-profit. But they might provide some comfort to not-for-profit employees who might otherwise allow a particularly legal-sounding gripe to bother them.

    It doesn’t matter what the not-for-profit does, as long as it is legal, and as long as it is working towards its stated mission in its articles of incorporation. (So if your organizational mission has shifted, and your articles of incorporation have not be amended, get thyself to your Secretary of State with an amendment right away!)

    All this points to the flaw in the system. With tax money, we the people have a voice in how it is disbursed. We may not like it, but we elect the people who spend it.

    On the other hand, we the people have no voice in how funds are spent if they are donated by a private party. So if someone is a billionaire because they did not pay their fair share of taxes (by gaming the tax system, for example, which is legal, but unethical) then that billionaire donates a million to some charity, it effectively means that instead of properly paying that million to the government, so that all of us could have a voice (however diffuse and indirect) in our collective priorities, we are effectively just giving up our influence and ceding it to that person who (perhaps) should have paid more taxes 50 years ago.

    So yeah. I want to see higher taxes instead of more private donations. Because I want even some small voice in determining how that money will be spent in my community. And I don’t hold in particular esteem someone who avoided paying taxes and who now gives a small bit of those proceeds to some particular charity.

    It is not the way things ought to work.

    And I am an old, ugly, crotchety geezer who talks too much.

  • Whitney Allen

    If I’m feeling bold, I will sometimes take the government argument a step further. Because, if my non-profit pays more taxes, we have fewer resources and so we do less work. But we won’t pay out enough taxes for the government to afford to plug the hole in services created by having fewer resources (because we are amazing hyper efficient unicorns, and the government is the DMV sloth in Zootopia). So guess who gets to pay more taxes tor the non-profit/government partnership to do the same amount work? YOU DO, my fellow citizen. Because the government will need to raise more money from YOU to grant back to US to do the work we were already doing.

  • Melissa Luana Data

    I agree with 90% of the article. I have worked primarily for non-profit social service or community health organizations. I attend a church which, of course, has non-profit status. My church definitely does NOT endorse political candidates. They do lease land from another (non-profit) church, who tried to profit off my church when the land value increased due to development. My church is part of a small network of homeless service providers in our community. There are no non-profit social service agencies or homeless shelters that specifically serve our community. In addition to the homeless, we serve low-income families and veterans. The ministry “work” of my church is service-oriented and service-based. We are providing for the community needs, which government and other non-profits have failed to do. If non-profit status needs to be restricted, perhaps don’t make blanket assumptions about based on a few who abuse their status.

  • Regenia Bailey

    I appreciate this post. I’m seeing a lot of new ‘nonprofit’ organizations that seem to be operating in an grey area that I would characterize as a small businesses doing good work but without a broader connection to community and community needs.

    One of the issues that I would like to discuss–calmly, thoughtfully, and without preconceived notions–is nonprofits and property taxes. As a nonprofit proponent as well as someone who has served in local public office, there’s a struggle and a balancing act for cities to support basic services. A lot of forces are at play in this, but it’s a real issue and one that has an impact on our nonprofit organizations.

    For years, our local feminist health clinic has made a voluntary payment in lieu of taxes (PILOT) to the city for what they calculated as their share of police and fire protection. This occurred because, at the time, the clinic’s executive director was a former city council member and she understood the landscape.

    We need a nuanced conversation about how we all work together in our local communities to support all the services we value–public, nonprofit, and yes, even those services provided by our locally owned small businesses. the status quo (taxes are bad) has never really served us and certainly isn’t working for us now as we see cuts in all kinds of public services. We need to be open to some big table conversations about community building, services, and taxes and who provides what and how those services are supported.