| Introduction |
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| Is your dog (cat, bird, fish, garden...) club or rescue organization operating as a tax-exempt, non-profit organization in the eyes of the IRS? Are you sure? |
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| The IRS has not been requiring tax-exempt, non-profit organizations with lower incomes to file annual tax returns. But at the same time, they have been dropping these organizations from their records, and the tax IDs used on their bank accounts have become invalid. Oops! |
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| To remedy this problem, the IRS is now requiring these organizations to file a simple, on-line form each year. But before your organization can begin this process, it may have to re-establish its status with the IRS. This document will tell you how, and will also serve as a guide to new organizations. |
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| Please take a moment to send me your comments and help me improve this document to help other clubs and rescues. What goes around comes around. |
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Peter Christensen
E-mail: Peter@DirtypawWebsites.com |
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| A Few Important Terms |
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| Every dog club and rescue will want to operate as a tax-exempt, non-profit organization. Non-profit means that the club is organized in such a way that its members do not profit from any fundraising or other income the organization receives. And tax-exempt means that because the club is organized as a non-profit, it is not required to pay taxes. Otherwise, all its income, including everything from membership dues to fees charged at events to contributions, would be taxable as it would be for a for-profit business. |
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| A tax-deductible organization, on the other hand, refers to an organization's being able to inform its contributors that they will be able to deduct their contributions to the organization on their personal or corporate income tax returns. Most dog clubs are of a social nature and would not qualify as tax-deductible organizations, though rescue organizations (rescues) will likely want to ensure that they do. Organizations that are tax-deductible in the eyes of the IRS are given the status 501(c)(3). |
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| Limitations of This Document |
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| This document addresses both non-tax-deductible non-profit organizations, and tax-deductible non-profit 501(c)(3) organizations, but only those which meet the following criteria: |
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| 1. | Non-tax-deductible non-profit organizations with gross annual receipts normally not more than $25,000. |
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| 2. | Tax-deductible non-profit 501(c)(3) organizations with gross annual receipts normally not more than $5,000. | |
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| You'll have to check with your state about state requirements. But if your club or rescue meets the above criteria, you'll find the IRS requirements very simple. Namely: |
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| 1. | You don't have to file paperwork with the IRS to establish your tax-exempt status. |
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| 2. | You don't have to file annual tax returns; only a simple, on-line form each year. | |
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| Organizations with greater income will have more complex filing requirements, and should refer to the IRS resources listed below for further information. |
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| Disclaimer: Do not take any of the information contained in this document as advice. This document is only to be used as a learning tool, and no guarantee whatsoever is made about its accuracy. |
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| IRS Resources |
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| Tax-Exempt Classes for Dog Clubs and Rescues |
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| The following three classes are listed on page 65 of Pub. 557: |
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| Class | Description of Organization | General Nature of Activities |
| 501(c)(3) | Religious, Educational, Charitable, Scientific,
Literary, Testing for Public Safety, to Foster
National or International Amateur Sports
Competition, or Prevention of Cruelty to
Children or Animals Organizations | Activities of nature implied by description of
class of organization |
| 501(c)(4) | Civic Leagues, Social Welfare Organizations,
and Local Associations of Employees | Promotion of community welfare; charitable,
educational or recreational |
| 501(c)(7) | Social and Recreational Clubs | Pleasure, recreation, social activities |
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| Class 501(c)(3) is the most likely choice for a rescue organization. |
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| Contributions made to 501(c)(3) organizations are deductible on the contributor's income tax return; contributions made to 501(c)(4) and 501(c)(7) organizations are not. See Tax-Deductible Contributions, below, for further information. |
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| Classes 501(c)(4) and 501(c)(7) are the most likely choices for social organizations like dog clubs. They are described in detail beginning on pages 46 and 48 of Pub. 557, respectively. But you won't find a dog club listed as an example for either class. |
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| Examples of 501(c)(7) organizations include hobby clubs and garden clubs, and these are about as close as they get to a typical dog club. So 501(c)(7), Social and Recreational Clubs, would appear to be the best choice. |
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| However, in most cases 501(c)(4) is in fact the most likely choice. This is because in describing a 501(c)(7) organization on page 49 of Pub. 557, it says:
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| "A section 501(c)(7) organization may receive up to 35% of its gross receipts, including investment income, from sources outside of its membership without losing its tax-exempt status." | | |
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| Most clubs receive the majority of their income from club-sponsored events rather than from membership dues, and exceed the 35% limit. This means that they would not qualify as a 501(c)(7), and so 501(c)(4) becomes the most likely choice. |
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| What Your Club or Rescue Needs to Do |
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| 1. | Establish Your Club or Rescue as a Non-Profit Association or Corporation: The IRS recognizes both non-profit associations and non-profit corporations as tax-exempt organizations. |
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| | It may be a better choice for a small club or rescue to simply become an association. To do so, they need only state in their Articles of Association that they are operating as a non-profit association. |
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| | Incorporation may be a better choice for a club or rescue with potential financial risk, or activities that might result in injury, because it provides a greater degree of legal protection for the members. Since a corporation is a legal entity in itself, the idea is that members are protected from lawsuits against the corporation. |
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| | However, it is a common misunderstanding that incorporation completely protects an organization's members. It doesn't for a couple of reasons: |
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| | a. | An organization's officers can be named in a lawsuit, and if the organization doesn't have enough funds to meet its obligations, the officers can be held liable. |
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| | b. | A member of an organization, even a corporation, can be sued as an individual for something that happens as a result of their personal conduct. |
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| | You may find it worthwhile to speak to a lawyer who specializes in non-profit organizations about associations and corporations in your state. And you will certainly want to consider purchasing insurance for your organization, as discussed below. | |
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| | A club or rescue can become a non-profit corporation by filing Articles of Incorporation with their state. Depending on state requirements, incorporation may involve annual reporting and renewal. Be sure to comply with such requirements, or your corporation may be dissolved. In some states, associations don't have to file with their state at all. |
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| | Your state will be able to provide you with information on how to form a corporation and operate with respect to state laws. If your state has requirements for associations, they will also be able to provide such information for associations. |
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| | On page 69 of Pub. 557, the IRS provides a draft that can be used as a guide in writing Articles of Incorporation. It can be modified and used as a guide in writing Articles of Association, too. |
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| 2. | Purchase Insurance: It is important for your club or rescue to maintain a general liability insurance policy that covers all activities. A general liability policy, however, is limited in what it covers. Depending on the size of your organization, the number and size of public events it holds, and other factors that might put it at risk, you will want to consider purchasing supplemental policies. | |
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| | While you should carefully study any policy you consider, the following briefly describes some of the different types of coverage available: | |
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| | • | General Liability: Covers claims for bodily injury and property damage when your club or rescue is found liable in a court of law. While the officers of your club or rescue could be named in a lawsuit, this insurance would cover all costs, including attorney fees, up to the limits of the policy. |
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| | Some General Liability policies include limited coverage for Property Loss and Accident Medical as described below; others do not. |
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| | If you are a rescue organization or your club does rescue work, be very careful in selecting a policy. Some policies cover rescue work, but others specifically exclude it. |
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| | • | Officers Liability: Even incorporating your club or rescue does not protect its members from being sued as individuals for something that happens as a result of their personal conduct. Officers Liability covers lawsuits directed at individual officers for errors and omissions, negligent acts, misleading statements, and breach of duty. |
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| | • | Financial Loss: Covers financial loss due to dishonesty, theft and forgery. |
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| | • | Property Loss: Covers loss or damage to property owned by your club or rescue, including everything from office equipment to event booths. |
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| | • | Accident Medical: While general liability covers claims for bodily injury, they must be the result of a lawsuit. Accident Medical covers medical bills for injury to anyone attending an activity or event without the necessity of a lawsuit. In fact, this coverage is purchased with the intent that it will help prevent lawsuits. |
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| | You might begin your search for the insurance company that offers the best products for your particular circumstances by comparing the policies of the following companies: | |
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| | • | Equisure (club and rescue insurance) |
| | • | Mourer-Foster (club, kennel, trainer, groomer, and sitter insurance) |
| | • | RV Nuccio and Associates Insurance Brokers (club insurance) |
| | • | Sportsmen's Insurance Agency Plan (club insurance) |
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| | Please let me know if you learn of other companies that could be added to the list. | |
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| 3. | Establish Your Club or Rescue as a Tax-Exempt Organization with Your State: Establishing your club or rescue as a non-profit organization does not automatically allow it to operate as a tax-exempt organization. |
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| | In some states, you need take no further action than establishing your club or rescue as a tax-exempt organization with the IRS. In other states, however, you need to establish your tax-exempt status with your state government. |
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| 4. | Establish Your Club or Rescue as a Tax-Exempt Organization with the IRS: |
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| | Clubs: It is not necessary to file paperwork with the IRS in order to establish your club as a tax-exempt organization with them. You simply identify your club as a non-profit, tax-exempt organization when you get your EIN (next step). [Ref: There is no reference to support this in publications made for our use; it is buried deep within the IRS tax code. But you will find it to be true when you phone the IRS to get your EIN.] |
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| | Rescues: Because your rescue's gross annual receipts are normally not more than $5,000, it is not necessary to file paperwork with the IRS in order to establish your rescue as a tax-exempt organization with them. You simply identify your rescue as a non-profit, tax-exempt organization when you get your EIN (next step). [Ref: Organizations Not Required To File Form 1023, Pub. 557 p. 21] |
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| | Both: Because you are not filing paperwork with the IRS, you will not receive a letter from them confirming your status as a tax-exempt, non-profit organization. See Formal Determination of Tax-Exempt Status Letter, below, for further information. |
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| 5. | Get an Employer Identification Number (EIN) from the IRS: As soon as you have established your club or rescue as a non-profit organization and determined your tax-exempt status as being either 501(c)(3), 501(c)(4) or 501(c)(7), you can phone the IRS or go on-line to get an EIN. An EIN is used by an organization much as an individual uses a Social Security number. You will also use your EIN on any bank accounts you open. |
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| 6. | File Form 990-N On-Line Annually: Because your club or rescue's gross annual receipts are normally not more than $25,000, you do not have to pay federal taxes or even file a return every year as an individual or business would. And it doesn't matter how much money your club or rescue has in the bank. [Ref: Pub. 557, p. 9] |
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| | You do, however, have to file a simple, electronic Form 990-N on-line each year, summarizing the status of your organization. Form 990-N must be filed by the 15th day of the 5th month after the end of your club or rescue's fiscal year. |
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| | You must phone the IRS and have them make arrangements for you to file Form 990-N on-line. It takes the IRS about a month to set this up, and the form cannot be filed in any other way. |
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| | There is no penalty for filing Form 990-N late. However, if your club or rescue does not file, it may be dropped from the IRS' records and your EIN may become invalid. |
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| Other Considerations |
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| 1. | Tax-Deductible Contributions: This is the first thing that comes to mind when we think of a tax-exempt, non-profit organization, so I want to explain why contributions to a club would not normally be something an individual could claim as a deduction on their income tax return. |
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| | Generally, only contributions to tax-exempt 501(c)(3) charitable organizations such as churches, the Red Cross, a dog rescue, or an organization that trains therapy dogs, can be deducted on an individual's income tax return. While a dog club could be a 501(c)(3) organization, most dog clubs are something between an educational, recreational, and social organization, and do not qualify. |
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| | Some 501(c)(4) and 501(c)(7) dog clubs do give a portion of their income to 501(c)(3) organizations. However, these clubs cannot give a contributor a receipt that could be used to show a tax-deductible contribution on the contributor's income tax return because these clubs are not 501(c)(3) organizations themselves. |
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| | It is possible for a 501(c)(4) or 501(c)(7) club to establish a separate fund that would all be donated to a 501(c)(3) organization, and then establish this separate fund as being 501(c)(3) qualified. The club could then give receipts to contributors that could be used to show that their contributions to this fund are tax-deductible. |
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| 2. | Formal Determination of Tax-Exempt Status Letter: Your club or rescue is able to operate as a tax-exempt organization without applying to the IRS in writing for approval to do so. However, the process outlined above does not provide your organization with a formal determination of tax-exempt status letter from the IRS. |
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| | Clubs: Should your club require something in writing to show evidence of its tax-exempt status, for example if you were to apply to another organization for a grant, you can obtain such a letter from the IRS by filing Form 1024 Application for Recognition of Exemption Under 501(a). |
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| | Rescues: Should a contributor request something in writing to show evidence of your tax-exempt status, you can obtain such a letter by filing Form 1023 Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Or you might be able to satisfy a contributor by providing them with a letter containing a statement similar to this: |
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| "Name of Rescue" is a non-profit organization exempt from Federal income taxes under Section 501(c)(3) of the Internal Revenue Code. | | |
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| | Both: It is also possible that your state will require a formal determination of tax-exempt status letter from the IRS. |
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| 3. | Form 1099-Misc: Anytime your club or rescue pays an individual over $600 in a year, for example paying a judge for their services at a show, it is your responsibility to report the amount paid to the IRS. This information is submitted on Form 1099-Misc, a copy of which is also sent to the payee. |
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| | There are significant fines for not submitting Form 1099-Misc. It provides the IRS with a method of double-checking that the payee is reporting the income on their tax return. |
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| 4. | State Sales Tax: If your club or rescue sells something at an event, do you have to collect sales tax? This is not an issue in states that don't have a sales tax. And in other states, your tax-exempt status may exempt you from having to collect a sales tax. You will have to check with your state. |
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