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Nonprofit Law/501c3 Spending Funds


Hi, I am the treasurer for an Elementary schools PTO which is set up as a 501c3.  We want to buy an IPad cart for some IPads the school will be receiving next year.  Our president is afraid that if we purchase something with this year’s budgeted funds for an item for next year we could be risking our 501c3 status.  The money would be coming out of our approved technology budget.  So my question is it ok/legal to use this year’s funds to purchase future items for upcoming years?  Thanks in advance for your help.

The IRS rule for what nonprofits may spend money on is similar to
the standard that the IRS uses when determining what is a valid
business expense for an ordinary business.

See "Business Expenses" on page 3, under "What Can I Deduct"
--start of excerpt  ---
To be deductible, a business expense must be
both ordinary and necessary. An ordinary ex-
pense is one that is common and accepted in
your industry. A necessary expense is one that
is helpful and appropriate for your trade or busi-
ness. An expense does not have to be indispen-
sable to be considered necessary.
--end of excerpt  ---

Therefore, as a regular for-profit business could put aside funds this year for an item to be purchased in the next year.  That is certainly allowed for one year.

There is no restriction for one or two years of accumulation of
funds.  However, if you do it for many years, then the IRS would
want to see a purpose for the accumulation. On page 126 of the
book "With Charity for All", author Ken Stern, former CEO of
National Public Radio wrote that "the standard benchmark for
charities: having an endowment and operating reserves at least
equal to the annual budget".  Therefore, I could not see any
problem maintaining at least that amount.

A 501(c)(3) organization that is not a private foundation may
accumulate funds for one or two years or so, as long as it
maintains substantial exempt activities, commensurate with its
financial resources. Exempt activities are those that are related
to the organization's purposes, not just activities to gain
funds. In other words they must be either religious, charitable
or educational activities. If it wants to accumulate funds longer
than a year or two, it must have a reason why it needs to save
up, i.e. for the purchase of a building. The test is that
accumulations of earnings and profits are necessary for the
reasonably anticipated needs of the organization.  page  12 (that document is a IRS National
Office Technical Advice Memorandum which cites to Presbyterian
and Reformed Publishing Co. v. Commissioner, 743 F.2d 148 (3rd
Cir. 1984), a U.S. Court of Appeals decision.

Harvey Mechanic, Attorney at Law -

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.  

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Harvey Mechanic


I am an attorney and I volunteer time to answer general questions about U.S. Federal income tax issues of nonprofit 501(c)(3) public charities only. Those questions could be about establishing and maintaining legal requirements for such non-profit organizations in the United States, including Internal Revenue service filings and requirements. I will not be working on this free forum to answer questions about Nonprofit's possible unrelated or for-profit businesses or how to fill out forms. This forum is only for general questions about federal tax law, not as the law applies to your specific situation. If you do not make your question public then I will not be spending much of my donated time on answers that would not benefit the public. If you have other questions, please contact me at I will reply from my email. In any case, do not reveal confidential information to me until after I have contracted with you to provide personal legal services. My responses on this forum are intended to be general statements of law, should not be relied upon as legal advice, and do not create an attorney/client relationship. For me to consider your individual situation and how the law applies, I would need to gather extensive information about the situation. To search my previous answers you can do a Google search by "" without the quotes and then add your search terms before hitting enter.


I have been practicing law and especially the law of nonprofit organizations since 1990 when I was admitted to the New York Bar and I have maintained my status with the Bar since that time.


B.S. Columbia University in New York City, 1970

J.D. (Law Degree) Brooklyn Law School, 1990 -- Cum Laude.

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