Nonprofit Law/Gymnastics Booster Club questions
Good morning, Mr. Mechanic!
We greatly appreciate that you take the time to work pro bono online and answer questions. So, thank you!!
Our Booster Club has been in existence for many years, but recently our board completely changed hands. I must admit that the previous board members were really not aware of the 501(c)(3) guidelines, whereas our current members are competent women who have read up on it. We still have some questions, but I have a couple for you.
First, you mentioned in a response online that "the funds are in the general fund and are to be used as the Booster club decides". Is this true? We have always paid for coaches expenses and fees with our booster club funds, as well as allocating some money for equipment and travel for the girls who qualify for higher competitions. My first question is this: For equipment, my understanding had been that it must be used for our competitive girls and only then could we buy it tax-free. If we know the equipment will be used for the class gymnasts and even cheerleaders who rent our space, then do we still get the tax-free status, can we still pay for it, or is that a gym owner expense?
Second, here comes the big question. In discussing all the guidelines, our board members are questioning whether being non-profit is the best option for the Booster Club. Could you please explain the pros and cons of the 501(c)(3) versus being a profitable organization?
Thank you so much for you time and assistance.
MPGA Gymnastics, Memphis, TN
You are welcome.
1. "the funds are in the general fund and are to be used as the Booster club decides" is a correct statement, but, of course the use must be in accordance with the charitable purposes of the 501(c)(3) organization. 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. For example, at: http://www.irs.gov/pub/irs-tege/eotopich02.pdf
the IRS refers extensively to the regular business expense rules and applies them to 501(c)(3) organizations. On page 32 we see "Reimbursements are technically covered by Regs. 1.62-2. However, for administrative purposes, all TE/GE [Tax Exempt & Government Entities Division]
administrative personnel will treat reimbursements of a business expense the same as if the expense were paid directly by the employer, as long as the employee complies with the substantiation rules..." See also http://www.irs.gov/pub/irs-pdf/p535.pdf
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 expense is one that is common and accepted in your industry. A necessary expense is one that
is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
--end of excerpt ---
As for equipment placed in the facility of a for-profit gym, that would not be a proper expense of the 501(c)(3) organization as it could not practically make sure that the equipment is only being used for charitable purposes.
2. If you want donors to be able to deduct donations and not to have your sales income, if any, taxed you would need to have a qualified 501(c)(3) organization. But then the organization would need to comply with the IRS regulations for such 501(c)(3) booster organizations. My summary of IRS regulations relating to 501(c)(3) booster organizations is at: http://goo.gl/IdQwML
and you may be interested to read that.
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.