The National Football League announced that it was voluntarily giving up its tax-exempt status. This may be baffling to many nonprofit people. Welcome to the confusing world of tax-exempt status.
True, the ability to operate and not pay income tax on the annual excess of revenues over expenses (what most people call a “profit”), is a big operating advantage for any business. How would you feel if you personally were exempted from income tax? Look at the amount of federal and state withholding on your next pay stub and imagine that money coming to you instead of going to the government. Wow!
The section of the Internal Revenue Code that spells out tax-exempt status is Section 501(c). However, this section of the code has many sub-sections—from 501(c)(1) all the way to 501(c)(29). The most common tax-exempt entity is the public charity, which is exempt from taxation under Section 501(c)(3). Of course, that leaves 28 other types of entities that are exempt from income tax if they comply with one of those other 28 501(c) sections of the code.
The NFL was exempt under section 501(c)(6). This section is for business leagues, trade groups and organizations like the National Dairy Council. This type of entity exists for the purpose of advancing the business interests of its members. For the most part, these entities are not involved in business in which they are selling something to the public and trying to make a profit. Rather, they are usually supported by dues paid by their members and the work that they do is designed to advance the businesses of their members.
For example, a business league like the National Dairy Council conducts research into the health benefits associated with adults and children consuming daily servings of milk and dairy products. It produces education materials and guidance to interested parties on nutrition and health and wellness—all of which is done with the aim of maintaining and improving dairy businesses around the country.
As I said, the council gets money to operate from dues paid by its members. The reason members join and pay dues is because they believe that the work of the council is important to their businesses and that if they combine their financial resources in the council, more can be done to advance their business interests than if each member did some work on their own.
The members of the Dairy Council are tax-paying entities, and if they spent money on research and education, it would be deductible as a normal business expense. Therefore, dues paid to the council are also deductible by the members. If the council happens to spend less in a tax year than the amount it received in dues, should that surplus of receipts over expenses be taxed in the same manner as the profits of a company? Congress has concluded that this excess of revenues over expenses represents a merely temporary situation, and assumes the funds would likely be spent in the following year. Since the work of the council (and other 501(c)(6) entities) is not really conducting business, but providing a service to members, it has created section 501(c)(6) as a tax-exempt category.
The big difference between 501(c)(6) and the other 27 tax-exempt categories that are not 501(c)(3) is that the 501(c)(3) entity is also a public charity. The unique characteristic of a 501(c)(3) charity is that contributions to it from businesses and ordinary citizens are tax deductible by the donor.
So to be precise, the primary advantage of a 501(c)(3) charity is not its tax-exempt status, but the portion of the law that allows donations from members to be deducted from the donor’s taxable income. The 501(c)(3) entity would be better served by referring to itself as a charity rather than as a tax-exempt entity. In this way, it would not be confused or compared with entities like the NFL, whose tax-exempt status has been frequently questioned by members of congress and the general public.
Still, why is the NFL giving up its tax-exempt status now and volunteering to pay taxes on the surplus of its dues revenue over its expenses? The answer is in the IRS Form 990 that must be prepared by all tax-exempt entities. This IRS form contains more information than any other tax form in the IRS database and the NFL would rather keep some or most of that information confidential. So they are willing to pay some income taxes (some estimate it will be $10 million per year) to have a little more confidentiality.
In conclusion, all tax-exempt entities are not created equal. Only amounts donated to a charity are deductible on the donor’s tax return. The fact that organizations like the National Dairy Council or the NFL are also tax exempt is not the travesty that some people will have you believe. These tax-exempt entities exist only to make their tax-paying members more profitable, resulting in more taxes paid to the U.S. Treasury.