by J. Stanley Schmidt
If your handbell choir is a community or professional ensemble, the I.R.S. indeed can help you. How? By designating your choir as a 501(c)3 organization.
There’s a wonderful riddle that asks, “What are the three biggest lies in America?” Unfortunately, sensibility and the editorial policies of Overtones preclude publishing answers one and two. The third answer, however, passes muster: “I’m from the Internal Revenue Service, and I’m here to help you!”
But that’s not really a lie. If your handbell choir is a community or professional ensemble, the I.R.S. indeed can help you. How? By designating your choir as a 501(c)3 organization.
What is a 501(c)3 designation?
It’s a determination by the federal government that releases your organization from the obligation to pay federal income taxes and permits your financial donors to deduct their gifts as charitable contributions on their income tax returns. The regulations and rules dealing with this status are found in section 501(c)3 of the Internal Revenue Code.
Who is eligible for 501(c)3 status?
Eligibility is limited to organizations that perform a valid public service. That means they are organized and operated exclusively for one or more of the following purposes: religious, charitable, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or the prevention of cruelty to children or animals. Your community or professional handbell choir may already meet this criterion. If not, it can.
Applying for a 501(c)3 determination
To apply for a 501(c)3 status, your organization must complete and file I.R.S. Form 1023 (available at www.irs.gov or by facsimile at 703-368-9694). Instructions for I.R.S. Form 1023 and the helpful I.R.S. Publication 557 (“Tax-Exempt Status for Your Organization”) are also available from the I.R.S. website and by facsimile. Some organizations (churches, synagogues, mosques, and others with gross annual receipts of not more than $5,000) may be considered tax-exempt even if they do not file I.R.S. Form 1023.
Eleven years ago my wife Ann founded Capital Carillon, a community choir that continues to serve the metropolitan Washington, D.C., area under the baton of her successor Rob Kobus. The choir sought and received a federal income tax exemption. In the early stages of our efforts, two Guild colleagues who had successfully traveled this road came to our rescue. One was David R. Davidson (who formed and directed the Dallas Handbell Ensemble). The other was David M. Harris (founder and director of The Raleigh Ringers). Both of them gave us first-rate navigation counsel along the way and provided copies of the documents they had used to receive their 501(c)3 designations.
What a 501(c)3 status does not do
The 501(c)3 designation only exempts your choir from federal income tax and favors those who make gifts to it. Contrary to popular folklore and word on the street, that’s all it does. Nothing more. Even though your group must be a not-for-profit organization in order to obtain a 501(c)3 designation, the I.R.S. does not grant you a not-for-profit status. That is done only by the state in which your group is incorporated.
Neither does the I.R.S. release you from other federal taxes, state income taxes, state personal property taxes, or state and local sales taxes.
Iowa (where I was born) automatically exempts 501(c)3 organizations from state income taxes. However, Maryland (where I live) requires that 501(c)3 corporations apply to the legal department of its revenue administration to seek that exemption. If your choir wants relief from state income taxes, be sure to check with the appropriate agency in your state.
Some states impose a personal property tax on equipment owned by your choir (such as bells, chimes, and music stands). For several years Capital Carillon has unsuccessfully sought state property tax relief from Maryland’s department of assessments and taxation. That office loses our documents, frequently changes personnel in midstream, and fails to acknowledge our inquiries, let alone respond to them. Somewhere along the way Capital Carillon will need to decide whether saving about $60 a year in personal property taxes as well as the time required to file detailed multi-page annual returns is worth the effort required to get the exemption.
Whether your choir is exempt from state and local sales taxes is determined by your particular state and city. If you wish relief from sales taxes on your retail purchases, contact the appropriate state or local government taxing authorities in your area.
All the basic information you need is available on the Internet.
The key requirements
To be released from the obligation to pay federal income taxes, your choir must be organized and operated exclusively for one or more of the exempt purposes. Of all the options, your best avenue is to demonstrate that your handbell ensemble serves the public interest because its purpose is exclusively educational.
A clear-cut way to do this is for your choir to become a not-for-profit corporation organized under the laws of your state, and then to submit your certified articles of incorporation when you complete I.R.S. Form 1023. You must also apply for and receive a federal employer identification number (EIN), similar to an individual’s Social Security number.
As an example, here is the relevant section of Capital Carillon’s articles of incorporation as a non-stock not-for-profit Maryland corporation:
The purpose for which Capital Carillon, Inc. is organized is exclusively educational within the meaning of section 501(c)3 of the Internal revenue Code of 1986 or the corresponding provision of any future United States Internal Revenue Law.
To that end Capital Carillon, Inc. provides educational and instructional training of qualified individuals of all ages for the purpose of improving and developing the capabilities of those individuals, and the educational instruction of the public, in the use and appreciation of handbell music. This includes the organization of a performing handbell choir and the performance of handbell music.
Notwithstanding any other provision of these articles, Capital Carillon, Inc. shall not carry on any activities not permitted to be carried on by an organization exempt from federal income tax under section 501(c)3 of the Internal Revenue Code of 1986 or the corresponding provision of any future United States Internal Revenue Law.
In addition, your choir must permanently dedicate its assets to exempt purposes. Capital Carillon’s articles of incorporation stipulate that
in the event of dissolution, the residual assets of the organization shall be turned over to one or more of the organizations which themselves are exempt as organizations described in sections 501(c)3 and 170(c)2 of the Internal Revenue Code of 1986 or corresponding sections of any prior or future Internal Revenue Code, or to the federal, state, or local government for exclusive public purpose.
What about fundraising?
Financial contributions to 501(c)3 organizations (except organizations testing for public safety) are deductible as charitable contributions on the donor’s federal income tax return. If your donor receives something of value in return for the contribution (a frequent occurrence with many handbell choir fundraising activities such as auctions, banquets, or concerts), part or all of the contribution may not be deductible. “Suggested contributions of $10 at the door” to attend your concerts may not qualify as a tax-deductible gift for your donors. Gifts received at activities sponsored by your community or professional choir that involve a minimum contribution are highly suspect when they are claimed as charitable deductions.
A fundraising caveat
Just because your community or professional choir is recognized as a 501(c)3 organization does not automatically authorize you to raise funds. That privilege may require approval of your state government. Maryland is one example. “The Free State” requires that organizations soliciting charitable gifts must apply for and receive an exempt organization fundraising notice from the office of the secretary of state. In the case of Capital Carillon, this annual notice does not imply endorsement of its public solicitations, but it does authorize the choir to seek gifts and grants. If they raised funds without this notice, Capital Carillon would be in violation of state regulations. You should check to determine if your state has similar rules.
Do you need professional assistance?
Of course you do! But that doesn’t mean you have to hire an attorney. In fact, unless your attorney has a proven track record with both non-profit corporations and 501(c)3 designations, you may be better off without one.
All the professional assistance we needed came from dealing directly with I.R.S. personnel and Maryland officials. They helped us jump through what at first looked like eye-of-the-needle hoops. For example, when Capital Carillon initially applied for 501(c)3 status, we were told by the I.R.S. that two provisions in our articles of incorporation needed to be revised. And then they showed us what the revisions should say. At every turn we had access to competent and helpful government professionals. We made good use of them. Why not! We were already paying their salaries.