A nonprofit should exist for genuine charitable purpose, not tax savings. TOMS Shoes and CrossFit OUR show how nonprofits build credibility. The IRS distinguishes public charities from private foundations, and prohibits founders from taking personal distributions or creating one purely to avoid taxes.
Why start a nonprofit? Now, the one reason that can't be the sole reason is because you want to save money on taxes. Yes, you can save money on taxes by setting up your own nonprofit, but that can't be the reason why you set it up. You want to have a purpose that you believe in, that you feel like funding with either property that you have or more often cash that you want to use to fund whatever purpose it is that you believe in. Having a nonprofit tied to your business is not something out of the ordinary. We've heard of really famous cases like TOMS Shoes, you know, you buy a pair, they donate a pair. The gym that we go to is called CrossFit OUR, Operation Underground Railroad, which is owned by The nonprofit OUR, they believe in, or they're attempting to free children from sex slavery. So it, it can lend credibility to your business. It can also be a marketing tool because if someone believes in your cause, they likely would be more interested in buying from your business, knowing that maybe a portion of what they're paying you goes to The cause that you set up that they also believe in. So there are benefits there.
There are for sure things that you need to consider. There are a variety of different nonprofits. Sometimes you hear the term 501. The reason you hear that term is because the tax code Section 501, Subsection , Subsection is what defines the most common charitable organizations, but there are C1s through C6s as well. I'm just going to talk to you about 501s, also known as nonprofits.
Those are words that people use interchangeably. I can have a 501 that's a private foundation. This is often going to be where, as the person who sets it up, I'm the only donor into the foundation, and then my private foundation likely donates to other charitable organizations. It's not an operating nonprofit. Or you can have a public charity, also a 501. This is where you're soliciting funds to find additional donors other than yourselves. You're probably operating the business, so it's more involved. So you can have a 501 that's a private foundation, you can have one that is a public charity. As a Someone who has a 501, what you can do once you have it set up is money that you contribute to your 501 for your purpose is a tax deduction on your personal tax return. So you do get a tax savings, but the IRS is very clear, you can't set up a nonprofit for the sole purpose of saving taxes. It's really just a way for you to use pre-tax money. On something that you believe in. And look, I've been doing this for a long time. When I bring up this topic as a tax strategy for clients, inevitably they already have something that they believe in. They're like, oh, I actually would like to do more of XYZ. Um, it's a way to be philanthropic. One of the most famous 501s out there is the Bill and Melinda Gates Foundation. The reason I bring this up is I mean, look, for some companies it adds credibility. Bill didn't— Bill Gates didn't need any additional credibility, but he did save a ton of money by putting money and property into this 501 during his, you know, working years. You can't, as a founder of a 501, you can't take distributions from your 501. The only way to get the money back out is if you work. in the 501, and it'll pay you a wage. There's also the possibility that your operating business provides a service that the 501 needs in order to fulfill its purpose, in which case it would pay money, and you would claim that as income on your business side. But that is the biggest limitation with a 501. It's not like a personal bank account, it's not like a business account, You can't just put money or pull money out whenever you want. So it's just, you need to be aware of that going into it. Always consult with a tax professional so that you understand, based on what you're trying to accomplish, what your purpose is, that this 501 will work for what you're trying to accomplish. I am going to read something directly from the IRS website so that you get an idea It is kind of boring language, but this helps you understand the actual language that the IRS uses when it's determining what purpose you have for the nonprofit. Does it qualify to be charitable? So the exempt purposes set forth in 501 are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competitions, and preventing cruelty to children or animals. A lot of people don't know that the college bowls, if you've ever seen those on TV, those are often structured like a 501. The website continues, the term charitable is used in its generally accepted legal sense and it includes relief of the poor, the distressed, or the underprivileged, Advancement of religion, advancement of education or science, erecting or maintaining public buildings, monuments, lessening the burdens of government, lessening neighborhood tensions, eliminating prejudice and discrimination, defending human and civil rights secured by law, and combating community deterioration and juvenile delinquency. So you can actually see those are pretty general terms. Chances are if you believe in a cause, it's probably going to fall under one of the 501 purposes, but again, you'll want to consult an accountant and an attorney on that. Please remember to like, subscribe, comment, share. We really want to get this information out to as many people as possible. We want people to realize that they have options. They don't have to just pay the IRS government more than what they legally need to. So let's— the goal of us is to just stick it to the IRS because they're not your friends. They sent me a postcard letting me know that they, they don't like you or me.
