In reading the "supporting our hobby" posts and the problems that are happening at one of the museums in So. Cal, I wonder, can non-profit "museums" do work for profit? There are some places out there that do wheel and truck work for example. Others do tube sheets for locomotive boilers. I see that this is one way of "supporting our hobby". Shop buildings this day and age should pay for themselves, and if they can generate money for "the big picture", it seems like this is an area that needs to be looked at.

So the question is, how is this "non-profit doing for profit work" done, and still be able to remain a tax exempt, non-profit entity?

I understand that as soon as you open your doors that you won't have a waiting list of money backed projects, but if you get one or two, this could offset the price of the shop building somewhat, or at least pay for a roof over a project.

Smokebox

> In reading the "supporting our
> hobby" posts and the problems that are
> happening at one of the museums in So. Cal,
> I wonder, can non-profit "museums"
> do work for profit?

The short answer is "yes". Non-profits absolutely can engage in profit-making activities. The rule is that the profits from such activities must be reinvested in the stated "educational" or nonprofit activities of the organization. Doing wheel work for profit (as at TVRM) is no different than turning a profit on your gift shop: all you need to do is make sure the resulting profit is reinvested in the educational or preservation mission.

There are ultimate limits to this, to prevent nonprofits from metasticizing into entites which compete head to head with taxed, for-profit companies, and then you get into having to file certain activities as "Unrelated Business Income," and pay taxes on them, but that's another story.

For a fuller answer, skim the summary below:

BASIC DEFINITIONS

In order to understand the differential tax policies between for-profit and non-profit organizations, a few basic misconceptions regarding these organizations must be dispelled from the start. A for-profit organization is incorporated using a legal form called the Articles of Incorporation. A for- profit organization will also have a Board of directors and officers, pay compensation, make investments, produce goods or services and hopefully, turn a profit. A non-profit organization is also formed using
the Articles of Incorporation. Similarly, a non-profit organization is run by an Administrative Board and officers, produces goods or services and makes investments. A non-profit organization will also, hopefully, turn a profit, unlike its name suggests. The dividing line between for-profit organizations and non-profit organizations concerns questions of ownership and profit distribution. For-profit organizations function under the "private inurement doctrine". 1 This doctrine arises because for-profit
organizations have owners, namely private stockholders. Profits earned by a for-profit organization ultimately are passed through, or inured, to the stockholders, usually by dividends on shares of stock. 2 Non- profit organizations are not permitted to function using the private inurement doctrine. The owners or administrators of a non-profit organization do not receive any portion of the organization's profits, as is specified in the Articles of Incorporation. 3 Any profits earned must inure back to a
non-profit activity sponsored by the organization itself or must be donated to other non-profit organizations. By not permitting non-profit organizations to distribute their profits according to the private inurement doctrine, it is thought that non- profit organizations will observe their pledges to serve the public interests and provide charity to the surrounding community. 4 Another difference between for-profit organizations and non-profit organizations concerns tax-exempt status. Generally, tax-exempt status is not conferred to for-profit organizations and similarly, not all non-profit
organizations are tax exempt. Tax- exempt organizations are a subset of non-profit organizations. For a non-profit organization to attain tax-exempt status, it must have the following three characteristics.
First, the organization's Articles of Incorporation must outline tax exempt activities at the time the corporation is started. A pre-existing corporation will not be permitted to attain tax-exempt status, even if the activities that they are performing would be considered charitable, unless its Articles of Incorporation are amended or modified to include tax exempt activities. 5 Second, a "substantial" portion of a non-profit organization must consist of tax exempt activities or a substantial portion of the corporation's money must go towards tax exempt activities. Attaining tax-exempt status does not mean that the non-profit organization cannot turn a profit. It does mean, however, that the profits are used only for tax exempt activities and are not distributed among shareholders. 6 Finally, upon the dissolution of the non-profit corporation, all assets must be distributed to other tax-exempt organizations. Again, tax exemption for a non-profit organization means that a substantial portion of the monies are used for charitable purposes. The money is not to be used by individuals for their own gains.


eledbetter@rypn.org

I strongly suggest all members of Non-Profit Organizations--railroad related or not--as well as potential donors, board members, and members of the inquiring public check out the Web site below concerning NPO finances. You need to know the financial health, income, practices (or malpractices), and expenditures of your non-profit organization. It's public knowledge and a public right to know, folks!

George

IRS Form 990 for NPO's

Profit is monies earned above and beyond expenses. I know of no non profit railroad museum that has more money than expenses, and should any spare change evolve itself out no doubt some additional programing can be found to consume it.

If you can make a buck helping another guy out and invest it in your mission, more power to you.

Dave

irondave@bellsouth.net

George is absolutely right!! However, add Publication 557 to your reading list (downloadable in pdf format from IRS) and visit the link below for a discussion of UBIT (unrelated business income tax)

It's amazing how much confusion the term "non-profit" creates. I've actually met 501(c) board members who think it means "we operate at a loss or only break even". As a result, the terms "charitable organization" or "exempt organization" are being used more and more.

What it does mean is that there are no stockholders expecting a return on their investment- attempts to do so are called "prohibited inurement" and carry the potential of all kinds of neat IRS penalties of the usual sort. In short the income must stay in the organization to further its goals and be produced within the guidelines of IRC 501(c)(3).

If you earn money outside the parameters of your mission, you pay an "unrelated business income tax" or "UBIT" on that money.

I seem to recall hearing once that if work is done exclusively by volunteers it is exempt from the unrelated business income tax-because that wouldn't be "carried on regularly as a trade or business", but check with your attorney, CPA or Enrolled Agent to be sure.

As for doing outside contract work, it depends on how or what. I would think TVRM doing wheel work would be well within its mission, accepting a contract to use a lathe to make parts for some manufacturer of automotive parts would be subject to UBIT. (I am not licensed-just my conjecture)

The question shouldn't be whether you should accept a money making project, its whether you'll report it as income on Form 990-T and do you have the right accounting systems/personnel to do cost accounting necessary to allocate fixed costs incurred in the production of the unrelated income.

As a side note, there's some evidence that for years the IRS looked the other way relative to 501's. In the 1990's they found flagrant violations of the law and on some occasions an attitude that noble purposes exempted people from the law. As a result, audits are up. They just concluded a new round of hiring for auditors on April 30.

So, read up check up and stay compliant!!! If you find a screw up, consult the right person. There maybe a voluntary compliance program that significantly reduces penalties-NEVER EVER ENRON something-that really ticks them off.

Of course I must add a disclaimer:

The preceeding is intended as a general discussion of issues for organizations organized under and exempt from Federal taxation under Internal Revenue Code 501(c) and is not intended as, nor should it be construed as tax or legal advice. Only a properly licensed attorney, Certified Public Accountant or Enrolled Agent may legally offer tax advice. Only a properly licensed attorney can offer legal advice. For advice relative to you or your organization please consult one of the previously mentioned professionals as appropriate to your needs and situation.



IRS Website-UBIT discussion

> Dave, you probably right about the lack of profitability, but the question of whether income is taxable or not revolves around how it is PRODUCED, rather than consumed. See my priior post and IRS pub 557.

> So the question is, how is this
> "non-profit doing for profit work"
> done, and still be able to remain a tax
> exempt, non-profit entity?

Since I am not a CPA, anyone serious about this question consult their auditor for the legal answer. I have been told by a CPA that Foundation Tax Law (whatever that encompasses)is applicable in some non-profit cases where a large endowment earns a substantial (I presume more than 50%, but do not know) portion of the entity's revenue. Since investment activity is not a stated activity in most non-profit's by-laws, making substantial money at it puts one into the "investing for profit" business. This would also be true of revenues generated from activities not regularly associated with the purpose of your organization. I would assume that profits from a large land or structure sale could be construed as within the scope of rail preservation provided that they were connected to the operation in some manner at one time. These two scenarios seem like the most likely we'll ever face.

We at OERM have done brake work for others in the past, but quit for liability reasons. THe income generated from it never came close to being substantial and it could easily be argued that the work -for historical entities- was within the scope of our by-laws.

I hope that helps.

wyld@sbcglobal.net

> Since I am not a CPA, anyone serious about
> this question consult their auditor for the
> legal answer.
GOOD ADVICE!!!

Foundation tax law is when the IRS determines that a charitable entity receives a substantial amount support from a single taxpayer. It is then covered by Internal Revenue Code 509, rather than 501 and has additional requirements imposed upon it.

>

I can see how working on other "non-profit" projects could pass as being in the same scope, but what about shop facility rentals? If a museum invests in a nice paint or sandblast booth, or has the opportunity to do foundry or machine work, does it have to directly relate to the field in the mission statement? If you build a paint shop, could you rent it out to someone who wants to paint a school bus in it to generate revenue for the museum?

Smokebox

> I have been told by a CPA that
> Foundation Tax Law (whatever that
> encompasses)is applicable in some non-profit
> cases where a large endowment earns a
> substantial (I presume more than 50%, but do
> not know) portion of the entity's revenue.
> Since investment activity is not a stated
> activity in most non-profit's by-laws,
> making substantial money at it puts one into
> the "investing for profit"
> business. This would also be true of
> revenues generated from activities not
> regularly associated with the purpose of
> your organization. I would assume that
> profits from a large land or structure sale
> could be construed as within the scope of
> rail preservation provided that they were
> connected to the operation in some manner at
> one time. These two scenarios seem like the
> most likely we'll ever face.

The Internal Revenue Code acknowledges two broad categories of tax-exempt, non-profit entities: Public Charities and Private Foundations. A non-profit is assumed by the IRS to be a Private Foundation (and thus subject to, for example, disbursing 5% of its asset value annually) unless it can meet a "Public Support Test." Depending on the type of structure asserted by the Charity (see IRC sections 509(a)(1) through 509(a)(3), the public support test may differ slightly.

As to earning revenue, a non-profit may be tax exempt on earnings related to its mission (i.e. ticket revenues, gift shop, shop services, etc.). It may also engage in non-related businesses - for example, a railroad museum may own a number of fast-food restaurants and use the profits to fund museum activities. In this case, however, profits from the fast-food business are subject to Unrelated Business Income Tax (UBIT).

Finally - "non-profit" and "tax-exempt" are two separate things. Anyone can create a new corporation and declare it non-profit. All this means is, as was said above, any profits won't be disbursed to owners (shareholders).

Only the IRS can declare that entity tax-exempt, after it has proven to the IRS that it meets certain criteria for serving the public good.

JAC

"Non-profit" is a tax status not a business plan.

Income from our wheel shop in counted just like revenue from ticket and gift shop sales.

G. Mark Ray - TVRM

TVRM Shop Updates by Steve Freer
aw90h@cs.com

> Of course I must add a disclaimer:

> The preceeding is intended as a general
> discussion of issues for organizations
> organized under and exempt from Federal
> taxation under Internal Revenue Code 501(c)
> and is not intended as, nor should it be
> construed as tax or legal advice. Only a
> properly licensed attorney, Certified Public
> Accountant or Enrolled Agent may legally
> offer tax advice. Only a properly licensed
> attorney can offer legal advice. For advice
> relative to you or your organization please
> consult one of the previously mentioned
> professionals as appropriate to your needs
> and situation.

Well there is something that I don't expect to see on this board and don't care to see it again. Lets leave the legalese elsewhere.


todengine@woh.rr.com

> I can see how working on other
> "non-profit" projects could pass
> as being in the same scope, but what about
> shop facility rentals? If a museum invests
> in a nice paint or sandblast booth, or has
> the opportunity to do foundry or machine
> work, does it have to directly relate to the
> field in the mission statement? If you build
> a paint shop, could you rent it out to
> someone who wants to paint a school bus in
> it to generate revenue for the museum?

> Smokebox

Smokebox,

You have to remember that 501(c)(3) status is granted in a letter of determination which provides the limits of your purpose. You of course determine that limit that when you submit your application which will typically say something like "to advance public knowledge of the history of railroads, through the restoration and operation of locomotives...yaddda yadda yadda"

Painting a school bus is essentially the same thing as MAACO or any commercial vehicle shop and it would be foolish to assert that activity would be within the TYPICAL railroad preservation letter of determination. You can do it, but you need to declare it as UBIT on 990-T

Don't forget if you so clearly venture out of your exempt purpose-especially dealing with a competitive bid situation like that, the commercial paint shop down the street is likely to call Congress and the IRS because he will rightly perceive you in competition with him and a commercial enterprise.

I can't advise you directly, but I'd bet a week's pay your CPA, Enrolled Agent or tax attorney would tell you the same thing.

> John, I agree with G. Mark Ray.

Your intent to not distribute money through stockholders may satisfy certain STATE incorpation categories, but in the common parlance "non-profit" generally means tax-exempt.

Its a practical thing, since if a donor is challenged,part of the substantiation that they have made a deductible contribution is obtaining the donee's letter of determination. No letter=potentially disallowed deduction.

Essentially, failure to be declared "tax exempt" through obtaining a letter of determination will not provide a "safe harbor" from an IRS assertion that you are not entitled to file a Form 990 (non-profit organization tax return) instead of a Form 1120 (for profit tax return and its attendent M-1 reconciliation

Otherwise, I think your explanation of foundations is among the best I've ever seen. You should be teaching tax law!

> Well there is something that I don't expect
> to see on this board and don't care to see
> it again. Lets leave the legalese elsewhere.

Rick, I put it at the end and clearly labelled as such so those who wish to, can skip it.

I did regulatory compliance work for five years and learned tht its important not to be perceived as stepping on the the turf of those professions, especially the bar.

Unless Hume tells me otherwise, I when and where I reason it to be appropriate.

On another matter, I think he's trying to reach you offline.