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Gonsiorek: Program fees and contributions just don't mix

Today’s topic is one that doesn’t exactly please my clients. However, I remind them that I am the “Princess of Doom.” It is my job to think of all the bad things that can happen and then avert any impending crisis! Today’s topic is the “booster club.”

Keep in mind that booster clubs include not only high school boosters but also youth athletic organizations, fine arts groups and other charitable organizations offering programs for a fee – not just those that call themselves "boosters." Using this IRS definition, a very large sector of our community has involvement with a booster club, as a board member, active volunteer, or parent of a child participant. In the eyes of the IRS, this has been an area of substantial abuse; so much in fact that IRS Tax-Exempt Director Lois Lerner placed booster clubs on her annual Work Plan as an area requiring review. Clearly the object of Lerner’s attention here is the propensity for booster clubs to commingle program service fees and charitable contributions, which is a big no-no.

Many organizations seek creative ways to fund-raise, to defray the cost of programs. One of the most common methods of fundraising involves students raising money to pay for trips, camps, uniforms, etc. Whether the students are selling candy, sponsorship ads in a program book, or simply seeking cash donations, the problem arises when the charity implements the concept of Participant Designated Accounts. Here’s how it works: The organization initiates a program where the student or program participant earns direct credit toward his or her program fees, camp, or trip cost based on that individual’s level of volunteer work or the amount of funds raised on behalf of the organization. This practice is extremely prevalent but creates tax consequences for both the organization and the participant. In fact, it can result in the loss of tax-exempt status.

The primary issue for the IRS is a payroll issue because amounts credited to an individual student’s account are taxable wages. Observance of the situation may prompt the IRS to initiate a payroll tax examination and assess taxes and penalties on the unreported compensation. In fact, several booster clubs have been subject to such examinations with taxes and penalties assessed in the tens of thousands of dollars.

Additional concerns for the organization include assessment of income taxes because the fundraising is now conducted by paid employees and not volunteers. The most severe situation is the risk that the organization has violated the rule of Private Benefit: Organizations exempt under Internal Revenue Code Sec. 501(c)(3) may not operate for the substantial private benefit of any individual. For small to medium-sized organizations, this fundraising activity may be a substantial portion of revenues. Substantial Private Benefit will jeopardize the tax-exempt status of the organization. These consequences are extremely severe and they deserve consideration when planning program and/or fundraising activities.

So remember: Whether you are selling candy to cover some of your program expenses, soliciting contributions for a mission trip, or simply placing a volunteer requirement on every parent in your athletic program, program fees and contributions are like oil and water. They just don’t mix.

* * *

I will be presenting my program, “Nonprofit Know-How” at 8 a.m. Feb. 20 for a local business league. This is a great program for nonprofit board members and employees to learn the basics. If you like the column, you will love the program. Breakfast is served; seating is limited. Email me for an invitation.

• Nancy Gonsiorek is a Certified Public Accountant providing audit, tax and consulting services to nonprofit organizations. Her firm, Nancy L. Gonsiorek, CPA, LLC is based in Crystal Lake. She can be reached at 815-455-9462 or via email at NancyGonsiorek@comcast.net.

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