Notes on Tax Exempt Organizations (EO)
Notes on Tax Exempt Organizations (EO)
A Tax exempt organization is a company or non-profit that is not required to pay taxes when it purchases items or sells items.
In 2015 there were (pg.12):
2.2 million For-profit C corporations
1.5 million Tax exempt corporations and organizations
8.5 million small businesses & partnerships
Over the last ten years the number of tax exempt organizations has grown by 20%, in contrast to a growth rate of about 2-3% in the for-profit sector.
2015 EO revenues were more than $2.3 Trillion; approximately one third of which came from government grants and fees for goods and services. The companies with the highest revenues were health insurers and health providers in forty-five (45) of the fifty (50) states. Educational institutions were highest in 4 states and an electric cooperative was highest in Mississippi.
Over the past ten years, the dollar value of assets being sheltered from taxes by Tax Exempt Organizations has doubled; to nearly $4 trillion dollars.
When assets are moved from For-profit businesses and individuals to tax exempt companies the assets are not taxed; and once moved, they continue avoiding taxes.
The moved assets create economic opportunities for potential managers and employees. At first glanced this appear to be a good thing; however when we look at these asset transfers with respect to the tax base, we notice that the transfer did not generate any tax revenue, and won’t generate any taxable income in the future. Furthermore we see that the For-profit employees have simply been reclassified as Non-profit employees working for a company that will not generate tax revenues. Once again, the working For-profit middle class employees are stuck making up the lion’s share, of the lost tax revenue; an unsustainable practice.
There are hundreds of thousands of wonderful tax exempt organization in the US that provide assistance to people in need around the world. Some of them struggle to raise money for their cause, while others have billions of dollars invested in stocks, bonds and other assets. Some CEO’s volunteer their time; while others are paid millions of dollars per year.
There are also tens of thousands of exempt companies established for personal gain or appearance.
The tax exempt statutes have been used and abused over the century. Many companies have used their tax exempt status to build up tax free assets and a large customer base. Once done, they switch their status to taxable or let it expire by not making the required filings. They keep their tax free assets and continue business as usual.
This scheme was recently highlighted when the National Football League (NFL),
After receiving years of bad press, decided to drop its tax exempt status. Read Liam O’Gorman-Hoyt’s “501(c)(6) Tax Exemptions: Closing the Loophole the NFL Just Exposed”.
Another such scheme uses memberships to build a nation-wide base and a brand name. For example, a weight-loss company (with branches in most states and Canada) grosses $4 million in membership dues and another $2 million in grants and other income. They spend $1 million on member benefits and $1.8 million on corporate officer and employee salaries, taxes, pension plans and travel expenses. They expensed a $225 thousand grant to a local medical college and $125,000 to their own foundation. Their foundation in return expensed a $150 thousand grant back to company; it also expensed $500 thousand, of its $9 million in liquid assets, to pay its Canadian affiliate for operational expenses.
Under the New Hamilton Tax Plan, transaction fees for all of these organizations would have been less than half the amount of fees they pay to hide their profits.
Americans are and always have been very generous. Those who can afford a $100 donation wouldn’t mind giving another 16 cents to cover the transfer cost.
Propublica.org has an excellent app “Nonprofit Explorer” with access to The IRS information on nearly every tax exempt organization in the US (the IRS tends to overlook religious organizations; and small EOs don’t have to report). Do a little digging; you’ll be surprised at the results.