Legal & Tax Issues

Q: What's the difference between 501(c)3 and 501(c)4?

A 501(c)4:• Does not have to pay taxes on its income.• The only annual report required is the IRS 990.A 501(c)3:• Does not pay taxes on income.• Donors making contributions can deduct them from their income taxes.• Can apply for tax exempt status from New York State so it does not have to pay sales taxes on items it buys.• Is required to register with the New York Charities Bureau.• Is required to file IRS 990 and New York State CHAR500 forms annually.Note: Creating a foundation does not eliminate the Kiwanis distinction between your club’s Administration and Project accounts. The Administration account remains a 501(c)4 which must report annually to the IRS. The Project account becomes the Club Foundation, which must file its own IRS 990 as well as the state CHAR500 form.

Foundation/Charitable Status/Taxes for Kiwanis Clubs

Kiwanis Clubs have both requirements and options with regard to their operations in order to comply with federal and state requirements, including required filings, tax exemptions and sales tax requirements.

This discussion is an overview of the subject designed to give New York Kiwanians a basic understanding of the requirements and options, with links to federal and state web sites and forms which will be useful. This is not intended as legal advice; clubs should contact lawyers and/or accountants for advice as needed.

Club Incorporation

All Kiwanis clubs are incorporated as 501(c)4 corporations under Internal Revenue Service rules. This means that Kiwanis clubs do not have to pay income tax on their revenue.

Requirements for 501(c)4 Corporations:
As a 501(c)4, Kiwanis clubs are required to file an IRS Form 990 each year. Because the Kiwanis fiscal year ends on Sept. 30, the filings are due by Feb. 15 of the following year.

The form clubs need to file is based on the revenues in their 501(c)4 corporation:

• Gross Receipts normally less than $50,000: Form 990-N

• Gross Receipts between $50,000 and $200,000: Form 990-EZ

• Gross Receipts greater than $200,000: Form 990

The Form 990-N can only be filed online. It is a simple process if you normally have income less than $50,000 a year. A simple statement that is the case is all that’s required.

Learn More about Creating A Foundation Here.

What Happens if Clubs Don't File?

If a club fails to file a Form 990 for three years, its tax exempt status may be revoked. At that point, all club revenue would be taxable. The IRS also may levy fines.

How is a Club Foundation Different?

Kiwanis clubs have the option of creating a club foundation which provides additional advantages and responsibilities.

The foundation is incorporated separately from the Kiwanis club. Kiwanis requires that most of the club’s Board of Directors serve on the Foundation’s Board of Directors as well.

Once you have the new corporation in place, you can begin the process of making it a 501(c)3 non-profit.

What's the difference between 501(c)3 and 501(c)4?

A 501(c)4:

• Does not have to pay taxes on its income.

• The only annual report required is the IRS 990.

A 501(c)3:

• Does not pay taxes on income.

• Donors making contributions can deduct them from their income taxes.

• Can apply for tax exempt status from New York State so it does not have to pay sales taxes on items it buys.

• Is required to register with the New York Charities Bureau.

• Is required to file IRS 990 and New York State CHAR500 forms annually.

Note: Creating a foundation does not eliminate the Kiwanis distinction between your club’s Administration and Project accounts. The Administration account remains a 501(c)4 which must report annually to the IRS. The Project account becomes the Club Foundation, which must file its own IRS 990 as well as the state CHAR500 form.

Sales Taxes

Sales Taxes for 501(c)4 Organizations:

Any 501(c)4 organization, either a club with no foundation or a club’s Administration Account, is required to pay sales taxes when making a purchase for club operations. For example, if a club purchased frames for awards to be presented to members, tax would have to be paid.

If a 501(c)4 organization, for example a Kiwanis club which does not have a foundation, has a fund-raising event which involves selling items to the public, sales taxes need to be collected on those sales.

Sales Taxes for 501(c)3 Organizations:

A 501(c)3 foundation is not required to pay sales taxes when making a purchase for foundation operations. For example, if a club foundation purchased equipment or supplies to be used for pancake breakfast fund-raising events, no tax would have to be paid. Vendors should be given a copy of the ST 119-1 form which shows the foundation’s tax exemption. The ST 119-1 can only be obtained from the state but it can be copied and used as often as necessary.

If a foundation has a fund-raising event which involves selling items to the public, sales taxes need to be collected.

If Clubs are Tax Exempt, Why Must they Collect Sales Taxes?

Many find this confusing — why would a tax-exempt organization have to collect sales tax? But when it comes to sales taxes any exemption is with the buyer, not the seller. Any taxable items sold to the public must have sales taxes collected, regardless of the tax status of the seller. Publication 843 from the state Department of Taxation and Finance covers this subject.

Club as Tax Collector

In order to collect sales taxes, clubs must apply to the state Department of Taxation and Finance to register as a sales tax collector. Once registered, regular reports are necessary and the sales taxes collected must be paid to the state. (It is legal to sell items “including sales tax” so that you don’t have to add the tax onto each sale.)

Once you are registered as a sales tax collector, you do not need to pay sales taxes when you purchase items for re-sale to the public. (This applies to 501(c)3 and 501(c)4 corporations.) For example, if you purchase coloring books for re-sale, you can give your supplier a re-sale certificate stating that you will be re-selling the items and collecting and remitting the sales taxes yourself.