Education on Tax Status Conversion
Education Event on May 19 at 7pm by Zoom
In Preparation for Membership Vote at Our
LWV of PWM Annual Business Meeting on June 8, 2022
In April, the LWVPWM Board approved putting the following motion before membership at the Annual Business Meeting:
Motion to put before Membership in June:
After having studied converting LWVPWM’s IRS tax status, our Board of Directors approved filing to gain IRS 501(c)3 status and to recommend that membership approve it. By voting “yes” on this motion, Membership will approve LWVPWM filing the necessary application forms with the IRS.
Information and Q&A have been offered at monthly meetings and before the recent concurrence meetings, along with extensive readings provided to board members, beginning in February of this year. This page begins with a general overview and below that offers a deeper dive for those who want more. Members who have additional questions or comments after reading this page, can email LWVportwashingtonmanhasset@gmail.com
League Context:
Our Board of Directors has been studying this since February 2022. We have learned that of the approximately 700 Leagues across the US, over 200 (including 18 state Leagues) have changed their tax status from 501(c)4 advocacy organizations to 501(c)3 tax exempt organizations since 2010. None of these has reported having to adjust how much advocacy they do nor being constrained by how much lobbying they can do.
How do the two kinds of tax status differ?
LWVPWM presently holds a 501(c)4 tax designation —dues and donations are not tax deductible — and there are no limits on lobbying.
If we convert, we will hold a 501(c)3 tax designation, and our dues and donations will be tax deductible — and the other requirements will not change our current operations
- major purpose will be education (the bulk of our efforts now)
- lobbying activities cannot be a “substantial” part of our activities (more below)
- we may not support or oppose political parties or candidates (same as now)
What are the benefits of converting?
- Simplified administration — rather than having some of our funds held by NYS in the Education Foundation and some held in our own accounts — all our funds would be under our control in one set of books. All of our revenues and expenses would also be accounted for in one ledger.
- Fundraising — dues do not cover our expenses — we need contributions to fund our programs and activities.
- The tax-exempt status would mean your/our dues would be tax deductible and any contributions you make will be deductible
- Also, many vendors offer discounts to tax exempt organizations — for example PayPal reduces their fees for online transactions
- Finally, many organizations require tax exempt status to make contributions: from grant-making organizations to donor-advised funds to online donor groups
How might our advocacy activities be curtailed, if at all?
Advocacy — which we do a LOT of — differs from lobbying — which we do very little of
- What we consider Advocacy, the IRS considers education, i.e., nonpartisan education about issues — the public policy positions we support based on serious, non-partisan study and consensus
- The IRS defines 2 kinds of lobbying:
- Direct Lobbying: We give our views on specific legislation to a legislator or staff
- Grassroots Lobbying: We encourage the public to contact legislators to support/oppose specific legislation
- Our current activities:
- We do very little lobbying — perhaps 1% of our time each year — and we’ve spent zero dollars annually on lobbying during each of the past 5 years
- We spend more time in advocacy — 10% — but very few dollars
- How will the IRS determine whether our lobbying is “substantial” (i.e., excessive for 501(c)3 status)?
- We will file for a status that defines “significant” in dollars expended per year — called 500(h)
- To exceed IRS limits we’d need to increase lobbying expenditures from zero dollars to about $700/yr or more
- We can expend unlimited volunteer hours on lobbying
What happens if membership votes to approve the change in tax status?
- We will also need to pass Bylaws Motion #1 (in your annual meeting mailing) — to conform to IRS requirements
- LWV of PWM will complete the IRS paperwork — according to instructions we’ve received from a LWVUS consultant who has successfully assisted 100+ Leagues
- We will ask the LWVUS consultant to double-check our filing to ensure no errors
- We will file the paperwork with the IRS — and wait
- Our new tax status will be effective as of the filing date (i.e., in June 2022), when the IRS accepts our paperwork (it may take 5 months or more)
A Deeper Dive:
BACKGROUND & INITIAL DUE DILIGENCE
At the March 2022 monthly board meeting, the LWVPWM Treasurer made a motion to begin studying this issue, prompted by guidance found on the National League’s website (written in June 2018), framed as FAQ’s designed to lay out the differences between a League’s choice of 501(c)4 or 501(c)3 and the benefits of electing 501(c)3. We recommend reading them immediately for a brief, expert summary, from a League perspective. The authors of the guidance, Tom Carson and Toni Larson have deep experience with the League. We have spoken with Tom and received additional materials from him, some of which are included here.
Tom says that over the past decade over 200 (of the approximately 700) Leagues in the US, and 14 state Leagues, have changed their tax status and now operate as 501(c)3 organizations. He’s advised about 100 of those, and no League he has advised has had the IRS deny its application. These include state Leagues of Alaska, Colorado, South Carolina, Texas, and Wisconsin, which have encouraged their local Leagues to also change. Although Illinois and California remain 501(c)4’s, about 30% of Illinois League members and half of California local Leagues have shifted to 501(c)3.
Tom notes that LWV of Texas and about half of its local Leagues are actively and constantly advocating (and lobbying) due to recent legislation and executive orders restricting voting, healthcare, civil rights, etc. Despite being 501(c)3 organizations, none has felt constrained or burdened by compliance because the mix of League activities is far greater than lobbying (mostly done by volunteers) and only limited funds are spent on lobbying. Tom reports that he has heard of no League changing its mix of services or reducing its advocacy or lobbying because of changing their tax status. A number made the change for financial reasons, to encourage more contributions, including from agencies and foundations which only contribute to 501(c)3s, and report benefit.
In studying their transition, the LWV of Oregon created this useful table listing typical League activities and how to characterize them for the purposes of the 501(c)3 IRS designation —“Lobbying vs. Advocacy vs. Education”.
The study committee has exchanged emails with and interviewed representatives of several of these Leagues.
We have also asked LWV of NYS through Laura Bierman about any NYS concerns and learned that NYS has been considering the shift but hasn’t (yet) put resources into researching it. LWV of NYC converted “years ago” (current board members couldn’t remember when).
ISSUES RAISED BY LWVPWM
Several concerns have been voiced by PWM members, which our interviews suggest are common across Leagues considering this change. These include:
1. Might League activities around advocacy and lobbying need to be curtailed?
Leagues PWM interviewed and LWV.org advisor Tom Carson has told us none of the 200+ Leagues who have converted have had to curtail their lobbying, as defined by the IRS. Advocacy is not affected by this conversion.
2. What will happen should our League want to spend considerably more time (and money) on lobbying than we are now?
When we file for conversion, we will also elect 501(h) status. This will cause the IRS to measure our lobbying activities, not by time but by expenditures. This would mean we wouldn’t have to measure and label all our volunteer hours annually, only our expenditures. We have spent nothing on lobbying over the past 5 years, would not exceed the IRS limit on lobbying expenses until we are well over $700 per year, and possibly considerably more. Further, we would need to exceed that number, on average, for four years. Since we already track all expenditures, the only additional effort would be tracking what we spend on lobbying. Since almost all our lobbying has no expenses at all (LWVPWM does not pay lobbyists nor entertain those who decide legislation), this removes risk of our being out of compliance.
We currently spend about 2% of our time on lobbying, and after electing 501(h) status, there will be no limit on how much time we can spend.
3. What if we fall out of compliance — what will the penalties, repercussions be?
The odds of our being out of compliance are very low, given the experience of so many other Leagues who also advocate and lobby under a 501(c)3 status, but it appears that there is a four-year window for managing the average expenditures spent on lobbying per year.
4. How much time/effort will we have to expend to remain in compliance (reports/filings)?
Our Board should regularly query members who lobby in the name of our League about their activities, and our Treasurer will have a line item dedicated to lobbying expenses. These will constitute de minimis effort. IRS tax filings may require one additional form, which we gather is relatively easy to complete and submit.
5. How much will it cost — to make the shift and then to maintain it?
Filing for the conversion will require a $600 fee.
6. How can we account for sending PMPs to LWVNYS and LWVUS, which are 501(c)4 organizations when our dues have been tax deductible to our members?
Per Tom Carson in “Pros & Cons of Applying to Change Tax Status“
Questions have been raised about the tax consequences of a §501(c)(3) organization making large annual Per Member Payments (PMPs) to LWVUS, which is §501(c)(4), and most state Leagues, which are also still §501(c)(4). The issue of PMPs, how they are calculated, how the recipients can and do use these funds, why they are considered exempt purpose expenditures for §501(c)(3) organizations, etc., were explored in extensive detail during the IRS’ review of several California local League’s applications to qualify under §501(c)(3). These issues were resolved favorably during these review, and the IRS approved these League’s applications. See APPENDIX VI for a more detailed discussion of these issues.
Questions have been asked about whether a §501(c)(3) local League can pay its entire obligation for PMPs to LWVUS or state/regional Leagues, in light of the limits which are placed on payments of PMPs from Ed Funds or Ed Fund accounts by §501(c)(4) local Leagues. There are no problems at all for §501(c)(3) local Leagues, as is witnessed by the experience of all such Leagues beginning in 2011.
Will we be over-burdened by IRS compliance
As now, we should send thank you’s to donors specifying (but we will be able to thank them for a tax-deductible gift). As now, we will monitor voter services, voter outreach, and forums for nonpartisanship. As now, our board of directors will review of monthly/annual financials. As now, we will send an annual tax filing to the IRS.
Per Tom Carson, again in “Pros & Cons of Applying to Change Tax Status“
Finally, concerns have been raised about the possible burden of having to send thank-you letters to contributors to ensure tax deductibility. The IRS does require written confirmation of individual contributions of $250 or more. However, it would be expected that any League would already be thanking persons making such a significant contribution, so there should be no incremental burden from converting to §501(c)(3). Many League write thank-you letters every year to every single contributor, no matter how small the amount.
Read more to answer these and other questions/concerns
- Two posts by the Council on Nonprofits describe the benefits of electing 501(h)
- Tom Carson on Advocacy vs Lobbying
- LWV of Oregon Table comparing League common activities: Education and Lobbying
- LWVUS FAQ on 501(c)3
PROCESS STEPS — To date & After June 8, 2022
To move toward a successful filing, our process has been as follows:
1. Done: Board vote to recommend asking membership at the annual meeting to vote yes to apply to the IRS for 501(c)3 status — this involved- Materials to be published to members (by email 30 days before annual meeting) and on website
- Scheduling education session (May 19) with a presentation and Q&A
- Arranging for Tom Carson to be available to answer questions at our annual meeting
2. Done: Board vote to recommend asking membership at annual meeting to approve revisions to the bylaws that would bring our bylaws into compliance with IRS regulations for 501(c)3
- Bylaws to be published to members (by email 30 days before annual meeting) and on website
4. In-Process: Begin preparing and drafting materials for the IRS filing and have Tom Carson review them
- Forms: 1023, 5768, 8821
- Financial documentation — five years of records
- Determine specific annual tax filings our treasurer will need to do beyond current filings
- Determine what changes to monthly/annual financial reports and board review are recommended
5. Review process and filings with a NYS tax attorney with expertise in nonprofits
6. File with the IRSMembers who have additional questions or comments after reading this page, can email LWVportwashingtonmanhasset@gmail.com