To Tax or Not to Tax?
(posted: Jun 02, 2011)
Joe Kluger, principal at WolfBrown Consulting
I’ve been reading with interest an ARTSblog debate (initiated by this provocative piece from Valerie Beaman) questioning whether the 501(c)(3) nonprofit model remains the best option for arts and culture groups that are having more difficulty than ever balancing the inherent organizational tension between mission and money. The debate occurred during the same week an article in the New York Times reported on the efforts of financially pressed U.S. cities to collect payments in lieu of taxes (PILOTs) from nonprofit organizations. The bad news/good news of this growing trend was that in Boston, nonprofits “can get credit for up to half of the [PILOTs] they owe by providing quantifiable ‘community benefits’ that directly help city residents.” But, as Diane Ragsdale pointed out in the ARTSblog debate, this could be a challenge for arts organizations that are already in a “struggle to reconcile what they do with the exempt purposes outlined under [IRS] Section Code 501(c)(3)” (which include charitable and educational purposes, but no reference to arts and culture).
These discussions prompt me to ask whether the debate about the optimum structure for an arts and culture group conflates the assessment of an organization’s financial interests and its public value. There are surely many arts and culture groups that enjoy tax-exempt status, which, even if performing at the highest standards of artistic excellence, do not operate exclusively within the IRS’ charitable and educational criteria. Similarly, there may be profit-generating organizations that provide a greater public service than some self-interested nonprofits (which is one of the reasons for the emergence in some states of the L3C, a low-profit limited liability company).
As public sector resources are increasingly strained, there may be mounting political pressure for government leaders to reexamine the criteria for tax-exemption and make it more a function of demonstrated public service than the absence of profitability. This may lead to traction for proposals, such as those made by Sen. Charles Grassley (R-Iowa) on behalf of hospitals, to have a two-tiered tax-exemption system, with the tax-deductibility of contributions limited to an organization’s charitable and educational activities. In the future, the matrix of tax-exempt organizational options may look like this:
Arts and culture groups would be wise to anticipate accountability demands for tax-exempt status by reexamining their missions, programs and financial structures to be sure they are serving the broad public interest, rather than their narrow self-interests.