Club Question

[Outsailing86]

Tax time had me thinking...

Is there a tax benefit to making your layout a Club with a 501c3 status? has anyone looked into this? 

[rrebell]

Only for those that plan to raise money.

[dknelson]

Outsailing86

Tax time had me thinking...

Is there a tax benefit to making your layout a Club with a 501c3 status? has anyone looked into this? 

 

Be careful as there seems to be quite a bit of misunderstanding out there about just what 501(c)(3) status really means and how difficult or easy it is to acquire.  

 

We are talking about a two step process for the most part: organizing as a not-for-profit organization (corporation, usually) under state law, and then petitioning the IRS for 501(c)(3) status.

 

  There can be advantages for a club in becoming a corporation or limited liability company, particularly if it is going to acquire property, such as a building to house the club layout, or feels the need to purchase liability insurance, or anticipates having assets in an account that will earn interest (which would be reported to the IRS by the bank, or mutual fund, or whatever it is that generates interest income).  Although some entities have successfully organized themselves under state law without hiring a lawyer to help (the paperwork is not all that tricky), most times a lawyer does get involved.  And I hate to spill this secret but lawyers expect to be paid.  All corporations have annual reporting obligations to the state.

 

501(c)(3) status from the IRS is a separate thing, although you need formal organization such as incorporation to take that step.  If you are going to solicit significant charitable contributions and the donors want to deduct those contribution, then yeah 501(c)(3) makes some sense, provided you have a solid basis for claiming that the club engages in the sorts of activities for which 501(c)(3) exists to encourage. 

 

But the IRS takes a dim view of fake donations.  True donations are one thing; dues to a club for example, are another -- if the person receives value for their dues (and presumably they do) then those are not the donations that 501(c)(3) exists for.  Or if a club buys a building for the layout but the rest of the building is rented, and that rent is what really keeps the club going-- the IRS may take the position that that is unrelated business income and thus fully taxable income to the club.  Example: a local hospital had its own laundry for linens and then started accepting outside laundry business.  There was no question the hospital as a hospital qualified as a 501(c)(3), but the IRS challenged the income made from the outside  laundry business, claiming it was unrelated business income.  

 

 

The other thing that has happened is that phony "museums" have been created which are really no such thing, in an effort to essentially "launder money" from a profitable business through the books of a very dubious museum. One Wisconsin dealer in styrene plastic in bulk learned that lesson.  

 

It is not a ticket to a tax free existence in other words.  Consider a club that decides to have a run of model freight cars printed up in club lettering (or prototype lettering) and sold as a club fund raiser.  You'd like to think that the income from those sales would be tax free to a charitable organization.  Maybe it is maybe it isn't.  But depending on where the money really goes the IRS could argue that the club is a charade or false front for a model railroad dealer.  This has actually happened by the way.  

 

About 25 or so years ago the IRS started taking a dimmer and dimmer view of the sorts of entities that were seeking 501(c)(3) status, because sad to say a lot of tax fraud was being committed under the name of "charitable oganization" activities.  There is annual reporting to the IRS (which may call for CPA or lawyer assistance each year) and the IRS is watching.  

 

Neither decision -- to incorporate or formally organize, and to petition the IRS for 501(c)(3) status -- should be taken lightly.  Someone in the club needs to agree to keep careful recordings and learn how to do the annual form filing that is involved.  Some real money has to be spent to go those routes.  But if the club is going to hold very significant assets, or make very significant expenditures, incorporation may make sense.  The federal tax status should be regarded as a separate issue.  I think getting the opinion of a qualified local attorney should be the first step

 

Dave Nelson

[mlehman]

I've done a lot of work with 501c3 organizations (including being what was effectively the CEO of what was at one time a major international news organization) and they would be a poor fit for what most people consider would go on with a model railroading organization. Currently, I'm the superintendent of the Illinois Terminal Division, NMRA.

Several years back, the ITD took over organizing the local train show (usually the last weekend in March, for 2023 it's the 25th and 26th), so we looked into all this sort of stuff, both at the state and federal levels. What will likely work best is likely going for 501c7 social club status. There is no big break on taxes, etc, but it keeps things square with the government. I won't go into the details, but would be happy to answer any specific questions.

[wrench567]

  Dave is spot on. My former club was a 501 c 3. We were audited because an IRS agent attended a train show and spotted the donation jar. The income from the donation jar was not listed in the anual filing. I think we ended up paying a sizable fine. But was able to keep the 501 c 3.

     Pete.

[maxman]

I’m not sure why you would even come up with this idea.  I’m sure you realize that a “club” implies more than one person.  Were you contemplating inviting others to join you in your basement on a weekly basis and allowing them a say in what you do?

[gmpullman]

https://www.irs.gov/charities-non-profits/charitable-organizations/organizational-test-internal-revenue-code-section-501c3

 

To be organized exclusively for a charitable purpose, the organization must be a corporation (or unincorporated association), community chest, fund, or foundation. A charitable trust is a fund or foundation and will qualify. However, an individual will not qualify. The organizing documents must limit the organization's purposes to exempt purposes in section 501(c)(3) and must not expressly empower it to engage, other than as an insubstantial part of its activities, in activities that are not in furtherance of one or more of those purposes.

My emphasis.

Cheers, Ed

[cv_acr]

Outsailing86

Tax time had me thinking...

Is there a tax benefit to making your layout a Club with a 501c3 status? has anyone looked into this? 

 

Your personal private layout in your house?

I don't think that flies....

[BroadwayLion]

We are a Catholic Monastery. Charitabe organization? Yes.

Tax Exempt, No. In North Dakota churches pay taxes on the things that they buy, and this includes the altar wine that we sell.

We have just a little over 3 square miles under our fences. That land and all of its oerataions are taxable. Why should our farm be tax exempt and yours is not.

Only the Church and library proper are tax exempt, the monastery proper pays taxes. why should we be exempt just because we are monks.

Now we do not pay city taxes even though it looks like we are in the city, but we are not. When the city line gets to our place, it crosses the street to the other side. So we do not get to vote in city elections or pay for improvements. Of course we do give to the city the equivlent of what such an assessment, (for roads), but not for water or sewer----we have our own systems.

We get our water frtom the South-West pipeline company just as if we were our own city. We have our own sewer system. In case of a fire we can join our firew mains to the city fire mains because we do not have the necessary water or pressure of power the hydrants. Our sprinkler system is connected to the city water mains. What the heck... They got the water  tower, eh.

ROAR

[BroadwayLion]

cv_acr

The mooseeum in Mandan is 501c3, and they do have a layout, but it is a real mooseeum with many displays on their yard, aven some 7" and 15" gague loops (Bring your own equipment)

 

 

Outsailing86

Tax time had me thinking...

Is there a tax benefit to making your layout a Club with a 501c3 status? has anyone looked into this? 

 

 

 

 

Your personal private layout in your house?

I don't think that flies....