In my household we are not yet focused on the upcoming holiday seasons. Instead, for us, 'tis the season of Pop Warner football playoffs. Our town is thrilled to see four of its youth teams advancing to the Super bowl this weekend. Here is where I insert a shameless, GO KP CHIEFS!! Last year we had not one, but two Pop Warner football teams advance to nationals in Orlando Florida! An organization to raise funds for the teams was quickly set up and the community came together to raise a commendable amount of money in record time so that all the boys were able to afford the trip.
To the point:
A familiar form of fundraising for athletics, bands and clubs is a booster club. Booster clubs are a great way to raise money and defray the cost of travel and much more. Particularly in a slumped economy, the help of a booster club can do a great deal to keep programs running smoothly. However, good intentions can cause unexpected and unpleasant tax consequences if the booster is not structured carefully.
Proper structuring of a booster club demands that first, the club establish an exempt purpose. To do so, the club must operate exclusively for charitable purpose. Moreover, they must show that they operate for public purpose verse private interest. Generally the IRS will recognize charitable purpose for financial assistance to amateur arts and athletics because it is assumed that the organizations are educational through their instruction and that they reduce juvenile delinquency. Operating for public interest demands that there be no private inurement and relates to how funds collected are disbursed.
What does the prohibition against private inurement mean?
First, a private shareholder or individual who has control of the entity's decisions can not directly benefit financially from the booster club's activities. Second, even unrelated or disinterested for-profit parties must not receive more than an insubstantial benefit. Insubstantial is defined as quantitatively incidental as well as an unintentional but necessary consequence to the booster club's charitable purpose.
In plain English:
If a booster club is set up to sponsor KP Pop Warner Football, and all athletes benefit from the activities of the club regardless of their involvement in said booster club; then the private benefit is incidental because it is a logical result of the organization's purpose. However, if funds are allocated to specific families based on their participation in fundraising; private benefit has been conferred to those members who participate.
Furthermore, if the club is made up of parent members and members are required to fundraise in order to play; the private benefit becomes intentional and not incidental. Under these circumstances, the club is simply a means of cooperative funding for member's children.
What is the tax implication of private inurement?
Not only does the booster club risk losing its exempt status as a result of private inurement; if fundraising activities are credited to specific athlete accounts, they could be treated as income to the athlete. Such income may be subject to payroll taxes or considered self employment income. If credits to the athlete account exceeds $600 in a calendar year, a 1099 Misc may be required.
Another consideration…
Booster clubs should be aware of unrelated business income. Income generated from the sale of advertising is generally unrelated to the club's exempt purpose. Organizations can avoid tax on unrelated business income if substantially all the work to garner said income is performed by uncompensated volunteers. Volunteers may be considered to be indirectly compensated if funds are credited to specific athlete accounts.
As always, it is wise to consult a tax advisor during the start up phase of your organization as well as upon which time you enter into new means of fundraising.
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