Photo by My Life Through A Lens
Most art is backed by a dream and an aspiration to make the world a better place, whether that be through music, dramatic performance, visual art, dance, or written word. But how does the artist share his or her art with the community? Consider one of the foundational catalysts of artistic expression and dissemination: the nonprofit. Many community theaters, music halls, museums, and other arts organizations around the country are “nonprofits,” but what does this designation mean? These businesses usually charge fees for entry to a performance or exhibition, and they have to generate funds to keep the lights on—so if there’s no “profit” in nonprofit, where does all this money go and what does this mean for the artist?
First, it’s important to understand what a nonprofit is (and what it’s not). Many people often use the terms “nonprofit,” “not-for-profit,” “501(c)(3),” and “tax-exempt” interchangeably, but each of these actually has its own separate meaning. For instance, the term “nonprofit corporation” is specifically defined by the Texas Business Organizations Code as a corporation that cannot, in most circumstances, distribute income to a member, director, or officer. Although “not-for-profit” is not defined in the Texas Business Organizations Code, the term is often used to describe a nonprofit organization. In short, although “nonprofit” and “not-for-profit” are commonly used interchangeably, in Texas the proper nomenclature is “nonprofit.”
Once recognized as a legal entity by the Texas Secretary of State, a nonprofit corporation can take the next step to attain federal “tax-exempt” status under Section 501(c)(3) of the Internal Revenue Code (the “IRC”). Nonprofits that are organized and operated exclusively for particular purposes (such as religious, charitable, scientific, public safety testing, literary, and educational purposes) can attain 501(c)(3) tax-exempt status. If the application is granted, donations to the nonprofit will be tax-deductible and the nonprofit will be exempt from taxes on net income.
Community theaters, music halls, museums, and other arts organizations can often qualify as nonprofits, and they can also achieve federal 501(c)(3) tax-exempt status if they meet the qualifications under the IRC. This usually means, among other requirements, filing a Form 1023 with the IRS and noting that the organization has an “educational” charitable purpose. After all, centuries of history have been told through song, story, theatrical performance, dance, and public artistic display.
Now that you have a brief overview of nonprofit terminology, let’s get back to the matter at hand—the nonprofit’s role in making a profit. Like any business, the nonprofit has to make money in order to continue running. Importantly, unlike “for-profit” businesses that are designed to turn a profit for their owners and shareholders, all profits earned by a nonprofit must be reinvested back into the organization’s administration or spent to advance the organization’s core charitable purpose. Any other use of these funds, or even failing to claim funds generated outside the scope of the nonprofit’s core charitable purpose, could result in a visit from the IRS. For that reason, it is very important to carefully account for any and all sales, donations, and other benefits. In the arts realm, this includes accounting for income from season subscribers, playbill ad space, and the value of donated art. Careful accounting for how funds are reinvested or spent is crucial as well.
Arts organizations provide a means by which artists can express themselves, which in turn provides an invaluable service to the community. The federal government recognizes this, and the various tax-exemptions delineated in the IRC directly incentivize the advancement of the arts—tax-exempt income and tax-deductible charitable giving means more money in the hands of artists and the organizations they work with.
Although forming a nonprofit can be a fulfilling means of supporting your local arts community, it could also be an overwhelming process—especially with regard to the various ins and outs of the IRC. An attorney experienced in forming and assisting nonprofits can help guide you through this process, so do your research and consult a skilled legal team. If you’d prefer to simply enjoy your community’s arts scene instead, consider buying season tickets to a community theater or patronizing a local art show. What you’ll discover is that many nonprofits and the artists they support aren’t in it for profit, but rather for the love of the arts. Regardless, profits are necessary to sustain the day-to-day operations of a nonprofit entity, even for the “starving artist.”
For more information on this article and this topic, contact Charles Wallace.