After a long and patient wait, we are delighted to report that Seattle Urban Squash received formal confirmation from Internal Revenue Service to convert its status from a “Private Foundation” to a “Public Charity” – both a 501(C)3 tax-exempt non-profit entity from the beginning of the current calendar year – January 1, 2014. This is a great news, yet another milestone along the way and positive endorsement of our long-term plan to establish Seattle Urban Squash as a leading non-profit Public Charity in Pacific Northwest. Seattle Urban Squash is firmly afoot and on its way in serving our children and youth in need, to help them build pathways of lifelong opportunities through an integrated and intensive after-school program of sports, education and community service.
For many of you the difference between a Private Foundation and a Public Charity may be of no concern but for some of you (including our ardent supporters) this has been a source of constant confusion – why can’t my employer match my contributions even though SUS is a registered non-profit 501(C)3 organization; why aren’t we applying for corporate grants…? A brief primer on 501(C)3 is therefore in order. Internal Revenue Service allows organizations of many sorts (28 or so!) to be nonprofits but by far the most common sort are 501(C)3 tax-exempt nonprofit organizations. These include Religious, Educational, Charitable, Scientific, Literary, Public Safety, National or International Amateur Sports leagues, Cruelty Prevention, Children or Animals Organizations. 501(C)3 organizations have one distinct advantage over all other nonprofits: contributions made to them are tax deductible by the donor.
Furthermore every 501(C)3 organization is classified by the IRS as either Private Foundation or a Public Charity. A Private Foundation is typically controlled by an individual, family, or corporation, and obtains most of its income from a few donors and investments--a good example is the Bill and Melinda Gates Foundation. In contrast a Public Charity receives majority of its income and support from broad section of community (they must be able to show to IRS that they receive at least one-third of their support from contributions, membership fees, or gross receipts from activities related to their exempt functions). Certain organizations such as churches, schools, hospitals, and medical research organizations, automatically qualify as public charities while others must prove so on annual basis (computed over 5 years including previous 4 returns!) as part of their tax return. Private Foundation and Public Charity are subject to different operating rules and regulations (stricter for Private Foundation) and also file different tax returns 990-PF and 990/990-EZ respectively.
While I am no tax expert but I can see a rationale in why congressional leaders decided to create these two classifications. With private foundations they enable charitable intent of one or small group of individuals on one hand. And on the other hand, with public charities they enable a self-regulating environment (through public support requirement) for large number of citizens to come together to support a common cause. And recently they made it easier to convert a Private Foundation to a Public Charity by allowing it to request termination of its Private status and receive an advance ruling to be considered as a Public Charity instead based on its current operations and future projections. This was a great enabler for us to overcome a common ‘chicken and egg’ hardship (how to raise funds, start operations while awaiting a favorable ruling from IRS) that many new charitable entities face often. So when in last February when group of us started discussing in the earnest that we need to get organized and start a formal Urban Squash program here in Seattle. One big hurdle was creation of the organization that can receive funds, provide tax credits to its donors and get the program off the ground. The application process for a new Public Charity non-profit organization with IRS could take anywhere from 12 to 18 months or longer especially if the application has no activity on the ground to show for. And meanwhile, no-one can make real contributions (one could pledge) and most certainly no program could get off the ground unless people gave money and expected no tax credits – a very difficult proposition for a wannabe new public charity specially when there are many thousands of charities already out there that one can chose to support and receive full tax credits. To avoid this conundrum we chose to repurpose an existing Private Foundation and thanks to generous support from Derek Crick from K&L Gates LLP (who our board member Dar Khalighi and his close friend, fellow Squash player and K&LGates lawyer Brian Knox together helped us engage with on pro bono) went through the formalization of this foundation (Adoption of required Articles of Incorporation, New Name and bylaws, Election of Board of Directors, Undertaking of Compliance Regulation,…) and redetermination application as a Public Charity. It took us a good few months to get this in order but we were able to file the application by September of the last year. At the same time thanks to generous financial support of our board members, advisors and Squash community, commitment from educators and parents from Northgate Elementary School as well as court/study space provided by Seattle Athletic and YMCA Clubs we were able to launch the program with starting capital, full-time staff, volunteers, and eager students. And as we look back today (read more about our first season here), opting to start as a Private Foundation turned out to be a very important and fruitful decision that helped us build financial capital, build credibility across all the stakeholders, learn to crawl before we walk or run, and provide IRS umpteen time to review our application, our projections and operations at their discretion and ultimately approve our Public Charity status.
It may still take a couple of months before our new status is reflected across all institutions (Guidestar, EasyMatch, CyberGrants…) that monitor/interact on behalf of majority of corporations that either match their employees contributions to their favorite charities or have dedicated corporate giving programs. Meanwhile we are getting ready to budget, finalize our pitch, practice grant writing skills and launch a sincere effort to raise a good portion of our annual budget going forward through employee matching and corporate grants along with existing fundraising drives that include direct contributions from board and advisory members, individuals, tournaments, auction, raffle and annual dinner. Having a broad base of community support helps us distribute support burden across more willing shoulders, help them define and shape the program for the benefit of our kids and at the same time make sure that we meet the public support test as mandated by our congressional leaders.