This story first appeared in the April 2011 edition of USA Football Magazine.
This content is for general informational purposes only and does not represent – and is not intended to provide – legal advice or opinion and should not be relied on as such.
What if you could save thousands of dollars each year on equipment, concessions and other expenses?
What if you could expand your league’s income base to include grants from the government, corporations and private donors?
By becoming a 501c3 tax-exempt organization, youth football leagues can do those things and more. The application process involves an initial investment in time and money, but the results are well worth it, said Tony Perry, former president of Central Massachusetts Pop Warner.
“It’s not difficult, especially if you have somebody who can point you in the right direction – internally or in the business community,” he said. “Youth leagues are businesses run by volunteers. A lot of times, the business part gets put on the back burner. This is one item leagues should take care of up front.”
USA Football recommends that every youth football organization seek 501c3 status, and those that already hold the exemption should make the job of keeping it a top priority. A secure financial future is just as important to a league’s welfare as strong coaching, a sturdy organization and solid player fundamentals.
Advantages to becoming a 501c3 organization can include:
- Exemption from federal taxes on net revenues and possible exemption from state sales or property taxes;
- the ability to accept contributions and donations that are tax-deductible to the donor;
- the ability to apply for certain grants that require 501c3 status, including USA Football Equipment Grants;
- inclusion under the Federal Volunteer Protection Act, which provides certain civil immunities for acts or omissions in the course of official duty;
- discounts from the U.S. Postal Service on bulk-mail rates and other services.
Joseph E. Miller, an Indianapolis lawyer with Baker & Daniels – a USA Football partner – who specializes in tax-exempt organizations, recommends finding someone within the youth football organization with experience in the process or consulting a professional to complete the application and filing, a procedure that can take up to 18 months.
“The IRS website will guide you through a lot of the questions, and anyone with enough time and patience to do it right can fill out the forms,” Miller said. “(However), it’s always good to have a professional opinion to help you out.”
Leagues should apply for 501c3 status and so should individual clubs, said Christine Johnt of the Niagara Orleans Football Association in Western New York.
Johnt said every new organization – even before the first shoulder pad is purchased – can begin the process for incorporation at the state level and seeking a 501c3 exemption on a federal level. Having each club with its own 501c3 status allows for teams to retain financial independence.
“The sooner you can get it done, the better off you are,” Johnt said. “Why would anyone want to pay sales tax or corporate tax for the stuff a league has to have? It’s about saving money. It’s worth it.”
Perry said relying on a national or regional 501c3 number can lead to problems when leagues or clubs want to switch affiliation.
“We’ll have a number of organizations every five or six years who want to regroup, and if they don’t have their own exemption, there is a sticking point in the process,” Perry said. “It helps keep autonomy between changes in officers and changes within leagues.”
Becoming a 501c3 organization opens a number of doors toward funding, Miller said. Along with the IRS’s “stamp of approval” as a nonprofit corporation, leagues can receive donations – which often are matched by private companies – or even apply for federal grants in some cases.
“There is a lot of goodwill identified with being a 501c3,” Miller said. “For the most part, potential charitable donors looking to find places to donate their money look first at 501c3s because they are seen as credible.”
The application process includes a number of financial questions, including salaries and reimbursements. All this information as well as three years worth of tax returns are considered open records and available upon request or an internet search.
Leagues that don’t have their financial information in order likely will not pass the application process – or could even lose their 501c3 status if they already have it. Notwithstanding this high bar, Miller said it’s worth it and transparency goes a long way toward establishing credibility in the community.
“People need to understand that any and all financial transactions are governed by pretty strict rules – for both employees and contractors,” Miller said. “If you pay anybody – even somebody to line the field or lay new sod – it should be in line with what everyone else gets paid for these duties. As long as you are sticking to good business practices, you should be OK.”
In the end, it’s about spending the league’s money on what helps the players, Perry said. Those months of work toward becoming a 501c3 organization can reap rewards for decades.
“Make sure you are dealing in a professional manner, and go online to get help from tax attorneys in your area if you need any help,” Perry said. “If your books are in order, this process should become a natural part of league business and something you can rely on to save money for generations to come.”
The first step toward qualifying for 501c3 status is incorporating at the state level. This allows leagues to create a legal entity with the power to interact with the world – whether entering into contracts, setting up bank accounts, hiring employees or buying real estate.
Another reason to incorporate is it provides limited liability to individuals.
“If you have an unincorporated group of people running a football league and a child suffers a severe injury, there is no limitation on the liability any individual can have who is perceived as responsible,” said Joseph E. Miller Jr., an Indianapolis attorney who specializes in tax-exempt organizations with Baker & Daniels. “The same thing can happen if someone slips and falls in the parking lot where games are held.”
In most cases, the process for incorporation is through the secretary of state. Unlike with a for-profit group, however, there is no ownership. Funds belong in a public domain, which also provides legal protection for volunteer officers.
Once established as a nonprofit corporation, leagues are then eligible to apply for 501c3 status. Federal laws, however, limit acceptance to youth sports that are open “on a broad, community-based basis,” Miller said.
“You need to be providing an activity for a community or large group of people,” Miller said. “It has to be inclusive enough that it goes beyond a single team or small group.”
Is your league already a 501c3 tax-exempt organization? Here are some things you need to do to make sure you don’t lose that status:
- Keep your financial records in order and file an annual 990 form with the IRS if your organization meets the minimum threshold.
- In determining executive compensation, be sure to avoid conflicts of interest, use appropriate comparability data and document all decisions.
- Do not engage in any activity or incur any expenses in support of, or in opposition to, a candidate for public office.
- Do not engage in any substantial lobbying activities.