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July 16, 2014, 2:26 p.m.
Business Models

A change in the IRS process for granting tax-exempt status could be a boon to nonprofit news

The new streamlined application process for becoming a 501(c)(3) might help nonprofit news startups — at least small ones — get off the ground more quickly.

It took almost a year and a half for nonprofit news site Eye on Ohio to get its tax-exempt status approved by the IRS this spring. Launched in the fall of 2012 by former business reporter Lori Ashyk, the site aims to follow the model of many smaller nonprofit news startups: reporting some of the investigative stories and statewide news that have fallen by the wayside as daily newspapers have shrank.

Ashyk knows the stories of other news nonprofits who’ve had difficulty navigating the tax-exemption process at the IRS and seen their applications disappear into a kind of limbo. “Compared to some of the other news organizations, it’s not that bad,” she said.

But there might be new relief for at least some journalists looking to get into the world of nonprofit news. This month, the IRS introduced a new application that makes getting tax-exempt status not much more complicated than ordering a pizza online. What was once a 26-page form has been cut down to three, and groups will now only have to pay a $400 fee rather than $850 to apply. Not all would-be nonprofits will be eligible for the streamlined process: The new form is only open to groups with annual income of less than $50,000 and assets of less than $250,000.

While that might seem like a low threshold, the IRS estimates around 70 percent of the organizations applying for 501(c)(3) status will qualify. And with the greater ease of use will come less government oversight: Some groups, such as the National Council of Nonprofits and the National Association of State Charity Officers, say the streamlined process is an invitation for groups to abuse tax-exempt status.

The universe of nonprofit news outlets has expanded in recent years as traditional media have shrank and some reporters have moved into more entrepreneurial roles. But one element of that growth has moved at a pace that fluctuates between erratic and glacial thanks to that 501(c)(3) approval process. In one of the more notable cases, it took the San Francisco Public Press 32 months to get approval from the IRS. Last year, a coalition of organizations including Knight Foundation and the Council on Foundations issued a report calling for the IRS to change its “antiquated and counterproductive” rules for granting tax-exempt status to journalism nonprofits.

The IRS says it has a backlog of 60,000 applications, with most pending for at least nine months. The new 501(c)(3) process was one result of the scrutiny the IRS received for the way it reviewed political groups seeking tax-exempt status. The idea behind the new application is to help small nonprofits avoid that tax-exempt purgatory and to help an IRS with less resources. According to IRS Commissioner John Koshinen in an interview with Time, the change will mean the division that reviews tax-exemption requests will see 40,000 to 50,000 fewer applications.

“If I was someone starting from scratch right now, I would certainly be looking at this. It’s a lot easier than it has been,” said Brant Houston, board chair at the Investigative News Network, which includes about 100 nonprofit newsrooms. The existing IRS review process for 501(c)(3) status is rigorous, but largely opaque, as organizations often received little information about the status of their application, Houston said.

For many, that meant finding a fiscal sponsor to help manage the financial tasks in the early days of the startup, Houston said. “People spent years waiting to go through the process, and it was not entirely clear why some are waiting two years and others go through in four months,” he said.

While the new 501(c)(3) process is simpler than the past, it comes with a test. Any group wanting tax-exempt status through the new 1023-EZ form has to pass a 7-page, 26-question eligibility worksheet where just one “yes” answer disqualifies an organization.

The other requirements are the annual revenue and assets ceiling. Big-name journalism nonprofits like ProPublica, the Center for Investigative Reporting, or The Texas Tribune crossed the $50,000 income hurdle a long time ago. But there’s still a long list of small and growing organizations whose budgets fit that requirement, said Andy Sellars, a clinical fellow at the Cyberlaw Clinic at the Berkman Center for Internet and Society. “That $50,000 mark is well within the operating budget of a lot of these new organizations,” Sellars said.

The Cyberlaw Clinic provides pro-bono legal aid to a number of nonprofit news sites, many of whom have a relatively small staff and limited budget, Sellars said. While efforts like the newly launched Marshall Project come with substantial financial backing from the outset, others are scraping together donations and using their own money. “This is a tremendous change for a lot of organizations, and I hope it means organizations can increasingly do this on their own as well,” Sellars said. “It’s one less obstacle going forward.

But just because the application for becoming a 501(c)(3) is simpler doesn’t mean news nonprofits can overlook the process. Journalism itself still isn’t recognized as an activity eligible for nonprofit status. Most nonprofit news organizations instead put themselves in the category of education. It’s not a perfect fit, but it’s close enough. Here’s the key line on “specific activities” on the 1023-EZ form:

Example 2. An organization whose activities consist of presenting public discussion groups, forums, panels, lectures, or other similar programs. Such programs may be on radio or television.

Example 3. An organization which presents a course of instruction by means of correspondence or through the utilization of television or radio.

Though the new 1023-EZ application offers an easier path to gaining 501(c)(3) status, the original form can be very instructional to would-be nonprofits, said Eric Gorovitz, a lawyer at Adler & Colvin who specializes in nonprofit legal issues. The new form is short on details and explanations, instead asking applicants to supply basic information under the “penalty of perjury.” Earlier this month, Gorovitz wrote about the new form:

Unlike its much more detailed sibling, the Form 1023-EZ asks the applicant to attest to a series of conclusory statements about its governing documents, purposes, and activities, but does not require elaboration or attachments. Applicants using the new form do not have to provide any details about, for example, their relationships with insiders or their finances.

In the longer form, applicants have to explain in detail what their organization does, how it will be structured, and how those things fit within the boundaries of what the IRS allows. That has the benefit of sharpening an organization’s focus and better understanding what they are allowed to do, he said. For journalism nonprofits, that might mean addressing the issue of revenue sources (the ratio of advertising revenue and subscriptions to other sources), and being explicit about any political activity (editorial-style candidate endorsements, for example). “It probably makes it easier for small journalism enterprises to get started,” Gorovitz said of the new form. “The question is, when they get bigger, doing things they think are fine, but have not learned they aren’t fine.” (Interestingly, Gorovitz also points out another side effect of the new 1023-EZ might be a loss of detailed background information for journalists investigating nonprofits.)

At places like Eye on Ohio, it’s likely the new 501(c)(3) application would have helped things get up and running faster. Though the process of getting tax-exempt status was long, Ashyk says it was useful because it helped shape her strategy for the site. Because of a question she received from the IRS on community involvement, Ashyk is planning to set up a community advisory board to help guide the site.

Getting the seal of approval from the IRS makes a big difference in the livelihood of nonprofits like Eye on Ohio, but of course it’s just the beginning of the work. “We’re very much in a startup stage, even though we’ve been around for over a year,” Ashyk said. “Things haven’t really changed that much. We’ll be in charge of our own funding now — but since we don’t have any it hasn’t made a whole lot of difference yet.”

Photo of tax forms from the Brookline Library used under a Creative Commons license.

POSTED     July 16, 2014, 2:26 p.m.
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