10 years ago, I presented at an ethnic and community news media conference on “The Nonprofit Option.” Since then, as expected, we have witnessed a substantial decline in commercial news media. Changes in technology, consumption, and advertising have driven this decline, which has also resulted in increased polarization and propaganda. At the same time, we have also seen an emergence of a nonprofit news media subsector beyond PBS and NPR, serving to fill in gaps in community reporting and investigative journalism. And now, there is talk about shifting major newspapers from for-profit to nonprofit.
So what does it take for a news organization to operate as a nonprofit?
While we refer here to “nonprofits” colloquially, we’re really talking about organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code and classified as public charities. Accordingly, a nonprofit news organization must be organized exclusively and operated primarily for a 501(c)(3) purpose. Most commonly, their exempt purpose is either educational or charitable or both.
According to the Treasury Regulations, the term educational relates to:
- The instruction or training of the individual for the purpose of improving or developing his capabilities; or
- The instruction of the public on subjects useful to the individual and beneficial to the community.
An organization may be educational even though it advocates a particular position or viewpoint so long as it presents a sufficiently full and fair exposition of the pertinent facts as to permit an individual or the public to form an independent opinion or conclusion. On the other hand, an organization is not educational if its principal function is the mere presentation of unsupported opinion.
According to the Treasury Regulations, the term charitable is to be interpreted in its generally accepted legal sense and includes, but is not limited to:
- Relief of the poor, distressed or underprivileged;
- Advancement of religion, education, or science;
- Erection or maintenance of public buildings, monuments, or works; and
- Lessening of the burdens of government.
The promotion of social welfare can also be charitable when conducted by an organization designed to accomplish one of the enumerated charitable examples listed above or to:
- Lessen neighborhood tensions;
- Eliminate prejudice and discrimination;
- Defend human and civil rights secured by law; or
- Combat community deterioration and juvenile delinquency.
Prohibition Against Private Benefit
A 501(c)(3) organization may not confer private benefits upon an individual that are more than incidental, quantitatively and qualitatively, to the furthering of its exempt purposes. Stated another way, an individual is not entitled to unjustly enrich himself at the organization’s expense, and if a nonprofit permits such unjust enrichment, it may have its 501(c)(3) status revoked. Where the prohibited private benefit is conferred upon an insider, like a board member, it may constitute private inurement, which will result in revocation of the nonprofit’s 501(c)(3) status. If the prohibited private benefit is not so egregious, it may constitute an excess benefit transaction and result in intermediate sanctions (penalty taxes) applied against the disqualified person who benefited from the transaction and board members who knowingly approved such transaction.
See Private Benefit Rules:
Generally, these set of rules will prohibit nonprofit newspapers from paying excessive compensation. And board members and principal officers who violate such rules, may be subject to penalty taxes of as much as 225% of the excessive amount they unjustly received. Additionally, because nonprofits have no owners and are not allowed to distribute net earnings to its insiders, nonprofit news organizations cannot make distributions of net income to individuals who may see themselves as the equivalent of shareholders in a for-profit corporation.
Lobbying and Political Intervention Activities
Unlike their for-profit counterparts, nonprofit news organizations are limited in the amount of their lobbying activities and prohibited from intervening in political campaigns. The lobbying limitation, however, allows for generous amounts of lobbying, particularly if the organization has made the 501(h) election, and does not restrict other forms of advocacy. On the other hand, the political campaign intervention prohibition strictly prohibits activities such as endorsing candidates for public office, making campaign contributions in support of such candidates, and otherwise using organizational assets to preferentially support certain candidates and/or political parties over others.
It’s very common for news organizations to support specific bills and to publish opinion pieces with a view on such proposed legislation. While a nonprofit news organization need not avoid such activities, they will need to track such activities for reporting purposes and ensure that they have not exceeded the permissible threshold.
News organizations also commonly endorse political candidates and otherwise express views that may influence elections. Nonprofit news organization may not make such endorsements and must be careful in avoiding partisan political activities that may be considered electioneering. Such problematic activities include publishing pieces on certain wedge issues in a partisan manner, particularly immediately before an election, even if such pieces do not explicitly endorse or even name a particular candidate.
The Electioneering Prohibition: A Closer Look
501(c)(3) Electioneering Rules: Employee Endorsements & Election Activities
501(c)(3) Electioneering Rules: Candidate Appearances & Debates
501(c)(3) Electioneering Rules: Voter Guides & Candidate Questionnaires
Unrelated Business Activities: Advertising
Another particularly important consideration for nonprofit news organizations is recognition that some of their activities may be considered unrelated business activities and net revenues earned from such activities may be subject to the 21 percent unrelated business income tax (UBIT). Moreover, if such unrelated activities are more than insubstantial in relation to the organization’s overall activities, they may jeopardize the organization’s 501(c)(3) status.
Nonprofit news organizations should be particularly attentive to the likelihood that their net income from advertising will be subject to UBIT. Where the organization produces a periodical with advertising, this may take a more detailed review by an accountant or knowledgeable financial manager or bookkeeper. While the sale of advertising is generally considered an unrelated business activity, the rules regarding periodicals are generous in allowing for expenses to reduce or even eliminate any unrelated business taxable income.
Expectedly, expenses directly related to the sale and publication of advertising (direct advertising costs) are deductible. But, not intuitively, readership costs for periodicals may also be deductible. Readership costs include expenses, depreciation or similar items which are directly connected with the production and distribution of the readership content of the periodical.
The nonprofit’s periodical income is the sum of its gross advertising income and its circulation income. Circulation income is income attributable to the production, distribution or circulation of a periodical (other than gross advertising income) including all amounts realized from or attributable to the sale or distribution of the readership content of the periodical, such as amounts realized from charges made for reprinting or republishing articles and special items in the periodical and amounts realized from sales of back issues. Where the right to receive a periodical is associated with membership in the organization, a portion of the membership dues and fees must be included as circulation income, subject to the following formulae more specifically described in Treasury Regulation 1.512(a)-1(f):
- If 20 percent or more of the total circulation of a periodical consist of sales to nonmembers, the subscription price charged to such nonmembers shall determine the price of the periodical for purposes of allocating membership receipts as circulation income.
- If less than 20 percent of the total circulation of a periodical consist of sales to nonmembers, and at least 20 percent of the members pay lower dues and fees because they do not receive the periodical, the amount of the reduction in membership dues for such a member determine the price of the periodical for purposes of allocating membership receipts as circulation income.
- If neither (1) or (2) above apply, the product of (A) the organization’s membership receipts multiplied by (B) the fraction of periodical costs over total costs is allocated to circulation income .
If direct advertising costs exceed advertising income, the organization has a net loss from the advertising business that can be carried forward.
If direct advertising costs are less than advertising income (so there’s some profit from the advertising business), then the readership costs may come into play in determining the amount of unrelated business taxable income.
- If there is net periodical income (advertising and circulation income less advertising and readership costs), the unrelated business taxable income will be the lower of the net advertising income or the net periodical income.
- If the periodical expenses (advertising and readership costs) are greater than the periodical income, there is no unrelated business taxable income but also no net loss from the advertising business that can be carried forward.
This is the state of nonprofit news in 2018 (NiemanLab)
The Nonprofit Road: It’s paved not with gold, but with good journalism (Columbia Journalism Review)