Originally published by Charles Wallace.
Photo by My Life Through A Lens
All “good” 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 charge for entry to a show or exhibition, and they have to generate funds to keep the lights on—so where does all this money go? If there’s no “profit,” what’s in it 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 its 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 the community. 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. Thus, it is very important for a nonprofit to carefully account for any and all sales, donations, and other benefits it receives. In the arts realm, this includes accounting for income from season subscribers, playbill ad space, and the value of donated art.
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 to which they contribute.
Although forming a nonprofit can be a fulfilling means of supporting your local arts community, it could also be overwhelming for the first-timer—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 don’t ever hesitate to do your research and find a skilled legal team. If you’d prefer to simply enjoy your community’s arts scene, consider buying season tickets to a community theater or patronizing a local art show. What you’ll discover is that many artists aren’t in it for profit, but for the love of the art. We have all heard about the “starving artist,” but real artists don’t starve—and neither do the communities they serve.
Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.
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