The Need for Nonprofits

I have a question about nonprofits. Is it true that all nonprofits pay nothing in taxes? And if so, why is that allowed? I understand it’s nice to give charities a break on their taxes, but why are we giving big tax breaks to huge organizations that pay their CEOs tons of money? If employees are making big bucks, doesn’t that mean the organization has plenty of money? And why are some organizations that are clearly not charities allowed to be nonprofits? The NFL is a nonprofit, and that seems really ridiculous to me: they make tons of money and should be taxed a lot! Even colleges, it seems to me, make a lot and should be taxed. Experts, can you explain this to me?

There are a lot of nonprofits in the United States, and some of them are very large indeed. The largest charity in the United States is the United Way, which received an incredible $3.71 billion in donations in 2015.

Nonprofits like the United Way don’t pay corporate taxes on profits because, of course, they don’t make any! Yet the CEO of the United Way made $1,236,611 in total compensation in 2015. Is that too much? You’re entitled to your opinion, but there are a few important things to note here.

First, and most importantly, there are some ways in which taxes reach nonprofits and their employees, say attorneys at Mackay, Caswell & Callahan, tax lawyers in upstate New York. Tax laws give big breaks to nonprofits, but their employees still pay income taxes and taxes on things like bonuses. Even the nonprofits themselves pay taxes: while they are exempt from property and income taxes, the nonprofits still have to pay taxes associated with employees, like social security and Medicare taxes.

And running a nonprofit isn’t easy, say developers at Acendia, a company that helps nonprofits with marketing and mobile apps. At for-profit companies, CEOs that manage billions of dollars are rewarded with over-the-top compensation packages. So the idea behind paying nonprofit CEOs and executives top dollar is a simple one: it’s the way to get the best talent. Skimp on compensation, and you just may end up seeing more waste as a consequence of having underqualified executives.

Not all nonprofits are charities, of course, and the status of organizations like universities as nonprofits is debated by some. But not just any business can be a nonprofit, and some of the more alarming examples – like the NFL – don’t hold up under scrutiny. For instance, the NFL’s league office is no longer a nonprofit entity, and the NFL’s individual teams never were. The profits associated with the NFL are made through the teams, and it is the teams that own things like the stadiums and merchandising rights – meaning those things were always taxed in the way you’d expect, even when the “NFL” was a nonprofit.

Hopefully this clears up some of your questions about nonprofits! While there can be debate about the pros and cons of some of the laws and regulations surrounding nonprofits, it’s also clear that charities like the United Way do enormous good in our world.