There seems to be a common misunderstanding particularly in the animal rescue world that operating as a charity or non-profit means you cannot carry a bank balance from year to year and that you cannot make more money on a transaction than your costs were (i.e. you must break even). So let’s set the record straight once and for all. This is a false misconception.
When you file the paperwork for your IRS 501(c)(3) designation you have to first be setup as a legal business in your state and have an FEIN (Federal Employee Identification Number). States vary regarding the types of businesses (LLC, S corp or Corporation) that qualify to operate as non-profit entities in their state so be sure to do your research or work with a licensed attorney for the state you’re setting up in. Once you’ve setup your business in your state and have your federal number, you can file the paperwork with the IRS to be designated as a charity under the tax code designation of 501, subpart c, type 3 which allows others to donate to you and reduce their taxable income by the amount of their donation, thus saving them on their taxes. The IRS will review your mission and paperwork and determine if your organization is focused on these public benefit areas and thus qualify to receive donations as a charity (meaning they can take the deduction). For 501(c)(3) designation your organization type must be for Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or the Prevention of Cruelty to Children or Animals. All of these carry the designation of a 501(c)(3) charity and the IRS sends you a designation letter to this effect and lists you in their database as eligible for tax deductible contributions.
So that was a lot of backstory to get to the root of our discussion, that being an approved 501(c)(3) public charity has nothing to do with carrying a bank balance or bringing in more money than you pay out (another misconception). The designation as a 501(c)(3) public charity is to allow others to take the deduction from their donation to support your mission. Once the money is in the bank account of the organization, that organization operates just like any other for-profit organization. They have bills to pay, sometimes they have salaries, benefits and operational costs (buildings, electricity, vehicles, insurance), and the only thing separating them from their for-profit neighbors is that they do not pay tax on all of the revenue they bring in, and others can reduce their taxes by giving them money. Depending on the size and volume of transactions the organization does, they likely have an accountant or bookkeeper to keep their accounting in order so that when they file their tax returns it is clear where their money went, and that it was in support of their mission statement that they used to achieve the designation of a charity from the IRS (most likely that they focus on the prevention of cruelty to animals). Everything else about them is a business including how they buy and sell items.
Often one of the main sources of inventory for animal rescues and shelters is the animals themselves. Sure you could be selling leashes and collars, food and treats but your primary draw is selling animals. We’ve also talked about the importance of being able to track the cost of your goods sold and attributing appropriate value to your animals. Let’s take for example an animal that a rescue organization is selling for a $300 adoption fee. Maybe they paid nothing to acquire the animal, got support from volunteers for the transport, and put in $50 of vaccinations and other items to get the animal healthy. Let’s assume that the animal was adopted out straight away so there were no food, housing or vet bills. We would normally say that they earned a $250 profit ($300 fee minus the $50 they put into the animal) and that their cost of goods sold was $50. However people get confused with the term “profit” because after all they are a non-profit right? It is perfectly legal, acceptable and smart business sense for them to put the $250 in the bank and carry a savings balance for their organization in the bank. After all, the next animal they might put $400 into and only charge $300 for an adoption fee resulting in a $100 loss on that transaction.
Bottom line is that rescue organizations do not have to always operate in the red and trying to survive until their next donation. With the right management, good business practices and tracking of their costs they can operate in the black and continue to focus on their mission to prevent cruelty to animals.
Got a question or want our perspective? Please ask. We’re happy to help.