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.
I have about 25 cats/kittens which I take care of from my own income. I have 4 sun rooms, a garage, a shed for shelter which have heating and cooling. I have 11 acres and have a portable building for the ferals and an open
carport with a wooden structure for when it is hot and they can get up high. I house, feed and take to vet. My vet bill for the year could exceed $10,000. I am trying to figure out how I can set up my own business with my own money and be able to right off some of these expenses. I work full time as well so I am not yet at the point that I would want to try and get any donations to help. Can you give any advise that would help?
Hi Freda. Definitely we appreciate your passion and care for animals. Writing off business expenses is a difficult question to respond to in a comment since there are many things involved that an accountant or tax advisor would be more suited for. It sounds like you are a community cat caretaker and that type of structure is more suited to a charitable organization that is mission driven. These are essentially small businesses but with a non-profit motive instead of profit. Check with your state website for the rules and regulations on what is required to file within your state. Basically you need to create an organization (according to your state rules), and then you can fill out the paperwork for the IRS to be considered a charitable organization. I hope this helps!
What if a non for profit starts charging for surrendered animals ($450 for horses e.x.)? Is it still a non profit?
Hi Renee. Great question and certainly on the surface it may seem unwarranted for an organization to do this. If you dig a little deeper though, the whole idea of a non-profit/charity, is that they are mission driven and all of the proceeds (known as profit in for-profit companies) are re-invested into the organization’s operations and mission. In your example, even if the organization charged for surrendering a horse, and even if they do not invest $450 into that horse before adopting them out, this is still legitimately a non-profit organization as no person is personally benefiting from the increased revenue. Certainly you may have the perspective that they are operating unethically which is a whole other conversation, but they are likely still within the laws and rules for a non-profit.
Do all the animals at a non-profit have to be owned by the non-profit? Can the animals being used be owned by someone else, housed at the non-profit and used for therapy for the non-profit?
If I purchase a kitten from a non profit animal rescue shelter, it is considered a charitable donation? The reason I ask is that we wish to return the kitten as my mother has a severe phobia re black cats and we wish to exchange it for a different colored one. Our state, Colorado, has a “buyers remorse law” stating that we have 3 days to return charitable donations under this law. However, the rescue shelter refuses to return our money or even let us exchange the kitten.
Hi Susie –
To your question, no it is not a donation unless you specify it is a donation. It is a sales transaction just like any other sales transaction. The only thing that differentiates a 501c3 is that the proceeds from the sale are not taxable. It is unfortunate that the organization will not let you return the kitten. I would recommend finding another organization that is willing to work with you as there are many reputable organizations out there that will help. Try looking at PetFinder to find one near you.
It was interesting to learn about how a mission can be supported when others can take a deduction when they donate and make sure that they keep their accounts in order. My mom has been looking for a place to donate money so that she can give back to her community and she helps kids. Being able to give to a professional could be really useful and allow her to do a lot more.
So I volunteer for several rescues by fostering. One org states it is a non-profit and they only charge 175 which includes shots, altering, food, etc. Plus they provide food etc for the fosters. The other gets volunteer transports, nothing comes with the dog at all, no money for fostering in the way of food, etc. Not specified if it is a non-profit on their website and charges $500 for adoption? They get the dogs from a society mostly in the south and pay for transport from one location to half way and then volunters start. It just seems that this is not non-profit?
I started my 501c3, I was calling the money received from adoptions “donations”. We got a new Board member who went through the website and changed the word donation to “fee”. I actually don’t like that. If it doesn’t matter, that’s fine.
Does it matter?