business or non profit

[Dude]

Client wants to start a trash hauling business but separate out items that can be donated. He has been advised to start a non profit as a way of saving money on taxes. Told him the first hurdle is setting up a legal non profit. Never really considered a comparison between a business and non profit for a sole proprietor. Any input would be much appreciated.

[spanel]

Post how he would "save money"

Items picked up are of zero cost to him? Maybe FMV? Either way, he donates these items... as a business, he gets no deduction as it flows thru to him personally anyway. At that point, Sch A items.

If he has a non for profit, all I see is costs out (990/state fees/etc) with 0 tax benefits.

Chris

[Dude]

A similar company in the area that he wants to model accepts cash donations for its "mission". In addition he would charge for items that are deemed trash and must be taken to dump.

[Uncle Sam]

I can just see an IRS audit coming -
IRS Agent: Based on your normal income level, how did you accumulate so much in tangible assets to be able to donate them?
Client: I removed those items from the trash hauling loads I was paid for. The trash hauling fees are included in my gross income.

In addition to Spanel's post - IRS wouldn't permit tax-exempt status to an entity where the main person who receives tax benefits is the person
controlling the activities of the tax exempt entity.

[Dude]

THis is why I am posting, apologies if I am missing something but cant the usable items be classified as a donation and separated from the junk (stored by the "non profit" until a recipient is found) which from what I can tell, a non profit is allowed to charge a fee to haul away? He is not selling the usable items but using them to justify his non profit status. Will this work if more than one person is in control of the entity?

[Rapid Robert]

If in the end your client expects to get paid for providing service, that will be taxable income on a W-2, right? So where will the tax savings come from (re-stating post #2.)

I believe "non profit" (not for profit) and "tax-exempt" are two different things. Check Pub 557. What code section are you contemplating? 501(c)(3)? . It sounds like the purpose is to donate discarded household items to a charity, is that really a tax-exempt function?

And a trash hauling business is still a business, can't see how that is related to any tax-exempt purpose.

edit: I tried search at the IRS tax exempt org search page, using terms like "trash" and "recycling". A lot of hits. Maybe you can find a similar organization as a model (you did mention some other org that the client was using for inspiration).

As for the "donated" items that have value -- wouldn't it be the individual who donates the item to your client (via curbside pickup) be the one who gets the charitable donation deduction? Once your client has the item, his proposed charitable organization could give them to other charitable organization similar to giving out a cash grant -- but where does your client get the tax benefit from that?

[Dude]

there is no w-2 he is not an employee. He takes ownership of trash separates and stores reusable items until a donee is found. Payment and donation in same trip. He feels this qualifies him for other donations and grants. Does his non profit status also exempt him from federal income tax? Seems so. Doesn't feel right though

[Uncle Sam]

Until your client completes IRS Form 1023 for application to become a tax exempt entity under 501(c)(3) - he's NOT TAX EXEMPT.
What you are continually suggesting is, he's taking a for-profit entity, and wants to turn it around into a tax exempt entity by virtue of being paid to haul away personal property under the for-profit entity and then
deciding which property to dispose of and which property to donate, and then wants the benefit of a tax donation deduction. You've been advised here by other posters as well that this won't fly.

[Dude]

Until your client completes IRS Form 1023 for application to become a tax exempt entity under 501(c)(3) - he's NOT TAX EXEMPT.
What you are continually suggesting is, he's taking a for-profit entity, and wants to turn it around into a tax exempt entity by virtue of being paid to haul away personal property under the for-profit entity and then
deciding which property to dispose of and which property to donate, and then wants the benefit of a tax donation deduction. You've been advised here by other posters as well that this won't fly.

Original post says he wants to start.....I get he is not exempt yet. I have read nothing that justifies your opinion that it won't fly.

[kathyc2]

Original post says he wants to start.....I get he is not exempt yet. I have read nothing that justifies your opinion that it won't fly.

All income is taxable unless it is exempted by law. So, if you think it's not, the onus is on you to find where the law excludes it.

A NFP can not be a person, it needs to be an entity. If the fee he charges is more than the disposal fees, vehicle expense, etc. then he will likely be taking money out of the entity. That will either need to be on a W-2 or 1099 which would be taxable to him.

[Dude]

THanks. This does not smell right to me either but a non profit does NOT have to have a "noble" mission to qualify. The NFL is a non profit.https://www.irs.gov/charities-non-pr...otball-leagues

Non profits CAN charge fees. He sees a pile of trash as two different piles. Do you think he is "taking money out"? The items discarded are classified as trash by the owner and this guy repurposes some of the items for donation. Much like non profits that haul away cars HE IS NOT taking the deduction. The original owner is welcome to deduct the donation (which btw is a service he provides as the original intnet of the owner was to merely throw the stuff away). He is arguing that the items repurposed are NOT for his benefit. Hauling away items that cannot be salvaged is ancillary to the mission of this potential non profit. Now I think this is the main mission and that is why I don't like it. However, this one is a a closer call than may here seem to htink. https://www.irs.gov/charities-non-pr...-organizations

I am drawn to help this guy not because of his non profit endeavor but because he is active on a trading app and does not seem to know the difference between gambling and investing. He is shorting stocks without understanding how dangerous this can be.

[kathyc2]

You said he's charging fees. If the cash coming in from that is going to him for his time, then that's taxable income to him.

[Dude]

Ok thanks. I was thinking it would go into the non profit for facilitating a donation (separating, cataloguing and storing) and then out to him as a 1099 salary minus costs. From there it seems like a wash between a proprietorship and a non profit. However, and this is where he thinks he can save on taxes, he opens himself up for potential cash donations as well when he claims non profit status these donations if not funneled to salary would be tax free?

Of course he wont even get non profit status if he applies as a single individual, he will have to have a "board" which he contends he can find. He will also need artilces and bylaws etc. I don't know. There are other entities in the area doing the same thing.

[kathyc2]

There are NFP's that repurpose "trash". However, the way you presented it, it sounds more like he's looking to make money for his personal use tax free rather than having a mission.

https://blog.greatnonprofits.org/5-nonprofit-recycling-programs-you-can-support-today/

[Uncle Sam]

Thank you Kathy - that's what I've been trying to convince this poster of. Tax exempt organizations mainly are organized to benefit third parties who need the benefits of what the organization is promoting on an objective basis based on meeting specific qualifications.
This client is attempting to create a sham - where he will haul away stuff for a living (for-profit entity), then select donative items where only he would benefit (or attempt to benefit) from the contributions. Once an exempt organization only benefits the main control person - IRS can revoke the exemption. These management functions are clearly identified on the Form 1023 application, and questions need to be answered on Form 990 (although not 990-N).