Can a Non-Profit Sell a Donated Vehicle to One of Its Members?

By Cara O'Neill

One of the generous donors of your animal rescue organization donates an immaculately maintained BMW for its use. While you appreciate the gesture, what your organization really needs is cash for cat food, not a fancy car. One of the members of the board of directors, however, would like to purchase it for her teenage daughter – and she is willing to pay a fair price.

Non-Profit Organizations and Fair Market Value of Property

Non-profit organizations are called “non-profit” because all revenues are used for the purpose of running the organization. Unlike a “for profit” organization, a non-profit is prohibited from distributing its revenue to its board of directors, officers, members or any private individuals. While formed under state law, a nonprofit can apply for 501(c)(3) tax-exempt status with the Internal Revenue Service. An excess benefit transaction occurs when a 501(c)(3) organization sells property to a board member, employee or other private party for less than fair market value. So, if your non-profit sells the donated BMW for less than it is worth, it violates the IRS rule that prohibits such transfers of assets to board members and others. The IRS may assess a penalty on the board member and other managers involved in the transaction. The non-profit organization itself could face revocation of its tax-exempt status, although this is unlikely since the IRS can punish the individuals who participated in the transaction. If the non-profit's tax-exempt status is revoked, its revenues become taxable in the same manner that any for profit business would be taxed.

Ready to form a nonprofit? Get Started Now
Pros & Cons of the 501(c)(3)

References

Related articles

501C3 Restrictions on the Sale of Property

Individuals operating 501(c)(3) organizations are often concerned about complying with the various restrictions imposed by the Internal Revenue Service -- their organization's tax-exempt status depends upon proper compliance. When selling the organization's property, so long as the organization follows a few common-sense rules, it should comply with IRS sales restrictions. A thorough understanding of the rules against improper excess benefits and self-dealing will help 501(c)(3) organizations maintain their tax-exempt status.

Can a Nonprofit Business Earn an Income?

Nonprofit organizations are given special tax status because of the benefits they provide to the community through their activities. Though these organizations can earn income without jeopardizing their special status, any profits made cannot be used for private benefit. Such organizations may have to pay taxes on income they earn through activities unrelated to their organizational purpose.

How to Form a Mutual Benefit Corporation in California

California law provides for several types of nonprofit corporations, one of which is called a mutual benefit corporation. The primary aspect of a mutual benefit corporation is that it is formed and operated solely for the benefit of its members, rather than making a profit. A mutual benefit corporation can be formed for any nonprofit purpose except a charity. To form a mutual benefit corporation in California, you file articles of incorporation with the Secretary of State’s office. You can download a sample form of articles from the secretary's website.

Doing the right thing has never been easier.

Related articles

Can a 501(c)(3) Make a Profit?

A 501(c)(3) organization is a nonprofit that has made a special election with the Internal Revenue Service to be ...

Non Profit Vs. for Profit Business: The Differences

A nonprofit generally refers to an organization that qualifies for special tax status under section 501(c)(3) of the ...

What Is a In-Kind Donation 501C3?

A 501(c)(3), or non-profit, is an IRS approved organization that has a charitable, religious, public safety, or ...

The Difference Between Non-Profit Corporations & For-Profit Corporations

Not all corporations are created equal. For-profit corporations include large publicly traded corporations, such as ...

Browse by category
Ready to Begin? GET STARTED