Healthy things grow. That goes for both people and organizations. All but the smallest of businesses grow and evolve over time. Often it is a necessity to keep up with changes in the business environment, regulatory change, or simply changes in consumer needs and wants.
It doesn’t happen often, but sometimes a nonprofit board is faced with the decision of whether or not to change the organization’s original mission. There are a number of scenarios that can give rise to this, and the degree of change in purpose will determine how that change must be approached. This article takes a look at some of the more common scenarios.
Most often the change in the nonprofit is a gradual increase in reach and scope. Maybe it’s the addition of new service areas or new beneficiaries, but the core focus of the organization stays the same. This is the most organic version of change we are exploring in this post. Let’s look at an example.
Young Voices Choral Group (fictional) is a community-based children’s performance choir that targets elementary-aged participants in economically disadvantaged neighborhoods in a 3 county area. After several years of operation, the nonprofit’s activities have grown in popularity. The Executive Director has been approached by a member of another nearby county’s Board of Education, asking if Young Voices could expand to include schools in their district.
This is textbook organic expansion. It is still within the original purpose that the IRS approved the organization to conduct. Expanding the reach of Young Voices to other counties, or even other areas of the country, would not require the organization to seek IRS approval of the expansion. Even if the nonprofit’s original 501(c)(3) application stated a 3-county approach, that is not something that is legally locked in. That initial explanation to the IRS was based on the plans at the time. It’s more about staying within purpose.
This is a more subtle version of change, and in most cases, it is equally as organic as the above situation. Over time, situations change and healthy organizations adapt to those changes. Evolution of purpose and/or programs can include new programs that are added to the original ones, or even the transition away from one set of programs to another. In this particular section, however, let’s assume that general need and beneficiary focus hasn’t changed.
After 7 years of operation, Youth Voices now serves a 10-county region. What was once 6 elementary schools being reached is now 14 elementaries and 4 middle schools. Plans are in the works to add 2 high schools next year.
In working with these children for the past 7 years, however, the Executive Director and the board has continually seen that the majority of the kids in the program are behind in grade-level reading. The board chair proposed in a recent meeting that Youth Voices explore the possibility of adding a tutoring program to their existing operations.
If they do, how does that impact their 501(c)(3) status? Can they add tutoring without seeking IRS approval?
Most likely, the answer is “yes”. The reason is somewhat technical, but it’s worth exploring. Essentially, when the IRS recognizes a nonprofit as a 501(c)(3) charitable organization, it does so based on the fact that the nonprofit’s activities satisfy one or more of the purposes the IRS deems to be charitable. Those purposes are:
- Testing for public safety
- Fostering national or international amateur sports
- Prevention of cruelty to animals and children
- Charitable (Includes activities of a charitable nature, but not articulated in a specific purpose above. Examples include benevolence to the poor and defense of civil rights.)
Activities targeting children are broadly considered educational if they are designed to expand a child’s knowledge or life experience. Examples includes schools, nonprofit daycares, arts and sports organizations, etc.
In this case, Youth Voices is considered an educational charity. As such, the IRS approved them as a 501(c)(3) because their choir program satisfied an educational purpose. Tutoring children is also an educational program. Therefore, in most cases, a nonprofit like Youth Voices can expand their program offering within the bounds of their 501(c)(3) determination as an educational nonprofit.
A great example of this is a well-known charity, March of Dimes. March of Dimes was originally founded by President Franklin D. Roosevelt in 1938. Known then as the National Foundation for Infantile Paralysis, the nonprofit was formed to fight the scourge of polio. The Foundation was a major funder of Jonas Salk, who developed the polio vaccine, effectively eliminating the disease from the US.
But, March of Dimes still exists today. Why? After the eradication of polio, March of Dimes changed their purpose from its focus on polio to improving the health of mothers and babies. Infant mortality is a chief focus for them now.
Going back to our example of Youth Voices, what would happen if all the schools served by the organization started their own choral programs, rendering Youth Voices choir work redundant? Could they simply do what March of Dimes did and replace choral programs with the tutoring programs mentioned above? That answer is “yes”, they can.
Completely changing your mission isn’t organic nor evolutionary. The reasons for the change may have occurred over time, but the decision to change focus is usually somewhat abrupt. If that change includes going from one charitable purpose category to another, that’s also pretty disruptive.
But the question is, can it be done?
Our example is stretching a bit thin, but imagine that Youth Voices determined that their programs for children were no longer needed. Those leading the organization still want to have impact in the community. In the multi-county area served by the nonprofit, the local government-run animal shelters are overwhelmed and simply don’t have the resources needed. The board of Youth Voices sees this as an opportunity to remain viable, and changes its name to Second Chances Animal Services, as well as changing its mission statement. The new program includes building an animal shelter to help with the overflow affecting the county facilities.
In this somewhat odd example, the question remains, can they do that? The answer is, yet again, probably “yes”. It always goes back to purpose. As long as the new program still satisfies an exempt charitable purpose as defined by the IRS, then an approved organization can legally make this change.
The final analysis is this: Once a charitable nonprofit receives 501(c)(3) status, it is free to operate any program it desires, as long as that program satisfies a charitable purpose within the IRS definition, even if that includes a wholesale change in mission. The only thing the IRS requires is that the organization report that change on its next annual IRS Form 990. Schedule O provides a space for the nonprofit to give specific details about the new program.
If the change is substantial, it is possible the IRS could follow up with questions to ensure the new operations are still 501(c)(3) compatible. In such an inquiry, it is handled much like the original tax exemption review process.
One exception to all of this is when a 501(c)(3) organization attempts to convert to another 501(c)(3) status. Examples include a 501(c)(3) private foundation wishing to be recognized as a 501(c)(3) public charity. In this case, the IRS has a process that includes the filing of Form 8940 to seek prior approval of the change.
Another exception is when a tax-exempt organization seeks a change in tax-exempt category, such as a 501(c)(4) wishing to become a 501(c)(3). While we have seen the IRS approve changes like this in the past, it is rare, and there is no defined process for doing so. In most cases, it is better to start a new organization and get approved under the tax-exempt status desired, then wind down the existing organization.
Times change, and so do community needs. Fortunately for most charities, they are free to change along with their circumstances, so long as they continue to satisfy an IRS-recognized charitable purpose.
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