FG’s Guide to Charging Fees in a 501(c)(3) Organization

When is it okay to charge fees in a 501(c)(3) organization?

Some 501(c)(3) organizations can charge fees for services, while others cannot. How do you know when it is appropriate? Below we will visit components of activities which qualify under IRC Section 501(c)(3) and discover when it is compliant to charge program fees to those participating in your organization’s activities.

Educational

To qualify as an educational organization, activities must relate to:

• The instruction or training of individuals for the purpose of improving or developing their capabilities, or
• The instruction of the public on subjects useful to individuals and beneficial to the community.

When an organization qualifies as an educational organization, fees charged can be at costs for providing the programs. Schools may charge tuition, after-school programs can implement fees, organizations which offer workshops or seminars on a variety of topics, can charge fees to participants of the program.

AN IMPORTANT EXCEPTION to educational programs charging costs for the education is for financial education organizations. When financial education or literacy is the primary education, there must be a charity care policy in place to allow individuals unable to pay to participate in the programs offered.

Charitable

Direct Services with an implemented fee for service: Many times non-profits seek to offer services in a more cost effective approach for the intended recipients, when commercial methods make such services unattainable. We are often presented plans which seek to implement fees for services below what the “market” will bear. However, in this way, organizations are demonstrating a commercial approach, and the IRS considers such entities to then be in competition with other for-profit endeavors, and not sufficiently conducting services in a charitable manner which would qualify for 501(c)(3) exemption.

To conduct services, which would ordinarily be available in the for-profit sector, in a charitable manner which does qualify for exemption, if fees are charged, they must be significantly below cost. While there is not stated threshold specific to this approach, 85% below cost is subjectively, where the IRS sees the activity being conducted in a charitable manner, and thusly, qualify for exemption. There are several rules within the Exempt Organizations of the IRS which do specifically use the 85/15 split, which lends to this being the subjective threshold when considering an organization’s activities. The IRS requires donative elements to be in place, which primarily support the organization being able to offer the programs significantly below cost and qualify for 501(c)(3) exemption.

There are EXCEPTIONS to this as well, especially when the services provided are medical services. One approach is to provide services on a sliding fee scale. In this way, those who can pay do, and those who cannot are either provided services based on their income and an established sliding fee scale or elimination of fees completely for those unable to pay. In this way, the entity is ensuring that charitable classes of individuals have access to services which they need.  Further, hospitals must have a charity care policy to serve those unable to pay, and must have a set aside number of beds for charitable cases only.

Religious

Religious organizations may charge fees for conferences, workshops or retreats, as well as any resource materials to help individuals further their religious journey, as long as they support the primary activity.

When offering religious based services, such as counseling, the rules are similar to those charitable services, as the primary purpose in this type of activity is not the teaching of the religion, but the counseling to those in need, even if from a religious viewpoint.

Prevention of Cruelty to Animals

Adoption fees can be charged, and do not have to be based on unique costs per animal, though they could be included in the fee. It is not uncommon for there to be different adoption fees based on species and breed within the species and the age of the animal.

Prevention of Cruelty to Children

 At times, childcare agencies will charge fees. Adoption services, may be provided with a fee charged to adopting parents, but donative elements must be present (similar to charitable direct services) and potentially with a sliding fee scale to be an exempt qualifying activity and not perceived as a commercial adoption agency.

RESOURCES

Revenue Ruling 72-369

Revenue Ruling 71-529

Airlie Foundation v. Commissioner, 283 F/ Supp. 2d 58 (D.D.C. 2003)