I don’t get excited about a lot of things these days, but when I learned about the thrift stores that are operated by the Community Spouses' Clubs associated with U.S. military bases worldwide, I was impressed.  As a nonprofit lawyer for over 25 years, I recently learned how my world of nonprofit law and the military world of service-oriented spouses' clubs intersect: if the spouse's clubs are not organized and operated properly, the IRS can step in and wreak havoc on their very existence. These thrift stores offer vital services to the community by allowing members of the military and their families to donate or consign their household goods to the store when they are assigned to a new base.  Incoming military families then have a place to purchase used household supplies. The income generated by these thrift stores is used for scholarships and grants to local community organizations. 

Talk about a win, win, win, win!

It is a win, that is unless your club does not have and maintain Internal Revenue Service (IRS) tax-exempt status.  

Where the IRS Comes In

Some spouses' clubs have operated for decades without incorporating or obtaining IRS tax-exempt status.  The volunteers operating the clubs often have no idea that they are required to be structured a certain way.  After all, they are operated by volunteers on U.S. military bases.

That was exactly the case for one long-established club until the U.S. Army Installation Management Command (IMCOM) provided notice that spouses' clubs operated on Army bases must be in compliance with IRS rules.  This club sought out the help of RENOSI, Inc. (Registration for Nonprofit Organizations Simplified) to file the required state corporate and federal IRS paperwork to bring the club into compliance.

Other clubs obtain IRS tax-exempt status, and then lose it when the required IRS 990-series annual tax return, or state corporate registrations, are not filed every year.  For example, a spouses' club lost its long-held IRS 501(c)(4) status after inadvertently using the wrong federal tax identification number.  After losing its IRS tax status, the organization was banned from operating on the Army base.  The group had to close its thrift store, losing its source of income, and ending its community scholarship and grant programs. This club worked with an attorney and an accountant at considerable expense to straighten out its tax status and come back into compliance.

Turnover

The cycling in and out of volunteers operating spouses' clubs, along with the complexity of the U.S. tax code, makes obtaining and maintaining IRS tax-exempt status a little tricky. 

Some spouses' clubs are operated under IRS section 501(c)(3) as charitable organizations (the preferred status that allows donations to be tax-deductible), while other clubs are operated under section 501(c)(4) and 501(c)(7).  Here is a primer to help make it all make more sense.

Incorporation

Before obtaining IRS tax-exempt status, it is a good idea to incorporate your club.  Incorporation provides liability protection for the volunteers.  If the club gets sued, it is the club’s assets at risk and not the assets of the volunteer leaders.

Federal tax identification number

The club should have a tax ID, called both a federal employee identification number (EIN) and a TIN or tax identification number.  This number identifies the club to the IRS and identifies the club’s income as belonging to the club.

IRS tax-exempt status

Obtaining IRS tax-exempt status allows the clubs to earn income and not pay federal income tax on the money raised.  Without IRS tax-exempt status, U.S. tax law provides that spouses' clubs should be paying income tax on the money raised.

 The appropriate IRS tax-exempt status for spouses' clubs depends on the activities the club is engaging in.  Activities to develop the relationship between the base, its personnel, and their families with the local community qualify as charitable activities under section 501(c)(3) of the Internal Revenue Code. Section 501(c)(3) exemption is considered the preferred category of tax exemption because it is the only category that allows an organization to receive donations that are tax-deductible. 

Volunteering in the local community also qualifies as a charitable 501(c)(3) activity.  Social activities for the club members, including member luncheons, and trips to nearby attractions or other countries, qualify as tax-exempt social activities under section 501(c)(7) of the Internal Revenue Code.  

Operating a thrift store that sells goods is considered a taxable business activity unless the store is:

1. operated by a tax-exempt organization, 
2. substantially all of the work is performed by uncompensated volunteers, and 
3. substantially all of the goods sold are donated to the store (rather than consigned).  

All three qualifications must be met or the income from the thrift store is subject to UBIT (unrelated business income tax).  If the store’s income is subject to UBIT and operating the store is the primary activity of the spouses' club, the club itself may not qualify for federal tax-exempt status under any category or section of the Internal Revenue Code.  

Operating a thrift store like a business

Because the spouses' clubs and their thrift store operations are a huge benefit to the members and the local community, word needs to get out of the importance of organizing and operating legally.  What the volunteer leaders of these clubs need is information and resources, and maybe a helping hand.  

RENOSI’s website provides a wealth of information on how to set up and operate a nonprofit including DIY guides to incorporating and applying for federal tax-exempt status.  You can even download a guide to Operating a Nonprofit (Tax-Exempt) Thrift Store!  RENOSI understands nonprofit organizations led by volunteers who rotate regularly. That is why we created a service to file the state-required registrations and IRS nonprofit tax return for you.  The registration documents are then kept in your organization’s cloud-based storage account for ease of access to next year’s volunteers.  

IRS rules can be complicated but you do not need to let them get in the way of operating your spouses' club.  You just need to know where to look for the right information and resources.