Charities and Other Tax-Exempt Organizations, 1997

Charities and Other Tax-Exempt Organizations, 1997 – Statistical Data Included

Paul Arnsberger

Nonprofit charitable organizations exempt from income tax under Internal Revenue Code section 501(c)(3) filed nearly 199,000 information returns and reported $1.4 trillion in assets for 1997, increases of 4 percent and 11 percent, respectively, from the previous year. Total revenue rose 7 percent to $754.6 billion, and total expenses showed a 6-percent increase to $677.1 billion [1]. These statistics exclude private foundations, most organizations with receipts totaling less than $25,000, as well as most churches and certain other types of religious organizations.

Data for other organizations receiving tax-exempt status under Code sections 501(c)(4) through (9) are also presented in this article. Such organizations are generally diverse both in function and financial character. For 1997, voluntary employee benefit associations, exempt under Code section 501(c)(9), reported assets of $94.8 billion and revenue of $85.4 billion, larger amounts than those registered by organizations classified under each of the Code sections 501(c)(4) through (8).

The statistics for charities and other tax-exempt organizations reported in this article are based on data compiled from Form 990, Return of Organization Exempt from Income Tax, and Form 990-EZ, the short form version of this information return. The latter form may be completed by smaller organizations, those with end-of-year assets of less than $250,000 and gross receipts of $25,000 to $100,000; only condensed income statements and balance sheets are included for filers of Form 990-EZ. Forms 990-EZ accounted for 25 percent of the returns filed by organizations exempt under Code sections 501(c)(3) through (9) for 1997.

Charitable Organizations Tax-Exempt Under Internal Revenue Code Section 501(c)(3)

In order to qualify for tax-exempt status, an organization’s purpose must be to serve the public good, as opposed to a private interest. Organizations that are exempt under Code section 501(c)(3) are those whose purposes are religious, charitable, scientific, literary, or educational. They may also foster national or international amateur sports competition, prevent cruelty to children or animals, or test for public safety. The activities of nonprofit organizations are limited in that they must further one or more of the purposes for which they were granted tax-exempt status. Examples of these “charitable” organizations include nonprofit hospitals, educational institutions, youth organizations, community fundraising campaigns, public charities, local housing organizations, historical societies, and environmental preservation groups. Organizations may not distribute net earnings to a private shareholder or individual. Participation by an exempt organization in activities that can influence legislation, or in a political campaign on behalf of, or in opposition to, any candidate, is also restricted. Generally, contributions to the organization are tax deductible [2].

Of the 580,416 active nonprofit charitable organizations recognized by the Internal Revenue Service (IRS) under Code section 501(c)(3), there were 198,957 returns filed for accounting periods that began in 1997 [3]. Those not required to file included churches and certain other religious organizations, as well as organizations with annual gross receipts totaling less than $25,000 [4]. Nonprofit private foundations tax-exempt under Code section 501(c)(3) are required to file Form 990-PF, Return of Private Foundation [5]. The number of returns filed by nonprofit charitable organizations for 1997 was 4 percent more than for 1996 (Figure A). Form 990-EZ returns represented 22 percent of total returns filed.

Figure A

Selected Items for Nonprofit Charitable Organizations, Reporting Years 1996 and 1997 [Money amounts are in millions of dollars]

Percentage

increase,

Item 1996 1997 1996-1997

(1) (2) (3)

Number of returns 192,059 198,957 3.6

Forms 990 149,902 155,330 3.6

Forms 990-EZ 42,157 43,627 3.5

Total assets 1,293,439 1,438,977 11.3

Total liabilities 564,566 624,978 10.7

Total fund balance

or net worth 728,873 813,998 11.7

Total revenue 704,346 754,616 7.1

Program service revenue 467,559 486,407 4.0

Contributions, gifts,

and grants 137,666 146,171 6.2

Membership dues and

assessments 6,347 6,823 7.5

Other 92,774 115,215 24.2

Total expenses 637,917 677,143 6.1

Excess of revenue over

expenses 66,429 77,473 16.6

NOTE: Data are from Forms 990 and 990-EZ for nonprofit charitable organizations that are tax-exempt under Internal Revenue Code section 501(c)(3) and exclude private foundations, most churches, and certain other types of religious organizations.

Financial Characteristics of Nonprofit Charitable Organization

Although 65 percent of the returns filed by section 501(c)(3) organizations were filed by organizations with assets of less than $500,000, these organizations held only 1 percent of the total assets and received 4 percent of total revenue (Figure B). In comparison, larger organizations, those with assets of $10 million or more, represented less than 6 percent of the returns filed, but accounted for nearly 90 percent of the total asset holdings and 81 percent of the total revenue reported.

[Figure B ILLUSTRATION OMITTED]

Overall, the total assets of nonprofit charitable organizations grew to $1.4 trillion, an increase of 11 percent over 1996. Cash, savings, and investments were the primary component of assets for these organizations, accounting for 61 percent of the total. Land, buildings, and equipment owned by nonprofits (but not for investment purposes) represented 22 percent of total assets [6].

The nonprofit charitable organizations in this study reported total revenue of $754.6 billion for 1997. Eighty-one percent of this was generated by organizations with assets over $10 million (only 6 percent of the population). Program service revenue was the major source of revenue for these organizations. This revenue is comprised of the fees collected by organizations in support of their tax-exempt purposes and includes such income as tuition and fees at educational institutions, hospital patient charges (including Medicare and Medicaid payments), admission fees collected by museums or community performance arts groups, YMCA/YWCA activity fees, and payments received for insurance and retirement coverage by selected pension and annuity funds. Overall, program service revenue totaled $486.4 billion, a 4-percent increase from 1996. Figure C illustrates the types of revenue received by organizations of different sizes. The largest organizations, those with assets of $10 million or more, received 69 percent of their total revenue from program service revenue, a larger percentage than organizations with fewer total assets.

[Figure C ILLUSTRATION OMITTED]

Total expenses, as reported on Forms 990 and 990-EZ, rose to $677.1 billion, a 6-percent increase over 1996. Salaries, other compensation, and employee benefits, the largest expense category for nonprofit charitable organizations, also increased by 6 percent, to $277.1 billion. Grants and similar amounts paid accounted for 13 percent of total expenses, a slightly larger portion than in 1996.

On Form 990 (but not included on Form 990-EZ), expenses for nonprofit charitable organizations are distributed among four areas: program services, fundraising, management and general, and payments to affiliates. Briefly, program service expenses are those associated with activities that further an organization’s exempt purpose; fundraising expenses are those incurred in soliciting contributions, gifts, and grants; and management and general expenses include those administrative and overhead costs which are not specifically related to program services or fundraising activities. Within these three broad areas are specific categories such as salaries and wages, grants and allocations, professional fees, and occupancy. The fourth area includes payments to organizations closely related to the reporting organizations, such as support and dues payments by local chapters to State and national agencies. Program service expenses accounted for the vast majority (87 percent) of total expenses reported by filers of Form 990; management and general expenses totaled 12 percent; and fundraising expenses and payments to affiliates, combined, accounted for slightly more than 1 percent.

Nonprofit Charitable Organizations Classified by NTEE Codes

The National Taxonomy of Exempt Entities (NTEE) is a classification system developed by the National Center for Charitable Statistics, which classifies organizations by institutional purpose and major programs and activities [7]. The codes are comprised of 26 major groups, which are aggregated into 10 program categories, as shown in Figure D. Within each program category, there is a wide diversity in the types of organizations conducting the different functions. The organizations were coded on the basis of information provided on Forms 990 and 990-EZ.

[Figure D ILLUSTRATION OMITTED]

Based on the NTEE classification, health was the dominant program category in terms of revenue, accounting for 52 percent of the total. Organizations in the health category also held the largest portion of total assets (35 percent). This category includes organizations that promote the wellness of individuals, the general treatment and prevention of disease or illness (including mental health and illness), and the medical rehabilitation of the physically disabled. Examples are hospitals; nursing or convalescent facilities; health support services, such as blood banks, organ banks, and emergency medical transport services; health care financing activities; substance abuse treatment services; organizations that study ethics or promote the practice of ethical behavior in medical care and research; health associations active in the prevention or treatment of diseases; and medical research. Just over 85 percent of the total revenue for nonprofit charitable organizations in this category was derived from their program services.

The program category of education includes higher education, elementary and secondary schools, correspondence schools, libraries, educational testing services, organizations providing opportunities for continuing education outside the framework of formal education, and student services and organizations. Education ranked a distant second in terms of revenue, which totaled $144.7 billion, and accounted for $404.6 billion in assets–more than one-quarter of the total for nonprofit charitable organizations.

Over one-third of Forms 990 and 990-EZ filed for 1997 were classified as human service organizations. Program service revenue ($44.3 billion) and contributions, gifts, and grants received ($38.5 billion) together represented nearly 90 percent of the total revenue for these organizations. This category was comprised of organizations in several classifications performing a broad range of services focused on specific needs within the community: housing and shelter programs, including housing, construction, management, and services to assist in locating, acquiring, or sustaining housing; job training and placement services; public safety, disaster preparedness, and relief services, including activities related to the effects of disasters and the providing of relief to accident victims; recreation and sports programs provided by organizations for camps, parks, and playgrounds, and amateur sports activities; crime prevention and legal services; and multipurpose organizations which provide a broad range of social or human services to individuals and families. (Included in this last category are such organizations as the American Red Cross, Salvation Army, Urban League, and YMCA’s/YWCA’s.)

Organizations Tax-Exempt Under Internal Revenue Code Sections 501(c)(4)-(9)

The statistics presented in this section are based on Forms 990 and 990-EZ filed by organizations tax-exempt under Code sections 501(c)(4) through (9). Figure E provides general descriptions of organizations included under these sections. Unlike nonprofit charitable organizations that are tax-exempt under Code section 501(c)(3), most contributions to these organizations are not tax-deductible. Financial data for organizations covered by these six Code sections are presented in Tables 2, 3, and 4.

Figure E

Types Of Tax-Exempt Organizations Under Internal Revenue Code Sections 501(c)(3)-(9)

Internal

Revenue

Code Description of General nature

section organization of activities

501(c)(3) Religious, educational, Activities of a nature

charitable, scientific, implied by the description

or literary organizations; of the class of

testing for public safety organization

organizations. Also,

organizations preventing

cruelty to children or

animals, or fostering

national or international

amateur sports competition

501(c)(4) Civic leagues, social Promotion of community

welfare organizations, and welfare and activities

local associations of from which net earnings

employees are devoted to charitable,

educational, or

recreational purposes

501(c)(5) Labor, agriculture, Educational or instructive

and horticultural groups whose purpose is

organizations to improve conditions of

work, products, and

efficiency

501(c)(6) Business leagues, chambers Improving conditions in

of commerce, and real one or more lines of

estate boards business

501(c)(7) Social and recreational Pleasure, recreational,

clubs and social activities

501(c)(8) Fraternal beneficiary Lodges providing for

societies and associations payment of life, sickness,

accident, or other

benefits to members

501(c)(9) Voluntary employee Providing for payment of

beneficiary associations life, sickness, accident,

or other benefits to

members

[TABULAR DATA 2-4 NOT REPRODUCIBLE IN ASCII]

Highlights of Financial Data

Voluntary employees’ beneficiary associations, Code section 501(c)(9), reported $94.8 billion in assets for 1997, considerably more than organizations exempt under sections 501(c)(4) through (8) (Figure F). This amount represented an increase of 43 percent from Reporting Year 1995. (A Statistics of Income study on 501(c)(4) through (9) organizations was not conducted for 1996.) Civic leagues and social welfare associations, section 501(c)(4), and fraternal beneficiary societies, section 501(c)(8), reported $56.2 billion and $53.4 billion in assets, respectively, for 1997. With the exception of social and recreational clubs, section 501(c)(7), the majority of the asset holdings by organizations under these six Code sections was reported by the largest organizations (those with assets of $10 million or more); for social and recreational clubs, however, the largest organizations represented just 25 percent of total assets. Social and recreational clubs differed from other types of organizations in the components of their assets as well. While organizations exempt under Code sections (c)(4), (5), (6), (8), and (9) held the majority of their assets in the form of cash, savings, and investments, social and recreational clubs reported 64 percent of their assets as land and buildings.

[Figure F ILLUSTRATION OMITTED]

In terms of revenue, voluntary employees’ beneficiary associations, section 501(c)(9), were also the largest of the six categories, with $85.4 billion, rising by 19 percent from 1995. Civic leagues and social welfare organizations, section 501(c)(4), ranked a distant second in terms of revenue, with $35.6 billion, an increase of 25 percent over the 2-year period. Program service revenue was the primary source of income for three types of organizations: civic leagues and social welfare organizations, section 501(c)(4); fraternal beneficiary societies, section 501(c)(8); and voluntary employees’ beneficiary associations, section 501(c)(9) (Figure G). These three types of organizations reported at least three-fourths of their revenue from program services. Membership dues and assessments were the principal source of revenue for labor, agricultural, and horticultural organizations, section 501(c)(5); business leagues, chambers of commerce, and real estate boards, section 501(c)(6); and social and recreational clubs, section 501(c)(7). Unlike nonprofit charities exempt under 501(c)(3), contributions, gifts, and grants were a minor source of income for those organizations exempt under sections 501(c)(4) through (9).

[Figure G ILLUSTRATION OMITTED]

Organizations Filing Form 990-EZ

Form 990-EZ may be filed by organizations that are exempt under Internal Revenue Code section 501(c), with annual gross receipts of less than $100,000 and assets under $250,000. The form was introduced for Tax Year 1989, and its use has grown steadily each year. Form 990-EZ requires less detailed reporting than the long form, especially on the balance sheet portion of the return.

Table 4 presents detailed data on Form 990-EZ filers, by Internal Revenue Code section. With the exception of voluntary employee beneficiary associations, Forms 990-EZ represented between 22 percent and 39 percent of all information returns filed. (Only 3 percent of organizations exempt under 501(c)(9) filed the short form.) The organizations reporting on Form 990-EZ accounted for very small proportions of total assets. Only labor, agricultural, and horticultural organizations, section 501(c)(5), and social and recreational clubs, section 501(c)(7), accounted for more than 2 percent of the total assets held by organizations under the subsection code. The assets of nonprofit charitable organizations that filed Form 990-EZ represented just one-tenth of a percent of the total assets of organizations exempt under section 501(c)(3). (Data for organizations that were eligible to file Form 990-EZ but filed the longer Form 990 instead are included with the data for filers of Form 990.)

Summary

For 1997, assets reported by nonprofit charitable organizations (excluding private foundations) tax-exempt under section 501(c)(3) totaled $1.4 trillion. These organizations also reported total revenue of $754.6 billion. The totals for assets and revenue increased 11 percent and 7 percent over 1996, respectively. The number of returns filed by these organizations was 198,957, which included both the longer Form 990 and the shorter Form 990-EZ.

Program service revenue, the fees received for the programs conducted in support of the purposes for which the tax exemptions under section 501(c)(3) were granted, was $486.4 billion for 1997. It represented nearly two-thirds of total revenue. Contributions, gifts, and grants increased by 6 percent to $146.2 billion. This source of revenue accounted for over one-half of the total revenue of organizations with asset holdings of less than $1 million, but for a much smaller share of the total revenue of the larger organizations. Expenses rose by 6 percent to $677.1 billion.

Using the National Taxonomy of Exempt Entities codes, which classify organizations by institutional purpose and major programs and activities, health care was the predominant major category, accounting for 35 percent of assets and 52 percent of total revenue reported by nonprofit charitable organizations under Code section 501(c)(3).

Organizations exempt under Internal Revenue Code sections 501(c)(4) though (9) are diverse in both their purposes and financial characteristics. Voluntary employees’ beneficiary associations, section 501(c)(9), led these organizations in terms of both assets and revenue, with totals of $94.8 billion and $85.4 billion, respectively. Program service revenue was the principal source of revenue and consisted of payments for health and welfare benefits. Membership dues and assessments were the principal source of revenue for labor, agricultural, and horticultural organizations, section 501(c)(5); business leagues, chambers of commerce, and real estate boards, section 501(c)(6); and social and recreational clubs, section 501(c)(7).

Data Sources and Limitations

The statistics in this article are based on a sample of the 1997 Forms 990, Return of Organization Exempt From Income Tax, and Forms 990-EZ, Short Form Return of Organization Exempt From Income Tax. Organizations used the 1997 forms when their accounting periods ended any time between December 31, 1997, and November 30, 1998. The sample did not include private foundations, which were required to file separate return forms. Most churches and certain other types of religious organizations were also excluded from the sample because they were not required to file Form 990 or Form 990-EZ. The sample included only those returns with receipts of more than $25,000, the filing threshold.

The sample design was split into two parts: the first part included returns of organizations exempt under section 501(c)(3), and the second part included organizations exempt under sections 501(c)(4) through (9). Returns of organizations tax-exempt under other Code sections were excluded. The data presented were obtained from returns as originally filed with the Internal Revenue Service. They were subjected to comprehensive testing and correction procedures in order to improve statistical reliability and validity. However, in most cases, changes made to the original return as a result of either administrative processing or taxpayer amendment were not incorporated into the data base.

Each part of the sample was classified into strata based on size of total assets, with each stratum sampled at a different rate. For section 501(c)(3) organizations, a sample of 13,757 returns was selected from a population of 202,620. Sampling rates ranged from 1.05 percent for organizations reporting smaller amounts for total assets to 100 percent for organizations with total assets of$10,000,000 or more. For organizations filing under sections 501(c)(4) through (9), a sample of 9,513 returns was selected from a population of 105,784. Sampling rates ranged from 2.05 percent for organizations reporting smaller amounts for total assets to 100 percent for organizations with assets of$10,000,000 or more. The filing populations for these organizations included some returns of terminated organizations, returns of inactive organizations, duplicate returns, and returns of organizations filed with tax periods prior to 1997. These returns were not included in the final sample, nor in the estimated population counts.

Because the data are based on samples, they are subject to sampling error. In order to use these statistics properly, the magnitude of the sampling error, measured by the coefficient of variation (CV), should be taken into account. Figure H shows CV’s for selected financial data. A discussion of methods for evaluating the nonsampling error can be found in the general Appendix of this issue.

Figure H

Coefficients of Variation for Selected Items, by Selected Internal Revenue Code Sections, Reporting Year 1997

Internal

Revenue Code Total Total Total Total

section revenue expenses assets liabilities

Coefficient of variation (percentages)

(1) (2) (3) (4)

501(c)(3) 0.48 0.55 0.06 0.22

501(c)(4) 0.89 0.90 0.39 0.37

501(c)(5) 2.26 2.37 1.12 2.14

501(c)(6) 2.11 2.28 0.67 0.65

501(c)(7) 2.33 2.40 1.81 2.62

501(c)(8) 0.85 1.01 0.26 0.11

501(c)(9) 5.79 6.64 0.29 1.54

NOTE: Includes data from Forms 990 and 990-EZ.

[TABULAR DATA 1 NOT REPRODUCIBLE IN ASCII]

Notes and References

[1] For data on previous years, see Arnsberger, Paul, “Nonprofit Charitable Organizations, 1996,” Statistics of Income Bulletin, Winter 1999-2000, Volume 19, Number 3; and Hilgert, Cecelia and Written, Melissa, “Charities and Other Tax-Exempt Organizations, 1995,” Statistics of Income Bulletin, Winter 1998-1999, Volume 18, Number 3.

[2] For more information on the requirements for tax-exemption under 501(c)(3) and other Code sections, see Internal Revenue Service Publication 557, Tax Exempt Status for Your Organization.

[3] Data presented in this article are from 1997 Forms 990 and 990-EZ. The total number of nonprofit charitable organizations, including those not required to file Form 990 or Form 990-EZ, was obtained from the Internal Revenue Service Exempt Organizations Business Master File (December 1997) and does not include private foundations filing Form 990-PF, Return of Private Foundation.

[4] The $25,000 filing threshold is an average of an organization’s gross receipts over the previous 3 years.

[5] For information on private foundations, see Whitten, Melissa, “Private Foundations and Charitable Trusts, 1997,” in this issue.

[6] The Form 990 includes a detailed balance sheet on which organizations classify their assets among a number of different components. The balance sheet on the shorter Form 990-EZ lists only three types of assets: cash, savings, and investments; land and buildings; and other assets. For the sake of consistency, the assets of organizations filing the long form are collapsed into these three categories. Detailed balance sheet data for Form 990 filers are provided in Tables 1 and 3.

[7] For information on the National Taxonomy of Exempt Entities classification system, see Hodgkinson, Virginia A.; Weitzman, Murray S.; et al., Nonprofit Almanac, 1996-1997: Dimensions of the Independent Sector, Jossey-Bass, Inc., 1996; Stevenson, David R.; Pollak, Thomas H.; and Lampkin, Linda M.; et al., State Nonprofit Almanac 1997: Profiles of Charitable Organizations, The Urban Institute, 1997; and The National Taxonomy of Exempt Entities Manual, The Urban Institute, 1997.

Paul Arnsberger is an economist with the Special Studies Special Projects Section. This article was prepared under the direction of Michael Alexander, Chief.

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