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From the Archive: Nonprofit or Not?

From AIR's Archive logoEditor’s note: Will Everett’s advice about starting a tax-exempt nonprofit organization first appeared as “Taking the 501(c)(3) Plunge” in the September 2008 AIRblast, the newsletter for independent producers and artists in public media. 

Since then, the IRS perspective on media nonprofits has shifted several times (for full details, see the “further research” list below). This piece surfaced from the archive as a companion for Cynthia Graber’s recent AIRblast centerpiece, “The Pragmatist’s Guide to Podcasts and Money,” which included a section on grant funding that is also addressed here. 

 
By Will Everett
 
There was a line from Isak Dinesen that I quoted when I was starting in radio eight years ago: “Through all the world there goes one long cry from the heart of the artist: Give me leave to do my utmost.”
 
I had just started producing a weekly program for our local NPR affiliate and had quit my newspaper job to make room for radio. I was cutting grass to make ends meet. I knew that eventually I’d have to find some real funding. Or find another day job.
 
My second-floor apartment had a screened porch that was cradled in the branches of a bottlebrush tree. When friends would drop by, we’d sit out with a bottle of wine and listen to the wind chimes clanging in the strong Gulf breezes. Everyone said it was just like being in a treehouse. 
 
One evening in the treehouse, a friend began listing off some of the larger grant-making foundations in our state. “You’re a nonprofit, right?” Technically, I was very nonprofit, but not in the eyes of the IRS. With a bit of research I found that funders nearly all had one thing ominously in common: No grants to individuals.
 
It took about six months to set up Treehouse Productions. A local university had a nonprofit resource center that shepherded us through the process of applying for a 501(c)(3), the IRS designation for a nonprofit, tax-exempt organization. I looked at a few templates, drafted some bylaws, and told my friends they’d just become board members. I then filed a few forms with the state of Texas, scraped together the $500 filing fee, and six months later received a letter from the IRS stating that the application had been approved.
 
That was eight years ago. Since then, I’ve spoken with many AIR members considering the nonprofit route, and the question invariably arises: Was it worth it? 
 
Answer: yes and no.
 
Low-hanging fruit
 
Like most who go the nonprofit route, my board and I did so with visions of six-figure grants just over the horizon. And initially, when those mega-grants didn’t materialize, we were discouraged. What we found, though, was that for small, regional funders, the programming coming out of our organization was made to order.
 
Of the 110,000 private foundations registered in the United States in 2006, 54 percent reported assets of under $1 million. These small foundations often have specific funding priorities and work with organizations in particular cities, states, or regions. Most grants in this category are in the $1,000 to $7,500 range. These foundations care more about what you do and where you’re doing it than your track record or national profile, making them ideal for the incipient nonprof.
 
How to find them? The nonprofit’s bible is the Foundation Directory, published annually by the Foundation Center or available online by subscription ($19.95/month for a basic membership). Whatever your emphasis, someone has probably endowed a legacy supporting that cause. With a few keywords, you can turn up dozens of foundations madly interested in your documentary on medieval torture practices or your weekly radio program on rare American bird calls.
 
Another prime funder in this category ($3,000 to $7,500) is your state arts council. After Treehouse Productions received its nonprofit determination, we applied to the Texas Commission on the Arts for core support. Being a new, untested organization proved an advantage more than a handicap with TCA. The staff vetted our first draft proposal and helped us bring it to fruition.
 
Six months later, we received our first grant check in the amount of $5,000.
 
Of course, five grand won’t keep the wolves away from the door for very long. But with the logo of the TCA proudly adorning our letterhead, other small grants began rolling in. As did the rejection letters. The mom-and-pop foundations in South Texas were pleased to throw money at us. Foundations like Ford, Haas, Gates, Wallace, Duke, and dozens of others happily passed on our proposals. And it stung, as rejections always do.
 
Someone once wrote that the secret to success is to fail often – meaning that success and failure follow the usual patterns of probability: The more you try, the more your chances of success. Even now, with a modest track record and an annual budget of around $100,000, we find that it still takes 20 to 25 applications to harvest one grant. It’s stubborn soil.
 
The paperwork angle
 
Managing a 501(c)(3) is rather straightforward. As a steward of public funds, your organization will be required to show where its money comes from and how it is spent. If the organization brings in more than $25,000 a year, it must file an IRS Form 990-EZ plus schedules detailing expenses and major contributors. To retain its nonprofit exemption, the organization must show that it receives its income from a variety of private and public sources. This information becomes part of the public record.
 
Nonprofit doesn’t mean you don’t make any money. When we get our first $1 million grant, I will gladly bump my salary to six figures. In the meantime, my monthly check from Treehouse Productions is predicated upon the organization’s income, which dips and spikes with heart-stopping irregularity.
 
At present, the filing fee for applying for nonprofit exemption is $750. So far, there’s no “Nonprofits for Dummies” on the market, and the paperwork involved is perplexing enough that legal assistance is often a must. Eileen McAdam, director of the Sound and Story Project, says it took a year to receive nonprofit status for the World Sound Foundation. “We began the process on our own, but very quickly realized that hiring an attorney would save us time and increase our likelihood of success. There are applicants who get turned down and have to begin again. An attorney who specializes in this can walk you through the steps quickly, easily and offer advice beforehand on any possible problem areas. Our attorney fees were approximately $1,500.”
 
But sometimes it’s all about who you know. Todd Melby and Diane Richard first sought nonprofit exemption for their Minneapolis-based production company, 2 below zero, four years ago. At the time, the process seemed too daunting. Last year, they met a tax attorney who agreed to put an intern on the project pro bono. They received their nonprofit letter of determination last month. 
 
“We knew we wouldn’t get any foundation money without that letter,” Melby said. “The approval process took nearly nine months, but it was worth the wait.”
 
Some independent producers, like John Hauschildt of Houston, need nonprofit exemption for only a short time. In seeking funding for his two-hour documentary on Texas history, Hauschildt persuaded his local arts council to serve as an umbrella organization. In this scenario, the organization lends out its resources, identity, and (most importantly) nonprofit status for a fixed period of time, often receiving a percentage of any grants raised by the applicant. “It was good for both of us,” Hauschildt said. “I was able to raise nearly $40,000 under their name. And they got national exposure through my documentary.”
 
Navigating the income stream
 
According to one study, 77 percent of independent producers report that their income comes from sources other than their independent radio work.  This means that most indies haven’t yet quit their day jobs. Is nonprofit exemption the answer?
 
Probably not. But for those of us who are long-form producers, it can help, if viewed as one part of the income stream.
 
Diversification is as important in radio as it is in stock portfolios. Income from stations, freelance work, repackaging, and merchandising are all steady-state revenue sources that can receive a timely boost from a national or regional foundation grant.
 
Grants carry a certain panache. They also provide validation that can enhance future grant applications and lead to more freelance work.
 
It’s good to bear in mind that while nonprofit determination is sacred to foundations, not everyone else cares. It was a while before I realized that the $20,000 that our local convention and visitors bureau was dropping on us to underwrite our weekly program bore no relationship to our nonprofit exemption. They were in it strictly for the advertising. Ditto the University of Texas, which invested $25,000 in our WWI documentary as long as we include their humanities scholars on the program. In addition, we found that few of our individual contributors itemized their contributions; they weren’t contributing because of the tax break but because they liked our product.
 
How do you know if nonprofit exemption is for you or your organization? Ask yourself the following:
 
• Can my work be summarized into a single mission statement?
• Does my work have national or regional appeal?

• Am I prepared for IRS scrutiny?

• Will nonprofit exemption really make a difference?
 
Nonprofit exemption made a difference for our organization, but it wasn’t the “open sesame” that I thought it would be. Those giant grants continue to elude me. Somehow, though, the Treehouse keeps turning out new radio material year after year.
 
Occasionally, like an old friend, a funder leaves a love note in our mailbox – and a check to show they mean it. And who can resist a friend like that?
 
Additional Resource Links:
 
• A New Approach to Helping Journalism Nonprofits at the IRS | The Digital Media Law Project, March 2014
• Research and Resources for Nonprofit Media | Council on Foundations, 
 
• Will Everett is a freelance producer and reporter based in Brownsville, Texas. He can be reached at willeverett1@gmail.com. Questions about this article? Email curator@airmedia.org.