Paying Taxes on Nonprofits

Magazines published by tax-free organizations may not make profits, but some of those that take advertising certainly make money. By the end of the year, the Journal of the American Medical Association will have sold some $12 million worth of ads; the National Geographic will have taken in an estimated $8.6 million in advertising revenue; Nation's Business, published by the U.S. Chamber of Commerce, should earn $4,000,000 from ads; and the American Association for the Advancement of Science's Science will probably have ad revenues of $2.2 million. For years, taxpaying competitors of these publications complained that their tax-free status enabled them to charge less for comparable ad space.

The Internal Revenue Service agreed, and last week issued a new regulation imposing taxes on the advertising income of the nonprofit journals. The tax will be calculated at the normal rate of 22% of the first $25,000 of taxable ad income, 48% on taxable revenues over $25,000. The publications will be able to deduct a standard $1,000, plus all expenses involved in selling advertising, plus all editorial costs above and beyond the income from subscriptions. A carryover tax deduction will be allowed if there is a net loss due to advertising expenses--but not if a loss is incurred because of editorial expenses.

Some of the publications affected by the new regulation will doubtless challenge it in court, and several bills have been introduced in Congress to restore the tax exemption. It is estimated that the new regulation will recover some $10 million in taxes. "But the primary objective," says IRS Commissioner Sheldon Cohen, "is not to add to tax revenues but to eliminate a source of unfair competition."

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