As Benjamin Franklin’s famously noted, nothing in life is guaranteed except for death and taxes. While this is largely true, there is an IRS classification that allows certain cemetery businesses exemption from taxes. 501(c)(13) status is available to nonprofit mutual cemetery companies and nonprofit incorporated cemetery companies. The Internal Revenue Code, § 501, defines eligible 501(c)(13) companies as:
Cemetery companies owned and operated for the benefit of their members or which are not operated for profit; and any corporation chartered solely for the purpose of the disposal of bodies by burial or cremation which is not permitted by its charter to engage in any business not necessarily incident to that purpose and no part of the net earnings of which inures to the benefit of any private shareholder or individual.
Prior to the ratification of the Sixteenth Amendment, which instituted our modern federal income tax system, cemeteries were often viewed as public organizations performing civic services and were thereby exempt from local excise and property taxes. Part of the Revenue Act of 1913 established a list of business and organization types that don’t have to pay taxes. Among these are “cemetery companies, organized and operated exclusively for the mutual benefit of their members.” Initially, only mutual cemeteries were included; in 1921, the statute expanded to include certain non-mutual cemeteries as well.
So, what exactly is a “mutual cemetery company operated for the benefit of its members?” In this context, “mutual” refers to an organization owned by its own customers in which members share all profits and losses. These cemeteries cannot operate commercially. They are “nonprofit” in the sense that any and all earnings remain within the organization for further mutual burial purposes rather than being paid out to employees and members for their own private benefit in the way traditional for-profit businesses distribute profits. Many mutual cemeteries only offer membership to certain people, such as members of a particular family or families; so long as they meet all other requirements, they may still receive 501(c)(13) status.
The second cemetery type eligible for 501(c)(13) status is nonprofit incorporated cemetery companies. The key difference between these companies and regular commercial cemeteries is nonprofit cemetery corporations must limit their operations exclusively to burial and crematory activities and must not “allow its net earnings to inure to the benefit of any private shareholders or individuals.” This means they must apply any excess net profits to exempt cemetery operations, which include acquiring cemetery property and operating, maintaining, and improving the cemetery.
Despite the not-for-profit requirement, a cemetery company may issue common stock so long as it pays no dividends. It’s not enough to simply opt not to issue dividends; it must be formally prohibited either via the corporation’s charter or applicable state law. Similarly, exempt companies cannot issue preferred stock unless said stock was issues prior to November 28, 1978 when this condition went into effect. Individuals who donate to these companies or to a perpetual care fund to benefit the cemetery as a whole may deduct these donations as charitable contributions on their income tax return. However, payments made to a perpetual care fund for a particular lot are not deductible
To seek 501(c)(13) status, one must submit Form 1024, Application for Recognition of Exemption Under Section 501(a). According to chapter 4 of IRS Publication 557, nonprofit mutual cemeteries must submit evidence to indicate the company is owned and operated for the benefit of lot owners and that said lot owners fully intend to use plots for bona fide burial purposes and are not holding them for resale. Non-mutual nonprofit corporations must show they are not permitted to engage in business outside the sole purpose of the disposal of human remains by way of burial or cremation. Under this statute, operating a mortuary is prohibited while selling monuments, vaults, flowers, and other products that may be used as a part of burial or cremation is permitted so long as the profits from these sales go directly towards cemetery upkeep and maintenance.
There are additional tax, finance, and business implications to consider regarding obtaining tax exempt status. If you have questions about whether your business qualifies for 501(c)(13) status or whether it’s the right choice for your cemetery or not, contact the experienced deathcare accountants and tax professionals at MKS&H to learn more.
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture, and your business goals. This approach enables our clients to achieve their greatest potential.