As most of you know, Open Source Matters is a New York based non profit organization that provides the legal, financial, organizational and other infrastructure support for he Joomla! Project.  The last few years have been complicated ones financially, and having just posted the 2008 990 form I want to explain some of that and also give an overall financial report for 2008.( As you may know, typically it takes about a year for all books to close, auditing to be done, and so on. So this report will concern the 2008  finances but with implications for 2009 and 2010.)

First, the financial report, which is pretty simple. We don't do a certified audit (our budget is not big enough for it to be required and the thousands of dollars it would cost are not a good use of project funds) but we do have an incredibly detailed review by an accountant who goes through every record.  While all the details are on the forms , I'll give a financial summary for 2008:

Total Income: $223,242
Total Expenses: $227,735

75% of income comes from monetizing the joomla.org websites in form of advertising (using Google AdSense).

The remainder comes from sources such as book royalties and prizes (thanks to Packt for both of those), Google Summer of Code, the shop, and  unsolicited gifts from individuals, firms, Joomla! Day organizers,  and user groups (and $32 in interest).

Expenses  in size order were:  legal (44%) , travel and conferences (30%), taxes (10%), hosting (7%), accounting (4%), and other items like insurance, office expenses, depreciation of hardware, promotional materials (about 5%).

Most, but not all, of the legal expenses relate to the Joomla! trademark, specifically registering it in a number of countries and also defending the trademark where individuals or companies have sought to register it for themselves. This is something that happens more often than I would have expected, but considering the value of the Joomla! trademark it is perhaps not surprising that some would try to take it from the community and put it into private hands. There are even some countries where Joomla! community members have been told by these individuals or companies that they cannot use the name Joomla!. For various reasons that made sense at the time, trademarking was not taken care of in the first two years of the Joomla! Project (2005-2007) so we have had to make up for lost time. That has made the number of such situations somewhat greater. Fortunately, in the majority of such cases informal discussions have led to resolution, but in a number we had to expend substantial resources that could otherwise have been used to support more constructive things. Still today there are seven active cases of people or companies seeking to privatise the name or logo. Not only do those people harm everyone who has built the Joomla! brand, they also harm the finances of the Joomla! Project.

If you have read the tax forms from earlier years you may be surprised that taxes in 2008 were only 10% of expenses. (On the 2007 form they were 20%.) This year, working with our accountant and legal advisers, we made a concerted effort to find ways to reduce our tax expenses.  As a result of this we have amended all of our previous returns (We'll post the amended returns once we're sure the IRS accepts them). I'm going to explain it, but it may be a little heavy going, which I apologize for in advance. However, this is by far the most important part of this report.

When OSM was founded, it was set up as a New York State non profit with charitable status in New York. At the time it was intended that OSM would seek what is called 501c3 status. This is a status that relates to federal taxes in the US. If an organization has 501c3 status, then donations to it are tax deductible for US tax filers. However, 501c3s are not supposed to earn their income in ways such as monetizing their websites through advertising. Such activities are considered "unrelated business" and if they make up more than about 20% of your income, it is extremely unlikely that you will ever receive 501c3 status. This is because the IRS would assume your non profit is set up as a tax  avoidance scheme.  At the same time, the non profit must pay full taxes on the unrelated business income. In our case, almost none of our expenses can be charged against the unrelated business income so the net income is high, raising our taxes considerably even though as an organization we run just break even or slightly at a deficit. That is, the unrelated business made money and had almost no expenses, but the non profit spent money and had almost no program related income.So there are two issues:

  1. The unrelated business income made it unlikely that OSM would ever get 501c3 status and
  2. Tax treatment as a 501c3 was actually costing the project a substantial amount of money.

Our accountant and lawyers looked at this and asked "Why do you want to be a 501c3?" There are only two real reasons. One is the tax deduction for US federal income tax filers making charitable contributions. The other is that in the US 501c3s are the kinds of non profits people are used to donating to, and this status is something that they look for as a "seal of approval."

In considering the importance of this issue, the board of OSM and the Community Oversight Committee considered whether focusing so centrally on our US community members made sense. We considered the financial investment required to make the legal case that OSM should get 501c3 status despite the unrelated business income or making the case that advertising is not really unrelated. These costs were potentially substantial. We also asked our major supporters (Software Freedom Law Center, Rochen, Google, Gforge) if the tax status of OSM would impact their continued support, to which they all said no. After long discussion, we decided that the one aspect of the 501c3 status that we thought was useful to everyone worldwide are the required financial filings. However, New York State requires the same public financial filings whether you are a 501c3 or not. So after much discussion, we decided to withdraw OSM's application for 501c3 status, amend the earlier year tax returns so that they did not assume this status, and changed our bylaws so that we are required to post the financial information that would formerly have been available from the IRS. So the 990 form that I posted today is not a 990 filed with the IRS, but is the one we are filing with New York State and contains all of the information that would have been filed if we were a 501c3. As you can see, it is quite extensive because the IRS has a strong commitment to financial transparency for non profits.

So to summarize this part, OSM is a New York State not for profit that does not have 501c3 status.

Some background links:
IRS Page on Charities
Wikipedia entry on 501(c) organizations