Could you describe how this abuse would take place, exactly? R&D is already tax deductible.

I could see that if you funded a non profit via income like Kickstarter, that would allow you to use that money over multiple financial years without paying taxes on it in the mean time.

But that doesn't really seem egregious if the technology is to be open sourced.

> Could you describe how this abuse would take place, exactly? R&D is already tax deductible.

Here's how: (1) Company sponsors and in-effect (though not in name) controls nonprofit doing open source development. (2) Company provides "discounts" on its services (e.g., support or other services tied to, or closed source software license for software that depends on, but is not -- if the OSS is copyleft -- strictly derivative of the OSS developed by the non-profit) to people who donate to the non-profit. Company has now effectively restructured itself in a way that its R&D costs, or some substantial portion of them, are not merely tax deductible for it (as they would be as business expenses in any case) but also funded by tax-deductible payments from customers (which payments may not have been tax deductible expenses otherwise, particularly if the software isn't exclusively for the B2B market.)

Its not the "open source" that is the problem, its the relationship with the sponsoring company -- but I can certainly see why "open source" development is a cover for a "charity" that could be ripe for abuse, and why the IRS might want to carefully scrutinize charities of that type.

Ah, that makes total sense. I was thinking about it from the perspective of the tax the entity pays, and didn't realize "donations" to this type of entity were tax deductible. That would indeed be ripe for abuse.

If you and I both start a business, but you set yours up so all the producer surplus goes to yourself as the sole shareholder, and I set mine up so all the producer surplus goes to myself as the main employee, why should I be able to claim non-profit status?

Are there not other protections against that?

If your non profit suddenly makes $10 million, you couldn't just pay yourself that money, could you? Surely you have to be able to justify that your spending was aligned with the stated goals of the non profit, if and when audited?

Forgive my ignorance, I'm from New Zealand, and the laws are quite different over here. For instance, corporate income tax is franked, so you aren't double taxed on profits. That alone removes a lot of incentive to eliminate the tax a company pays.

> Are there not other protections against that?

Sure, there's protections that apply after the fact of abuse, but the whole purpose of having a 501(c)(3) application and review is to try to filter inappropriate entities out before the fact.