Tax-Exempt Status and IRS Reporting Obligations. 1. All Undergraduate Organizations

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Edwina Harper
6 years ago
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1 Tax-Exempt Status and IRS Reporting Obligations All undergraduate organizations are expected to comply with the Undergraduate Regulations, and must also comply with Federal and State tax laws. The purpose of this information is to summarize some of the laws that may affect your undergraduate organization. This is not a comprehensive report of all the Federal and State tax laws that apply to undergraduate organizations, but rather a summary of some of the basic tax laws affecting undergraduate organizations. If you have general questions about the information outlined herein, or if you wish to seek assistance with any of your organization's financial or tax matters, please contact Dean Edgar Letriz in the Yale College Dean's Office. Additional information on nonprofit eligibility and application may also be obtained by accessing the online resources of the Yale Law School!s Nonprofit Organizations Clinic. 1. All Undergraduate Organizations While the great majority of undergraduate organizations are not certified by the Internal Revenue Services as nonprofit groups (Yale University!s nonprofit status does not extend to its undergraduate organizations), Yale College nonetheless requires all undergraduate organizations to operate exclusively on a not-for-profit basis. An organization which operates exclusively on a not-for-profit basis will generally qualify as exempt from Federal taxation under Internal Revenue Code (IRC) Section 501(a). In order to qualify as exempt from Federal taxation under IRC Section 501 (a), a student organization must generally by a type of organization described in IRC Section 501 (c). Although IRC Section 501(c) includes organizations operating as support organizations (501(c)2)), membership organizations (501(c)(4)), trade associations (501(c)(6), and fraternal beneficiary societies (501(c)(8)), the majority of undergraduate organizations will qualify for tax exemption under IRC Section 501(c)(3). An organization exempt under IRC Section 501(c)(3) is an organization organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes. In order to support its entitlement to this exemption, every organization should have a written Constitution, Bylaws, and/or Article of Association

2 which would typically include the following basic information: 1. The name and purpose of the organization; 2. A description of its activities in terms that indicate the organization's taxexempt character; 3. A description of its membership (e.g., how does someone become a member? Is the group composed predominately of Yale students? Is there membership by audition? Is the group exclusive in any other way?); 4. A list of officers and a description of how officers are chosen; 5. An indication of how and for what purpose the organization disburses its funds; 6. A dissolution provision stating that if the group dissolves, its assets will be distributed to Yale University or to some other designated tax-exempt organization. An absolute requirement for federal tax-exemption under IRC Section 501(c)(3) and certain other organizations described under IRC Section 501(c) is a firm rule that none of the organization's net income or profits can be distributed to officers, members of the organization or any other individual. Organizations wishing to pay wages to students must receive advance written approval to do so from the dean of student affairs. All students permitted to earn wages for their work with an undergraduate organization must be hired through the Yale College Dean's Office and paid according to prevailing rates and regulations of the Office of Student Employment. Note: 99% of all undergraduate organizations do not pay wages of any kind. An organization exempt from taxation under IRC Section 501(c)(3) is also prohibited from attempting to influence legislation or participating in or intervening in a political campaign on behalf of any candidate for public office. An organization that is not organized and operated exclusively for exempt purposes will be liable for federal and state income taxes on its taxable income, if any, and will not be entitled to any of the benefits accorded a tax exempt organization. 2. Organizations with Gross Receipts of Not More than $5,000

3 per Year An organization that normally has not more than $5,000 in gross receipts per year (which includes most undergraduate organizations) and which is organized and operated exclusively for tax-exempt purposes will generally be treated as tax-exempt without any further action. The gross receipts of an organization are not more than $5000 if: i) During the first taxable year of the organization, the organization received gross receipts of less than $7,500; ii) during its first two taxable years, the aggregate gross receipts received by the organization are $12,000 or less; and iii) in the case of an organization which has been in existence for at least three taxable years, the aggregate gross receipts received by the organization during the immediately preceding two taxable years plus the current year are $15,000 or less. 3. Organizations with Gross Receipts in Excess Of $5,000 per Year An organization that normally has in excess of $5,000 in gross receipts per year must formally request recognition of exempt status in order to be recognized as an entity exempt from federal income taxes. The request is generally made on Form 1023, Application for Recognition of Exemption under IRC Section 501(c)(3) of the Internal Revenue Code.* *Note: Organizations which are not described in IRC Section 501(c)(3) may be required to file Form 1024, Application for Recognition of Exemption under Section 501 (a) or for Determination under Section 120, rather than Form 1023 in order to formally request recognition of exempt status. If the form is properly filed, the organization will generally be treated as tax-exempt until the IRS acts on the application. In order to ensure that the Form 1023 is complete and accurate, we strongly recommend that you seek professional assistance in providing this information. 4. Organizations with Gross Receipts in Excess Of $25,000 per Year Whether it has received recognition of its tax-exempt status or is awaiting notification of exempt status, an organization that normally has gross receipts in excess of $25,000 in a year must file Form 990, an annual information return, with the federal government. An organization's gross receipts are considered normally to be in excess

4 of $25,000 if the organization is: i) Up to a year old and has received, or donors have pledged to give, more than $37,500 during its first tax year; ii) between one and three years old and averaged more than $30,000 in gross receipts during each of its first two tax years; or, iii) three years old or more and averaged more than $25,000 in gross receipts for the immediately preceding three tax years (including the year for which the return would be filed). An organization that has gross receipts during the year of less than $100,000 and total assets at the end of the year less than $250,000, however, may file Form 990-EZ, Short Form Return of Organization Exempt from Income Tax, rather than Form 990. A Form 990 or Form 990- EZ must be filed even if the organization has little or no net income (e.g., because its expenses equal its income) or has income only from carrying on its exempt activities. If your organization is required to file an annual information return, we strongly recommend that you consult with a tax professional in order to ensure that the annual return is complete and accurate. 5. The Employer Identification Number Any organization that employs anyone, that files tax returns, or that opens a bank account will be required to have an Employer Identification Number (EIN). The EIN is the equivalent for organizations of an individual's Social Security Number. To obtain an EIN, you must file a Form SS-4 with the Department of the Treasury, a copy of which may be obtained from the Office of Student Affairs. (You do not need to be an employer to file this form.) Although many organizations may have filed for and obtained an EIN, you should check your records in order to determine if your organization has an EIN. You may not use Yale's EIN for your bank accounts (nor may the Yale name appear in outside bank accounts), and you should not use an individual's Social Security Number because the funds in the account may then be treated by the IRS as part of that individual's assets and any earnings on the account will be deemed earnings of the individual for tax purposes. 6. Employment Taxes In general, undergraduate organizations are not permitted to employ students directly. Under some circumstances, the Yale College Dean's Office will employ bursary students to perform services for an undergraduate organization, and charge the organization for the wages and other costs. An undergraduate organization that employs anyone directly is responsible for withholding from wages and remitting to the

5 Federal or State government the applicable income tax and the employee's share of FICA taxes. In addition to withholding and remitting income and FICA taxes, the organization will be responsible for the filing of annual information returns (e.g., Forms W-2, 1099, etc.). 7. Federal Income Taxes Although an organization qualifies for tax exempt status under IRC Section 501 (a), it may still be subject to Federal income tax on income from an unrelated trade or business. Unrelated trade or business income is the gross income derived from any trade or business that is regularly carried on and that is not substantially related to the organization's exempt purpose. There are several exceptions to the definition of unrelated trade or business income. An exempt organization which has gross income from an unrelated trade or business of $1,000 or more in any year must file Form 990T, Exempt Organization Business Income Tax Return, and pay the related tax. Gross income is defined as gross receipts minus the cost of goods sold. 8. State Filing Requirements An organization which is required to file a Form 990 or Form 990-EZ is not required to file a copy of the federal information return or an equivalent state information return with the State of Connecticut. If your organization is required to file a Federal income tax return, however, you should be aware that it may also be required to file a state income tax return. 9. A Sales Tax Exemption Number Undergraduate organizations are not permitted to use Yale University's sales tax exemption number. You may apply for one for your organization, but the State of Connecticut has become increasingly reluctant to grant this exemption. 10. Remitting Sales Tax to the State of Connecticut Even if you have a sales tax exemption number that applies to your organization's purchases, it does not exempt your organization's sales from the sales tax. Although some sales (e.g., clothing worth less than $50) are not subject to sales tax, most sales are subject to tax. If you sell goods or services, you should determine whether you are required to collect sales tax from your purchases and remit it to the State. An organization may also be required to file a sales tax return with the State of

6 Connecticut. 11. Recordkeeping All organizations must maintain accurate and complete financial records and must keep them for at least six years. Failure to maintain proper records may make it difficult to substantiate to the IRS or to the State Department of Revenue Services that the organization does not owe taxes, interest and penalties for prior years. The Yale College Dean's Office can hold copies of your financial records for safekeeping. 12. Public Disclosure An organization must, during the three-year period beginning with the due date (including extensions, if any) of the Form 990 (or Form 990-EZ), make its return available for public inspection upon request. The entire information return, with the exception of the schedule of contributors, must be made available. In addition, certain other information, including the Form 1023, must be made available for public inspection. Inspection must be permitted during regular business hours at the organization's principal office. PDF version of this document.

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