Deep Dive Into the Form 1023 Application for 501c3 Tax-Exemption

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1 Deep Dive Into the Form 1023 Application for 501c3 Tax-Exemption Lorri Dunsmore Perkins Coie November 2, 2017 Seattle, Washington

2 November 2, 2017 Deep Dive Into the Form 1023 Application for 501c3 Tax-Exemption Lorri A. Dunsmore Anthony McCormick Perkins Coie LLP

Tax-Exempt Status Tax-exempt and nonprofit are different Tax-exempt usually means exempt from federal income tax Tax-exempt status: Is granted by

3 Tax-Exempt Status Tax-exempt and nonprofit are different Tax-exempt usually means exempt from federal income tax Tax-exempt status: Is granted by IRS Gives donors ability to deduct their donations on their tax-return (if a 501(c)(3)) Involves a lot of restrictions and requirements by the IRS

4 Types of Tax-Exempt Organizations A lot of different kinds of organizations can be taxexempt... for example: 501(c)(3): charities 501(c)(4): social welfare organizations 501(c)(5): unions and agricultural organizations 501(c)(6): trade associations 501(c)(7): social clubs 501(c)(8) and (10): fraternal organizations Etc.... We are focusing on 501(c)(3) public charities

5 501(c)(3) Tax-Exempt Status Organizational test Articles of Incorporation must contain: Purposes clause limiting purposes of the corporation to 501(c)(3) purposes only Dissolution clause providing assets will be distributed on dissolution only for exempt purposes (or to a government) Articles of Incorporation cannot contain: Provisions expressly empowering organization to engage in non-exempt activity (e.g., political activity, distributing assets to private individuals or for-profit businesses)

6 501(c)(3) Tax-Exempt Status (cont d) Operational test This is about the activities of the nonprofit Operated exclusively for exempt purpose Exclusively = No substantial part of activities may be for a non-exempt purpose Absolute prohibition on two things: political campaign activity private inurement

7 501(c)(3) Tax-Exempt Status (cont d) IRS resources regarding qualification for 501(c)(3) status: irs.gov/charities-&-non-profits/charitable- Organizations/ IRS Publication 557 ( the basics ) IRS Publication 1828 (for churches and religious orgs.) IRS Publication 4220 (application process) IRS Publication 1771 (charitable contributions) IRS Publication 598 (unrelated business)

8 Applying for 501(c)(3) status With few exceptions, organizations must apply to be recognized as 501(c)(3) organizations The organization must have an EIN to apply The organization will submit either Form 1023 or Form 1023-EZ depending on the size and activities of the organization

9 Applying for 501(c)(3) Status Using Form 1023 Form pages (main form), 8 schedules, and narrative attachment IRS receives around 60,000 applications/year The form and all attachments must be mailed to the IRS Fee: $400 / $850 Processing times from 2 months to well over 1 year Must be filed within 27 months of formation

10 Applying for 501(c)(3) Status Using Form 1023 (cont d) Submitting Form 1023 If the organization does not qualify to submit form 1023EZ, it must submit form 1023 and submit by mail Materials required to be submitted: Form 1023 Checklist Form 2848 Form 1023 and applicable schedules (with original signature) Attachment to Form 1023 and attachments (such as conflict of interest policy) Articles of Incorporation and any amendments Bylaws

11 Applying for 501(c)(3) Status Using Form 1023-EZ Applications began taking much longer in 2012 IRS budgets have been continually falling IRS response in 2014: Form 1023-EZ Deliberate decision to skip some processing on the front end, to devote more IRS resources to examinations

12 Form 1023-EZ Form 1023-EZ Simplified application for eligible orgs: $50,000 or less annual gross receipts $250,000 or less assets Other restrictions Processing times from 3-6 weeks Computerized Online Application (online only) at pay.gov Completion requires completion of questionnaire and completion of online application. No written materials or copies of governance documents submitted. Reduced Fee: $275 Must be filed within 27 months of formation

13 Form 1023-EZ Preparation Download instructions and eligibility worksheet from Complete eligibility worksheet by hand (at end of instructions) Gather organizational documents and board information must have Articles, bylaws, appointment of directors complete Download paper copy of 1023-EZ from pay.gov Fill out paper copy of 1023-EZ; review instructions and resolve any issues

14 Form 1023-EZ Preparation (cont d) Log in to pay.gov and fill out actual form based upon paper draft. You can save your work and download PDF version for recordkeeping. Client, not lawyer, needs to electronically sign.

15 Form 1023-EZ Qualification 1023-EZ Qualification Worksheet Annual gross receipts: $50,000 or less for 3 years Total assets: $250,000 or less U.S. organizations only No LLCs No churches, schools, hospitals, or HMOs No credit counseling orgs. No joint ventures with for-profits In general, no weird orgs.

16 Form 1023-EZ Specific Sections Attestation of Eligibility Part I Identification of Applicant Part II Organizational Structure Part III Specific Activities Part IV Foundation Classification Part V Reinstatement after Automatic Revocation Part VI Signature

17 IRS Restrictions-Requirements for 501(c)(3) Organizations Private Inurement Lobbying Donor substantiation Unrelated Business Income Form 990 Annual Report Filing

18 Private Inurement No part of the net earnings of a Section 501(c)(3) organization may inure to any private shareholder or individual What is Private Inurement? Any use of charity s assets or income for the benefit of an insider Insider has no precise definition but we have clues: Officers and directors Major contributors Key employees Family of the above

19 Private Inurement: Excess Benefit Transactions Applies to Transactions between Section 501(c)(3) public charities/ 501(c)(4) organizations and insiders Insiders = Disqualified Persons Board members Officers Family members Related corporations, partnerships, LLCs, etc. Certain Employees

20 Excess Benefit Transactions (cont d) Disqualified person gets excess benefit Payments for services Compensation Sales transactions Leases Loans Use of assets

21 Excess Benefit Transactions (cont d) Rebuttable Presumption of Reasonableness Independent board members Disqualified person not participating or present Appropriate comparability data Document decision in writing Importance of Conflict of Interest Policy

22 Lorri A. Dunsmore, Partner Lorri Dunsmore has over 25 years of experience representing individuals, businesses and tax-exempt organizations in a variety of charitable, wealth transfer, business succession and federal tax matters. Lorri regularly works with individuals and tax-exempt organizations to address a wide range of tax and state law issues impacting charitable giving, formation of nonprofits and addressing the specialized needs of taxexempt organizations including private foundation excise taxes, excess benefit transactions, lobbying restrictions, fundraising law compliance, commercial co-ventures and joint ventures. Lorri has spoken and written about numerous issues related to nonprofit governance and compliance matters and has worked with a variety of tax-exempt organizations to provide training for board members and officers. Lorri's practice also includes advising clients on the formation, operation, management and transfer of family business entities. She works closely with families to implement business succession and wealth transfer strategies. Lorri has experience advising privately held corporations, limited liability companies and professional corporations on issues ranging from formation to dissolution. Anthony J. McCormick, Associate Anthony (Tony) McCormick is an associate with the firm's Trust & Estate Planning practice. Tony counsels his clients in both the tax and non-tax aspects of estate planning, with a specific focus on estate planning strategies to efficiently minimize taxes through the creation of wills, trusts, business entities, and charitable organizations and the use of gifts, sales, and other wealth-transfer strategies. Tony's practice also includes advising individuals and tax-exempt organizations on the wide range of legal issues affecting charitable giving, the formation of nonprofit organizations, and the organizational steps required to maintain a charitable organization's tax exempt status.

Getting Tax-exempt. Linnea R. Michel, Esq. Legal Center for Nonprofits, Inc.

Getting Tax-exempt. Linnea R. Michel, Esq. Legal Center for Nonprofits, Inc. Getting Tax-exempt Linnea R. Michel, Esq. Legal Center for Nonprofits, Inc. 2014 Legal Center for Nonprofits, Inc. Information provided herein is not legal advice and is intended for informational purposes