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 only. Consult an attorney before acting on the information contained herein. Attendance at this program does not result in an attorney-client relationship.
This program will provide an understanding of: Basic principles underlying tax-exempt status; How to choose either IRS 1024, 1023, or 1023-EZ; Eligibility for 1023-EZ; Highlights of IRS 1023 application; Process steps to tax-exempt status. The focus of this program is on 1023-EZ. Details of original 1023 will be online at www.legalcenterfornonprofits.org/resources/ Scope of this Program
Nonprofits To apply for tax-exempt status: Charities use IRS 1023 Other exempts use IRS 1024 A few nonprofits are not tax-exempt (very rare). Tax-exempts Charities 501(c)(3) Other 501(c) All charities are tax-exempt nonprofits. The Nonprofit Sector Quick Review All tax-exempts are NOT charities; e.g., social clubs, fraternal organizations.
Your organization is ready to apply to IRS when it has: Planned activities & well-developed sense of mission & goals; Formed its Board of Directors; Organized as either a corporation or unincorporated association; Received an Employer Identification Number (EIN); Identified its appropriate federal tax classification. For descriptions of various types of organizations, go to: http://www.irs.gov/charities-&-non-profits/types-of-tax- Exempt-Organizations Developed a budget and identified funding streams. Getting Ready to Apply
501(c)(3) (Apply with 1023) Religious Educational Charitable Scientific Literary Exempt Purposes (For full list, see IRS Pub 557, pp. 65-66.) Other (Apply with 1024 unless otherwise indicated) Title holding corporation for exempt organization 501(c)(2) Civic leagues, social welfare, local associations of employees 501(c)(4) Labor, agricultural & horticultural organizations 501(c)(5) Business Leagues, chambers of commerce, real estate boards, etc. 501(c)(6) Social and recreational clubs 501(c)(7) Testing for public safety Post or organization of past or present members of the armed forces 501(c)(19) To foster national or international amateur sports Child care organizations 501(k) (Apply with 1023) competition (may also be 501(c)(3) educational organization) Prevention of cruelty to children Political organizations 527 (Apply with 8871) Prevention of cruelty to animals Getting Ready to Apply
Certain organizations are exempt from the application requirement: Churches, inter-church organizations, conventions or associations of churches, or integrated auxiliaries of churches; Any organization (other than a private foundation) having annual gross receipts of less than $5,000. Certain organizations may self-declare tax-exempt status: 501(c)(4) social welfare 501(c)(5) labor 501(c)(6) business leagues To Apply or Not to Apply
501(c)(4), 501(c)(5), 501(c)(6) entities may self-declare tax-exempt status; but consider: No Determination Letter from IRS, which may be important in grant-seeking, or audit situations. Organization must still file annual reports and otherwise follow exempt organization rules. IRS is currently scrutinizing self-declarers compliance. Cost savings because no IRS user fee, attorney or other preparer fees to pay. To Apply or Not to Apply
Why apply for 501(c)(3) charity status? Primary benefits of tax-exempt status: Tax-exemption Federal income tax; State income, sales tax; for some entities, property tax. Deductibility of contributions Charitable 501(c)(3) organizations, except organizations that test for public safety; 501 (c)(19) Veterans organizations. Business expense deduction may be available when charitable deduction is not. Grants generally only available to 501(c)(3) ORGs (some exceptions) Preferential postal rates for mailings in furtherance of exempt purpose Benefits of Tax-exempt Status
Some might consider these disadvantages : Must serve public rather than private interests (public benefit requirement); Dependent on public support; Governed by Board of Directors rather than one individual; Private persons may not benefit from activities of ORG, except for reasonable compensation, reimbursement (private inurement doctrine); Not exempt from tax on income generated by unrelated activities (i.e. Unrelated Business Income Tax aka UBIT); Legislative or lobbying activity is limited, and political activity prohibited. Limitations on Charities
Organized and operated for charitable purposes Organizational Test: Limit its purposes to one or more of the exempt purposes listed in IRC section 501(c)(3), Ensures no nonexempt activity permitted, and Ensures assets are permanently dedicated to exempt purpose. Operational Test: Principal activities further exempt purposes; limits participation in certain kinds of activities and absolutely refrain from others. No private inurement; Limited legislative activity; No political activity. Key Themes in Application
Pillars of Charitability 1. Public Benefit 2. Public Support 3. Independence of Directors Key Themes in Application
Public Benefit is demonstrated in answers to questions on: Purpose of the organization; Activities of the organization, described in both application and narrative attachment; Financial section; that is, where is the money going? Key Themes in Application
Public Support is demonstrated in answers to questions on: Fundraising; Make-up of Board of Directors; Financial section; that is, Where is the money coming from? Key Themes in Application
Independence of Directors is demonstrated in answers to questions on: Board of Directors, generally; Conflicts of interest; Relationships among Directors; Relationships between Directors and the organization; Contractual and other relationships and transactions with/among Directors and/or organization. Key Themes in Application
IRS assumes all organizations are private foundations ( PF ) until proven otherwise. The 1023 is the vehicle a nonprofit must use to demonstrate that it is not a private foundation. PFs are based on private support, usually one family group or other source of funds; PFs do not solicit the public for funds; May be philanthropic or intended for estate planning purposes; Subject to stricter tax rules. The 1023 is designed to demonstrate the charitable nature of the organization. Foundation in entity name does not lead to PF status. Application s Purpose
Three versions of 1023 available: Original 12 pages plus additional schedules, fillable & saveable pdf; Interactive same as original but online form has icons that pull up sections of the Instructions; 1023-EZ 2 ½ pages, completely electronic, but must satisfy eligibility requirements. Old Form New Form
When to use which form? Small uncomplicated organizations with expected income of less than $50,000 per year for each of past 3 years or projected for coming 3 years should use 1023-EZ. User Fee = $400. Eligibility Worksheet determines if 1023-EZ is available for your ORG. All other ORGs must use original or interactive 1023. User fee is $400 if average expected gross receipts is <$10K User fee is $850 if average expected gross receipts is >$10K Old Form New Form
Step 1: Eligibility Worksheet (pages 11-17 of Instructions) Available at http://www.irs.gov/pub/irs-pdf/i1023ez.pdf 1023-EZ
1023-EZ
Quick List of ORGs Not Eligible for 1023-EZ Gross receipts greater than $50,000 (actual past or projected future 3 years) Schools Hospitals Churches Foreign LLCs Successors to for-profits And many other specialized types of entities 1023-EZ
Small ORGs that were automatically revoked may use 1023-EZ 1023-EZ
Step 2: Go to Pay.gov and create account 1023-EZ
Create pay.gov account and log in first! If you don t create an account and log in before going to form, you will not be able to save the form to return to it later, make corrections, etc. 1023-EZ
https://www.pay.gov/public/login 1023-EZ
1023-EZ
1023-EZ
Eligibility attestation Contact Info Board List Formation Info & magic words organized & operated exclusively for charitable Operation of Law
More magic words! Limitations on charities Choose a if relying on fundraising; choose b if you will rely in part on fees.
Note: signature is under penalties of perjury! For ORGS that have been automatically revoked.
After completing the form: Prompt for payment of user fee via pay.gov. Credit or debit card Funds transfer from bank account Can only submit when fee is paid. Asks for email to send confirmation. 1023-EZ
Confirmation email for electronic 1023-EZ You may receive a letter from IRS indicating 1023 was received, 3-4 weeks after submitting paper 1023. Sometime later, you will receive: Determination letter; or Request for Additional Information followed by Determination Letter; or Assignment to Agent for development and detailed questions. 1023-EZ determinations issuing in about one month! Be patient, but can call (877) 829-5500 for status or other questions. What happens next?
Sandy Deja, Prepare Your Own 501(c)(3) Application, 2012; available from author at P.O. Box 10525, Fairbanks AK 99710; or email to c3book@aol.com. IRS, Pub 4220, Applying for 501(c)(3) Tax-Exempt Status IRS, Pub 557, Tax-exempt Status for your Organization. IRS, Top Ten Reasons Tips to Shorten Tax-exempt Application Process. http://www.irs.gov/charities-&- Non-Profits/Top-Ten-Reasons-for-Delays-in-Processing- Exempt-Organization-Applications www.irs.gov/charities-&-non-profits has various online resources to help with application. Resources
IRS website: http://www.irs.gov/charities-&-non- Profits/Applying-for-Tax-Exempt-Status IRS Form 1023 and IRS Instructions to Form 1023. IRS Form 1024 and IRS Instructions to Form 1024. US Treasury FAQ, Protecting Charitable Giving, available at http://www.treasury.gov/resource-center/terrorist-illicit- finance/documents/treasury%20charity%20faqs%206-4- 2010%20FINAL.pdf US Treasury, Anti-terrorist Financing Guidelines, available at http://www.treasury.gov/resource-center/terrorist-illicitfinance/documents/guidelines_charities.pdf Resources