Difference between revisions of "How to obtain tax-exempt status"
From NGO Handbook
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After obtaining tax-exempt status, if an NGO experiences changes to its status or operations, the organization is required to perform certain acts. If a tax-exempt NGO experiences changes to its “legal structure” it must file a new tax exemption application.<ref>Ibid. at 16</ref> If an NGO is inactive, its tax exemption is not terminated, but the NGO must still file annual returns with the IRS.<ref>Ibid. For more information on section 501(c)(3) filing requirements, see § 2.3.2.</ref> If the NGO is “liquidated, dissolved, terminated or substantially contracted”, the NGO must file an annual return by the fifteenth day of the fifth month after the change.<ref>Ibid.</ref> If the NGO amends its articles of organization or bylaws it must send a conformed copy to the IRS area manager.<ref>Ibid.</ref> | After obtaining tax-exempt status, if an NGO experiences changes to its status or operations, the organization is required to perform certain acts. If a tax-exempt NGO experiences changes to its “legal structure” it must file a new tax exemption application.<ref>Ibid. at 16</ref> If an NGO is inactive, its tax exemption is not terminated, but the NGO must still file annual returns with the IRS.<ref>Ibid. For more information on section 501(c)(3) filing requirements, see § 2.3.2.</ref> If the NGO is “liquidated, dissolved, terminated or substantially contracted”, the NGO must file an annual return by the fifteenth day of the fifth month after the change.<ref>Ibid.</ref> If the NGO amends its articles of organization or bylaws it must send a conformed copy to the IRS area manager.<ref>Ibid.</ref> | ||
| − | ==Classes of | + | ==Classes of Section 501(c)(3) Organizations== |
Section 501(c)(3) organizations fall into two classes. In applying for tax-exempt status, an NGO must indicate whether it is a private foundation or public charity. By definition, private foundations have a limited financial support base, compared to the broad base of financial support of public charities.<ref>Internal Revenue Service, Applying for 501(c)(3) Tax-Exempt Status., at 5.</ref> Unlike a public charity, a private foundation is subject to excise taxes, restrictions on financial dealings, and there is limited deductibility for contributions.<ref>Internal Revenue Service, Tax-Exempt Status for Your Organization, at 27</ref> An NGO is considered a private foundation unless it falls under subsection (a) of 26 U.S.C. § 509 of the Internal Revenue Code (section 509), because the organization has broad public support or actively supports a publicly supported organization. | Section 501(c)(3) organizations fall into two classes. In applying for tax-exempt status, an NGO must indicate whether it is a private foundation or public charity. By definition, private foundations have a limited financial support base, compared to the broad base of financial support of public charities.<ref>Internal Revenue Service, Applying for 501(c)(3) Tax-Exempt Status., at 5.</ref> Unlike a public charity, a private foundation is subject to excise taxes, restrictions on financial dealings, and there is limited deductibility for contributions.<ref>Internal Revenue Service, Tax-Exempt Status for Your Organization, at 27</ref> An NGO is considered a private foundation unless it falls under subsection (a) of 26 U.S.C. § 509 of the Internal Revenue Code (section 509), because the organization has broad public support or actively supports a publicly supported organization. | ||
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Private foundations are NGOs that are not generally publicly supported. Thus, this class of NGOs is subject to excise taxes on net investment income. Additionally, in comparison to a public charity, a private foundation faces:<ref>Ibid. at 27. See also ibid., for samples.</ref> | Private foundations are NGOs that are not generally publicly supported. Thus, this class of NGOs is subject to excise taxes on net investment income. Additionally, in comparison to a public charity, a private foundation faces:<ref>Ibid. at 27. See also ibid., for samples.</ref> | ||
| − | + | *Restrictions on self-dealing between the NGO and those with an interest in the organization | |
| − | + | *Requirements to “annually distribute income for charitable purposes” | |
| − | + | *Limits on its private business holdings | |
| − | + | *Requirements to include specific provisions in its enabling documents regarding investment income and expenditures. | |
Some private foundations may qualify as private operating foundations (POFs), which has some advantages. | Some private foundations may qualify as private operating foundations (POFs), which has some advantages. | ||
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====Private Operating Foundations==== | ====Private Operating Foundations==== | ||
| − | <blockquote>''Private | + | <blockquote>''Private Foundations versus Private Operating Foundations'' |
* POFs can receive grants from a private foundation and not have to distribute it within one year and the funds “nevertheless may be considered a qualifying distribution by the donating private foundation.”<ref>Ibid., at 45. The IRS does not define qualifying distribution.</ref> | * POFs can receive grants from a private foundation and not have to distribute it within one year and the funds “nevertheless may be considered a qualifying distribution by the donating private foundation.”<ref>Ibid., at 45. The IRS does not define qualifying distribution.</ref> | ||
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A private foundation is considered a POF if it meets the ''assets'', ''support'', or ''endowment'' test and makes qualifying distributions of substantially all (at least 85%) “of the lesser of its adjusted net income or minimum investment return” towards activities related to its organizational purposes.<ref>Ibid.</ref> The assets test is met if 65% or more of the POF’s assets are:<ref>Ibid.</ref> | A private foundation is considered a POF if it meets the ''assets'', ''support'', or ''endowment'' test and makes qualifying distributions of substantially all (at least 85%) “of the lesser of its adjusted net income or minimum investment return” towards activities related to its organizational purposes.<ref>Ibid.</ref> The assets test is met if 65% or more of the POF’s assets are:<ref>Ibid.</ref> | ||
| − | + | *Devoted “to the active conduct of an exempt activity and/or to a functionally related [[NGO-Business Partnerships|business]]” | |
| − | + | *“Stock of a corporation controlled by the foundation” | |
| − | + | *A combination thereof. | |
| − | + | ||
The support test is met if:<ref>Ibid.</ref> | The support test is met if:<ref>Ibid.</ref> | ||
Revision as of 10:36, 11 August 2008
This article is intended to provide a general description of the process for obtaining 501(c)(3) status under the U.S. Internal Revenue Code and is not intended to substitute for the advice of private counsel on specific issues related to the IRC or the 501(c)(3) application process. Original draft by Bobby C. Neal.
In the United States, a non-governmental organization (NGO) is generally subject to federal, state, and local taxes unless and until the organization qualifies for tax-exempt status. This article focuses on the process for obtaining a federal income tax exemption for NGOs.[1] NGOs that meet the criteria set forth in 26 U.S.C. § 501 of the Internal Revenue Code (section 501) are eligible for a federal tax exemption.[2] The benefits to obtaining tax exempt recognition by the Internal Revenue Service (IRS) include: income tax exemption, eligibility to receive tax-deductible contributions, possible exemption from certain employment taxes, and reduced postal rates. Section 501 describes the organizations that are eligible for tax-exempt status. The most significant category of tax-exempt organizations is section 501(c)(3).
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