Difference between revisions of "How to obtain tax-exempt status"
From NGO Handbook
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Thus, an NGO funded by a “single donor, family, or corporation” may qualify as a pubic charity, not for its activities, but because of its relationship with a publicly supported organization.<ref>Ibid.</ref> To satisfy requirement (2) that the NGO is operated, supported, and controlled by or in connection with a publicly supported organization, the NGO must have a specific type of relationship with the publicly supported organization.<ref>Ibid, p. 41.</ref> The NGO must be either:<ref>Ibid.</ref> | Thus, an NGO funded by a “single donor, family, or corporation” may qualify as a pubic charity, not for its activities, but because of its relationship with a publicly supported organization.<ref>Ibid.</ref> To satisfy requirement (2) that the NGO is operated, supported, and controlled by or in connection with a publicly supported organization, the NGO must have a specific type of relationship with the publicly supported organization.<ref>Ibid, p. 41.</ref> The NGO must be either:<ref>Ibid.</ref> | ||
| − | + | *Operated, supervised or controlled by a publicly supported organization | |
| − | + | *Supervised or controlled in connection with a publicly supported organization or | |
| − | + | *Operated in connection with a publicly supported organization. | |
For the first two types of relationships to satisfy requirement (1) that the NGO is organized and operated to carry out the purposes of the publicly supported organization, the NGO needs to satisfy the ''organizational'' and ''operational'' tests. The organizational test is met if the articles of organization of the NGO:<ref>Ibid.</ref> | For the first two types of relationships to satisfy requirement (1) that the NGO is organized and operated to carry out the purposes of the publicly supported organization, the NGO needs to satisfy the ''organizational'' and ''operational'' tests. The organizational test is met if the articles of organization of the NGO:<ref>Ibid.</ref> | ||
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For the third type of relationship to satisfy requirement (1) that the NGO is organized and operated to carry out the purposes of the publicly supported organization, the NGO needs to meet the ''organizational'', ''responsiveness'', ''integral-part'', and ''operational tests''.<ref>For more detailed information on these tests, see ibid, pp. 42-44.</ref> | For the third type of relationship to satisfy requirement (1) that the NGO is organized and operated to carry out the purposes of the publicly supported organization, the NGO needs to meet the ''organizational'', ''responsiveness'', ''integral-part'', and ''operational tests''.<ref>For more detailed information on these tests, see ibid, pp. 42-44.</ref> | ||
| − | The '''organizational test''' is similar to that | + | The '''organizational test''' is similar to that of the first two types of relationships. The test is met if the NGO’s governing instrument:<ref>Ibid, p. 42. For more information on the designate requirement, see ibid at pp. 42-43..</ref> |
| − | + | *Limits its purpose to supporting a publicly supported organization | |
| − | + | *Designates the organization the NGO is “operated, supervised, or controlled by” | |
| − | + | *Does not give “express powers inconsistent with [its] purpose.” | |
The '''responsiveness test''' is met if the NGO is responsive to the publicly supported organization by either:<ref>Ibid, p. 43.</ref> | The '''responsiveness test''' is met if the NGO is responsive to the publicly supported organization by either:<ref>Ibid, p. 43.</ref> | ||
| − | + | *The publicly supported organization electing, appointing, or maintaining a close relationship with the officers of the NGO, or | |
| − | + | *The NGO is a trust and the publicly supported organization is the named beneficiary. | |
The '''integral-part test''' is met if the NGO is significantly involved in the operations of the publicly supported organization and the publicly supported organization is dependant on the NGO because:<ref>Ibid.</ref> | The '''integral-part test''' is met if the NGO is significantly involved in the operations of the publicly supported organization and the publicly supported organization is dependant on the NGO because:<ref>Ibid.</ref> | ||
| − | + | *The NGO is performing the functions or carrying out the purpose of the publicly supported organization or | |
| − | + | *The NGO is making payments of “substantially all of its income to or for the use of” the publicly supported organization and the amount is significant to the publicly supported organization. | |
The '''operational test''' has limited applicability because the integral-part test is more specific.<ref>Ibid.</ref> An NGO can fail the operational test and the integral-part test if the NGO performs activities that do not constitute activities that, but for the NGO, a publicly supported organization would have performed.<ref>Ibid.</ref> | The '''operational test''' has limited applicability because the integral-part test is more specific.<ref>Ibid.</ref> An NGO can fail the operational test and the integral-part test if the NGO performs activities that do not constitute activities that, but for the NGO, a publicly supported organization would have performed.<ref>Ibid.</ref> | ||
Revision as of 11:33, 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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