Difference between revisions of "How to obtain tax-exempt status"
From NGO Handbook
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The annual returns are due “the fifteenth day of the fifth month after the end of the [NGO’s] accounting period.”<ref> Ibid. Exempt NGOs that are not political organizations, but that have political taxable income must also file Form 1120-POL for the year. Ibid., at 10. Exempt NGOs may set up a separate and segregated fund that is treated as an independent political organization, so that the income is not attributed to the exempt NGO. Ibid. Section 501(c)(3) organizations may lose their tax exemption for campaigning for or against any political candidate.<ref>Ibid., at 10-11.</ref> If an NGO’s application is pending, the NGO should complete and file the appropriate Form 990 and indicate its application is pending.<ref>Ibid.</ref> There are penalties for failing to file an annual return. | The annual returns are due “the fifteenth day of the fifth month after the end of the [NGO’s] accounting period.”<ref> Ibid. Exempt NGOs that are not political organizations, but that have political taxable income must also file Form 1120-POL for the year. Ibid., at 10. Exempt NGOs may set up a separate and segregated fund that is treated as an independent political organization, so that the income is not attributed to the exempt NGO. Ibid. Section 501(c)(3) organizations may lose their tax exemption for campaigning for or against any political candidate.<ref>Ibid., at 10-11.</ref> If an NGO’s application is pending, the NGO should complete and file the appropriate Form 990 and indicate its application is pending.<ref>Ibid.</ref> There are penalties for failing to file an annual return. | ||
| − | ===Donor | + | ===Donor Information=== |
Tax-exempt NGOs must provide certain donors with information regarding their charitable contribution. For contributions over $75, NGOs must provide donors with a disclosure statement.<ref>Internal Revenue Service, Applying for 501(c)(3) Tax-Exempt Status, at 8-9. For more information on the acknowledgment and reporting requirements with respect to contributions, see Internal Revenue Service, Tax-Exempt Status for Your Organization, at 12-13.</ref> Additionally, for a donor to deduct a charitable contribution of $250 or more, the NGO must provide the donor with a written acknowledgment.<ref>Internal Revenue Service, Applying for 501(c)(3) Tax-Exempt Status, pages 8-9.</ref> | Tax-exempt NGOs must provide certain donors with information regarding their charitable contribution. For contributions over $75, NGOs must provide donors with a disclosure statement.<ref>Internal Revenue Service, Applying for 501(c)(3) Tax-Exempt Status, at 8-9. For more information on the acknowledgment and reporting requirements with respect to contributions, see Internal Revenue Service, Tax-Exempt Status for Your Organization, at 12-13.</ref> Additionally, for a donor to deduct a charitable contribution of $250 or more, the NGO must provide the donor with a written acknowledgment.<ref>Internal Revenue Service, Applying for 501(c)(3) Tax-Exempt Status, pages 8-9.</ref> | ||
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===Disclosures=== | ===Disclosures=== | ||
| − | An NGO must make available for public inspection its tax-exempt application and all supporting documents, as well as its last three annual returns.<ref>See Internal Revenue Service, Tax-Exempt Status for Your Organization, at 13; Internal Revenue Service, Applying for 501(c)(3) Tax-Exempt Status, at 8; Internal Revenue Service, “Application for Recognition of Exemption,” http://www.irs.gov/charities/article/0,,id=96109,00.html.</ref> The documents must be available during regular business hours and the NGO must furnish copies of the documents upon request unless they are widely available | + | An NGO must make available for public inspection its tax-exempt application and all supporting documents, as well as its last three annual returns.<ref>See Internal Revenue Service, Tax-Exempt Status for Your Organization, at 13; Internal Revenue Service, Applying for 501(c)(3) Tax-Exempt Status, at 8; Internal Revenue Service, “Application for Recognition of Exemption,” http://www.irs.gov/charities/article/0,,id=96109,00.html.</ref> The documents must be available during regular business hours and the NGO must furnish copies of the documents upon request unless they are widely available (i.e. on the internet).<ref>Internal Revenue Service, Tax-Exempt Status for Your Organization at 14.</ref> If any of the information in the application materials is a trade secret or otherwise confidential under the law, the NGO may withhold the specific material from public inspection.<ref>Ibid, pages 13-14.</ref> |
| − | ===Unrelated | + | ===Unrelated Business Income=== |
An exempt NGO may still be liable for tax on unrelated business income. Unrelated business income is income “not substantially related to the charitable, educational, or other purpose that is the basis for the [NGO’s] tax exemption.”<ref>Ibid, p. 9</ref> Tax-exempt NGOs must file tax returns for any unrelated business income of $1,000 or more by using ''Form 990-T'', in addition to its annual return.<ref>Ibid.</ref> | An exempt NGO may still be liable for tax on unrelated business income. Unrelated business income is income “not substantially related to the charitable, educational, or other purpose that is the basis for the [NGO’s] tax exemption.”<ref>Ibid, p. 9</ref> Tax-exempt NGOs must file tax returns for any unrelated business income of $1,000 or more by using ''Form 990-T'', in addition to its annual return.<ref>Ibid.</ref> | ||
| − | ===Reporting | + | ===Reporting Employer’s Taxes=== |
If an NGO has employees it must file ''Form 941'' Employer’s Quarterly Federal Tax Return. If an NGO does not have a payroll during a quarter or does not have employees, the NGO does not need to file the form.<ref>Rural Community Empowerment Program, “501(c)(3) Fact Sheet.”</ref> However, it may be better to complete the return and file it regardless.<ref>Ibid.</ref> A common issue raised by the IRS with NGOs is misclassifying employees as independent contractors.<ref>Ibid.</ref> | If an NGO has employees it must file ''Form 941'' Employer’s Quarterly Federal Tax Return. If an NGO does not have a payroll during a quarter or does not have employees, the NGO does not need to file the form.<ref>Rural Community Empowerment Program, “501(c)(3) Fact Sheet.”</ref> However, it may be better to complete the return and file it regardless.<ref>Ibid.</ref> A common issue raised by the IRS with NGOs is misclassifying employees as independent contractors.<ref>Ibid.</ref> | ||
Revision as of 11:41, 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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