Difference between revisions of "How to obtain tax-exempt status"
From NGO Handbook
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====Section 509 (a)(1) organizations==== | ====Section 509 (a)(1) organizations==== | ||
| − | The NGOs found in this public charity category include: | + | The NGOs found in this public charity category include: |
| + | *Churches | ||
| + | *Educational organizations | ||
| + | *Hospitals or medical research organizations | ||
| + | *Endowment funds | ||
| + | *Government units | ||
| + | *Publicly supported organizations.<ref>Internal Revenue Service, Tax-Exempt Status for Your Organization at 30.</ref> | ||
| + | While the former organizations are specifically defined by the IRS,<ref>For specific definitions of the first five types of NGOs, see Internal Revenue Service, Tax-Exempt Status for Your Organization at 30.</ref> to be identified as a publicly supported organization, an NGO must pass several tests. Unless an NGO is committed to raising funds from the public it may want to consider an alternative public charity type.<ref>Internal Revenue Service, Applying for 501(c)(3) Tax-Exempt Status at 6.</ref> | ||
| − | An NGO qualifies as publicly supported if it passes the ''one-third support test'', that is, if it normally receives one-third of its support from the government, public contributions, or a combination of the two.<ref>Internal Revenue Service, Tax-Exempt Status for Your Organization at 31.</ref> Normally is defined as, if in the four previous tax years before the current year, the NGO met the test on an aggregate basis.<ref>Ibid. See page 16 for the computation period used for newer organizations.</ref> If the NGO cannot pass the one-third support test, it must pass the ''facts and circumstances test'', that is, an NGO qualifies as publicly supported if under all the facts and circumstances, the NGO normally receives substantial support from the government, the public, or a combination of the two.<ref>Ibid. If an NGO is unable in a later tax year to normally meet this test, it will not in itself prevent the NGO from meeting the test. Ibid.</ref> | + | An NGO qualifies as publicly supported if it passes the ''one-third support test'', that is, if it normally receives one-third of its support from the government, public contributions, or a combination of the two.<ref>Internal Revenue Service, Tax-Exempt Status for Your Organization at 31.</ref> Normally it is defined as, if in the four previous tax years before the current year, the NGO met the test on an aggregate basis.<ref>Ibid. See page 16 for the computation period used for newer organizations.</ref> If the NGO cannot pass the one-third support test, it must pass the ''facts and circumstances test'', that is, an NGO qualifies as publicly supported if under all the facts and circumstances, the NGO normally receives substantial support from the government, the public, or a combination of the two.<ref>Ibid. If an NGO is unable in a later tax year to normally meet this test, it will not in itself prevent the NGO from meeting the test. Ibid.</ref> |
The facts and circumstances test is broken down into two requirements, the ''10% of support requirement'' and the ''attraction of public support requirement''. Under the first requirement, the NGO receives substantial support from the government and/or the public, if the total amount normally received by an NGO from these two sources is at least 10% of its total support.<ref>Ibid.</ref> The second requirement is determined by whether an NGO is organized and operated “to attract new and additional public or government support on a continuous basis.”<ref>Ibid.</ref> This requirement is met if the NGO maintains “continuous and bona fide” programs for soliciting funds from a broad base or it performs activities to attract support from the government or other public charities.<ref>Ibid.</ref> Whether the program is continuous and bona fide is partly determined by whether the scope of the NGO’s fund-raising is “reasonable in light of its charitable activities.” <ref>Ibid.</ref> | The facts and circumstances test is broken down into two requirements, the ''10% of support requirement'' and the ''attraction of public support requirement''. Under the first requirement, the NGO receives substantial support from the government and/or the public, if the total amount normally received by an NGO from these two sources is at least 10% of its total support.<ref>Ibid.</ref> The second requirement is determined by whether an NGO is organized and operated “to attract new and additional public or government support on a continuous basis.”<ref>Ibid.</ref> This requirement is met if the NGO maintains “continuous and bona fide” programs for soliciting funds from a broad base or it performs activities to attract support from the government or other public charities.<ref>Ibid.</ref> Whether the program is continuous and bona fide is partly determined by whether the scope of the NGO’s fund-raising is “reasonable in light of its charitable activities.” <ref>Ibid.</ref> | ||
Revision as of 10:56, 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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