IRC § 501(c)(3) tax exempt status 8/23/07
Advance ruling period eliminated 9/8/08
The IRS issued final, temporary and proposed regulations on September 8, 2008 doing away with advance rulings that granted public charity status for an initial 5-year period but required them to demonstrate after the initial 5-year period that they in fact received a substantial part of their support from public sources to receive a final determination letter. The temporary regulations instead provide that an organization qualifies as a public charity (rather than a private foundation) for its first 5 years if it can show in its initial application that it expects to meet the public support test, regardless of the level of actual support it subsequently receives during the 5 years. The regulations eliminate Form 8734, Support Schedule for Advance Ruling Period, which is no longer needed. After the first 5 years organizations must demonstrate their public support on Schedule A of the revised Form 990, Public Charity Status and Public Support.
Organizations that received an advance ruling that will expire after June 8, 2008 are treated as public charities for their first five years of existence, regardless of actual public support. These organizations will not have to file Form 8734 at the end of the advance ruling period. Contributors taking a charitable deduction can rely on the advance ruling as though it were a definitive ruling letter.
This change occurred because of the recent redesign of Form 990, filed by exempt organizations, enhances transparency and makes it easier for for exempt organizations to show that they are ‘publicly supported’ charities, rather than private foundations. The IRS can investigate public support by reviewing the Schedule A, so there is no need for an advance ruling. Organizations will begin filing the new Form 990 in 2009 for their 2008 tax year.
Organizations that have already received an advance ruling under the old regime, but are still in their first 5 years of existence, can use their advance ruling letter as their final determination letter.
In addition to the streamlined approval process, the new regulations include other modifications necessary to implement the redesigned Form 990. IR-2008-102.
Benefits of § 501(c)(3) exempt status
- exemption from federal income tax;
- eligibility to receive tax-deductible charitable contributions;
- some organizations may be exempt from certain employment taxes;
- 501(c)(3) status assures foundations and other grant-making institutions that they are issuing grants or sponsorships to permitted beneficiaries;
- state officials may grant exemption from state income, sales, and property taxes;
- the U.S. Postal Service offers reduced postal rates to certain organizations
Most organizations must file an application with, and be recognized by, the IRS.
The IRS has issued Revenue Procedure 2007-52 <http://www.irs.gov/irb/2007-30_IRB/ar16.html>, which provides procedures for issuing determination letters and rulings on exempt status under sections 501 and 521 of the Internal Revenue Code, effective July 23, 2007.
Applications are normally processed in the order of receipt by the Service. Expedited handling may be approved where a written request contains a compelling reason. Circumstances generally warranting expedited processing include:
- A grant to the applicant is pending and the failure to secure the grant may have an adverse impact on the organization’s ability to continue to operate.
- The purpose of the newly created organization is to provide disaster relief to victims of emergencies such as flood and hurricane.
- There have been undue delays in issuing a determination letter or ruling caused by a Service error.
How do you apply for 501(c)(3) status?
Forms to File to apply for 501(c)(3) status
FORM SS-4 An employer identification number (EIN) is your account number with the IRS and is required regardless of whether the organization has employees. Include the organization’s EIN on all correspondence to the IRS. Apply for an EIN by completing Form SS-4, Application for Employer Identification Number, by calling toll-free (800) 829-4933, or by submitting an online version of the form via http://www.irs.gov. Form SS-4 is available at Social Security Administration offices, by request through the IRS at (800) 829-3676, and by downloading the form from the IRS Web site at www.irs.gov (See Publication 1635)
Form 1023 Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, and mail to the address indicated in the instructions.
User fee The IRS will not process an application until the required user fee is paid. If your average annual gross receipts have or will exceed $10,000 annually over a 4-year period, the user fee is $750. If your gross receipts have not and or will not exceed $10,000 annually over a 4-year period, the required user fee payment is $300.
Form 872-6 In some cases, an organization filing Form 1023 must also file Form 872-6 consenting to an extension of the statute under which the IRS can assess tax on net investment income for private foundations.
Form 2848 Power of Attorney and Declaration of Representative, if someone other than your principal officer or director will represent you on matters about the application.
Form 8821 Tax Information Authorization, if you want the IRS to be able to provide information about your application to an employee other than a principal officer or director.
When to File
Most organizations must file Form 1023 by the end of the 15th month after they were created, with a 12-month extension available.
An organization that is not a private foundation is not required to file Form 1023 unless its annual gross receipts are normally more than $5,000. An organization must file Form 1023 within 90 days of the end of the year in which it exceeds this threshold.
An organization that files its application before the deadline will be recognized as tax exempt under section 501(c)(3) of the IRC from the date of its creation. An organization that files an application after the deadline may be recognized as tax exempt from the date of the application; it may also request exemption retroactive as of the date of creation.
The IRS tax specialist reviewing an application may request additional information in writing. If all information received establishes that an organization meets the requirements for exemption, the IRS will issue a determination letter recognizing the organization’s exempt status and providing its public charity classification. This is an important document that should be kept in the organization’s permanent records.
Qualifications for § 501(c)(3) exempt status
There are 3 key components to be exempt under section 501(c)(3):
Be organized as a corporation, trust, or unincorporated association, and its organizing documents (articles of incorporation, trust documents,articles of association) must:
- limit its purpose to those described in section 501(c)(3) of the IRC;
- not expressly permit activities that do not further its exempt purposes, i.e., unrelated activities; and
- permanently dedicate its assets to exempt purposes and provide that on dissolution of the organization the assets will be transferred to another 501(c)(3) entity
A substantial portion of an organization’s activities must further its exempt purpose(s). Certain other activities are prohibited or restricted including, but not limited to:
- absolutely refrain from participating in the political campaigns of candidates for local, state, or federal office
- restrict its lobbying activities to an insubstantial part of its total activities
- ensure that its earnings do not inure to the benefit of any private shareholder or individual
- not operate for the benefit of private interests such as those of its founder, the founder’s family, its shareholders or persons controlled by such interests
- not operate for the primary purpose of conducting a trade or business that is not related to its exempt purpose
- not have purposes or activities that are illegal or violate fundamental public policy
3. Exempt purpose
An organization must have one or more exempt purposes, stated in its organizing document. IRC § 501(c)(3) lists the following exempt purposes:
- fostering national or international sports competition
- preventing cruelty to children or animals, and
- testing for public safety
CHARITABLE Charitable organizations conduct activities that promote:
- relief of the poor, the distressed, or the underprivileged
- advancement of religion
- advancement of education or science
- erection or maintenance of public buildings, monuments,or works
- lessening the burdens of government
- lessening neighborhood tensions
- eliminating prejudice and discrimination
- defending human and civil rights secured by law
- combating community deterioration and juvenile delinquency
EDUCATIONAL Educational organizations include:
- schools such as:
- a primary or secondary school
- a college, or
- a professional or trade school
- organizations that conduct public discussion groups, forums, panels, lectures, or similar programs
- organizations that present a course of instruction by means of correspondence or through the use of television or radio
- museums, zoos, planetariums, symphony orchestras, or similar organizations
- nonprofit day-care centers
- youth sports organizations
- The term "church" includes:
- mosques, and
- similar types of organizations
- Although the IRC excludes these organizations from the requirement to file an application for exemption, many churches voluntarily file applications for exemption to assure church leaders, members, and contributors that the church is tax exempt under § 501(c)(3) and qualifies for related tax benefits
- Other religious organizations that do not carry out the functions of a church may qualify, but must apply for exemption, e.g.:
- mission organizations
- speakers’ organizations
- nondenominational ministries
- ecumenical organizations, or
- faith-based social agencies
Public charity or a private foundation ?
Every organization that qualifies for tax-exempt status under section 501(c)(3) of the IRC is further classified as either a public charity or a private foundation, and different tax rules apply to the operations of each:
- Deductibility of contributions to a private foundation is more limited than deductibility of contributions to a public charity (See Publication 526, Charitable Contributions).
- Private foundations are subject to excise taxes that are not imposed on public charities (See Publication 578, Tax Information for Private Foundations and Foundation Managers).
Under § 508 every organization is automatically classified as a private foundation unless it meets one of the exceptions listed in § 509(a) (See Publication 557). Generally, a public charity has a broad base of support while a private foundation has very limited sources of support. Organizations statutorily classified as public charities under section 509(a) of the IRC are:
- organizations that provide medical or hospital care (including the provision of medical education and in certain cases, medical research)
- organizations that receive a substantial part of their support in the form of contributions from publicly supported organizations, governmental units, and/or from the general public
- organizations that normally receive not more than one-third of their support from gross investment income and more than one-third of their support from contributions, membership fees, and gross receipts from activities related to their exempt functions
- organizations that support other public charities
If the organization requests public charity classification based on receiving support from the public, it must continue to seek significant and diversified public support in later years. Unless the organization is committed to raising funds from the public, it may be more appropriate to consider alternate statutorily-based public charity classifications.
A new organization that cannot show that it has received enough public support may request an advance ruling of its status. At the end of its advance ruling period, usually 5 years, it must file a schedule showing its sources of support. If the schedule indicates sufficient public support, the organization receives a definitive ruling of its public charity status. If the organization does not meet the public support requirements in the future, it could be reclassified as a private foundation.
§ 501(c)(3) organizations are required to keep books and records detailing all activities, both nonfinancial and financial (sources of support, contributions, grants, sponsorships, and other sources of revenue). (See Publications 4221, 557, and the instructions to Forms 990, 990-EZ, and 990-PF).
Filing Requirements / Annual Information Returns
Organizations recognized as tax exempt under § 501(c)(3) of the IRC may be required to file an annual information return: Form 990, Form 990-EZ, or Form 990-PF, along with Schedules A and B.
Certain categories of organizations are excepted from filing Form 990 or Form 990-EZ including churches and very small organizations (whose gross receipts are normally $25,000 or less) (but see 990-N below).
Beginning in 2008, small tax-exempt organizations that previously were not required to file returns may be required to file an annual electronic notice, Form 990-N, Electronic Notice (e-Postcard – there will be no paper form) for Tax-Exempt Organizations not Required To File Form 990 or 990-EZ. This filing requirement applies to tax periods beginning after December 31, 2006. Organizations that do not file the notice will lose their tax-exempt status as of the filing due date of the third year.
Exceptions to the e-Postcard requirement include organizations that are included in a group return, private foundations required to file Form 990-PF, and section 509(a)(3) supporting organizations required to file Form 990 or Form 990-EZ. In addition, this filing requirement does not apply to churches, their integrated auxiliaries, and conventions or associations of churches.
Unrelated Business Income Tax
In addition to filing Form 990, 990-EZ, or 990-PF, an exempt organization must file Form 990-T if it has $1,000 or more of gross receipts from an unrelated trade or business during the year. The organization must make quarterly payments of estimated tax on unrelated business income (UBTI) if it expects its tax for the year to be $500 or more (use Form 990-W to help calculate the amount required). In general, the tax is imposed on income from a regularly carried-on trade or business that does not further the organization’s exempt purposes (other than by providing funds) (See Publication 598 and the Form 990-T instructions).
Disclosure Requirements / Public Inspection of Exemption Applications and Annual Information Returns
§ 501(c)(3) organizations must make their application (Form 1023) and the three most recent annual returns (Form 990 or Form 990-EZ) available to the public, upon request and without charge (except for a reasonable charge for copying). The IRS also makes these documents available for public inspection and copying. Private foundation returns (Form 990-PF) filed on or after March 13, 2000, are subject to the same disclosure rules. These documents must be made available at the organization’s principal office during regular business hours. Upon request, an organization must furnish copies of the application and the three most recent annual returns. The requests may be made in person or in writing. (See Publication 557)
Charitable Contributions / Substantiation and Disclosure
Organizations that are tax exempt under § 501(c)(3) must meet certain requirements for documenting charitable contributions. The federal tax law imposes 2 general disclosure rules (See Publication 1771, Charitable Contributions – Substantiation and Disclosure Requirements):
- a donor must obtain a written acknowledgment from a charity for any single 501(c)(3)9 contribution of $250 or more before the donor can claim a charitable contribution on his/her federal income tax return;
- a charitable organization must provide a written disclosure to a donor who makes a payment in excess of $75 partly as a contribution and partly for goods and services provided by the organization, for more information.
The IRS offers help through assistors and with reading material that is accessible either online, via mail, by telephone, and at IRS walk-in offices in many areas across the country. General IRS Assistance Get materials on the latest tax laws, assistance with forms and publications, and filing information through the following IRS resources:
- IRS forms and publications can be downloaded from the Internet http://www.irs.gov/
- ordered by telephone (800) 829-3676
- IRS Tax Fax (703) 368-9694 Dial from a fax machine, and follow voice prompts to get forms faxed back to you.
- federal tax questions (800) 829-1040
- small business federal tax questions (800) 829-4933
- Specialized Assistance for Tax-Exempt Organizations:
- IRS Exempt Organizations (EO) division: EO Web site http://www.irs.gov/eo/
- EO customer service (877) 829-5500
- EO customer service mailing address:
Internal Revenue Service
TE/GE Customer Account Services
Cincinnati, OH 45201
Tax Publications for Exempt Organizations available via the Internet and free through the IRS at (800) 829-3676:
- Pub 517, Social Security and Other Information for Members of the Clergy and Religious Workers
- Pub 526, Charitable Contributions Pub 557,Tax-Exempt Status for Your Organization
- Pub 578, Tax Information for Private Foundations and Foundation Managers
- Pub 598,Tax on Unrelated Business Income of Exempt Organizations
- Pub 1771, Charitable Contributions— Substantiation and Disclosure Requirements
- Pub 1828, Tax Guide for Churches and Religious Organizations
- Pub 3079, Gaming Publication for Tax-Exempt Organizations
- Pub 3833, Disaster Relief, Providing Assistance through Charitable Organizations