Difference between revisions of "How to obtain tax-exempt status"
From NGO Handbook
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====Private Operating Foundations==== | ====Private Operating Foundations==== | ||
| − | + | ''Private Foundations versus Private Operating Foundations'' | |
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* 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> | ||
* Contributions to POFs are subject to a “higher charitable deduction limit on the donor’s tax return.”<ref>Ibid.</ref> | * Contributions to POFs are subject to a “higher charitable deduction limit on the donor’s tax return.”<ref>Ibid.</ref> | ||
| − | * Excise taxes do not apply to an exempt operating foundation.<ref>Ibid. An exempt operating foundation is any private foundation that is a POF; has been publicly supported for at least 10 years; has a governing body that is representative of the public; and does not have any disqualified individual serving as an officer. Ibid.</ref | + | * Excise taxes do not apply to an exempt operating foundation.<ref>Ibid. An exempt operating foundation is any private foundation that is a POF; has been publicly supported for at least 10 years; has a governing body that is representative of the public; and does not have any disqualified individual serving as an officer. 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> | 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> | ||
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The support test is met if:<ref>Ibid.</ref> | The support test is met if:<ref>Ibid.</ref> | ||
| − | + | *85% or more of the POF’s support is normally received from the general public and five or more unrelated exempt organizations | |
| − | + | *Not more than 25% of its support is normally received from any one exempt organization | |
| − | + | *Not more than 50% of its support is normally received from gross investment income. | |
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| − | + | The endowment test is met if the POF" | |
| + | *Normally makes qualifying distributions for the active conduct of its exempt function of at least two-thirds of its minimum investment return [that is,] 5% of the excess of the total fair market value of all assets of the foundation … over the amount of indebtedness incurred to acquire those assets.<ref>Ibid.</ref></blockquote> | ||
To establish an NGO as a POF, the NGO must complete Schedule E of Form 1023. | To establish an NGO as a POF, the NGO must complete Schedule E of Form 1023. | ||
Revision as of 11:44, 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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