Difference between revisions of "How to obtain tax-exempt status"
From NGO Handbook
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There are two differences between section 509(a)(1) and (2) organizations. For section 509(a)(2) organizations:<ref>Ibid., at 37.</ref> | There are two differences between section 509(a)(1) and (2) organizations. For section 509(a)(2) organizations:<ref>Ibid., at 37.</ref> | ||
| − | # | + | # The term support includes support allowed under section 509(a)(1) and income from activities related to the NGO’s exempt purpose (which is not allowed to be considered income under the support test for section 509(a)(1) organizations). |
| − | # | + | # There is “a limit on the total gross investment income and unrelated business income an [NGO] may have,” whereas there is no limit under section 509(a)(1). |
To be considered a public charity under section 509(a)(2), an NGO must meet two tests: the one-third support test and the not-more-than-one-third support test. The one-third support test is met if the NGO normally receives more than one-third of its financial support from “gifts, grants, contributions or membership fees” and gross receipts from a related trade or business.<ref>Ibid. The definition of normally is the same as for section 509(a)(1) organizations.</ref> Gross receipts may be included only to the extent that they are “not more than the greater of $5,000 or 1% of the [NGO’s] total support” for the applicable tax year.<ref>Ibid.</ref> For this test permitted sources of support include section 509(a)(1) organizations, the government, and non-disqualified persons.<ref>Ibid. For the definition of disqualified persons see ibid., at 42. Like section 509(a)(1) organizations, unusual grants are not subject to any percentage limitations. Ibid., at 38.</ref> The not-more-than-one-third support test is met if the NGO normally receives not more than one-third of its support from: gross investment income and the excess of unrelated business income from unrelated trades or business “over the tax imposed on that income.”<ref>Ibid., at 37. Amounts received from section 509(a)(3) organizations are considered gross investment income rather than gifts or contributions to the extent it is gross investment income of the section 509(a)(3) organization. Ibid., at 44.</ref> | To be considered a public charity under section 509(a)(2), an NGO must meet two tests: the one-third support test and the not-more-than-one-third support test. The one-third support test is met if the NGO normally receives more than one-third of its financial support from “gifts, grants, contributions or membership fees” and gross receipts from a related trade or business.<ref>Ibid. The definition of normally is the same as for section 509(a)(1) organizations.</ref> Gross receipts may be included only to the extent that they are “not more than the greater of $5,000 or 1% of the [NGO’s] total support” for the applicable tax year.<ref>Ibid.</ref> For this test permitted sources of support include section 509(a)(1) organizations, the government, and non-disqualified persons.<ref>Ibid. For the definition of disqualified persons see ibid., at 42. Like section 509(a)(1) organizations, unusual grants are not subject to any percentage limitations. Ibid., at 38.</ref> The not-more-than-one-third support test is met if the NGO normally receives not more than one-third of its support from: gross investment income and the excess of unrelated business income from unrelated trades or business “over the tax imposed on that income.”<ref>Ibid., at 37. Amounts received from section 509(a)(3) organizations are considered gross investment income rather than gifts or contributions to the extent it is gross investment income of the section 509(a)(3) organization. Ibid., at 44.</ref> | ||
Revision as of 12:19, 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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