Difference between revisions of "How to obtain tax-exempt status"
From NGO Handbook
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If a NGO cannot meet the computation period requirements, the NGO may qualify for an advanced ruling to be treated as a section 509(a)(1) public charity for five years to develop an “adequate support history” to reinforce an initial determination.<ref>Ibid., at p. 35.</ref> An NGO will qualify if it can show that its organizational structure, programs, activities, and methods of operation are “likely to attract” wide support from the public, other public charities, and the government.<ref>Ibid.</ref> A request for an advance ruling must be accompanied by Form 872-C Consent Fixing Period of Limitation Upon Assessment of Tax stating that the NGO will be subject to taxes if it fails to qualify.<ref>Ibid.</ref> “Thirty to forty-five days before the end of the advanced ruling period,” the IRS will request “financial support information” to make the final determination.<ref>Ibid.</ref> If an NGO received an advanced ruling of its determination status as a public charity, the computation period for meeting the requirements discussed above is based on all years in the five year advance ruling period.<ref>Ibid, at p. 33.</ref> | If a NGO cannot meet the computation period requirements, the NGO may qualify for an advanced ruling to be treated as a section 509(a)(1) public charity for five years to develop an “adequate support history” to reinforce an initial determination.<ref>Ibid., at p. 35.</ref> An NGO will qualify if it can show that its organizational structure, programs, activities, and methods of operation are “likely to attract” wide support from the public, other public charities, and the government.<ref>Ibid.</ref> A request for an advance ruling must be accompanied by Form 872-C Consent Fixing Period of Limitation Upon Assessment of Tax stating that the NGO will be subject to taxes if it fails to qualify.<ref>Ibid.</ref> “Thirty to forty-five days before the end of the advanced ruling period,” the IRS will request “financial support information” to make the final determination.<ref>Ibid.</ref> If an NGO received an advanced ruling of its determination status as a public charity, the computation period for meeting the requirements discussed above is based on all years in the five year advance ruling period.<ref>Ibid, at p. 33.</ref> | ||
| − | ====Section 509(a)(2) | + | ====Section 509(a)(2) Organizations==== |
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> | ||
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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> | ||
| − | '''New | + | '''New Organizations''' |
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Like 509(a)(1) organizations, section 509(a)(2) organizations must have operated for at least eight months before the IRS will make a final determination.<ref>Ibid., p. 39.</ref> However, as for section 509(a)(1) organizations, new NGOs are eligible to use the advanced ruling period to meet section 509(a)(2) requirements.<ref>Ibid., p. 38.</ref> If the NGO reasonably expects to meet the two tests, the IRS may issue an advanced ruling granting the NGO status as a section 509(a)(2) public charity.<ref>Ibid.</ref> At the end of the period, the NGO must establish that it satisfies the tests.<ref>Ibid.</ref> If not, the NGO will be considered a private foundation. A request for an advanced ruling must be filed with the consent to extend statute, Form 872-C, that it will be subject to private foundation taxes if it does not qualify.<ref>Ibid, p. 39.</ref> | Like 509(a)(1) organizations, section 509(a)(2) organizations must have operated for at least eight months before the IRS will make a final determination.<ref>Ibid., p. 39.</ref> However, as for section 509(a)(1) organizations, new NGOs are eligible to use the advanced ruling period to meet section 509(a)(2) requirements.<ref>Ibid., p. 38.</ref> If the NGO reasonably expects to meet the two tests, the IRS may issue an advanced ruling granting the NGO status as a section 509(a)(2) public charity.<ref>Ibid.</ref> At the end of the period, the NGO must establish that it satisfies the tests.<ref>Ibid.</ref> If not, the NGO will be considered a private foundation. A request for an advanced ruling must be filed with the consent to extend statute, Form 872-C, that it will be subject to private foundation taxes if it does not qualify.<ref>Ibid, p. 39.</ref> | ||
To determine if the NGO meets the support tests, the IRS will consider on a case by case basis whether the NGO’s organizational structure, programs, activities, and methods of operation will attract wide support from the public, other public charities, and the government.<ref>Ibid.</ref> All pertinent facts will be considered including whether:<ref>Ibid.</ref> | To determine if the NGO meets the support tests, the IRS will consider on a case by case basis whether the NGO’s organizational structure, programs, activities, and methods of operation will attract wide support from the public, other public charities, and the government.<ref>Ibid.</ref> All pertinent facts will be considered including whether:<ref>Ibid.</ref> | ||
| − | + | *The governing body includes members with special knowledge, who are community leaders, or are elected by a “broadly based membership” | |
| − | + | *A substantial part of the NGO’s original funding is provided by the public, public charities, or government grants | |
| − | + | *A substantial part of the NGO’s initial funding is in an endowment fund and whether investment of the fund is “unlikely to result in more than one-third” of the NGO’s total support | |
| − | + | *The NGO has a plan to raise funds | |
| − | + | *The NGO has a plan to carry on its activities | |
| − | + | *The NGO has set a fixed rate fee for membership to attract diverse members | |
| − | + | *The NGO provides products, services or facilities to the public, public charities, or the government. | |
====Section 509(a)(3) organizations==== | ====Section 509(a)(3) organizations==== | ||
Revision as of 12:22, 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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