Difference between revisions of "How to obtain tax-exempt status"
From NGO Handbook
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Certain private foundations that support section 509(a)(1) and (2) organizations may be considered public charities under section 509(a)(3) if they meet the following requirements:<ref>Ibid., at 40. The term publicly supported organization refers to a section 509(a)(1) or (2) organization. Ibid. Disqualified persons refer to those with an interest in the NGO, such as substantial contributors, managers, owners, or family members. For more information, see ibid., p. 42.</ref> | Certain private foundations that support section 509(a)(1) and (2) organizations may be considered public charities under section 509(a)(3) if they meet the following requirements:<ref>Ibid., at 40. The term publicly supported organization refers to a section 509(a)(1) or (2) organization. Ibid. Disqualified persons refer to those with an interest in the NGO, such as substantial contributors, managers, owners, or family members. For more information, see ibid., p. 42.</ref> | ||
| − | # | + | # The NGO is organized and operated to carry out the purposes of a publicly supported organization. |
| − | # | + | # The NGO is “operated, supported, and controlled by or in connection with” a publicly supported organization. |
| − | # | + | # The NGO is not controlled by a disqualified person. |
Thus, an NGO funded by a “single donor, family, or corporation” may qualify as a pubic charity, not for its activities, but because of its relationship with a publicly supported organization.<ref>Ibid.</ref> To satisfy requirement (2) that the NGO is operated, supported, and controlled by or in connection with a publicly supported organization, the NGO must have a specific type of relationship with the publicly supported organization.<ref>Ibid, p. 41.</ref> The NGO must be either:<ref>Ibid.</ref> | Thus, an NGO funded by a “single donor, family, or corporation” may qualify as a pubic charity, not for its activities, but because of its relationship with a publicly supported organization.<ref>Ibid.</ref> To satisfy requirement (2) that the NGO is operated, supported, and controlled by or in connection with a publicly supported organization, the NGO must have a specific type of relationship with the publicly supported organization.<ref>Ibid, p. 41.</ref> The NGO must be either:<ref>Ibid.</ref> | ||
| − | # | + | # Operated, supervised or controlled by a publicly supported organization. |
| − | # | + | # Supervised or controlled in connection with a publicly supported organization. |
| − | # | + | # Operated in connection with a publicly supported organization. |
For the first two types of relationships to satisfy requirement (1) that the NGO is organized and operated to carry out the purposes of the publicly supported organization, the NGO needs to satisfy the ''organizational'' and ''operational'' tests. The organizational test is met if the articles of organization of the NGO:<ref>Ibid.</ref> | For the first two types of relationships to satisfy requirement (1) that the NGO is organized and operated to carry out the purposes of the publicly supported organization, the NGO needs to satisfy the ''organizational'' and ''operational'' tests. The organizational test is met if the articles of organization of the NGO:<ref>Ibid.</ref> | ||
| − | + | *Limit its purpose to one or more of the purposes in requirement (1) | |
| − | + | *Do not expressly empower the NGO to engage in activities that do not further that purpose | |
| − | + | *Specify the publicly supported organization the NGO supports | |
| − | + | *Do not expressly empower the NGO to support other organizations than those specified. | |
The operational test is met if the NGO performs only permissible activities for permissible beneficiaries. Permitted activities are those activities that support or benefit the specified organizations.<ref>Ibid, p. 42.</ref> These may include providing payments or services to the class benefitting from the specified organization; using “income to carry on an independent activity or program that supports or benefits” the specified organization; or raising funds for the specified organization or its beneficiaries.<ref>Ibid. An NGO does not have to pay its income to the specified organization to meet this test.</ref> Permitted beneficiaries are the specified publicly supported organizations or the beneficiaries of those specified organizations.<ref>Ibid, p. 41.</ref> | The operational test is met if the NGO performs only permissible activities for permissible beneficiaries. Permitted activities are those activities that support or benefit the specified organizations.<ref>Ibid, p. 42.</ref> These may include providing payments or services to the class benefitting from the specified organization; using “income to carry on an independent activity or program that supports or benefits” the specified organization; or raising funds for the specified organization or its beneficiaries.<ref>Ibid. An NGO does not have to pay its income to the specified organization to meet this test.</ref> Permitted beneficiaries are the specified publicly supported organizations or the beneficiaries of those specified organizations.<ref>Ibid, p. 41.</ref> | ||
Revision as of 12:30, 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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