Difference between revisions of "How to obtain tax-exempt status"
From NGO Handbook
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#'''Sources of Support Factor'''. If an NGO receives at least 10% but less than one-third of its support from public and government sources, the IRS will consider whether it receives support from the government or from a “representative number of persons” rather than receiving most support from an individual or family. The representative number of persons needed to comply with this factor will be determined by the type of organization, its age, and whether its activities are limited to a particular geographic area. | #'''Sources of Support Factor'''. If an NGO receives at least 10% but less than one-third of its support from public and government sources, the IRS will consider whether it receives support from the government or from a “representative number of persons” rather than receiving most support from an individual or family. The representative number of persons needed to comply with this factor will be determined by the type of organization, its age, and whether its activities are limited to a particular geographic area. | ||
#'''Representative Governing Body Factor'''. Whether an NGO’s governing body represents “the broad interests of the public” rather than of “a limited number of donors” is considered. An NGO is in compliance with this factor if the governing body is composed of: | #'''Representative Governing Body Factor'''. Whether an NGO’s governing body represents “the broad interests of the public” rather than of “a limited number of donors” is considered. An NGO is in compliance with this factor if the governing body is composed of: | ||
| − | *Public officials | + | :*Public officials |
| − | *Individuals selected by those public officials | + | :*Individuals selected by those public officials |
| − | *Persons with specialized knowledge | + | :*Persons with specialized knowledge |
| − | *Community leaders | + | :*Community leaders |
| − | *Individuals elected by a broad base of the NGO’s [[Board Members|members]]. | + | :*Individuals elected by a broad base of the NGO’s [[Board Members|members]]. |
<ol start="4"> | <ol start="4"> | ||
<li>'''Availability of Public Facilities or Services Factor'''. Evidence of public support under this factor include: | <li>'''Availability of Public Facilities or Services Factor'''. Evidence of public support under this factor include: | ||
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*Participating or sponsoring programs by public officials or individuals with special expertise | *Participating or sponsoring programs by public officials or individuals with special expertise | ||
*Maintaining programs to accomplish charitable work in the community | *Maintaining programs to accomplish charitable work in the community | ||
| − | *Receiving grants from a charity or government agency.</li> | + | *Receiving grants from a charity or government agency.</li></ol> |
| − | + | <ol start="5"> | |
| + | <li>'''Membership organizations factors'''. There are additional factors pertinent to whether a membership organization will be deemed to be publicly supported. A membership organization is publicly supported if: | ||
* Its solicitation for dues is designed to enroll “a substantial number of persons” | * Its solicitation for dues is designed to enroll “a substantial number of persons” | ||
* Membership dues have fixed rates to ensure they are financially available to a “broad cross section” of the public | * Membership dues have fixed rates to ensure they are financially available to a “broad cross section” of the public | ||
| − | * Activities appeal to a “broad common interest or purpose.”</ol> | + | * Activities appeal to a “broad common interest or purpose.”</li></ol> |
''Support'' | ''Support'' | ||
| − | |||
The IRS defines support as including:<ref>Ibid., at 33. Amounts received from activities in furtherance of the NGO’s exempt purpose and from contributions of services where a deduction is not allowed are not considered support with regards to the tests a public charity must meet. Ibid.</ref> | The IRS defines support as including:<ref>Ibid., at 33. Amounts received from activities in furtherance of the NGO’s exempt purpose and from contributions of services where a deduction is not allowed are not considered support with regards to the tests a public charity must meet. Ibid.</ref> | ||
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Support from the public includes “direct or indirect contributions” from individuals, trusts, or corporations during the four years preceding the current tax year (or the substituted computation period for new organizations discussed below) that are less than 2% of the total support for that period.<ref>Ibid.</ref> In other words, public contributions can only count for 2% of the NGO’s total financial support that goes into consideration as to whether the NGO receives one-third or 10% of its support from the public. Grants from public charities or the government are not subject to the 2% limit unless the grants represent amounts set aside by the donor for the NGO’s claim of public support status.<ref>Ibid., p. 34.</ref> Additionally, unusual grants, or contributions by disinterested parties attracted to the publicly supported nature of the NGO in an unusual or unexpected amount that would adversely affect the NGO’s public support status, are not subject to the 2% limit.<ref>Ibid.</ref> | Support from the public includes “direct or indirect contributions” from individuals, trusts, or corporations during the four years preceding the current tax year (or the substituted computation period for new organizations discussed below) that are less than 2% of the total support for that period.<ref>Ibid.</ref> In other words, public contributions can only count for 2% of the NGO’s total financial support that goes into consideration as to whether the NGO receives one-third or 10% of its support from the public. Grants from public charities or the government are not subject to the 2% limit unless the grants represent amounts set aside by the donor for the NGO’s claim of public support status.<ref>Ibid., p. 34.</ref> Additionally, unusual grants, or contributions by disinterested parties attracted to the publicly supported nature of the NGO in an unusual or unexpected amount that would adversely affect the NGO’s public support status, are not subject to the 2% limit.<ref>Ibid.</ref> | ||
| − | '''New Organizations''' | + | '''New Organizations''' |
NGOs in existence for more than eight months but less than five years can substitute the ''preceding four-year computation period requirement'' with the number of tax years in existence before the current tax year to meet the one-third or facts and circumstances tests.<ref>Ibid. at 33.</ref> If the NGO’s first tax year was at least eight months, the computation period for status determination consists of “either the first tax year or the first and second tax years.” <ref>Ibid.</ref> If an NGO’s first tax year was less than eight months, the computation period consists of “either the first and second or the first, second and third tax years.”<ref>Ibid.</ref> | NGOs in existence for more than eight months but less than five years can substitute the ''preceding four-year computation period requirement'' with the number of tax years in existence before the current tax year to meet the one-third or facts and circumstances tests.<ref>Ibid. at 33.</ref> If the NGO’s first tax year was at least eight months, the computation period for status determination consists of “either the first tax year or the first and second tax years.” <ref>Ibid.</ref> If an NGO’s first tax year was less than eight months, the computation period consists of “either the first and second or the first, second and third tax years.”<ref>Ibid.</ref> | ||
Revision as of 08:39, 12 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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