Difference between revisions of "How to obtain tax-exempt status"
From NGO Handbook
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* 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.”</li></ol> | + | * Activities appeal to a “broad common interest or purpose.”</li></ol> <br> |
| − | The IRS defines ''support'' as the following:<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> gifts, grants, contributions, membership fees (if the fees are to provide support and not to buy admission or merchandise), net income from unrelated business activities, gross investment income, tax revenues, and the value of services or facilities furnished by the government without charge. | + | The IRS defines ''support'' as the following:<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> gifts, grants, contributions, membership fees (if the fees are to provide support and not to buy admission or merchandise), net income from unrelated business activities, gross investment income, tax revenues, and the value of services or facilities furnished by the government without charge.<br> |
| − | 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> <br> | + | 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> <br> |
'''New Organizations''' <br> | '''New Organizations''' <br> | ||
| − | 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> <br> |
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> | ||
Revision as of 08:56, 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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