Difference between revisions of "How to obtain tax-exempt status"
From NGO Handbook
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*No private shareholder or individual receives a benefit from the NGO’s net earnings | *No private shareholder or individual receives a benefit from the NGO’s net earnings | ||
*Lobbying or political campaigning are not a substantial part of the NGO’s activities.<ref>Ibid.</ref> | *Lobbying or political campaigning are not a substantial part of the NGO’s activities.<ref>Ibid.</ref> | ||
| − | + | '''Exempt Purposes''' | |
An exempt purpose includes one or more of the following: | An exempt purpose includes one or more of the following: | ||
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*Temples | *Temples | ||
*Mosques.<ref>Ibid.</ref> | *Mosques.<ref>Ibid.</ref> | ||
| − | Churches are automatically considered to be tax-exempt, but many apply for formal recognition of this status regardless.<ref>Ibid.</ref | + | Churches are automatically considered to be tax-exempt, but many apply for formal recognition of this status regardless.<ref>Ibid.</ref> |
An NGO is considered ''organized for an exempt purpose'' if the NGO’s organizing documents: | An NGO is considered ''organized for an exempt purpose'' if the NGO’s organizing documents: | ||
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==Applying for Tax-Exempt Status== | ==Applying for Tax-Exempt Status== | ||
| − | + | The basic process and all forms can be found on the [http://www.irs.gov Internal Revenue Service website], under the section on [http://www.irs.gov/charities/index.html?navmenu=menu1 Charities and Nonprofits]. The basic procedure is outline under the Frequently Asked Questions section on [http://www.irs.gov/charities/article/0,,id=136196,00.html Applying for Exemption: Procedure for Applying]. Publication [http://www.irs.gov/pub/irs-pdf/p557.pdf 557] provides the instructions for the application. | |
| − | *IRS Form SS-4 Employee Identification Number | + | Basically, an NGO’s application for federal tax-exempt status must include: |
| − | *The | + | |
| − | *IRS Form 1023 Application for Recognition of Exemption | + | *'''IRS Form SS-4 Employee Identification Number'''. |
| − | *The required accompanying documents and statements or explanations | + | *'''Form 8718 and the appropriate application fee'''. The United States charges an administrative fee to process each application. This form certifies the payment of this fee. The 1023, 8718 and the fee payment in U.S. dollars are sent to the address in Covington, Kentucky listed on the Form 8718. For each of these steps, there is help available on the IRS website or by calling the toll-free number listed on each form. |
| − | *The relevant financial data | + | *'''IRS Form 1023: Application for Recognition of Exemption'''. Form 1023 is the application for recognition of tax exempt status. The instructions are outlined in the Pub 557 and within the 1023 form. It is on this form that the organization explains exactly what they do and how they do it. The form requires that the organization provide a copy of the "organizing document." That is the official form or document that created your NGO. It might be a government application, a constitution or other official form. It should be submitted in its original format. Organizations are also asked to provide a document that describes how the organization operates, known in the United States as organizational bylaws. . |
| − | *Additional information related to their particular activities (for certain specific types of NGOs). | + | *The '''required accompanying documents''' and statements or explanations |
| + | *The '''relevant financial data''' | ||
| + | *'''Additional information''' related to their particular activities (for certain specific types of NGOs). | ||
An NGO’s application package must show that the following is true: | An NGO’s application package must show that the following is true: | ||
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===IRS forms=== | ===IRS forms=== | ||
| − | Various IRS Forms, described in this section, are required to be submitted as part of the application for tax-exempt status. In addition to these forms, if an NGO will have a designated appointee representing the organization with the IRS, the NGO must also file IRS Form 2848 Power of Attorney and Declaration of Responsibility and IRS Form 8821 Tax Information Authorization. IRS Form 2848 authorizes someone other than the NGO’s principal officer or [[The Primary Responsibilities of an NGO Executive Director|director]] to represent the organization on matters regarding the application. IRS Form 8821 authorizes any individual, corporation, firm, organization, or [[NGO Networking|partnership]] designated by the applicant NGO to inspect and/or receive the NGO’s confidential tax [[NGO Information Management|information]] in any office of the IRS. | + | Various IRS Forms, described in this section, are required to be submitted as part of the application for tax-exempt status. All forms can be downloaded from the [http://www.irs.gov Internal Revenue Service website] from the [http://www.irs.gov/formspubs/index.html Section on Forms and Publications]. |
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| + | In addition to these forms, ''if'' an NGO will have a designated appointee representing the organization with the IRS, the NGO must also file IRS Form 2848 Power of Attorney and Declaration of Responsibility and IRS Form 8821 Tax Information Authorization. IRS Form 2848 authorizes someone other than the NGO’s principal officer or [[The Primary Responsibilities of an NGO Executive Director|director]] to represent the organization on matters regarding the application. IRS Form 8821 authorizes any individual, corporation, firm, organization, or [[NGO Networking|partnership]] designated by the applicant NGO to inspect and/or receive the NGO’s confidential tax [[NGO Information Management|information]] in any office of the IRS. | ||
=====Form SS-4 Employee Identification Number===== | =====Form SS-4 Employee Identification Number===== | ||
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====Section 509 (a)(1) Organizations==== | ====Section 509 (a)(1) Organizations==== | ||
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The NGOs found in this public charity category include: | The NGOs found in this public charity category include: | ||
*Churches | *Churches | ||
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In addition, the IRS considers five public support factors to determine if an NGO is publicly supported. The NGO does not have to satisfy all five requirements; it just must show “a sufficient combination of the factors.”<ref>Ibid., at 31-32.</ref> The weight the IRS gives to each factor depends on the nature, purpose, and age of the NGO.<ref>Ibid., at 32.</ref> The five factors include:<ref>See Ibid. In considering these additional factors the IRS may consider facts outside the “normal” time period (i.e., outside the current and four preceding tax years). Ibid.</ref> | In addition, the IRS considers five public support factors to determine if an NGO is publicly supported. The NGO does not have to satisfy all five requirements; it just must show “a sufficient combination of the factors.”<ref>Ibid., at 31-32.</ref> The weight the IRS gives to each factor depends on the nature, purpose, and age of the NGO.<ref>Ibid., at 32.</ref> The five factors include:<ref>See Ibid. In considering these additional factors the IRS may consider facts outside the “normal” time period (i.e., outside the current and four preceding tax years). Ibid.</ref> | ||
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#'''Percentage of Financial Support Factor'''. If an NGO receives at least 10% but less than one-third of its support from public and government sources, the percentage of financial support will be considered. The higher the percent, the lower the burden the NGO has to meet. If the percentage is low, the sources of the NGO’s financial support will also be considered in determining compliance with this factor. | #'''Percentage of Financial Support Factor'''. If an NGO receives at least 10% but less than one-third of its support from public and government sources, the percentage of financial support will be considered. The higher the percent, the lower the burden the NGO has to meet. If the percentage is low, the sources of the NGO’s financial support will also be considered in determining compliance with this factor. | ||
#'''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, individuals selected by those public officials, persons with specialized knowledge, community leaders, and/or individuals elected by a broad base of the NGO’s [[Board Members|members]]. |
| − | + | <ol start="4"> | |
| − | + | <li>'''Availability of Public Facilities or Services Factor'''. Evidence of public support under this factor include: | |
| − | + | *Whether an NGO regularly provides facilities or services to benefit the public | |
| − | + | *Whether an educational or research institution “regularly publishes scholarly studies” that are widely used | |
| − | + | *Participating or sponsoring programs by public officials or individuals with special expertise | |
| − | + | *Maintaining programs to accomplish charitable work in the community | |
| − | + | *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” | |
| − | + | * 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> <br> | |
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| − | '' | + | 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> <br> |
| + | *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 | ||
| + | *The value of services or facilities furnished by the government without charge.<br> | ||
| − | + | <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> | |
| + | <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> <br> | |
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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> | ||
Latest revision as of 13:35, 14 January 2009
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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