Difference between revisions of "How to obtain tax-exempt status"
From NGO Handbook
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Under section 501(c)(3) of the United States Internal Revenue Code, a corporation, community chest,<ref>A community chest is a publicly supported fund for charity or social welfare.</ref> fund, or foundation<ref>A charitable trust is a fund or foundation. Internal Revenue Service, “Exemption Requirements,” http://www.irs.gov/charities/charitable/article/0,,id=96099,00.html.</ref> is eligible for tax-exempt status if: | Under section 501(c)(3) of the United States Internal Revenue Code, a corporation, community chest,<ref>A community chest is a publicly supported fund for charity or social welfare.</ref> fund, or foundation<ref>A charitable trust is a fund or foundation. Internal Revenue Service, “Exemption Requirements,” http://www.irs.gov/charities/charitable/article/0,,id=96099,00.html.</ref> is eligible for tax-exempt status if: | ||
| − | + | *The NGO is organized for one or more exempt purposes | |
| − | + | *The NGO is operated for one or more exempt purposes | |
| − | + | *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> | |
<blockquote>'''Exempt Purposes'''<br> | <blockquote>'''Exempt Purposes'''<br> | ||
An exempt purpose includes one or more of the following: | An exempt purpose includes one or more of the following: | ||
| − | * | + | * Any religious, charitable, scientific, literary or [[Educational NGOs|educational purposes]] |
| − | * | + | * Testing for public safety |
| − | * | + | * Fostering national or international amateur sports competition |
| − | * | + | * Preventing cruelty to [[Children's NGOs|children]] or animals.<ref>Internal Revenue Service, Applying for 501(c)(3) Tax-Exempt Status, Pub. 4220 (rev. June 2007), 3, http://www.irs.gov/pub/irs-pdf/p4220.pdf (accessed January 3, 2008).</ref> |
The most common are charitable, educational and religious. Charitable activities include: | The most common are charitable, educational and religious. Charitable activities include: | ||
| − | * | + | *Relief of the poor |
| − | * | + | *Advancement of religion, education or science |
| − | * | + | *Defending [[Human Rights NGOs|human and civil rights]] |
| − | * | + | *Eliminating discrimination.<ref>Ibid., at 4</ref> |
Educational organizations include: | Educational organizations include: | ||
| − | * | + | *Schools |
| − | * | + | *Groups that organize public discussions or panels |
| − | * | + | *Museums |
| − | * | + | *Zoos |
| − | * | + | *Day-care centers.<ref>Ibid.</ref> |
For religious purposes, the term church includes: | For religious purposes, the term church includes: | ||
| − | * | + | *Synagogues |
| − | * | + | *Temples |
| − | * | + | *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></blockquote> | Churches are automatically considered to be tax-exempt, but many apply for formal recognition of this status regardless.<ref>Ibid.</ref></blockquote> | ||
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: | ||
| − | + | *Limit its purpose to an exempt purpose under section 501(c)(3) | |
| − | + | *Limit its activities to those that further that purpose | |
| − | + | *State that the NGO’s assets will be distributed for the exempt purpose in the event of dissolution.<ref>Ibid., at 2-3; Internal Revenue Service, “Exemption Requirements.”</ref> | |
An NGO is considered ''operated for an exempt purpose'' if the NGO: | An NGO is considered ''operated for an exempt purpose'' if the NGO: | ||
| − | + | *Refrains from political campaigning | |
| − | + | *Restricts lobbying to an insubstantial part of its activities | |
| − | + | *Does not share it earnings with any shareholders or individuals | |
| − | + | *Is not operated to benefit the private interests of the founders | |
| − | + | *Is not operated for the primary purpose of conducting trade or business unrelated to the exempt purpose | |
| − | + | *Does not engage in illegal activities or violate public policy.<ref>Internal Revenue Service, Applying for 501(c)(3) Tax-Exempt Status, at 3.</ref> | |
To obtain tax-exempt status for an NGO that meets these criteria, the organization must file an application for federal income tax exemption with the IRS.<ref>A tax-exempt central organization may apply for a federal income tax exemption on behalf of its subordinate organizations. Internal Revenue Service, Tax-Exempt Status for Your Organization, Pub. 557 (rev. March 2005), 6, http://www.irs.gov/pub/irs-pdf/p557.pdf (accessed January 3, 2008). For more information on the group application process, see ibid., at 6-7.</ref> | To obtain tax-exempt status for an NGO that meets these criteria, the organization must file an application for federal income tax exemption with the IRS.<ref>A tax-exempt central organization may apply for a federal income tax exemption on behalf of its subordinate organizations. Internal Revenue Service, Tax-Exempt Status for Your Organization, Pub. 557 (rev. March 2005), 6, http://www.irs.gov/pub/irs-pdf/p557.pdf (accessed January 3, 2008). For more information on the group application process, see ibid., at 6-7.</ref> | ||
Revision as of 10:38, 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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