Starting a Tax Exempt Organization
The term 501(c)(3) refers to Section 501(c)(3) of the Internal Revenue Code, where the rules and regulations governing exempt organizations are found. Tax exempt organizations are commonly referred to as 501(c)(3). 501(c)(3) includes both public charities and private foundations.
Being a tax exempt organization is not an astatic thing. It’s a course of action with a lifecycle to it. The normal five steps to the life cycle of a tax exempt organization include:-
- Starting out
- Applying for exemption
- Required filings
- current compliance and
- meaningful events.
Starting out and applying for exemptions are rare because you should only do them once for any single organization. You need to create an organization under your state’s law. Your state will have rules that you would likely make your organizations purpose to qualify as a non-profit, which is a state level classification. The organizations, organizing documents are its Articles of Incorporation. For unincorporated organizations, it’s Charter, Constitution, and Articles of Association. The organizing document must have a clause that limits the organization’s purposes to one or more of the exempt purpose listed in the IRS code. It’s most not expressly empowers the organization to include in activities that are not in furtherance of its exempt purposes. It should have a dissolution clause. Assets of the organization must be permanently dedicated to an exempt purpose described under Section 501(c)(3). By-laws are different from the organizing documents. By-laws are organization’s internal operating rules. Federal law doesn’t require specific language in the by-laws of most organizations. However, state law may require you to have by-laws, so it’s a good idea to contact the state to find out its specific requirements.
When you are creating your organization, you may need to create organization documents based upon the requirements of your state. You will need these when you apply for tax exemption. When you apply for tax exemption, which is a federal level position, you will need to acquire an employer identification number (EIN). already though you don’t have any employees you would nevertheless need an EIN which is similar to your personal social security number, but it’s only for your business. It would clarify you to the IRS. It’s typically issued by the IRS. Apply for EIN by different ways.
- Apply online.
- Complete the required form and fax it to the IRS.
- Mail the form to the IRS.
- You can already apply for EIN by telephone.
All EIN applications must disclose the name and tax payer identification number of the true principal officer, general partner, grantor, or owner, whom the IRS would call as “Responsible Party”.
In order to apply for tax exempt position under Section 501(c)(3), you have to fill out applicable forms and submit with user fees. User fees are based upon the gross receipts. Total money an organization receives from all supplies before taking out costs or expenses. It’s based upon the gross receipts an organization received/plants to receive over a four year plan. Generally an organization is required to apply for recognition of exemption with the IRS within 27 months from the end of the month in which it was organized for its exemption to be effective from its date of formation. When certain requirements are met, this deadline can be extended. typically on receipt of application and user fees, the IRS approves simple applications within 90 days or less. IRS would have an Exempt Organization Specialist stated to course of action complicate application which needs substantial data and takes more than 90 days to course of action. In some situations, it may take up to six months. Determination letter recognizing exempt position which shows foundation classification and long-lasting records required for public disclosures would be issued by the IRS.
Churches, including synagogues, temples and mosques are not required to apply, in addition they are nevertheless exempt from federal income tax and the contributions they receive are tax deductible, but they can nevertheless apply. Most of them apply to receive the determination letter that proves their tax-exempt position and specifies that contributions to them are tax deductible.
Churches, schools, organizations providing medical or hospital care are statutory charities. Other public charities are organizations that receive meaningful public sustain including organizations that provide sustain to other public charities.
In order to qualify an organization as a public charity, it has to pass the organization and operational test, general public sustain etc.
Organizational test:- The organization limits its purpose to one or more of the exempt purpose listed in Section 501(c)(3). It does not permit the organization to include in non-exempt activity and assets of the organization must be permanently dedicated to an exempt purpose. For the operational test, the organization must show that its principal activities will be to further its exempt purpose. The organization also has to limit the participation in certain types of activities and absolutely refrain from other extremely activities.
To demonstrate public sustain the organization has to show that it receives substantial sustain and contributions from publicly supported organization, governmental units and or the general public or no more than 1/3 sustain from gross investment income and unrelated business income combined and more than 1/3 sustain from contributions, membership fees and gross receipts from activities related to exempt roles. In this a good record keeping is an important factor.
The IRS assesses the activities and the test is conducted when you are first applying for tax-exempt position. When the organization after receiving the 501(c)(3) position engages in extremely activities, you could lose your tax-exempt position and would be placed under both taxes and penalties. Churches, their integrated auxiliaries, and conventions or associations of churches and an organization that is not a private foundation and the gross receipts of which in each taxable year are typically not more than $5000 are typically treated under public charity. When an organization qualifies as a 501(c)(3) organization, the IRS presumes it’s a private foundation unless it can show that it’s a public charity.
The main difference is where the organization’s financial sustain comes from. Generally a public charity has a general base of sustain while a private foundation has very limited supplies of sustain. There are also different tax rules like private foundations are unprotected to excise taxes that aren’t imposed on public charities.
typically the IRS grants public charity position when it passes the public charity test for the initial five years, based upon the expected sustain is treated as a public charity in spite of of actual sustain. From year 6 onwards, the IRS based on information provided in annual reporting, it’s calculated for current year plus four past years.
Group exemption letters are issued by IRS for smaller group associated with a single central group. They can apply as a group and there is no need for individual application. Group exemption letters have the same effect as individual letters.
Post application, organizations may function as a tax exempt organization while waiting for approval. Donors have no assurance that their contributions will be deductible until application is approved. While waiting for the approval, the organization may follow the procedure for record keeping, keeping detailed records of financial and non-financial activities.
The benefits of Section 501(c)(3) position is that, the organization gets exemption from federal income tax, tax-deductible contributions and reduced postal rates. Possible exemption from State income, sales and employment taxes. The organization can receive tax-exempt financing.
The position comes with responsibilities. 501(c)(3) organization is organized and operated exclusively for exempt purpose that are: Religious, Charitable, Scientific, Testing for public safety, literacy or educational, designed to foster national or international amateur sports competitions, for the prevention of cruelty to children or animals. Recordkeeping is another important aspect. The organization has to keep detailed records of financial and non-financial records. IRS Publication, compliance guide has information on why you need to keep records, what records you should keep, and how long to keep your records. Most public charities recognized as tax-exempt are required to file an annual information return. Good records make it easier to complete your required annual filings. The organization is required to make public certain documents that you file with the IRS, but not all of your records. Following documents on request have to be provided. The organization’s annual returns for its three most recent years after the due date, including any extensions. All Form 990 schedules (except for donor names and address), their attachments, and supporting documents. Determination letter from the IRS showing that the organization has been granted tax-exempt position. The organization is not responsible for providing free meeting space.