Entities - Tax Exempt Organizations

Question 1

What are the different types of tax exempt organizations?

Answer 1

• charities
• religious organizations
• social welfare organizations
• labor organizations
• employee benefit associations or funds
• veteran organizations
• political organizations (but lobbying to influence legislation or political parties is not an exempt purpose)

Question 2

What are the requirements to have exempt status?

Answer 2

An exempt entity must file an information return (form 990) if gross receipts exceed 50,000.
- churches do not have to file a 990

Question 3

What are the requirements to obtain tax-exempt status

Answer 3

• make a written application for exempt status
• be approved by the IRS
• Become incorporated under the standard procedures
• issue stock
• include the articles of organization the fact that the articles limit the purpose of the entity to the charitable / exempt purpose

Question 4

What are the requirements to retain exempt status

Answer 4

• no part of the net earnings may inure to the benefit of any private foundation or individual
• no substantial part of the activities may be nonexempt activities (i.e., propaganda or influencing legislation)
• The organization may not directly participate or intervene in any political campaign

Note: the organization must also file the required annual information tax forms (if applicable). If the organization fails to file for three consecutive years, the tax exempt status will be revoked

Question 5

What is unrelated business income

Answer 5

UBI is gross income from any unrelated trade or business regularly carried on minus business deductions connected therewith
UBI is:
1) Derived from an activity that constitutes a trade or business
2) Regularly carried on and
3) not substantially related to the organizations tax-exempt purposes

Question 6

How is UBI taxed for an exempt organization?

Answer 6

the organization may be subject to regular corporate income tax on its unrelated business income

• the organization is allowed a 1,000 specific deduction from UBI thus only UBI in excess of 1000 subject to tax
• further there are other types of income that are specifically excluded from tax