Unit 17: Nonprofit Organizations Flashcards
In general, there are two types of exempt entities:
- 501(c) charities
- Other 501(c) entities (this group includes non-charities, including social clubs, labor unions, and nonprofit political organizations)
Requirements: Organization
It must be organized as a corporation, a trust, or an unincorporated association, and its purpose must be limited to a qualified exempt purpose, as described in section 501(c)(3). A nonprofit entity may not be organized as a partnership or sole proprietorship
Requirements: Exempt Purpose
It must have one or more exempt purposes as listed under section 501(c)(3): Charitable, educational, religious, scientific, literary, fostering national or international sports competition, preventing cruelty to children or animals, or testing for public safety
A substantial portion of its activities must be related to its exempt purpose(s). Further, a 501(c)(3) organization must:
- Refrain from participating in political campaigns of candidates. 501(c)(3) organizations must also avoid any issue that may be construed as political campaign intervention
- Restrict is lobbying activities to an “insubstantial” part of its total activities
- Grants, donations, and activities may not assist any private election campaign or endorse any political candidates for public office
- Ensure that its earnings do not benefit any private shareholder or individual
- Not operate for the benefit of private interests, such as those of its founder, the founder’s family, or its shareholders
- Not operate for the primary purpose of conducting a trade or business that is not related to its exempt purpose.
Before applying for tax-exempt status, an organization must be created by:
Preparing and organizing document
1023
“Application for Recognition of Exemption”
Used to request exempt status of 501(c)(3) status
1023: who is not required to file?
Any organization with annual gross receipts of no more than $5,000 is not required to file a 1023 but must do so within 90 days of the tax year in which it exceeds this threshold
Applications for recognition of exemption on Form 1023 must be submitted:
Electronically online at www.pay.gov
1023 user fee
$600
1023-EZ
A simpler application form that is designed for small tax-exempt organizations. The application is only three pages long, compared to 26 pages for the traditional Form 1023
1023-EZ fee
$275
1023-EZ: To qualify, an organization must
- Gross receipts of $50,000 or less in the three prior years, and
- Assets(based on FMV) of $250,000 or less
A 501(c)(3) must generally request an exemption from the IRS within:
27 months after the end of the month in which it was formed to obtain exempt status as of the date of its formation.
While an organization’s application is pending approval, the organization may operate as if:
it we tax-exempt
Who is not required to request a formal exemption?
Churches and similar religious organizations, regardless of their size or the amount of revenue or donations that the church receives. Chruchs are classified as public charities by default.
1024
Used by 501(a) organziaitons
examples
- fraternal benefit societies
- Business leagues
- Chambers of commerce
- Farmers cooperatives
1024-A
Used by organizations exempt under section 501(c)(4)
Examples:
- Social welfare organziaitons
- Volunteer fire departments
- Community service clubs such as Rotary Clubs and Lyon’s club
8976
“Notice of Intent to Operate Under Section 501(c)(4)”
Must be filed within 60 days of the organization’s formation
501(c)(1)
These are exempt corporations that are organized under an Act of Congress, including Federal Credit Unions and National Farm Loan Associations
501(c)(5)
Includes labor unions, county fairs, agricultural cooperatives, and horticultural organizations
501(c)(6)
Includes business leagues, professional sporting leagues, and boards of trade
501(c)(7)
Includes social and recreation clubs, college fraternities and sororities, athletics clubs, yacht clubs, and hobby clubs
501(c)(8) & 501(c)(10)
Includes fraternal beneficiary societies and associations operating under the lodge system. 501(c)(8) organizations provide insurance benefits to the society’s members, while 501(c)(10) organizations provide charitable benefits, Examples include the Knights of Columbus, Freemasons, and the Shriners
501(c)(9)
These are voluntary employee beneficiary associations (VEBA) that are organized to pay life, sick, accident, or similar benefits to members or their dependents
501(c)(12)
These are benevolent life insurance associations, exempt utility co-ops, and telephone and electric cooperatives
501(c)(13)
These are nonprofit cemetery companies and crematoria. Individual contributions to 501(c)(13) entities are tax-deductible but subject to a 30% of AGI limit for individuals
501(c)(14)
These are state-chartered credit unions and other mutual financial organizations
501(c)(19)
These are veterans organizations. To qualify for this exempt status, the group must originate in the U.S. and at least 75% of its membership must be current or prior members of the armed forces. Contributions to a 501(c)(19) are tax-deductible by the donor, but subject to a 30% of AGI limit for individuals
All private foundations must file Form:
990-PF “return of Private Foundation”, every year, regardless of their income.
Only the following organizations are not required to file Form 990:
- Churches and their affiliated organizations
- Government agencies, as well as Section 501(c)(1) entities
- Certain political organizations
Tax-exempt organizations with gross receipts of $50,000 or less may file
Form 990-N, “Electronic Notice for Tax-Exempt Organization Not Required to File Form 990”.
This form is also called an “e-postcard” because it is filed electronically and is short.
If an organization has gross receipts of less than $200,000 and total assets at the end of the year of less than $500,000, it can file a form
990-EZ
When are information returns due?
By the 15th day of the 5th month after their tax year ends.
8868
Used to request a 6-month filing extension
990 late filing penalty
$20/day, not to exceed the lesser of:
$11,000
or
5% of the gross receipts of the organization of the year
990 late filing penalty: who has to pay $110/day?
Organizations with annual gross receipts exceeding $1,129,000 and a penalty has a maximum of $56,000
Failure to file an annual information return for three years in a row will result in:
The automatic revocation of exempt status.
An organization that has lost its tax-exempt status through automatic revocation may be required to file one of the following federal income tax returns and pay any applicable income taxes
- Form 1120, U.S. Corporation Income Tax Return, or
- Form 1041, U.S. Income Tax Return for Estates and Trusts
Tax-exempt organizations that are required to file electronically, but do not, are deemed to have:
failed to file their return. This is true even if a paper return is submitted unless the organization files by paper to report a name change
Exempt organizations: excise tax on executive compensation
21% of executive compensation over $1m
4720
Used to report excise tax and is due on the 15th day of the 5th month after the end of the employer’s taxable year
For most organizations, an activity is considered an unrelated business activity and subject to UBIT if:
- It is a trade or business
- It is regularly carried on
- It is not substantially related to furthering the exempt purpose(s) of the organization
An exempt organization that has more than $1,000 or more of gross income from UB must file:
Form 990-T
