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Q Can we get 501(c)(3) status without hiring an attorney or accountant?
AYou know that 501(c)(3) status is vital to the success of your non-profit organization. What could be more important than tax deductions for your donors, and the ability to apply for government and foundation grants?
Beware of do-it-yourself 501(c)(3) templates and downloads sold on the internet. It is a too much of a risk to try for 501(c)(3) recognition on your own! You are not alone in asking. We receive every year many calls from do-it-yourselfers and even 1st time accountants. They cry help. The IRS receives huge numbers of do-it-yourself 501(c)(3) incomplete applications every year, slowing down the processing of all applications.
Q What form do we file to get our tax exempt
status?
A An Organizations seeking 501(c)(3) status (generally, charitable, educational, scientific and religious organizations) file IRS Form 1023. Other groups, such as social welfare organizations, labor unions, professional associations, or social clubs use form 1024.
Q How much will it cost to get our tax exempt
status?
A There is currently
a two tier fee schedule Internal Revenue Service (IRS) requires a payment
of a one time "user fee" with each application for a 501(c)(3) determination
letter. An organization that have averaged, or will average gross receipts
NOT more than $10,000 during its first 4 years (NOT more than $ 40,000.00
combined annual gross income for the first four years) the Fee is $150.00
An organization that have averaged, or will average gross receipts MORE than
$10,000 during its first 4 years (more than $ 40,000.00 combined annual gross
income for the first four years) Fee $500.00
Other costs you might incur when setting up a new non-profit organization
include incorporation, charitable solicitation and other registration fees
to state and local authorities, and fees to have your articles of incorporation,
bylaws and exemption application professionally prepared.
Q What if I choose the $150.00 fee and my gross receipts are more?
A At the time of application you should make a good faith estimate on your gross receipts. Ask yourself this question. Can I run this organization on less then $10,000 per year? The IRS agent reviewing the application will ask themselves the same question. If the answer is no the agent will ask for the balance of the fee $350.00 before approving the application.
Q How long will it take to get our tax exempt
status?
A The IRS is currently (3/99) saying that it takes an average of 120 days to process an application. Roughly a quarter to a third of the applications they receive do not require further development, and are processed in six to ten weeks. The balance of the applications they receive take closer to five or six months - hence the "average" 120 days.
Q What is the deadline for applying for tax
exempt status?
A An organization must file its application within 15 months after the end of the month in which it was formed, and if the IRS approves the application, the effective date of the organization’s section 501(c)(3) status will be the date it was organized.
Q Is their an exception to the 15-month filing requirement?
A Yes, if the organization: Is a church, interchurch organization of local units of a church, a convention or association of churches, or an integrated auxiliary of a church. Is not a private foundation and normally has gross receipts of not more than $5,000 in each tax year; or c Is a subordinate organization covered by a group exemption letter, but only if the parent or supervisory organization timely submitted a notice covering the subordinate.
Q Is there an extension to the deadline?
A Yes, Relief from the 15-month filing requirement is granted automatically if the organization submits a completed Form 1023 within 12 months from the end of the 15-month period.
Q What if the 27 months have
past?
A You can apply for discretionary extension
under these regulations; the IRS will allow an organization a reasonable extension
of time to file a Form 1023 if it submits evidence to establish that: It acted
reasonably and in good faith, and granting relief will not prejudice the interests
of the government. Showing reasonable action and good faith.-an organization
acted reasonably and showed good faith if at least one of the following is
true. 1. The organization filed its application before the IRS discovered
Its failure to file. 2. The organization failed to file because of intervening
events beyond its control. 3. The organization exercised reasonable diligence
but was not aware of the filing requirement. 4. The organization reasonably
relied upon the written advice of the IRS. 5. The organization reasonably
relied upon the advice of a
Qualified tax professional who failed to file or advise the organization to
file Form 1023. An organization cannot rely on the advice of a qualified tax
professional if it knows or should know that he or she is not competent to
render advice on filing exemption applications or is not aware of all the
relevant facts.
Q What if the 27 months have
past we can not get the “discretionary extension”?
A You can have the IRS consider the
application as a request for recognition of exemption as a section 501(c)(3)
organization from the date the application is received and not retroactively
to the date the organization was created or formed.
You can also request recognition of section 501(c)(4) status
for the period beginning
With the date the organization was formed and ending with the date the Form
1023 application was received (the effective date of the organization’s
section 501(c)(3) status). You must attach a completed page 1 of Form 1024.
Q Can we ask for donations
before we get our tax exempt status?
A First you must register and comply
with your State Charitable solicitation requirements. If your charitable,
educational, scientific or religious organization submits its application
to the IRS by the deadline described above and is approved, the "effective
date" of your group’s tax exempt status will be the day it was
originally created. This means that contributions that your organization received
after incorporation, but before the IRS issued your exemption letter will
be deductible.
Q What are the chances of having
our exemption application approved?
A Recent statistics show the IRS approving
tax exempt status for a little more than 70% of the applications they receive,
and denying tax exempt status for less than 1% of the applications they receive.
The other 29% or so are mostly organizations who become discouraged by the
numerous questions the IRS asks, and give up before they actually get a ruling.
Q Does a small organization really need to apply?
A Tax law does not require a 501(c)
(3) application when an organization normally has gross receipts less than
$5,000 per year. A small organization may want to apply anyway to save donors
possible inconvenience in an audit, to be able to apply for grants, or to
obtain a bulk mailing permit. An organization which no longer qualifies for
this low gross receipts exception must submit its application to the IRS within
90 days of the end of the year in which average gross receipts exceed $5,000.
Q Can we pay salaries to our
board members? Can we rent a building owned by a board member, or purchase
equipment from a board member?
A Tax law always permits the payment
of reasonable compensation for goods or services actually rendered. If the
IRS finds that amounts received by insiders are unreasonably high, however,
they can fine both the insider who received the payment, and the board members
who approved the payment. In extreme cases, they can take away the organization’s
tax exempt status.
It is a good idea, therefore, to fully document the board’s decision-making
process when any kind of payment will be made to an insider. Place copies
of all relevant information (salary surveys, job description, resumés,
prior salary history, real estate appraisals, rent "comparables")
in the minutes, and never let a board member vote on his or her own compensation,
or on the compensation of anyone related to him or her.
Q What are the Limitations for a 501(c)(3) organization?
A A 501(c)(3) must serve public purposes,
rather than private purposes
A (c)(3) must not pay dividends or distribute earnings in any other way to private shareholders or individuals.
While a (c)(3) can pay reasonable amounts for goods and services, payments to insiders that are unreasonably high can result in fines imposed on both the insiders and the board members who approved the payments. In extreme cases, the organization can lose its tax exempt status.
Although (c)(3) organizations are generally exempt from federal
income tax, they do have to pay tax on net income from regular trade or business
activities that are unrelated to their exempt purposes. (Refer to IRS Publication
598 http://www.irs.gov/pub/irs-pdf/p598.pdf for additional information.)
Legislative activity (lobbying) must be limited. Ordinarily, the limit is
less than 5%, measured in a variety of ways. Most organizations, however,
can elect higher limits with increased annual reporting requirements.
Political activity (support of, or opposition to, candidates for public office) is absolutely prohibited, and will lead to revocation of exempt status as well as penalty taxes.
No 501(c)(3) can exist for a purpose that is illegal or contrary to well-defined Federal public policy.
Q What is an Accounting period
and how do I choose?
A Your accounting period is the 12-month
time period you will use for record keeping. It is also sometimes called your
fiscal year or tax year. Your accounting period must end on the last day of
a month. Most non-profit organizations follow a calendar year. It's easy to
remember. Some non-profits, like schools, have a natural year. It makes sense
for a school to start a fresh set of records September 1, or to close their
books June 30. Non-profits that will be relying on a particular funding source,
like a state or county agency, will probably want to follow the same fiscal
year as the funding source.
For example, if you plan to keep your books on a calendar year, and will submit your application to the IRS around June 15th, you should provide the IRS with a financial statement ending on December 31, supplemented by an interim statement ending May 31st, or April 30th. If your group had no financial activity at all for a given period, the IRS needs to know that.
Q What is a Federal ID Number
and do I need one?
A Every exempt organization must have
an employer identification number (EIN), whether or not it has any employees.
If your organization does not have an EIN, your application for recognition
of exemption should include a completed Form SS-4, Application for Employer
Identification Number. You will also need this number, known by several different
names - TIN, EIN, FEIN - for banking and other purposes. It is not a good
idea to use anyone's Social Security Number, even for a short period of time.
Q How do I find reasonable compensation Information?
A You are most likely to find free information at government websites, such as the Bureau of Labor Statistics http://www.bls.gov/ or an equivalent site for your state government. Check your local library for reference copies of salary surveys you might otherwise have to pay for. If the survey information you find is somewhat out of date, the BLS website also has an "Inflation Calculator."
Q What is the minimum amount I can have on the
board that the IRS will accept?
A You will need to meet your state
requirement first. The IRS likes to see at least three unrelated people on
the board of a 501(c) (3) organization. If you have related individuals on
the board, such as a husband and wife, the related persons should hold less
than half the voting power. So, with two related people, you would need at
least three additional, unrelated, people on the board, making it possible
for the husband and wife team to be outvoted. If you have related board members
The IRS requests that you expand your boards.
Q What are Disqualified Persons?
A The explanation of "disqualified persons" in the instructions is not particularly helpful. In plain words, the IRS wants to know - 1) Are any board members related, by blood or marriage? and 2) Have any board members made a donation (directly, or indirectly through businesses or foundations they control) of $5,000 or more?
Q Can our organization charge
for services?
A Yes, see what other non-profits offering
similar services charge, and base your fees on that, or set your fees at a
level that most people likely to need services can afford, or set your fees
as low as you feasibly can, with the difference to be made up by donations,
or establish a sliding scale for fees based on income and family size.
Q What is public charity status?
A 501(c)(3) public charities are supposed to receive at least one third of their support from the general public. Some organizations find themselves relying heavily on donations from founders or board members, or going back year after year to the same foundations or corporations, for income which may not count as "public" support. See public support rules
Q What Is an Advance Ruling?
A If you have completed a closed accounting
period of at least 8 months you are eligible for a Definitive Ruling. If not,
the IRS will give you an Advance Ruling and will not make a final determination
until your advance ruling period ends which is usually 4 years after you receive
the first 501(c)(3) determination letter. During this time the IRS will look
to see if your organization will meet the attraction of public support factors
[under IRC Sections 509(a)(1) and 170(b)(1)(A)(vi)] and/or the support test
[under IRC section 509(a)(2)].
Q What Is An Advance Ruling Follow Up?
A At the end of the five year period, the IRS asks for financial data, which it will analyze to see if the organization has met the public support tests. The Form the IRS uses for this is 8734.
Q What is the public support test?
A An organization will qualify as publicly supported if it passes the one-third support test or the facts and circumstances test.
One-third support test. An organization will qualify as publicly supported if it normally receives at least one-third of its total support from governmental units, from contributions made directly or indirectly by the general public, or from a combination of these sources.
Facts and circumstances test. To qualify, an organization must meet the ten percent of- support requirement and the attraction of public support requirement.
Ten percent of- support requirement the total amount of governmental and public support normally received is at least 10% of the total support normally received by that organization.
Attraction of public support requirement. An organization
must be organized and operated in a manner to attract new and additional public
or governmental support on a continuous basis. An organization will meet
This requirement if it maintains a continuous and bona fide program for solicitation
of funds from the general public, community, or membership group involved
or if it carries on activities designed to attract support from governmental
units or other charitable Organizations.
Q What two types of public charities depend on a "one-third" test?
A 509(a)(1)/170(b)(1)(A)(vi) - These organizations," receive their public support from gifts or contributions.
509(a)(2) - These organizations receive their public support from payments for goods or services, such as admissions to cultural events, fees for therapy, or payments at fundraising events.
