Tax-Exempt Status by B7BptW86


									Breakfast with the IRS

          Justin Lowe, Tax Law Specialist
   Exempt Organizations, Internal Revenue Service
                  (202) 283-9486

    "Material provided in this presentation is for educational use only
    and is not intended to establish IRS position or practice and may
    not be relied on or cited as precedent. For more detailed
    information, please refer to the "Charities and Nonprofits" section
     § 527 Tax Treatment

• Prior to July 2000: All political
  organizations tax-exempt
• July 2000: New reporting and
  disclosure requirements created
• November 2002: Reporting and
  disclosure requirements amended
    Automatic Tax-Exemption

• Committees of state or local
• State or local party committees
• Organizations required to report under
  FECA as political committees
• Organizations that never receive or
  expect to receive more than $25,000
  in any year
 § 527 Political Organization

An organization that is organized and
operated primarily for the purpose of
directly or indirectly accepting
contributions or making expenditures
for a § 527 exempt function
    § 527 Exempt Function

Section 527 exempt function activity is
defined as attempting to influence the
selection, nomination, election or
appointment of any individual to
Federal, State, or local public office,
office in political party, or Presidential
Types of § 527 Organizations

Federal, state and local:
• Candidate Committees
• Political Parties
• Political Action Committees
  Organizational Requirements

• No formal organizational requirements
  necessary – political organization may
  be, but need not be, incorporated
  (opening a bank account sufficient)
• Employer Identification Number (EIN)
  needed – even if no employees
• Form SS-4
Employer ID Number
Form SS-4
Form 8871 Not Filed Notice
   Form 8871 Not Filed Notice

• Political organizations that do not file
  Form 8871 will receive notice
• Organizations that are automatically
  tax-exempt fill out Section I, sign
  Section III and return to IRS
• Organizations that file Form 8871 late
  may use Section II to explain
  reasonable cause
Notice Response
    Automatic Tax-Exemption

• Committees of state or local
• State or local party committees
• Organizations required to report under
  FECA as political committees
• Organizations that never receive or
  expect to receive more than $25,000
  in any year
     Tax-Exempt v. Taxable

• Tax-Exempt Political Organizations
  • Automatic – only Form 1120-POL
  • Otherwise – Form 8871, Form 8872 and
    Form 990 in addition to Form 1120-POL
• Taxable Political Organizations
  • File Form 1120-POL
  • All income, including contributions,
    subject to 35% tax
Taxation of § 527 Organizations

• Taxable income taxed at highest
  corporate rate (currently 35%)
• Principal campaign committees of
  candidates for U.S. Congress
  taxed at graduated corporate
  rates (beginning at 15%)
             Taxable Income

All income (including investment income) except:
• Contributions
• Membership dues and assessments
• Political fundraising or entertainment event
  income, provided not regularly carried on trade
  or business
• Sale of political campaign materials, provided not
  regularly carried on trade or business
• Bingo income
         Deductions Allowed

• Only expenses directly connected to
  earning taxable income deducted
  • Includes expenses such as brokerage fees for
    investment accounts
  • Does not include fundraising expenses or
    political campaign expenditures
• $100 specific deduction allowed
Form 1120-POL
            Form 1120-POL

• Form 1120-POL required to be filed if
  organization has taxable income after taking
  $100 specific deduction
• Activity can be structured to avoid receipt of
  taxable income so no Form 1120-POL required
• Organization may file Form 1120-POL to start
  statute of limitations period running
• Form 1120-POL due 15th day of 3rd month after
  year end (March 15th for calendar year)
             Form 8871
• Required to be filed within 24 hours of
  establishment or within 30 days of material
  change to be tax-exempt
• Must be filed electronically at
• Organization is taxable political
  organization until Form 8871 is filed
• IRS may waive tax for reasonable cause
Political Organization Filing and
           Form 8872
• Only required if Form 8871 filed
• QSLPOs not required to file
• Failure subjects organization to
  assessment of 35% of contributions
  and expenditures not properly
• IRS may waive assessment for
  reasonable cause
Form 8872
               Form 8872

• Periodic reports of contributions and
  • Even-numbered years: monthly or quarterly
    with pre- and post-election reports
  • Odd-numbered years: monthly or
• Organizations with contributions or
  expenditures exceeding $50,000 for the
  year must file electronically
                Form 8872

Contributor and Payee information disclosed
• Name
• Address
• Amount of Contribution or Expenditure
• Occupation (if contributor or payee is
• Employer (if contributor or payee is individual)
• Date of Contribution or Expenditure
• Purpose (for expenditures)
Form 8872- Schedule A
Form 8872 – Schedule B
• Organization limits activities to state and
  local elections
• Organization required to and reports
  Form 8872 information to a state agency
• State agency makes report available
• Organization makes report available
• No federal candidate or officeholder
             Form 990
• Annual information return
• Only required if Form 8871 filed
• Caucus or association of state or local
  officials not required to file
• QSLPO required to file when gross
  receipts equal $100,000 or more
• All others required to file when gross
  receipts equal $25,000 or more
• Due 15th day of 5th month after year end
  (May 15th for calendar year)
        Public Disclosure
• Form 8871, Form 8872 and Form 990
  required to be publicly available
• Form 1120-POL not publicly available
• Filed forms available on IRS web site at
• Mailed in filings available as pdf images
• Electronic filings searchable on all fields
  and downloadable
          Solicitation Notice

 Must provide notice that contributions are
  not deductible for Federal income tax
  purposes as charitable contributions
  (section 6113)
 Notice 88-120 provides safe harbor
 Exception for small organizations (less
  than $100,000 annually)
Notice 88-120
Employment Taxes
  Other Exempt Organizations

• § 501(c)(3) – Charitable Organizations
• § 501(c)(4) – Social Welfare
• § 501(c)(5) – Labor, Agricultural and
  Horticultural Organizations
• § 501(c)(6) – Business Leagues,
  Trade Associations, etc.
         §501(c)(3) Status:
      Charitable Organizations

An organization must be organized
and operated exclusively for an
exempt purpose—charitable,
religious, educational, scientific,
    § 501(c)(3) and Elections

• Participating in, or intervening in
  (including the publishing or distributing
  of statements), any political campaign
  on behalf of (or in opposition to) any
  candidate for public office –
  Absolutely prohibited
• Encouraging people to participate in
  the electoral process in non-biased,
  neutral manner – § 501(c)(3) purpose
    Political Campaign Activity

• Any and all activities that favor or oppose
  one or more candidates for public office
• Includes candidate endorsements and
  contributions to campaigns
• Includes distributing materials prepared by
  others that favor or oppose candidates
• All facts and circumstances will be
                IRS Activity

• Political Activities Compliance Initiative
  • “Fast Track” evaluation of allegations
  • Review of public campaign disclosures
• Guidance
  • Fact Sheet 2006-17 (plain language)
  • Revenue Ruling 2007-41 (precedential)
  • 21 examples illustrating application of facts
    and circumstances test
       § 501(c)(4) Status:
    Social Welfare Organizations

An organization must be
operated exclusively for the
promotion of social welfare--
promoting the common good
and general welfare of the
people in the community
           § 501(c)(5) Status:
Labor, Agricultural & Horticultural Organizations

  An organization must be
  operated for the betterment of
  conditions of those engaged in
  their pursuits and their earnings
  may not inure to the benefit of
  any member.
         § 501(c)(6) Status:
Business Leagues, Trade Associations, etc.

 Organizations that are
 associations of persons with a
 common business interest which
 promote the common interest and
 do not conduct a regular trade or
 business for profit
  § 501(c)(4), (c)(5), or (c)(6) Status

• Primary activity must be in furtherance of
  exempt purpose
• May engage in non-exempt purpose
  activities without jeopardizing exemption
  provided less than primary activity
• Lobbying may be exempt purpose activity
• Political campaign activity is not exempt
  purpose activity
  § 527(f) Tax Consequences

• Taxed on lesser of political
  expenditures or investment
• May set up separate segregated
  fund - taxed as political
                             501(c)(3)   501(c)(4)   501(c)(5)   501(c)(6)   527

 Receive Tax-Deductible        YES         NO          NO          NO        NO
 Charitable Contributions

May Receive Contributions      YES         YES         YES         YES       NO
 or Fees Deductible as a
    Business Expense

  Substantially Related        YES         YES         YES         YES       YES
  Income Exempt from
   Federal Income Tax
Investment Income Exempt       YES         YES         YES         YES       NO
 from Federal Income Tax

  Engage in Legislative        LTD         YES         YES         YES       LTD
  Engage in Candidate          NO          LTD         LTD         LTD       YES
   Election Advocacy
Engage in Public Advocacy      YES         YES         YES         YES       LTD
Not Related to Legislation
 or Election of Candidates
       For More Information

IRS Charities & Nonprofits Website:
 Subscribe to EO Update – link at bottom of page
IRS Political Organization Website:
TE/GE Customer Account Services:
  • (877) 829-5500 (toll-free)
  • P.O. Box 2508
     Cincinnati, OH 45201
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