America’s Byways Resource Center Obtaining and Maintaining Tax Exempt Status for Small NonProfits
Scott R. Haumersen, CPA, Managing Partner March 18, 2008
Questions? Q i ?
Email me during the presentation at g p scott.haumersen@wegnercpas.com
2
Tax Exempt Status Discussion Outline
• • • • • Types of Exempt Organizations Obtaining Exemption Maintaining Exemption State Requirements Alternatives: Fiscal Sponsorships Al i Fi l S hi
3
Types of Tax Exempt Organizations
• 501(C) 3 – Charitable, Religious, Educational, Scientific • 501 (C) 4- Civic Leagues & ( ) g Social Welfare Organizations • 501 (C) 6 Business Leagues 6-
4
Requirements
• Significant Differences
• • • • • • Charitable Contributions Lobbying Political activity Private Inurement Purpose/Dissolution Clauses Public B fit P i t B fit P bli Benefit vs Private Benefit
5
Obtaining Exemption
• Incorporation in a State
• Articles and Bylaws • Limits liability of Board members • Must have IRS required wording
• • • •
Preparation of IRS form 1023 or 1024 Filing fee Fili f $750/$300 Process 3-6 months Group E G Exemption letter?? ti l tt ??
6
Application for 501(c)(4) or 501 (c) (6) Status
• Generally not required to file as exemption can be retroactive • File form 1024 • B fit of filing is a Benefit f fili i determination letter and public recognition of status. iti f t t
7
Application for 501(c)(3) Status
• Exempt from application if annual g gross revenues will be under $5,000
• May create some doubts about deductibility of donations by donors and may limit receiving grants
• Fil form 1023 within 27 months File f ithi th of forming organization
8
Maintaining Exemption
• R i d to comply with IRS Required t l ith code section 501 and laws governing nonprofit organizations i fit i ti
• Filing IRS Form 990 • Public disclosure • Sarbannes Oxley and other laws
9
Filing Requirements
• New forms for 2008!
• 990- N annually if gross revenues are less than $25,000. • 990-EZ annually if gross revenues less than $1.0M/$.5M/$.2M phased in. • Due 4 1/2 months after year end. Can y extend three months (twice). Form 8868 • Late penalties are large ($20 per day for small organizations) • IRS is less willing to waive penalties than in the past
10
Form 990 Tips
• Form is combination of financial and compliance disclosures and now li di l d governance issues. • Read the instructions
• Includes topics such as: donor acknowledgements, valuing special events, requirements for public i f bli inspections of 990 and a discussion of intermediate sanctions
• Historically, IRS does not review forms beyond missing pages and one or two boxes
11
More 990 Tips
• Publicly available at: www.guidestar.org
• Assume that donors will look at it • Treat it as marketing tool
• Possibility of filing 990-T if have y g unrelated business activity
• Example: Running a gift shop in a visitor center
12
State Requirements
• Each State has it s own it’s requirements for organizations doing business or fundraising in that State
• Check with State Attorney General y or • Department of Regulation and Licensing
13
Example: Michigan
Register with Attorney General for Fundraising License
• Must have a Form DAG009-005 to fundraise with general public in MI • File “Application for License to Donations” registration Statement” within 30 days of starting to fundraise
14
State of Michigan Form DAG 009-005
• File annually • D e fi e months after year-end, Due five ear end can request one month extension • Requires a review by a CPA if i i b receipts more than $100,000 and audit for more than $250,000 di f h $2 0 000
15
State of Michigan Sales Tax Exemption
• MI Dept of Revenue form • N d IRS d Need determination letter for i i l f application. 501 (3) and (c) 4 • May still need to pay sales taxes if sell over $5,000 per year in sales taxable items
16
State of Michigan
• File annual corporate report to maintain corporate status
17
Alternatives: Fiscal Sponsorships
• Look for an organization or government unit to sponsor your t it t activities
• Closely aligned with your mission • Structure and oversight • Low cost
18
Fiscal Sponsorships are Very Common
• Many small organizations start out being sponsored • A group with charitable status may be asked to sponsor another group to help receive donations and provide general support
19
…And are Commonly Done Wrong……
• Fiscal Agency is generally not allowed g p g p • A group that is using its status to help another group is 100% responsible for how the money is used by the other entity • There needs to accountability and controls.
• Written agreement • Fiscal oversight
20
…How to do it Right How
• One structure is to award a grant to the sponsored group with funds that came from a donation.
• Written agreement • Progress reports on grant expenses • Th recipient entity must also report The i i t tit t l t income and expense as some type of entity – partnership, sole proprietor or unincorporated association. i t d i ti
21
Tax Reporting for Fiscal Sponsorships
• Another structure is to report the p group p j sponsored g p as a project or activity of the sponsor.
• The sponsor must report revenue and expense of the pass through entity. • It must fit their exempt purposes and mission
22
Advantages of Tax Exemption/ Incorporation
• Deductibility of contributions • Formalizes organization and governance • R l estate and sales tax Real t t d l t exemptions • May limit liability
23
Disadvantages of Tax Exemption/Incorporation
• Regulatory oversight by IRS and others • Increased costs for compliance • M More record k i d keeping • Potential for penalties if deadlines are missed
24
Resources
• www.IRS.gov
• • • • 1023 Form and Instructions 1024 Form and Instructions Publication P bli ti 557 Charities & Nonprofits
• Applying for 501(3) status Guide • Compliance Guide for 501(c)3 organizations • www.wegnercpas.com/YnonProfit
25
Contact Information C t tI f ti
Scott R Haumersen CPA, Partner Haumersen, CPA Wegner CPAs and Consultants 2110 Luann Lane Madison WI 53713 608-442-1925 scott.haumersen@wegnercpas.com www.wegnercpas.com
26