Tax-Exempt Organizations by qnl49935


									Tax-Exempt Organizations
The t erm s “non -p rofit ” and “tax -exemp t” ar e n ot sy nonymous. Nonpr ofit
stat us i s determi n ed by S TATE law, whi ch govern s or gani zin g doc um ent s. Ta x
exempt stat us i s gover ned by F ED ERAL la w. Thus, a ll tax -exempt
orga niza tion s are nonprofit , but not all n onpr ofi ts ar e necessarily ta x - exemp t.

Fo r m i n g a n d O p e r a t i n g yo u r S o f t b a l l Te a m
Operating Plan                        Contributions to charitable organi-     “Charities and Nonprofits” on the
Creating an operating plan is         zations by individuals and corpora-     IRS home page. The fee for filing
the first step toward turning an      tions are tax deductible. To qualify,   the articles of incorporation is $30
idea into a successful organiza-      the organization must be a corpora-     and you should send in the origi-
tion. An operating plan puts the      tion, community chest, fund, or         nal with 3 copies. The state will
idea on paper, creates a guide        foundation.                             certify two copies and any addi-
to achieve the desired results,                                               tional copies for $8 each.
and will also help identify poten-    Forming a Corporation
tial problems that may occur dur-     A corporation is formed un-             Name of organization
ing the organization’s existence.     der state law by fil-                   For purposes of avoiding trade-
The operating plan can also be        ing articles of incor-                  mark infringement and promotion
used to measure success and           poration with the                       of the organization itself, the or-
can be changed as the organiza-       secretary of state.                     ganization should adopt a unique
tion grows and its goals pro-         These articles will de-                 name. You can search for exist-
gress.                                scribe the purpose,                     ing names by going to the Office
                                      legal name, address,                    of the Secretary of State,
Creating a Charitable Organi-         board structure, and duration of the Click Online Ser-
zation                                corporation. Sample drafts of arti-     vices, then click California Busi-
Organization that meet the re-        cles of incorporation are available     ness Search. You can then type
quirements of IRC 501(c)(3) are       from the IRS website at                 in the name of your organization
exempt from federal income tax. Follow the link to         to be sure that it isn’t being used
                                                                              by any other organization.
Checklist for Forming an Exempt Organization                                  Bylaws
                                                                              The organization’s bylaws will
      Create an operation plan             Open a bank account              outline the main principles under
                                                                              which the corporation operates.
      Form a corporation                   Apply to the IRS for recogni-    In addition to stating the purposes
                                             tion for tax-exempt status       of the organization, the bylaws
      Create bylaws                                                          should provide for the required
                                            Apply to the Franchise Tax       qualification, duties, and respon-
      Elect board members                                                    sibilities of board members, num-
                                             Board for tax-exempt status      ber of board member, election
      File for an Employer Identi-                                           and removal of board members,
                                            File necessary state and         membership requirements and
       fication Number (EIN)                                                  rights of general members, for-
                                             federal returns and reports
                                                                                                  (Continued on page 3)
                      Page 2                                                                            Tax-Exempt Organizations

                      Common Questions Regarding Your Tax-Exempt Status
What is the difference between non-profit and tax-              than one-third of its support from gross investment in-
exempt status?                                                  come.
Non-profit status is a state law concept. Non-profit status     In addition, the organization must meet the requirements
may make an organization eligible for certain benefits,         of detailed support tests.
such as state sales, property, and income tax exemp-            Generally, an organization computes its support over a
tions. Although most federal tax-exempt organizations           four-year period. A new organization, however, may re-
are non-profit organizations, organizing as a non-profit        quest on its application an advance ruling that it will be
organization at the state level does not automatically          treated as a publicly-supported organization for its first
grant the organization exemption from federal income            five taxable years. At the end of the five-year advance
tax. To qualify as exempt from federal income taxes, an         ruling period, the organization must submit information to
organization must meet requirements set forth in the In-        the IRS to establish that it met one of the public support
ternal Revenue Code.                                            tests for its advance ruling period. If the organization fails
                                                                to provide such information, it will be reclassified as a
How does an organization become tax-exempt?                     private foundation.
An organization becomes tax-exempt by applying for rec-         An organization that wishes to continue to be treated as a
ognition of exemption from the Internal Revenue Service.        public charity after the end of its advance ruling period
The IRS will recognize an organization as tax-exempt if it      should submit Form 8734, Support Schedule for Advance
meets the requirements of the Internal Revenue Code.            Ruling Period, within ninety days after the end of the ad-
Organizations applying for tax-exempt status must submit        vance ruling period. Failure to submit Form 8734 re-
two applications: First, one requesting an Employer Iden-       sults in your organization automatically being reclas-
tification Number (EIN); and second, the other applying         sified as a private foundation.
for recognition of exemption.
                                                                What are my filing responsibilities once I receive/
What is the difference between a private foundation             apply for my tax-exempt status?
and a public charity?                                           An exempt organization is required to file Form 990 annu-
Every section 501(c)(3) organization is classified as ei-       ally, with the exception of organizations with gross re-
ther a private foundation or a public charity. Private foun-    ceipts under $25,000, or organizations in existence less
dations and public charities are distinguished primarily by     than one year with gross receipts less than $37,500. An
the level of public involvement in their activities. Public     organization with gross receipts more than $25,000 and
charity generally receive a greater portion of their finan-     total assets below $250,000 may file Form 990-EZ.
cial support from the general public and have greater in-
teraction with the public. A private foundation is typically    New law: e-Postcard (Form-990N). Beginning in 2008
controlled by members of a family or a small group of in-       (for tax periods beginning after 2006), small tax-exempt
dividuals, and derives much of its support from a small         organizations that previously were not required to file re-
number of sources and from investment income.                   turns because gross receipts were less than $25,000 are
Under the tax law, a section 501(c)(3) organization is pre-     now required to file Form 990-N electronically with the
sumed to be a private foundation unless it requests, and        IRS. The form will list the organization’s Tax Identification
qualifies for, a ruling or determination as a public charity.   Number, legal name, any assumed name, mailing ad-
                                                                dress, information about the principle officer, and evi-
What is an advance ruling period and what are the               dence of the organization’s continuing basis for exemp-
requirements?                                                   tion.
A section 501(c)(3) organization may be classified as a
public charity on the basis that it is publicly supported. An   What happens if Form 990 is filed late?
organization is considered publicly supported if:               If Form 990 is filed after the due date (including any ex-
It normally receives a substantial part of its support from     tensions), and the organization doesn’t have reasonable
a governmental unit or from contributions from the gen-         cause for filing late, the Internal Revenue Service will im-
eral public; or,                                                pose a penalty of $20 per day for each day the return is
It normally receives more than one-third of its support         late. The maximum penalty is $10,000 or 5% of the or-
from gifts, grants, contributions, or gross receipts from       ganization’s gross receipts, whichever is less.
activities related to its exempt purposes, and not more
Volume 1, Issue 1                                                                                             Page 3

(Continued from page 1)                  nances of any member of the or-         Required attachments
mation of committees, authority for      ganization. An EIN is sufficient to     The organization is required to
the board members to receive             open a bank account in the name         submit several documents with
funds and make disbursements,            of the organization. There should       Form 1023 in order for approval
and a mechanism for amending the         be at least two people authorized       to be considered.
bylaws themselves.                       to write checks.                        Bylaws. A “conformed copy” is
                                         If an individual agrees to take         required to be submitted with the
Board members                            over as treasurer for an organiza-      application. A conformed copy
The bylaws should state the num-         tion, make sure the current board       reflects any changes made in the
ber of board members and provide         members have closely reviewed           bylaws since the time of adoption.
detailed job descriptions for each.      the organization’s financial infor-     Description of activities. A de-
Issues include any mandatory ser-        mation. Require a letter stating        scription of the organization’s pur-
vice on committees, required atten-      that all the financial affairs of the   poses and activities is required
dance at meetings, and each board        organization are in order and           with the application, including cri-
member’s authority to receive do-        there are not past discrepancies        teria, procedures, or other means
nations or pay expenses. Board           for which the new treasurer may         the organization has adopted to
members’ voting rights should be         be held accountable.                    carry out its purpose.
defined. If any board member is                                                  Financial data. Statements must
required to report to another, this                                              be submitted showing receipts
should be defined in the bylaws.         Applying to the IRS for Recog-          and expenses for the current year
                                         nition of Tax-Exempt Charita-           and the prior three years, (or the
                                         ble Status                              number of years in existence, if
Employer identification number           The application for recognition by      less than four years). A balance
(EIN)                                    the IRS as an exempt organiza-          sheet for the current year is re-
An EIN is necessary to open the          tion for a 501(c)(3) organization is    quired. If operations have not yet
organizations bank account, and for      made by filing Form 1023                begun, a proposed budget for two
any federal filings that may be re-      (Application for Recognition of         full accounting periods and a cur-
quired. The application for an EIN       Exemption) under 501(c)(3) of the       rent statement of assets and li-
is made for filing IRS Form SS-4         Internal Revenue Code. The ap-          abilities will be acceptable.
(Application for Employer Identifica-    plication is a 26-page form that        Other information. The IRS may
tion Number) by mail, phone, fax,        requires extensive details about        require other information to dem-
or online. The fastest way to get an     the purpose of the organization,        onstrate the charitable function of
EIN is to follow the “Online EIN Ap-     financial information, and opera-       the organization. These items
plication” link from the IRS home-       tions. If average annual gross          may include the organization’s
page at                     receipts have exceeded or will          advertising, publications, distribu-
                                         exceed $10,000, the user fee for        tions, and fundraisers.
                                         applying is $850. If actual or ex-
Bank Account                             pected gross receipts are
Finances should be separated im-         $10,000 or less, the user fee is
mediately from any personal fi-          $400.

   If your 501(c)(3) can show that it anticipates broad financial support, the IRS may treat it as a public
   charity for up to five years from the date of the organization’s formation. This is called an advance ruling.
   The ending date of this period appears on the determination
   letter recognizing your tax-exempt status.
   After you submit the form, the IRS will determine if your organization met one of the public support
   tests. If it did, you will receive a definitive ruling granting public charity status.
Page 4                                                                                          Tax-Exempt Organizations

Jeopardi zing Your 501(c)(3) Status
After an organization qualifies for     stantial, a 501(c)(3) may risk los-    their exempt status. Exempt
501(c)(3) status, it must continue      ing its tax-exempt status.             status is only jeopardized when
to act in furtherance of its exempt                                            the activity generating unrelated
purposes to keep its tax-exempt         Political Campaign Activity: Po-       income makes up a substantial
status.                                 litical campaign activity involves     part of the organization’s overall
                                        directly or indirectly participating   activities.
There are four types of activities      or intervening I any political cam-
that can jeopardize that status.        paign on behalf of or in opposition    Gaming is one of the most com-
These are:                              to any candidate for elective of-      mon and successful types of
                                        fice.                                  fundraising. This can range from
        Private benefit/inurement,                                            sponsoring a bingo game to a
                                        Excessive Unrelated Business           once-a-year raffle or casino night.
        Lobbying,                      Income (UBI): UBI is income            Most often, gaming will generate
                                        from a regularly-carried-on            UBI.
        Political campaign activity,   trade or business that is not
         and                            substantially related to the or-       You may also need to withhold
                                        ganization’s exempt purpose.           taxes from the prize winner. The
        Activities generating ex-                                             rates and requirement of with-
         cessive unrelated busi-            Regularly-carried-on              holding depend on the game
         ness income (UBI).                  means the activity shows          played and whether the winner
                                             frequency and continuity and      furnishes taxpayer identification at
Private benefit: 501(c)(3)s must             that it is conducted in the       the time the prize is awarded.
avoid all activities that will sub-          same way that a non-exempt
stantially benefit the private inter-        organization would run a          Organizations with gross income
est of any individual or organiza-           similar business.                 of $1,000 or more from unrelated
tion.                                                                          business must file Form 990-T
                                            Not substantially related         annually.
Inurement: No part of an organi-             means that the activity is not
zation’s net earnings may inure to           important to furthering the       If an organization does not file for
the benefit of a private share-              exempt purpose of the or-         three consecutive years, its tax
holder or individual. This means             ganization (other than gener-     exempt status will be revoked as
that a 501(c)(3) organization is             ating income for it).             of the filing due date for the third
prohibited from allowing its in-                                               return. If tax-exempt status is re-
come or assets to accrue to insid-      Some of these activities are abso-     voked on this basis, the organiza-
ers.                                    lutely prohibited, while others are    tion must apply (or reapply) by
                                        restricted.                            filing Form 1023 and paying the
Lobbying: Lobbying is an activity                                              appropriate user fee to have its
designed to influence legislation.      A small amount of unrelated trade      tax-exempt status reinstated. If it
If its lobbying activities are sub-     or business activity in relation to    can show reasonable cause for
                                        an organization’s exempt purpose       not filing, the reinstatement of tax-
                                        activity will have no impact on        exempt status may be retroactive.
Volume 1, Issue 1                                                                                                              Page 5

Sample               Required Disclosures
Contribution Letters                       Public Inspection Rules for 501(c)(3) Organizations
                                           In return for not paying income taxes and for receiving tax-deductible contributions, Con-
                                           gress requires 501(c)(3) organizations to disclose the following information to the public
Dear [Donor]:                              upon request:

                                              Annual returns-Form 990, 990-EZ, 990-PF, and any Forms 990-T
Thank you for your cash contribution of
$150 that [organization’s name] received      All Form 990 schedules, attachments, and supporting documents
on [date received]. In exchange for your      Applications for exemption and all supporting documents (Form 1023)
contribution, we gave you a cookbook
worth an estimated fair market value of       Letter from the IRS ruling that your organization has exempt status
$25. Therefore, for Federal income tax     You can post these documents on your website and direct people there if they make re-
purposes, your contribution deduction is   quests over the phone or via email. If you don’t have the documents posted, you need to
limited to $125. Thank you again.          make a copy of the forms. You can charge the requesters a reasonable fee for doing so.

Sincerely,                                 If the request is made in person, you should give them copies that day. If your organiza-
                                           tion doesn’t have an office or has limited hours, the request should be made available
                                           within two weeks.

Dear [Donor]:
                                               “Remember: If you sell tickets of any kind that gives a donor a chance
Thank you for your cash contribution of
$300 that [organization’s name] received
                                               to enter a drawing to win money, this is not a „donation‟. The donor is
on December 21, 2007. No goods or              unable to claim a deduction for the amount of the ticket.”
services were provided in exchange for
your contribution.


                                           Quid Pro Quo Disclosures
                                           A contribution made by a donor in exchange for goods or services is a quid pro quo.
                                           If an exempt organization receives a donation greater than $75, and the donor receives
                                           goods or services in return for the contribution, the exempt organization must disclose the
                                           value of those goods or services to the donor. Donors can only claim a deduction for the
                                           amount the contributed that is above the value of the goods or services they received.
                                           The disclosure must provide a good-faith estimate of the fair market value of the goods or
                                           services. It must also state that they can only claim the contribution amount that exceeds
                                           the fair market value of the goods or services provided.

                                           Non-Quid Pro Quo Acknowledgments
                                           When you do not give a donor something in return for their contribution, you do not have
                                           a disclosure requirement. However, a donor cannot claim a tax deduction for any contri-
                                           bution unless they maintain a record of the contribution in the form of either a bank record
                                           or a written communication from the organization. In addition, without a written acknowl-
                                           edgment from the organization, donors cannot claim tax deduction for any single contribu-
                                           tion of $250 or more.
D e a n ' s T a x Se r v i ce

780 Camino Caballo                                                 Every year you must file your renewal to the
Nipomo, CA 93444
                                                                   Secretary of State to keep your corporation
Phone: 805-929-2090
Fax: 805-929-1806
                                                                   active. You can check your organizations
E-mail:                                   status at
                                                                   You must file your federal and state income
                                                                   tax forms. Unless you have unrelated busi-
                                                                   ness income, your tax liability for the federal
                                                                   government should by zero. The State of
                                                                   California has a $10 filing fee.
Enrolled to practice before the IRS                                You must file an Annual Registration Re-
                                                                   newal Fee Report to Attorney General of
                                                                   California. Depending on your gross annual
                                                                   revenue this fee can range from $0-$50.
       Melodie C. Dean, EA
                                                                   If you fail to adhere to these guidelines, you
                                                                   may jeopardize your tax-exempt status. You
                                                                   can check your tax-exempt status at
                                                          Click on the tab: Charities &
                                                                   Non-Profits. Click Search for Charities.
                                                                   Type in the name of your organization.

In Conclusion
Having your own softball team can be fun and rewarding. You have to realize that there is a lot of time and effort that needs to be done to
keep the organization within the requirements of both Federal and State laws. It would be a good idea to recruit others to help meet these
requirements. This way you as a coach will be able to focus on coaching your team.

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