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 www.ca.gov. 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. www.irs.gov. 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 www.irs.gov. 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. Sincerely, 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: firstname.lastname@example.org status at www.ca.gov 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 www.irs.gov. 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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