Federal tax law provides tax benefits to nonprofit organizations recognized as exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code (IRC). It requires that most organizations apply to the Internal Revenue Service (IRS) for that status.
Benefits of having 501(c)(3) status include exemption from federal income tax and eligibility to receive tax-deductible charitable contributions. To qualify for these benefits, most organizations must file an application,and be recognized by, the IRS. Another benefit is that some organizations may be exempt from certain employment taxes.
Individual and corporate donors are more likely to support organizations with 501(c)(3) status because their donations can be tax deductible. Recognition of exemption under section 501(c)(3) of the IRC assures foundations and other grant-making institutions that they are issuing grants or sponsorships to permitted beneficiaries.
To be tax exempt, an organization must have one or more exempt purposes, stated in its organizing document. Section 501(c)(3) of the IRC lists the following exempt purposes: charitable, educational, religious, scientific, literary, fostering national or international sports competition, preventing cruelty to children or animals, and testing for public safety.
The most common types of 501(c)(3) organizations are charitable, educational, and religious.
The term church includes synagogues, temples, mosques, and similar types of organizations. Although the IRC excludes these organizations from the requirement to file an application for exemption, many churches voluntarily file applications for exemption. Such recognition by the IRS assures church leaders, members, and contributors that the church is tax exempt under section 501(c)(3) of the IRC and qualifies for related tax benefits. Other religious organizations that do not carry out the functions of a church, such as mission organizations, speakers’ organizations, nondenominational ministries, ecumenical organizations, or faith-based social agencies, may qualify for exemption. These organizations must apply for exemption from the IRS.
Every organization that qualifies for tax-exempt status under section 501(c)(3) of the IRC is further classified as either a public charity or a private foundation. Under section 508(b) of the IRC, every organization is automatically classified as a private foundation unless it meets one of the exceptions listed in sections 508(c) or 509(a).
For some organizations, the primary distinction between a classification as a public charity or a private foundation is the organization’s source of financial support. Generally, a public charity has a broad base of support while a private foundation has very limited sources of support. This classification is important because different tax rules apply to the operations of each. Deductibility of contributions to a private foundation is more limited than deductibility of contributions to a public charity. In addition, private foundations are subject to excise taxes that are not imposed on public charities. For more information about the special tax rules that apply to private foundations, see Publication 4221-PF, Compliance Guide for 501(c)(3).
Within 30 days You will receive a “Letter of Acknowledgement” of your request stating that they
Received your application and they will assign a document locator number. Your application WILL BE entered into the computer system at the I.R.S. Processing Center in Covington, Kentucky. After it will be sent to the Cincinnati office for initial review. Some applications can be approved based on this initial review. If this is the case, you will receive a letter stating that you are exempt from Federal income tax. If the initial review indicates that additional information or changes are necessary, your application will be assigned to an Exempt Organization Specialist in Cincinnati or in another IRS office who will call or write. NOTE! GENERALLY MOST APPLICATIONS NO MATTER HOW THOROUGH THEY ARE PREPARED WILL BE REVIEWED BY AN IRS AGENT.Applications are assigned in the order they are received. If the additional information indicates that you qualify for exemption, you will receive a letter stating that you are exempt from Federal income tax.
You may normally expect to hear from them within 120 days or sooner.
The IRS tax specialist reviewing an application may request additional information in writing. If all information received establishes that an organization meets the requirements for exemption, the IRS will issue a determination letter recognizing the organization’s exempt status and providing its public charity classification. This is an important document that should be kept in the organization’s permanent records.
Exempt Organizations Annual Reporting Requirements – Annual Electronic Notice (Form 990-N e-Postcard ) for Small Organizations $50,000 for tax years ending on or after December 31.
Any organization that fails to file a required annual return or notice for three consecutive years will automatically lose its tax-exempt status, by act of law, as of the due date of the return for the third consecutive year.
Web-based Training Modules, www.stayexempt.irs.gov,
EO Customer Service, (877) 829-5500
A request for expedited processing must be made in writing and must fully explain the compelling reason. Granting expedited processing is at the discretion of the IRS.
In general, applications are processed in the order received by the IRS. Sometimes, however, the IRS will work a case outside the regular order. For expedited processing to be granted, however, there must be a compelling reason to process the case ahead of others. Compelling reasons include the following:
A pending grant, where failure to secure the grant will have an adverse impact on the organization’s ability to continue operating.
A newly created organization providing disaster relief to victims of emergencies. IRS errors have caused undue delays in issuing a determination letter.
The name of the person or organization committed to giving the grant or asset, The amount of the grant or the value of the asset, The date the grant will be forfeited or permanently redirected to another organization, The impact on the organization’s operations if it does not receive the grant/asset, and The signature of a principal officer or authorized representative.
Under the Act, the governing body of a nonprofit corporation is called the “board of Directors and the individuals who serve on the board are referred to as “directors.” Sometimes nonprofit organizations call their board a “board of trustees” and refer to the Members of the board as “trustees.”
Directors manage the business affairs of the corporation. Usually, this means that the board sets policy, adopts and oversees the budget, hires the executive director and makes other major decisions for the organization. Sometimes, particularly as organizations are just starting up, the board of directors is involved in the day-to-day management of the organization.
If you have not done so, it is important to develop a mission statement for the organization. A clear, mission statement becomes the basis for developing purposes of the organization, as well as a necessary tool for raising funds, recruiting directors and Volunteers and planning activities and programs of the organization.
The rules and regulations enacted by an association or a corporation to provide a framework for its operation and management Bylaws are the most important legal document of any organization Bylaws outline in writing the day-to-day rules for your organization and provide comprehensive guidelines to keep things running smoothly.
Bylaws outline the structure of an organization and should be customized for each organization . Bylaws establish and protect the rights, and duties and responsibilities of an organization’s members, Board of Directors, executive committee.
The purpose of the conflict of interest policy is to protect this tax-exempt organization’s (Organization) interest when it is contemplating entering into a transaction or arrangement that might benefit the private interest of an officer or director of the Organization or might result in a possible excess benefit transaction. This policy is intended to supplement but not replace any applicable state and federal laws governing conflict of interest applicable to nonprofit and charitable organizations.
Form1023 is the IRS application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code. Eligible organizations file Form1023 to obtain recognition of exemption from federal income tax under.