Introduction
Managing a compliant 501(c)(3) organization, what is normally called non-profit organization, requires five basic steps to follow. With a few exceptions, not following these steps will mean your organization is non-compliant and subjected to closure.
You may contact Prime2Prime Ideas to help you start your section 501(c)(3) Organization and to develop your startup and operating documents and manage your books.
This article covers the lifecycle of a typical tax-exempt organization. It addresses the important steps to help you become familiar with the benefits and responsibilities associated with achieving exempt status. The first point to note is that the term 501(c)(3) refers to section 501(c)(3) of the Internal Revenue Code – where the rules and regulations governing exempt organizations are found. Tax-exempt organizations are commonly referred to as 501(c)(3)s. 501(c)(3) includes both public charities and private foundations.
Being a tax-exempt organization is not a static thing. It’s a process with a lifecycle, benefits and responsibilities. There are steps to follow in applying for tax-exempt status. There are resources on the IRS website, however you may employ the services of a professional to kick-start, structure and manage your organization to stay compliant.
Also note that there are different types of exempt organizations. The IRS has a course on how to Apply for Tax-Exempt Status for these exempt organizations on its website. One of the major benefits enjoyed by Section 501(c)(3) organizations is their exemption from filing the normal Federal Taxes filed by tax paying organizations. This status, with the exception of a few organizations which are exempted even if they don’t apply to be exempted, must be explicitly granted by the IRS. Which means, you must apply and be granted this relief.
There are five steps to the lifecycle of a tax-exempt organization. They include
- Starting Out
- Applying for the Exemption
- Required Filings
- Ongoing Compliance and
- Significant Events
The first two stages are single filings (you do these ones) and the last three are periodic filing (you do this periodically so long as the organization exists).
Starting Out
This is the first step in creating a section 501(c)(3) organization. It starts with creating an organization under a state’s law. Your state will have rules that would likely make your organization a non-profit, which is a state level classification. When creating the organization, you may need to create organizing documents based on the requirements of your state. You will need these organizing documents if you apply for tax exemption.
If you’d like to apply for tax exemption, which is a federal level status, you’ll need to acquire an employer identification number, or EIN even if you don’t have employees. Your EIN is similar to your personal social security number, only it’s for your business. It identifies you to the IRS.
Finally, you need to determine what type of tax-exempt organization you have. You’ll need this information when you apply for tax-exempt status.
Applying for the Exemption
To apply for an exemption for your section 501(c)(3) organization, you’ll need to fill out Form 1023 or Form 1023-EZ. That’s a big step. There are resources to help you on the IRS website or you may need a professional to help you complete this form accurately.
Required Filings
After the IRS has granted you your exemption status, you have to meet the mandatory annual filing requirements. You’ll need to file annual exempt-organization returns, and you could be required to file unrelated business income tax filings, and other returns and reports. Once you have your tax-exempt status, you must understand how to maintain an existing organization by complying with the required periodic filing.
Ongoing Compliance
This next step is important to keep your tax exempt status active. It’s helpful to understand how an organization can avoid jeopardizing its tax-exempt status. To do that, you’ll need to understand employment taxes, public disclosure requirements, and other ongoing compliance issues must be complied with. The IRS has a course on how to do this, alternatively, you may hire the services of a consultant to help you stay compliant. The IRS has information on Maintaining Tax-Exempt Status and also on Required Disclosures, which tells you what information the public is entitled to see, as well as Employment issues.
Significant Events
This last step in the lifecycle of a section 501(c)(3) organization has to do with your tax-exempt status. The events include, but aren’t limited to
- Audits
- Private letter rulings and
- Termination proceedings
To be sure that tax-exempt status is right for you, you’ll need to understand some of the benefits and responsibilities that come with tax-exemption, the steps required to become tax-exempt, and the rules your organization must follow after you apply. As your organization grows, your exempt status responsibilities will grow, too.
Benefits of operating a Section 501(c)(3) Organization
In addition to being exempt from federal income tax, contributions to your organization are tax deductible, you may be exempt from paying state income, sales and employment taxes, you have access to reduced postal rates, you are exempt from paying federal unemployment tax, and you can receive tax-exempt financing.
Responsibilities of operating a Section 501(c)(3) Organization
There are three key responsibilities of operating a section 501(c)(3) organization. These are;
- Recordkeeping
- Annual Filings and
- Public Disclosures
Recordkeeping
Keep detailed records of both Financial and Non-Financial records. You should keep detailed records, including records you’d probably want to keep for any business. For example, you’re required to keep books and records detailing all activities, both financial and nonfinancial. The IRS has publications and compliance guidelines for 501(c)(3) Public Charities, on why you need to keep records, what records you should keep, and how long to keep your records.
Annual Filings
The IRS does not need to see all of your records on a regular basis. But the records you keep will allow you to have everything you may need to submit your required annual filings.
Most public charities recognized as tax-exempt under section 501(c)(3) of the Code are required to file an annual information return: either the Form 990 or Form 990-EZ. Certain categories of organizations are exempted from filing Form 990 or Form 990-EZ – including churches and very small organizations. However, most small organizations that aren’t required to file Form 990 or 990-EZ must file an annual electronic notice, the Form 990-N, also known as the e-Postcard.
Public Disclosure
There are specific records that need to be made public upon request. Section 501(c)(3) organizations must make their exemption application and the three most recent annual information returns (your Form 990s) available to the public, upon request and without charge (except for a reasonable charge for copying). If your organization has $1,000 or more in gross income from an unrelated business, it must file Form 990-T, Exempt Organization Business Income Tax Return, and that must be made available as well.
You should make the documents available at the organization’s principal office during regular business hours and requests can be made in person or in writing.
This article was produced from the IRS course on Applying for Tax-Exempt Status!
Edited by: Prime2Prime Ideas Research for information purposes
