The laws and regulations governing exempt organizations are found in Section 501(c)(3) of the Internal Revenue Code, hence the phrase 501(c)(3). The designation “501(c)(3)” is often used to refer to tax-exempt organizations. Public charities and private foundations qualify as 501(c)(3) organizations.
Having your company qualify for tax exemption is nothing to brag about. There is a natural progression to this process. A tax-exempt organization goes through the following typical five-stage life cycle:
Initial Steps
Exemption Requesting
Mandatory Reporting
Maintaining compliance and noting noteworthy occurrences.
Forming a company and filing for exemptions should be repeated just once. It would be best if you created a corporation by the laws of your state. To classify your organization as a non-profit, a designation made at the state level, you must follow the rules established by your state. Articles of Incorporation are the foundational documents of a corporation. A Charter, Constitution, and Articles of Association are the governing documents of a non-profit organization. The organization’s articles of incorporation must include a provision restricting its activities to one or more exempt purposes specified in the Internal Revenue Service code. It does not give the organization permission to do anything that isn’t directly related to its tax-exempt mission. A provision for its termination is necessary.
Organizational assets must be irrevocably set aside for the exclusive benefit of the organization’s exempt purpose as defined in Section 501(c)(3). The bylaws are separate from the articles of incorporation. Bylaws are the governing documents of an organization. The bylaws of most groups are not required to include any particular language by federal law. However, by-laws may be required by state law; it’s a good idea to check with the relevant authorities in your state to be sure.
Depending on state laws when starting a business, administrative paperwork may need to be drafted. You’ll need these for your tax exemption application. Employer Identification Numbers (EINs) are required when filing for tax exemption at the federal level. An EIN, which is like an SSN but is used just for a business, is required even if you don’t have any employees. In other words, the IRS could use it to pin you down. The Internal Revenue Service is the typical issuer of such a document. There are several ways to apply for an EIN.
Submit your application via the web.
Please fill out all the necessary paperwork and fax it to the IRS.
Please send it to the IRS by mail.
EIN applications are accepted over the phone.
The IRS requires that any entity applying for an EIN reveal the name and taxpayer identification number of its “Responsible Party,” typically its chief executive officer, general partner, grantor, or owner.
You must complete the appropriate paperwork and pay the associated expenses to apply for a 501(c)(3) tax exemption. The gross income is used to calculate the user fees. Incoming funds from all channels before deducting all outgoing expenditures. Over four years, it considers the company’s actual and projected gross sales. For an organization’s exemption to be effective as of the date it was formed, it must file for recognition of exemption with the IRS no later than 27 months after the end of the month in which it was incorporated. This due date may be extended if specific conditions are satisfied. The IRS typically processes and accepts straightforward applications within 90 days of receiving the completed application and associated user fees. The IRS would assign an Exempt Organization Specialist to handle particularly complicated applications that require extensive supporting documentation and take over 90 days to process. It could take as long as six months. The IRS would send a determination letter confirming the organization’s tax-exempt status and outlining the classification and documentation requirements for public reporting.
Religious institutions such as churches, synagogues, temples, and mosques are not necessary to apply to be excluded from federal income tax and to have donations deducted from taxable income. Most of them seek the decision letter confirming their tax-exempt status and stating that donations to them are legitimate charitable deductions.
Statutory charities include religious institutions, educational institutions, healthcare providers, and hospitals. Organizations that provide help to other public charities are considered to be “other public charities.”
To be recognized as a public charity, an organization must meet specific criteria, such as having widespread public support.
The organization meets Section 501(c)(3) requirements if its activities are restricted to one or more abovementioned activities. It requires that all of the organization’s resources be used exclusively for the exempt purpose for which it was established. The operational test requires evidence that the organization’s primary operations will be directed toward achieving its exempt goal. The group must also strictly forbid itself from engaging in certain illegal acts and restrict its involvement in others.
To prove it has public backing, an organization must show that it receives more than one-third of its funding from contributions, membership fees, and gross receipts from activities related to exempt functions and no more than one-third from gross investment and unrelated business income combined. Accurate record-keeping is crucial in this regard.
When you first apply to the IRS for tax-exempt status, they will conduct the assessment and test. Your organization risks losing its tax-exempt status and becoming subject to taxes and penalties if it engages in banned activities after acquiring 501(c)(3) status. Organizations, not private foundations, whose annual gross receipts often do not exceed $5000, are typically classified as public charities. This includes churches, their integrated auxiliaries, conventions, and associations of churches. In the absence of evidence to the contrary, the IRS treats every organization that claims 501(c)(3) status as a private foundation.
The primary distinction is the origin of the organization’s funding. Public charities can draw on a far larger pool of donors than private foundations. In addition, public charities are not required to pay excise taxes but private foundations must.
For most organizations, the IRS will recognize them as public charities regardless of whether or not they receive any donations if they pass the public charity test during the first five years. It is calculated for the current year plus the four prior years based on information supplied in yearly reporting beginning in year 6.
The IRS issues group exemption letters to subgroups of a larger organization. There is no need for individual applications if they decide to apply as a group. Letters requesting a group exemption are equally effective as personal exemption letters.
After filing for tax exemption, organizations can continue operations as usual. The application process does not guarantee that donors’ contributions will be tax deductible. While it waits for clearance, the organization can keep complete records of financial and non-financial operations according to the protocol for record keeping.
With the 501(c)(3) classification, a charity is exempt from paying federal income tax, donors can deduct donations from their taxable income, and the organization receives preferential postal rates. There’s a chance you won’t have to pay income, sales, or even state employment taxes. The group is eligible for tax-free funding.
High standing requires diligent effort. The sole aim of a 501(c)(3) organization must be “religious,” “charitable,” “scientific,” or “educational.” Safety, literacy, education tests; tests promoting regional, national, and worldwide amateur sports contests; and cruelty-prevention tests on humans and nonhumans. Also crucial is maintaining accurate records. The company must maintain thorough records of all transactions, financial and otherwise. The IRS publication’s compliance guide explains why you must keep records, what kinds of data you should preserve, and how long. Most public charities that qualify for tax exemption must submit a yearly report. Maintaining accurate records facilitates the filing of any necessary
annual reports. The organization must make Certain IRS filings public, but this does not apply to all data. The following records must be supplied upon request. Three years’ annual reports for the organization, filed on time or with the proper extensions. Complete Form 990, including all attachments and supporting documents (but not donor names and addresses). Tax-exempt status verification letter from the Internal Revenue Service. The group does not provide complimentary conference rooms.
R. T. Rinu Cherian
Free Tax Preparation for the Poor
Legal Aid Society of Northern New Jersey
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