The term 501(c)(3) refers to Section 501(c)(3) of the Internal Revenue Code, which contains the rules and regulations governing exempt organizations. Tax-exempt organizations are commonly known as 501(c)(3). 501(c)(3) includes both public charities and private foundations.
Being a tax-exempt organization is not static. It is a process with a life cycle. The five normal steps for the life cycle of a tax-exempt organization include:
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starting
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waiver request
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required submissions
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Ongoing compliance and
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Significant events.
Getting started and applying for waivers is unique because you only need to do it once for a single organization. You need to create an organization under the law of your state. Your state will have rules that would likely cause your organizations to qualify as a nonprofit organization, which is a statewide classification. The organizations, the organizational documents are their Articles of Incorporation. For unincorporated organizations, it is the Articles of Incorporation, the Constitution, and the Articles of Association. The organizing document must have a clause limiting the purposes of the organization to one or more of the exempt purposes listed in the IRS code. It does not expressly authorize the organization to participate in activities that are not in development of its exempt purposes. It should have a dissolution clause. The organization’s assets must be permanently dedicated to an exempt purpose described in Section 501(c)(3). Bylaws are different from organizational documents. The statutes are the internal rules of operation of the organization. Federal law does not require specific language in the statutes of most organizations. However, state law may require you to have statutes, so it’s a good idea to contact the state for its specific requirements.
When you are creating your organization, you may need to create organization documents based on your state’s requirements. You will need them when you apply for tax exemption. When you apply for a tax exemption, which is a federal level status, you will need to acquire an Employer Identification Number (EIN). Even if you don’t have employees, you would still need an EIN that is similar to your personal Social Security number, but it is for your business only. I would identify it to the IRS. It is usually issued by the IRS. Apply for the EIN in different ways.
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Apply online.
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Complete the required form and fax it to the IRS.
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Submit the form to the IRS.
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You can even apply for the EIN over the phone.
All EIN applications must disclose the name and taxpayer identification number of the actual principal officer, general partner, grantor, or owner, whom the IRS would refer to as a “Responsible Party.”
To apply for tax-exempt status under Section 501(c)(3), you must complete the relevant forms and submit them with user fees. User fees are based on gross receipts. Total money that an organization receives from all sources before taking out costs or expenses. It is based on the gross revenue an organization received/plants to receive during a four-year plan. An organization is generally required to apply for exemption recognition with the IRS within 27 months after the end of the month in which it was organized for the exemption to become effective from the date of formation. When certain requirements are met, this period may be extended. Normally, upon receipt of the application and user fees, the IRS approves simple applications within 90 days or less. The IRS would have an Exempt Organization Specialist assigned to process complex applications that need substantial data and take more than 90 days to process. In some cases, it can take up to six months. The IRS will issue a determination letter acknowledging exempt status showing the foundation’s classification and required permanent records for public disclosures.
Churches, including synagogues, temples, and mosques, are not required to apply, but they are still exempt from federal income tax and the contributions they receive are tax deductible, but they can still apply. Most of them request to receive the determination letter that proves their tax-exempt status and specifies that contributions to them are tax deductible.
Churches, schools, and organizations that provide medical or hospital care are statutory charities. Other public charities are organizations that receive significant public support, including organizations that provide support to other public charities.
To qualify an organization as a public charity, it has to pass the organization and operation test, broad public support, etc.
Organizational test:- The organization limits its purpose to one or more of the exempt purposes listed in Section 501(c)(3). It does not allow the organization to engage in non-exempt activities and the organization’s assets must be permanently dedicated to an exempt purpose. For the operational test, the organization must show that its primary activities will be to further its exempt purpose. The organization must also limit participation in certain types of activities and absolutely refrain from other prohibited activities.
To demonstrate public support, the organization must demonstrate that it receives substantial support and contributions from publicly supported organizations, government units and/or the general public or no more than 1/3 support of gross investment income and income Combined unrelated business and more than 1/3 support from contributions, membership dues, and gross income from activities related to exempt functions. In this, good record keeping is an important factor.
The IRS evaluates the activities and the test is done when you first apply for tax-exempt status. When the organization after receiving 501(c)(3) status engages in prohibited activities, you could lose your tax-exempt status and be subject to both taxes and penalties. Churches, their integrated auxiliaries, and conventions or associations of churches and an organization that is not a private foundation and whose gross receipts in each taxable year normally do not exceed $5,000 are normally treated as public charity. When an organization qualifies as a 501(c)(3) organization, the IRS assumes it is a private foundation unless you can show that it is a public charity.
The main difference is where the organization’s financial support comes from. In general, a public charity has a broad base of support, while a private foundation has very limited sources of support. There are also different tax rules, such as private foundations, which are subject to excise taxes that are not imposed on public charities.
Normally, the IRS grants public charity status when you pass the public charity test for the first five years, based on intended support is treated as a public charity regardless of actual support. From year 6 onwards, the IRS, based on the information provided in the annual reports, is calculated for the current year plus four prior years.
The IRS issues group exemption letters for smaller groups associated with a single core group. You can apply as a group and there is no need to apply individually. Group exemption cards have the same effect as individual cards.
After applying, organizations can operate as a tax-exempt organization while they wait for approval. Donors are not sure that their contributions will be deductible until the application is approved. While waiting for approval, the organization can follow the record keeping procedure, keeping detailed records of financial and non-financial activities.
The benefits of Section 501(c)(3) status are that the organization gets federal income tax exemption, tax-deductible contributions, and reduced postage rates. Possible exemption from state income, sales and employment taxes. The organization may receive tax-free funding.
Status comes with responsibilities. The 501(c)(3) organization is organized and operates exclusively for exempt purposes that are: religious, charitable, scientific, testing for public safety, literacy, or education, designed to promote national or international amateur sports competition, for the prevention cruelty to children or animals. Record keeping is another important aspect. The organization must maintain detailed records of financial and non-financial records. IRS publication, Compliance Guide has information on why you need to keep records, what records you should keep, and how long you should keep your records. Most public charities recognized as tax-exempt are required to file an annual information return. Good records make it easier to complete the required annual filings. The organization is required to make public certain documents it files with the IRS, but not all of its records. The following documents must be provided upon request. The organization’s annual returns for its most recent three years after the due date, including extensions. All Form 990 schedules (except donor names and addresses), their schedules, and supporting documents. Determination letter from the IRS showing that the organization has been granted tax-exempt status. The organization is not responsible for providing free meeting space.
