Tax
II. C. Principle–501(c)(3) Status for the Charitable Nonprofit
After completion of incorporation, creation of the trust with an indenture, or adoption of the articles of organization of an unincorporated association, the board should seek tax treatment consistent with its charitable purposes under Internal Revenue Code 501(c)(3) from the U.S. Internal Revenue Service, and then faithfully and successfully conduct the affairs of the nonprofit entity within that Code sections’ provisions.
Practices
- Application should be made to the U.S. International Revenue Service for federal income exempt status on IRS Form 1023 available on the IRS Web site. The nonprofit should also apply for an employer identification number (EIN) with form SS-4 which is also available on the IRS Web site. This EIN number is required even if the charitable nonprofit is not an employer.
The Law of Tax Exempt Organizations (2007), by Bruce Hopkins.
Frequently Asked Questions about Tax
Rev. Rul. 55-319 1955-1C.B. 119 holds that a wholly-owned state instrumentality may, under certain circumstances, qualify for exemption from Federal income tax under section 501(c)(3) of the Code. This position is amplified by Rev. Rul. 60-384 1960-2 C.B. 172 which holds that a wholly-owned state or municipal instrumentality that is a separate entity and a counterpart of an organization described in section 501(c)(3) of the Code may qualify for exemption under that section. However Rev. Rul. 60-384 further holds that an instrumentality would not be a clear counterpart of section 501(c)(3) organization if it is clothed with powers beyond those of an organization described in section 501(c)(3). Examples of such powers set forth in the Rev. Rul. are enforcement or regulatory powers exercised in the public interest such as health, welfare, or safety.
Application can be made to the U.S. internal Revenue Service for federal income tax exempt status using either IRS Form 1023 or Form 1023-EZ. Both are available on the I.R.S. website.
The Form 1023-EZ can only be filed if the nonprofit anticipates less than $50,000 in gross receipts in any of the next three years. An eligibility worksheet can help you determine if you are eligible to file the 1023-EZ. The Form 1023-EZ can only be filled electronically but a form can be printed out for review. Instructions are available. The filing fee is $275. You should receive a decision within a few months.
If you must file the full Form 1023, it can be downloaded from the I.R.S. website. Instructions for this form are also available. An interactive Form 1023 helps ensure that you have the necessary documentation. The filing fee is $400 for nonprofits for which gross receipts have not or will not exceed $10,000 per year for four years. The fee is $850 for nonprofits with annual gross receipts that exceed or will exceed $10,000 per year over a four-year period. Form 1023 can be filed only on paper. It might take six months to hear back on final exemption.
In Iowa, exemption from state income tax is automatic once federal exemption is received.
Form 1023 requires a four-year projected budget. It can be helpful to review the Form 990s of similar organizations. For guidance on developing a budget it can be helpful to review the Form 990s of similar organizations. For example, if you are creating a nonprofit animal shelter, look at an Iowa animal shelter's 990 filings. Form 990s can be found on the Guidestar website.
The tax code has a number of related terms about government entities and government-related entities. Being a "government unit" is different from being a "governmental instrumentality." Tax proceedings often look to state law to determine if an entity meets a definition of "government entity." Iowa law has an overall definition of governmental entity as any unit of government in the executive, legislative, or judicial branch of government; an agency or political subdivision; any unit of another state government, including its political subdivisions; any unit of the United States government; or any association or other organization whose membership consists primarily of one or more of any of the foregoing.
The IRS will send you a determination letter. IRS Revenue Procedure 2009-4 states that a determination letter is "a written statement issued to a taxpayer by the Service’s EO Determinations or EP Determinations office that applies the principles and precedents previously announced to a specific set of facts." This means the IRS reviewed the facts on the nonprofit's Form 1023 Application for Exemption in light of the law and determined that it can be a 501(c)(3) exempt entity. You will use your organization's determination letter for many purposes. For instance when approaching a funding agency that would potentially give your organization a grant, you will need the determination letter to establish your organization's 501(c)(3) status. Many funders will not even review a grant application if there is no determination letter accompanying it.
An IRS letter ruling is generally used to get a determination that an organization is exempt under IRC 115. When organizing as a nonprofit corporation an organization seeking exemption under IRC 115 should have dissolution provisions in the articles of incorporation that refer to IR15. See this information on governmental entities from the IRS.
