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
Section 3 of Revenue Procedure 95-48 is clear that government affiliates do not need to file the annual information return Form 990. However an entity having unrelated business income must still file Form 990-T to report that taxable income even though it does not file Form 990. A more complete answer on filing requirements can be found here.
Organizations exempt under 501(c)(3) have two primary tax benefits:
1) exemption from income tax on earned income, and
2) a deduction available from income tax to donors who itemize.
See a more in-depth discussion in this document of the same name.
The most important recent statement on government affiliates is IRS Revenue Procedure 95-48 which lists factors used in determining if an entity can be an exempt government affiliate. For more information see Internal Revenue Service Revenue Procedure.
A "government instrumentality" is not defined in the tax code. Rev. Rul. 57-128, 1957-1 C. B. 311. articulates six criteria to identify instrumentalities:
- whether it is used for a governmental purpose and performs a governmental function;
- whether performance of its function is on behalf of one or more states or political subdivisions;
- whether there are any private interests involved, or whether the states or political subdivisions involved have the powers and interests of an owner;
- whether control and supervision of the organization is vested in public authority or authorities;
- if express or implied statutory or other authority is necessary for the creation and/or use of such an instrumentality, and whether such authority exists; and
- the degree of financial autonomy and the source of its operating expenses.
Follow this link for a more detailed definition of government instrumentality
Every US and foreign charity that qualifies under Internal Revenue Service Code section 501(c)(3) as tax-exempt is a private foundation unless it demonstrates to the IRS that it falls into the public charity category. According to The Foundation Center, a private foundation is a nongovernmental, nonprofit organization having a principal fund managed by its own trustees or director. Generally, a private foundation is a fund of private wealth established for charitable purposes. The principle function of most private foundations is to make grants to other nonprofit organizations, qualified individuals, and government entities. On the Form 1023 application for exemption Part X, you work through factors to determine if the nonprofit can get public charity status. Generally, tax treatment for a private foundation is less favorable than for a public charity.
There are a number of ways that a 501(c)(3) moves from private foundation to public charity status. If the nonprofit is a church, school, or hospital, or tests for public safety, it will be a public charity. The nonprofit can also get its funding or support primarily from the general public, receiving grants from individuals, government, and private foundations. If one third of the organization's support comes from these public sources, it passes the "public support test". There are a variety of such support tests. For more information about them, see page 32, Qualifying as Publicly Supported in IRS Publication 557 - Tax Exempt Status for Your Organization. On the Form 1023 application for exemption Part X, you work through factors to determine if the nonprofit can get public charity status. After receiving exemption, Form 990 filers will then use Schedule A to calculate that fiscal year's public support.