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Application for Tax Exempt Status - Form 1023

Non-profit organizations serve the public good and may reduce the burden on governmental entities to provide similar services. In return for this exemption from federal income taxation, an exempt organization is required to be organized and operated solely for the publics benefit and not for the private interests of its management or donors.

Obtaining IRC Section 501(c)(3) status lends credibility to your organization and may enhance the organizations ability to attract tax deductible individual donations and grants. If you are starting a new non-profit organization, the application process can seem daunting at times with all the financial projections, by-law requirements and requests from the IRS for additional information but it may also help refine your stated mission and provide a blue print for achieving the organizations goals.

Most organizations who receive a Federal income tax exemption are also considered tax exempt for State tax purposes. However, the state may require a separate state application be completed and some states only allow application after receiving Federal tax exempt status from the IRS.

If you would like assistance in preparing your organizations application for tax exempt status or annual tax return, please feel free to contact me at (214) 755-3108.

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Section 501(c)(3) Organizations

There are two types of Section 501(c)(3) organizations: public charities and private foundations. Public charities receive their financial support through donations from the general public. If an organization has a limited number of financial supporters or receives all of its funding through a single individual, it may be classified as a private foundation. The distinction between publicly supported charities and private foundation status is important because of the additional compliance and regulatory restrictions on private foundations.

Exempt Purpose
An organization may qualify for exemption from federal income tax if it is organized and operated exclusively for one or more of the following purposes.

                    • Charitable.
                    • Religious.
                    • Educational.
                    • Scientific.
                    • Literary.
                    • Testing for public safety.
                    • Fostering national or international amateur sports competition
                    • The prevention of cruelty to children or animals.

Entity Choices
Section 501(c)(3) exempt organization must be a
                    • corporation,
                    • community chest,
                    • fund,
                    • trust or
                    • foundation.


Certain Organizations are Automatically Considered Tax Exempt
These organizations may wish to apply to confirm their tax exempt status or for other for non tax reasons but are generally automatically exempt if they meet the requirements under section 501(c)(3).

 Churches including interchurch organizations of local units of a church, conventions or associations of churches, or integrated auxiliaries of a church, church men's or women's organization, religious school, mission society, or youth group.
Any non profit organization (other than a private foundation) that normally receives not more than $5,000 in annual gross receipts.


Application for Recognition of Exemption Under Section 501(c)(3)
Form 1023 Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code is filed by organizations requesting recognition under Section 501(c)(3). Generally, organizations with gross annual receipts in excess of $5,000 must apply for recognition of exempt status. Organizations with annual gross receipts less than $5,000 are not required to apply but may wish to apply in order to obtain confirmation of federal tax-exempt status. Note: other types of exempt organizations apply for exempt status by filing Form 1024.

The Form 1023 is rather lengthy and some what complex but generally tries to assure that:

• The organization is organized and operated exclusively for one or more of the approved exempt purposes – Charitable, religious, educational etc.
• You must establish that your organization will be operated for the benefit of the public and explicitly prohibit any part of the organizations net earnings to benefit private interests, such as the creator or the creator's family, shareholders of the organization or others directly or indirectly associated with the organization.
• Required inclusion in the by-laws of a statement that in the event the organization is dissolved all assets will be transferred to the state/government or other qualified 501(c)(3) organization.
• The organization will not attempt to influence legislation (unless it elects to come under the provisions allowing certain types of lobbying expenditures) or participate to any extent in a political campaign for or against any candidate for public office. If any of the activities (whether or not substantial) of your organization consist of participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for public office, your organization will not qualify for tax-exempt status under section 501(c)(3). Note: such participation or intervention includes the publishing or distributing of statements but may not include certain non-partisan voter education activities. If your organization will engage in ANY political activates carefully review the planned activities with your legal or tax advisor.
• You need to completely describe the planned activities, funding sources, rules, criteria, standards, assets, expenditures, fund raising, and future plans of the organization. Even with all the information included on a properly completed Form 1023, the IRS will frequently request supplemental information.
• Items you will need to complete the Form 1023: Articles of Incorporation, certificate of incorporation, or other controlling document, By-laws of the organization, organization mission statement, listing of the assets & liabilities, sources of income, past or projected financial statements, listing of planned or performed activities and how they relate to furthering your exempt purpose, names address phone numbers of officers or directors, Employer Identification Number (EIN), the list goes on and on
• Hey, I never said this was going to be easy!
• An application requires careful preparation because it will be closely scrutinized by the IRS and will become open for public inspection.

Generally, if the organization files its application within 15 months after the end of the month in which it was created, and IRS approves the application, the effective date will be the date the organization was formed.

Pursuant to Treasury Regulation 301.9001-(a)(2)(iv), organizations are allowed and automatic 12 month extension to file if the application is filed within the 27 month period. If Form 1023 is filed within 27 months after the end of the month of the organization's creation, the effective date of exempt status will be the date of the organization's creation. If Form 1023 is filed after 27 months from creation, the effective date will be the date the application was filed. Late filing can adversely affect both the taxes owed by the organization, and deductibility by donors.

An organization that missed the 27 month deadline, and needs 501(c)(3) status for prior periods, might want to seek professional tax help in asking the IRS to waive the 27 month rule. An organization that missed the 27 month deadline, and does not need retroactive 501(c)(3) status, can usually get 501(c)(4) status for prior periods. Remember, if exemption is granted, the application form will become public record and must be provided to any member of the general public who requests a copy.

The 15/27 Month Rule is waived for churches, subordinate organizations covered by a group ruling, organizations created before October, 1969, and small publicly supported organizations with less than $5,000 per year in gross receipts.

Form 8718 User Fee for Exempt Organization Determination Letter Request is filed to pay the fee charged by the IRS. If the IRS ultimately finds the application acceptable, it will issue a "Determination Letter" confirming tax-exempt status.

Maintaining Your Organizations Tax Exempt Status
Once your organization receives its coveted IRS determination letter the task of maintaining the federal tax-exempt status begins! Proper accounting and reporting of the organizations activities is required in many areas including related and unrelated activities, public support requirements, inurement, political activity, legislative activity, donor substantiation, compensation and public inspection of the organization's tax records.


Unrelated Business Income Tax (UBIT) – Form 990-T
Regardless of exemption, certain types of income such as advertising revenue are deemed not effectively connected with the organization's stated exempt purpose and are therefore taxable. You may be wondering why the IRS imposes a tax on certain types of ‘commercial’ income. One of the principal cases dealing with UBIT involved a large business that was donated to a tax exempt organization. Rather than sell the business and use the proceeds to fund its exempt purpose, the exempt organization decides to own and operate the business. The problem as you may have guessed is that the exempt had a significant pricing advantage since it did not pay federal income tax and was basically driving its competition into bankruptcy. Thus, the UBIT was born to level the playing field and tax non related ‘business’ income of a non profit organization the same as if it were subject to corporate income tax.

If a non profit organization has unrelated business income of $1,000 or more it is required to file Form 990 T. This form is in addition to the requirement to file other returns such as  Form 990 or Form 990 PF. Note: the filing of Form 990 T also applies to non profit organizations that may not be required to file IRS form 990.


Required Annual Federal Returns
Most tax exempt 501(c)(3) organizations with annual gross revenues more than $25,000 are required to file an annual Form 990 with the Internal Revenue Service. Even if not required to file a Form 990, organizations may wish to complete and file anyway because it assists in record-keeping and may be required for calculating state returns. Form 990 is due by the 15th day of the 5th month after the end of the organization's fiscal year and is open to public inspection. Form 990 EZ may be filed if annual gross revenues are less than $100,000 and total assets are less than $250,000. Finally, Form 990-T is used to report any taxable income the organization receives.

Texas Nonprofit Resources

Center for Nonprofit Management Dallas Texas
www.cnmdallas.org

Communities Foundation of Texas
www.cftexas.org

Guide Star
National Database of Nonprofit Organizations
www.guidestar.org

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