501(c)(3) Tax Exemption

Form 1023 is used to apply for exemption under IRS 501(c)(3).

Religious, charitable, scientific, testing for public safety, literary, educational, fostering amateur sports, or prevention of cruelty to children or animals.

On average the IRS takes 6-9 months from the time they receive the application package, however there are exceptions. Animal organizations tend to receive determinations quite quickly, and foreign or housing organizations may take an extended period of time. Doing it right the first time is critical, and that is where BryteBridge’s experience helps. Also, if you are in a hurry, our staff can assist with tips to help expedite the process.

Reg. l. 501(c)(3)-1(d)(2) provide that the term “charitable” is used in IRS 5Ol(c)(3) in its generally-accepted legal sense and includes relief of the poor and distressed or of the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments, or works; lessening of the burdens of government; and/or promotion of social welfare.

For the IRS to approve an organization as a church, they must demonstrate that they have a set of distinct religious beliefs, a place of worship, regularly-scheduled services, and an established congregation. Lately the IRS has been requesting photographs of the church facility, the signage outside that invites the public to attend services, and the congregation at worship. In addition they have requested a list of members of the congregation, including names, addresses, and phone numbers.

Fostering Amateur Sports- Sports activity is not in and of itself an exempt activity under IRS 501(c)(3). To qualify:

1. An organization may be educational within the meaning of IRS 501(c)(3) if it teaches sports to youth or by being affiliated with an exempt educational organization. Such educational organizations may also provide facilities and equipment.
2. An organization that develops, promotes, and regulates a sport for youths may be charitable within the meaning of IRS 501(c)(3) as combating juvenile delinquency or lessening the burdens of government.
3. The organization is organized and operated to foster national or international amateur sports competition and no part of its activities involve the provision of athletic facilities or equipment. (Think Olympic training).

The organizing document for the company; it states the organization’s specific purposes, incorporators, etc. The outline will vary from state to state.

Similar to Articles of Incorporation, but used for LLCs. Please note that a Nonprofit LLC is not typically permissible by the IRS.

Internal operating rules for an organization; they state who should do what, how they should do it, when they should do it, etc. This basic nonprofit template discusses board duties and elections, memberships, meetings, etc.

If your organization has been operational for 5 years or more, then actual financial information for the last 5 years is required. If the organization has been in operation 1-4 years, we must have actual financial information for the periods of operation, and projected financials to include a total of 4 years of information. If the organization is a start-up, a 3-year projection is required.

Yes. However, the fees should be for provision of services which help to achieve the exempt purpose. These fees should be reduced in comparison with a commercial entity that may offer the same service. If fees are charged for any goods or services that do not directly involve the exempt services, the revenue may be subject to unrelated business income taxes.

Reg. 1.501(c)(3)-1(b)(l)(i) provide that an organization is organized exclusively for one or more exempt purposes only if its Articles of Organization:  Limit the purposes of such organization to one or more exempt purposes; and do not expressly empower the organization to engage, other than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more exempt purposes. In addition, the organization’s assets must be dedicated to an exempt purpose, either by an express provision in its governing instrument or by operation of law. Reg. lRS 501(c)(3)-1(b)(4).

IRS 508(e) imposes additional requirements for governing instruments of private foundations. These are discussed in the Private Foundations Manual.

The term “articles” includes “the trust instrument, the corporate charter, the articles of association, or any other written instrument by which an organization is created.” Reg. 1.501(c)(3)-1(b)(2). The organizational test cannot be met by any document that is not the creating document.

A corporation’s bylaws cannot remedy a defect in its corporate charter. A charter can be amended only in accordance with the State’s nonprofit corporation law. States generally require that any amendments be filed with and approved by the chartering authority. In the case of a trust, operating rules cannot substitute for the trust indenture. For an unincorporated association, the test must be met by the basic creating document, whatever it is called, and any amendments. Subsidiary documents that are not amendments to the creating document may not be relied on.

The board is the governing body of the organization. In most nonprofits, the board does not participate in the daily operations of the organization. They must approve major organizational decisions, such as budget, salaries, amending articles or bylaws, etc. These individuals are there to ensure that the organization has the public’s interest at heart, and that all operations are done appropriately. Board functions must be offered on a volunteer basis. Board members may be recompensed for any out-of-pocket expenses. Sometimes, members of the board may also hold a day-to-day position in the organization. This is a separate position from that which they hold on the board. An individual who happens to be on the board may receive compensation for their daily role in the organization.

501(c) Board Requirements: You must have at least three (3) unrelated and uncompensated individuals.

Yes, however, there must always be a majority of “uninterested” individuals on the board. This means unrelated by blood, marriage, adoption, or business, and not receiving compensation for any reason.

Members of the board, award committee, or their family members should not be eligible to receive funding.

To remain in compliance, the organization must submit a Form 990 each year. This form (which comes in a variety of formats depending on the organization’s specific financial situation) must be submitted following the end of the fiscal year. Each year, the organization must file annual reports with their state to ensure that the corporation remains in good standing.

Most states require nonprofit organizations to register with the Attorney General or Department of Consumer Services before soliciting donations from the public. This ensures that all organizations requesting donations are in fact legitimate.

Not necessarily, but it is a good idea. This will prevent your organization from paying state level corporate and franchise taxes, freeing up more funds to put toward programs. In addition, sales tax exemption may be available to save you money on purchases made for the organization. The good news is the process is a lot simpler than federal tax exemption, however the state’s department of revenue may require you to first submit a copy of your IRS determination letter.

This varies by state. Some states will automatically exempt organizations that have been deemed exempt at the federal level. Other states require organizations to apply separately for state level exemptions.