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by George Fisher, November, 2007 I. BASIC RESPONSIBILITIES OF A 501(c)(3) ORGANIZATION
IRS Section 501(c)(3) states that for an organization to qualify for tax exempt status it must be organized and operated exclusively for charitable purposes. This standard is met if the organization engages in activities that accomplishes one or more of exempt purpose defined in the tax code, which includes “educational or fostering national or international amateur sports competition”. In general no part of the income for non profit organization may be distributed to its members, directors or officers. Contributions for which no benefit is received made to a 501(c)(3) organization are tax deductible.
II. PUBLIC CHARITY OR PRIVATE FOUNDATION.
All 501(c)(3) organizations are classified as Private Foundations or Public Charities. The main difference between a Public Charity and a Private Foundation is the source of financial support. A private foundation derives its financial support from a small number of private sources while a public charity is primarily supported by the public. There are four basic ways that an organization can demonstrate that it is not a private foundation:
a. Certain organizations are presumed to be public charities, such as churches, schools, hospitals, medical research and organizations who derive at least 33% of the support from public contributions and/or government grants.
b. Service provider organizations, i.e. organizations receiving more than one third of their support from contributions and revenues from related business enterprises.
c. Support organizations – an organization which is operated to benefit and perform the functions and carry out the purposes of other public charities which is controlled by public charity.
d. An organization which is organized and operated exclusively for testing for public safety.
The presumption, unless an organization can show otherwise favors a finding of a private foundation status by the IRS. Private foundations are subject to a number of special excise taxes on passive income, undistributed income, impermissible expenditures, etc. which generally makes private foundation status undesirable.
In any event, a 501(c)(3) organization is absolutely prohibited from engaging in any political campaigning activities, endorsements of candidates, making donations to a candidates campaign, etc. Usually small non profit organizations will qualify as a public supported 501(c)(3) organization rather than as a private foundation. The distinction between a public supported organization and a private foundation is that private foundation usually is operated with a small number of large donors which require the organization to operate under more stringent rules governing donations. A public charity receives more than one third from contributions from public supported organizations, grants or donations by the general public.
III. TYPE OF ORGANIZATION.
The non-profit organization may be a trust, a limited liability company or a corporation. A corporation would be the most logical type of organization for the purposes that would be formed under this discussion. There would be no individual liability. Any liability resulting from the operation of the corporation would be limited to the assets of the corporation. Officers and directors may be elected annually or a convenient time as set forth in the by-laws of the corporation.
IV. HOW TO FORM A NON-PROFIT CORPORATION AND RECEIVE 501(c)(3) TAX EXEMPTION.
1. Choose a name and file a corporation that meets the particular state in which the corporation is being formed.
2. Generally there would be Articles of Incorporation and Corporate By-Laws which set forth the operating rules for the corporation.
3. Directors must be appointed along with officers who will be determined at the first meeting of the organizers.
4. Licenses and permits must be obtained as may be required by the state in which the corporation is formed.
V. APPLYING FOR YOUR 501(c)(3) FEDERAL TAX EXEMPTION.
After the corporate filing has been completed an application would be filed with the Internal Revenue: filing forms 8718-User Fee for Exempt Organization Determination Letter Request and IRS package 1023 Application for Recognition of Exemption.
VI. THERE MAY BE A REQUIREMENT FOR A STATE TAX EXEMPTION.
There are a few states that still require that a separate application be filed for a state tax exemption Most states as long as you file Non-Profit Articles of Organization and obtain your Federal 501(c)(3) tax exempt status, your state tax exemption will be automatically granted.
VII. LENGTH OF TIME FOR IRS APPROVAL AS A 501(c)(3) ORGANIZATION.
Generally this takes anywhere from two to six months barring any unusual circumstances. Once the application is filed, IRS generally has a number of questions as follow up with a deadline as to when these questions or requests are answered, usually in 14 to 21 days.
VIII. AFTER OBTAINING 501(c)(3) STATUS
Filing Requirements
1. If the corporation raises or expends over $25,000.00 in a calendar year, form 990 or 990-EZ must be filed with the Internal Revenue Service no later than April of the following year.
2. If the organization does not raise over $25,000.00 in calendar year it is under no obligation to file an annual return with any federal body, however accurate financial records must be filed since in four years form 8734 –Support Schedule for Advance Ruling Period must be filed.
IX. MAINTAINING CHARITABLE STATUS AS A 501(c)(3).
After the organization has received its IRS determination letter confirming that it is a 501(c)(3) for a certain period of time (usually five years), if the organization applied for an advance ruling status, at which time the IRS will review the organization’s financial records to determine whether it has received enough public support to continue to qualify as a 501(c)(3). Small donations from a larger number of individuals from the general public will usually be enough to qualify for the organization to continue with a 501(c)(3) status.
X. CONTRIBUTIONS
Donations of non-cash assets
Jobs Act imposes strict substantiation requirements for contributions of boats after 2004 when the claimed value exceeds $500.00. Under these rules no deductions is allowed unless the donor received or attaches to his or her federal tax return a contemporaneous written acknowledgement from the charity set forth with the name and tax payer identification number, i.e. social security number of the donor and an accurate description or identification number of the boat. If the charity sells the boat without significant intended use or material improvement the acknowledgement must also confirm that the boat was sold as an arms length transaction between unrelated parties and in turn, verify the amount of the gross sales proceeds and include a written warning to the donor, the donor’s deduction is limited to the amount of the sales proceeds which the charity is able to sell the boat. This may or may not take place at the same time that the donor delivers the boat to the charity, ie. The donor will report the contribution, the tax year in which the boat is sold by the charity. It may not be the year in which the gift is made. The charity must provide the acknowledgment to the donor within thirty days of the sale of the boat. The charity must also disclose to the Internal Revenue Service the information included in the acknowledgment of the gift given to the donor.
In the event that the charity intends to make significant use of the donated boat or make material improvements, required acknowledgement of the gift must certify that the use and duration of such use or the intended material improvements to be made and that the boat will not be transferred in exchange of money before the completion of such use or improvements. The charity must also provide the donor acknowledgement of the gift within thirty days of the contribution if the charity intends to retain the boat for its own use. Again the charity must disclose to the Internal Revenue Service included in the acknowledgment given to the donor.
For boats that the charity does not intend to use in its program and accepts solely for sale, the value of the gift is limited to the price for which the boat is sold. For those boats that are either going to be used in the charities program or on which the charity intends to improve and increase its value, although a marine survey is not required, a fair market value will be established based on various book value books and available information for sale prices for boats in similar condition, available comparable sales.
Under the Pension Protection Act of 2006, if you donate property, for example a boat with a value of more than $5,000.00, and if the organization to which it is donated sells or trades it after the year it was donated but within three years of the contribution and the organization does not provide a written statement confirming that it was used for the organization’s purpose or that its intended use became impossible, donor could lose it’s deduction.
For boats valued over $5,000.00 but less than $500,000.00 a marine survey is required and must be kept by the donor for proof of substantiation of the boat’s value. The charity should provide a value form listing the pertinent information of the donor’s tax identification number, description of the boat, the surveyors name and address and property identification of the boat and the surveyed value.
There are nine terms by the Internal Revenue Service for a “qualified appraiser” including one who has earned an appraiser declaration from a recognized professional appraiser organization and regularly performs appraisals for which the individual receives compensation.
XI. ANNUAL FILINGS BY A 501(c)(3) ORGANIZATION
1. If raised over $25,000.00 in one year, must file form 9902. Beginning in 2008 there is a new requirement by the pension protection act of 2006 for filing even though the organization has not raised over $25,000.00 in one year. The regulations for this particular section are not available at this time.3. Check your individual state’s requirements for filing as a 501(c)(3) organization.4. If the 501(c)(3) organization is employing any employees, an employment tax return must be filed accordingly. 5. If the 501(c)(3) organization receives unrelated income then there is an annual income tax return required to be filed.
6. If the 501(c)(3) is involved in available “Quid Pro Quo” contributions, and they amount to more than $250.00 an annual return must be filed setting forth those donations. 7. 501(c)(3) organization returns are always subject to public inspection and if requested, copies must be furnished to the individual requesting the information.a. Exemption applicationsb. Annual returnsc. Political organization donations if appropriate8. Federal form 8282 must be filed if a donor has donated property of $500.00 or more and its sold within two years, then report on that must be filed within 125 days.9. Appraisal – Federal form 8283 if a donation required an appraisal (over $500,000.00)10. Closure statement for a Quid Pro Quo contribution over $75.0011. If ceased operating for a period of time it is not necessary to terminate the organization, however the annual information returns required must be filed each year.12. If the 501(c)(3) has been liquidated, dissolved or terminated, the annual return of information by the 15th day of the 5th month after the change must be filed.
XII. FEDERAL LAWS RELATING TO 501(c)(3)
Internal Revenue Service Pension Protection Act of 2006 American Jobs Creation Act of 2004Laws required for charitable organizations by a particular state in which the organization functions.
