The term 501 (c) (3) refers to Section 501 (c) (3) of the Internal Revenue Code, which contains the rules and regulations that govern exempt organizations. Tax-exempt organizations are commonly known as 501 (c) (3). 501 (c) (3) includes both public charities and private foundations.
Being a tax-exempt organization is not a static thing. It is a process with a life cycle. The five normal steps in the life cycle of a tax-exempt organization include:
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Starting
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Exemption request
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Required Presentations
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Continuous compliance and
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Significant events.
Getting started and applying for exemptions is unique because you only have to do it once for each organization. You need to create an organization under the law of your state. Your state will have rules that would likely make your organization qualify as a nonprofit organization, which is a statewide classification. Organizations, organizational documents are their Articles of Incorporation. For unincorporated organizations, it is Charter, Constitution and Articles of Association. The organizing document must have a clause that limits the purposes of the organization to one or more of the exempt purposes listed in the IRS code. Most of the time you do not expressly authorize the organization to participate in activities that do not promote your exempt purposes. It should have a dissolution clause. The organization’s assets must be permanently dedicated to an exempt purpose described in Section 501 (c) (3). Bylaws are different from organizational documents. The statutes are the internal operating rules of the organization. Federal law does not require specific language in the bylaws of most organizations. However, state law may require you to have statutes, so it is a good idea to contact the state for their specific requirements.
When creating your organization, you may need to create organization documents based on the requirements of your state. You will need them when you apply for the tax exemption. When you apply for the tax exemption, which is a federal level state, you will need to acquire an employer identification number (EIN). Even if you don’t have employees, you would need an EIN that is similar to your personal social security number, but it is only for your business. I would identify it to the IRS. Usually issued by the IRS. Apply for the EIN in different ways.
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Apply online.
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Complete the required form and fax it to the IRS.
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Submit the form to the IRS.
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You can even apply for the EIN over the phone.
All EIN applications must disclose the name and tax identification number of the actual principal officer, general partner, grantor, or owner, whom the IRS would call the “Responsible Party.”
To request tax-exempt status under Section 501 (c) (3), you must complete the appropriate forms and submit them with user fees. User fees are based on gross income. Total money an organization receives from all sources before deducting costs or expenses. It is based on the gross income that an organization received / plants that will receive during a four-year plan. Generally, an organization must apply for exemption recognition from the IRS within 27 months from the end of the month in which it was organized for its exemption to be effective from its formation date. When certain requirements are met, this period can be extended. Typically, upon receipt of the application and user fees, the IRS approves simple applications within 90 days or less. The IRS would have an Exempt Organization Specialist assigned to process the complex application that needs substantial data and takes more than 90 days to process. In some cases, it can take up to six months. The IRS will issue a determination letter acknowledging the exemption status showing the foundation’s classification and the permanent records required for public disclosures.
Churches, including synagogues, temples, and mosques, are not required to apply but are still exempt from federal income tax and the contributions they receive are tax deductible but can still apply. Most of them request to receive the determination letter that proves their tax exempt status and specifies that the contributions to them are tax deductible.
Churches, schools, organizations that provide medical or hospital care are statutory charities. Other public charities are organizations that receive significant public support, including organizations that provide support to other public charities.
To qualify an organization as a public charity, it has to pass the organization and functioning test, broad public support, etc.
Organizational test: – The organization limits its purpose to one or more of the exempt purposes listed in Section 501 (c) (3). It does not allow the organization to engage in non-exempt activities and the organization’s assets must be permanently dedicated to an exempt purpose. For the operational test, the organization must demonstrate that its main activities will be to promote its exemption purpose. The organization also has to limit participation in certain types of activities and absolutely refrain from other prohibited activities.
To demonstrate public support, the organization has to demonstrate that it receives substantial support and contributions from publicly supported organizations, government units and / or the general public or no more than 1/3 of the support from gross investment income and combined unrelated business income and more than 1/3 support from contributions, membership dues and gross income from activities related to exempted functions. In this, good record keeping is an important factor.
The IRS evaluates activities and the test is done when you first apply for tax-exempt status. When the organization after receiving 501 (c) (3) status engages in prohibited activities, you could lose your tax-exempt status and be subject to taxes and penalties. Churches, their integrated auxiliaries and church conventions or associations and an organization that is not a private foundation and whose gross income in each taxable year normally does not exceed $ 5,000 are normally treated as public charity. When an organization qualifies as a 501 (c) (3) organization, the IRS assumes it is a private foundation unless it can show that it is a public charity.
The main difference is where the financial support of the organization comes from. Generally, a public charity has a broad base of support, while a private foundation has very limited sources of support. There are also different tax rules, as private foundations are subject to special taxes that are not imposed on public charities.
Typically, the IRS grants public charity status when you pass the public charity test for the first five years, based on intended support it is treated as a public charity regardless of actual support. From year 6 onwards, the IRS is based on the information provided in the annual reports and is calculated for the current year plus the previous four years.
The IRS issues group exemption letters for smaller groups associated with a single core group. They can apply as a group and there is no need to apply individually. Group exemption cards have the same effect as individual cards.
After application, organizations can operate as a tax-exempt organization while awaiting approval. Donors have no guarantee that their contributions will be deductible until the application is approved. While awaiting approval, the organization can follow the record keeping procedure, keeping detailed records of financial and non-financial activities.
The state benefits of Section 501 (c) (3) is that the organization gets exemption from federal income tax, tax deductible contributions, and reduced postage rates. Possible exemption from state income, sales and employment taxes. The organization can receive tax-exempt funding.
The state comes with responsibilities. The 501 (c) (3) organization is organized and operated exclusively for exempt purposes that are: Religious, Charitable, Scientific, Public Safety Testing, Literacy or Educational, designed to promote national or international amateur sports competitions, for the prevention of cruelty to children or animals. Record keeping is another important aspect. The organization must maintain detailed records of financial and non-financial records. An IRS publication, the Compliance Guide has information on why you need to keep records, what records to keep, and how long to keep them. Most public charities recognized as tax exempt are required to file an annual information return. Good records make it easy to complete your required annual filings. The organization is required to release certain documents that you file with the IRS, but not all of your records. The following documents must be provided upon request. The organization’s annual returns for its most recent three years after the due date, including extensions. All Form 990 attachments (except donor names and addresses), attachments, and supporting documents. Determination letter from the Internal Revenue Service (IRS) showing that the organization has been granted tax exempt status. The organization is not responsible for providing free meeting space.
