An organization that seeks to obtain tax-exempt status must be properly formed, and must follow a prescribed process in order to apply for and maintain this status. Furthermore, when it terminates, the organization must also follow the appropriate steps for dissolution.
Forming an Organization: In order for the IRS to recognize an organization’s exemption, the organization must be organized as a trust, a corporation, or an association. It is crucial to choose the appropriate type of entity for your organization as it will impact your future charitable endeavors. More information about potential entity types is available here.
Applying for Tax Exempt Status: The organization must have one or more qualified exempt purpose stated in its organizing document. There are different filing requirements for different types of organizations, so it is important to be aware of the forms required, the user fee, the filing deadline and the processing procedure for each type of organization. While waiting for the application to be processed by the IRS, the organization may begin operating as a tax-exempt organization. However, most organizations are required to file an annual information return or electronic notice while their application for exemption is pending.
Annual Reporting & Filing: Generally, tax-exempt organizations are required to file annual returns. However, the forms used may vary depending on the type of organization, such as Form 990 for public charities and Form-990 PF for private foundations. If an organization does not file the required tax return in a timely manner, penalties may accrue in addition to any taxes owed. Additionally, if an organization fails to file as required for three consecutive years, it will automatically lose its tax-exempt status. Estimated tax payments are required if an organization expects its tax for the year to be $500 or more. Furthermore, if an organization has $1,000 or more of gross income from an unrelated business, Form 990-T must also be filed.
How to Retain Exempt Status: Organizations must continue to perform activities that are consistent with their stated purpose when they applied for tax-exempt status. A tax-exempt organization qualifying under section 501(c)(3) must run activities which meet the following criteria:
- Refrain from participating in the political campaigns of candidates
- Restrict its lobbying activities to an insubstantial part of its total activities
- Ensure that its earnings are not used for the benefit of any private shareholder or individual
- Not operate for the benefit of private interests
- Not have purposes or activities that are illegal
Termination of Exempt Organization:
In general, tax-exempt organizations that end their operations, whether by terminating tax-exempt operations, transferring assets or merging with another tax-exempt organization, must inform the IRS about the details of the action. Depending on the type of organization, a final annual return may also be required. For more information on dissolving a tax-exempt organization in California, click here. Charitable organizations in California must obtain permission from the Attorney General’s office in order to dissolve.
There are varying requirements for different types of non-profit organizations. It is crucial that proper tax treatment is applied to the specific type of organization. For more information, please contact our office at (858) 558-9200.