It’s easy for a501(c)(3) organization to maintain its IRS tax-exempt status – and can it be just as easy to lose it. the IRS recognizes private foundations, churches, educational institutions, hospitals, and many other types of public charities.
501(c)(3) IRS Tax-Exempt Status Is a Privilege
IRS tax exemption is a privilege, and your 501(c)(3) organization can lose it if you’re not careful. There are 6 key areas to stay on the IRS’s good side and keep that tax exemption.
- private benefit / private inurement,
- lobbying,
- political campaign activity,
- unrelated business income (UBIT),
- annual reporting obligation, and
- operation in accordance with the stated exempt purpose(s).
1. Private Benefit / Private Inurement
If your 501(c)(3) holds an IRS tax-exemption, then its activities have to be directed toward an exempt purpose. It should not serve the private interests, or benefit, of any person or organization more than insubstantially.
By the same token, nonprofits with tax exemption can’t have its income or assets benefit insiders. This includes people like board members, officers, directors and important employees of an organization. If an organization benefits them, the insiders AND the organization could be subject to penalty excise taxes, and the nonprofit could lose its tax-exempt status.
2. Lobbying
Lobbying is when an organization contacts, or asks the public to contact, lawmakers to propose, support, or oppose legislation. It’s also considered lobbying when the organization directly advocates for or against any legislation. Nonprofits can do some lobbying – it’s not an all out ban – but too much can hurt your tax exemption. Your organization’s lobbying cannot be more than an “insubstantial” part of its overall activities.
3. Political Activity
Nonprofits cannot participate in political campaigns for or against any candidate for public office, at the federal, state or local level. To learn more about political activity and nonprofits, check outCharities, Churches and Educational Organizations – Political Campaign Intervention.
4. Unrelated Business Income (UBI)
Earning too much income from activities that aren’t related to your exempt purpose can endanger your exempt status. This kind of income comes from business that isnot substantially related tothe organization’s exempt purpose. This can get murky because there are some modifications, exclusions and exceptions. For more information about what is considered UBI and how it’s taxed, seePublication 598, Tax on Unrelated Business Income of Exempt Organizations.
5. Annual Reporting Requirements
Public charities are exempt from federal income tax, yes. But, the Internal Revenue Code requires most of these organizations to report information every year by filing the Form 990. The 990 verifies that the nonprofit still qualifies for tax exemption. It’s public record, and it helps inform the public about the organization’s programs and operations.
ThePension Protection Act of 2006provides for automatic revocation of an organization’s tax-exempt status if it fails to file a required annual information return for three consecutive years. In June 2011, the IRS enforced this provision for the first time by publishing a list of about 275,000 organizations that lost their tax-exempt status for failing to meet their annual filing obligations for three consecutive taxable years.
You can learn more about filing requirements, including new requirements applicable to supporting organizations, at IRS Nonprofits and Charities.
6. Not Operating Within Your Exempt PURPOSE Endangers Your 501(c)(3) IRS Tax-Exempt Status
This can be really troublesome. A 501(c)(3) with the IRS tax-exemption received it because it promised to fulfill a charitable mission or purpose. Day to day it must pursue the exempt activities it promised in its IRS application for exemption. If an organization’s activities go toward something other than its original purposes, it must inform the IRS to prevent future problems. If you’re unsure whether a deviation is significant enough to report, contact a nonprofit attorney.
Questions about 501(c)(3) IRS Tax-Exempt Status?
If you have questions about your 501(c)(3) IRS tax-exempt status, schedule your consultation with Birken Law now.
FAQs
A 501(c)(3) organization can maintain its tax-exempt status if it follows the rules affecting these six areas: private benefit/inurement, lobbying, political campaign activity, unrelated business income (UBI), annual reporting obligation, and operation in accordance with stated exempt purpose(s).
What are the 6 reasons a nonprofit organization can lose its 501(c)(3)? ›
HOW CAN A NONPROFIT LOSE ITS 501(c)(3) STATUS?
- Failing to file a Form 990 with the IRS. ...
- Engaging in private benefit or private inurement. ...
- Lobbying. ...
- Political campaigning. ...
- Generating too much Unrelated Business Income. ...
- Failing to operate in accordance with its purpose.
IRS regulations prohibit 501(c)(3) public charities from specific types of activities and require certain levels of reporting and public disclosure. An organization that fails to abide by these rules may be placed under sanction or have its tax-exempt status revoked by the IRS.
What activities can jeopardize a nonprofit organization's tax exempt status? ›
For 501(c)(3)s, the four main activities that can jeopardize the organization's tax-exempt status are:
- activity that results in private benefit or inurement;
- lobbying activity, if it constitutes a substantial part of the organization's overall activities or if it exceeds a predetermined dollar amount;
According to the author, “SB 834 revokes the California tax-exempt status of a nonprofit organization if the Attorney General determines that the nonprofit has actively engaged in or incited treason, misprision of treason, insurrection, seditious conspiracy, advocating overthrow of the government or the government of ...
How to dissolve a 501c3 with the IRS? ›
A 501(c)(3) organization must file for dissolution first with its state and then send the approved dissolution documentation to the IRS. It is important for an organization to check with its state Attorney General's office first to ensure that the specific procedures and documentation are submitted.
Can churches lose tax exempt status? ›
In order to maintain their tax-exempt status, churches and other religious organizations must comply with certain ongoing rules. Failure to follow these Internal Revenue Service guidelines can result in costly fines or the loss of the organization's tax-exempt status.
What happens to the money when a 501c3 dissolves? ›
As required by law, a nonprofit organization that is ceasing existence is required to transfer all remaining assets to another tax-exempt organization or to the government. It is unlawful to give any property away to individuals - including board members, volunteers, staff, or beneficiaries.
How do I regain my non profit status? ›
Per the IRS, a Nonprofit organization must apply to have its tax-exempt status reinstated. Steps to getting reinstated: Apply for recognition of tax exemption by filing Form 1023 or Form 1023-EZ, as applicable. Complete updated tax returns to submit with the 1023 application.
How much does it cost to reinstate a 501c3? ›
Re-Apply For Tax-Exempt Status
The costs are $400 to $850, depending on some specifics about your organization and the filing status. If your status is about to be reinstated due to it being an automatic mistake, you would not want to skip ahead and go through the trouble of reapplication.
Political activity
All 501(c)(3) organizations are prohibited from participating in any political campaign on behalf of (or in opposition to) any candidate running for public office. The prohibition applies to all campaigns at the federal, state and local levels.
Can a 501c3 go dormant? ›
Yes. An organization can suspend its operations for a short period without losing its 501(c)(3) status.
What are the IRS rules for 501c3? ›
Exemption Requirements - 501(c)(3) Organizations
To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual.
How do you lose your 501c3 status? ›
“The act requires that all tax-exempt organizations—except churches and church-related organizations—must file an annual return with the IRS. And if they don't do so for three consecutive years, they automatically lose their exempt status.”
How often does the IRS revoke 501c3 status? ›
All exempt organizations required to file an annual return or submit an annual electronic notice are subject to automatic revocation for failure to file for three consecutive years.
What can't a 501c3 do? ›
Under the Internal Revenue Code, all section 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office.
What is a 501 C 6 nonprofit organization? ›
Section 501(c)(6) of the Internal Revenue Code provides for the exemption of business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues, which are not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or ...
What is the number one reason nonprofits fail? ›
Even with the best intentions, a lack of funding will lead most nonprofits to fail. Not having a clear fundraising strategy will result in exhausting the limited resources and causing stress to the organization.
Can a nonprofit have a loss? ›
A financial loss can have a tremendous impact on a nonprofit. The loss of money can create a cash flow crunch and force the organization to reduce its spending.
