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Nonprofit Update: Don’t Lose Your 501(c)(3) Tax Exempt Status

February 25, 2015

Tips for easy and effective regulation of your tax exempt status.

One of the biggest threats for nonprofits today is losing their tax exempt status, even though the status is relatively easy to maintain. The IRS revokes the tax-exempt status of more than 100 501(c)(3) organizations every year! Do not ignore compliance issues; you can put your organization in jeopardy!

7 areas to regulate

  1. Lobbying- Though 501(c)(3) organizations are allowed to do some lobbying, lobbying activities cannot be “substantial”. Organizations can elect to have their lobbying activities measured by an expenditure test to evaluate whether activities are considered substantial, something called the 501(h) election. In making the 501(h) election, the nonprofit agrees to only spend a certain percentage of its total expenses on lobbying. For more information on lobbying regulations, read our whitepaper: Political Campaign Activity and Lobbying.
  2. Private benefit - A nonprofit’s activities cannot serve the private interests or benefits of any organization or individual, they must be focused solely toward some exempt objective.
  3. Inurement- Inurement is a concept stating that no part of an organization’s net earnings can serve to benefit a private shareholder or individual who has a chance to direct or manipulate nonprofit activities because of their relationship to the organization. Insiders like board members, directors, and officers are prohibited from benefiting from an organizations income or assets, which could include the payment of dividends or the transfer of property for less than fair market value. These insiders could be tacked with an excise tax.
  4. Unrelated business income (UBI)- A nonprofit with too much investment in a trade or business that is not significant to the exempt purpose of the organization is putting their tax exempt status at risk. Unrelated income from any unrelated business or trade could be taxable. Watch out for common UBI producing activities like selling advertising space in magazines, journals, etc., or selling products and/or publications that are not related to the organization’s purpose. If you are aware of UBI in your nonprofit, you must file a form 990-T and pay tax on that income.
  5. Political activity- 501(c)(3) organizations are forbidden to partake in any political campaign (federal, state, or local) on behalf of (or against) anyone running for a public office position. Nonprofits can promote participation in voting but they cannot directly support or oppose a specific candidate.
  6. Annual reporting obligations- Most nonprofits are required to provide information to the IRS under IRC reporting requirements to indicate that they continue to be tax-exempt. There are a number of forms public charities typically file, including:
    Form 990- Return of organization exempt from Income Tax
    Form 990-EZ- Short form return of organization exempt from income tax
    Form 990-N (online form)- Electronic Notice (e-Postcard) for tax exempt organization not required to file form 990 or 990- EZ
    Refer to the IRS Charities and Nonprofits Annual Reporting & Filing page for more information.
  7. Acting in accordance with stated exempt purposes- If your organization has changed course, let the IRS know. If you stop doing the exempt activities you told the IRS you were going to do on your original application for exemption, you could lose your tax exempt status.

To fully enjoy the tax exempt status that comes with being a 501(c)(3) organization, you MUST comply with IRS regulations! Refer to www.irs.gov for periodic updates.

Questions on nonprofit IRS compliance? Contact any member of our Not-for-profit Services Team.

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