There are many benefits to being recognized by the IRS as a 501c3 nonprofit organization. One of the biggest benefits would be tax exemption from the IRS. Being exempt from paying taxes means that your organization will not have to pay federal taxes, and in many locations sales taxes and property taxes are also exempt.  Being tax exempt can save you a great deal of money over time, allowing you to focus more of your funding efforts towards actual programs and services.

501c3 recognition also has the ability to make your organization more credible in the eyes of the public and other entities within your community. After being approved by the IRS as a 501c3 organization you will have the ability to clearly state your 501c3 nonprofit status on all materials you distribute and any announcements made about your organization. This notifies any interested parties that you are a legitimate organization and have proven to the IRS that the work you are doing is serving the public.

Another major benefit to becoming a 501c3 nonprofit organization is having the ability to give tax deductions to individuals who make a donation to your organization. As a 501c3 organization all donations made, whether monetary or in-kind, can be claimed on that individual’s personal income taxes. This is very appealing for potential donors, specifically those who are interested in making large donations or contributions to your organization. Having 501c3 nonprofit status also makes it much easier to solicit donations. Many individuals and companies will not make contributions to organizations that are not recognized as 501c3 nonprofit organizations since they are unable to receive any benefit from their donations.  

Having 501c3 nonprofit status will also allow your organization to be eligible for many grants. These grants can be from both private foundations as well as the government. Most grant funding organizations require applicants to be recognized as a 501c3 before considering their grant proposal. Upon approval by the IRS your organization will be issued a letter showing confirmation of your approval. This letter will be required by most grant funding organizations when applying for a grant.

Other benefits include discounted postage rates as well as special mailing privileges for nonprofit organizations. The United States Postal Service provides opportunities for bulk mailing to nonprofit organizations, which is another method nonprofit organizations can save money. Finally, a 501c3 tax exempt organization could receive free or discounted rates from media outlets, e-mail services and newswires for announcements and press releases related to your organization. This can provide your organization with the opportunity to increase awareness of the activities you are holding as well as the work you are doing in the community. 

Receiving 501c3 nonprofit status from the IRS is typically a big turning point for many nonprofit organizations. But it did not come without much hard work, anxious waiting and possibly assistance from a professional nonprofit consultant.  While the benefits of becoming a 501c3 nonprofit are big, so is the amount of paperwork and package preparation.  Therefore, if your organization is seeking 501c3 status from the IRS it is encouraged to seek assistance to make sure the application is completed correctly and speedily.

501c3 is one of the many IRS tax codes used for nonprofit organizations. The 501c3 specifically applies to organizations operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals. There are also other IRS codes for different types of nonprofit organizations; these organizations all have 501c status but are given different numbers to specify what type of activates they are involved in.

Once an organization has received 501c3 status it is then exempt from paying federal taxes. The government strictly regulates the activities of nonprofit organizations as a measure of insuring that their activities remain dedicated to exempt activities. One regulation the government institutes is at no time can any part of the organizations activities or the net earnings of the organization be used to benefit any director, officer, or any private individual associated with the organization. Also, steps must be taken to so that none of the organization’s officers or any private individuals benefit from the distribution of any assets owned by the organization (should the organization shut down or stop operating for any reason). In order to remain in compliance, a 501c3 nonprofit organization must file a 990 tax return form with the IRS every year. This form is used to display the financial activities of the organization over the course of the previous year.

One of the most desirable advantages of starting a 501c3 nonprofit organization is that donations made to the organization can be tax deductable. This makes soliciting donations easier for the organization because donors can claim the donations they make on their taxes. By allowing these donations to be tax deductable, the donors really are not losing any money by making donations and many donors would rather give their money to an organization or a cause that they believe rather than to the government.

A Free Webinar About Why Obtaining 501c3 Tax Exempt Status is Necessary to Help your Organization Grow!

Are your donors able to make charitable contributions and receive a tax deduction?  Is your organization qualified to receive private and public grant money? Is your non profit saving money on lower postage rates on corporate mailings?

If the answer is “no” to the above questions, perhaps your non profit should take steps to obtain 501c3 status!  

The recognition of your organization as a 501c3 tax exempt non profit by the Internal Revenue Service (IRS) offers numerous advantages and is necessary to help your organization grow.  

We invite you to spend some invaluable time with CharityNet USA and find out why obtaining 501c3 status is essential to the growth of your organization’s projects and programs!

Topics of Interest:
•Qualifications
•Steps to Obtaining the Status
•Staying in Compliance

Join us for a free nonprofit webinar July 1st, 2010 from 3:00 P.M. – 4:00 P.M. (EST) & learn how to gain the numerous advantages your non profit organization deserves!

When the IRS examines a 501(c)(3) application, one of the major issues they are looking for is any potential conflict that exists. This conflict of interest could exist between the nonprofit organization and its board members, directors, trustees, or key employees. In my experience working with clients who are applying for their 501(c)(3) status, I have seen many situations arise in which a conflict of interest presents itself and may jeopardize the approval of the application. Even if this issue does pass the initial review completed by the IRS, if the conflict of interest is not addressed and dealt with appropriately, it could jeopardize future compliance with the IRS as well as damage the organization’s reputation; which, in turn, will damage funding.

Conflicts of interest in nonprofit organizations must be addressed very seriously whether they seem small or large. How an organization manages conflicts of interest that arise will determine whether an organization is frequently involved in legal problems and public scandals or actually accomplishing the organization’s mission. Conflicts of interest can arise whenever an individual, who has authority or decision-making power in a nonprofit organization, will privately benefit from a transaction, agreement, or activity of the organization.

One simple example of a conflict of interest is a board member with voting rights who will also be employed by the organization for other duties. The board of directors are responsible for reviewing and approving a nonprofit organization’s budget which would include the salaries and compensation of employees and independent contractors. If one of your board members will receive compensation then an obvious conflict arises if this board member has the authority to set his or her compensation. There are multiple ways to deal with this issue, some more extreme than others. For example, one solution would be to remove the board member from the board of directors altogether. However, such as drastic step does not need to be taken. A typical solution to such an issue would be to have this board member abstain from voting on his or her’s individual compensation. This in turn allows the board member to remain on the board and receive compensation for their duties as an employee, while avoiding a dangerous conflict. Although this issue may seem obvious, many board members do not see some of the more discrete conflicts of interests that arise throughout the lifecycle of their organization.

A useful way to discover if a conflict of interest exists during a decision-making process is to check and see if a decision will benefit any of your director. Of course, this will require all of your directors to be upfront and honest about any aspect of the decision that may benefit them.

Another asset to your organization is your conflict of interest policy. When you organization applies for its 501(c)(3) tax exempt status, the IRS requests that you adopt a conflict of interest policy and submit it with your application. However, you should always remember that this policy serves as a guideline and cannot replace careful consideration and an ethical approach to any decision made by a board. Each member of your Board should be required to acknowledge acceptance of the conflict of interest policy on an annual basis, and the policy should be reviewed at the initiation of all Board meetings. This will serve as a key reminder to every decision maker about their responsibility to disclose and avoid any conflicts of interest.

Nonprofit board members and executives must not only be able to recognize potential conflicts of interest, but they must determine when these conflicts present areas of concern and what to do about them. This can be a great responsibility and should be taken seriously – your organization’s tax exempt status and your future funding depend on it.

A Webinar about why Obtaining 501c3 Tax Exempt Status is Necessary to Help your Organization Grow!

Are your donors able to make charitable contributions and receive a tax deduction?  Is your organization qualified to receive private and public grant money? Is your non profit saving money on lower postage rates on corporate mailings?

If the answer is “no” to the above questions, perhaps your non profit should take steps to obtain 501c3 status!  

The recognition of your organization as a 501c3 tax exempt non profit by the Internal Revenue Service (IRS) offers numerous advantages and is necessary to help your organization grow.  

We invite you to spend some invaluable time with CharityNet USA and find out why obtaining 501c3 status is essential to the growth of your organization’s projects and programs!

Topics of Interest:
•Qualifications
•Steps to Obtaining the Status
•Staying in Compliance

Learn how to gain the numerous advantages your non profit organization deserves by attending our webinar on Thursday, April 29, 2010 from  3:00 p.m. – 4:00 p.m. (EST).

Although the IRS does have very specific requirements for what can and what cannot be done. In regards to lobbying, these requirements should not deter your organization from applying for 501c3 tax exempt status if you believe that lobbying would further your mission and exempt purpose. A non profit organization with 501c3 status can engage in lobbying and in many instances, should engage in lobbying.  I am writing this article, not as an exhaustive discussion on 501c3 organizations and lobbying, but to help you decide if you should still apply for tax exempt status if you want to engage in lobbying.

Political activities and legislative activities (commonly referred to as lobbying) are two different things and are subject to two different sets of rules. But hopefully this will point you in the right direction:

Political activities are almost all prohibited by the IRS. These types of activities would include: directly or indirectly campaigning for (or against) a political candidate who is elected to public office, contributing to a political campaign, or making any type of statement for (or against) a political candidate. This type of activity can result in your 501c3 status being denied or revoked.

Legislative Activities* may also cause your 501c3 status to be denied or revoked if it makes up a substantial part of your activities. Your organization cannot be formed for the sole purpose of influencing legislation, but in many cases it may be critical to furthering the mission of your organization. If this is the case, you should not necessarily shy away from applying for 501c3 status, but you will need to be careful to follow IRS guidelines. The keyword above is “substantial.”

Now aside from involving your organization in issues of public policy through educational meetings and distributing educational materials relating to a current issue, which is allowed; how can your organization work with legislative bodies to accomplish your mission?

Well, let’s take a look at an example. One of my favorite non profit organizations, International Justice Mission (IJM), works to “secure justice for victims of slavery, sexual exploitation and other forms of violent oppression.” Now IJM’s main activity is to provide support to individuals who have been a victim of this type of injustice. However, IJM also organizes many Justice Campaigns with which they mobilize Americans to support U.S. policies to abolish sex trafficking and modern-day slavery. One of their current goals is to have Congress establish a trade policy to deny access to American markets for items that were produced by child or slave labor. IJM specifically targets policy-makers, aka legislators, to push for this reform. Staff from IJM meets with legislators and works to educate them along with voters. This activity is considered lobbying and it is being actively done by a 501c3 non profit organization.

This is just one of many organizations who participate in a form of lobbying to accomplish its mission. Now there are maximums that can be spent on lobbying by a 501c3 organization and your organization should file Form 5768 along with your initial 501c3 application. But if you are considering not applying for 501c3 status because you want to participate in lobbying, carefully look into the limitations, but remember it can be done. Remember, IJM’s goal through its lobbying activities is to influence policy-makers to “champion the rights of the poor and vulnerable,” which is their exempt purpose. Like in this example, if you feel lobbying is necessary to promote your exempt purpose, do not let that hinder your organization in applying for 501c3 tax exempt status.  Rather take a look at the specific rules and requirements and make an informed decision, you may be surprised at what you can do.

*Legislation includes action by Congress, any state legislature, any local council, or similar governing body, with respect to acts, bills, resolutions, or similar items (such as legislative confirmation of appointive office), or by the public in referendum, ballot initiative, constitutional amendment, or similar procedure.  It does not include actions by executive, judicial, or administrative bodies. (IRS.gov)

The Cyber-Assistant will do good things for first-time 501(c)(3) applicants but will it do enough to justify waiting to submit your 1023 application?

In 2003, the IRS started a review and revision process of how they examined applications for 501(c)(3) tax exempt status. They called this process, “Project ASPIRE,” and was created in response to the large increase in 1023 applications. At that point, the number of exempt applications was increasing by over 40% while the number of IRS Exempt Organization employees was remaining the same. The goal of Project Aspire was to find ways to streamline the 1023 application process, both for the applicant and the IRS. Following the project the IRS made some good strides, most notably, the elimination of Form 8734 (Advance Ruling Period). However, the major recommendation of this project was to continue previous efforts to develop a fully interactive filing for the 1023 application, termed the “Cyber-Assistant.”

One of the major changes in submitting your 1023 application through the Cyber-Assistant will be the stated decrease in the filing fee ($200 regardless of previous or projected revenue). It also may cut down on paper; however, since the last report, the application would still be printed and then mailed to the IRS. 

For as much flak as the IRS takes, I must say that they are doing the right thing here. After all, that 2003 project that was mentioned earlier, Project ASPIRE, stands for:

Alleviate any application backlog

Streamline the determinations process

Prioritize application review

Improve customer service

Redirect resources to cases deserving enhanced review and compliance

Enhance quality control 

But while all of this is good, is it really beneficial to wait for the Cyber Assistant to apply for your 501(c)(3) tax exempt status? After all, the idea for the Cyber Assistant dates back well beyond 2003 and the IRS has promised its release year after year.

Here are some reasons you should not wait:

1. Benefits of obtaining 501(c)(3) status that may apply to your organization include discounts on postage, exemption from state and sales taxes, property tax exemptions, and eligibility for private and government grants. In determining whether or not to wait, you need to determine if you can afford to miss these benefits.
2. Your 501(c)(3) status will be retroactive to the date of your incorporation as long as you submit your 1023 application within 27 months of being formed. This means that previous donations to your organization may qualify as tax deductible contributions. If you submit your1023 application after this, you will lose this benefit and be required to submit additional paperwork.
3. Delays and technical issues may plague the Cyber Assistant for many of its initial months once it is released. Although the IRS has designed it with the end-user in mind, good intentions do not always mean good implementation. As with most new software releases, the Cyber Assistant will not be immune to bugs and technical issues, which may add delays to processing your 1023 application. Furthermore, with the stated lower filing fee, I would guess that there will be more applications than ever…leading to further delays!

Above all, you should know that the Cyber Assistant will not make foolproof the 1023 application, just make it more convenient. The point of the Cyber Assistant is to refer you to previous IRS publications when you arrive to a question that you do not know how to answer. But this still means that you will have to read that IRS publication and try to figure out what they are saying! In some cases, the Cyber Assistant will provide broad advice on certain subjects but that will not replace professional advice to your specific organization and questions. So weigh your options carefully when you are considering whether or not to wait for the Cyber Assistant. 

Information taken from:
Advisory Committee on Tax Exempt and Government Entities
http://www.irs.gov/pub/irs-tege/act_rpt2_part1.pdf

Fees for Applying for 501c3 Tax Exempt Status are Set Increase!

User fees will increase for all applications for exemption (Forms 1023, 1024, and 1028) postmarked January 3, 2010:

• $400 for organizations whose gross receipts are $10,000 or less annually over a 4-year period
• $850 for organizations whose gross receipts exceed $10,000 annually over a 4-year period
• $3,000 for group exemption letters

Last time the IRS increased their fees they received a deluge of applications and had a huge backlog for months. Don’t wait until the last minute to receive your exempt status, get your 501c3 application (Form 1023) in before the holidays to save money and expedite the process. 

Remember, you will face additional hurdles if you apply more than 27 months after the end of the month in which your organization was legally formed.

Benefits of 501c3 Tax Exempt Status

The primary benefits of tax exempt status include:

• Donors can make charitable contributions and receive a tax deduction. Most often donors will refuse to offer funding if they will not receive a tax deduction.
• The organization will be qualified to receive private and public grant money.
• As a tax exempt organization you can save money on lower postage rates on corporate mailings.

Your dream has become a reality. The cause that is your passion has been transformed into a functional organization. You′ve established a board, clarified your mission, adopted bylaws, incorporated, and achieved 501(c)(3) status from the Internal Revenue Service. After such exhaustive effort has been expended, it would be senseless to allow the organization to lose its exempt status or even become administratively dissolved for failure to uphold administrative compliance. Thus, knowledge is power-organizational administrators must be diligent in educating themselves on all state and federal regulations.

First and foremost, it is important to recognize that almost all forms of regulatory compliance will be difficult without the maintenance of adequate financial records. It is imperative that administrators document all sources of receipts and expenditures. A sufficient donor database is ideal. It is also critical to retain all supporting documents, such as grant applications and awards, sales slips, paid bills, deposit slips, and cancelled checks. This will allow for easy preparation of financial statements, include statements of activities (income statement) and statements of financial position (balance sheet).

A 501(c)(3) organization′s annually mandated filing with the IRS is the form 990. All organizations are now required to file, regardless of revenue; however the version of the form will differ based upon the year′s receipts. The filing is due on the 15th day of the 5th month after the fiscal year end  (For example, if the fiscal year ends December 31, the 990 is due on May 15th), but it may be submitted anytime after the fiscal year end. To remain in full compliance, administrators must be aware of all forms that must be filed, i.e. the 990-T for unrelated business income, and special filing requirements for supporting organizations.

In addition to annual reporting, organizations with paid employees will be faced with additional quarterly filings. Like all employers, charities who pay wages must withhold, deposit, and pay employment taxes, including federal income tax, Social Security, and Medicare. This must be done for each individual paid more than $100 per year and reported on form 941.

In addition to IRS compliance some states, though not all, will require annual state level tax filings. Upon commencement of the activities, you′ll need to be sure to obtain state level sales and income tax exemptions, if they are available in your state. If the organization is not granted state exemption, they must file and pay taxes! In some states, even organizations exempt from state taxes must still file some sort of annual return.

In addition to state tax considerations, each year the organization must file an annual report with their state to remain an active corporation. While these forms typically require a minimal amount of information, failure to file may lead to an administrative dissolution of the organization.

A final state level compliance issue to remain abreast of is concerned with charitable solicitation registration requirements. Such laws have been implemented in most states in an effort to protect consumers, and the statutes require charitable organization to register and become licensed prior to the initiation of any solicitation activities. These registrations typically require annual renewal, and come with stiff penalties for violations. If an organization will solicit in more than one state, a valid registration must be in place in each state where representatives will seek donations.

Possibly most importantly, you must remain aware of what activities may jeopardize your exempt status. The most common offenses that lead to the revocation of a 501(c)(3) are private inurement and political campaign intervention. Private inurement occurs when an insider receives excess benefit from the existence of the organization, either in the form of direct financial gain or in more indirect means such as the provision of business to a for-profit in which an insider has an ownership interest. Excess benefit may also occur in transactions with outsiders, however the benefit in the situation must be substantial. Lobbying activities, or attempts to influence legislation, may be conducted; however these activities must be kept to a minimum.

501(c)(3) nonprofits are also strictly prohibited from undertaking any political campaign intervention. While organizations may provide voter education or a review of the issues supported by all candidates, a public charity may not, directly or indirectly, support or oppose any candidate for political office.

Finally, organizations must be diligent in filing annual returns on a timely basis each year. Not only can the IRS revoke the exempt status of any organization that fails to file returns for more than two years, it also reserves the right to impose penalties upon late filers. While an organization may not owe any taxes, the standard penalty for late filing of the annual information return is $20 per day, up to a maximum of $10,000.

Remaining in compliance after attainment of 501(c)(3) status may seem a daunting task; however with careful attention and cooperation of organizational administrators, public charities can function successfully and fulfill their missions abundantly.

In the past, a recently formed 501(c)(3) organization was subject to a five year advanced ruling period. During this period the organization would be classified as a public charity . After five years had passed the organization was charged with the responsibility of providing documentation of all income for the previous five years in an effort to demonstrate that they had in fact passed the public support test. A tedious Form 8734 would be prepared and submitted in support of such claim. However, new temporary tax regulations passed on September 9th have eliminated this advanced ruling process.

Under the new regulations, all organizations will retain their classification as a publicly supported charity for the first five years of operations. Beginning the sixth taxable year, the organization must demonstrate that it is meeting the guidelines for classification as a public charity each year on its annual return. If an organization passes the public support test on a given annual return, they will retain their public charity status for that tax year and the following tax year only. An organization may be reclassified as a private foundation at any point that it does not meet the public support test on an annual return.

So how will this affect your organization? If your application is pending with the IRS or if you are currently in your advanced ruling period you need do nothing. Your organization’s information will automatically be updated to reflect classification as a public charity until your sixth taxable year. While the new regulations eliminate the burden of completing the cumbersome form 8734, it also opens up the possibility for continual reclassification of your organization’s status. Administrators must remain more diligent than ever in maintaining good financial records , as the complexity of the new
form 990s beginning with the 2008 tax year will prove to require detailed information.