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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.