Demystifying Tax Exempt Status

Описание: This video, presented as the first installment of a six-part series, serves as an expert guide to starting a 501(c)(3) tax-exempt organization and familiarizing individuals with the compliance laws and regulations related to this status. It draws on comprehensive IRS resources to explain the detailed process of creating and managing nonprofit entities.
Key themes and concepts covered in the video include:
• Types of Tax-Exempt Organizations: The sources primarily cover organizations under Section 501(c) of the Internal Revenue Code, which specifies various categories of tax-exempt organizations. These include charities (501(c)(3)), social welfare organizations (501(c)(4)), labor unions (501(c)(5)), business leagues (501(c)(6)), and social clubs (501(c)(7)). Other types, such as farmers' cooperatives (521) and political organizations (527), are also referenced. The publication details which organizations are discussed and where to find information for others not covered in detail.
• Application Process for Tax-Exempt Status:
◦ Organizations seeking exemption must apply in writing using specific IRS forms.
◦ The correct forms depend on the organization type: Form 1023 (or 1023-EZ for smaller organizations) for 501(c)(3) charities, Form 1024 for many other 501(c) types (including 521 farmers' cooperatives as of January 3, 2022), and Form 1024-A for 501(c)(4) organizations. Political organizations use Form 8871 to notify the IRS of their Section 527 status.
◦ Applications, along with a user fee, must be submitted electronically through Pay.gov.
◦ Required documentation includes a unique EIN (Employer Identification Number), organizing documents (like articles of incorporation), a full description of proposed activities, and financial data. Incomplete applications will be returned.
• Determination Letters: The IRS issues a determination letter to formally recognize an organization as tax-exempt under Section 501(a). This letter is typically effective from the date of formation if the application is filed within 27 months from the end of the month of organization. A determination letter can be revoked if there is a material change in the organization's operations, if it was based on inaccurate information, or for failure to file required returns or notices for three consecutive years. Proposed adverse determinations can be appealed through the IRS Independent Office of Appeals.
• Filing Requirements: Most exempt organizations must file annual information returns, such as Form 990, Form 990-EZ, or Form 990-N. Organizations with Unrelated Business Taxable Income (UBTI) must file Form 990-T. New 501(c)(4) organizations are required to notify the IRS of their intent to operate using Form 8976. Exemption applications and annual returns are generally available for public inspection, though certain trade secrets or proprietary information can be withheld.
• Group Exemption Letters: A group exemption letter is a determination letter issued to a central organization that recognizes the exemption of its subordinate organizations on a group basis, streamlining the application process. Subordinates must have their own EINs and be under the central organization's general supervision or control. Important Note: As stated in Notice 2020-36, the IRS is currently not accepting any new requests for group exemption letters. Central organizations must submit annual updates regarding their subordinates to maintain the group exemption. A group exemption can cease to be effective for a subordinate if it no longer meets inclusion requirements or for the group as a whole if conditions aren't fulfilled, including automatic revocation for failure to file required returns for three consecutive years.
• Excise Taxes and UBTI: Tax-exempt organizations can be subject to various excise taxes, including those on private foundation net investment income and executive compensation exceeding $1 million. Organizations with more than one unrelated trade or business must compute UBTI separately for each, ensuring that losses from one business do not offset income from another.
• Key Forms and Resources: The sources extensively reference various IRS forms and publications relevant to tax-exempt organizations. They also direct users to IRS.gov for obtaining forms, instructions, publications, and assistance.
The material emphasizes that achieving and maintaining tax-exempt status is a privilege that requires strict adherence to IRS rules, ongoing filing requirements, and staying informed about legislative and regulatory changes.