Frequently Asked Questions (FAQs)
- Where can I get technical help with this web-based training?
Refer to the Help button at the bottom of your screen. - Will I receive official CPE or CLE credit for taking this course?
No. However, upon completing the feedback survey at the end of each course, you can print out a personalized Certificate of Completion. - What is the difference between nonprofit, tax exempt, and charitable?
The term “nonprofit,” as well as “not-for-profit” and “nonstock,” describe the way an organization incorporates under state law. These terms all describe organizations that are not organized to make a profit, and that typically do not issue stock.
The term “tax exempt” refers to the status granted by the IRS to qualifying organizations. To receive tax-exempt status, an organization must meet a specific description and, for 501(c)(3) status, complete and submit an application. 501(c)(3) tax exemption applies to Federal income tax and Federal unemployment tax. States also grant tax exemption, but the process and types of exemption vary from state to state.
The term “charitable” refers to a type of organization that is recognized as tax exempt under section 501(c)(3) of the Code. 501(c)(3)s, which also include religious and educational organizations, receive certain benefits not conferred on other tax-exempt organizations; for example, contributions to them are tax deductible by the donor. - What is the difference between section 501(c)(3) and section 170?
All of the 501(c) sections, including 501(c)(3), describe particular types of organizations that qualify for tax exemption. Section 170 provides that contributions to certain types of organizations—primarily 501(c)(3)s and a few others—are deductible by the donor as itemized deductions. Section 501(c)(3) governs tax exemption of organizations, while section 170 governs deductibility of contributions by individuals.Back to top
- Why would an organization file Form 1023, Application for Recognition of Exemption, when it is not required to do so?
Usually a church or very small organization files to be recognized as tax exempt—even though it doesn’t have to—for the peace of mind such recognition provides their donors. Most donors want to be able to prove, if the IRS examines their return, that their contribution is deductible by showing that the organization to which they contributed is in IRS Publication 78, Cumulative List of Organizations Described in Section 170(c) of the Internal Revenue Code of 1986. Being able to demonstrate that an organization is a recognized 501(c)(3) may have other benefits, such as qualifying for lower postal rates. - Are contributions to these organizations (tax exempt, but without a determination letter) tax deductible?
A donation to a church or an organization with less than $5,000 in annual gross receipts is deductible by the donor as a charitable contribution whether or not the organization has applied for and received tax-exempt status from the IRS.Back to top - When is an organization’s tax-exempt status effective?
If an organization files its application for recognition as a tax-exempt organization within 27 months of the date of its incorporation or formal organization, then exemption, if granted, will be effective as of the date of its incorporation or formal organization.
If an organization files for exemption after 27 months from the date of incorporation or formal organization, then exemption, if granted, will be effective from the postmarked date of the application for exemption. - What is the difference between a public charity and a private foundation?
All 501(c)(3) organizations have what is called a “foundation classification.” The terms “public charity” and “private foundation” are ways of referring to an organization’s foundation classification. Because of the way the law is written, any organization that qualifies for tax-exempt status under section 501(c)(3) is presumed to be a private foundation, unless it can show that it qualifies for one of the exceptions to private foundation status. Any organization qualifying for such an exception is sometimes called a public charity.
Some types of organizations, such as churches and schools, are defined as public charities by law. But most organizations qualifying for public charity status do so because they can show that their financial support comes from a broad cross-section of the public. Organizations that receive their support from a very narrow base, or that were set up by a wealthy individual or family, will typically be classified as private foundations.
Although both types of organizations are tax exempt under section 501(c)(3), private foundations are subject to certain excise taxes and reporting requirements that do not apply to public charities.Back to top
- During my first five years of existence when I’m automatically deemed a public charity by the Service, do I still need to file an annual return for those years?
You will still need to comply with the normal annual return filing requirements during your first five years of existence, including Form 990-N, unless you are otherwise not required to file a return. However, you will still be a public charity regardless of the public support information reported in the Schedule A to your annual return. - What can I do to help ensure that my organization does not unexpectedly lose its public charity classification?
An organization will lose its public charity status starting in its sixth year of existence if it cannot pass the public support test for two consecutive years. If the organization cannot meet the public support test for two consecutive years, it will be reclassified as a private foundation as of the start of the second consecutive year. In order to avoid unexpectedly losing your public charity classification, you should keep careful track of your public support information through out the year instead of waiting until the end of the tax year when you are preparing your Schedule A. - What happens if an organization is reclassified as a private foundation?
The organization is still exempt as a 501(c)(3) organization, but it will be subject to the excise taxes that apply to private foundations. It will also file a Form 990-PF, Return of Private Foundation, instead of a Form 990, Return of Organization Exempt from Income Tax. - What activities can jeopardize 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;
- any political campaign activity; and
- unrelated business activity that is substantial when compared with the organization’s exempt-function activities.
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- What is private benefit?
Private benefit occurs when an individual or organization receives a benefit—monetary or nonmonetary—from a 501(c)(3) organization. A tax-exempt organization that provides a substantial amount of private benefit may risk losing its tax-exempt status. (This does not include paying reasonable salaries or providing services to individuals as part of an organization’s exempt-function activities.)
- What is inurement?
Inurement occurs when an “insider” of an exempt organization receives any of an organization’s net income or inappropriately uses any of its assets for personal gain. An insider is a person who has a personal and private interest in the activities of an organization. Examples are officers, directors, and key employees. Any amount of inurement, no matter how small, can jeopardize an organization’s tax-exempt status. (This does not include paying reasonable salaries or providing services to individuals as part of an organization’s exempt-function activities.)
- What is the difference between private benefit and inurement?
Inurement is a subset of private benefit and deals specifically with insiders, while private benefit can be to both insiders and outsiders. Both terms describe situations in which an exempt organization’s income or assets are inappropriately diverted for private gain rather than used for a public purpose. - What is lobbying?
Lobbying is defined as “the attempt to influence legislation.” Legislation includes actions by Congress or any state legislature, local council, or other similar governing body. Actions by these bodies include acts, bills, or resolutions. If an exempt organization contacts, or urges the public to contact, a member or employee of a governing body in order to advocate for or against an action by the body, it is lobbying.Back to top
- What are the consequences of lobbying?
If a 501(c)(3) organization conducts substantial lobbying, it risks losing its tax-exempt status. Loss of exemption would result in the organization’s income becoming subject to income tax. In addition, taxes may apply to the organization and to managers who knew that the lobbying expenditures were excessive. - How does the IRS determine if lobbying activities are substantial?
The IRS uses one of the following two methods to determine whether the lobbying activities of a 501(c)(3) are substantial:
- the “substantial part test,” or
- the “expenditure test.”
The first test is a subjective test based on the facts and circumstances. The IRS considers a variety of factors, including the time devoted to the lobbying activity by both compensated and volunteer workers, as well as the money spent on it. If the activity as a whole is determined to be substantial, the organization’s exempt status may be jeopardized.
The second test is an objective, mathematical test that applies a dollar limit for lobbying expenditures based on the organization’s total expenditures. As long as the organization’s total annual lobbying expenditures are under this limit, its lobbying is considered insubstantial. An organization must elect to have its lobbying activities measured by this test by filing Form 5768, Election/Revocation of Election by an Eligible Section 501(c)(3) Organization to Make Expenditures to Influence Legislation. This election, governed by section 501(h) of the Code, must be made during the tax year for which it is to be effective.Back to top - What is political campaign activity?
Political campaign activity is directly or indirectly participating or intervening in any political campaign on behalf of or in opposition to any candidate for elective public office. This includes making contributions to political campaign funds or making public statements in favor of or in opposition to any candidate for public office. - What are the consequences of participating in political activity?
For a 501(c)(3), violating the political campaign prohibition may result in revocation of tax-exempt status, and imposition of certain excise taxes.Back to top
- What is the difference between lobbying and political activity?
Lobbying is activity in support of or in opposition to legislation. (Think “L & L”—Lobbying & Legislation.) Political activity is about supporting or opposing a candidate for elective office. - What is UBI?
“UBI” stands for “unrelated business income,” which is income that an exempt organization receives from conducting activities that are not related to its exempt purpose. Even if an organization uses the income from an unrelated activity to help pay for its exempt activities, that income is still UBI. - What are the consequences of conducting UBI-generating activities?
Conducting UBI-generating activities is not necessarily a bad thing. An organization might just have to pay tax on those activities. However, for 501(c)(3)s, if the conduct of UBI-generating activities becomes substantial in comparison with the organization’s exempt-function activities, then the organization’s tax-exempt status could be jeopardized. - How do I report an organization that is violating its tax-exempt status?
To tell the IRS about an organization that you suspect may not be complying with any or all aspects of its tax-exempt status, write to EO Classification, Mail Code 4910, 1100 Commerce Street, Dallas, TX, 75242.Back to top
- Who must file an annual information return?
Any exempt organization (public charity) whose gross receipts for its taxable year exceed $25,000 must file a Form 990, Return of Organization Exempt from Income Tax, or Form 990-EZ (Short Form) for that year. Private foundations must file Form 990-PF, Return of Private Foundation, even if their gross receipts are less than $25,000 for the year. An organization’s original determination letter granting exemption will include information about the organization’s filing requirements.
For annual periods beginning after 2006, a tax-exempt organization that is not required to file Form 990 because its gross receipts are less than $25,000 must file an annual electronic postcard (e-postcard). The e-postcard must include:
- Name
- “Doing Business As” (dba) names
- Address
- Taxpayer Identification Number (TIN)
- Name and address of principal officer
- Evidence of continued basis for exemption from filing requirements
- See Internal Revenue Code section 6033(i).
For annual periods beginning after 2006, failure to file Form 990, Form 990-EZ, or an e-postcard for three consecutive years will result in revocation of exempt status as of the filing due date for the third return. An organization revoked under this Code section must apply for reinstatement and pay a user fee, whether or not the organization was originally required to file for exemption. Reinstatement of exemption may be retroactive if the organization shows that the failure to file was for a reasonable cause. Additional information with respect to section 6033(i) will be available at www.irs.gov/eo as procedures are finalized.
Churches never have to file a Form 990, 990-EZ or an e-postcard.Back to top - When is Form 990, Return of Organization Exempt from Income Tax, due?
An organization’s Form 990 is due by the 15th day of the fifth month following the end of its tax year. So, for a calendar-year organization, Form 990 is due on or before May 15. An organization can file for an automatic three-month extension of time to file Form 990. Organizations can also request an additional three-month extension if the original three months was not enough time, but this extension is not automatic. You must show reasonable cause for the additional time requested. - Can returns of tax-exempt organizations be e-filed?
Yes. E-file is available for:
- Form 990;
- Form 990-EZ, Short Form Return of Organization Exempt from Income Tax;
- Form 8868, Application for Extension of Time to File an Exempt Organization Return;
- Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations; and
- Form 7004, Application for Automatic 6-Month Extension of Time To File Certain Business Income Tax, Information, and Other Returns
All you have to do is use IRS-approved software. You can find a list of IRS-approved software, including those offering free e-file, at http://www.irs.gov/efile, and then click on “e-file for Charities and Nonprofits.”
E-filing is required for certain large tax-exempt organizations. For details, see the website.Back to top
- Do I really have to show my return to anyone who asks?
Yes. In fact, you have to show your three most recent returns to anyone who asks. You also have to provide a copy of the return if the person asks for one, but you can charge a reasonable amount for making the copy. Or, if your return is “widely available,” which these days means it’s posted on the Internet, you can refer the requester to the Internet address without providing a copy. However, you still have to have a copy of the return available for the requester to see.
You do not have to show anyone information about your contributors, even if asked. - What happens if I do not permit someone to examine my return?
If your organization does not comply with the public inspection requirements, it—and the individuals responsible for the failure to comply—could be penalized. The penalties will continue to accrue until the public inspection requirement is satisfied. - What if I have a question that this training doesn't answer?
Visit the Exempt Organization pages on irs.gov, or call Customer Account Services toll-free at 877-829-5500 during normal business hours. Back to top
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