THE NON-PROFIT
ORGANIZATION
STARTING OUT
The first stage in the life cycle of any
organization is its creation. A nonprofit organization may be created as a
corporation, a trust, or an unincorporated association. Any of these entities
may qualify for exemption. Note, however, that a partnership generally may
not qualify.
To qualify for exemption under section 501(c)(3),
an organization must be organized exclusively for purposes described in that
section. This means, among other things, that the organization’s articles
of organization must contain certain provisions. The IRS provides sample
articles of organization that contain the required provisions. Most organizations
also adopt by-laws. You should also apply for an employer identification
number, even if you do not have employees.
APPLYING TO THE IRS
Once an organization has been created under state law
and begins to operate, it may want to be recognized as exempt under section
501(c)(3) of the Internal Revenue Code. In addition to exemption from federal
income taxation, organizations recognized as exempt under section 501(c)(3)
may enjoy collateral benefits under the Internal Revenue Code, as well as under
state or local income, property, sales, use or other tax provisions.
To apply for exemption, an organization should obtain and complete the required
forms (exemption application) and application for employer identification number
and submit them, along with the required user fee. If an organization will
be represented by an attorney or other representative, it must also submit
a power of attorney.
Public disclosure requirements apply to exemption applications that the IRS
approves.
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ANNUAL FILINGS
Although they are exempt from income taxation, exempt
organizations are generally required to file annual returns of their income
and expenses with the Internal Revenue Service. If an organization has unrelated
business income, it must file an unrelated business income tax return. In addition
to filing an annual exempt organization return, exempt organizations may be
required to file other reports and returns as discussed under Ongoing Compliance.
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ONGOING COMPLIANCE
In addition to annual return requirements, exempt organizations
are required to file certain returns and reports and make disclosures.
SIGNIFICANT EVENTS
In addition to periodic reporting, a section 501(c)(3)
public charity may interact with the Internal Revenue Service at key times
during its life cycle.
Notifying the IRS
As stated in the exemption determination letter, an organization must notify
the IRS of material changes in its form, activities, or sources of support.
This includes notifying the IRS of any merger with another organization
and when the organization terminates.
Private Letter Rulings
You may want to seek a private letter ruling on the tax consequences of material
changes that you intend to make in your structure or activities.
Audit
In addition, the IRS may audit a section 501(c)(3) organization to ensure that
it is complying with the requirements for exemption and paying required taxes.
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