Maintaining Your Organization’s 501(c)(3) Status
by Eric S. Taylor, CPA, CGFM, Audit Partner
Posted on November 8, 2016
When a non-profit organization is granted 501(c)(3) status by the Internal Revenue Service (IRS), it is required to follow certain guidelines and regulations set by the IRS.The IRS monitors and regulates these organizations to help ensure these organizations are meeting these requirements set forth by the government.It is in every 501(c)(3) organization’s best interest to be well educated on the regulations in order to keep its tax-exempt status with the IRS. There are certain activities to complete, and to avoid, when trying to maintain a 501(c)(3) status with the IRS.
It is very important for a tax-exempt organization to compile and retain adequate records to assist it in maintaining its 501(c)(3) status. Complete and well organized records are necessary to help ensure compliance with Federal and State laws, as well as the transparency and the credibility of the organization.
A 501(c)(3) organization should maintain complete and accurate financial records and supporting documentation that track income, expenses, and assets, as well as maintain employment tax records for the organization. Organizations with multiple programs are required to track income and expenses for each program separately. The organization’s financial records should be in accordance with the accounting period and accounting method the organization selects in the tax exempt application form (Form 1023) to the IRS. There are two options for an accounting period, (a calendar year and a fiscal year) and there are multiple accounting methods which can be selected to compute taxable income, with the cash method and accrual method being the most used.
In addition to financial records, there are certain permanent records, as well as annual filings and records used to prepare IRS tax returns, which an organization should keep. These include:
- A copy of the organization’s organizing documents, which include articles of incorporation, bylaws, and any amendments;
- A copy of Form 1023;
- A copy of the determination letter for 501(c)(3) status, received from the IRS;
- Descriptions of the organization’s programs; and
- Minutes of governing body’s meetings.
- Some of the items noted above are required to be made available for public inspection.That is why it is so important to maintain and retain complete and accurate records.Keeping these accurate records will be useful in the preparation of the organization’s required annual federal and state filings.
Required Tax Return Filings
Most 501(c)(3) organizations are required to file an annual informational Form 990 return to the IRS. Churches and certain church-affiliated organizations are exempt. Your entity must file a Form 990, 990-EZ or 990-N, depending on the organization’s gross receipts and total assets, or a 990-PF for private foundations. These forms are due to the IRS on the 15th day of the 5th month after the accounting period ends. An organization may file for an automatic 3-month extension of time to file, as well as an additional, non-automatic, 3-month extension. Monetary penalties can be charged to an organization for returns filed late. When an organization fails to file required Form 990 returns for three consecutive years, its tax-exempt status is automatically revoked.Thus, it is imperative to stay on top of IRS filings to avoid costly fines and status revocation.
Compliance Issues That Can Jeopardize a 501(c)(3) Status
In addition to not filing returns to the IRS, an organization can jeopardize its 501(c)(3) status by engaging in the following activities:
- Participating in non-exempt activity – Activities of the 501(c)(3) organization must be in alignment with the purpose reported to the IRS in the Form 1023 and Form 990;
- Participating in extensive lobbying – 501(c)(3) organizations may only conduct activity designed to influence legislation on a limited basis;
- Political campaign intervention – 501(c)(3) organizations are prohibited from participating in any political campaign on behalf of, or in opposition to, any candidate running for public office;
- Having excessive unrelated business income (UBI) – Earning too much income generated from business activity conducted on a regular basis that is not substantially related to the organization’s exempt purpose is prohibited; and
- Private benefit or Inurement – 501(c)(3) organizations activities should serve the public interest and an exempt purpose, and should not substantially benefit the private interest of an individual or organization. In addition, its income or assets are prohibited from substantially benefiting an insider beyond reasonable compensation for work performed.
Participation in some of these activities could cause the organization to be required to pay taxes. Participation in any of these activities could result in the organization’s 501(c)(3) status being revoked by the IRS, and should obviously be avoided.
Simply applying for and obtaining a 501(c)(3) status from the IRS does not mean an organization is done with its legal responsibility to remain a 501(c)(3) organization. Management of the organization should take the necessary time and resources to be fully educated on the topic. A good way to find information regarding the IRS 501(c)(3) requirements is to go to the IRS website at irs.gov. The website has useful instructional information and forms to assist any organization in obtaining and maintaining its 501(c)(3) status.