Partner Training: 501(c)(3)

501c3 Nonprofit Tax Exemption

Partner Service & Sales Training

What is a 501(c)(3)

I. What is a 501 (c)(3)?II. Eligible OrganizationsIII. Eligible ActivitiesIV. CharityNet USA Services & Processes

501(c)(3) Benefits

501(c)(3) Organizations:• Do not pay federal corporate income tax. With this

exemption, an organization can save 15-35% of its taxable income.

• In most cases do not pay state corporate, franchise, excise, sales, and use taxes.

• Can offer individual and corporate donors a tax deduction for their contribution. This is an incentive for taxpayers who itemize their deductions.

• Are eligible to receive foundation grants.• Are eligible for lower postal rates with the U.S.

Postal Service.• Are viewed as a whole as reputable organizations.

Why 501(c)(3) ?

“Nonprofit” does NOT mean tax exempt• Many types of nonprofit organizations may

qualify for exemption from federal income taxes, however that exemption is not automatic.

• Applications must be filed with the Internal Revenue Service requesting the privilege of tax exemption for the organization.

• In many states, separate application processes exist for exemption from state-level taxation.

Other Sections of IRC 501(c)

• There are many other sections of 501(c) that provide federal tax exemption for other types of organizations.

• Many of these sections provide different benefits.

• Some sections provide tax exemption but not donor deductibility.

Eligible Organizations

I. What is a 501 (c)(3)?II. Eligible OrganizationsIII. Eligible ActivitiesIV. CharityNet USA Services & Processes

What Organizations Qualify for 501(c)(3) Exemption?

• To receive a determination as a 501(c)(3) organization, a nonprofit must prove, through a detailed application process, that they are both organized and operated exclusively for allowable purposes.

Organizational Test

• To qualify, an organization’s governing document (most commonly the Articles of Incorporation) must meet the organizational test. They must:– Limit the purposes of such organization to one or

more exempt purposes;– NOT expressly empower the organization to engage

in activities which in themselves are not in furtherance of one or more exempt purposes;

– Dedicate all assets to an exempt purpose.

Operational Test

• To satisfy the operational test, an organization must be operated exclusively for one or more of the following purposes: – Religious– Charitable– Scientific– Testing for public safety– Literary– Educational– Fostering amateur sports– Prevention of cruelty to children or animals

Examples of Qualifying Organizations

• Homeless Shelters• Soup Kitchens• Churches• Outreach Ministries• Private Schools• Daycares• Museums• Community Development

Organizations

• Clothing Ministries• Prison Ministries• Foreign Assistance• Art Schools/Centers• Youth Organizations• Little Leagues • Low Income Housing• Senior Housing• Orphanages

Eligible Activities

What is a 501 (c)(3)?II. Eligible OrganizationsIII. Eligible ActivitiesIV. CharityNet USA Services & Process

Religious

• IRS definition of “religious”:– "A sincere and meaningful belief which

occupies in the life of its possessor a place parallel to that filled by the God of those admittedly qualifying for the exemption comes within the statutory definition."

Am I a “Church” ?

• To meet the IRS definition of a “church”, a 14 point test is used, which includes establishing that the organization has:– Religious doctrine or belief of any kind– Established location of worship– Established congregation, which is not just a family

(There is no set number of members, but think 25 minimum)

– Regularly scheduled worship services– Ordained religious leader

More on Churches

• While true churches are automatically deemed exempt from federal income taxes, there are many reasons why churches still seek recognition, including:– Ability to seek grant funding– Ease of documenting large contributions from major

donors– Reduced rental rates for facilities, in many cases– Reduced postage rates– Also, separation of outreach programs into a distinct

501(c)(3) provides additional funding options

• IRS definition of “Charitable”:– Relief of the poor and distressed or of the

underprivileged– Advancement of religion– Advancement of education or science– Erection or maintenance of public buildings,

monuments, or works– Lessening of the burdens of government– Promotion of social welfare

Charitable

Amateur Sports

• Sports activity is not in and of itself an exempt activity under IRC 501(c)(3)! – An organization may be educational within the

meaning of IRC 501(c)(3) if it teaches sports to youth or by being affiliated with an exempt educational organization.

Amateur Sports

• Sports for youths may be charitable because they combat juvenile delinquency or lessen the burdens of government.

• An organization may qualify if they foster national or international amateur sports competition and no part of its activities involve the provision of athletic facilities or equipment.

Limitations for 501(c)(3) Organizations

• 501(c)(3) organizations are subject to limitations on some specific activities, including:– Private benefit/ inurement– Lobbying– Political Campaign Activity– Unrelated Business

Private Benefit

• The prohibition of excess benefit to insiders is absolute. Individuals or corporations involved cannot be in a better position because of the existence of the nonprofit.

• In contrast, if the activities of an organization privately benefit someone who is not an insider, that benefit must be substantial in order to jeopardize the organization’s tax-exempt status.

Lobbying

• Lobbying is activity designed to influence legislation.

• Lobbying cannot be a substantial part of the activities of a 501(c)(3) organization

Political Campaign Activity

• 501(c)(3)s are prohibited from directly or indirectly participating or intervening in any political campaign on behalf of or in opposition to any candidate for public office.

• This includes making contributions to political campaign funds or making public statements for or against the candidate.

Annual Compliance for 501(c)(3) Organizations

• Form 990 (Annual Tax return for Exempt Organizations)

• State Corporate/Franchise Tax Returns• Annual Reports• Charity Registration• Other state-specific filings

Services & Process

What is a 501 (c)(3)?II. Eligible OrganizationsIII. Eligible ActivitiesIV. CharityNet USA Services & Process

501(c)(3) Services & Process

BizCentral USA provides comprehensive 501 services, offering all items necessary to remain in compliance with state and federal regulations, including:• IRS Form 1023 • Financial Projections• Articles of Incorporation• Bylaws• Conflict of Interest Policies• State Income Tax Exemption Applications• State Sales Tax Exemption Applications• Charitable Organization Registrations

Pricing

• Prices charged for completion of the paperwork necessary to apply for 501(c)(3) recognition will vary, depending on how far the client is in the process and how many supplemental documents they’ve already prepared.

• In addition, pricing may be affected by the number of state level filings required in the client’s state.

• Price quotes include only document preparation fees, and all government filing fees will be the responsibility of the client.

Process

• Once a sale has been made on one of our 501 services, clients are given access to our 501 Services “Steps Page”

• Here, they will find a variety of information, tips, samples, and questionnaires.

• Step 1: Clients will complete the appropriate questionnaire, and submit any other required documents.

• Step 2: An interview will be set up once the questionnaire is completed.

Process

• Step 3: Once all information is gathered, their service will be completed usually within 10-15 business days.

• Step 4: Depending on the service purchased, some documents may be sent to the client via email for filing.

• Step 5: Finally, the completed product is sent to the client once final payment is made.

Conclusion

• 501(c)(3) recognition provides certain qualifying nonprofits with many advantages.

• Benefits include exemption from federal income taxes, as well as the ability to offer donors a tax deduction for their contribution

• Many states will require additional filings in order to stay in full compliance

• Professional assistance is necessary for organizations who are not familiar with all state and federal procedures