Category Archives: Tax Exempt

What is Religious Exemption?

There is an old joke about an IRS auditor who calls a clergyman to confirm a large donation from a parishioner and asks, “Did Mr. Thompson donate $10,000?” The clergyman thinks a moment and replies with a smile, “He certainly will!”

The interesting thing is that while that donation is tax-deductible for Mr. Thompson, like other nonprofit organizations, the church doesn’t have to pay taxes on it, but unlike other charities, it has even less responsibility for reporting it.

So, what is religious exemption? For charities this is a big question because exemption can mean tax exemption, exemption from financial reporting, and exemption from state charitable solicitation registration in many cases.

Let’s talk about tax exemption and exemption from financial reporting to break it all up. Later we will get into religious exemption from charity registration.

Why is there a special classification for religion?

Churches are protected from government interference by the First Amendment to the Constitution. Therefore, the degree to which an organization is associated with the direct practice of religion determines their level of accountability (reporting) to the IRS and subsequently to the states.

The IRS categorizes religious charities accordingly: churches, their integrated auxiliaries, religious organizations, and other. Each type as defined by the IRS determines what level of reporting they need to do. In general, churches and their integrated auxiliaries (per the IRS) are treated differently from “religious organizations” as follows:

  1. “Church” (used as an overarching term to indicate any similar place of worship, such as a synagogue or mosque) – The IRS gives 14 attributes of a church, primarily among which is being a legally recognized organization and having a congregation and an ordained clergy (see the IRS Tax Guide for Religious Organizations Glossary);
  2. “Integrated auxiliary” is a 501(c)(3) nonprofit and public charity that is associated with a church or denomination and is internally funded, though missionary groups and youth groups do not usually need to meet this last criteria. Churches and Integrated Auxiliaries (including the definition of a missionary group) are further defined in the Code of Federal Regulations, 26 CFR Section 1.6033-2(g) & 2(h);
  3. “Religious organizations” — according to the IRS, these can include nondenominational ministries, interdenominational and ecumenical (encompassing multiple Christian faiths) organizations, and groups whose purpose is for the study or advancement of religion; and
  4. Other — If the activity of the organization is primarily secular in function when performed by other groups, the charity may not fit in the religious exemption. 7.26.2.2.1 (03-30-1999)

The biggest difference is that because of the need for the separation between church and state, churches and their integrated auxiliaries don’t have to file a Form 990, while religious organizations do. The other end of that separation is that religious organizations can do some, not substantial, issue based lobbying while churches cannot. Page 10 of the IRS Webinar on Churches and Religious Organizations: Do’s and Don’ts has a chart to help you see where you might fit by what is required of you.

It is important to know where your organization falls on this spectrum to know what is required of you at the federal level. Next, we will delve into how it affects state compliance.

This information is not intended as legal advice or instruction.

State Charity Registration Exemptions

You have started your nonprofit and you have applied to the IRS for a federal exemption, but wait, that does not mean you are exempt from filing state taxes, paying local sales taxes or registering your charity in each state.  Approximately 40 states require you to file a state charity registration application, several require you to apply for a corporate license and some you will need state tax exemptions.

These application processes are completely different than Federal tax exemption.  The state charity registration is your organization notifying the state that you will be soliciting its residents for donations.  The application that you provide to them is there way of assuring transparency to their citizens.   Looking for an exemption from filing a state charity registration application? Well, good luck!!  Those laws have more loop holes than an amusement park.

One hundred percent of all states offer some type of exemption but qualifying for that exemption and keeping it is a different story. Each state law has its own definitions and requirements for those exemptions. Some states only require an initial letter notifying them that your organization believes it is exempt while others require you to file an application for approval to the state charity office and a few require annual notifications.  In those states the fees are reduced for the exemption not the required paperwork.

Here are some common state exemptions:

Revenue <$25,000 (can vary from $5,000 to $50,000)

Religious Organizations or their affiliated groups

Educational Institutions or their supporting groups

Membership Organizations – Fraternal, Social, alumni, or professional

Veteran’s Organizations including Police, Fire and Rescue Groups

Political Party or Candidates for Office

Donations for a Specified Individual

Hospitals

Some other not so common state exemptions:

Childcare Providers

Adoption Agencies

Clinics

Boys and Girls Clubs

Less than 10, 35 or 100 Donors per Year

As noted before, and will be discussed in our next post on the common exemptions, each of these exemptions have their own requirements designated by the state where you are soliciting donations.  They are not only determined by the state where you are physically located but in each state where you are soliciting donations.  You may be exempt in your home state but not in others; as well as your organization could be exempt in foreign states but not your state of origination.

If you have any comments, questions or concerns, please contact us at 800-780-6027 or support@simplecharityregistration.com for more detailed answers.

 

DC Corporate Registration/Qualification

Nonprofits must file for a basic business license in DC which in lieu of completing a charity registration application.  This includes completing corporate registration with the FN-1 Form as a foreign entity conducting business in DC. The best way to register in DC is online through the Department of Consumer and Regulator Affairs (DCRA), Corporations Division, CorpOnline Web Portal.

It is best to register through their portal as you can track your progress from the corporate registration to the tax exempt application and then on to registering your non-profit as a business with the BBL-EZ Form.

You will need to have a Registered Agent for filing both as a Foreign Non-profit and for completing the BBL-EZ application both can be provided by a service or an individual residing in DC. If your organization is registering nationwide you are going to need registered agents for several states so we recommend using a national agency so that you only have one point of contact for that service. Here is the link to the blog we posted earlier in the year on the role of Registered Agents in state charity registration process.

If you plan on using a name in DC other than your registered corporate name, you also will need to register that Trade Name.

Please contact us with any comments, questions or concerns at (800) 780-6027 or support@SimpleCharityRegstration.com.

California Corporate Registration/Qualification

Out of state charitable corporations must register or qualify with the California Secretary of State’s office if they do business in California which includes soliciting for donations.  A non-profit corporation can do this by filing a Statement and Designation by Foreign Corporation (Form S&DC-S/N).

You will need to have a Registered Agent for filing the Statement and Designation by Foreign Corporation which can be provided by a service or an individual residing in California. If your organization is registering nationwide you are going to need registered agents for several states so we recommend using a national agency so that you only have one point of contact for that service. Here is the link to the blog we posted earlier in the year on the role of Registered Agents in state charity registration process.

After obtaining the corporate registration approval, we recommend that the organization files for state tax exemption with the California Franchise Tax Board.  The Submission of Exemption Request (Form FTB 3500A) should be filed so that the organization will be recognized as a tax exempt entity and will not have to pay any California franchise taxes.

For more information on corporate registration review the California Secretary of State’s website or you could read up on Corporate Registration and Registered Agents on our blog.

Please contact us with any comments, questions or concerns at (800) 780-6027 or support@SimpleCharityRegstration.com.

Non-profit or Tax Exempt??

Welcome to SimpleCharityRegistration.com.

What is the difference between a nonprofit and being tax exempt?

Tax exemption on the federal level is a designation given by the IRS that basically just says that “if you are providing a community service and not paying a profit to yourself or investors, then you shouldn’t have to pay taxes on the money that you have brought in.” Also, “After you provide the proper documentation the IRS will allow your donors the ability to take the monies that they give you as a deduction on their income taxes.” A nonprofit is how you are designating how your business will be structured on the state level which could include any of the following: Unincorporated Association, Nonprofit Corporation, Charitable Trust, or in some cases an LLC.

You may be asking,
“Why do I have to register my nonprofit if I am tax exempt?”

The simple answer is that you are letting the state know that you will be doing business within its boundaries and how you will be conducting that business. Registering your nonprofit with the correct state authorities can be a two step process. The first part is registering with the state that you will be conducting business either as a domestic or foreign entity and how it is structured.

Secondly, you must register with the proper agency where you will be asking their citizens for donations/contributions to fund your organization and what services you will be providing for those funds you will be collecting. These two processes also give the citizens of that state a trusted local authority to confirm if your organization and the money that you are asking them for is being used as you say it will be because the paperwork that you file with the state about your organization as a nonprofit will be available for them to review.

As always please contact us with any comments, questions or concerns at (800)780-6027 or Support@SimpleCharityRegistration.com.

Thanks for watching!

IRS Warns Organizations Filing Form 990-N of Possible Error Messages  

The IRS just sent the following notice to its EO (Exempt Organization) update subscribers.

Some Form 990-N Electronic Filing System (e-Postcard) users may see error messages

The Form 990-N online filing system moved from Urban Institute to IRS.gov in February. While the new system has been successful, a very small percentage of users see site errors while registering or submitting the form. The IRS offers this advice:

  • Review the steps listed on How to File Form 990-N. Pay particular attention to the “text character” restrictions.
  • The Form 990-N (e-Postcard) User Guide will explain each step in the filing process.
  • If site errors are unresolved, call TE/GE Customer Account Services at 877-829-5500. A representative will gather your Form 990-N information for filing on your organization’s behalf.
  • Organizations will not be penalized for filing late if it was caused by website issues. Organizations should continue efforts to file, even if they are late.

For more on filing Form 990-N, see the Form 990-N page on IRS.gov.

Follow this link to become an EO subscriber and receive important information regarding exempt organizations like we did.

Your Nonprofit Organizations Form 990: What Are They Looking at?

Today I found a fantastic resource that GuideStar has put together called “Highlights of IRS Form 990”.  It gives an overview of the 12 sections of the Form 990 without leaving you feeling overwhelmed by the enormity of the form.  What really drew me in was that the presentation was done from the perspective of the reviewer.  What is the importance of each section?

These are some of the things I found interesting:

How to determine what form year you want to look for from the fiscal year and other goodies that can be found in the header section.  It’s not just where you put the address!! (Pt 3 – Video Tutorial)

Brief explanation of what is the difference between unrelated business income (UBI) and revenue and the proper places to report those incomes including Form 990-T (Pt 4)

Discussion on how your mission statement sets the tone for the rest of the document and flows into Section III: Statement of Program Service Accomplishments. I have new respect for that mission statement!! (Pt 5)

In Part VI: Governance, Management, and Disclosures – I was interested to learn how I could use this form to make the non-profit stronger by implementing some of policies discussed this section of the 990 (Pt 7)

Brief explanation on who needs to be included in Section VIII: Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors.  This is always a meaty subject!! (Pt 8)

If you have never worked with the 990 or even if you have it was a nice half hour discussion on the importance of the information that your organization will be presenting to the IRS and interested parties.   It is a good resource to show to new board members and accounting staff who may have not worked prior in the non-profit area.  Plus the presenter had a pleasant voice that kept me engaged!!

The overview can be downloaded and saved as a pdf or they have a complimentary video tutorial that can be found on their website as well as on YouTube and is broken into 10 parts for a total run time of less than 40 minutes.  That is probably my favorite feature as I can listen and learn “one bite at a time”!!

Annual Informational Return Basics for Nonprofits – IRS Forms 990-N, 990-EZ, 990, and 990-PF

Why am I Filing a Tax Return if my Organization is Exempt?

The series 990 returns are not tax returns used to assess a tax rather they are annual informational returns.  They are used for providing the IRS and the public with information about your organization’s programs, activities, relationships, transactions, and governance, in addition to revenues, expenses and assets.

What Form Should my Organization File?

Gross receipts less than $50,000 file a 990-N (also called a Postcard) electronically.

Note: most states require you to file a 990, 990-EZ or their state form which contains similar information with your charity registration or renewal forms so be prepared to provide that level of information.

Gross receipts less than $200,000 and Total assets less than $500,000 file a 990-EZ or 990.

Gross receipts greater than $200,000 or Total assets greater than $500,000 file a 990.

Private Foundations should always file the 990-PF regardless of their financial status.

For further reference, see IRS 990 Instructions or Guidestar publishes many informative blogs on IRS reporting requirements and SimpleCharityRegistration.com is also always here to help.

What is the difference between a nonprofit and being tax exempt?

I was at a seminar in DC the other day trying to get a handle on how they have their process set up for filing your charity registration and I heard a woman complaining about “taxation without representation” and why if she was tax exempt did she have to register her nonprofit  with the states or DC.  Obviously I stayed out of this argument because I did not want to step on any toes but what they should have told the woman was that they are in fact two totally different issues.

What is the difference between a nonprofit and being tax exempt?

Tax exemption on the federal level is a designation given by the IRS that just says “Hey if you are providing a community service and not paying a profit to yourself or investors then you shouldn’t have to pay taxes on the monies that you have brought in” and with that “After you provide us with the proper documentation we will allow your donors the ability to take the monies that they give you as a deduction on their income taxes”.

A nonprofit is how you are designating how your business will be structured on the state level which could include: Unincorporated Association, Nonprofit Corporation, Charitable Trust or in some cases an LLC.

Why do I have to register my nonprofit if I am tax exempt? 

The simple answer is that you are letting the state know that you will be doing business within its boundaries and how you will be conducting that business.  Registering your nonprofit with the correct state authorities can be a two step process.  First it is registering with the state that you will be conducting business either as a domestic or foreign entity and how it is structured.  Secondly, you are registering with the proper agency that you will be asking their citizens for donations/contributions to fund your organization and what services you will be providing for those funds you will be collecting.

These two processes also give the citizens of that state a trusted local authority to confirm if your organization and the money that you are asking them for is being used as you say it will be because the paperwork that you file with the state about your organization as a nonprofit will be available for them to review.