For charities, membership groups, and other types of non-profits, tax-exempt status is often an organization’s most valuable asset. Losing its tax-exempt status could cause the profits of a membership group to be subject to income tax – in essence double taxation as membership dues are paid with after-tax dollars. A loss of tax-exempt status could mean a significant decline in donations to a charitable organization, in addition to any tax on organization profits.
After all the hard work of applying for tax-exempt status, it’s in every non-profit organization’s best interest to keep it. Different rules apply to different types of non-profits depending on the Internal Revenue Code section under which they are organized, but some rules apply across the board to nearly all organizations:
- Timely file each year’s federal non-profit tax return, e.g., Form 990, Form 990-EZ, if one is applicable to your organization. If this return isn’t filed for three consecutive years, the IRS automatically revokes an organization’s tax-exempt status. As someone who regularly assists non-profits with regaining their tax-exempt status after revocation, I encourage all organizations to outsource the preparation of their tax filings. There are numerous benefits in working with an advisor for tax preparation, but sometimes the biggest benefit is simply that the tax returns are filedat all.
- Consider the organization’s activities. Have day-to-day operations changed substantially from when the organization applied for tax-exempt status? Do the organization’s operations look less like a non-profit and more like a business? Is the organization engaging in prohibited activities such as political lobbying? In short, if an organization has activities that don’t further its exempt purpose, it is potentially putting its tax-exempt status in jeopardy.
- Consider who is benefiting from organization dollars. An automobile club established as a 501(c)(7) social organization should be paying for activities that benefit the club membership. A 501(c)(3) charitable organization established to provide housing to the homeless should be providing housing to the homeless. Keep an eye out for any one particular person – whether part of the organization or not – who may be receiving some sort of specific financial benefit. Tax-exempt organizations are expected to benefit the group of individuals they say they do and not any one particular individual. Doing otherwise risks the organization’s tax-exempt status.
Every situation is unique! Please reach out with any questions about establishing, re-establishing, or maintaining, your organization’s tax-exempt status.