501(c)(3) is a tax status for organized and operated organizations for charitable, religious, educational, scientific, and literary, testing for public safety, fostering national or international amateur sports competitions, and preventing cruelty to children or animals. According to the IRS, the term charitable is used in its generally accepted legal sense and includes:
- Relief of the poor, the distressed, or the underprivileged.
- Advancement of religion.
- Advancement of education or science.
- Erecting or maintaining public buildings, monuments, or works.
- Lessening the burdens of government.
- Lessening neighborhood tensions.
- Eliminating prejudice and discrimination.
- Defending human and civil rights secured by law.
- Combating community deterioration and juvenile delinquency.
Maintaining your 501(c)(3) status can be easy, and losing it can be just as easy; here are six ways you can lose your tax-exempt status:
- Not completing your annual reporting
The last thing you want to hear when growing your nonprofit is your tax-exempt status has been revoked. It is essential to complete your state’s annual filings and your IRS annual filing of one of the Form 990s.
The Pension Protection Act of 2006 provides for the automatic revocation of an organization’s tax-exempt status if it fails to file the required annual information return for three consecutive years. Don’t let this be you!
Set a reminder and assign someone responsible for your organization’s annual reporting to help prevent you from losing your exempt status.
Urging the public to contact members or employees of a legislative body to propose, support, or oppose legislation is considered lobbying and can jeopardize an organization’s tax-exempt status. Although a 501(c)(3) organization can lobby, it should be a tiny part of its overall activities. Be mindful of this.
- Political activity
501(c)(3) organizations are prohibited from participating in any federal, state, and local political campaign on behalf of or in opposition to any candidate running for public office.
- Private Benefit
A 501(c)(3) organization’s activities should not serve the private interests or benefit of any individual or organization. A nonprofit may not permit any of its income or assets to benefit insiders, such as board members, officers, directors, and essential employees. If an organization benefits insiders, the insiders and the organization could be subject to penalty excise taxes and lose its tax-exempt status.
- Unrelated Business Income (UBI)
Earning too much income from unrelated activities can jeopardize an organization’s 501(c)(3) tax-exempt status. This excess income may come from a regularly carried-on trade or business that is not substantially related to the organization’s exempt purpose.
- Operation in accord with the stated exempt purpose(s)
Over time your organization’s purpose may change. Remember that an organization must pursue exempt activities in its IRS application for exemption. If the organization’s purpose differs from what was initially reported to the IRS, the organization must inform the IRS to prevent future problems.
For more information on these ways to avoid losing your tax-exempt status, visit irs.gov or schedule your FREE consultation with a member of the Nonprofit Enthusiast team at HERE.