Recently In a nationalized bank with representations from all over the world, diversity reflected when a Kashmiri reminisced the golden leaves of Chinar trees, picking up of millions of saffron flowers to make the mysterious saffron spice, the free-flowing Jhelum river, mysterious Indus river and ever calm Chenab river, and all other golden epithets of Kashmir to a CPA hailing from Tamil- Nadu, myself. Particularly during the spring, one longs to walk among the fallen leaves near the famous university in Srinagar. But these scenes ended the calm atmosphere when he showed a letter from Internal Revenue Service (IRS) about a tax-exempt organization with which my client had a close association. As usual, I am not going to discuss the problem of my friend but explain “Tax Exempt Organizations”, their structure, accounting periods, tax return to be filed and other salient features related to payment of tax related to U.S.A. When recently Income tax department of Government of India raised its fingers about certain Tax Exempt Organizations operating in India and their non- filing of tax returns, the news reporters had a killing about the lengthy income tax form and other procedures maintained about these organizations.
But our discussion about the tax aspects of those organizations operating in U.S.A., will blow away the arguments of news reporters about the system prevalent in India. Let knowledge yield place to ignorance.
Let us delve deeply into the taxation aspects of “Tax Exempt Organizations” In U.S.A.
An organization that qualifies for exempt status under Internal Revenue Code in U.S.A., is expected to meet the following requirements continually.
1. Not to be a ‘for-profit’ entity
2. Not exert any political agenda
3. Not having net earnings that would benefit the members of the organization.
One is immediately tempted to ask “Who are these organizations?” Pat comes the reply though a long list of names.
Educational organizations
- Schools like a primary, secondary, or higher secondary or a college, professional or trade school.
- Organizations which conduct public discussion forums, groups, panels, lectures, or similar programs.
- Correspondence organizations teaching students using media like radio, TV or other advanced media.
- Youth sports organizations.
- Day care non- profit organizations
Are there any charitable institutions under this head?
Yes, the following list of charitable institutions may help us.
Charitable Organizations
1) Charitable institutions which promote the welfare activities:
- Salvation Army
- Goodwill
- Erection of public buildings or public monuments
- Lessening of burdens of government
- Conducting free medical camps
- Defending civil rights like American Civil Liberties Union
- Combating juvenile delinquency
2) For the purpose of reference, some of the sections under which exemptions can be sought from IRS for registration as per the publication 557 from IRS are given below:
(Publication 557 can easily be referred from irs.gov website)
- 501(c)(2) Title holding corporations,
- 501(c)(4) Civic leagues, social welfare organizations,
- 501(c)(5) Labor, agricultural, or horticultural organizations,
- 501(c)(6) Business leagues, chambers of commerce, etc.,
- 501(c)(7) Social clubs,
- 501(c)(8) Fraternal beneficiary societies, orders, or associations,
- 501(c)(9) Voluntary employees’ beneficiary associations,
- 501(c) (10) Domestic fraternal societies, orders, etc.,
- 501(c) (12) Benevolent life insurance associations, mutual ditch or irrigation companies, mutual or cooperative telephone companies,
- 501(c) (13) Cemetery companies,
- 501(c) (15) Mutual insurance companies or associations,
- 501(c) (17) Trusts providing for the payment of supplemental unemployment compensation benefits,
- 501(c) (19) A post, organization, auxiliary unit, etc. of past or present members of the Armed Forces of the United States, and
- 501(c) (25) Title holding corporations or trusts.
Filing requirements
Most organizations exempt from income tax under Section 201(a) must file an annual information return (Form 990 or 990 EZ) or submit an annual electronic notice under Form 990-N, subject to certain conditions of gross receipts or assets as per details given below:
- When the gross receipts of the tax-exempt organization are normally $50,000, form 990-N or file 990-EZ or 990 itself.
- When the gross receipts of the tax-exempt organization are less than $2,00,000, and total assets less than $5,00,000, file Form 990-EZ or 990 itself.
- When the gross receipts of the tax-exempt organization are $2,00,000, or more and total assets $5,00,000, or more file Form 990.
- For private foundation use Form 990.
Mind boggling information about Form 990
Yes, it is a 12-page document titled “Return of Organization Exempt from Income Tax”. It has 12 parts which have been given below for information:
1. Part 1: Summary, activities, governance, revenue and expenses, net assets or fund balances
2. Part 2: Signature block with the signature of authorized officer
3. Part 3: Statement of program service accomplishments
4. Part 4: Checklist of required schedules
5. Part 5: Statements Regarding Other IRS Filings and Tax Compliance
6. Part 6: Governance, Management, and Disclosure
7. Part 7: Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors
8. Part 8: Statement of Revenue
9. Part 9: Statement of Functional Expenses
10. Part 10: Balance Sheet
11. Part 11: Reconciliation of Net Assets
12. Part 12: Financial Statements and Reporting
Form 990 has 16 schedules which are given below with some explanation (taken from IRS web site irs.gov – also quoted at the end as reference):
Schedule A: This schedule is to provide required information about public charity status and public support.
Schedule B: Schedule of contributors – For reporting all contributors of money or property valued at least $5,000 or $1,000 for religious contributions.
Schedule C: If an organization has an ownership interest in a joint venture that conducts political campaign activities or lobbying activities, the organization must report its share of such activity occurring in its tax year on schedule.
Schedule D: Organizations that file form 90 use this schedule to provide required reporting of donor advised funds, conservation easement, certain art and museum collections, escrow accounts and custodial arrangements, endowment funds, and supplemental financial information.
Schedule E: Schools – For reporting policies, facilities, and benefits of the school and for explaining in detail the necessary information
Schedule F: Statement of activities outside the United States – Organizations that form 990 use this schedule to provide information on their activities conducted outside the U.S.A., at any time during the tax year.
Schedule G: Supplemental Information Regarding Fundraising or Gaming Activities- Schedule G (Form 990 or 990-EZ) is used by an organization that files Form 990 or Form 990-EZ to report professional fundraising services, fundraising events, and gaming.
Schedule H: Hospitals – Hospital organizations use this schedule to provide information on the activities and policies of, and community benefit provided by, its hospital facilities and other non-hospital health care facilities that it operated during the tax year.
Schedule I: Grants and Other Assistance to Organizations, Governments and Individuals in the U.S: Organizations that file Form 990 use this schedule to provide information on grants and other assistance made by the filing organization during the tax year to organizations, governments.
Schedule J: Compensation information – Organizations that file Form 990 use this schedule to report compensation information for certain officers, directors, individual trustees, key employees, and highest compensated employees, and information on certain compensation practices.
Schedule K: Supplemental information on Tax exempt bonds – Organizations that file Form 990 use this schedule to provide certain information on their outstanding liabilities associated with tax-exempt bond issue.
Schedule L: Transactions with interested persons – It is used by an organization that files Form 990 or 990-EZ to provide information on certain financial transactions or arrangements between the organization and disqualified person(s) under section 4958 or other interested persons. Schedule L is also used to determine whether a member of the organization’s governing body is an independent member for purposes of Form 990, Part VI, line 1b.
Schedule M: Noncash Contributions – Organizations that file Form 990 use this schedule to report the types of non-cash contributions they received during the year and certain information regarding such contributions.
Schedule N: Liquidation, Termination, Dissolution, or Significant Disposition of Assets – Organizations that file Form 990 or Form 990-EZ use this schedule to provide information relating to going out of existence or disposing of more than 25 percent of their net assets through a contraction, sale, exchange, or other disposition.
Schedule O: Supplemental information to Form 990 – Organizations should use Schedule O(Form 990 or 990-EZ) rather than other documents to provide the IRS with more specific and in depth explanations and response to questions on Form 990 or 990-EZ.
Schedule R: Related organizations and unrelated partnerships – Organizations that file Form 990 use this schedule to provide information on related organizations, certain transactions with related organizations, and certain unrelated partnerships with whom they conduct significant activities.
The purpose of this article is to showcase the systematic and complex form structure adopted by IRS to ensure that the non- profit organizations do not misuse its privileges and follow the rules evolved to help the poor and unwanted sector of the society and report their activities in detail to give suitable governance to the regulatory bodies.
Let us look at other provisions pertaining to non -profit/tax-exempt organizations related to submission of tax forms.
Due date
The due date for filing of Form 990-N, 990, 990-EZ is the 15th day of the 5th month after the close of the organization’s tax year (Obviously, it is 15th of May for a calendar year organization). In case of dissolution, termination or dissolution, it is 15th day of the 5th month after the said event.
Electronic filing
It may not be a surprise for the readers to learn that electronic filings of forms 990-N, 990 or 990-EZ or the relevant schedules is the norm among organizations.
Exemptions
Certain organizations are not expected to file the above tax forms which are as under:
- Certain political organizations.
- Certain church, church-related organizations or other-religious type organizations.
- Certain private foundations do use Form 990-PF, Return of Private Foundation
- Yes, private plans exempt under IRC section 401 use form 5500 Annual return/Report of Employee Benefit Plan.
Application for extension of time to file an exempt organization’s tax return
Form Number 8868 can be used for automatic 3 months’ extension while the same has to be used for further extension which is not automatic.
Loss of exempt status
Organizations that fail to submit their filing requirements for three consecutive tax years would automatically lose their exempt- status as on the filing date of the third year. Recently thousands of non- exempt organizations lost their status due to non- observance of this condition. Let our Indian kith and kin not make any noise over observance of rules here, particularly pertaining to nonprofit organizations.
Penalties
Late filing
A penalty of $20 a day, not to exceed the smaller of $10,000 or 5% of gross receipts of the organization for the whole year. Maximum penalty for non- submission of form is $100 per day subject to a maximum of $50,000.
Responsible person
The organization gets a letter to complete the form or provide correct information addressed to the responsible person who gets a fixed period to act. In case, he fails to act, he is liable for a fine of $10 per day which may go up to $5000 as the maximum.
Legal responsibilities on organizations under 501(c) (3) status holders:
As persons living in India, these stipulations would reinforce the general feeling in us that civilized countries survive time and flourish because legal requirements are expected from living human beings as well as legal bodies. Our presumption that law can be misused to benefit one’s benefit may compulsorily yield place to the sensible position that non- obeying of laws may land one into unwanted punishments which may even include jail if criminal activities would have been indulged in.
Recordkeeping:
These organizations are expected to keep records/books of financial as well as non-financial activities. Detailed information on the sources of support is critical in determining the private foundation status.
Disclosure requirements:
A 503 (c) (3) organization has to make available certain documents public. The public can ask to see themselves their most recent annual returns, their application form (1023) or any letter or communication received from IRS.
Substantiation and disclosure:
A 503 (c) (3) organization must obtain must give a written acknowledgement to a donor who contributed $250 or more as donation so that he can use this in his tax return as charitable contribution. Similarly, the above organization would also indicate in writing having received $75 as cash and others as goods and services.
How does one organization apply for recognition of Exemption Under Section 503 (c) (3) for tax-exempt status?
Just file form 1023 to request tax exempt status for entities organized or operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational purposes or cultural purposes.
Then, if it is possible to get tax-exempt status even without filing the above return?
Yes, for the following entities:
- Churches
- Temples
- Synagogues
- Mosques
- Integrated auxiliaries of churches and conventions or association of churches
- Any organization that has gross receipts not more than $5,000.
The above exempt organizations may still file Form 1023 to show that they have a determination letter which confirms their nature as tax-exempt. Normally, most of these organizations would frame the tax- exempt certificate duly framed and exhibit in their office on the wall.
Some more interesting facts about filing of tax-exempt forms:
- File form 1023-EZ which is 3 pages instead of 26 pages for 1023 Form in case of organization whose gross receipts would be $50,000 or less and the assets are $250,000 or less. A user fee of $400 has to be paid for processing Form 1023 EZ.
- Form 1024 is to be used to get exemption under 501(a) of the Internal Revenue Code particularly, applicable for fraternal societies, employee benefit associations/funds, social clubs, labor and agricultural organizations or veteran organizations.
Private Foundations
It is unrealistic as not to discuss private foundations established by an individual, family or a corporation. Having a Private Foundation enables a donor to have some control over assets and also enjoy tax-exempt status. It is true that organizations under 501(c) are generally private foundations unless notified to IRS. Those who are not private foundations but tax-exempt organizations include churches, hospitals, research organizations or charitable institutions receiving a major share of receipts from federal or state government or their units.
Form 990-PF, Return of Private Foundation is to be filed by the 15th day of the 5th month following the close of foundation’s accounting period.
Unrelated Business Income
What happens if tax-exempt organization also indulges in trade or business which has nothing to its basic character?
Yes, I can recollect a successful café run by a tax-exempt organization which becomes popular because of the richness of the food, proper location or sincerity shown by the organization for users of the café.
This invite filing of 990-T for tax-exempt organizations having gross unrelated trade or business income of $1,000 or more. It is to be filed 15th day of the 5th month after the close of the tax year. Expectedly, this attracts the corporate income tax. If the income was acquired due to the labor of volunteers who took no income for their work or sale of gifts received by the organization or conduct of games of choice, the income may attract no income tax. However, proper maintenance of records may be compulsory. IRS gets attracted by this type of income and may conduct audit or raise queries.
Conclusion
A serious discussion with my friend at a nationalized bank who deals with a tax-exempt organization in U.S.A., resulted in this article. As per expectation of my readers, I have tried to explain the basic character of a tax-exempt organization, its maintenance of records, filing of various tax returns (at times 16 schedules with Form990), consequences of non- filing of tax returns for 3 years, the definition of Private Foundation and unrelated business income and its relationship with tax-exempt organization.
This article hardly covers the complexities of tax-exempt organizations who may receive even $1 billion or more as receipts and the complexities of understanding their tax returns. The writer has heard lectures of experts from IRS who have rich experience of dealing with those powerful tax entities. The admirable character of these CPAs/Tax commissioners from IRS/State governments is that they do not see the size of these organizations but the complexities of the work and also show awareness to generally explain the necessity to follow the rules.
I hope this article satisfies my readers and if one needs an expert advice, a CPA can be contacted to have a safer sail.
Reference
IRS Website https://www.irs.gov/
IRS Pub 557, Tax-exempt status for your organization
Form 990, Return of Organization exempt from income tax
IRS Publication 4220, Applying for 501 ( c) (3) Tax-exempt status
IRS Publication 4221-PC, Compliance Guide for 501 ( c) (3) Public Charities
Deluxe edition of Federal 1040-Small Business -Estates-Trusts Tax Book for the year 2016
About the author : Subramanian Natarajan C.P.A. (USA), M.Sc., CAIIB took voluntary retirement in 2000 from Punjab National Bank after handling various facets of banking like deposit mobilization, foreign exchange, auditing and borrower accounts. After living in USA for 12 years during which period he worked in international auditing firms specializing in international tax, auditing, IFRS etc., he continues his practice in New Delhi, India. He can be reached at subcpa@gmail.com. Tel: 7503562701, 9015613229. He currently lives in Delhi. His name appears as tax consultant in web site of American embassy, New Delhi. He is thankful to various suggestions received from readers and is delighted to see the enormous enthusiasm of readers.
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