As a tax-exempt organization, preserving your 501(c)(3) status is critical to the short-term and long-term success of your organization. It is arguably the most important asset your tax-exempt organization maintains. There are several special rules governing those with 501(c)(3) status, from record-keeping requirements to limitations on what activities they can engage in. How can you take steps to preserve your 501(c)(3) status in 2020 and beyond?
Why Does Tax-Exempt Status Matter?
If you lose your 501(c)(3) status, you will experience a myriad of negative consequences, including:
- Needing to pay federal income tax on annual revenue, as well as potential state income tax
- Potentially being subject to back taxes and penalties for failure to pay them
- Removal of any state-level exemptions the organization benefitted from
- Removal from the IRS Publication 78 that lists all 501(c)(3) organizations
- Donors losing their ability to deduct donations to your organization on their taxes
- A decrease in granting opportunities available, as many foundations require 501(c)(3) status
Tips for Preserving Your 501(c)(3) Status
The IRS details six core areas of 501(c)(3) status that have separate regulations: private benefit/inurement, lobbying, political campaigns, unrelated business income (UBI), annual reporting obligations and operating within your stated exempt purpose.
- Private Benefit/Inurement: 501(c)(3) organizations cannot allow assets or income to benefit insiders, like directors, employees, board members or officers. When the organization benefits insiders, both the organization and the insiders could have to pay penalty excise taxes.
- Lobbying: Lobbying cannot be more than an insubstantial part of a 501(c)(3) organization’s activities, but they can engage in some lobbying.
- Political Campaigns: Every 501(c)(3) organizations is prohibited from participating in political campaigns on behalf of or in opposition to candidates running for any public office on the local, state or federal level. What can be considered political campaign intervention? Read the guide by the IRS here.
- Unrelated Business Income (UBI): If an organization generates too much income from activities unrelated to their organization, that could jeopardize its tax-exempt status. What is UBI, and is your organization affected? Read the IRS UBI guide here.
- Annual Reporting Obligations: Most 501(c)(3) organizations need to complete annual reporting requirements, like completing a Form 990 every year, to continue receiving their exemption. If you fail to meet annual reporting obligations for three consecutive years, you can lose your tax-exempt status.
- Operating Within Your Stated Exempt Purpose: If you change your mission and activities from the stated purpose on file with the IRS, you should update your records to prevent potentially losing your status.
Rubino & Company Is an Experienced Nonprofit Compliance & Consulting Resource
Since 1980, Rubino & Company has provided skilled nonprofit compliance and consulting services to nonprofits throughout the country. To learn more about our nonprofit compliance and consulting services, please call us today at (301) 564-3636.