America's Byways Resource Center Obtaining and Maintaining Tax Exempt Status for Small NonProfits Scott R. Haumersen, CPA, Managing Partner March 18, 2008 Questions? Email me during the presentation at scott.haumersen@wegnercpas.com TAX EXEMPT STATUS DISCUSSION OUTLINE -Types of Exempt Organizations -Obtaining Exemption -Maintaining Exemption -State Requirements -Alternatives: Fiscal Sponsorships TYPES OF TAX EXEMPT ORGANIZATIONS -501(C) 3 – Charitable, Religious, Educational, Scientific -501 (C) 4-Civic Leagues & Social Welfare Organizations -501 (C) 6-Business Leagues Business Leagues REQUIREMENTS Significant Differences -Charitable Contributions -Lobbying -Political activity -Private Inurement -Purpose/Dissolution Clauses -Public Benefit vs Private Benefit OBTAINING EXEMPTION Incorporation in a State -Articles and Bylaws -Limits liability of Board members -Must have IRS required wording -Preparation of IRS form 1023 or 1024 -Filing fee $750/$300 -Process 3-6 months -Group Exemption letter?? APPLICATION FOR 501(c)(4) OR 501 (c) (6) STATUS -Generally not required to file as exemption can be retroactive -File form 1024 -Benefit of filing is a determination letter and public recognition status APPLICATION FOR 501(c)(3) STATUS -Exempt from application if annual gross revenues will be under $5,000 -May create some doubts about deductibility of donations by donors and may limit receiving grants -File form 1023 within 27 months of forming organization MAINTAINING EXEMPTION -Requiired to comply with IRS code section 501 and laws governing nonprofit organiizations • Filing IRS Form 990 • Public disclosure • Sarbannes Oxley and other laws FILING REQUIREMENTS New forms for 2008! -990-N annually if gross revenues are less than $25,000. -990-EZ annually if gross revenues less than $1.0M/$.5M/$.2M phased in. -Due 4 1/2 months after year end. Can extend three months (twice). Form 8868 -Late penalties are large ($20 per day for small organizations) -IRS is less willing to waive penalties than in the past FORM 990 TIPS -Form is combination of financial and compliance disclosures and now governance issues. -Read the instructions. Includes topics such as: donor acknowledgements, valuing special events, requirements for public inspections of 990 and a discussion of intermediate sanctions -Historically, IRS does not review forms beyond missing pages and one or two boxes MORE 990 TIPS -Publicly available at: www.guidestar.org -Assume that donors will look at it -Treat it as marketing tool -Possibility of filing 990-T if have unrelated business activity -Example: Running a gift shop in a visitor center STATE REQUIREMENTS -Each State has its own requirements for organizations doing business or fundraising in that State -Check with State Attorney General or Department of Regulation and Licensing EXAMPLE: MICHIGAN -Register with Attorney General for Fundraising License -Must have a Form DAG009-005 to fundraise with general public in MI -File “Application for License to Donations” registration Statement within 30 days of starting to fundraise STATE OF MICHIGAN FORM DAG 009-005 -File annually -Due five months after year-end, can request one month extension -Requiires a review by a CPA if receipts more than $100,000 and audit for more than $250,000 STATE OF MICHIGAN SALES TAX EXEMPTION -MI Dept of Revenue form -Need IRS determination letter for application. 501 (3) and (c) 4 -May still need to pay sales taxes if sell over $5,000 per year in sales taxable items STATE OF MICHIGAN File annual corporate report to maintain corporate status ALTERNATIVES: FISCAL SPONSORSHIPS -Look for an organization or government unit to sponsor your activities -Closely aligned with your mission -Structure and oversight -Low cost FISCAL SPONSORSHIPS ARE VERY COMMON -Many small organizations start out being sponsored -A group with charitable status may be asked to sponsor another group to help receive donations and provide general support …AND ARE COMMONLY DONE WRONG…… -Fiscal Agency is generally not allowed -A group that is using its status to help another group is 100% responsible for how the money is used by the other entity -There needs to accountability and controls. -Written agreement -Fiscal oversight …HOW TO DO IT RIGHT -One structure is to award a grant to the sponsored group with funds that came from a donation. -Written agreement -Progress reports on grant expenses • The recipient entity must also report income and expense as some type of entity – partnership, sole proprietor or unincorporated association. TAX REPORTING FOR FISCAL SPONSORSHIPS -Another structure is to report the sponsored group as a project or activity of the sponsor. -The sponsor must report revenue and expense of the pass through entity. -It must fit their exempt purposes and mission ADVANTAGES OF TAX EXEMPTION/INCORPORATION -Deductibility of contributions -Formalizes organization and governance -Real estatte and sales tax exemptions -May limit liability DISADVANTAGES OF TAX EXEMPTION/INCORPORATION -Regulatory oversight by IRS and others -Increased costs for compliance -More record keepiing -Potential for penalties if deadlines are missed RESOURCES -www.IRS.gov ---1023 Form and Instructions ---1024 Form and Instructions ---Publication 557 ---Charities & Nonprofits -Applying for 501(3) status Guide -Compliance Guide for 501(c)3 organizations -www.wegnercpas.com/YnonProfit CONTACT INFORMATION Scott R Haumersen, CPA, Partner Wegner CPAs and Consultants 2110 Luann Lane Madison WI 53713 608-442-1925 scott.haumersen@wegnercpas.com www.wegnercpas.com