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Maintaining tax-exempt status from the IRS is not as simple as getting it signed off once. Both Section 501(c)(3) and Sec. 501(c)(7), and other types, you should be cautious of how your nonprofit performs activities and generates revenue. Reviewing the IRS’s tax-exempt status rules to ensure your organization is maintaining them is worthwhile.
Types of nonprofits
Tax-exemption applies to many categories, and each type of exemption has its own rules. However, several issues have a tendency to apply to most tax-exempt entities. These issues include:
- Lobbying: A Sec.501(c)(3) status nonprofit is limited on the amount of lobbying a charitable organization can perform. Lobbying is not necessarily prohibited, just limited. According to the IRS, your organization should no devote “a substantial part of its activities” to trying to influence legislation.
- For Sec. 501(c) nonprofits the restrictions on lobbying are looser. If these groups lobby, it must relate to the accomplishment of the group’s purpose. For instance, an association of teachers can lobby for education reform under this status without concern for losing its tax-exempt status.
- Campaign activities: The IRS considered campaign activities and lobbying to be two separate practices. Campaign activities are completely off-limits for Sec.501(c)(3) organizations. These organizations cannot participate or intervene in any political campaign for public office. Campaign restrictions are variable for other forms of nonprofits.
- Excess profit and private inurement: The cardinal rule about profits when it comes to nonprofit organizations is that the profits cannot be used to benefit private interests. If your fundraising exceeds the income required to operate the money needs to be put back into the organization. This might include providing additional services or creating an endowment or reserve for the organization. The income cannot be used to reward any individual or a person’s related entities.
- Unrelated revenue: If a trade or business is being used to generate income regularly and it is outside the scope of your mission, you may be subject to unrelated business income tax (UBIT). Examples of businesses subject to UBIT include universities that rent performance halls to non-students or a charity that sells advertising in its newsletter. Ignoring this provision of the tax code puts your company’s tax-exempt status at risk. However, losing an exempt status from unrelated business income is a rare occurrence.
Know the policies
The IRS rules for all nonprofits eligible for tax-exempt status are outlined in IRS Publication 557, Tax Exempt Status for Your Organization. We can help your nonprofit to understand and apply the information in this report based on your specific situation. Contact us at 818-334-8623 or click here, and we will contact you.