What are the two types of exempt entities under section 501(c)(3)?
- 501(c) charities
- Other 501(c) entities
501(c) charities have a charitable focus, while ‘other’ 501(c) entities include non-charities such as social clubs, labor unions, and nonprofit political organizations.
What is required for an organization to qualify for tax-exempt status under section 501(c)(3)?
- Organized as a corporation, trust, or unincorporated association
- Limited to a qualified exempt purpose
- Must have one or more exempt purposes as listed under section 501(c)(3)
- Substantial portion of activities related to exempt purpose(s)
- Refrain from political campaigning and limit lobbying activities
- Earnings do not benefit any private individual
- Not operate for private interests
- Not operate primarily for unrelated trade or business
True or False:
Nonprofit organizations can be structured as partnerships or sole proprietorships.
False
Nonprofit entities are intended to serve a greater purpose rather than profit for individual owners, and can be formed as corporations, trusts, or associations.
What is the first step before applying for tax-exempt status?
Prepare an organizing document
The organizing document must limit the organization’s purposes to those set forth in section 501(c)(3) and specify that assets will be permanently dedicated to the exempt purpose.
How does an organization apply for tax-exempt status under §501(c)(3)?
By filing Form 1023, Application for Recognition of Exemption, which requests IRS approval for charitable, religious, educational, or similar organizations to be recognized as tax-exempt.
Very small organizations with annual gross receipts of no more than $5,000 are not required to file Form 1023 unless they exceed this threshold.
What is the user fee for Form 1023 in 2025?
$600
The user fee for Form 1023-EZ is $275, which is a simpler application form designed for small tax-exempt organizations.
What conditions must be met to qualify for Form 1023-EZ?
- Gross receipts of $50,000 or less in the three prior years
- Assets of $250,000 or less
Form 1023-EZ is a simplified application form for small tax-exempt organizations.
Fill in the blanks:
Contributions to a section 501(c)(4) organization generally are not deductible as ______ ______.
charitable contributions
What is Form 1024, Application for Recognition of Exemption used for?
It is filed by organizations seeking tax-exempt status under §501(a), other than §501(c)(3) charities (which use Form 1023).
Form 1024 is used by organizations such as fraternal benefit societies, business leagues, chambers of commerce, and farmers’ cooperatives.
What distinguishes a 501(c)(4) organization from a 501(c)(3) organization?
- 501(c)(4) organizations can engage in political campaign activity and lobbying
- Contributions to 501(c)(4) organizations are generally not tax-deductible
What distinguishes a public charity from a private foundation under section 501(c)(3)?
- Source of financial support: Public charities have a broad base of support from the public and members, whereas private foundations have more limited sources.
- Public charities receive more than one-third of their annual support from governmental units and/or the general public.
Which organizations are automatically classified as public charities?
- Churches
- Hospitals
- Medical research organizations
- Schools, colleges, and universities
What annual information return must exempt organizations file with the IRS?
Most tax-exempt organizations must file an annual Form 990 series return (Form 990, 990-EZ, or 990-PF). Exceptions include churches and their affiliates, certain religious organizations, and government agencies, which are not required to file.
What is the main tax implication of being classified as a private foundation?
- Contributions have more limited deductibility compared to public charities.
- Subject to an excise tax on net investment income.
Which organizations are not required to file Form 990?
- Churches and affiliated organizations
- Government agencies
What is Form 990-N also known as?
“E-postcard”
It is used by tax-exempt organizations with gross receipts of $50,000 or less and must be filed electronically.
Under what conditions can a tax-exempt organization file Form 990-EZ?
- Gross receipts of less than $200,000
- Total assets at the end of the year of less than $500,000
What is the penalty for late filing of Form 990?
- $25 a day, not to exceed the lesser of $12,500 or 5% of the gross receipts of the organization for the year.
- For organizations with annual gross receipts exceeding $1,274,000, the penalty is $125 for each day failure continues, with a maximum penalty of $63,500.
What happens if an organization fails to file its annual information return for three consecutive years?
The organization’s tax-exempt status may be automatically revoked.
What must donors obtain for single contributions of $250 or more to claim a charitable deduction?
A written acknowledgment from the organization.
What written statement must charitable organizations provide for quid pro quo contributions over $75?
A statement indicating the value of goods or services provided in exchange for the donation.
What is the excise tax rate on executive compensation exceeding $1 million for exempt organizations?
A 21% excise tax applies to compensation over $1 million paid to each covered employee.
What form is used to report and pay the excise tax on excess executive pay for exempt organizations?
Form 4720
The excise tax is due on the 15th day of the fifth month after the end of the employer’s taxable year.
Who is considered a ‘covered employee’ for the excise tax on excess executive pay?
One of the entity’s five highest-paid employees
Once an employee is classified as a covered employee, they remain so for that organization, regardless of future compensation changes.
-
Essential Tax Law Figures for Businesses34
-
Unit 1: Business Entities and Requirements72
-
Unit 2: Accounting Periods and Methods65
-
Unit 3: Business Income46
-
Unit 4: Business Expenses64
-
Unit 5: Employee Compensation and Fringe Benefits78
-
Unit 6: Other Business Deductions and Credits72
-
Unit 7: Basis of Business Assets31
-
Unit 8: Depreciation and Amortization58
-
Unit 9: Disposition of Business Assets58
-
Unit 10: Partnerships in General43
-
Unit 11: Partnership Distributions and Liquidations26
-
Unit 12: C Corporations in General46
-
Unit 13: Corporate Transactions29
-
Unit 14: Corporate Distributions and Liquidations30
-
Unit 15: S Corporations48
-
Unit 16: Farming Business35
-
Unit 17: Tax-Exempt Organizations39
-
Unit 18: Retirement Plans for Businesses93
-
Unit 19: Trusts and Estates47
