501(c) non-profit organizations fulfill important purposes to local communities. Having access to a tax-exempt status makes it more affordable to run a non-profit and for it to reach more people with its mission. However, non-profit organizations can lose their tax-exempt status if they do not follow the rules and regulations set by the IRS.
To make sure your non profit organization maintain its tax exempt status, you must meet certain requirements. It is important to know how to keep your nonprofit organization’s tax-exempt status. You also need to know what will cause you to lose this status. According to the IRS, non-profits must follow rules for these six areas to be able to maintain their tax-exempt status:
Private Benefit and Inurement
Private benefit and inurement are two ways a nonprofit can lose its tax-exempt status. Private benefit is having a private person or individual benefit from the organization. Inurement is the misuse of funds by an organization’s insiders.
An example of private benefit would be if the non-profit served to benefit a specific person, such as by offering an excessive amount of compensation to one employee. It could also mean sending all clients to a single for-profit business to increase the revenue of that other business through referral traffic.
Another way an organization can lose its status is through inurement. This happens when an insider or other people involved with the organization misuse funds for their personal gain, such as using charitable donations to make a profit for themselves.
Unrelated Business Income
Earning too much-unrelated business income that is outside of your tax-exempt status can cause a non-profit organization to lose its tax-exempt status. Examples of unrelated business income include inventory sales, income from parking fees, storage income, and advertising income. What counts as unrelated business income varies based on the organization, so it is a good idea to speak with a non-profit attorney when deciding whether something is tax-exempt or would fall under unrelated business income.
Annual Reporting Obligation
Non-profits are required to file annual reports with the IRS. If they do not, they can lose their tax-exempt status. Most small tax-exempt non-profits must file a form called the 990-N with the IRS every year. The 990-N is an electronic way of filing taxes for non-profits.
Operating Within Stated Exempt Purposes
One of the most important things a non-profit organization needs to do is operate within the stated purpose of its tax-exempt status. This means that it must do what it states in its filing papers – charitable or educational. If a non-profit starts doing something other than what it originally started, it can lose its tax-exempt status.
Lobbying is the process of trying to persuade lawmakers, either directly or through the public, to support or oppose certain legislation. In some cases, it can be used to create new legislation. Lobbying is allowable to some degree by non-profits. However, too much lobbying can change the focus of the non-profit’s primary activities and can hurt its status.
Political Campaign Activity
Non-profits that engage in political campaign activity can lose their tax exemption as well. In order to maintain its non-profit designation, a non-profit must not make any contributions of money or other things of value to a political candidate for an elected office, must not provide any financial support or in-kind support to a candidate, and may not participate in any efforts on behalf of a candidate.
A certain amount of political campaign activity is permissible without jeopardizing the organization’s tax-exempt status, but the organization cannot be primarily engaged in this type of activity. This policy isn’t designed to prohibit organizations from making statements about the politics they support or to create politically neutral content. However, participating in political campaign activities become problematic when these activities become a large focus of the organization instead of the purposes that make it tax-exempt.
Contact a Chicago Non-Profit Lawyer
By following the guidelines outlined by the IRS, it is possible to run a non-profit organization without ever having to worry about losing its tax-exempt status. However if you have any questions about how to maintain your organizations tax exempt status or how to determine unrelated business income, it can be a smart decision to proactively schedule a consultation with an experienced Chicago tax and non-profit lawyer, like James C. Provenza & Associates.