Unit 17 Nonprofit organizations

Exempt entities and UBIT (unrelated business income tax)

1. An exempt organization carrying on more than one "unrelated business activity" must now separately calculate UBTI for each activity. 2. Losses from one unrelated business activity cannot be used to offset income derived from another trader or business.

Public charity or private foundation

1. 501(c)(3) organization can be classified as either private foundation or public charity. 2. Generally, churches, hospitals, schools, medical research organizations, schools, colleges, and universities are automatically classified as public charities by default. 3. The primary distinction for private foundations and public charity is the organization's source of financial support. 4. Public charities tend to have a board base of support and accepts most of its donations from its members and the general public. 5. The private foundation has more limited sources of support. 6. An exempt organization will not be considered a private foundation if it receives more than 1/3 of its annual support from governmental units and/or the general public. 7. The deductibility of contributions to a private foundation is more limited compare to the public charity's contributions. 8. There is an excise tax on the net investment income of domestic private foundations, and it must be paid annually, or it can be paid quarterly estimate tax if the total tax for the year is $500 or more. 9. All private foundations must file Form 990-PF, Return of Private Foundation, every year, regardless of their income. All tax form must be e-filed. 10. All private foundations are required to file formal exemption, regardless of their gross revenue the number of members, or their size.

Form 1023, Application for recognition of exemption

1. An entity must use Form 1023, Application for Recognition of Exemption, to request exempt status. 2. Any organization (except for private foundations), with annual gross receipts of no more than $5,000 is not required to file Form 1023. 3. When the entity's gross receipts is more than $5,000, it requires to file Form 1023 within 90 days of the tax year. 4. Beginning 01/31/2020, Form 1023 must be submitted electronically at www.pay.gov. 5. The user fee for Form 1023 is $600 in 2020. 6. Small tax-exempt organization can file Form 1023-EZ instead, the user fee is $275. To be qualified to file Form 1023-EZ, the organizations must have: 1) gross receipts of $50,000 or less in the 3 prior years, and. 2) assets (based on FMV) of $250,000 or less.

Penalties for non-filing

1. An exempt organization that fails to file a required return or provided incorrect information may be assesses a penalty for each day the return is late. a penalty applies on each day after the due date the return is not filed. 2. In 2020, the late filing penalty is $20 a day, not to exceed the lesser of: 1) $10,500 or, 2) 5% of the gross receipts of the organization for the year unless there is a reasonable cause the late filing. 3. The late filing penalty is $105 each day for organization that has annual gross receipts of $1,084,000, with a maximum penalty for any one return of $54,000. 4. Failure to file an annual information return for 3 consecutive years will result in the automatic revocation of exempt status. 5. The organization needs to reapply exemption with Form 1023 or Form 1024 after its exemption status got revoked for not filing return. Fees are required to paid. 6. When the organization has lost its tax-exempt status through automatic revocation may be require to file Form 1120 or Form 1041 (estates and trusts) returns, and pay applicable income tax.

Exempt entities with employees

1. Any entity with employees must withhold and remit income and FICA on its employee's wages, even the entity is tax-exempt. 2. "Excess executive pay": is an excise tax that imposes on exempt organization's executive compensation that exceeds $1 million. The excise tax is 21% on the amount that is over 1 million. 3. an employee will be treated as "covered employee" if the employee is one of the entity's 5 highest-paid employees. 4. The excise tax is reported and paid using Form 4720, which is due on the 15th day of the 5th month after the end of the employer's taxable year.

Exempt entity filing requirements

1. Every exempt entity must file an annual information return with the IRS with Form 990, Return of Organization Exempt from Income Tax, unless it is specifically exempt from the filing requirement. 2. The following organizations are not required to file Form 990: 1) churches and their affiliated organizations 2) government agencies, as well as Section 501(c)(1) entities 3) certain political organizations (special rules) 3. Tax-exempt organizations with gross receipts of $50,000 or less may file Form 990-N, Electronic Notice for Tax-exempt Organizations Not Required to File Form 990. Form 990-N is also called "e-postcard", and e-filed only. 4. An exempt entity may choose to file on a fiscal year or a calendar-year basis. 5. The information return is due by the 15th day of the 5th month after the tax year end (May 15th) 6. Form 8868, Application for Extension Time to File an Exempt Organization Form, can be filed to request 6-month-externsion to file the annual information return for the exempt entities. 7. Charitable organizations are required to provide a written disclosure to a donor who has received goods or services in exchange for a single payment in excess of $75. This kind of contribution is also called "quid pro quo" contribution.

Other section 501(c) organizations

1. Most organizations do not qualify for exemption under section 501(c)(3) may qualify for tax-exempt status by filing Form 1024, Application for Recognition of Exemption Under Section 501(a). 2. There are may types of organizations that qualify as nonprofit organizations, but not all exempt entities qualify to receive contributions that are deductible by the donors. 3. The law requires all 501(c)(4) organizations to file a notice of registration with the IRS within 60 days of the organization's formation. 4. Form 8976, Notice of Intent to Operate Under Section 501(c)(4), must be e-filed, no paper form available. 5. 501(c)(4) organizations are permitted to engage in political campaign activity and lobbying, which are disallowed for other charitable organizations.

Unrelated Business Income Tax (UBIT)

1. Tax-exempt organizations can engage in income-producing activities that are unrelated to tax-exempt purposes. 2. Income from unrelated business activities is subject to federal tax called the UBIT - unrelated business income tax. 3. An activity is considered an unrelated business activity and subject to UBIT if: 1) it is a trade or business 2) it is regularly carried on, and 3) it is not substantially related to furthering the exempt purposes of the organization 4. the exempt entity is required for file Form 990-T when it has $1,000 or more of unrelated business income. The filing deadline is 15th day of the 5th month after the tax year ends. 5. Any UBIT must be paid in full when Form 990-T is filed, but no later than the date the return is due. 6. Exempt entities are required to calculate UBIT separately for each unrelated trade or business. Losses from unrelated business activity cannot be used to offset income derived from another trade or business. 7. Schedule M (Form 990-T) is used when there are 2 or more unrelated businesses.

501 (c)(3) organizations

1. To qualify for these benefits, an organization must file an application with the IRS and must meet the following requirements: 1) Organization: it must be organized as a corporation, a trust, or an unincorporated association. It cannot be organized as sole proprietorship or partnership. - its purpose must be limited to qualified exempt purpose. 2) Exempt purpose: it must have 1 or more exempt purpose as listed under section 501(c)(3): - charitable - religious - scientific - literacy - fostering national or international sports competition - preventing cruelty to children or animals - testing for public safety 3) operation: a substantial portion of its activities must be related to its exempt purposes. Further, a 501(c)(3) organization must: - refrain (避免)from participating in political campaigns of candidates - restrict its lobbying activities to an "insubstantial" part of its total activities - grants, donations, and activities may not assist any private election campaign or endorse any political candidates for public office - ensure that its earning does not benefit any private shareholder or individual - not operating for the benefit of private interests, (ex. founder, or founder's family) - the primary purpose is not conducting a trade or business that is not related to its exempt purpose

Applying for tax-exempt status

1. an organization must be created by preparing an organizing document. as the first step, this is even before requesting an EIN, or filing a formal application for exemption with the IRS. 2. The organization's "organizing document" must limit the organization's purpose that are required under Section 501(c)(3) and must specify that the entity's assets will be permanently dedicated to specified exempt purposes. 3. A 501(c)(3) must request an exemption from the IRS within 27 months after the end of the month when it was formed to obtain the exempt status. 4. Other nonprofit groups must file a formal application within 15 months. 5. Filing the tax-exempt application before the deadline: the organization may be recognized as tax-exempt from the date of its creation. 6. Filing the tax-exempt application after the deadline: the organization may be recognized as tax-exempt from the date the date the application is received. 7. When the tax-exempt is not approved, the organization may operate as it is tax-exempt, and any contributions from the donors would qualify. 8. If the application is not approved, the organization would be liable for filing federal income tax return. 9. Churches and similar religious organizations are not required to formal exemption, regardless of their size or the amount of the revenue or donations that the church receives. 10. A private foundation is always required to request formal tax exemption, regardless of the amount of its gross receipts.

Exempt entities in general

1. there are 2 types of tax exempt entities: 1) 501 (c) charities and 2) other 501 (c) entities (includes: non-charities, social clubs, labor unions, and nonprofit political organization) 2. The 501(c)(3) organizations are exempt from paying income tax in connection with their charitable activities, and they are able to receive charitable contribution that are tax deductible to the donors.