Friday April 26, 2024
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7.1.5 Form 1023 and Form 990
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Form 1023 and Form 990
Form 1023: Organizations seeking recognition of exemption from federal income tax under Sec. 501(c)(3) must file Form 1023.
Form 990: Form 990 is the annual return of organizations exempt from income tax.
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Form 1023
Organizations seeking recognition of exemption from federal income tax under Sec. 501(c)(3) must file Form 1023. Churches, organizations other than private foundations with gross receipts of $5,000 or less in each taxable year and entities covered by group exemptions need not file Form 1023. Reg. 1.508-1(a).
Identification of Applicant and Organizational Structure
The organization must provide its name, address and the name of its primary contact or authorized representative on Form 1023. In addition, it must include information about its organizational structure. A copy of the organization's articles of incorporation must be attached showing certification of filing with the appropriate state agency. Current bylaws should also be attached showing date of adoption.
The organization must demonstrate that its organizational document contains the required provisions to meet the organizational test under Sec. 501(c)(3). The organizational document must state its exempt purpose(s), such as charitable, religious, educational, and/or scientific purposes. The articles must state that upon dissolution the organization and its remaining assets are to be used exclusively for an exempt purpose. Sec. 501(c)(3).
Although not expressly required, the articles should include a provision that no part of the organization's net earnings may inure to the benefit of private shareholders or individuals, as required for all 501(c)(3) organizations. The articles should also establish that the organization will not attempt to influence legislation as required under Sec. 501(c)(3) as a substantial part of its activities. The organization may make an election under 501(h), which permits limited lobbying expenditures. However, no organizations may participate in or intervene in any political campaign on behalf of or in opposition to a candidate for public office and qualify for tax-exempt status under Sec. 501(c)(3).
Description of Activities
In an attachment, the organization should describe its past, present and planned activities. The organization has the opportunity to demonstrate how its activities achieve its exempt purpose(s). The organization should consider attaching representative copies of newsletters, brochures or similar documents to support activities in furtherance of its purpose.
Compensation of Officers, Directors, Trustees, Employees and Independent Contractors
The organization must list the total annual compensation of all officers, directors and trustees. The organization must report the names of its five highest compensated employees and independent contractors who receive compensation of more than $50,000 per year and the compensation amounts. Any family or business relationships should be disclosed. The organization should demonstrate that proper procedures have been followed in approving compensation arrangements. Any leases, contracts, loans, sales, purchases or other arrangements between the organization and its officers, directors, trustees and otherwise disqualified persons (as defined under Secs. 4958, 4946) must be disclosed.
Member and Other Individual Benefits
The organization must disclose any goods, services or funds provided to members and other individuals as part of its activities. If benefits are provided only to a select group, the organization must explain the limitation and how recipients are selected for each benefit or program. Any benefits provided to individuals with a family or business relationship with any officer, director, trustee or other disqualified person must also be disclosed. The organization is also required to answer questions relating to its organizational history.
Specific Activities
The organization must respond to questions that relate to specific activities it conducts. The organization must disclose whether it engages in electioneering, which is prohibited under 501(c)(3). If the organization attempts to influence legislation, it must indicate whether these activities are "insubstantial" or it is making an election under 501(h) to have its legislative activities measured by expenditures by filing Form 5768. In addition, the organization must disclose the type of fundraising programs it plans to conduct, such as mail, e-mail, web, personal or phone solicitations. Any efforts to engage in economic development, joint ventures (including partnerships or limited liability companies) and operations in foreign countries should be disclosed. If the organization will make grants, loans or other distributions, it must describe its selection process and procedures to assure that resources are used to further its exempt purpose(s).
Financial Data
The organization must provide a schedule with detailed financial data for the most recent four tax years. If the organization has been in existence for less than four years, it must complete the statements for each year it was in existence and provide projections of its future revenues and expenses based on a reasonable and good faith estimate of future finances. Under revenues, the organization must disclose any gifts, grants and contributions received, membership fees received, investment income, income from exempt operations and unusual grants. Under expenses, the organizations should disclose contributions, gifts, grants and similar amounts paid out, disbursements to members, compensation, other salaries and wages, interest expense, occupancy expense, depreciation and depletion and professional fees. The organization is also required to complete a balance sheet reporting assets and liabilities for its most recent completed tax year.
Public Charity Status
Form 1023 is designed to classify the organization as either a private foundation or a public charity. A private foundation is a Sec. 501(c)(3) that does not meet the requirements of public charity status. That is, a private foundation is not a per se public charity (church, school or hospital), and does not meet either of the public support tests or fit within any of the other categories of public charities. If the organization is a private foundation, the Form 1023 is designed to determine whether it is a private operating foundation. A private operating foundation engages directly in the active conduct of charitable, religious, education and similar activities, as opposed to indirectly carrying out these activities by providing grants to individuals or other organizations.
Schedule A. Churches
Churches must complete Schedule A to demonstrate the facts and circumstances that support their exempt status as a church. Questions concern whether the organization has a creed or statement of faith, form of worship and formal code of doctrine and discipline. The organization must describe its religious hierarchy or ecclesiastical government. If the organization has regularly scheduled religious services, it must describe the nature of the services and provide copies of relevant literature such as bulletins. The organization must disclose if it has an established place of worship and established congregation or other regular membership group. The number of members must be disclosed and the organization is asked to describe the process by which an individual becomes a member. The organization is asked whether it conducts rituals including baptisms, weddings and funerals and has schools for the religious instruction of the young. There are also questions regarding the ordination or licensing of ministers and affiliated churches.
Schedule B. Schools, Colleges and Universities
An organization that operates a school as an activity must complete Schedule B. Here the organization must establish whether it has attributes to support its exempt status as a school such as a regularly scheduled curriculum, a regular faculty of qualified teachers, a regularly enrolled student body and facilities where educational activities are regularly carried on. The organization must disclose whether it is a public school and if it meets certain requirements, it is not required to complete the remainder of Schedule B. The organization is asked whether a state or federal administrative agency or judicial body has ever determined that it is racially discriminatory and must supply a copy of any racially nondiscriminatory policies and supporting materials. A table must be completed showing the racial composition for the current academic year and projected composition for the next academic year of the student body, the faculty and the administrative staff. Information is also required as to the number and amount of loans and scholarships awarded to students enrolled by racial categories.
Schedule C. Hospitals and Medical Research Facilities
Schedule C is to be completed by hospitals, which includes an organization whose principal purpose or function is providing hospital or medical care and medical research organizations operated in conjunction with a hospital. Hospitals are asked a number of questions to determine whether their services benefit all individuals in the community, thereby satisfying the requirements for a public charity. Hospitals are asked whether medical services are provided to all individuals, whether the hospital maintains an open full-time emergency room and whether services and facilities are used for charity patients. If the hospital carries on a formal program of medical training or medical research, it must describe the type and scope of these programs and its affiliations with other hospitals or providers. Hospitals are asked whether their board of directors and hospital staff are representative of the community served. There are also questions about the management of activities or facilities, recruitment incentives to physicians and lease of or purchase of medical equipment and assets.
Medical research organizations must name the hospitals with which they have a relationship and describe the relationship. Copies of written agreements and supporting materials should be attached. In addition, the organization should attach a schedule describing present and proposed activities for the direct conduct of medical research and attach a schedule of assets showing their fair market value and the portion of assets directly devoted to medical research.
Schedule D. Supporting Organizations
Supporting organizations must complete Schedule D, identifying information about the organization they support and their relationship. To be classified as a supporting organization, an organization must meet one of three relationship tests:
Test 1: "Operated, supervised, or controlled by" one or more publicly supported organizations, or
Test 2: "Supervised or controlled in connection with" one or more publicly supported organization, or
Test 3: "Operated in connection with" one or more publicly supported organizations.
The organization is asked to disclose information to establish that it meets one of these tests. Questions focus on how the governing board is composed and the degree of control exercised by the supported organization. If the organization meets relationship Test 1 or Test 2, it must specify the supported organization by name or by naming a similar purpose or charitable class of beneficiaries in its supporting document. An organization does not qualify as a supporting organization if it is controlled directly or indirectly by one or more disqualified persons (as defined in Sec. 4946) other than foundation managers or one or more organizations that it supports.
Filing Form 1023
Charities must file Form 1023 within 15 months of formation. An automatic extension of 12 months is also available. If the charity files Form 1023 within its first 27 months (the 15 month filing date plus the 12 month extension), recognition of its tax exempt status will be retroactive to the date of formation, upon approval by the IRS. The application must include a user fee determined by the amount of the organizations gross annual receipts.
Form 990
Form 990 is the annual return of organizations exempt from income tax. Generally, all charitable organizations except churches and organizations with annual gross receipts of $25,000 or less are required to file Form 990. Private foundations file Form 990-PF. If an organization's gross receipts during the year are less than $100,000 and its total assets at the end of the year are less than $250,000, it may file Form 990-EZ.
Form 990 is available for public inspection, and for some people, serves as the primary or sole source of information about a particular organization. How the public perceives an organization may be determined by the information presented on its return. Therefore, it is important that the 990 return is complete and accurate.
IRS Notification Requirement for Small Charities
Charities with gross receipts not more than $25,000 are not required to file Form 990. However, they must report to Treasury annually, in electronic form, their legal name, mailing address and Internet web site address (if any), taxpayer identification number, the name and address of a principal officer and evidence of the basis for its exemption from Filing Form 990. If such an organization terminates its existence, it must give Treasury notice of that termination. Sec. 6033(i)(1).
If an organization fails to provide the required notice for three consecutive years, the organization's tax-exempt status is revoked. If an organization is required to file Form 990 and fails to do so for three years, its tax exempt status is also revoked.
Revocation of tax exempt status is effective from the date that was the last day the organization could have timely filed the third required information notice. To again be recognized as tax-exempt, the organization must apply to Treasury for recognition of tax-exemption. With reasonable cause, Treasury may retroactively reinstate the exempt status of the nonprofit. Sec. 6033(j)(3).
There is no monetary penalty for failure to file the notice. Like other information returns, the notices are subject to the public disclosure and inspection rules that apply to exempt organizations.
Revenue, Expenses and Changes in Net Assets
The organization reports its total revenue and expenses and notes any changes to net assets on its annual return. Total revenue may include contributions, program service revenue, membership dues, interest and dividends, gross rents and other investment income. Total expenses may include expenses associated with program services, management, fundraising and payments to affiliates. The organization reports its net assets or fund balances at the end of each year.
Statement of Functional Expenses
The organization must provide a statement of functional expenses on its Form 990. Grants and allocations must be reported. Amounts of specific assistance to individuals and benefits paid to or for members should be documented in an attached schedule. The organization must provide compensation of officers and directors, other salaries and wages, pension plan contributions and other employee benefits. Accounting fees, legal fees and professional fundraising fees are reportable. The organization must also disclose certain administrative expenses including supplies, telephone, postage and shipping, rental and printing costs. Depreciation and depletion should be included in an attached schedule.
Statement of Program Service Accomplishments
Organizations must describe all achievements made in furtherance of their exempt purpose on their Form 990. Exempt purpose achievements should be described in a "clear and concise manner." Organizations must provide grant recipients, amounts and allocations. Other program services should be included in an attached schedule. The organization must provide a total of program service expenses on its Form 990.
Balance Sheets
The organization must provide its balance sheet showing assets, liabilities and net assets or fund balances for the beginning and end of the year. Assets may include cash, savings, accounts receivable, pledges receivable, grants receivable, investments and other assets. Liabilities may include accounts payable and accrued expenses, grants payable, deferred revenue, loans from disqualified persons, tax-exempt bond liabilities and other liabilities. Total net assets or fund balances are reportable on the 990. In some instances, organizations must report reconciliation of revenues and expenses due to audit.
List of Officers, Directors, Trustees and Key Employees
The organization must list its officers, directors, trustees and key employees, even if not compensated, on its annual return. The organization must include the name and address, title and average hours per week devoted to the position, compensation, contributions to employee benefit plans and deferred compensation on the individual's behalf and other expenses. The organization must identify whether any of the above individuals received aggregate compensation of more than $100,000 from theirs or related organizations of which more than $10,000 was provided by related organizations.
Other Information
The organization must include additional information concerning any changes to its organizing or governing documents. If the organization has unrelated business gross income of $1,000 or more during the year it must file Form 990-T. If the organization has made certain political expenditures, those must be disclosed on its 990 and it must file Form 1120-POL for the year. The organization must report whether it has received any donated services or the use of materials, equipment or facilities at no charge or at substantially less than fair rental value and indicate the value of these items. In addition, any excess business holdings or excess benefit transactions during the period are reportable here.
Analysis of Income-Producing Activities
The organization must analyze its income-producing activities and disclose its related or exempt function income, unrelated business income and excluded amounts on its annual return. Program service revenue, membership dues, interest, dividends, net rental income, net income and gross profits or losses are reportable. To the extent that the organization has income that is unrelated to its exempt function income, it may be required to pay unrelated business income tax.
The Tax Cuts and Jobs Act (TCJA) of 2017 changed the treatment of certain unrelated business income. Sec. 512(a)(6) was amended to require organizations that have more than one unrelated trade or business activity to separately compute the unrelated business taxable income for each trade or business. The unrelated business taxable income and expenses of each business must be taken separately; As a result, net operating losses cannot be carried back to previous tax years or used to offset income from unrelated business activities. Net operating losses may be carried forward indefinitely.
The TCJA amended Sec. 512 further by increasing unrelated business income by the amount of certain fringe benefit expenses for which a deduction is disallowed. Sec. 512(a)(7) states that certain employee fringe benefit payments are treated as unrelated business income unless the benefit would be deductible under Sec. 274. In order for a benefit to be deductible under Sec. 274, the fringe benefit must be directly connected or associated with the trade or business which is regularly carried on by the organization.
The fringe benefits address in Sec. 512(a)(7) include:
- Any qualified transportation fringe, as defined in Sec. 132(f);
- Any parking facility used in connection with qualified parking, as defined in Sec. 132(f)(5)(C); or
- Any on-premises athletic facility, as defined in Sec. 132(j)(4)(B).
Relationship of Activities and Additional Information
The organization must describe the relationship of its activities to the accomplishment of its exempt purposes. Detailed information should be provided on how each activity, for which income is reported, has contributed to the accomplishment of the organization's exempt purpose. In addition, information regarding taxable subsidiaries and disregarded entities is reportable including the percentage of ownership interest, nature of activities and total income. The organization is also required to disclose information regarding transfers associated with personal benefit contracts.
Filing Requirements and Penalties
Form 990 is due on the 15th day of the 5th month after a charity's accounting period ends. For example, if a charity uses the calendar year for accounting purposes, its Form 990 would be due four months and 15 days after December 31, or May 15. An automatic three-month extension of time to file Form 990 is available to charities that file Form 8868. An additional three-month extension of time to file may be available if a charity can show cause. The return must be signed by an officer of the organization. Form 990 can be filed electronically. For more information on electronic filing visit www.irs.gov.
A tax exempt organization that fails to file a return is subject to a penalty of $20 per day. The maximum penalty for a single return is the lesser of $10,000 or 5% of the organization's gross receipts for the year. If the organization has gross receipts greater than $1 million, penalties increase to $100 per day with a maximum penalty of $50,000.
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Private Letter Rulings
PLR
200436019 Charity Exempt from Filing Form 990:
Charity, a Sec. 501(c)(3) organization, is a state-created entity. Charity operates Hospital, which is also a Sec. 501(c)(3) organization. Charity's primary mission is to provide medical and hospital care to residents of City. Its primary source of revenue is generated from patient services.
PLR
200513030 PF Converts to Community Foundation:
Donors Alfred and Bertha created a private foundation. The private foundation was primarily designed to enhance the "physical, cultural and spiritual environment of the people of the State of M and the United States of America, and primarily of N and the area comprising O."
PLR
200607022 Supporting Organization Acting as Affiliate of Governmental Unit Not Required to File Form 990:
A, a Sec. 509(a)(1) supporting organization, is a council that studies aging for governmental unit B. A requested a ruling that it is exempt from filing Form 990 under Rev. Proc. 95-48, Sec. 402(b).
PLR
200616036 Governmental Unit Affiliate Exempt from Filing Form 990:
Three counties of State S (S) created, through an intergovernmental agreement, G. G provides workforce development, job training and general employment services to the citizens of the three counties in S. G requested a ruling that it was not required to file Form 990.
PLR
201102066 Exempt Status Revoked for Failure to Respond:
Organization was incorporated under the laws of State. It subsequently applied for and received tax-exempt status from the Internal Revenue Service. Organization was created to "preserve and present the culture, heritage and religious beliefs of the Native American people of the Location."
PLR
201204016 Organization Required to File Form 990:
After receiving tax-exempt status under Sec. 501(c)(3), Organization claimed an exemption from filing Form 990, under Sec. 1.6033(a)(2)(g)(i), on the grounds that it is a mission society.
PLR
201241012 Electric Utility Asks Permission to Pay Taxes:
ORG is exempt from federal income tax under Sec. 501(c)(12). ORG is an electric distribution cooperative serving a particular geographic area in a certain state.
PLR
201809008 Foundation's Classification Modified, Exempt Status Unchanged:
Organization was granted tax exempt status under Sec. 170(b)(1)(A)(iv). On Part IV of Form 1023EZ under the "Foundation Status" description, Organization stated that it was operated for the benefit of a college or university that is owned or operated by a governmental unit.
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Related Topics on Form 1023 and Form 990
7.1.1
Types of Public Charities:
There are three main ways to qualify as a public charity. The first is to operate as a traditional public charity, the second is to have broad public financial support and the third is to actively function in a supporting relationship to another public charity. Sec. 509(a).
7.2.1
Classification as a Private Foundation:
All Sec. 501(c)(3) charities are classified either as private foundations or as public charities. Public charities tend to be the traditional "charitable" organizations such as schools, hospitals, churches, museums and organizations that work with broad segments of the public. Typically, a single wealthy family forms a private foundation as a charity that invests money and uses it to make grants to other charities.
Nationalist Foundation:
In Nationalist Foundation v. Commr., T.C. Memo. 2000-318; No. 14871-98X (October 1,2000), the Tax Court denied Section 501(c)(3) status to The Nationalist Foundation (NF). NF is a Mississippi nonprofit corporation organized in 1987. It attempts to be the legal and educational advocate for "rightist and promajority Americans." It advocates these policies and seeks to assist citizens in "private litigation" against the government.
Harris:
In Thomas More Law Center v. Harris, 2:15-ov-03048 (16 Nov 2016), the U.S. District Court for the Central District of California held that the California Attorney General requirement for nonprofits to disclose names of their major donors was unconstitutional. The California Attorney General was enforcing a requirement that nonprofits disclose major donor names by filing IRS Form 990 with Schedule B.
Lapham Foundation:
One of the goals of some donors is to retain the maximum level of control, but still benefit from the favorable charitable deductions of a public charity. A potential method for achieving this objective is to create a supporting organization that distributes grants to a donor advised fund maintained by a public charity. If this method is successful, then the donor receives deductions under the public charity rules, but still has maximum control.
Cuddeback:
Lucille M. Cuddeback signed a will that transferred one-half of her estate to a testamentary charitable remainder unitrust for her niece. Ms. Cuddeback passed away in 1992. The niece-beneficiary passed away in 1993 and the trust continued, with 10% of income payable to Bedford Presbyterian Church, New York, NY, 10% payable to Parklane Baptist Church, Baltimore, MD and 80% of income payable to Keswick Multi-Care Center, Baltimore, MD.
Salvation Navy:
David Valfer of Hartford, CT is a charitably minded person. He volunteers weekends at the Hartford Senior Center. His duties include handing out milk, replenishing paper goods and soap in the restrooms and setting up the video for seniors. Mr. Valfer incorporated the "Salvation Navy, Inc." and applied for exempt status under Sec. 501(c)(3).
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