by Ronald E. Milliman
There are two steps involved in obtaining your 501(c)(3) tax-exempt status. First, you must become incorporated as a non-profit organization in your state; this was described in part 1 ("The Braille Forum," June 2012). Then you need to apply for 501(c)(3) status to the IRS. Here's how.
What Is a 501(c)(3) Tax-Exempt Organization?
Definition: Corporations that are "organized and operate exclusively for charitable, educational, or religious purposes," no substantial part of whose activities are lobbying or trying to influence legislation, and which do not endorse political candidates, and no part of whose income "inures" to the benefit of its members, directors, or others, except as compensation for services actually performed. To meet this test, specific language must be included in the articles of incorporation stating that (1) the organization is organized and operated exclusively for specified charitable purposes; (2) none of its earnings or assets can be distributed to officers, directors or other private individuals (although payment of reasonable compensation for services is permitted); and (3) if it dissolves, the organization's assets are to be transferred to another charitable organization. Be sure to check your chapter and affiliate constitutions to see whether they designate where the funds should go if the chapter/affiliate dissolves. If these requirements are met, then the organizational test is satisfied. The proper wording for these paragraphs can be found in IRS Publication 557.
IRS regulations state that to be exempt, the organization must be "exclusively" charitable. However, the IRS and the courts have interpreted "exclusively" to mean "substantially." An organization can carry on incidental non-charitable activities. For example, a charitable organization can conduct some business activities that are unrelated to its charitable purposes without losing its tax-exempt status. Remember that the IRS will look closely at any organization that operates in a manner that makes charity appear to be only a secondary purpose.
Public Charity or Private Foundation. In granting 501(c)(3) status, the IRS will classify your organization as being either a "public charity" or "private foundation." The choice is made by the IRS, not the organization, based on the sources of the organization's support.
A public charity is a "Publicly Supported Organization" that is a 501(c)(3) organization that meets the 1/3 public support test -- it receives at least one-third of its support from public sources such as small contributions, government grants, or from other public charities, and does not receive much income from investments. If an organization qualifies, it will not be subject to the restrictions applicable to private foundations.
A private foundation receives the bulk of its income from private contributions (e.g., a large corporation) and/or from its investments. Private foundations have more restrictions on their activities.
When you fill out the application for tax-exempt status, you need to show that your sources of income will be from relatively small public donations, public fundraisers, and government and foundation grants. Being recognized as a 501(c)(3), tax-exempt, non-profit charity is considered the most desirable for ACB affiliates and chapters because of the "goodies" that come with it: contributions to a 501(c)(3) entity are tax-deductible for the donor, and only 501(c)(3) organizations qualify for foundation grants.
Filing for Your 501(c)(3) Tax-Exempt Status
The first step is to obtain and complete IRS forms: IRS Package 1023, Application for Recognition of Exemption; and IRS Form 818, User Fee for Exempt Organization Determination Letter Request. I also recommend that you obtain IRS Publication 557, Exempt Status for Your Organization. To request the forms, call the IRS toll-free at 1-800-829-3676. Allow at least two weeks for delivery. You can also download everything from the IRS web site, www.irs.ustreas.gov/formspubs/index.html.
Part IV of Form 1023 asks you to describe in detail your organization's past, present, and future activities. An attachment to Form 1023 will always be needed. This question, along with your articles of incorporation, will determine whether your organization qualifies for exemption.
Suggestions for Your Narrative. Focus your narrative on achieving your organization's tax-exempt purposes. If your activities are to be focused on helping blind and low-vision people, providing scholarships, grants, etc., then that's what your narrative should include.
You need to avoid booby traps. Don't brag about how you plan to go down to City Hall and demand better code enforcement; this could easily be interpreted by the IRS to be lobbying. Nor should you write about the benefits that your members will enjoy. The activities of charitable organizations must benefit the entire community. If only the membership were to benefit, the IRS would interpret the activity as private inurement, which would automatically disqualify the corporation for 501(c)(3) status.
Check List. Near the end of Form 1023, there is a checklist. Assemble your packet for submission following the order of the documents outlined in that checklist. It gives instructions on where to send the application and how to handle the filing fee. You should also write a short cover letter, to be signed by the president of your affiliate or chapter, explaining that you are applying for tax-exempt status and that your application is attached. You should include the following statement: "The attached bylaws are a true and correct copy of the bylaws that are currently in effect."
The forms are long; you will need to stay organized. You may want to seek the assistance of an attorney to help with the completion of the forms, especially if you've done the articles of incorporation and bylaws without legal help. Be sure to include any materials such as bylaws, mission statements, and philosophies. There is also a filing fee that must accompany your form 1023. The fee changes from time to time; be sure you are sending the correct amount.
What to Expect from the IRS. After submitting the application, you can expect a letter from the IRS in about eight weeks. The letter will acknowledge the receipt of your application. The letter may ask you for more information. Answer all questions truthfully and in full, and submit the answers to the IRS by the deadlines included in the letter. The letter will also give you the name and telephone number of your contact person at the IRS. Call this person and find out exactly what they want to know and what you need to provide to be acceptable to the IRS.
Once you have all of the IRS' questions answered, the IRS will send you a determination letter. Save this letter -- it is very important! Not only does it give you critical information about compliance and staying out of trouble with the IRS, but your potential funding sources will usually ask you for a copy of it.
Once your application is approved, you must follow IRS reporting rules, such as making certain your affiliate's or chapter's records are open to the public and filing annual tax form 990 with the IRS. If your organization fails to file this annual IRS form for five consecutive years, it risks losing its 501(c)(3) status.
Conclusion. If you are going to conduct fundraisers of any kind, it is important that your affiliate or chapter have its 501(c)(3) tax-exempt status from the IRS. This will allow people who support your organization to deduct their donations from their federal taxes. You can, and should, clearly display your 501(c)(3) tax-exempt status on your web site, and in all of your brochures and other materials.