Earlier we brought you more information on how to become a nonprofit. Now we’re here to tell you ways to KEEP that status. You’re welcome.
Can you lose your exemption status?
Once tax exempt status has been obtained, the organization must continue to follow specific rules in order to maintain this status. The following are common ways an organization can have its exempt status revoked:
- Not completing your annual filings for three consecutive years (it seems obvious, but it happens more than you think).
- Unrelated business income becomes more than an insubstantial amount of your gross receipts. The IRS states that unrelated business income (income generated from activities not related to your stated exempt purpose) should be insubstantial to your organization. There is no bright line definition of substantial, but a good rule of thumb is more than 15% of the revenues or activities of the organization.
- Supporting/opposing a political candidate. Organization exempt under 501(c)(3) are prohibited from engaging in any political activity including endorsing candidates. Political activity is different from lobbying and an insubstantial amount of lobbying may be allowed.
- Income which inures to the benefit of any individual. The activities of the organization must be for the benefit of the public, not specific individuals. Therefore, operating for the benefit of individuals or providing specific benefits to individuals can impact tax exemption. Here’s an example. If a hockey association (organized as a tax-exempt nonprofit) requires its members to fundraise on behalf of the association, the funds raised must go the association as a whole, not individual members. Therefore, if Johnny raised $1,000 and Billy decided not to participate in the fundraising, the $1,000 collected must be used for the benefit of the association as a whole; not credited to Johnny’s account for his benefit.
Starting a nonprofit is an exciting journey, but it’s also complicated. There are numerous resources that can help you along that journey. If you need help getting started, reach out; we would be happy to help.