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- 1. IRC Sec. 501(c)(3) Tax Exemption and Tax Issues National Association of Realtors November 8, 2013
- 2. The Unique Alternative to the Big Four® Overview • Choosing the Right Charitable Vehicle • Basics of Section 501(c)(3) status • Public Charity vs. Private Foundation Status • Interaction with the IRS • Grants and Other Assistance Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 2
- 3. The Unique Alternative to the Big Four® Overview – Fun Facts • There are more than 1.5M nonprofit organizations exempt from federal income tax under Section 501(a) of the IRC. • 970,401 public charities • 98,837 private foundations • 496,259 other types of nonprofit organizations, including chambers of commerce, fraternal organizations and civic leagues. Source: NCCS Business Master File 10/2012 • • Approximately 80,000 new organizations apply for recognition of exemption each year. Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 3
- 4. The Unique Alternative to the Big Four® Choosing the Right Charitable Vehicle Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 4
- 5. The Unique Alternative to the Big Four® Organizational Considerations Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 5
- 6. The Unique Alternative to the Big Four® IRC Sec. 501(c)(3) - General 501(c)(3) organizations Public Charity 509(a)(1) 509(a)(2) Audit | Tax | Advisory | Risk | Performance Private Foundations 509(a)(3) Operating Nonoperating © 2012 Crowe Horwath LLP 6
- 7. The Unique Alternative to the Big Four® Basics of Section 501(c)(3) Status • Advantages of tax exemption may include: • Income Taxes • Deductibility of contributions • Qualifications for grants • Tax-exempt financing • Employee benefit programs • Federal unemployment taxes • Postal rate savings • Property tax exemption • Sales / use tax exemption Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 7
- 8. The Unique Alternative to the Big Four® IRC Section 501(c)(3) • Requirements to qualify for tax exemption: • No Private Inurement • No part of its net earnings may inure to the benefit of any private shareholder or individual (director, officer, other person in a position to influence decision). • PRIMARY AREA OF CONCERN FOR SCHOLARSHIPS • No Substantial Lobbying • Prohibit qualifying organizations from participating in lobbying as a substantial portion of their activities; • Lobbying, or attempting to influence legislation in any way, is allowed to some degree, but it cannot be a primary focus of the nonprofit. • No Political Campaigning • Directly or indirectly participates in a political campaign on behalf of or in opposition to any candidate for public office. Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 8
- 9. The Unique Alternative to the Big Four® Basics of Section 501(c)(3) Status - Qualification Organizational test • Permissible purposes Operational Test (and no more) • “Exclusively” versus “Primarily” • Private benefit and inurement • Form of entity • Political activities • Purposes set forth in organizational • Lobbying activities document • Dissolution clause 9
- 10. The Unique Alternative to the Big Four® Public Charity vs. Private Foundation Status • Concept • Disadvantages of private foundation status • Default Rule • Need a “route” to public charity status – four possibilities: • Nature of organization • Receipt of substantial contributions • Receipt of substantial exempt function income • Supporting relationship with other charitable organization(s) Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 10
- 11. The Unique Alternative to the Big Four® Public Charity Classifications • Section 509(a)(1) / 170(b)(1)(A)(vi) • Status based on receipt of substantial support in the form of contributions from governmental units or the general public • Section 509(a)(2) • Status based on receipt of substantial support in the form of revenue from conduct of activities in furtherance of exempt purposes (“exempt function income”) • Section 509(a)(3) • Status based on relationship in support of one or more other “publicly supported” organizations, i.e. those described in 509(a)(1) or (2) • Types I, II, and III (functional integrated or not) Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 11
- 12. The Unique Alternative to the Big Four® 2012 Filing Thresholds – Public Charity • Form 990 • Form 990-EZ • Gross receipts < $200,000 and total assets < $500,000 for tax years ending on or after December 31, 2012. • Form 990-N • Gross receipts < $50,000 for tax years ending on or after December 31, 2012. • Note that some states have their own versions of the Form 990-N that may also be required. • Form 990-N filing is not allowed for private foundations or certain supporting organizations. Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 12
- 13. The Unique Alternative to the Big Four® Types of Foundations • Private Non-Operating Foundation: • Most common type • Subject to excise tax on net investment income • Required to pay out annually qualifying distributions at a minimum of 5% of the fair market value of their assets • Contributions are deductible at FMV for cash/appreciated securities • 30% AGI limitation for cash • 20% AGI limitation for appreciated securities • Private Operating Foundation: • Uses the majority of its income to actively run its own charitable programs or services. • Ex. include museums, libraries, research facilities and historic property • Not subject to 1-2% excise tax • Community Foundations/Donor Advised Funds Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 13
- 14. The Unique Alternative to the Big Four® Filing Requirements – Private Foundations • Federal - Form 990-PF • No minimum filing thresh hold • Federal - Form 4720 (excise tax return) • Private Foundations are not eligible to file Form 990-N • Failure to file for three consecutive years will result in revocation of exempt status. Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 14
- 15. The Unique Alternative to the Big Four® Other Potential Taxes on Private Foundations Besides the excise tax based on Net Investment Income, PF’s may have to pay other excise taxes: • • • • • • Section 4941 - Tax on Self-Dealing Section 4942 - Tax on Failure to Distribute Income Section 4943 - Tax on Excess Business Holdings Section 4944 - Tax on Investments that Jeopardize Charitable Purposes Section 4945 - Tax on Taxable Expenditures Section 4965 - Tax on Being Party to Prohibited Tax Shelter Transactions • These taxes restrict the permitted activities of private foundations. Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 15
- 16. The Unique Alternative to the Big Four® Interaction with the IRS • Obtaining recognition of exemption • Exemption application (IRS Form 1023) • Effective date of exemption • IRS determination letter • Group exemption rulings • Special projects and automatic referrals to National Office Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 16
- 17. The Unique Alternative to the Big Four® Interaction with the IRS • Enforcement • Historically, limited enforcement resources for TE / GE • Uptick in recent years • IRS alternative approaches: • Examinations (audits) • Correspondence • Field • TEP • General • Compliance Checks Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 17
- 18. The Unique Alternative to the Big Four® Grants and Other Assistance • Grants made to: • Government • Organizations • Individual • Grants and other assistance include • Awards, prizes, allocations, stipends, scholarships, research grants, and similar payments and distributions • Grants and other assistance do not include • Grants to affiliates that are not organized as legal entities separate from the filing organization • Grants made to branch offices, accounts, or employees located in the United States Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 18
- 19. The Unique Alternative to the Big Four® Mandatory Recordkeeping Requirements for Grantor Organization • Proof grantee organizations are exempt public charities-IRS Pub 78 listing • Recipients’ names and addresses • Amounts and purposes of the grants and how it meets the exempt purpose • Proof of payment (check, wire transfer, etc.) • How the recipients are selected • Relationships between recipients and any members, contributors or officials • Policy and procedures for monitoring the use of grant funds Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 19
- 20. The Unique Alternative to the Big Four® Questions? Audit | Tax | Advisory | Risk | Performance © 2012 Crowe Horwath LLP 20
Editor's Notes
- A private foundation is a nongovernmental, nonprofit organization having a principal fund managed by its own trustees or directors. Private foundations maintain or aid charitable, educational, religious, or other activities serving the public good, primarily through the making of grants to other nonprofit organizations. Every U.S. and foreign charity that qualifies under Section 501(c)(3) of the Internal Revenue Service Code as tax-exempt is a "private foundation" unless it demonstrates to the IRS that it falls into another category. Broadly speaking, organizations that are not private foundations are public charities as described in the Internal Revenue Service Code.Public charities generally derive their funding or support primarily from the general public, receiving grants from individuals, government, and private foundations. Although some public charities engage in grantmaking activities, most conduct direct service or other tax-exempt activities. A private foundation, on the other hand, usually derives its principal fund from a single source, such as an individual, family, or corporation, and more often than not is a grantmaker. A private foundation does not solicit funds from the public.