Form 990: AICPA’s Answer to Unlocking the Tax Complexities

Chapter 0

Overview - Filing and Disclosure Requirements

Introduction

Exempt organizations are mostly controlled either directly or indirectly by the same laws that affect most other types of business operations. In addition, there are tax laws that are specific to the nonprofit environment. These additional laws or rules that pertain to exempt organizations are generally restricted to charitable giving and qualifying for and/or maintaining tax exemption. While not necessarily affecting tax status, exempt organizations must adhere to special rules on contracts, employee benefits, environmental law, healthcare, postal service, and state fundraising requirements.

While all of the aforementioned areas affect the operations of an exempt organization, this course deals with one small area of the law; that is, filing requirements and the proper preparation of returns.

Organization

Exemption - Overview

Exempt organizations are unique in the business world because of their classification as nonprofit organizations. In some cases this description is a misnomer since, without some form of profit or excess of revenues over expenses, it is unlikely the organizations would exist. They can be more aptly described as businesses organized without a profit motive. State laws generally control the formation and organization of most nonprofit organizations, while federal law concentrates on exemption. States limit the form of organization that most nonprofit entities can take to (1) corporations, (2) trusts, and (3) associations. While trusts and associations are viable setups for doing business, most nonprofit organizations take a corporate form.

Exemption does not occur automatically by virtue of a nonprofit formation. Exempt status may or may not be granted based on a complicated application for exemption. Completion and approval of the application involves providing the IRS with certain information including, but not limited to, the organization’s purpose, relationship to any private interest, inurement to private individuals, and financial responsibility.

Organizations attempting to qualify under §501(c)(3) file Form 1023, Application for Recognition of Exemption. Organizations requesting exemption other than for §501(c)(3) will file Form 1024, Application for Recognition of Exemption under Section 501(a). Based on the two general forms for application for exemption, the following is the general breakdown of exempt organizations:¹

Form 1023 is required for the following:

§501(c)(3) - Corporations and any community chests, funds, or foundations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation, and which does not participate or intervene in any political campaign on behalf of any candidate for public office.

Form 1024 is required for the following:

§501(c)(2) - Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization that itself is exempt under §501.

§501(c)(4) - Civic leagues or organizations not organized for profit, but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.

§501(c)(5)2 - Labor, agricultural, or horticultural organizations.

§501(c)(6) - Business leagues, chambers of commerce, real estate boards, boards of trade, or professional football leagues, not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.

§501(c)(7) - Clubs organized for pleasure, recreation, and other nonprofit purposes, substantially all of the activities of which are for such purposes and no part of net earnings of which inures to the benefit of a private shareholder.

§501(c)(8) - Fraternal beneficiary societies, orders, associations operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system and providing for the payment of life, sick, accident, or other benefits to the members of such a society, order, or association, or their dependents.

§501(c)(9) - Voluntary employees’ beneficiary associations providing for the payment of life, sick, accident, or other benefits to the members of such an association or their dependents or designated beneficiaries, if no part of the net earnings of such association inures to the benefit of any private shareholder or individual.

§501(c)(10) - Domestic fraternal societies, orders, or associations operating under the lodge system, the net earnings of which are devoted exclusively to religious, charitable, scientific, literary, educational, and fraternal purposes, and that do not provide for the payment of life, sick, accident, or other benefits.

§501(c)(11) - Teachers retirement fund associations of a purely local character.

§501(c)(12) - Benevolent life insurance associations of a purely local character, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations, but only if 85% or more of the income consists of amounts collected from members for the sole purpose of meeting losses and expenses.

§501(c)(13) - Cemetery companies owned and operated exclusively for the benefit of their members.

§501(c)(14) - Credit unions without capital stock organized and operated for mutual purposes and without profit.

§501(c)(15) - Insurance companies or associations other than life if the net written premiums for the taxable year do not exceed $350,000.

§501(c)(16) - Corporations organized by an association subject to farmers’ cooperative rules or members thereof.

§501(c)(17) - Trust or trusts forming part of a plan providing for the payment of supplemental unemployment compensation benefits.

§501(c)(18) - Trust or trusts created before June 25, 1959, forming part of a plan providing for the payment of benefits under a pension plan funded only by contribution of employees.

§501(c)(19) - Posts or organizations of past or present members of the Armed Forces or an auxiliary unit or society of, or a trust or foundation for any such post or organization, at least 75% of the members of which are past or present members of the Armed Forces, and substantially all of the other members of which are individuals who are cadets or are spouses, widows, or widowers of past or present members.

§501(c)(20) - Organizations or trusts created or organized in the U.S., the exclusive function of which is to form part of a qualified group legal services plan or plans, within the meaning of §120.

§501(c)(21) - Trusts established in writing, created or organized in the U.S., and contributed to by any person if the purpose of such trust is exclusively to satisfy in whole or in part the liability of such person for claims for compensation for disability or death due to Black Lung Acts.

§501(c)(22) - Trusts created or organized in the U.S. and established in writing by the plan sponsors of multi-employer plans if the purpose of such trust is exclusively to pay any amount described in §4223(c) or (h) of ERISA.

§501(c)(23) - Any association organized before 1880 of which more than 75% of the members are present or past members of the Armed Forces, and of which a principal purpose is to provide insurance and benefits to veterans or dependents.

§501(c)(24) - Trusts described in §4049 of ERISA.