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Maintaining Tax Exempt And Public Charity Status

Acquiring tax exempt and public charity status is among the first and most important steps a non-profit takes in starting its organization. However, there is maintenance required once this status is acquired. The following are items your nonprofit organization should be doing to stay in good standing:

  1. Comply with Federal Tax Law: This is required to maintain tax exempt status and avoid penalties. The federal tax law has certain rules in place that your public charity must comply with. Examples of these rules include the organization’s purpose cannot be organized to operate for the benefit of private interest or attempt to influence legislation as a substantial part of its activities.
  2. Pay Employment Taxes: While tax exempt organizations are exempt from federal, state and local income taxes, they are responsible for employment taxes. The organization has to withhold, deposit and pay these employments taxes (including federal income tax withholding, Social Security and Medicare).
  3. Be Aware of Unrelated Business Income Tax (UBIT): Unrelated Business Income (UBI) is derived from a trade or business, regularly carried on that is not substantially related to an organization’s exempt purpose. Organizations need to file Form 990-T if they have $1,000 or more of UBI. If an organization has excessive UBI (the IRS has not specifically quantified this), the organization may result in the IRS deciding that the organization is not operating specifically for exempt purposes.
  4. Pass the Public Support Test: Organizations exempt under IRC section 501(c)3 are required to pass an annual public support test in order to maintain their tax exempt status (certain exceptions to this rule apply such as churches, schools & colleges, hospitals and supporting organizations). The threshold of this test is that the organization must receive at least one third of its support from the general public or a governmental unit. If the public charity does not meet this test for two consecutive years, it may be classified as a private foundation.
  5. File Annual Form 990: Depending on the organization’s total annual receipts and total assets, it is required to file annual IRS Form 990-N, 990-EZ or 990. If an organization fails to file for three consecutive years, its tax exempt status will be revoked.

Should you have any questions regarding the items outlined above, or need assistance filing your public charity’s Form 990, please contact your GBQ advisor.

Article written by:
Gennyfer Mullins, CPA
Tax Senior

Contact
  • Rich Lundy
  • Director, Tax & Business Advisory Services
  • (614) 947-5264
  • rlundy@gbq.com