Non-profits work very hard to gain 501(c)3 status. Once received there are several things that a 501(c)3 (organization) should avoid doing to maintain tax-exempt status.
1). Serving a Private Benefit or Interest: All activities of an organization should be for their exempt purposes. An organization should not substantially engage in any activities that serve the private benefit or interest. The activities of an organization should serve the public interest.
2). Engaging in Private Inurement: An organization is prohibited from allowing income or assets to benefit insiders. Examples of insiders are board members, officers, directors, and important employees of a non-profit. If these types of activities occur an organization could be subject to penalty excise taxes, and it could jeopardize its tax-exempt status. An example of private inurement would be paying dividends or unreasonable compensation to insiders or transferring property to insiders for less than fair market value.
3). Engaging in Lobbying: Lobbying is any activity designed to influence legislation. An organization is allowed to do some lobbying; however, these lobbying activities cannot be more than an insubstantial part of its overall activities. Too much lobbying may hurt an organization’s tax-exempt status.
4). Engaging in Political activity: All organizations are prohibited from participating in political campaigns on behalf of or in opposition to any candidate running for public office. This includes campaigns at the federal, state, and local levels. Examples of political activity that is prohibited would be when a non-profit:
a. Makes or solicits contributions to or for candidates or political organizations
b. Endorses a candidate or rates the candidates (no matter how objective such rating may be)
c. Publishes or distributes partisan campaign literature or written statements
d. Has its representatives speak out about a candidate
e. Uses its resources to influence an election
5). Generating too Much Unrelated Business Income: Generating too much income from unrelated activities could cause an organization to lose tax-exempt status. Unrelated activities are defined as regularly carried on trade or business that is not substantially related to the organization’s exempt purpose. An organization receives tax-exempt status because it pursues exempt purposes. If it’s generating a substantial amount of unrelated business income, an organization is no longer pursuing its exempt purpose and puts itself at risk to lose tax-exempt status.
6). Failing to Complete the Annual Reporting Obligation: Non-profit organizations are required to report certain information annually by completing one of the Form 990 returns. An organization’s tax-exempt status can be revoked if it fails to file a required form 990 return for three consecutive years.
7). Deviating from Original Purposes: An organization must operate in accordance with stated exempt purposes and pursue the exempt activities it promised in its original application for exemption. If an organization has deviated from its original purposes, it must contact the IRS to prevent future problems.
If you have any questions regarding your non-profit’s tax-exempt status, please contact your Hawkins Ash CPAs representative.
