What are requirements to become a 501(c)(3). What happens if these rules are violated?
- No part of the net earnings may inure to the benefit of any private shareholder or individual.
- No substantial part of the activities may be non-exempt (such as propaganda, political lobbying, influencing legislation)
- The organizations may not directly participate or intervene in a political campaign
- Violation = loss of tax-exempt status
What 4 categories are considered tax-exempt <em>public</em> charities(cannot private foundations)?
- Max 50% charitable deduction donees
- Receive more than 1/3 of annual support from members of the public and less than 1/3 from investment income and unrelated business income.
- Supporting organizations
- Public safety testing organizations
True / False: A 501(c)(3) must file an annual tax return and acts as a pass-thru to the primary contributors.
- An annual information tax return is filed, but taxes are not passed-thru to anyone.
What is the due date of filing the information return for a tax-exempt organization if the year end if 12/31?
True / False: A private foundation can also be treated as a public organization
- A private foundation ceases and then becomes a public organization if the public organization rules are met.
- A private foundation may voluntarily terminate
Define Unrelated Business Income
- Any income that is
- derived from an activity that constitutes a trade or business,
- regularly carried on, and
- not substantially related to the organization’s tax-exempt purposes.
True / False: Work performed by unpaid workers in an activity constitutes an unrelated business.
- The fact that the work is performed by volunteers makes the activity “related” and not taxable
True / False: Articles made by disabled persons as part of their rehabilitation constitute an unrelated business.
- This work is deemed “related” and not taxable.
Ownership of an unrelated business is limited to ___% of the business enterprise by a private foundation plus all disqualified persons. What happens to excess holdings?
- Excess holdings are taxed
If third parties have effective control of the business enterprise, the private foundation may own up to ____% of an unrelated business enterprise before being subject to tax.
A tax-exempt organization may be subject to regular corporate income tax in what circumstance?
- Ownership of the unrelated business exceeds 20% OR
- If third parties have effective control of the business enterprise, the foundation may own up to 35%.
A UBI sustains a net operating loss. How does a tax-exempt organization treat this loss?
NOL offsets income using the carryback and carryover provisions of a NOL.
What types of income are EXCLUDED from UBI?
- Royalties, interest, dividends, annuities (unless derived from a controlled organization)
- Rents from real or real+personal property (if <50% of the rent is attributable to the personal property)
- Gain / (loss) on property sold in the ordinary course of business
- Income from research of a college or hospital
- Activities limited to tax-exempt orgs by law (e.g., bingo games or games of changes)
- Income derived from membership lists
True / False: Income for a social club or HOA is taxable.
- Any profit derived is taxable.
True / False: A tax-exempt organization must pay estimated taxes when income is subject to tax.
How much is the deduction allowed against UBI for a tax-exempt organization?
No tax on the first $1,000
What is a Feeder Organization and how is it taxed?
A feeder organization tries to claim tax exemption because all profits from the trade or business go to tax exempt organizations. The IRS still considers these businesses and they are taxed as such.
What 3 organizations, other than a 501(c)(1) are exempt from filing the 990 or 990-EZ annual tax return?
- Religious or internally supported organization
- Orgs that typically have <$5,000 in gross receipts (educational, religious, frats, prevention of cruelty to animals, etc)
- Orgs that typically has <$50,000 in gross receipts may file a short-form 990-N simply claiming that receipts are <$50,000.
What is an “automatic revocation” of tax exempt status?
When the tax exempt organization fails to file the required return for 3 consecutive years, the tax-exempt status is revoked.