IRS Exempt Organizations Workshop – May 10, 2005

Session 1

Tax-Exempt Status
Jeopardizing 501(c)(3) Status

  • Distinction between "tax-exempt" and "nonprofit"
  • Major types of exempt organizations – charitable/educational/religious; public charity/private foundation; (c)(3) / (c)(4) / …
  • Benefits of tax-exempt status – income tax exemption; possible exemption from state income, sales and property taxes; reduced postal rates offered to some
  • Actions that jeopardize tax-exempt status – private benefit; inurement; more than an insubstantial amount of unrelated trade or business activity; substantial lobbying; political campaign activity
  • Major categories of public charities – statutorily-defined (e.g., churches, schools); public support test

Session 2

Unrelated Business Income
Discussion of Gaming Activities

  • Three parts of the UBI Test – (1) constitutes a trade or business; (2) regularly carried on; and (3) not substantially related to the organization’s exempt purpose
  • Types of activities that commonly generate UBI for exempt organizations – advertising, gaming sale of merchandise and publications, rental income
  • Common exceptions and modifications to UBI – activities conducted substantially by volunteers; activities conducted for the convenience of members, students, patients, officers or employees; sales of donated merchandise; distribution of "low cost" articles; convention and trade show activity; qualified sponsorship income; bingo income; exclusions (interest and dividends, royalties, certain rents from real properties, certain gains and losses); deductions (net operating loss, charitable contribution, $1,000 specific deduction)
  • Identification and definition of "gaming activities"
  • Form used to report UBI and pay the tax – Form 990-T, EO Business Income Tax Return (gross income of $1,000 or more in taxable year); Form 990-W, Estimated Tax on UBTI (estimated tax expected to be $500 or more)

Session 3

Employment Issues

  • Main factors used to categorize a worker as either an employee or an independent contractor
  • Identification of workers that are statutorily classified as employees and those that are statutorily classified as independent contractors
  • Major employment tax forms and their uses for the typical small EO

Session 4

Form 990

  • Identification of recordkeeping requirements
  • Purpose – information return
  • Entities that must file – annual gross receipts of $25,000 or more, but exceptions (e.g., churches); filing to start 3-year statute of limitations (box "k")
  • Identification of what is reported on major sections
  • Common errors – name of organization must match EIN, signature

Description of the Audit Process

  • Common types of audits of EOs – correspondence examinations, office examinations, field examinations
  • Types of records required by IRS auditor – governing documents, brochures and printed literature describing activities, Forms 990 for previous and subsequent years; minutes; books and records; auditor’s report; tax returns and related work papers; employment tax returns and related work papers

Session 5

Required Disclosures

  • Public inspection rules applicable to 501(c)(3) organizations – Form 1023, Form 990 (but not Schedule B)
  • Major substantiation rules for contributions – quid pro quo contributions where donor’s payment exceeds $75; donor’s requirement for written acknowledgement from charity for any single contribution of $250 or more in order to claim charitable deduction
  • Other disclosure rules applicable to 501(c)(3) organizations