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The IRS, taxes, Internal Revenue Code, and exemptions are all things that require careful reading and consideration. IRS codes are a language of their own. If you are a non-profit organization in particular, knowing what your company designation is with the IRS is beneficial and important.

For certain non-profit organizations the IRS classifies them as tax-exempt under section 501(c)(3) of the Internal Revenue Code. A 501(c)(3) organization is exempt from federal income taxes, tax exempt financing, exemptions from federal unemployment tax, and reduced postal rates.  Best of all contributions to 501(c)(3) organizations are tax deductible, increasing your likelihood of receiving donations from the public.

How do you know if you qualify as a 501(c)(3) organization? The IRS has a test to determine if you qualify. The attorneys at HAASCAYWOOD PC can  assist and walk you through the IRS filing process and test to determine if you qualify as a 501(c)(3) organization.

Knowing what a 501(c)(3) company is and how the IRS reviews a 501(c)(3) company can be the difference of thousands of dollars owed at tax time.

The IRS denotes a 501(c)(3) status to either a private foundation or public charities. A 501(c)(3) is a code that tells the IRS you are a Non-Profit Organization. The IRS uses numeric codes to allow the IRS to know what type of organization you are running and associates your status with certain tax exemptions. Once a company is designated as a 501(c)(3), the IRS assigns a separate subcategory code to your company to determine what test the IRS will apply when looking at deductions and exemptions. Two common 501(c)(3)s are a 509(a)(1) and a 509(a)(2).

A 509(a)(2) charitable organization is an organization supported primarily through income earned from performing a tax-exempt purpose. This is commonly referred to by the IRS as “mission related income.” The IRS test for a 509(a)(2) organization is more intricate and balances multiple factors over the course of 5 years.

The IRS will look at how a 509(a)(2) charitable organization is receiving funding. The IRS will look at your source of income over a five (5) year period. This means one year does not define your organization; however,  if your operations change significantly as to your source of income or the purpose for which services are provided change significantly over that five (5) year period, your 501(c)(3) may be affected.

The test the IRS uses for a 509(a)(2) charitable organization is a two (2) prong test that balances different types of income. The first prong of the test is where the IRS examines if the organization receives at least 33.3% of its income from gifts, grants, contributions, membership fees, gross receipts from admission fees, sales of merchandise, the performance of services, and furnishing facilities. The second prong of the test looks at organization income, gross investment income, and unrelated business taxable income. Organization income, gross investment income, and unrelated business taxable income must be less than 33.3% of a 509(a)(2) charitable organization’s income. A 509(a)(2) charitable organization must pass both prongs of this IRS test to keep its charitable organization status. The IRS test requires an extensive look at financial records. Having a legal eye review the documents, can help a charitable organization successfully prepare for the IRS two (2) prong test.

If your organization is a 509(a)1, you will have a separate funding requirement the IRS will analyze.

There are also additional subcategories and specific IRS requirements for organizations such as churches and similar religious affiliated organizations, as well as organizations that receive less than $5,000 of income in a year.

Qualifying as a 501(c)(3) organization, and having an understanding of your 501(c)(3) status, is not the end of your dealings with the IRS. Additional filings with the IRS will be required to confirm your continued maintenance of your 501(c)(3) status and compliance with the requirements put in place by the IRS.

Knowing what type of 501(c)(3) you are, is important. Knowing how your 501(c)(3) functions with the IRS is even more important.  If you are a Non-Profit Organization and have questions, please contact HAASCAYWOOD PC. We have attorneys who are happy to help and translate the Internal Revenue Code and its regulations.


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