Loss of Nonprofit Status
Reasons for Loss of Exempt Status
A nonprofit can lose its status if it participates in activities that do not align with its exempt purpose, such as generating excessive Unrelated Business Income (UBI). This is income from a business activity that is regularly carried on but not related to the organization’s primary purpose.
Consequences and Remediation
If a nonprofit loses its exempt status, the IRS mandates the following steps for reinstatement:
- Remedy the problem that caused the revocation.
- File an application for reinstatement and pay the filing fee.
- Attach a request for retroactive reinstatement, if applicable.
Nonprofit Governance and Evaluation
State governments primarily regulate nonprofit organizations. In the U.S., nonprofits must:
- Register with the state in at least 39 states.
- File a charter.
- Avoid distributing profits to members.
- Utilize all profits for organizational work.
Expenses may include rent or mortgage payments and the role of the founder is critical in managing operations and mitigating risks. Evaluating a non-profit’s effectiveness is essential in this context.
Conflicts of Interest and Dissolution
Private Benefit / Private Inurement are terms related to the mismanagement of nonprofit assets, benefiting insiders such as board members or staff. This can lead to excise taxes and the loss of tax-exempt status.
When dissolving a non-profit, its assets must transfer to a similar organization, not to its members.
Tax-Exempt Status Maintenance
IRS Revocation Conditions
The IRS automatically revokes 501(c)(3) status if an organization fails to file required 990 series returns for three consecutive years. A reinstated organization must maintain compliance to avoid repeated revocation.
Tax-Exempt Status Validity
There is no expiration date for 501(c)(3) status, but organizations must continue certain actions to maintain their tax-exempt status. These include fulfilling annual filing requirements and adhering to regulations governing non-profit operations and activities.
Role of Nonprofits and Volunteers
Nonprofits serve society by promoting civic engagement and providing services. Volunteers are critical to helping these organizations achieve their objectives.
Filing Requirements and Asset Ownership
Nonprofit Filing and Asset Ownership
Failure to file an annual information return is a common reason for revocation of charitable status. The CRA has revoked approximately 1,700 charities per year since 2010, with 43% due to filing failures. The assets of a nonprofit are owned by the organization and must be dedicated to exempt purposes. Private foundations also have restrictions on their ability to grant to certain organizations.
Obtaining 501(c)(3) Status
To get 501(c)(3) status, organizations must file for a Recognition of Exemption and pay a $600 fee to the IRS. Utilizing services to file can incur additional costs.
Definition and Benefits of 501(c)(3) Status
The 501(c)(3) status exempts a corporation from federal taxes on its revenues and income, facilitating its mission-driven activities. This status enables nonprofits to focus on delivering public benefit without the burden of federal income taxation.