Key Takeaways:

  • 501(c)(3) Status is Generally Permanent: Once granted, a 501(c)(3) status does not require renewal, but compliance with IRS regulations is necessary to maintain tax-exempt status.
  • Annual IRS Filings Are Required: Organizations must submit Form 990 annually to the IRS. Failure to file for three consecutive years results in automatic revocation.
  • Reinstatement After Revocation: If a nonprofit loses its 501(c)(3) status, it can apply for reinstatement through the IRS using Form 1023 or 1023-EZ, depending on eligibility.
  • State-Level Requirements Vary: While federal tax-exempt status does not need renewal, certain states may require periodic filings or renewals for nonprofit registration.
  • Compliance is Crucial: Maintaining good standing with both the IRS and state agencies is essential for continued tax-exempt benefits.
  • Avoiding Revocation: Proper recordkeeping, timely filings, and legal compliance help organizations avoid losing their tax-exempt status.

Tax Exempt Organizations

Tax-exempt status frees an organization from the obligation of paying income taxes to state and federal tax bodies. An organization must send its annual filings to the IRS to retain its status. These annual filings are not a renewal, and the organization can still maintain its tax-exempt status even if it did not meet its filing requirements in a year.

An organization can obtain a tax-exempt status when it incorporates with the Secretary of State of a particular state as a nonprofit. With a nonprofit designation, the organization does not need to apply for 501(c) status to be exempt from state sales and income taxes and qualify for state-awarded grants and contracts.

Depending on their purpose, nonprofits do not require 501(c)(3) or federal tax-exempt status to function. However, a 501(c)3 offers certain benefits that are lacking in other designations, but the purpose and financial size of the organization determine whether it needs to apply for the status.

Nonprofits that want federal tax-exempt status need to file for 501(c) designation with the IRS. If the mission of the organization qualifies it for the status, the IRS approves the application. For example, a children's charity may be designated as a 501(c)(3) while a national trade association may be given a 501(c)(6) designations. The 501(c)(3) qualifies donors for a tax deduction when they donate.

Tax-exempt organizations may establish subordinate 501(c)(3) organizations for the collection and disbursement of tax-deductible donations. Trade associations with 501(c)(6) designation usually own 501(c)(3) foundations for purposes of collecting and disbursing tax-deductible contributions. For instance, a national trade association that advocates for architects may own a foundation, which sponsors students to study architecture in college.

501(c)(3)

According to recent regulations, an organization will be designated as 501(c)(3) if it can prove that public contributions can support at least one-third of its functions at the time of filing for tax-exempt status.

A nonprofit organization must follow state and federal tax laws strictly. If you wish to obtain federal 501(c)(3) status, your organizations must be ready to subject itself to the scrutiny of the IRS during the lengthy application process. However, you will not renew the tax-exempt status if your application is approved.

While your organization is not required to renew its 501(c)(3) status, the Internal Revenue Service has some filing requirements your organization must comply with to maintain its tax-exempt designation. One of the conditions is to file an annual report of your yearly revenue and operations with the IRS. Furthermore, you must adhere to state reporting and registration requirements that apply to your organization to avoid losing your corporate and exempt designation.

Maintaining 501(c)(3) Status

To retain 501(c)(3) tax-exempt status, an organization must comply with IRS requirements, including:

  • Annual Filings: Organizations must submit IRS Form 990 (990-N, 990-EZ, or 990) each year to report financial activities and confirm ongoing compliance.
  • Operational Compliance: Nonprofits must continue operating exclusively for exempt purposes without benefiting private interests or engaging in excessive lobbying or political activity.
  • Recordkeeping: Proper documentation of income, expenditures, and governance helps ensure compliance with federal and state laws.
  • State Reporting: Some states require additional filings, such as charitable solicitation registrations or annual reports, to maintain good standing.

Failure to meet these requirements could lead to penalties, loss of tax-exempt status, or even legal consequences.

Do You Have to Renew 501(c)(3) Status?

No, nonprofits do not need to renew their 501(c)(3) status with the IRS. However, they must file annual reports (Form 990) to remain in compliance. If a nonprofit fails to submit required filings for three consecutive years, the IRS will automatically revoke its tax-exempt status.

Even though federal recognition is permanent, some states require periodic renewals for state tax exemption, corporate registration, or charitable solicitation purposes. Nonprofits should check with their state’s revenue and charity offices to ensure compliance with local laws.

Changes to 501(c)(3) Status Effective Dates for New Nonprofits

The 2006 update of the tax code required all 501(c) organizations except churches to file a version Form 990 annually. Nonprofits that fail to submit the form for three consecutive years will have their tax-exempt status revoked automatically.

The new regulation led to an odd situation where the tax-exempt status of applicant nonprofits was revoked even before their designation as such was approved. Primarily, the new rules designated the applicant organizations as tax exempt from the date of the application without considering their operations or contributions before that time.

In Revenue Procedure 2013-9, the IRS formally included failure to file Form 990 in its considerations for effective dates. The new rules now state that the status of applicants (except for those described in § 501(c)(29)) as tax-exempt will be effective as of the formation of the organization if:

  • The purpose and activities of the organization before the application comply with exemption requirements.
  • The organization has not failed to observe Form 990 filing requirements for three consecutive years.
  • The organization applied for tax-exempt status within 27 months from the end of its month of formation.

The implication is that if a nonprofit that is applying for 501(c)(3) status, and it is over 27 months since the formation of the organization, and you did not file Form 990 since the nonprofit was formed, your effective tax exemption date will take effect after the 27 months.

Reinstating 501(c)(3) Status After Revocation

If a nonprofit loses its 501(c)(3) status due to noncompliance, reinstatement is possible by following these steps:

  1. Determine Eligibility for Retroactive Reinstatement:
    • If the organization lost status due to failure to file Form 990 for three years, it may qualify for retroactive reinstatement under a streamlined process.
    • Organizations that file within 15 months of revocation using Form 1023 or 1023-EZ (if eligible) can request reinstatement to the original revocation date.
  2. Choose the Correct Reinstatement Method:
    • Streamlined Retroactive Reinstatement: For small organizations eligible to file Form 990-N or 990-EZ.
    • Retroactive Reinstatement with Reasonable Cause: For organizations that do not qualify for the streamlined process but can demonstrate reasonable cause for failing to file.
    • Post-Mark Date Reinstatement: For nonprofits that do not qualify for retroactive reinstatement and will have their reinstatement date as the date the new application is approved.
  3. File IRS Form 1023 or 1023-EZ: Organizations must complete and submit the appropriate exemption application, along with any required reinstatement fees.

Once reinstated, the IRS will issue a determination letter, and the nonprofit will regain tax-exempt status.

Frequently Asked Questions

1. Do you have to renew 501(c)(3) status annually?

No, the IRS does not require renewal of 501(c)(3) status, but organizations must file Form 990 each year to maintain their tax-exempt designation.

2. What happens if a nonprofit fails to file Form 990?

If a nonprofit fails to file Form 990 for three consecutive years, the IRS will automatically revoke its tax-exempt status.

3. Can a revoked nonprofit regain 501(c)(3) status?

Yes, nonprofits can apply for reinstatement by submitting Form 1023 or 1023-EZ and may qualify for retroactive reinstatement if they act within 15 months of revocation.

4. Do state requirements differ from IRS regulations?

Yes, some states require nonprofits to renew tax exemptions, file annual reports, or register for charitable solicitations separately from the IRS.

5. How can a nonprofit avoid losing 501(c)(3) status?

To prevent revocation, nonprofits should maintain proper records, file Form 990 on time, and comply with federal and state regulations.

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