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We are a "Non-profit Corporation" but do not have a 501(c)3

status. We have received contributions...
We are a "Non-profit Corporation" but do not have a 501(c)3 status. We have received contributions from fundraising events. Are these contributions subject to being taxed?
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Answered in 4 minutes by:
10/19/2013
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12,875
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Lane :

Hi,

Lane :

Essentially, for donations to be tax deductiible, they need to be made to a qualified charity

Lane :

Qualified charities are 501(c)(3)s, religious organizations and certain other organizations organized under section 501

Lane :

If you're organized at the state level as a non-profit corporation, then as long as you are satisfying your state's regulations and reporting requirements, then you MAY not have to pay tax on your income at the STATE level

Lane :

If you can tell me more about your organization, I can help further, For example, if the events were for qualified charities and those funds were ultimately donated to THOSE charities (actual qualified charities) then your organization may have charitable deductions against the income

Lane :

Amutual benefit non-profit corporation or membership corporation, in the United States, is a type of nonprofit chartered by a your state that exists to serve its members in ways other than obtaining and distributing profits to them. Therefore, it cannot obtain502(c)(3)non-profit status as a charitable organization


And even though a mutual-benefit corporation can be non-profit or not-for-profit, but it still must pay regular corporate tax rates. A mutual benefit corporation will pay the same taxes as a regular for-profit corporation. (C corporation tax rates). Mutual benefit corporations must still file tax returns and pay income tax because they are not formed for a purpose that anyone in the world could benefit from. Mutual benefit corporations are formed for nonprofit purposes like managing a condo association, a downtown business district, or a homeowners association.

Lane :

If you'll come back and share more detail we can go further here, but again, simply incorporating as a non-profit doesn't ALWAYS make the income from operations exempt from taxes

Lane :

I still don't see you coming into the chat here ... I'll move s t the Q&A mode ... Maybe that will help

Lane :

Please lt me know if you want to talk more on this

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
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Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Hi Caleb

Can you provide a little more info ... what the fundraisers were for, how the money was then used, etc.

I may be able to help

Thanks
Lane
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Customer reply replied 4 years ago

Our organization is establishing an educational institution. We held a fundraiser with community members to receive some seed money to open a school. The fundraising money will be used to up front lease costs, renovations, start up school costs, etc. The money currently is sitting in our bank account and has not yet been used, we expect to use the money when the need arises (around February 2014 most likely). We have tried to apply for a 501(c)3 status by filling out form 1023, however since the school is not in operation at the moment we do not qualify.


 


The question then is, with the money already received, do we have to pay "income" taxes on this amount. With that, which forms would we file for the 2013 tax year (we were incorporated in July 2013) and are there any deductions we can take?


Does the school have a religious affiliation, per chance?

If not, then you'll use the regular 1120 federal corporate form, but, yes there are start up expenses that can be deducted .. along with all of the normal operating expenses of a business such as utilities, salaries, etc.

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Customer reply replied 4 years ago

In our articles of incorporation we put religious context on how the corporation would operate. We share the same address as one of our religious institutions, however we don't necessarily associate ourselves with them.


OK, first see this: http://www.sba.gov/community/blogs/community-blogs/small-business-cents/startup-cost-tax-deductions-%E2%80%93-how-write-expense

And on the religions organization piece?

Here's what the IRS guide for religions organizations says:

To qualify for tax-exempt status, such an
organization must meet the following requirements

■ the organization must be organized and operated
exclusively for religious, educational, scientific, or other
charitable purposes,
■ net earnings may not inure to the benefit of any
private individual or shareholder,
■ no substantial part of its activity may be attempting
to influence legislation,
■ the organization may not intervene in political
campaigns, and
■ the organization’s purposes and activities may not
be illegal or violate fundamental public policy


However, to err on the conservative side, you should know this:

Automatic Exemption for Churches

Churches that meet the requirements of IRC section
501(c)(3) are automatically considered tax exempt and
are not required to apply for and obtain recognition of
tax-exempt status from the IRS.

Religious Organizations:

Unlike churches, religious organizations that wish
to be tax exempt generally must apply to the IRS for
tax-exempt status unless their gross receipts do not
normally exceed $5,000 annually.

You may want to look at a service such a Legal Zoom for filing the Form 1023. They have a turnkey service, but won't be as expensive as using an attorney.

But yes, in the mean time, you should use all of the normal expenses that any other corporation can use to lower it's taxable income.

lane
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Hi Caleb

I'm just following up with you to see how everything is going. Did my answer help?


Let me know,
Lane
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Caleb,

I was just doing some research to see if I could find anything else regarding your issue.

This site (a law firm specializing in non-profits) is actually talking about 501(c)(3)s that have had their exempt status revoked....

Two thins may still apply:

(1) They verify that if you're a corporation that you'll have to file the 1120 as we discussed BUT MOST IMPORTANT...

(2) They say that donors may be able to deduct their contributions once the tax exempt status is reinstated.

They say: (Note the sentence, where I've underlined)

If our nonprofit’s 501(c)(3) tax-exempt status has been revoked, may donors continue to receive a tax-deduction?

No. Donations received after official notification of revocation of your tax-exempt status as a 501(c)(3) are no longer tax-deductible.

Individuals can always donate, but only upon official notification of re-instatement of your 501(c)(3) tax-exempt status may your donors receive tax-deductibility for their gifts.

People who donated to the organizations before their status was revoked can still claim the deductions, according to the IRS.



Here's the site: http://www.cullinanelaw.com/nonprofit-law-101-youve-automatically-lost-tax-exemption-now-what/

I know this isn't the magic answer, but if those that have lost status can provide for a deduction once status is re-granted... the maybe this means that those awaiting or expecting the status can provide the deduction once that status is granted.


Just looking to see if I could find anything at all for you ... might be worth a quick call to discuss your situation with them: (I have no association with them, it's just that their area of expertise really seems to apply here).

Hope this helps.

And again, as I mentioned before there ARE things that the corporation can deduct NOW to offset any income for now.

Lane

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Customer reply replied 4 years ago

Hi Lane,


All of these answer are helping a lot, thank you! However, a few questions still remain.


 


Maybe if I try and rephrase the question it will have better clarity.


 


A non-profit corporation, incorporated in July 2013. The articles of incorporation and by-laws include religious context in which the corporation will operate, however, the corporation does not associate itself with a specific religious institution. The corporation was founded in order to establish a public charter school and provide other educational services long-term. The corporation attempted to apply for 501(c)3 status, but did not qualify as the school is not in operation until August 2014. Fundraisers have already taken place and contributions were made to the non-profit corporation. The corporation will use the funds as defined in the articles of incorporation and by-laws. There is no officer/executive/board compensation.


 


The question is, is the amount already collected and any further contributions received by the corporation without the 501(c)3 status, subject to income taxes or any other type of tax?



Does this require the 1120 or the 990 since we intend to apply for our 501(c)3 status and are incorporated currently as a non-profit corporation?


Hi Caleb,

First, IRS does consider you as qualified.

(c) Charitable contribution defined.--For purposes of this section, the term “charitable contribution” means a contribution or gift to or for the use of--(1) A State, a possession of the United States, or any political subdivision of any of the foregoing, or the United States or the District of Columbia, but only if the contribution or gift is made for exclusively public purposes.(2) A corporation, trust, or community chest, fund, or foundation--(A) created or organized in the United States or in any possession thereof, or under the law of the United States, any State, the District of Columbia, or any possession of the United States;(B) organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals;(C) no part of the net earnings of which inures to the benefit of any private shareholder or individual; and(D) which is not disqualified for tax exemption under section 501(c)(3) by reason of attempting to influence legislation, and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.A contribution or gift by a corporation to a trust, chest, fund, or foundation shall be deductible by reason of this paragraph only if it is to be used within the United States or any of its possessions exclusively for purposes specified in subparagraph (B). Rules similar to the rules of section 501(j) shall apply for purposes of this paragraph.

26 U.S.C.A. § 170 (West)
I've underlined the applicable part of the tax code above.

So, legally, you satisfy the definition of non-profit under Title 26, the internal revenue code.



BUT you're not in the system yet SO you need to be aware of a couple of things:

27th month rule
In order to receive a tax-exemption dating from the date of your incorporation you need to file the 1023 within 27 months of your incorporation.

If you file after 27 months, your exemption will only be effective from the application's postmark date.

 

You can file for an extension of the 27 month deadline by attaching to your 1023 a statement providing the reasons why you failed to complete the 1023 application process within the 27-month period after your incorporation.

 

You can find the acceptable reasons in the INSTRUCTIONS for form 1023. They include bad advice and information from a lawyer, accountant, or IRS employee.

Filing the 990

If your organization claims to be tax-exempt and intends to file your 2300 with the IRS by the end of the 27th month you must file Form 990 (or 990-EZ or 990-N as appropriate) during the 27 month period, even though you have not received determination yet. (The determination letter from IRS is your best PROOF of tax exempt status).

 

Larger nonprofits that have gross receipts of more than $50 ,000 have to file Form 990 or 990-EZ.

 

Smaller non-profits having gross receipts of less than $50,000 should file the 990-N.

 

 

 

I spoke with a tax law professor of mine about this. and filing the 1120 only applies when you have LOST tax exempt status.

 

By the way ... NOT filing the 990 is one of the best ways to do that.

 

 

 

When you do the 990, you'll notice that the receipts will be indicated as either related to the charity or not. Related receipts, (donations that meet with your articles and by laws, for the operation/construction of the school, for example, are related) will not be taxable.

 

Hope this clears it up for you.

 

Lane

 

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Hi Caleb,

I actually called the lawfirm that I linked above, and she confirmed the information, generally (not know all of your specifics), THAT I MOST RECENTLY POSTED.

You really might want to give them a call. (I have no association with the firm, other than seeing that they are knowledgable in the area)

I spoke with Molly Cullinane Again, here's their site and contact information.

We look forward to helping you and your nonprofit or social enterprise. Please feel free to call us or fill out this form so we can be in touch with you shortly.

Phone

512.298.2898

Mailing Address

Cullinane Law Group
9600 Escarpment Blvd. Ste. 745 – 208
Austin, Texas 78749



She mentioned that that can "expedite" the application process ... so it MAY be worth a phone call.

Lane

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Customer reply replied 4 years ago

Ok thanks for the information Lane.

You're welcome ... good luck.

Just be cognizant of that 27 month issue, especially, and I think you'll be fine.

(I'm a big fan of private education ... an opportunity to do it right)

Lane
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Lane
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12,875
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Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986

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