Obtaining and Maintaining Tax Exempt Status Lisa Chaffee, CPA Tonya Schlaht, CPA EideBailly www.eidebailly.com

Outline for Today History of the requirements of Exempt Organizations Form 1023 Application for Tax Exempt Status Annual Compliance Forms and Tax Filings Resources and Additional Information

Exempt Organization Requirements Must be organized and operated for exempt purposes Organizing document requirements Must define a charitable mission Include limitations on activities Assets must be permanently devoted to charitable purposes Dissolution clause Operating requirements Must benefit broad segment of the general public Must not provide private benefits to insiders May not engage in political activities

Public Charity Status Presumed to be a private foundation unless publicly supported Private Foundation Support typically comes from limited number of donors Subject to restrictions on activities with insiders Typically meet charitable purposes making grants to other nonprofit organizations Public Charity Support comes from general public Board should not be controlled by insiders Typically meet charitable purposes by conducting activities

Public Charity Options Publicly supported Organization normally receives at least 33 1/3 % of its support from direct or indirect contributions from the general public, other publicly supported organizations, and the government. Limitations are applied on amount that can be included in calculation by each donor Government and publicly supported organization contributions are not limited Facts and circumstances test available

Public Charity Supporting Organization Exempt purpose is primarily to support one or more other exempt organizations versus receiving contributions from the general public Usually identified in the Articles and Bylaws Supported organization typically controls the supporting organization Board is appointed by the Supported Organization Same individuals are on board of both Can not be controlled by donor/donor family

Process Identify board of directors Create organizing documents (Articles, Bylaws) Acquire Employer Identification Number Apply for tax exempt status Submit Form 1023 Application for Exempt Status to obtain tax exempt status from IRS Typically takes three to six months for approval Establish separate banking accounts Maintain separate books and records

Exempt Organization Reporting Required Filings Form 990 – Exempt Organization Information Returns Unrelated Business Income Tax Filings State Filings Charitable solicitations reporting Donation substantiation reporting Subject to public disclosure requirements

Form 1023 Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue code Purpose of form When to file Public inspection

Form 1023 Part I: Identification of Applicant Organization name/mailing address Employer Identification Number Monthly annual reporting period ends Primary Contact Represented by an Authorized Representative Incorporated Date

Form 1023 Part II: Organizational Structure Are you a: Corporation Limited liability company Unincorporated association Trust Have you adopted bylaws?

Form 1023 Part III: Required Provisions in Your Organizing Document Exempt purpose: Charitable, religious, educational, and/or scientific Example— “The organization is organized exclusively for charitable, religious, educational, and scientific purposes under section 501 (c)(3) of the Internal Revenue Code, or corresponding section of any future federal tax code.

Form 1023 Part III: Required Provisions in Your Organizing Document Dissolution Clause: Must permanently dedicate your assets for a section 501(c)(3) purpose Example: “Upon the dissolution of this organization, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or corresponding section of any future federal tax code, or shall be distributed to the federal government or to a state or local government, for a public purpose.”

Form 1023 Part IV: Narrative Description of Your Activities Describe past, present, and planned activities in a narrative. What is the activity? Who conducts the activity? When is the activity conducted? Where is the activity conducted? How does the activity further your exempt purposes? What percentage of your total time is allocated to the activity? How is the activity funded?

Form 1023 Part V: Compensation and other Arrangements With Your Officers, Directors, Trustees, Employees, and Independent Contracts Names, titles, and mailing addresses of officers, directors, and trustees Relationships Board qualifications

Form 1023 Part V: Continued Establishing and approving compensation Conflict of interest Purchase of goods, services, or assets from highest compensated employees Arm’s length Fair market value

Form 1023 Part V: Continued Leases, contracts, loans or other agreements with highest compensated employees Written or Oral Arrangements How Terms are Negotiated Fair Market Value

Form 1023 Part VI: Your Members and Other Individuals and Organizations That Receive Benefits From You Providing goods, services, or funds to individuals Providing goods, services, or funds to organizations Part VII: Your History Successor to another organization

Form 1023 Part VIII: Your Specific Activities Political Campaigns/Influence Legislation Gaming Activities Fundraising Government Units Economic Development Develop/Manage Activities or Facilities Joint Ventures/Limited Liability Companies Childcare Organizations

Form 1023 Part VIII: Continued Intellectual Property/Contributions Operations in a Foreign Country Grants, Loans to Organizations Grants, Loans to Foreign Organizations Closer Connections with Organizations Cooperative Service Organization of Operating Educational Organizations Charitable Risk Pool Operating in a School

Form 1023 Part VIII: Continued Provide Hospital or Medical Care Providing Low-Income Housing for Elderly or Handicapped Providing Scholarships, Fellowships, or Educational Loans

Form 1023 Part IX: Financial Data—Change to Part IX Advanced ruling period eliminated If in existence: <5 years: financial data for each year in existence and provide projections for future years for a total of: 3 years if you have not completed 1 tax year 4 years if you have completed 1 tax year > = 5 years: complete the schedule for the most recent 5 years Separate statement needed for 5th year (as only 4 columns on the form)

Form 1023 Part IX: Financial Data – Method of Accounting Cash basis – include income when it received, and claim deductions when expenses are paid Accrual basis – include items when they are earned and claim deductions when they are incurred Government Accounting Standards Board (GASB) has new rules that require disclosure in the governments statements if certain criteria are met

Form 1023 Part IX: Financial Data – Statement of Revenue & Expenses Gifts, grants, and contributions Gross investment income Expenses Grants and assistance to governments, organizations, and individuals Compensation Fees for services Office expenses Insurance expense

Form 1023 Part IX: Financial Data – Balance Sheet Assets Cash Investments Liabilities & Fund Balances/Net Assets Accounts Payable Fund Balance Net Assets

Form 1023 Part X: Public Charity Status Part XI: User Fee Information Private Foundation Public Charity Private Operating Foundation Part XI: User Fee Information Gross receipts $10,000 and under = $400 Gross receipts over $10,000 = $850

Form 1023 Other Information Assembled Package User fee Form 1023 Checklist Form 2848 Form 1023 Articles Bylaws Attachments After the Form 1023 is Submitted Initial recognition letter Determination letter

Annual Compliance What is the Form 990? It is not a “tax form” It is an “information return” It is also Public document through which nonprofits are held accountable An opportunity for nonprofits to communicate with users

Annual Compliance Contains detailed information that is NOT included in the audited financial statements Executive compensation Transactions with Board members Sources of revenue Accomplishments Expense allocations Detail of Investment Organization Structure

Annual Compliance Readers of the Form 990 Widespread availability Community members Board members Employees or other stakeholders Internal Revenue Service (IRS) Watchdog organizations Widespread availability Internet sites Public inspection requirements

Annual Compliance Public Inspection Requirements for 501(c)(3) Form 990 and 990-T for past three years All attached schedules and statements Names and addresses of contributors on Schedule B is not open to public inspection Application for Exempt Status – Form 1023

Annual Compliance IRS may assess incomplete return penalties On organization and on “responsible individual” $20/day capped at $10,000 $100/day capped at $50,000 for organizations with revenue > $1 million Automatic revocation – failure to file for 3 years

Annual Compliance Form 990 Gross receipts > $200,000 - or – Total assets > $500,000 Core form & additional schedules Due date – 4 and ½ months after year end Three month extension available (automatic) Second three month extension if needed (if approved)

Annual Compliance 990 Overview Snapshot of key financial, compensation, and governance and operational information Requires two-year financial comparison Includes the number of volunteers (FT or PT) Reports UBI (unrelated business income) if any Requires description of mission

Annual Compliance Form 990-EZ Filed by organizations with: Gross receipts between $50,000 and $200,000 and Assets less than $50,000 Core form – financial, program service, TDOKEs and other info Additional schedules – Form A, B, C, E, G, L, N, O may be required

Annual Compliance Form 990-N E-postcard Required to be filed by small organizations Less than $50,000 average gross receipts Three years of non-filing will result in revocation of exempt status www.epostcard.form990.org Items needed Organization name/DBA/address < $50K Gross receipts and not terminated Name/address of principal officer

Annual Compliance Other Annual Reports ND Secretary of State IRS www.nd.gov/sos/nonprofit Nonprofit Annual Report form Charitable Organization Registration Statement Charitable Organization Annual Report IRS Form 1099 – payment for services Forms W2 – payments considered as wages

Annual Compliance Other Grant writing Publication 526 – Charitable Contributions Contribution substantiation Quid Pro Quo Publication 557 – Tax-exempt Status for Your Organization Grant writing Awareness of what funds are available Develop process of applying for grants

Resources Websites www.irs.gov/charities www.guidestar.org How to apply Life Cycle www.guidestar.org www.eidebailly.com/industries/non-profit www.stayexempt.irs.gov www.boardsource.org

Questions and Concerns

Thank You! Lisa Chaffee, CPA Tax Senior Manager Eide Bailly LLP 1730 Burnt Boat Loop, Ste. 100 PO Box 1914 Bismarck, ND 58502-1914 lchaffee@eidebailly.com T 701-255-8438 F 701-224-1582 www.eidebailly.com Tonya Schlaht, CPA Tax Manager Eide Bailly LLP 1730 Burnt Boat Loop, Ste. 100 PO Box 1914 Bismarck, ND 58502-1914 tschlaht@eidebailly.com T 701-255-8481 F 701-224-1582 www.eidebailly.com