Set up That Nonprofit Organization Properly

[Pages:2]Set up That Nonprofit Organization Properly

By Kim Manning, CPA

Do you have something special to contribute to the world? Every day, individuals are inspired to start a nonprofit to help serve their community, but keeping the Tax Man happy by setting up your nonprofit organization properly and filing all the correct annual returns can be daunting. Failure to comply with the requirements can get you a letter from the IRS or the Franchise Tax Board asking for large penalties.

In order to be able to solicit tax-deductible contributions, the entity must obtain its tax-exempt status. If this is not done properly, the organization will be considered a corporation and will be required to pay both federal and state taxes.

According to Section 501(c)(3) of the Internal Revenue Code, the organization must be organized and operated exclusively for the following purposes: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to children or animals.

The entity should incorporate as a nonprofit public benefit corporation with the California Secretary of State, then obtain a federal employer identification number (EIN) with the IRS. After filing a statement by domestic nonprofit corporation with the California Secretary of State, the organization may apply to the IRS for tax-exempt status using Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. The entity generally has 27 months from inception to apply for the IRS tax exemption. Once it passes the 27month deadline, it's up to IRS discretion to grant retroactive tax exemption and may be more difficult to obtain tax exemption from the start of operations.

Obtaining tax-exempt recognition from the IRS does not automatically give the organization tax exemption from the State of California, although having already obtained it does make the process of applying to the State easier. Use California Form 3500, Exemption Application, if the entity has not yet obtained IRS taxexempt status. If the organization already has its IRS tax exemption, use the shorter California Form 3500A. The entity is also required to register with the Attorney General's Registry of Charitable Trusts using Form CT-1 if it has received contributions.

Nonprofit organizations may also obtain tax-exempt status without being legally incorporated. However,

an entity of this sort, called an association, would have no legal existence separate from its members. Consequently the members could be held personally liable for the association's debts.

Nonprofits are required to file three forms annually. The IRS requires Form 990/990EZ/990-N, the California Franchise Tax Board requires Form 199/199N, and the Attorney General's Office's Registry of Charitable Trusts requires Form RRF-1.

Sound confusing? Starting and sustaining a nonprofit are not easy tasks, but we applaud your commitment to helping others. Call us for additional information ? we want to keep you running properly so your efforts can be put towards helping make the world a brighter place.

LSL CPAs ? Focused on You (714) 672-0022

Connect with us: Facebook: @lslcpas LinkedIn: Twitter: @lslcpas Instagram: lsl_cpas

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