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01-Dec-2015

501(c)(?)

Most of us have been involved in some type of organization that is considered a not-for-profit entity. Typically, an organization will start as a charitable group with a purpose or mission that benefits the public. Then they may become more formalized by actually incorporating. As the group plans for the future and sustainability, being recognized as a nonprofit by the government is a necessary step. It is likely a person involved in some way may not even realize the organization is a nonprofit corporation. There are many reasons an organization may fit this category and choose this type of legal status. Let’s examine some of the important factors to consider in this process.


Is your organization actually a nonprofit?

-Nonprofit businesses use fundraising and the earnings from their activities to promote the mission or programs of their organization. Most nonprofits are created to serve a community or public purpose rather than the financial benefit of a private individual or group.

-Common nonprofit categories include Trade Associations: 501(c)(6), Social Clubs: 501(c)(7), Charities: 501(c)(3), Government and Political Groups: 501(c)(4).

-The most commonly known federal tax-exempt nonprofit status is a 501(c)(3) organization, which must be operated exclusively for “religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition..., or for the prevention of cruelty to children or animals...”


The best way to gauge if an organization should be a nonprofit is to answer the question, "Who will benefit from this business?" If the answer is the public or community then it is likely you should form a nonprofit.


Another consideration is the leadership of the nonprofit. If you are willing to form a board of at least three members and relinquish control of the activities and functions of the group to that board, then a nonprofit may be a good fit. It is legal for a nonprofit organization (NPO) to make money (subject to certain restrictions) and to provide reasonable compensation to its employees, however the organization’s funds must be used to operate the nonprofit or granted to other NPOs. Once established as a nonprofit corporation, the organization can own property and assets and apply for loans and grants.


Legalizing your status

-Once you have determined you qualify as a NPO you can register your organization’s name with the Nebraska Secretary of State’s office. You can do this online for a $30 fee. It is wise to make sure you have a name that is not being used by another entity in your community or even in the state if your organization’s reach is beyond your locality. First, research the name you are considering to be positive it is not already in use. Visit nebraska.gov to learn more.

-Once that is determined, register your name. You can reserve a corporate name with a $25-$30 Application for Reserved Name. Trade names are for existing companies who want to operate with another name.

-You will then need to file the Articles of Incorporation and confirm your nonprofit status with the State of Nebraska. This can also be done online. Reference Nebraska Revised Statute 21-1921 for required elements of the articles. Although this document can be written and prepared by a member or director of your -NPO, it is still advised to have an attorney review to ensure that your articles contain provisions required by the IRS to obtain tax-exemption under 501(c)(3).


By incorporating your nonprofit organization, you will also minimize the risk of personal liability for members and directors.


The next step is to register for a Federal Tax ID Number, also known as the Employer Identification Number or EIN. This can be done online with the IRS, using form SS-4. There is not a fee to apply for this number and if done online, the number is assigned immediately. However, the online application can only be completed between 7 a.m. – 10 p.m. Eastern Time, Monday through Friday. You will need this number for a variety of reasons as an organization:

Setting up a commercial bank account for your organization.

Applying for tax-exempt status.

Hiring employees to work within your organization.


Tax Status

  • -A motivating factor for becoming a 501(c)(3) nonprofit is the tax-exemption status that applies to this class of nonprofit organizations. This status can be claimed on both the Nebraska and federal level.
  • -The organization will generally not be required to pay state and federal income tax.
  • -Donations made to the organization are tax-deductible for the donor.
  • -Many grants are available to organizations with this IRS tax status.
  • -Many organizations are charitable in nature and rely upon the donations to support their purpose. People who make donations are more likely to do so when they can deduct the amount of that donation as a Schedule A itemized deduction on their income tax return.
  • -To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization, i.e. it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates, according to the IRS.

To be granted a nonprofit tax-exempt status from the IRS, an organization must complete and file an Application for Recognition of Exemption, Form 1023 or Form 1023EZ (for small nonprofits with less than $50,000 in annual gross receipts). The organization must also complete Form 8718, which is the determination of what the fee is to apply for this status. As of September 2015, if the annual gross receipts of the organization are expected to be under $10,000 then the fee is $400, and if annual gross receipts are expected to be more than $10,000, the fee is $850.


To get the tax-exempt status from the State of Nebraska, the organization simply incorporates as a nonprofit and is granted this status in conjunction with obtaining the federal tax exemption. If your organization will sell products to the public, then it will need to get a sales tax number from the Nebraska Department of Revenue by filing a Form 20, Nebraska Tax Application.

 

The NPO will have to complete Form 990 Income Tax Return (Return of Organization Exempt from Income Tax) yearly if more than $25,000 is earned in a year and if the total assets are more than $250,000.  Form 990-EZ can be filed by organizations with gross receipts of less than $200,000 and total assets of less than $500,000 at the end of their tax year.


Nebraska nonprofits are also required to file a biennial report with the State of Nebraska by April 1 of every odd-numbered year. Tax each year if more than $25,000 is earned in a year and if the total assets are more than $250,000.


Leadership

In order to stay in good standing as a nonprofit 501(c)(3) organization there must be bylaws, a board of directors and very organized records. Under Nebraska law, the minimum number of directors of a nonprofit corporation is three. Your board will need to vote on the bylaws and elect officers.

Minutes from each meeting should be kept on file. Any special licenses and permits should be applied for and there should be insurance purchased for the organization to protect the members and directors based on the activities of the group. The safe and accurate keeping of records is very important. Another suggestion is to do regular audits of the records, as this will often be required for the application of certain grants and specialized programs.


KEY CONTACTS:

Nebraska Secretary of State’s Office

1305 State Capitol

Lincoln, NE 68509

PHONE: (402) 471-4079 | FAX: (402) 471-3237

nol.org/home/SOS

Information & forms concerning tax and revenue considerations for nonprofit corporations in Nebraska

Nebraska Department of Revenue

301 Centennial Mall South, 2nd Floor

Lincoln, NE 68509

PHONE: (402) 471-2971 | (800) 742-7474

revenue.state.ne.us

Internal Revenue Service

(800) 829-3676

(703) 368-9694 FAX

irs.gov

Publication 557: Tax Exempt Status for Your Organization -information and application requirements for nonprofit organizations

Publication 583: Starting a Business & Keeping Records

Form 1023: Application for Recognition of Exemption Under 501(c)(3), and the packet that accompanies the form

Form 1024: Application for Recognition of Exemption Under Section 501(a)

Form 8718: User Fee for Exempt Organization Determination Letter Request

Form 990: Return of Organization Exempt From Income Tax

Form 990-EZ: Short Form, Return of Organization Exempt From Income Tax

Form SS-4: Application for Employer Identification Number


KEY DOCUMENTS:

  • -Articles of Incorporation
  • -Bylaws
  • -IRS Determination Letter
  • -1023 Application
  • -Minutes
  • -Meeting Agendas
  • -Calendar of Events
  • -Dues Statements
  • -Correspondence
  • -Contracts & Deeds
  • -Scrapbooks & Photo Albums
  • -Publications, Brochures & Advertising
  • -Journals: Cash, Receipts, Payroll
  • -General Ledger
  • -Bank Statements
  • -Canceled Checks
  • -Cash Register Tapes
  • -Receipts and Invoices
  • -Purchase Agreement for Assets
  • -Depreciation Schedules
  • -Guest Book Sign-in
  • -Contact List of Members or Service Area
  • -Records for Tracking Nonmember Income
  • -Tax Returns
  • -IRS Forms 990
  • -Return of Organization: Exempt from Income Tax) & 941 (Employer’s Quarterly Federal Tax Return)
  • -Employment Tax Return Forms: W-2 (Wage and Tax Statement), W-3 (Transmittal of Wage & Tax Statements) 1096 (Annual Summary and Transmittal of U.S. Information Returns) 1099 DIV (Dividends and Distributions)
  • -Audits and/or Compilations

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