Download Essentials of Not-For-Profit Incorporation and Tax Exemption ©

Essentials of Not-For-Profit
Incorporation
and Tax Exemption ©
Community Exchange Series
Hosted by: Council Member
Laurie Cumbo
Presented by: Jacques L. David
January 28, 2017
Roadmap to the Presentation
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The presentation begins with a practical
introduction to creating a not-for-profit
corporation in New York State.
The presentation follows with a discussion of
how to obtain tax exempt status and to
comply with annual reporting requirements.
Agenda
Part I
Not-for-Profit Incorporation
3
Types of New York State
“other than for-profit” Corporations
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Not-for-profit corporations
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Educational corporations
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Formed under the Religious Corporations Law
Cooperative corporations
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4
Formed under the Education Law
Religious corporations
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Formed under the Not-for-Profit Corporation Law
Formed under the Cooperative Corporations
Law, except for workers cooperatives, which may
be formed for-profit
What is a Not-for-Profit Corporation?
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A not-for-profit corporation is an entity
chartered by the state and often is required
to register with the state charities bureau.
Tax exempt status is obtained from the
federal government following incorporation.
What is a Not-for-Profit Corporation?

Nonprofits are formed for many different
purposes, including making a profit.
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But profits must be used to support nonprofit
activities
No part of the nonprofit’s assets or income
may benefit the nonprofit’s board, directors,
officers or members except for the payment
of reasonable compensation for services
rendered to the organization.
Why Form a Not-for-Profit
Corporation?
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Limited liability
Perpetual existence
Clear corporate rules to follow
Easier to attract funding and obtain federal
and state tax exempt status
Is the Organization Ready to
Incorporate?
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Does the organization have a clear, well-defined
mission and a core group to do the work
required to achieve that mission?
Does the organization have nonprofit purposes?
Has the organization identified a population in
need of its services?
Does the organization have a plan, including a
detailed description of activities and a budget?
Types of New York State
Not-for-Profit Corporations: Charitable

Charitable Corporations
Defined in the N-PCL as “charitable,
educational, religious, scientific, literary, cultural
or for the prevention of cruelty to children or
animals.”
9
Types of New York State
Not-for-Profit Corporations: NonCharitable

Non-Charitable
–
10
Defined in the N-PCL as “other than a charitable
corporation, including but not limited to, one
formed for any one or more of the following nonpecuniary purposes: civic, patriotic, political,
social, fraternal, athletic, agricultural, horticultural,
or animal husbandry, or for the purpose of
operating a professional, commercial, industrial,
trade or service association.”
Steps to
Not-for-Profit Incorporation
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Reserve the name of the entity with the New
York Department of State (optional).
Draft a certificate of incorporation
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Be careful to state charitable purposes, if
501(c)(3) status will be sought.
Elements of the Certificate of
Incorporation
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Name of the Corporation
Type: Charitable or Non-Charitable
Whether the Corporation will have members
Statement of corporate purposes
Statement that the Corporation does not
require approval or consent of any
organization or governmental agency
Statement that Corporation is not formed for
profit
Elements of the Certificate of
Incorporation (cont’d)
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Statement that no substantial part of corporate
resources will be devoted to carrying out
propaganda or lobbying activities
Statement that corporation will not participate
in, or intervene in, any political campaign
Names and addresses of initial directors (at
least 3)
Name of Incorporator (must be at least 18
years old)
Dissolution statement
Steps to
Not-for-Profit Incorporation (cont’d)
1.
2.
3.
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Obtain waivers or approvals, if required, from
state or city agencies.
Submit the certificate of incorporation, together
with any waivers or approvals (and the
applicable filing fees), to the Department of
State for filing.
Upon the filing of the certificate of
incorporation, the incorporation becomes
effective and the entity’s corporate existence
commences.
Steps to
Not-for-Profit Incorporation (cont’d)

The corporation must then hold an initial
organizational meeting at which the following
matters are typically addressed:
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Adoption of the by-laws
Election of the directors and officers
Designation of a bank or credit union for the
organization’s accounts
Authorization to apply for 501(c)(3) (or other
applicable) tax exempt status and to register the
organization as a charity
Steps to
Not-for-Profit Incorporation (cont’d)
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16
In lieu of holding an initial organizational
meeting, the initial directors may pass a
unanimous written consent covering the
matters otherwise addressed at a meeting.
However, it is recommended that a new
corporation hold a meeting, to ensure that
the board of directors understands its role
and is fully engaged in the affairs of the
organization.
Registration Requirements
for Charitable Organizations
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Charitable organizations (and other
nonprofits that solicit donations in New York)
must register with the New York State
Attorney General’s Charities Bureau by filing
Form CHAR410.
Each registered nonprofit must annually file
Form CHAR500 with the Charities Bureau.
Agenda
Part II
Federal, State & Local Tax Exemptions
18
Why Apply for Federal Tax Exemption?
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The organization will be exempt from paying
federal tax on income.
Donors to 501(c)(3) tax exempt organizations
receive tax deductions for their donations.
The organization will have an easier time
obtaining state and local tax exemptions.
Many nonprofits cannot survive unless
recognized as a 501(c)(3) organization.
Bulk mailing discounts are available.
Limits on 501(c)(3)
Tax Exempt Organizations

The organization must be organized and
operated exclusively for one of the following
purposes:
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Religious
Charitable
Scientific
Literary
Educational
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Testing for public safety
For prevention of cruelty to
children or animals
To foster national or
international sports competition
Limits on 501(c)(3)
Tax Exempt Organizations (cont’d)

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The organization must be organized to serve
a charitable class (and not solely to benefit
an individual).
No private inurement. Examples include:
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Excessive compensation to employees
Certain business relationships between the
corporation and its directors and officers
The IRS imposes “intermediate sanctions” in
private inurement cases (IRC Sec. 4958).
Limits on 501(c)(3)
Tax Exempt Organizations (cont’d)
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Not more than minor activity influencing
legislation (no more than ~5% of total
revenues).
“Lobbying” means attempting to influence
legislation
If engaging in lobbying, take the “h election”
(“lobbying expenditures test”):
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The organization can do additional lobbying by
making the “501(h) election”
Can spend ~20% of revenues on lobbying
Limits on 501(c)(3)
Tax Exempt Organizations (cont’d)
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No intervention in political campaigns
No purposes that violate the law or public
policy
Limit on revenues from unrelated business
income
Tax on unrelated business income
Conservation of charitable assets
Limits on 501(c)(3)
Tax Exempt Organizations (cont’d)
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If the organization dissolves, its assets must
be distributed to another 501(c)(3)
organization.
A significant portion of revenues must come
from public sources, otherwise the
organization will be treated as a private
foundation rather than a publicly supported
charity, triggering additional, often crippling
regulations.
Steps to Take Prior to Applying
for Tax Exempt Status
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A 501(c)(3) nonprofit must be organized and
operated exclusively for one of the charitable
purposes outlined in the Internal Revenue
Code. Failure to do so will result in denial or
revocation of tax exempt status and other
penalties and fines.
Organizational requirements:
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Incorporate as a not-for-profit corporation
State tax exempt purposes in the charter.
Applying for
Federal Tax Exempt Status
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Obtain an Employer Identification Number
(“EIN”) using IRS Form SS-4
Complete and file IRS Form 1023 for
recognition as a 501(c)(3) organization or
Form 1024 for recognition as a 501(c)(4), (5),
(6), (7) or (10) organization
Applying for
Federal Tax Exempt Status: 1023-EZ
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File Form 1023-EZ within the first 27 months
of the organization’s incorporation to ensure
exemption begins retroactively on the date of
incorporation.
Pay $275 application fee, as applicable,
depending on anticipated or actual revenues.
(Annual gross receipts don’t exceed $50,000
in any of the past 3 years, and don’t exceed
$50,000 in any of the next 3 years)
Applying for
Federal Tax Exempt Status: 1023-EZ
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Key elements of the Form 1023-EZ include:
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Applicant Information (name, address, EIN,
phone, information about officer or directors)
Organizational Structure (e.g. corporation,
unincorporated association, or trust, date and
state of incorporation, information about
organizing documents)
Description of nonprofit activities and activities
that organization will not engage in
Information to determine classification as a public
charity or private foundation
Federal Reporting Requirements
for Exempt Organization
Which Forms Do Exempt Organizations File?
 IRS Form 990-N (e-Postcard): Gross receipts
normally ≤ $50,000
29

IRS Form 990 E-Z or 990: Gross receipts <
$200,000, and Total assets < $500,000
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IRS Form 990: Gross receipts ≥ $200,000,
and Total assets ≥ $500,000
Federal Reporting Requirements
for Exempt Organizations (cont’d)

IRS Form 990-T (and corresponding New
York State Form CT-13)
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Required to file if the organization has more than
$1,000 in unrelated business income.
The Pension Protection Act of 2006 provides
for automatic revocation of tax exempt status
upon failure to file the Form 990 for three
consecutive years.
State and Local Tax Exemptions
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New York State corporate tax exemption
New York State sales tax exemption
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Applies to New York State sales tax on receipts
from the sale of personal property, sales, and
admission charges (with certain exceptions)
New York City corporate tax exemption
State and Local Tax Exemptions (cont’d)
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The New York State/City real property tax
exemption.
Some 501(c)(3) organizations that own real
property are exempt from paying state and
city property taxes under the following
conditions:
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The lot must be owned by a nonprofit.
The property must be used exclusively to
carry out the organization’s exempt purposes
Fiscal Sponsorship
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Fiscal sponsors (the “sponsor”) are 501(c)(3)
organizations that receive tax deductible
contributions on behalf of organizations or persons
that have not obtained 501(c)(3) status (the
“project”).
After taking an administrative fee, the 501(c)(3)
sponsor then disburses the money to the project for
uses that are appropriate for a 501(c)(3) exempt
organization.
A fiscal sponsor is responsible for the proper
expenditure of the funds it disburses to a project.
Fiscal Sponsorship (cont’d)
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Fiscal sponsorship is usually only a short-term
solution because of the administrative fees paid and
the lack of autonomy.
A fiscal sponsor and the non-501(c)(3) organization
should have consistent purposes.
The IRS has indicated that “control” and “discretion”
are the hallmarks of a fiscal sponsorship: the
sponsor must exercise control over the funds and
discretion regarding disbursements.
Fiscal Sponsorship (cont’d)
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A written fiscal sponsorship agreement
should be entered into setting forth
provisions for:
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administrative fee to be charged by the sponsor
mutual access to financial records
the procedure for disbursing funds
cooperation in preparing any necessary reports
termination of the agreement
…and finally…
THE END.
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