Until 1969, there was no legal requirement that an organization must file with the IRS to obtain tax-exempt status. This status was automatic if the organization could demonstrate that it met the requirements set forth in Section 501(c)(3) of the tax code. In other words, an organization claiming tax exempt status was presumed to be qualified unless the IRS determined to the contrary. However, in 1969, Section 508 was added to the tax code, specifying that no organization would be treated as tax-exempt unless it applied to the IRS for tax-exempt status. Thus Form 1023 was born as the tax-exempt status application.
Some exceptions were carved out, however. Three classes of organizations do not have to apply for tax exempt status:
1. Churches, interchurch organizations of local units of a church, conventions, and associations of churches. In addition, integrated organizations within a church are covered. This includes men’s and women’s organizations, seminaries, mission society, and the like.
2. Any organization that is not a private foundation and normally has receipts of not more than $5,000 per year.
3. Subordinate organizations covered by a group exemption letter.
Group exemptions may be obtained by an organization having affiliates or subordinate organizations. This helps the affiliates avoid having to file for their own exemption, which would likely be approved due to its relationship with the central organization. The central organization files its own tax return and may include some or all of the subordinate organization on the return. For example Habitat for Humanity holds a group exemption, which applies to its affiliates. Each affiliate, however, files its own Form 990 annually. The group will be issued a Group Exemption Number (GEN) which each affiliate submitting its own Form 990 should include on the return.
Each subordinate organization must have its own employer identification number (EIN) even if it has no employees. To receive a group exemption the central organization must submit a letter requesting the exemption. This would include a list of the names, addresses, and EINs of subordinates to be included in the group exemption letter in addition to extensive information regarding the organization and its subordinates. In order to add or remove a subordinate organization, the central organization must submit a letter to the IRS listing subordinates that are to be added to or removed from the list. This is included the annual report required by the IRS, giving updated information about the central organization. It must be submitted at least 90 days prior to the end of its annual accounting period.
Group exemption letters can help subordinate organization avoid the cost and time of submitting its own application for recognition as a 501(c)(3) organization. However, if the organization should drop its affiliation, it would have to submit its own application as an independent organization. In addition, it is imperative that the controlling organization follow the IRS guidelines for maintaining the group exemption.
Connect with John Stancil on TaxConnections for more information.
Dr. John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.
Dr. Stancil has written for the Polk County Business Journal and has presented a number of papers at academic conferences. He wrote the Instructor’s Manual for the 13th edition of Horngren’s Cost Accounting. He is published in the Global Sustainability as a Business Imperative, Green Issues and Debates, The Encyclopedia of Business in Today’s World, The Palmetto Business Review, The CPA Journal, and in the NATP TaxPro Journal. His paper, “Building Sustainability into the Tax Code” was recognized as the outstanding accounting paper at the annual meeting of the South East InfORMS. He wrote a book entitled “Tax Issues Faced by U. S. Missionary Personnel Abroad ” that will soon be published.
He has recently launched a new endeavor, Church Tax Solutions, which presents online, on demand seminars on various church and clergy tax issues.
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