Forming Not-For-Profit Entities and Their Tax Exempt Status
Many religious, charitable, educational, and scientific activities can be carried out by not-for-profit organizations. Christian religious ministries other than churches often use this vehicle for conducting their activities. These organizations, if properly constituted and operated, can be made exempt from having to file the corporate income tax returns which business corporations must file. People making donations to tax exempt not-for-profit entities can claim charitable deductions for their gifts when they file their income tax returns. These charitable gifts are a great source of revenue for not-for-profit organizations.
Careful legal work is required to properly set up these organizations so that the tax exempt applications are successful. Most of these organizations are incorporated under the New York not-for-profit corporation law. Some of these corporations are membership organizations with a board of directors elected by the organization’s membership. Others have no membership and are run by a board of directors which is self-perpetuating. Educational organizations are sometimes chartered by the board of regents under New York’s education law. In any case these organizations must have bylaws which are carefully tailored for the tax exempt purpose and can withstand IRS scrutiny.
The incorporation of a not-for-profit corporation under state law does not give tax exempt status. An application to the internal revenue service is required, and the IRS must issue a tax exempt letter for the organization to be tax exempt and for gifts to be tax deductible under section 501(c)(3) of the Internal Revenue Code. These applications require that detailed information about the finances and activities of the organization be submitted together with information about the officers and directors of the organization. When the IRS issues these tax exempt letters, they are sometimes provisional for five years, and then later must be made permanent upon a further application.
If the organization is to own real estate and wants to avoid property and school taxes, there is a separate tax exempt application which must be made to the municipality. If the organization wants to buy things without paying sales tax, there is yet another tax exempt application which is made to New York State.
There are many pitfalls in the process of establishing and operating these organizations. Annual registrations (or a claim of exemption from registration) must be filed with the New York State for all charitable organizations. Good legal counsel is absolutely essential for a successful tax-exempt entity. This is the sort of legal work which requires that we have detailed information from the client on the particular purpose intended and how the organization will be operated. There are restrictions on the activities of tax-exempt organizations which if violated can lead to the revocation of the tax exempt status. If you are serious about establishing and operating these types of organizations, you should contact our office for more information.