Friday, March 17, 2006

Better late than never

Recently, several unrelated clients have asked me about the timing/deadline for filing the IRS application for tax exempt status. Although I knew the general rules, my conversation with an IRS technical assistance agent the other day clarified a few nuances. . . . All the info below assumes an incorporated nonprofit entity.

If the organization is applying for 501c3 status and the application is submitted within 27 months of incorporation, then exempt status will be retroactive back to the date of incorporation. If the application is submitted after that 27 month deadline, then the applicant can still obtain 501c3 exempt status but with the following caveat. For the period between the incorporation date and the date the organization filed the application more than 27 months later, the organization will be deemed to have had 501c4 status rather than 501c3 status. The 501c3 status will be effective only as of the date the organization filed the application and thereafter - not back to the incorporation date.

With respect to applications for other types of exempt status (e.g. 501c4, c5 or c6) there is no hard deadline to file the application according to the agent I spoke with - a nonprofit organization can apply anytime and exempt status will be retroactive back to the date of incorporation if it's granted.

Another question I've been asked lately by several clients is "what tax return do we file while exempt status is pending?" The IRS agent told me the following:

If 2005 was the organization's first year of operation, for instance, and the organization had less than $37,500 in revenue for 2005, then it does not have to file the 990 for 2005 at all if an application for exemption is pending.

If 2005 was the organization's first year of operation and it had $37,500 or more in revenue (and it has an application for exemption pending), then it must file the 990 and check the box that says tax exempt status is pending.

But, I asked the agent, "What if the organization has been incorporated a long time, 2005 was the first year it had any revenue, and it has never filed for exempt status? What return do they file then?" Unfortunately, where there is no exemption or pending application on file, the organization must file a Form 1120 (corporate return) and pay any tax that is owed. Of course, if the organization's expenses for 2005 offset the revenue, then little or no tax may be owed, and if the organization receives exempt status later, it can apply for a refund of the taxes paid. However, wouldn't it be smarter to just get the exempt status in the first place?