We get a lot of calls from people with great ideas for charitable undertakings but often with little understanding of how to put those ideas into action. For many people, funds are limited and they want to use what money they have for the advancement of their causes, not to pay fees to attorneys (who can blame them?).
Our federal and state governments grant non-profit status and tax exemptions because the activities of those organizations are aimed at the common good. Therefore, government agencies have worked hard to make the legal steps necessary to create and operate a “non-profit” relatively simple, streamlined, and economical. This article addresses legal compliance and filings related to charitable organizations exempt under Section 501(c)(3) of the Internal Revenue Code. There are several other types of tax-exempt organizations, but 501(c)(3) organizations are the most common.
The primary characteristics of non-profit entities are that, after compliance with several legal prerequisites, they can solicit funding from the general public and, most importantly, can offer income tax deductions to the donors of these funds. Moreover, the corporation itself is granted an income tax exemption by the federal and state governments allowing it to accept the contributions without paying income tax.
Be aware however that, these tax exemptions do not apply to funds generated in a regularly carried-on trade or business of the entity not substantially related to its charitable purpose. These funds may be subject to “Unrelated Business Income Tax” or “UBIT.” An example of this is a gift shop operated at a museum to generate funds. Since the gift shop is presumably not directly related to the actual museum operation and is a regular source of income, such receipts may be subject to income tax. For information on UBIT, refer to IRS Publication 598.
Step 1: Create a Non-Profit Entity
The first step in the process of creating a non-profit, is to create a non-profit business entity under the laws of the state in which you will have your primary offices or operations. All states recognize and charter non-profit corporations and many states also have enacted statutes allowing a non-profit to be created and to operate as a limited liability company. New Mexico is not one of these states, and has not yet passed non-profit LLC laws. Whether a non-profit corporation or LLC, the practical difference is small, being mostly a matter of nomenclature.
In most states, the Office of the Secretary of State (SOS) issues a certificate or charter establishing the non-profit corporation after the filing of Articles of Incorporation (or Articles of Organization for an LLC) by the organization. The states provide various, recommended forms for this and other filings. In New Mexico, the entire formation process, including later-required filings can be accomplished online at: http://www.sos.state.nm.us/Business_Services/Domestic_NM_for_Non_profit_Corp.aspx.
Note that one of the documents to be filed with the NM SOS is the “Non-Profit Initial Report” and, each year thereafter, the “Annual or Supplemental Report.” The primary purpose of these reports is to report contact information, including the name and address of the organization and those of its officers and directors.
New Mexico statutes also require that “initial bylaws of a [non-profit] corporation shall be adopted by its board of directors.” Primarily, the bylaws establish how decisions in the operation of the non-profit are made and delineate the powers of the board of directors and officers. Forms for non-profit bylaws are fairly uniform and are widely available on the Internet, but do carefully read and revise whatever you chose to use, because they are important documents for your non-profit.
Step 2: Apply for Tax-Exempt Status
Once the non-profit corporation formation documents are filed and the legal entity is established, the second (and equally important) step, is to apply for its tax-exempt status. This application, IRS Form 1023 or 1023-EZ, is filed with the Internal Revenue Service and, once granted, also acts as a tax exemption under state law. Here again, there is an abundance of guidance and instructional materials available to assist in this step.
A good place to start is the IRS website for non-profits, entitled Tax Information for Charities and Other Non-Profits. This site contains various helpful links to assist in keeping your organization compliant from a tax reporting standpoint. It provides links for “Applying for Tax Exempt Status,” “Annual Reporting & Filing,” “How to Stay Exempt,” and others, including what to do to reinstate your exemption if it is revoked.
IRS Publications that provide all the information needed to obtain your tax exemption and to remain compliant are Publication 4220, “Applying for 501(c)(3) Tax-Exempt Status,” Publication 557, “Tax-Exempt Status for Your Organization,” and Publication 526, “Charitable Contributions.” These publications are available online, are very well-organized, and are great sources to answer your questions about tax compliance for your organization.
It is very important that you remember that, while exempt from actual income tax for its charitable operations, your organization is not exempt from reporting its charitable and financial activities. Each year, charitable organizations must file IRS Form 990 or Form 990EZ (for organizations with gross receipts of less than $200,000 and total assets of less than $500,000) at the end of their tax year. Both of these forms are available and fillable on the IRS website at https://www.irs.gov/uac/current-form-990-series-forms-and-instructions.
Step 3: In New Mexico, Register with the New Mexico Attorney General’s Office
Finally, in New Mexico you need to be aware of the “Charitable Solicitations Act,” N.M.S.A. §57-22-1 et seq. This act requires that every tax-exempt charitable organization in New Mexico, excepting religious and educational organizations, must register with the Office of the New Mexico Attorney General and annually report pertinent information, including sources and uses of funds and involved individuals. This act also requires registration of professional fundraisers. Information on this filing is available at http://www.nmag.gov/charity-registration-faq.aspx. Information provided on this annual report is available for inspection by the general public, and if you’re forming a non-profit outside of New Mexico, be sure to double-check for similar statutes in your domestic state.
Law 4 Small Business, P.C. (L4SB). A little law now can save a lot later. A Slingshot Company. Ask L4SB about its experience in compliance requirements applicable to non-profit organizations and in the operation of charitable organizations in general. We are happy to help with your organization’s compliance needs, and provide discounted rates to non-profits.