IRS simplifies 501(c)(3) advance ruling process
From the National Council of Nonprofit Associations
On Sept. 9, the IRS issued temporary income tax regulations that simplify the process for nonprofits to secure tax-exempt status by eliminating the advance ruling process for a section 501(c)(3) organization’s status as a public charity and not a private foundation.
What does this mean? Basically, this will not affect many nonprofits -- but for those that it does affect it is good news because it simplifies things. Under prior law, when an organization applied to the IRS for recognition as a tax-exempt charitable organization under Section 501(c)(3), the IRS would issue an “advance ruling” good for five years that essentially granted the organization the equivalent of a “probationary status” to allow it to prove it could meet the public-support test. Under the old system, at the end of the five years, the organization had to fill out yet another form to pull together information from past IRS Form 990s to show it had enough public support. That additional form is now eliminated.
Effective immediately under the new regulations, the IRS will automatically classify a new 501(c)(3) organization as a public charity for its first five years if it can show in its application that it can reasonably be expected to be publicly supported. The nonprofit then files its 990 or 990-EZ each year as required. No extra forms are involved.
How does this affect a nonprofit that has already received its final "definitive" tax-exempt determination letter? Not at all. If a nonprofit already has its final IRS determination letter, that determination letter overrides this change, which has no affect on the organization at all.
The IRS will continue to monitor the organization’s public charity status through public-support information reported annually on Schedule A of Form 990. The public-support test is based on a five-year computation period that consists of the current year and the four years immediately preceding the current year.
Notwithstanding the ruling process change, an organization still could lose public charity status if it cannot pass the public-support test for two consecutive years. In that case, it will be reclassified as a private foundation as of the start of the second consecutive year. To avoid unexpectedly losing the public charity classification, a nonprofit should carefully track its public-support information throughout the year instead of waiting until the end of the tax year when it is preparing Schedule A. For more information about record-keeping, see Publication 4221-PC, Compliance Guide for 501(c)(3) Public Charities.
How does this affect a nonprofit that is still in the five-year window under the old process? The new rules affect only organizations whose advance ruling periods have not yet expired or that expired on or after June 9, 2008 and before Sept. 9. An organization “in process” will automatically be classified as a public charity for its first five years of existence regardless of the support actually received. It will no longer need to file Form 8734 with the IRS at the end of its advance ruling period. It must file annual returns, however, and beginning with its sixth taxable year and all succeeding years, it must meet the public-support test as shown on the revised Schedule A of Form 990.
The advance ruling determination letter that the organization received when it applied to the IRS for a tax exemption is now considered by the IRS to be the nonprofit’s final determination letter. The organization and its donors may rely on that letter with respect to the organization’s public charity classification unless the organization no longer meets the public support test and the IRS changes that status and sends a notice of the change.
