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Forming a Tax-Exempt Organization

Posted by Pietro E. Canestrelli | Oct 20, 2020 | 0 Comments

With the current state of the world, charities are needed now more than ever. If you are contemplating creating a charity you should consult with a qualified tax attorney or advisor as the world of charities is more complicated than you would think.

In general, organizations described in IRC 501(c)(3) fall into two categories: private foundations and public charities. IRC 509 makes the statutory distinction between private foundations and public charities which is if you do not qualify as a public charity you are a private foundation. This difference is important because private foundations have much stronger rules against self-dealing and mandatory distributions.

There are basically two kinds of public charities: 1) organizations that engage in inherently public activities; and, 2) publicly supported organizations.

Organizations that engage in inherently public activities are typically what one thinks of as charities and include:

  • Churches;
  • Educational organizations;
  • Hospitals; and,
  • Governmental units of the United States

Publicly supported organizations are charities that normally receive a substantial part of their support from governmental units and/or from direct or indirect contributions from the general public. The “substantial part of support” requirement is met by satisfying a thirty-three and one-third percent support test or, alternatively, a “facts and circumstances” ten percent test.

To apply for recognition by the IRS of exempt status under IRC 501(c)(3) an organization must prepare and submit a Form 1023, Application for Recognition of Exemption.  The IRS charges a user fee of:

1) $400 for organizations whose gross receipts do not exceed $10,000 or less annually over a 4-year period; and,

2) $850 for organizations whose gross receipts exceed $10,000 annually over a 4-year period. 

This does not include the professional service fees paid to prepare and submit Form 1023.

Under California State law, a nonprofit public benefit corporation must be organized primarily or exclusively for charitable purposes. In addition, it must either 1) plan to obtain state tax-exempt status under IRC 501(c)(3), or 2) is organized to act as a civic league or a social welfare organization and plan to obtain state tax-exempt status under CR&TC 23701(f) and/or federal tax-exempt status under IRC 501(c)(4)... In contrast, a corporation organized for other than religious, charitable, civic league, or social welfare purposes will be a nonprofit mutual benefit corporation.

As you can see above, if you are thinking about forming a tax-exempt organization for charitable purposes it is important that you consult a qualified tax attorney or other professional before taking on this needed and fulfilling mission.


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About the Author

Pietro E. Canestrelli

J.D. LL.M Taxation Certified Bar Tax Specialist CEO


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