Termination of 501(c)(3) Exempt Status
Public and private charities may be subject to termination of their exempt status either by voluntarily or involuntary acts. There are very limited circumstances where a failure to adhere to formalities can be resolved without having to file a new exemption application, therefore it is important to understand the activities that can lead to exemption status loss. These activities vary between public and private charities.
In order to keep their exemption status intact, public charitable organizations must do the following:
- Refrain from participating in political campaigns of candidates for local, state or federal office;
- Restrict its lobbying to an insubstantial part of its total activities;
- Ensure that its earnings do not inure to the benefit of any private shareholder or individual;
- Not operate for the benefit of private interests such as those of its founder, the founder’s family, its shareholders or persons controlled by such interest;
- Not operate for the primary purpose of conducting a trade or business that is not related to its exempt purpose, such as a school’s operation of a factory;
- Not provide commercial-type insurance as a substantial part of its activities;
- Not have purposes or activities that are illegal or violate fundamental public policy; and/or
- Satisfy annual filing requirements.
Private charities may terminate their exempt status in one of four ways:
- Voluntary termination by notifying the IRS of intent to terminate and paying a termination tax;
- Involuntary termination for either willful repeated violations or a willful and flagrant violation of the private foundation excise tax provisions and becoming subject to the termination tax.
- Transfer of assets to certain public charities; and/or
- Operating as a public charity for a continuous period of 60 months after giving appropriate notice.
It is extremely important to adhere to all of the formalities of 501(c)(3) organizations in order to not subject the charity to inadvertent termination of exemption status. Also, upon dissolution, the NPO must distribute all of its assets to one or more §501(c)(3) organizations or governmental entities.
Learn more about nonprofit corporations:
- Overview of Nonprofit Organizations
- Incorporating the Nonprofit Corporation
- Types of Tax-exempt Organizations
- Qualifying as a 501(c)(3) for Tax-exempt Status
- Required Annual Filings to Maintain the Tax-exempt Status
- Termination of 501(c)(3) Exemption Status
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