As a non-profit leader, you know tax-exempt status is a foundational part of your organization. Still, the IRS requires organizations to meet specific operational standards each year to maintain that status. Small shifts in funding, mission, or structure can affect your eligibility over time, creating a risk of non-compliance. A periodic review is the best way to avoid costly surprises and ensure your organization continues to operate on solid ground.
What It Means to Be Tax-Exempt
Tax-exempt status refers to an organization’s exemption from federal income tax under Section 501(c) of the Internal Revenue Code. The most common category is 501(c)(3), which applies to charitable, educational, and religious groups.
This status does not eliminate every tax obligation. Payroll, property, or state and local taxes may still apply depending on the organization's location and activities. To maintain their exemption, most nonprofits must file an annual Form 990, which provides transparency about finances and governance. A failure to file for three consecutive years results in automatic revocation of tax-exempt status.
The Crucial Difference Between Private Foundations and Public Charities
While both private foundations and public charities qualify as 501(c)(3) tax-exempt organizations, the IRS classifies and regulates them very differently based on their sources of funding.
Public charities receive a significant portion of their support from the general public, government grants, or other public entities. They have more operational flexibility and face fewer restrictions.
Private foundations are typically funded by a single source, like an individual, family, or corporation. They operate under stricter rules, pay a small excise tax on investment income, and must meet annual distribution requirements.
If your organization's funding sources have changed, your classification may no longer match your operations. A CPA can help confirm you are aligned with the most favorable IRS standards.
Trust, Corporation, or Association: Your Legal Structure
Before the IRS grants tax-exempt status, an organization must be formed as a legal entity under state law. The three most common structures are:
- Trusts: Often used for foundations or endowments, a trust is a legal arrangement where funds are set aside and managed for a specific charitable purpose.
- Corporations: A nonprofit corporation is the most common structure, providing liability protection for its leaders and governed by a board of directors.
- Associations: An unincorporated association is a simpler structure for groups with a shared purpose, but it offers less legal protection for its members.
Each structure carries different compliance and reporting requirements. Your organization's legal form should support its long-term goals and tax strategy.
When to Re-Examine Your Organization's Status
Even well-run nonprofits can drift out of compliance. It's time for a professional review of your tax-exempt status if:
- Your primary funding sources have changed.
- You have significantly expanded your programs or activities.
- You have started generating income from business-related activities.
- You haven’t filed a Form 990 in the last two years.
- Your governing documents or board structure have been updated.
A periodic compliance check is the best way to identify and resolve issues early.
How a CPA Provides Clarity
Tax-exempt organizations face complex IRS requirements that can change over time. A CPA specializing in nonprofit tax law can review your structure, confirm your classification, and prepare all necessary filings. They also provide crucial guidance on managing donations, grants, and income to ensure your organization remains fully compliant.
At Myrick CPA, we help nonprofits and tax-exempt entities across Washington, D.C., and the nation maintain compliance and operate with confidence. Our secure client portal and virtual consultations make it easy to share documents and get expert guidance from anywhere.
If you have questions or are concerned about your organization’s tax-exempt status, contact Myrick CPA.
