There are many reasons why a tax-exempt organization, like a 501(c) might consider restructuring. For example, if a non-profit is struggling financially, it might decide to team up with another organization to cut costs and share resources. Or a non-profit might decide to move to a different state. These changes generally have a simpler restructuring process, but it’s important to follow certain steps.

An Easier Process

Tax-exempt organizations making certain changes to their structure used to be required to file a new exemption application — and create a new legal entity. But IRS Revenue Procedure 2018-15 changed the rules regarding non-profit restructuring. Now, in many cases, non-profits can simply report a restructuring on their Form 990. To be eligible for this simpler process, your restructuring must satisfy certain conditions:

First, your organization must be a U.S. corporation or an unincorporated association; be tax exempt as a 501(c) organization; and be in good standing in the jurisdiction where it was incorporated (or, in the case of an unincorporated association, where it was formed).

Second, your restructuring must involve one of the following:

1. Changing from an unincorporated association to a corporation,
2. Reincorporating a corporation under the laws of another state after dissolving in the original state,
3. Filing articles of domestication to transfer a corporation to a new state without dissolving in the original state, or
4. Merging a corporation with or into another corporation.

 
Your “surviving” organization is required to carry out the same exempt purpose that the original did. Its new articles of incorporation must continue to satisfy the IRS’s organizational test.

When The Rules Don’t Apply

There are some additional limitations to using Form 990 to report a restructuring. For example, the new rules don’t apply if your surviving organization is a “disregarded entity,” limited liability company (LLC), partnership, or foreign entity.

Also, surviving organizations still have reporting obligations — for instance, to report the restructuring on any required Form 990 for the applicable tax year. And these rules apply only to federal income tax exemptions. Your state’s laws could require you to file a new exemption application.

Will You Qualify?

Even though non-profit restructuring can be straightforward, you should talk to your tax advisors before making a move. It’s possible your plans won’t qualify under Rev. Proc. 2018-15 and that you’ll need to apply for a new exemption and clear other hurdles. Contact us for guidance.