Restructuring can help certain non-profits reduce costs, combine resources, change legal forms, or move to another state. For some domestic organizations recognized as tax-exempt under Section 501(c), IRS guidance allows the surviving organization to retain its federal tax-exempt status without filing a new exemption application. However, this relief only applies when specific requirements are met.
If your organization is considering a structural change, review the federal tax rules, state requirements, and operational impacts before moving forward.
When Relief Applies
In the past, certain structural changes were treated as creating a new legal entity that had to file a new exemption application. Under IRS Revenue Procedure (Rev. Proc.) 2018-15, a qualifying surviving organization generally can retain its federal tax-exempt status without reapplying if it reports the restructuring on any required Form 990 for the applicable tax year.
To qualify for this simpler process, your restructuring must meet certain conditions. First, your restructured organization — or any merger partners — must be a domestic business entity classified as a corporation for federal tax purposes; be recognized as tax-exempt under Section 501(c); and be in good standing in the jurisdiction where it was incorporated or formed. Qualifying unincorporated associations classified as corporations for federal tax purposes are eligible.
Second, your restructuring must involve one of the following:
- Incorporating an unincorporated association under state law
- Reincorporating a corporation under the laws of another state
- Filing articles of domestication to transfer a corporation to a new state without dissolving in the original state
- Completing a statutory merger of one corporation with and into another corporation
The surviving organization must be a domestic business entity classified as a corporation for federal tax purposes, continue to carry out the same exempt purposes, and remain exempt under the same paragraph of Section 501(c). It can’t obtain a new Employer Identification Number (EIN). What’s more, the survivor’s articles of organization must continue to satisfy the IRS organizational test, including the requirement that assets be dedicated to exempt purposes.
Understanding Limitations
Rev. Proc. 2018-15 doesn’t apply if either your restructuring organization or the surviving organization is a disregarded entity, limited liability company, partnership, or foreign business entity. It also generally doesn’t cover a restructuring that begins with a trust, results in the surviving organization obtaining a new EIN, or seeks recognition under a different paragraph of Section 501(c).
Even when a new exemption application isn’t required, the surviving organization must report the restructuring on any required Form 990. Following a domestication or reincorporation in another state, it also must report any change of address on its next annual return or information notice. The surviving organization may separately report the change by filing Form 8822-B. Depending on the transaction, the terminating organization may need to file a final Form 990 or Form 990-EZ, as applicable, and complete Schedule N. Schedule N also may be required if your restructuring involves a significant disposition of net assets.
These rules address only federal income tax exemption. Your state’s law may impose separate requirements involving incorporation, tax exemptions, charitable registrations, notices, or regulatory approvals. So, you should review any restructuring’s potential effects on contracts, grants, restricted gifts, licenses, and other obligations.
Plan Before Making A Move
Restructuring can provide meaningful financial and operational benefits to 501(c) organizations, but the legal form and sequence of your transaction matter. Before proceeding, work with KPM’s financial advisors and your team of legal advisors to confirm that the restructuring qualifies for relief under Rev. Proc. 2018-15 and to identify all federal and state filing requirements.
