Non-profit organizations are different from for-profit businesses in many vital ways. One of the most crucial differences is that under Section 501(c)(3), Section 501(c)(7), and other provisions, non-profits are tax-exempt. Keep in mind that your tax-exempt status is fragile. If you do not follow the rules laid out in IRS Publication 557, ‘Tax-Exempt Status for Your Organization,’ the IRS could revoke it. Be particularly alert to the following common stumbling blocks.
Lobbying & Campaign Activities
There are many categories of tax exemption — each with its own rules. But certain hot-button issues apply to most tax-exempt entities — such as lobbying and campaign activities. Having a Section 501(c)(3) status limits the amount of lobbying a charitable organization can undertake. This does not mean lobbying is totally prohibited. However, according to the IRS, your organization should not devote “a substantial part of its activities” trying to influence legislation.
For non-profits that are exempt under other categories of Section 501(c), there are fewer restrictions on lobbying activities. Lobbying activities these groups undertake must relate to the accomplishment of the group’s purpose. For instance, an association of teachers can lobby for education reform without risking its tax exemption.
The IRS considers lobbying to be different from campaign activities, which are completely off limits to Section 501(c)(3) organizations. This means they cannot participate or intervene in any political campaign for or against a candidate for public office. If you are not a 501(c)(3) organization, campaign restrictions vary.
Excess Profit & Unrelated Revenue
The cardinal rule about excess profits is that a non-profit cannot be operated to benefit private interests. If your fundraising is successful and you have extra income, you must put it back into the organization through additional services or by creating a reserve or an endowment. You cannot use extra income to reward an individual or a person’s related entities.
If you are generating income through a trade or business you conduct regularly and it is outside the scope of your mission, you may be subject to unrelated business income tax. Examples include a college that rents performance halls to noncollege members of its community or a charity that sells advertising in its newsletter. Almost all non-profits are subject to this provision of the tax code, and, if you ignore it, you could risk your exempt status. That said, losing an exempt status from unrelated business income is rare.
Notice From the IRS
The best way to preserve your organization’s exempt status is to refrain from risky activities. If you do, however, receive notice from the IRS of a violation, please contact us. We can help you respond and get your non-profit back on track.