A few years ago, IRS Revenue Procedure 2018-15 changed the rules regarding non-profit restructuring. If you have participated in a restructuring in the past, you will be relieved to know that in many cases it is now easier. Even so, if recent challenges have led your organization to consider restructuring, it is important to work with a professional advisor, such as a CPA.
That Was Then
Under previous IRS rules, tax-exempt organizations were required to file a new exemption application when they made certain changes to their structure. Filing this application created a new legal entity.
To apply for new exempt status, non-profits had to file a final Form 990 under their initial Employer Identification Number (EIN), obtain a new EIN, and apply for exemption for the new entity. In addition to being a time-consuming and often expensive process, the new non-profit risked failing to receive its tax-exempt status. The process also required changing the EIN on all bank and investment accounts.
This Is Now
Now, in many situations restructuring non-profits are required only to report significant organizational changes on their Forms 990. To be eligible, the restructuring must satisfy certain conditions. Your organization must be:
1. A U.S. corporation or an unincorporated association
2. Tax exempt as a 501(c) organization
3. In good standing in the jurisdiction where it was incorporated or, in the case of an unincorporated association, formed
In addition, your reorganization must do one of the following: change from an unincorporated association to a corporation; reincorporate a corporation under the laws of another state after dissolving in the original state; file articles of domestication to transfer a corporation to a new state without dissolving in the original state; or merge a corporation with or into another corporation.
The ‘surviving’ organization must carry out the same exempt purpose that the original organization did. For a 501(c)(3) organization, the new articles of incorporation must continue to satisfy the IRS’ organizational test that requires your non-profit’s organizing documents to limit its purposes and use of its assets to exempt purposes.
Note that there are additional limitations. For example, the new rules do not apply if your surviving organization is a ‘disregarded entity,’ limited liability company, partnership, or foreign business 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.
For more information and guidance, contact us.