In order for an organization to qualify as exempt from federal income tax under section 501(c)(3), two essential elements must be satisfied. The organization has to be organized and operated solely for one or more exempt purposes. It needs to be organized as either a corporation, a trust, or an unincorporated association. There must be wording in the organizing document limiting the purpose of the organization, and also permanently dedicating the assets of the organization to be used for exempt purposes.
The organization needs to be operated for the purpose of furthering one or more of the stated exempt purposes from the organizing document. Some specific activities are restricted or prohibited. These include participating in any political campaigns; unjustly enriching board members, officers, or any other insiders; furthering non-exempt purposes more than negligibly; operating mainly for the primary purpose of engaging in a trade or business which is not related to the exempt purposes of the organization; and taking part in illegal activities, or those that violate basic public policy.
The completion of Form 990 provides the IRS with pertinent information about the organization, so a determination can be made regarding tax-exempt status. There are several questions to be answered, dealing with the past, present, and future planned activities of the organization. Also included is financial information about the organization. Financial data can be given in either budgeted or actual amounts, depending on the specific circumstances involved.
Once the IRS has reviewed the Form 1023 and considered the request, if approved, a determination letter will be issued. The letter gives written assurance regarding the organization’s tax-exempt status, as well as if the organization is qualified to receive tax-deductible charitable contributions. Further, each qualified tax-exempt organization will be classified as either a private foundation or a public charity.
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