Student Organizations: Tax-Exempt Status And Filing Requirements

Student organizations are required to operate as non-profit entities, but this does not automatically grant them tax-exempt status. To be recognized as a tax-exempt organization, student groups must apply for non-profit status with the IRS. The process of obtaining federal tax-exempt status can be complicated and involves follow-up paperwork, so it is not encouraged for most student organizations. However, if a student organization's yearly gross receipts exceed a certain threshold, they must file for tax-exempt recognition.

What is the difference between nonprofit and tax-exempt status?

The terms "nonprofit" and "tax-exempt" are often confused, but they refer to two distinct concepts. Nonprofit status is granted under state law, while tax-exempt status refers to federal income tax exemption under the Internal Revenue Code.

Nonprofit organisations are those that work to serve a public purpose rather than provide financial benefits to individuals or entities. They are typically formed around a cause, mission, or community need. Nonprofit organisations are allowed to generate income that exceeds their expenses while still retaining their nonprofit status. However, they are prohibited from distributing their net earnings to individuals who control the organisations or accumulating equity appreciation for private benefit. Instead, their earnings must be reinvested into the organisation to further its nonprofit purposes.

Most nonprofit organisations also seek tax-exempt status, but it is not automatic. To become tax-exempt, an organisation must meet certain requirements and apply to the IRS and the state. Tax-exempt status means that an organisation is exempt from paying federal corporate income tax on income generated from activities related to its tax-exempt purposes. However, they are still subject to other taxes, such as federal payroll taxes, state and local unemployment taxes, real estate taxes, and sales taxes, among others.

To maintain their tax-exempt status, organisations must comply with strict guidelines and continue to demonstrate their qualifying operations. Failure to submit the required annual filings, such as Form 990, can result in the revocation of tax-exempt status.

What are the benefits of non-profit status?

Non-profit organisations are those that operate for the benefit of the public, rather than to earn a profit. While non-profit status comes with some drawbacks, such as the cost and time required to start one, there are also several benefits.

One of the main benefits of non-profit status is that it provides personal asset protection. This means that if a non-profit is sued by a creditor for an outstanding debt, the personal assets of those involved in the organisation are protected.

Another major benefit is tax exemption. Non-profits are exempt from paying federal and state income taxes on profits. They are also usually exempt from similar state and local taxes. This means that all earnings can be used to further the organisation's mission. Non-profit status also makes donations to the organisation tax-deductible for donors, providing an incentive for people to contribute.

Non-profit organisations also have formalised structures, with a board of directors providing leadership and strategic management. This can attract more professional and skilled candidates to work with the organisation. Non-profits also tend to have highly motivated employees who are driven by intrinsic rewards, such as the achievements of their clients and a good work-life balance.

Non-profits are also eligible for public and private grants, as well as group discounts on health or life insurance benefit programs if they have enough employees. They can also exist long after their founders have left, as long as their purpose stays relevant and they continue to generate revenue.

How do student organizations obtain federal tax-exempt status?

Student organizations are required to operate as non-profit organizations, but they are not automatically registered as 501(c)3 organizations and do not automatically receive federal tax-exempt status. To obtain federal tax-exempt status, student organizations must apply for it independently through the Internal Revenue Service (IRS).

Before applying for tax-exempt status, student organizations must first become state nonprofits. Nonprofit status is applied for through the state, whereas tax-exempt status is applied for through the IRS. Groups that do not have nonprofit status are legally classified as "unincorporated associations".

To become a state nonprofit, student organizations must register through the Secretary of State's website. This involves filing Articles of Incorporation and paying a filing fee of $70-$90. Nonprofits must also file an annual renewal with the state, though there is no fee for this.

Once an organization has obtained nonprofit status, it can then apply for tax-exempt status through the IRS. To do so, organizations must file IRS Form 1023-EZ (if annual income is below $50,000) or IRS Form 1023 (if income exceeds $50,000). These forms can be found on the IRS website.

Obtaining tax-exempt status requires a one-time fee of $275 (for organizations filing Form 1023-EZ) or $600 (for organizations filing Form 1023). This may be a financial burden for some organizations, but it will exempt them from owing taxes to the IRS in the long term, resulting in significant savings.

It is important to note that even if an organization is tax-exempt, it may still be subject to federal income tax on income from an unrelated trade or business. Unrelated trade or business income refers to income derived from any trade or business that is not substantially related to the organization's exempt purpose.

In addition, obtaining tax-exempt status does not exempt an organization from sales tax. To apply for sales tax exemption, organizations must complete and submit a separate form, typically through the state department of revenue.

What are the annual filing requirements for tax-exempt organizations?

The annual filing requirements for tax-exempt organizations vary depending on the type of organization and the amount of money it brings in each year.

Annual Filing Requirements for Tax-Exempt Organizations:

All organizations exempt from federal income tax under Internal Revenue Code section 501(a) must file an annual information return, except for the following:

• A church, an interchurch organization of local units of a church, a convention or association of churches
• An integrated auxiliary of a church
• A church-affiliated organization that exclusively manages funds or maintains retirement programs
• A school below college level affiliated with a church or operated by a religious order
• Church-affiliated mission societies if more than half of their activities are conducted in foreign countries or directed at people in those countries
• An exclusively religious activity of any religious order
• A state institution whose income is excluded from gross income under section 115
• A corporation described in Section 501(c)(1) that is organized under an Act of Congress, is an instrumentality of the US, and is exempt from federal income taxes
• A stock bonus, pension, or profit-sharing trust that qualifies under Section 401 (required to file Form 5500)
• A religious or apostolic organization described in Section 501(d) (required to file Form 1065)
• A governmental unit or affiliate that meets the requirements of Revenue Procedure 95-48
• A private foundation described in Section 501(c)(3) and exempt under Section 501(a) (required to file Form 990-PF)
• A political organization that is a state or local committee of a political party, a political committee of a state or local candidate, a caucus or association of state or local officials, or required to report under the Federal Election Campaign Act of 1971

Small tax-exempt organizations with gross receipts below a certain threshold may only need to file an annual electronic notice (e-Postcard). Organizations with gross receipts above $50,000 must file Form 990 or Form 990-EZ. The deadline for these filings is the 15th day of the 5th month after the end of the organization's fiscal year. For example, if an organization's fiscal year ends on June 30, 2009, the deadline would be November 15, 2009. This deadline can be extended for six months without showing cause by filing Form 8868 before the due date.

Student Organizations:

Student organizations are not automatically registered as 501(c)3 organizations and do not have federal tax-exempt status unless applied for independently. They must operate as non-profit organizations that do not generate income for individuals or the organization itself. To become tax-exempt, student organizations must register as non-profit organizations with their state and then register as a 501(c)(3) organization by filing IRS Form 1023-EZ (for annual income below $50,000) or IRS Form 1023 (for income above $50,000).

Additional Requirements:

In addition to annual filings, tax-exempt organizations may have other ongoing compliance obligations. If an organization has unrelated business income, it must file an unrelated business income tax return. Some organizations may be required to file certain returns electronically and pay employment taxes. Furthermore, tax-exempt organizations must maintain accurate and complete financial records for at least six years and make their returns available for public inspection for three years after the due date.

What are the tax implications for organizations that do not obtain tax-exempt status?

Organizations that do not obtain tax-exempt status are subject to federal income tax on income from an unrelated trade or business. This includes gross income from any trade or business that is regularly carried on and that is not substantially related to the organization's exempt purpose.

In addition, organizations that do not obtain tax-exempt status may be required to pay federal corporate income tax on income generated from activities that are substantially related to the purposes for which the entity was organized. This tax is known as unrelated business income tax (UBIT).

Furthermore, organizations that do not obtain tax-exempt status may be subject to other taxes, such as federal payroll taxes, state and local unemployment taxes, real estate taxes, sales and use taxes, and taxes on lobbying activities.

It is important to note that even if an organization is tax-exempt, it may still be subject to certain taxes. For example, tax-exempt organizations that engage in unrelated business activities may be subject to UBIT. Additionally, certain state and local taxes may apply to tax-exempt organizations, depending on the specific laws and regulations in the jurisdiction.

To obtain tax-exempt status, organizations must apply for recognition of exemption from the Internal Revenue Service (IRS). This process typically involves filing specific application forms, such as Form 1023 or Form 1024, and paying a user fee. Obtaining tax-exempt status can provide significant long-term savings for organizations by exempting them from certain taxes.

Frequently asked questions