Randall H. Borkus Law

The Requirements for Ongoing Operations for Charities

Randall H. Borkus MS, JD. LL.M./Taxation

The IRS has placed on its webpage a very helpful explanation of the phases of life for a charity – see IRS publication "Life-Cycle of a Public Charity”. One of the sections discusses the requirements for ongoing operations for charities.

The basic ongoing function of a charity is to fulfill its exempt purpose. In doing so, the charity will secure funding from individual donors, other charities or governmental agencies. The charity is exempt from payment of federal income tax unless it has unrelated business taxable income. Each year, the charity will be required to file annual informational returns, even if it does not have unrelated business income (“UBI”).

Annual Information Return. Most all charities will file a Form 990 or Form 990-EZ. However, filing exemptions are granted for churches, integrated auxiliaries for churches, church related organizations that manage retirement programs, church-related elementary and secondary schools and some religious orders.

Form 990 is due on the 15th day of the 5th month after the end of the fiscal year of the charity. It is primarily a financial form. Revenue, expenses and changes in fund balances are all reported each year. Program service accomplishments and expenditures are also listed. Form 990 is signed and dated by an officer of the charity.

There are two exceptions to filing a Form 990. Organizations with receipts of less than $25,000 are not required to file Form 990. Some organizations also qualify for shortened versions of Form 990 entitled Form 990EZ. These organizations generally have assets of less than $250,000 and receipts of less than $100,000 for the year.

Private foundations, which are exempt but do not meet the broad public support tests, must file Form 990-PF.

If a charity has paid premiums or received certain life insurance or certain annuity or endowment contracts known as "personal benefit contracts," it must file Form 8870.

Unrelated Business Taxable Income. If a charity regularly carries on a business that is not substantially related to its exempt purpose, then income from that activity will constitute Unrelated Business Taxable Income (UBTI). There is an exemption for $1,000 of UBI. However, if the UBI is $1,000 or greater, then a charity must file Form 990-T. In addition, it should pay estimated tax payments to cover its anticipated tax obligation for UBTI. Most charitable organizations strive diligently to avoid UBTI. If a charity consistently generated a major portion of its revenue through UBTI, the IRS might question the appropriateness of its tax-exempt status.

Potential Loss of Exempt Status. There are three different ways that charities might subject themselves to penalties or even loss of exempt status. First, a charity is not permitted to provide inurement or private benefit to directors, officers or other influential insiders. Second, if a charity provides an "excess benefit" to an individual, then it could be subject to excise taxes. This section of the law is called the “intermediate sanctions provision.” Third, it is generally not permissible for a charity to devote a substantial part of its program toward lobbying.

Employment Taxes. Charities are exempt from income taxes, unless they have UBTI. However, the charity, its officers and directors are obligated to make certain that the employment taxes are paid. With the exception of some clergy who may choose for religious reasons to not participate in the Social Security program, all employees and their charitable employer are required to make payment of the appropriate amounts to the Social Security and Medicare payments.