Organizations recognized as exempt from federal income tax under this section of the Internal Revenue Code include private foundations, churches, schools, hospitals, and many other types of public charities.
A 501(c)(3) organization can lose tax exempt status if the organization engaged to involve in following actives.
1. Private Benefit/Inurement Private benefit:
501(c)(3) organization’s activities should be involved in satisfying the purpose of tax-exempt organizations. Its activities should not serve the private interests, or private benefit, of any individual or organization more than insubstantially. Inurement: A 501(c)(3) organization is prohibited from allowing its income or assets to benefit insiders – typically board members, officers, directors and important employees of an organization. If an organization benefits insiders, the insiders and the organization could be subject to penalty excise taxes and the organization could lose its tax-exempt status.
2. Lobbying or political activity
Lobbying is when an organization contacts, or urges the public to contact, members or employees of a legislative body (or any executive branch official who may participate in the formulation of legislation) for the purpose of proposing, supporting, or opposing legislation, or when the organization advocates the adoption or rejection of legislation.
If organization intends to include political candite’s or introduce political agenda, form a PAC, Political Action Committee can be formed.
3. Unrelated Business Income (UBI)
Earning too much income generated from unrelated activities can jeopardize an organization’s 501(c)(3) tax-exempt status. This income comes from a regularly operating trade or business that is not substantially related to the organization’s exempt purpose. However, there are some modifications, exclusions and exceptions.
4. Annual tax return not filed for 3 consecutive years
While 501(c)(3) public charities are exempt from federal income tax, the Internal Revenue Code requires most of these organizations to report certain information annually. This reporting requirement, fulfilled by completion of one of the Form 990 series of returns, verifies that the organization continues to qualify for exemption and informs the public about the organization’s programs and operations. The Pension Protection Act of 2006 added a new law that provides for automatic revocation of an organization’s tax-exempt status if it fails to file a required annual information return for three consecutive years.
5. Operation in accord with stated exempt purposes
An organization must pursue the exempt activities it promised in its IRS application for exemption. If an organization has deviated from its original purposes, filing restated Articles of Incorporation must be filed and approved by IRS and the Secretary of State.
(Excerpt from IRS FAQ)
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Paul Joo, CPA