TAX-EXEMPT ORGANIZATION’S LEGAL FORMALITIES
By Angel Y. Dayan, CPA, EA, ABA, ATA
Are they good where you are? What are we anyway? Are we a “for profit” or “not for profit” organization? That is the question. The organization that we enthusiastically set up in this country for public charitable work, social and civic fundraisers, and certain acts of public service and/or religious events or activities should be organized and registered as a “not-for-profit” entity in the State of California or wherever it operates. The first step is an entity formation, the formal structure of a legitimate charitable organization. We have at least 400 Filipino-American organizations if I recall it right from last count based on an old list available at the Philippine Consulate in Los Angeles.
Tolerated to operate “outside the radar” in somewhat a misplaced trust until discovered and penalized, no government agency verifies their paperwork and very few meet the required true legal formalities or do enjoy public grant(s). Yes, our intentions for them are by all means laudable and by definition truly honorable. But the most important, of course is we need not pay any corporate income tax at all. This is a privilege. Not too fast though. These business operating entities fall into the distinct categories of the U.S. Code Title 26 Section 501 ( c ) of the Internal Revenue Code.
At the same time, the organizations are also governed by the California Revenue and Taxation Code principally R&TC-23701. Otherwise, they are to be taxable on income generated like any business corporation subject to the minimum franchise tax of $800 dollars per year and/or the final “measured tax” in California. Forming these organizations with the purest of our intentions and motives are most admirable. They are best defined by their mission statements or business plans, the aspired goals, articulated objectives, and preconceived purposes for the mutual benefit of the members, for the extended community it serves and the public at large. We do find ourselves proactively very good at conducting fundraising events under these organizations, albeit we oftentimes lack legal documents. Being operated “de facto” and/or “ultra vires” we do acts of charity to help out and thus raising funds in haste seems to be our priority. It is our “horse behind the cart.” The organizing document and legal formalities are always in the back burner which is typical, such as the conformed articles of incorporation, regular board minutes, the adopted bylaws and other internal operating documents are nowhere. The executory contracts, memos of understanding and letters of commitments, if any, are equally important to keep. But all these are not sufficient for the organization to be deemed or considered legally “tax-exempt.” Our Filipino-American community for the most part tends to think these legal formalities are good enough. They are not. After the entity formation, the organization must submit an application to the IRS and to the California Franchise Tax Board for evaluation to be determined or considered “income tax-exempt.”A federal tax i.d. number and an “agent for service of process” are required and will be necessary to have. It is the organization that should be determined “income tax exempt” and not the Directors, Officers, and the Members themselves who may receive funds or taxable fringe benefits from the organization. It is the nature of the compensation received that will determine what may or may not be taxable. To obtain what is called a “determination letter or ruling” is another very important next step to the tax-exempt process. Upon sending the application, the IRS may give its approval in one or two months, but the California Franchise Tax Board could take at least three (3) months or 90 days and may even be longer now. We have been asked on occasion by these organizations to obtain their “tax-exempt determination letters” both under the federal law, and the State of California. It is the important document that will make the contributions to the fundraisers tax deductible. To provide a helpful response, we have put together a list of the requirements that the organization should submit. It surprises the uninformed. If you would be interested, you can call me and I will mail you the list that will provide you with some helpful guidance. The list is quite long and some requirements are technical, such as an Operating Budget. The Internal Revenue Service also publishes a material that gives guidance to compliance for Section 501 (c) (3) Public Charities. But if you need consulting help for the tax-exempt determination approval process, please call my office. We assist in filing the annual Federal and State information returns for “non-profits.” If you have been awarded a grant and need an audit, call us too. It is time to put the house of non-profits in order for the next fundraising event. There must also be accountability and transparency from the Directors and Officers who ran and participate in these charitable and religious organizations. Call us at (213)-365-1040 or visit our website at www.taxwork.com. We would be glad to assist you. (Angel Y. Dayan, CPA, EA, ABA, ATA Tax-Exempt Organization Consultant)