Nonprofit Compliance – Maintaining Tax-Exempt Status in Virginia
Nonprofit organizations in Virginia face complex compliance requirements at both the federal and state levels. From annual Form 990 filings to maintaining public charity status, understanding these obligations is essential for preserving tax-exempt status and donor confidence.
Applying for Tax-Exempt Status
To receive tax-exempt status under Section 501(c)(3), an organization must meet a specific description and complete and submit an application . If an organization files its application for recognition within 27 months of incorporation, tax-exempt status (if granted) will be effective as of the date of incorporation . If filing after 27 months, status will be effective from the submission date of the application .
Public Charity vs. Private Foundation
All Section 501(c)(3) organizations have a “foundation classification” . Any organization that qualifies for tax-exempt status under Section 501(c)(3) is presumed to be a private foundation unless it can show that it qualifies for one of the exceptions .
Some types of organizations (churches, schools) are defined as public charities by operation of law . Most organizations qualifying for public charity status do so because they can show that their financial support comes from a broad cross-section of the public .
Maintaining Public Charity Status
An organization will lose its public charity status starting in its sixth year of existence if it cannot pass the public support test for two consecutive years . If the organization cannot meet the public support test for two consecutive years, it will be reclassified as a private foundation as of the start of the second consecutive year .
To avoid unexpectedly losing public charity classification, organizations should keep careful track of public support information throughout the year instead of waiting until the end of the tax year when preparing Schedule A .
Activities That Can Jeopardize Tax-Exempt Status
For 501(c)(3)s, the four main activities that can jeopardize tax-exempt status are :
Activity that results in private benefit or inurement
Lobbying activity that constitutes a substantial part of overall activities
Political campaign activity
Unrelated business activity that is substantial when compared with exempt-function activities
Understanding Private Benefit and Inurement
Private benefit occurs when an individual or organization receives a benefit from a Section 501(c)(3) organization . A tax-exempt organization that provides a substantial amount of private benefit may risk losing its tax-exempt status (this does not include paying reasonable salaries) .
Inurement occurs when an “insider” (officer, director, or key employee) receives any of an organization’s net income or inappropriately uses its assets for personal gain . Any amount of inurement, no matter how small, can jeopardize an organization’s tax-exempt status .
Lobbying Rules
Lobbying is defined as “the attempt to influence legislation” . If a Section 501(c)(3) organization conducts substantial lobbying, it risks losing its tax-exempt status .
The IRS uses one of two methods to determine whether lobbying activities are substantial:
Substantial part test – Subjective test based on facts and circumstances, considering time and money spent
Expenditure test – Objective mathematical test applying a dollar limit based on total expenditures
Political Campaign Activity
Political campaign activity is directly or indirectly participating or intervening in any political campaign on behalf of or in opposition to any candidate for elective public office . For a 501(c)(3), violating the political campaign prohibition may result in revocation of tax-exempt status and imposition of certain excise taxes .
Unrelated Business Income
UBI (unrelated business income) is income that an exempt organization receives from conducting activities not related to its exempt purpose . Even if an organization uses the income from an unrelated activity to help pay for its exempt activities, that income is still UBI. For 501(c)(3)s, if the conduct of UBI-generating activities is substantial, the organization could jeopardize its tax-exempt status .
IRS Resources for Nonprofits
The IRS Charities and Nonprofits page provides comprehensive information for tax-exempt organizations . The Stay Exempt program offers web-based mini-courses for new and existing tax-exempt organizations.
At Nova Tax & Accounting Services , we provide audit and assurance services and Form 990 preparation for nonprofit organizations across Virginia and Washington DC. Schedule your free consultation to discuss your compliance needs.