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Knowledge Base

Q:
What activities can jeopardize a nonprofit organization’s tax-exempt status?
A:

IRS regulations prohibit 501(c)(3) public charities from engaging in specific types of activities and require certain levels of reporting and public disclosure. An organization that fails to abide by these rules may be placed under sanction or have its tax-exempt status revoked by the IRS. These regulations include:

  • Private benefit/inurement – An organization may not permit an insider (someone with a personal or private interest in the organization) to benefit substantially from the activities of the organization.
     
  • Lobbying – While 501(c)(3) organizations are permitted to engage in lobbying on some level, the amount of lobbying activities must be limited so as not to constitute a substantial portion of the organization’s activities.
     
  • Political campaign activity/electioneering – 501(c)(3) organizations and their representatives (while acting in an official capacity) may not campaign for or against candidates for elected office.
     
  • Unrelated business income (UBI) – An organization may lose its exempt status if it generates excessive income from a regularly-carried-on trade or business that is not substantially related to the organization’s exempt purpose.
     
  • Annual reporting obligation – With the exception of churches and subordinate organizations, all 501(c)(3) public charities are required to file some version of the Form 990 with the IRS on an annual basis. While smaller organizations with gross receipts under $25,000 were previously exempt from this requirement, these charities must now file the Form 990-N (e-Postcard) each year in order to stay compliant.
     
  • Operation in accord with stated exempt purpose – An exempt organization is expected to operate in accordance with the charitable purpose or purposes outlined in its application for recognition of tax-exempt status (Form 1023). An organization must notify the IRS of any substantial changes to its operating purpose.

The resources below provide more detailed information on these restrictions as well as guidance on how exempt organizations can ensure compliance with IRS regulations.

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