After months of waiting (and months before that of planning, filling out paperwork, and hoping by some miracle that you were heading in the right direction) the moment of truth has finally arrived: you have been granted 501c3 status. You take a moment to congratulate yourself, along with everyone else who was involved in the process, because hey, this is a monumental accomplishment and you should be proud of yourself! However, once the excitement and adrenaline fade away, and the ‘new car smell’ begins to wane, you might start thinking to yourself, ‘Is it possible for my 501c3 status to be taken back?’
It Is Possible to Lose It?
While it would be nice to believe that a 501c3 is a long-lasting, well-earned privilege – and to some extent, it is—the truth is that it is possible to lose your 501c3 status after obtaining it. Although the IRS will not personally come to your door and demand that you hand over your 501c3 status over burglar style, they will let you know that your status has been revoked. All previous effort will essentially go to waste, which is not something that anyone wants to experience, let alone a business organization that worked so hard to get 501c3 status in the first place.
So what can you do to ensure that your 501c3 will remain nice and safe and far away from the IRS’ clutches? For one thing, you can definitely consider the following tips and suggestions.
Adequate Books and Records
Regardless if it is for a business or not, keeping records, receipts and a list of general expenditures is never a bad idea. You want to know how much is being spent and what it is being spent on. This concept is especially important when it concerns 501c3 status. Be sure to document every little thing, regardless if you feel it is small and inconsequential. Chances are it will matter in the long run even if it does not matter then and there. Documents such as grant applications, sales slips, paid bills, deposit slips and canceled checks are all important to keep around. That way, you can refer back to them for the utmost bookkeeping accuracy.
Keeping records and receipts do not just apply to the organization. When it comes to donations, a donor should receive some form of written acknowledgment from your organization for any gift more than $250. This is done so that the donor knows to take a tax deduction. They are helping you out, so you should be willing to turn around and offer the same courtesy right on back.
File Your 990s
Falling under the same category is probably the most important must-do: filing your 990 form. A 990 is the mandatory annual tax return for business organizations, and there is absolutely no getting around it if you wish to maintain your 501c3 status. The 990 not only lets the public have access to the organization’s financial information, but it is also used to make sure that the organization itself is not taking advantage of their tax-exempt status.
Think of it as though the 990 is helping out with your organization’s publicity. Potential donors and other interested parties can have a peek for themselves at your finances and see that you are a trustworthy, honest organization. Who would not want to donate to an organization like that?
Which 990 Form is Best?
The exact type of 990 a business has to file depends on the organization’s gross receipts and assets. Because of this it is a good idea to look into which 990 form is best suited for your organization, unless you happen to be a church. Churches, which include worship houses such as mosques and synagogues, are not required to file a 990 form.
Keeping all of that in mind, it is easy to see why the 990 is such an important and unavoidable aspect of keeping your 501c3 status. So to avoid losing it, make sure to do your business duty and file your annual 990 on the 15th day of the 5th month after the fiscal year ends (for example, if your fiscal year ends December 31st, then your 990 would be due on May 15th).
Lobbying and Politics
There are plenty of internal politics in the 501c3 business world, but it is never a good idea to get actual politics involved. Compromising and losing your 501c3 status has never been easier if your business chooses to engage in a significant amount of lobbying. Even if you test the waters by engaging in a teensy smidgeon of lobbying, too much will earn your 501c3 status a one-way ticket straight back to the IRS.
As tempting as it can be to contact (or urge possible donors or supporters to contact) a legislative body for the sake of supporting, proposing or opposing legislation, it is better not to do it at all. The same applies if your organization promotes rejecting or adopting legislation. There is a safe way, however, to involve your organization in matters of social laws without it being considered lobbying if it is something you truly want to do. If your organization holds any kind of educational meetings, where materials are prepared and distributed, it can still fall within public policy. Just remember to keep it educational so you do not compromise your 501c3 status.
Refrain from Political Campaign Activity
Similarly to lobbying, an organization should refrain from participating in any and all political campaign activity. The temptation to promote a popular candidate that is presently running for office is very real, especially during the teetering height of election season. You may think that favoring a popular candidate will increase the chances of a certain political party donating or supporting your organization, but the only thing it will really do is cause your organization to enter red flag territory. Do yourself a favor and leave politics out of the equation altogether.
Unrelated Business Income and Inurement
Variety may be the spice of life, but it should not be something your organization chooses to constantly partake in. You wrote the activities and services of your business organization in your 1023 application—and in great detail, at that—so it is best to stick with it. Veering off the path and jumping into other and unrelated activities can put your 501c3 status on the line. There are exclusions to this, such as volunteer labor, cafeteria work, selling donated items, and bingo games, but for the most part it is recommended to keep doing what your business said it was going to do from the get-go.
It should go without saying, but another 501c3 no-no is inurement. The IRS considers any operations within the organization that is done for the sake of private interest to be inurement. No part of the organization’s net earnings, regardless of the circumstance, should ever go towards the benefit of any individual or investor within the organization. If it does, then not only can you kiss your 501c3 status goodbye, but you can also expect to pay some hefty penalty taxes as well. Being honest and up front with your finances is key to a successful business, and it will guarantee that your 501c3 status will not be withdrawn.
If you still are not certain about what you can do to avoid losing your 501c3 status, please contact BryteBridge to speak with one of our business professionals at 407-857-9002, or info@BryteBridge.com. Helping you and your organization succeed is our topmost priority.