IRS has 2 tests to assure 501(c)3 tax exemption status; organizational test and operational test
By Gregory Jackson
In the United States the Internal Revenue Service (IRS) has created the 501(c) organization, a tax exempt nonprofit organization. While there are 29 different types of tax exempt organization, from 501(c)1 Corporations Organized Under Act of Congress, which include Federal Credit Unions, to 501(c)29 Qualified Nonprofit Health Insurance Issuers under section 1322(h)1 of the Affordable Care Act, Groundz filed as a 501(c)3. Being a new 501(c)3 means we are required to pass two IRS tests: The organizational test and the operational test.
1. The Organizational Test. The Organizational Test has a clear goal of tax exempt appropriate status. In order for an organizational to meet the organizational test it only has 4 choices: Religious, charitable, scientific, or educational. Under the Articles of our organization we list ourselves as charitable. Charitable means an organization who aids those in need. The cy pres doctrine applies to charitable organizations like us.
Cy pres means “so near” as in the event an organization is unable to fulfill its objective, the courts will in affect chose a cause of like purpose/mission. Cy pres applies to organizational dissolution if an organization closes, then all contributions outstanding goes to a nearly related 501(c)3 organization that operational helps similar or related goals and objectives.
Who is Groundz benefiting?
We donate compost to local farmers to help them grow local food to benefit food deserts. Prior to us serving our farmers, in all cases local farmers never produce enough compost on their own. In most cases, they must travel to pick up compost, but with Groundz help they produce compost onsite. Even if your organization has not yet been approved, you may continue seeking contribution. ” Rest assured, you may continue to operate your organization, including soliciting contributions, while your application is pending,” writes Tamera Ripperda, director of exempt organizations tax exempt & government entities (TEGE) from the IRS. “Although donors have no assurance that contributions are tax deductible for federal income tax purposes until the application is approved, contributions made while an application is pending would qualify if the application is approved, since most approvals are effective from the date of an organization’s formation.”
Therefore, if your organization is not a 501(c)3 but you are accepting donations and tax exempt operations while you are applying, upon your organization’s approval means you will be exempt retroactive to the date beginning with date of founding.
2. Operational Test. The operational test strengthens operational deficiency. A word to avoid in the operational test is “services” since such purposes create vague exempt manner. Using the word “services” denote that the organization’s operations can function without the need for exempt status since this form of activity could be accomplished in a for profit enterprise, according to Bill Angner, IRS tax exemption manager. Mr. Angner also mentioned that every September a 501(c)3 organization must submit an e-postcard to maintain exemption status.
Since Groundz is an exempt nonprofit organization we often receive donation requests in sustainable supply chain-related to organic waste recycling. Other sustainable organic waste supply chain donations benefit include education, renewable energy, and wellness as insubstantive part; while they are important to us our exempt purpose is to help local farmers create food security for local food economy.
Our activities are driven by exempt organizational goals including local food, education, and wellness. We have recently received requests to lead in field trips or university practicums. Hawken Schools had a field trip last summer to Forward Church’s Willow Community Garden were I led a field trip for school students on how we compost Merwin’s Wharf food waste. There is also Case Western Reserve University’s Weatherhead School of Management MBA program where I created an MBA practicum for 2nd-year MBA students to lead in a 4-month practicum featuring celebrity chef food waste recycling for local food. We have also connected with Cleveland Clinic to identify waste to wellness opportunities for cancer research and nutrition as a preventative for diet-related illness.