However, there are circumstances where lobbying is allowed for certain eligible 501(c)(3)s. Under section 501(h), eligible 501(c)(3)s can elect to make lobbying expenses by filling out IRS Form 5768 Election/Revocation of Election by an Eligible Section 501(c)(3) Organization To Make Expenditures To Influence Legislation, which was revised in September 2009. Organizations making this election will have to pay an excise tax and cannot have lobbying expenditures that exceed the permitted amounts by more than 50% over a 4-year period without losing their tax-exempt status.

The extent of an organization’s lobbying activity will not jeopardize its tax-exempt status, provided its expenditures related to such activity do not normally exceed an amount specified in section 4911. This limit is generally based upon the size of the organization and may not exceed $1,000,000. For any tax year in which an election under section 501(h) is in effect, an electing organization must report the actual and permitted amounts of its lobbying expenditures and grass roots expenditures (as defined in section 4911(c)) on its annual return required under section 6033. See Part II-A of Schedule C (Form 990 or Form 990-EZ). When an organization that has elected to have 501(h) provisions apply to them no longer wishes to have the provisions apply, the election must be revoked by filing another Form 5768.

Types of 501(c)(3)s that are eligible for this election include the following:

• Section 170(b)(1)(A)(ii) (relating to educational institutions),
• Section 170(b)(1)(A)(iii) (relating to hospitals and medical research organizations),
• Section 170(b)(1)(A)(iv) (relating to organizations supporting government schools),
• Section 170(b)(1)(A)(vi) (relating to organizations publicly supported by charitable contributions),
• Section 509(a)(2) (relating to organizations publicly supported by admissions, sales, etc.), or
• Section 509(a)(3) (relating to organizations supporting certain types of public charities other than those section 509(a)(3) organizations that support section 501(c)(4), (5), or (6) organizations).

The form can be found at http://www.irs.gov/pub/irs-pdf/f5768.pdf and more information can be found in section 501 of the Internal Revenue Code.

What changed? How is your T-E organization affected?

The final regulations require all 403(b) providers, including churches, to have a plan document in place no later than 12/31/08. Failure to adopt a written plan before 1/1/09 will render all subsequent contributions to the plan to be fully taxable. The plan document must address several issues, including:

• Employee eligibility, Contribution limits, Distributions, Benefits, Salary reductions, Investments, Loans, Hardship withdrawals, Allocation of compliance responsibilities to employers and fund providers (vendors)

The IRS has made available a sample plan document that can be used by tax-exempt organizations: see IRS Publication 2009-3.   If a plan is established directly through a mutual fund or other investment company most of these third-party vendors have created generic plan documents for use by their clients.

The final regulations also require “large” ERISA-covered 401(b) plans (generally plans with 100 or more eligible employees) to file audited financial statements along with their 2009 Form 5500.  Small 401(b) plans (generally fewer than 100 eligible employees) are eligible for a waiver of the audit requirement but are required to file the Short Form 5500 (5500-SF) which includes aggregate financial information related to the Plan.

Additional changes are discussed in detail at http://www.irs.gov/retirement/article/0,,id=172433,00.html

If you need help in understanding these new reporting requirements, please contact me.

So what if an opportunity presents itself to increase your bottom line that may not fit your mission? Does that mean as a NPO you can not take advantage of this opportunity?  Not necessarily.  The income can be earned, but depending on its source, it may be considered unrelated business income. If the revenue is unrelated, then net income in excess of $1,000 is subject to the excise tax.

What types of property or transactions are specifically exempt or subject to being taxed? Continue reading…

Some unrelated business income is specifically exempt from being taxed, such as certain types of mineral royalty income and income from the sale of merchandise, substantially all of which was donated to the organization. Certain common endeavors that NPO’s may consider which result in UBIT are gift shops, rental of personal property and rental of debt-financed real property. Some NPO’s have also been contacted about leasing property to locate cell phone antennas or even billboards on their property. Before launching into these ventures, give us a call.  We may be able to assist you in structuring the agreement so that the tax implications can be minimized, or at the very least, provide you with information to avoid the shock of having to cough up 35% of your “new found” money.

This area of tax-exempt is complicated and often abused. Contact us for help.