Disclaimer: I am neither a lawyer nor a tax advisor. This article is not legal advice. This article is not tax advice. This is a series of articles on research into regulations and information for Non-Profit Decentralized Autonomous Organizations (DAOs). For those unfamiliar with DAOs, we recommend starting with our previous article titled DAOs 101. If you haven’t read part 1, please find it below.
Where we left off:
After becoming a 501(c)(3) Non-Profit, the Internal Revenue Service (IRS) burdens the organization to prove that they are a public charity versus a private foundation. Where does a Non-Profit begin its quest to become a public charity? Form 1023.
Form 1023 and Form 1023EZ
Form 1023, an Application for Recognition of Exemption, does precisely what it’s named. It starts the application process for being recognized as a tax-exempt organization. According to the IRS website, Form 1023 must be submitted online and includes a user fee. Of note, the IRS states that to receive an exemption, an organization “….must be organized as a trust, a corporation, or an association.” Given that our DAO is interested in becoming a Trustless Unincorporated Nonprofit Association (TUNA?), an association is the most applicable avenue for our context.
So what is an association?
An association is defined as “…a group of persons banded together for a specific purpose.” The IRS notes that associations must have a written document showing its creation, typically called articles of association. The articles of association must contain specific language. To help ensure the language is in the articles of association, the IRS has issued Publication 557, which includes an example of this suggested language. In addition, at least two people have to sign and date the document.
Are you still there? If so, you are a rockstar. Just know that.
So you mentioned 1023-EZ before. What is that? If your Non-Profit is smaller in size and has “…assets of $250,000 or less and annual gross receipts of $50,000 or less,” you may be eligible to fill out Form 1023-EZ, the “streamlined” version. The definition of Gross Receipts can be found later in this article. You can use an eligibility checklist found here to help determine if you meet the 1023-EZ status.
So you have gotten recognition as a public charity. Now it’s time to sit back, put your feet up, and have a sip of that Mai Tai. Right?
Yeah, not so fast. While Non-Profits get recognition as “tax-exempt,” it doesn’t mean they don’t file taxes. This is where Form 990, Form 990-EZ, 990-PF, and Form 990-N come in. Unless certain exceptions apply, non-profits must still file annual returns or notices.
Form 990 is the IRS’ primary tool for gathering information about tax-exempt organizations, educating organizations about tax law requirements and promoting compliance. Organizations also use the Form 990 to share information with the public about their programs. Additionally, most states rely on the Form 990 to perform charitable and other regulatory oversight and to satisfy state income tax filing requirements for organizations claiming exemption from state income tax.
So which Form 990 do I use for my Non-Profit?
It depends on a couple of factors, but who doesn’t love a great IRS infographic to help?
Two factors that help determine which 990 Form to use are Total assets and Gross Receipts. For simplicity’s sake, Total Assets are everything an organization owns and the kitchen sink. Gross receipts, on the other hand, are defined below.
Gross receipts are the total amounts the organization received from all sources during its annual accounting period, without subtracting any costs or expenses.
Using the chart above, if your Non-Profit received less than $50,000 in Gross Receipts (annually), you could be eligible to file via Form 990-N. Depending on how the DAO defines its tax year determines when the form would need to be submitted. An example using the 990-N is provided.
At this point, my brain and computer tabs have reached a limit. To recap, 501(c)(3) organizations must apply to receive recognition of tax exemption from the IRS. Form 1023 or 1023EZ (depending on your organization’s circumstances) is used. While tax exemption may be given, it doesn’t mean that filing taxes fall by the wayside. Non-Profits should use their organization’s Gross receipts, Total Assets, and entity type to determine which Form 990 is applicable.
What’s next? Part 3 of this series will continue our understanding of Non-Profit forms and taxes and potentially dive into state applicability.
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