Of the four different kinds of public charities recognized under Section501(c)(3) of the Internal Revenue Code, the traditional publicly supported charity is the most common form. The tax exempt letter will refer to it as a subsection509(a)(1) organization or a subsection 170(b)(1)(A)(vi) organization. It contains churches, schools, nonprofit hospitals, a lot of small supporting organizations for schools, hospitals, etc., and includes governmental units, and publicly supported charities and community foundations. Unlike the private independent foundation it relies principally on public support and contributions from individuals, businesses, other charitable entities or the government for its main sources of support.
For an overview of the different kinds of charitable organizations see the report on types of charitable organizations>.
QUESTION: What is a publicly supported charity?
QUESTION: How does it come into existence?
QUESTION: What are the tax benefits?
- Contributions to the charity will give the donor a tax deduction.
- Earnings will not be subject to income tax (earnings from commercial activities may be subject to income taxes).
QUESTION: How does it qualify as a public charity?
ANSWER: You file an application with the Internal Revenue Service (Form1023). This application is very detailed and must be filed within fifteen (15) months of the formation of the charity. The Internal Revenue Service will take between four to six months to send the tax exempt letter, however, once issued the exempt status will be effective retroactively to the date the charitable organization was formed (either as a trust or as a corporation).
QUESTION: Are there any charities exempt from filing Form1023?
ANSWER: Yes - - - churches and their auxiliary groups and any charity (not a private foundation) which expects its gross receipts to be less than $5,000 per year. NOTE: The Internal Revenue may not recognize a charity as a church just because it calls itself one.
QUESTION: What are the requirements for the charity to be recognized by the Internal Revenue Service?
QUESTION: What is the mechanical test?
QUESTION: Explain the facts and circumstances test?
QUESTION: What is the two (2%) percent rule and why is it important?
QUESTION: Must a charity to be qualified satisfy both tests?
QUESTION: Do these tests have to be met only once?
QUESTION: After initial qualification if a charity cannot satisfy either one of the tests in a particular year, will it lose its tax exempt status?
QUESTION: Do any state reports have to be filed in connection with the application of the organization to be recognized as tax exempt?
ANSWER: Yes, to the Office of the Attorney General in Massachusetts. When the organization is formed as a corporation the Secretary of State's Office will automatically send a copy to that office. If the organization is formed as a trust, then a copy of the trust should be filed with the Attorney General. In all cases a copy of the tax determination letter as received by the Internal Revenue Service should be filed with the Office of the Attorney General and with the state division of corporation taxes. Also, any charity intending to solicit funds from the general public (except churches) has to register for this purpose with the Office of the Attorney General (limited exception applies if less than $5,000 per year).
QUESTION: Does the public charity have to distribute a set amount per year?
ANSWER: No. While there are no percentage limitations on the distributions of funds received, most publicly supported charities distribute a substantial amount of support received in carrying out their charitable mission.
QUESTION: Does the publicly supportedorganization have to file annual federal tax returns?
ANSWER: Yes. An information return specifically called Form990 must be filed each year due four and one-half (4=) months after the close of the charity's year. While no taxes will be due the return is very detailed and requires a great deal of information to be reported and is used to record the necessary information to continue to qualify the organization as a charitable organization.
QUESTION: Are annual returns due to the State of Massachusetts?
ANSWER: A corporation should file its federal exempt status letter with the state corporation division - - - then no state corporation return is due - - - a certificate of condition should be filed each year with the Secretary of State. If the charity is a trust - an information return (Form2) should be filed each year. In addition to this all registered charities must file an annual form with the Attorney General's Office (Form PC) with copies of Form990 attached.
QUESTION: Are any public charities exempt from filing the annual tax return Form990?
ANSWER: Yes - a church and its auxiliary groups, and any public charity whose gross receipts do not normally exceed $25,000 are exempt.
QUESTION: Can salaries and reimbursement of expenses be paid?
ANSWER: Yes. Reasonable salaries for services rendered on behalf of the charity and required for the carrying out of its mission and reimbursement of expenses similarly required are allowed. As with all charitable organizations the Internal Revenue Service and the Attorney General's Office will be diligent in monitoring unreasonable salaries or unreasonable reimbursement of expenses or providing benefits for persons who have a close relationship to the charity or persons related to them.