[Legislative Update] Form 990-N for Small Charities: What Should Small Foundations Do?

May 19, 2010

In the past, 501(c)(3) public charities with annual income below $25,000 were exempt from filing the 990 tax return that is required of larger charities each year. Starting in 2007, due to tax law changes in the Pension Protection Act, public charities with income under $25,000 must annually file a 990-N or have their tax-exemption revoked after 3 years of non-filing. (Only churches are exempt from these filing requirements.)

Although the IRS has made several attempts to warn these organizations of their need to file over the 3-year period, an estimated 350,000 public charities have not filed a single 990-N as of a few days before the initial deadline of May 17, 2010. The IRS Commissioner is urging these organizations to file the 990-N even if they missed the May 17 deadline, stating that the IRS “will help these organizations maintain their important tax-exempt status,” but current legislation states that charities that missed the deadline will have their tax-exempt status automatically revoked, making it necessary for the charities to submit a new application for tax-exempt status and potentially pay taxes on any income received between May 18, 2010 and the date they are re-approved.

Although this largely affects those particular nonprofits, it also affects private foundations that fund these organizations. Specifically, private foundations are required to practice expenditure responsibility on any grants to organizations without public charity status or pay fines for making a taxable expenditure.

How ASF members may be affected

  • Tax-exempt status: Although the overwhelming majority of ASF members are private foundations and will not have their own tax-exempt status affected by this new rule, any members that are classified as 509(a)(1),(2) or (3) public charities and have an average income of less than $25,000/year must be filing the 990-N annually or are in danger of having their tax-exempt status revoked. If your organization falls into this latter category and you haven’t yet filed form 990-N, we recommend you do so immediately and seek knowledgeable legal counsel.

  • Increased requirements for funders of small organizations: It is important that your foundation know whether a grantee has complied with IRS filing rules. (Remember that churches are exempt from these requirements.) To easily determine if a grantee has lost or is in danger of losing its tax-exempt status due to lack of filing the 990-N, ask the grantee for evidence that it filed the form, or search online using a tool that was created by ASF’s colleague organizations and uses IRS data: http://nccsdataweb.urban.org/epostcard.

If you find that a potential grantee has not filed a 990-N, you have several options for assisting the organization:

  • Notify the organization that its tax-exempt status is in danger of being revoked. Be sure that it files the 990-N immediately and before any funding is given. Consider making a grant to the organization for nonprofit tax & legal training or assistance.

  • Fund the organization following your usual procedures, because senior IRS officials have stated that a foundation can rely on the current tax-exempt determination letter until the IRS issues a revocation letter, which is not likely to occur before January 2011. If you fund the organization after it has received this revocation letter, the foundation can potentially be fined for making a taxable expenditure unless it exercises expenditure responsibility; or

  • Exercise expenditure responsibility when making the grant.

Any grants made before May 17, 2010 can be made relying on the organization’s tax-exempt determination letter and following your usual procedures for determining grantee status.