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by Thomas A. Glessner, J.D.
 Recently, a pregnancy help center notified the National Institute of Family and Life Advocates (NIFLA) of an impending audit that the Internal Revenue Service (IRS) was undertaking of the center's operations. In its letter to the center, the IRS stated that its audit was "to verify the correctness of income or gross receipts, deductions, and credits and to determine that the organization is operating in the manner stated and for the purpose set forth in its applications for recognition of exemption." It was a straightforward challenge to the center's tax-exempt status.
There are specific details you must attend to in order to preserve your center's tax-exempt status with the IRS. Every board member of your center is strongly advised to review this article and to retain it for future reference.
The Nature of Your Tax-Exempt Status
All corporations, including nonprofit corporations, are subject to federal, state, and local taxation unless they qualify for tax-exempt status with the IRS. In order for a nonprofit corporation to become a tax-exempt entity for federal income tax purposes, it must meet specific requirements set forth in the Internal Revenue Code, the US Treasury regulations under the code, and the Internal Revenue Service. Many states gear their income tax structures to the IRS's definition of "taxable income." Organizations should also keep in mind other potential state tax exemptions, such as exemptions from property taxes, sales and use taxes, and occupational licensing taxes.
Each pregnancy help center should be incorporated as a nonprofit corporation under the laws of the state in which it operates and be recognized as tax-exempt by the IRS under Section 501(c)(3) of the Internal Revenue Code. This section of the Code exempts from taxation all organizations which are "organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals." The general requirements for all 501(c)(3) organizations are that no personal benefit (profit in the nature of a dividend) may inure to private individuals, members, or officers and that the organization must not engage in prohibited lobbying activities.
After an organization files all necessary documents with the IRS, a determination letter ruling will be issued. This ruling recognizing exemption is effective from the date the organization was formed, and donors may rely upon this letter in order to deduct contributions made to the organization. It is extremely important that this letter be kept on file for future reference. Many times donors and grant-makers will request a copy of the letter before giving funds. It is possible for an organization to be given an advance ruling (a ruling issued before the organization begins operation) on its exempt status. In order to obtain an advance ruling, the organization must show its expected activities, sources of income, and principal expenditures. Even if the organization provides the appropriate information, the IRS can require that the organization present a record of actual operations before it issues a ruling.
The language of the IRS Code specifically requires that a tax-exempt organization be organized and operated exclusively for permitted purposes. The regulations state that "the articles of organization must limit the organization's purposes to one or more of those [tax exempt purposes]...and must not expressly empower it to engage, other than as an insubstantial part of its activities, in activities that do not further one or more of those purposes." (See IRS Publication 557, "Tax Exempt Status for Your Organization.")
As a tax-exempt entity under Section 501(c)(3), a pregnancy help center may engage in activities designed to influence legislation, i.e., lobbying on issues, as long as such activities do not comprise a "substantial part" of its activities. The issue of what constitutes a "substantial part" of an organization's activities is technical. Space does not permit a further discussion of this issue, but for more information on this point contact NIFLA.
In regards to political candidates, a tax-exempt organization under Section 501(c)(3) is also prohibited from any direct or indirect participation in political campaigns. Organizational endorsements, organizational donations to a candidate, and use of organizational resources on behalf of a candidate could threaten the tax-exempt status of a pregnancy help center.
Informational Income Tax Return
Even though you are tax-exempt and do not pay income taxes, you may have to file an informational income tax return with the IRS annually. Form 990, "Return of Organization Exempt from Income Tax," must be filed each year if your gross revenue is "normally more than $25,000." According to the IRS, an organization's gross receipts are considered to be "normally" $25,000 or less if the organization is: (1) up to one year old and has received or donors have pledged to give $37,500 or less during its first tax year; (2) between one and three years old and averaged $30,000 or less in gross receipts during each of its first two tax years; or (3) three years old or more and averaged $25,000 or less in gross receipts for the immediately preceding three tax years including the year for which the return would be filed.
If your gross receipts each year are not normally more than $25,000, the IRS asks that you establish that you are not required to file Form 990 by May 15 of each year. A penalty of $10 a day is charged when the return is filed late, unless there is reasonable cause for the delay. The maximum penalty charged cannot exceed $5,000 or 5 percent of your gross receipts for the year, whichever is less. This penalty may also be charged if a return is not complete, so you need to be sure that your return is complete before filing.
Public Inspection
You are required to make your annual return available for public inspection at your principal business office for three years after the return is due. Any member of the public may come during business hours and request to inspect this return. You are not required to allow inspection of the part of the return that lists major contributors, but all other parts of the return must be available for inspection.
You are also required to make available a copy of your exemption application and supporting documents and your exemption letter if you applied for your exemption after July 15, 1987. In addition, copies of all correspondence with the IRS concerning the application must be provided for inspection as well.
Failure to make these documents available for public inspection may subject you to a penalty of $10 per day for each day there is a failure to comply up to a maximum of $5,000 in the case of an annual return.
Call for Help
Questions on your tax-exempt status can be intimidating and overwhelming. NIFLA exists to serve centers and help them with their questions. Please feel free to call us at (540) 785-9853 for advice and consultation on issues concerning your tax-exempt status.
Thomas Glessner is the President of the National Institute of Family and Life Advocates. For details, contact NIFLA, P. O. Box 42060, Fredericksburg, VA 22404, phone: (540) 785-9853.
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