Are you setting up a nonprofit that will have multiple sub-chapters or already part of a larger nonprofit? There’s a secret weapon you might not be aware of: the group exemption. Whether you’re launching a new cause or steering an established institution, a group exemption could be a game-changer for your nonprofit, reducing time, costs, and stress. Let’s demystify what group exemption is, who it’s intended for, and the steps to secure it for your nonprofit.
What is a group exemption?
A group exemption for nonprofits is a provision by the Internal Revenue Service (IRS) that allows a central, or “parent”, nonprofit organization to obtain tax-exempt status on behalf of its subordinate organizations or chapters. This means that the individual chapters or sub-entities of a larger nonprofit don’t have to separately apply for their own tax-exempt status; they fall under the umbrella of the parent organization’s exemption.
Here’s how it works:
- The central or parent organization applies for a group exemption letter from the IRS.
- Once granted, new subordinates or chapters can be added under this umbrella without needing to individually apply for tax-exempt status.
- It simplifies the administrative process for large nonprofits with multiple chapters or affiliates, ensuring that all their entities can operate as tax-exempt without going through the rigorous application process individually.
It’s important to note that the parent organization assumes responsibility for ensuring that its subordinates comply with the rules and regulations associated with maintaining tax-exempt status.
For example, let’s say that you are a national animal protection nonprofit group with 30 subsidiary chapters around the country. By filing for a group exemption at the national level, you could extend your tax-exemption to all 30 of your subsidiary chapters. It’s like giving every chapter a fast-pass to the tax-exempt world, sparing them the effort and time
Why do nonprofits apply for group exemptions?
For rapidly expanding nonprofits or those with numerous chapters, a group exemption minimizes paperwork and ensures each chapter remains compliant with IRS guidelines. Considering chapters often see yearly treasurer turnovers, a group exemption alleviates the pressure of maintaining individual tax-free statuses. This streamlining allows the organization to concentrate more on its core objectives.
Efficiency and cost-saving: By securing a group exemption, nonprofits can streamline the administrative process, reducing both time and expenses associated with individual tax-exempt applications for each chapter.
Eased compliance: Group exemptions provide a consistent tax-exempt status across all chapters, enhancing organizational uniformity and reputation, while also centralizing compliance oversight to reduce risks of non-compliance.
Facilitated expansion: For nonprofits that are growing and introducing new chapters, a group exemption simplifies the integration process by removing the need for separate tax exemption applications for each new entity.
Which nonprofits are eligible to apply for a group exemption?
The Internal Revenue Service (IRS) has specific criteria for which nonprofits are eligible to apply for a group exemption. Here’s a general overview of the eligibility requirements:
Central organization: There must be a central, or “parent”, organization that supervises or controls the subordinate organizations (the chapters, affiliates, or local units). The parent organization is the one that applies for the group exemption.
Purpose and structure: The subordinates must be affiliated with the central organization and share common purposes and structures. Essentially, they should operate in a similar manner and for similar reasons.
Subordinate inclusion: The central organization must maintain and annually update a list of all the subordinates included in the group exemption.
Annual information: The parent organization must ensure that either they or the subordinates meet the annual reporting requirements, like filing the appropriate version of Form 990.
Organizational structure: The subordinates must be subject to the general supervision or control of the central organization. This doesn’t mean daily oversight but indicates a level of consistent oversight, such as shared bylaws or regular reporting.
Consistent exempt status: All subordinates covered by the group exemption must be eligible for the same section of exemption under the Internal Revenue Code (e.g., all are 501( c)(3)).
No individual exemptions: Subordinate organizations covered by the group exemption generally shouldn’t have their own separate tax-exempt recognition from the IRS.
How to obtain a group exemption for your nonprofit
To obtain a group exemption for your nonprofit, you must follow a structured process set out by the IRS. Keep in mind that you can only apply for group exemption if you are the central organization of your nonprofit group – individual chapters cannot apply for a group exemption on behalf of the central org. Before applying for group exemption, your nonprofit must have already obtained tax-exempt status. Here is a step-by-step guide to obtaining a group exemption:
1. Eligibility check: Before applying, ensure that your central organization and its subordinates meet the IRS eligibility criteria for a group exemption. This includes having a central organization that supervises or controls the subordinates, consistent purposes and structures among them, and ensuring that subordinates don’t have individual exemptions.
2. Prepare the application: The central organization should submit a letter to the IRS requesting a group exemption. This letter needs to include specific information about the central organization and its subordinates, such as:
- Description of the relationship between the central organization and its subordinates.
- Details of the central organization’s purposes and activities.
- Sample copy of a typical subordinate’s organizing document.
- Description and sample of any bylaws, regulations, or other governing instruments applicable to subordinates.
- Certification that all subordinates have provided written authorization to the central organization, allowing it to include them in the group exemption.
- Include Required Documentation: Along with the letter, submit the central organization’s exemption determination letter, a list of subordinates to be included in the group exemption, and any other relevant information or documentation requested by the IRS.
3. Annual list of subordinates: The central organization must provide an annual update to the IRS listing all subordinates covered by the group exemption. This list should include any subordinates that have been added or removed during the year.
4. Respond to IRS feedback: After reviewing your application, the IRS might request additional information. Promptly and thoroughly address any questions or requests for clarification.
5. Receive Group Exemption Letter (GEL): If approved, the IRS will issue a Group Exemption Letter (GEL) to the central organization. This letter will cover all the subordinates listed in the application.
The process might sound complex, but with due diligence, preparation, and possibly the assistance of professionals familiar with nonprofit tax matters, obtaining a group exemption can be a streamlined experience. Always stay updated with IRS guidelines and regulations regarding group exemptions, as they may change over time.
How to Maintain Group Exemption Status
Maintaining a group exemption for your nonprofit requires the central organization to submit an annual update to the IRS, detailing additions or removals of subordinates. It’s vital to ensure all entities under the exemption adhere to IRS guidelines, file appropriate annual returns (like Form 990), and stay compliant with tax laws. The central organization should also keep detailed records, monitor any significant changes to its or its subordinates’ governing documents, and address IRS inquiries promptly. Staying informed about evolving tax laws and regulations is key to ensuring the continued validity of the group exemption.
As a subordinate chapter under a parent organization, your responsibilities are much simpler. Your primary annual filing concern is the Form 990, a mandatory document that all registered nonprofits must submit to the IRS yearly. With Crowded’s assistance, completing this form becomes hassle-free. It’s crucial to note that failing to file your Form 990 for three consecutive years will result in the loss of your chapter’s group exemption status and its Employer Identification Number (EIN).
Did the IRS stop accepting new group exemptions?
On June 17th, 2020, the IRS announced a temporary halt on new group exemption applications. This decision, which culminated from a decade-long review, was made to revamp the group exemption process for greater efficiency and improved compliance with Section 501(c) tax-exemption requirements. The IRS said it is aiming to create a more streamlined, standardized approach that lightens its administrative load.
Although many central organizations will see minimal changes due to a robust grandfather rule, others may face increased administrative tasks. The new guidelines have the potential to limit the types of qualifying subordinates, which could reduce the total number of group exemptions.
As of August 2023, the hold on new group exemption applications remains active. However, organizations that secured a group exemption before June 17th, 2020, can still modify their subordinate list and maintain their exemption status.
How do I add a new group to my group exemption?
If you are a central nonprofit organization that wants to add a new group to your group exemption, follow these steps. First, ensure that the new group is qualified to be part of your group exemption. To qualify, the group should have a similar structure and fiscal year, and be under the supervision of your central organization. Once you have established that the group is qualified, gather key details from the new group, including its name, EIN, a description of operations, and a signed consent to join the exemption.
As the central organization with the group exemption, keep an updated list of all subordinates included in your exemption and submit any changes to the IRS annually or more frequently if chosen. Although not always required, some organizations opt to notify the IRS immediately upon adding a group. Finally, retain records of communications with the IRS, and regularly review the new group’s compliance, such as ensuring they submit their annual Form 990. Consulting a professional for guidance during this process is recommended.
While the IRS is not currently accepting new requests for group exemptions, central organizations with an existing exemption can continue to add groups under their group exemption as usual.
How Crowded can help your nonprofit with group exemptions
Navigating nonprofit compliance can be overwhelming, but at Crowded, we understand this challenge. We offer more than just a financial app for groups; our team is also a go-to resource for nonprofit compliance, with a deep understanding of its nuances.
Our team’s expertise covers areas such as 990 filings, group exemption processes, and EIN compliance for both central and subsidiary organizations. Nonprofits in the Crowded community enjoy perks such as individual support and help in setting up and maintaining group exemption, 990 filing, and EIN troubleshooting.
If you need a helpful hand or guidance in any of these areas, feel free to reach out to us for support!