What is a group exemption? How to know if its right for your nonprofit

Explore the ins and outs of group exemptions and determine if it's the optimal path for your nonprofit's tax status.
What is a group exemption and how to know if its right for your nonprofit
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Does your nonprofit have multiple sub-chapters or is already part of a larger nonprofit? If so, keep reading to learn about the group exemption.

Whether you’re a large nonprofit organization with many sub-chapters, or a new sub-chapter, it’s important to know about the group exemption option for filing with the IRS. A group exemption reduces time and money spent on reporting and stress. This article will go through everything you need to know about it: what it is, who it applies to, why it’s beneficial, if it’s still accepting applications and more.

What is a group exemption?

A group exemption is a provision from the Internal Revenue Service (IRS) that allows a central or “parent” nonprofit organization to extend their tax exempt status unto their subordinating chapters. Individual chapters don’t need to separately apply for their own tax-exempt status; they fall under the umbrella of the parent organization’s exemption.

For example, a national nonprofit with 30 chapters can file for a group exemption so their 30 subchapters do not need to do their own tax filing.

Did the IRS stop accepting new group exemptions?

Unfortunately for new nonprofits hoping to benefit from a group exemption, the IRS has paused applications for new group exemptions on June 17th, 2020. The IRS is revisiting their policies on qualifications, maintenance and  the application process for a group exemption. In the meantime, no new groups are able to apply. Those who already have an exemption are able to continue as before, and maintain compliance with the IRS guidelines.

As of February  2024, 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 to Maintain Group Exemption Status

Central Organization:

Maintaining a group exemption is very doable with proper organization and planning. The IRS requires an annual update from the central organization about any changes within any of the subordinate chapters that may have occurred during the year. This includes changes in character or purpose of the chapter, as well as practical details such as address or name. This is also the time for the central organization to report the addition or withdrawal of any of their subordinate chapters. Your organization should ensure that all entities under your exemption adhere to IRS guidelines, file appropriate annual returns (like Form 990), and stay compliant with tax laws. 

Individual Chapters:

Being a subordinate chapter of a parent organization simplifies your responsibilities. The only annual filing that you need to worry about is the 990 form. This is a form that all registered nonprofits must file to the IRS every year. If you fail to file it for 3 years in a row, the chapter will lose its group exemption status and EIN (Employer Identification Number). 

Take a look at our compliance checklist for a full list of what you need to stay compliant.

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:

  1.  Ensure that the new group is qualified to be part of your group exemption. 
    1. To qualify, the group should have a similar structure and fiscal year
    2.  under the supervision of your central organization. 
  2. Gather key details from the new group:
    1. Name
    2. EIN
    3. Description of operations, 
    4. 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. 

Retain records of communications with the IRS, and regularly review the new group’s compliance, such as ensuring they submit their annual Form 990. 

Why do nonprofits apply for group exemptions?

Nonprofits with many chapters would be interested in a group exemption because of its simplicity. Only the central organization needs to apply for tax exempt status, instead of each chapter individually. 

This exemption saves time and bureaucratic headaches for both the nonprofit and the IRS, as the IRS currently oversees 4,000 groups with 440,000 subordinate groups! 

 

Eased Compliance for Chapters

With the group exemption, there is less paperwork and less headache for the chapter to worry about. Each chapter treasurer may not have the capacity to manage applying for their own tax exemption, so a group exemption is a great solution. Some chapters see yearly treasurer turnovers, a group exemption alleviates the pressure of maintaining individual tax-free statuses.

 

Saving time and money

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 Expansion

It is much easier to create new chapters of a nonprofit organization with a group exemption. It simplifies the integration process by removing the need for separate tax exemption applications for each new entity.

 

Unity with the Central Organization

The group exemption necessitates greater transparency, communication and unity between the chapters and their central organization. This can lead to greater collaboration and better performance of the chapters. On the other hand, in cases where a chapter goes rogue or defunct, the central organization can reclaim any leftover funds (if they have a banking partner like Crowded). 

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 an overview of the eligibility requirements:

Central organization: There must be a central, or “parent”, organization that supervises or controls the subordinate chapters. 

Purpose and structure: The subordinates must be affiliated with the central organization and share a common purpose. 

Subordinate inclusion: The central organization must maintain and annually update a list of all the subordinates included in the group exemption.

Annual Reporting: 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.

Same 501(c) type: 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 exemption: Subordinate organizations covered by the group exemption generally shouldn’t have their own separate tax-exempt recognition from the IRS.

 

Before applying, ensure that your central organization and its subordinates meet the IRS eligibility criteria for a group exemption.

How to obtain a group exemption for your nonprofit

Please be aware that new applications for group exemptions are currently not being accepted. The following is the instructions for obtaining a group exemption under the policy for the IRS before they stopped accepting applications in 2020. 

If your nonprofit organization has chosen that you want to pursue a group exemption, you must file for your own tax exemption status. Then, you must declare to the IRS that each chapter within your organization is:

  1. Affiliated with them
  2. Subject to your supervision or control
  3. Exempt from taxation under the same clause of the IRC 501(c)
  4. In the same accounting period as the parent

For more detailed information, see the IRS documentation.

Here is a step-by-step guide to obtaining a group exemption:

  1. Prepare Your 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:
    1. Description of the relationship between the central organization and its subordinates.
    2. Details of the central organization’s purposes and activities.
    3. Sample copy of a typical subordinate’s organizing document.
    4. Description and sample of any bylaws, regulations, or other governing instruments applicable to subordinates.
    5. Certification that all subordinates have provided written authorization to the central organization, allowing it to include them in the group exemption.
  2.  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.

After reviewing your application, the IRS might request additional information. Promptly and address any questions or requests for clarification.

If your application is approved, the IRS will issue you a Group Exemption Letter (GEL). This letter will cover all the subordinates listed in the application.

The process might sound intimidating, but with proper preparation, and potentially a hired nonprofit tax professional, obtaining a group exemption is definitely achievable!

 

Keep an eye on the IRS guidelines and regulations regarding group exemptions, as they may reopen group exemption applications at any time.

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Your questions, answered.

A group exemption is a designation from the IRS that allows a central nonprofit organization to extend their tax-exempt status to their subordinating chapters. With a group exemption,  individual chapters do not need to apply for their own tax exemption status, saving time and resources.

The IRS has paused applications for new group exemptions at the moment. They are revisiting their policies and in the meanwhile, no new groups are able to apply. Those who already have an exemption are able to continue as before and maintain compliance with the IRS guidelines.

Yes, if you are a subordinate organization of a nonprofit that has a group exemption, you still need to submit the Form 990 every year.  The specific type of Form 990 you need to fill out will depend on the amount of money your group has collected in gross receipts within the year.