For those of you who have read some of our past blog posts, you may know that the new legislation impacting corporate entities, limited liability companies, and nonprofit corporations is the Corporate Transparency Act (the “Act”) which becomes effective January 1, 2024. For general information about this Act, I encourage you to check out George Ptasinski’s blog post titled The Corporate Transparency Act and Tax-Exempt Organizations explaining how it works.
As you may note from George’s blog post, tax exempt entities are exempt from the reporting requirements of the Act. These entities include organizations exempt under Section 501(c) of the Internal Revenue Code of 1986, as amended (the “Code”) (think 501(c)(3), 501(c)(4), and 501(c)(6) organizations); political organization under Section 527(e)(1); and trust and split interest trusts under Section 4947(a) of the Code.
Nonprofit organizations may then be asking why they should concern themselves with the Act. There are three considerations all nonprofit organizations should think about when it comes to the Act: (1) how does the Act implicate nonprofit organizations that are not tax exempt under the Code, (2) what should nonprofits seeking tax exemption do before receiving their determination letter, (3) what are entities that assist tax exempt entities?
- Nonprofit Organizations without Tax-Exemption
The Act does not exempt nonprofit organizations which have not received a determination of tax-exempt status from the reporting requirements of the Act. The requirements of the Act apply to nonprofit organizations, just as any other corporate entity. Therefore, the beneficial owners of such organizations must report. But if a nonprofit does not have any owners, who are the beneficial owners? Again, referring to the discussion on beneficial owners in George’s blog post, the Act doesn’t only look to financial ownership, the Act also looks to those who exercise control of an organization. Those persons who exercise control over the organization will probably be considered beneficial owners. This includes a board of directors or board of trustees of an organization.
- Nonprofit Corporations Applying for Tax Exemption.
What about nonprofit corporations that are seeking tax exemption but have not received their determination letter. Fortunately, the Act itself gives us guidance. The Act exempts organizations described in section 501(c) of the Code “determined without regard to section 508(a)” (emphasis added) of the Code. Section 508(a) of the Code requires certain organizations (specifically charitable organizations) to file applications in order to be determined as exempt under Section 501(c)(3). The Act therefore allows the reporting exemption to apply for those organizations seeking to be determined as tax-exempt under Section 501(c)(3), even if a determination letter has not been issued yet. To ensure that a nonprofit seeking tax-exempt status can adequately show that it operates under Section 501(c)(3), even before a determination letter has been issued, the nonprofit should seriously consider submitting an application to be determined as exempt under Section 501(c)(3) within 90 days of incorporation.
- Entities that Assist Tax-Exempt Entities
Other entities that are exempt from the reporting requirements of the Act are those entities that are organized exclusively to provide financial assistance to, or hold governance rights over, tax-exempt organizations under Section 501(c). The legislative history regarding this provision is scarce. There is, so far, very little literature or information about what type of organization this provision describes. One thought is that this provision may apply to a corporation that only holds donor advised funds which are investment accounts held for charitable purposes, managed by an entity (sometimes a for-profit corporation or LLC), and funded by individual donors. These types of organizations would seem to fit the definition in the exemption. Professionals who practice in this area are hopeful that guidance on this provision will come from the IRS sooner rather than later.
This blog is for general information purposes only and should not be relied upon as specific legal advice. This article, or contacting Apex, does not in any way form an attorney-client relationship. If you have any questions or would like to learn more, please contact us or visit our blog. You might also like to read, Nonprofit Member Inspection, Eliminating Statutory Membership, and What Are the Changes to Members Rights from the 2022 Washington Nonprofit Law Update?