Tax-Exempt Status Of Your Chapter
Before we go into all of the legal "mumbo-jumbo" about the tax-exempt status of Chapters, we need to qualify that the information in this workbook is not a substitute for the official information available from the United States Internal Revenue Service (IRS). In fact, what we have done in this section is try to clarify the details from IRS Publication 557 and information we have been able to obtain in telephone conversations directly with information assistants at the IRS. We suggest you obtain a copy of the IRS Publication 557 and contact the IRS in addition to what you learn during the Chapter Leadership Workshop. You will find that this publication is not terribly difficult to read and the assistants at the IRS are generally sincere and helpful.
- What is the Official Legal Status of Your Chapter?
- EAA requires Chapters to be incorporated as non-profit corporations
- State considers the Chapter to be non-profit
- Federal Government considers the Chapter to be a corporation
Who is Tax-Exempt From Federal Taxes and How do They Get That Way?
An organization may qualify for exemption from federal income tax if it is organized exclusively for one or more of the following purposes:
- Testing for public safety*
- Fostering national or international amateur sports competition
- Prevention of cruelty to children or animals
* Indicates areas where Chapters traditionally qualify.
To qualify, the organization must be a corporation, community chest, fund, or foundation. A Chapter meets this test by being incorporated as a non-profit corporation. A trust is a fund or foundation that will qualify. However, an individual or a partnership will not qualify.
(The above section is paraphrased from IRS Publication 557.)
Okay, so who is required to file for a "letter of determination"?
Your Chapter should qualify as tax-exempt, which mean the Chapter is exempt from paying federal income taxes. However, this does not mean your Chapter is automatically required to file for exempt. If they meet the definition of one or more of the organizations listed above, and as described in the detailed information in IRS Publication 557, and your Chapter's gross annual income does not exceed $5,000, then your Chapter is not required to file for a letter of determination. However, if your Chapter's gross annual income exceeds $5,000, then your Chapter must file an application, (Form 1023), and obtain a letter of determination from the IRS.
There are Several Different Kinds of IRS Tax-Exempt Classifications, Which One Suits Your Chapter Best?
- The most common classifications are 501(c)3 and 501(c)7.
- Classification 501(c)7 applies to "Social Recreation Clubs", and for most Chapters, this may be the easiest classification to qualify for and may best fit the nature of their operations.
- Classification 501(c)3 applies to the organization described earlier in this section of your workbook. Under classification 501(c)3, in addition to being exempt from paying federal income taxes, organizations under this classification may accept donations, the value of which are deductible by the donor from their federal tax obligation.
- This classification has some real benefits to both donors and the organization; however, there are several tests the organization must meet and this classification is closely monitored during the application process and subsequent to issuance of the letter of determination.
- Classification 501(c)3 can be difficult to obtain and even more difficult to maintain. Organizations that fail to maintain their operations in accordance with their original classification can lose their classification and the donors may be required to pay back taxes on donation they have already made and declared.
Before a Chapter decides to seek a letter of determination under classification 501(c)3, it is very important that the Chapter clearly understand the complete responsibilities of this classification, both during the application process and while their Chapter operates in the future. This classification and its responsibilities should not be taken lightly!
What is an Employer Identification Number and is Your Chapter Required to Obtain One?
- All exempt organizations, whether exempt by the nature of their operations or by letter of determination, are required to obtain and maintain an employer identification number.
- The employer identification number establishes the organization as an entity and this number is used when tax forms are filed.
- Never use the social security number of one of the members of your Chapter when establishing a banking account.
How to Apply For an Employer Identification Number!
The employer identification number is easy to apply for and can be done using IRS Form SS-4, Application for Employer Identification Number.
How Does Your Chapter Obtain Further Details?
- Stop by an IRS Office
- Call the IRS. (Make sure to ask for someone who is familiar with tax-exempt requirements.) There are several offices across the United States that specialize in tax-exempt organizations. (The one nearest Oshkosh is in Cincinnati, Ohio, and their number is (877) 829-5500. Be prepared to hold for a long time!)
- Visit the IRS web site at
What About Your Chapter's State Tax Responsibilities?
There are no common guidelines available to explain what your Chapter's obligations are to the taxing authority in your state. Your Chapter should either contact the state department of revenue or ask a local accountant to help.
- Non-Profit Corporation
- IRS Tax Exemption, 501 (c)3 or 501 (c) 7
- Employer Identification Number