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How to Become Exempt from Federal Income Tax i.e. Nonprofit Status
A nonprofit organization is one that is created for a specific charitable purpose and governed by a group of individuals who do not benefit financially from association with the organization. These individuals make up an independent board of directors for the organization and become financially and managerially responsible for running the club. Nonprofit designation does not forbid the organization from making a profit, however, any profit earned must be invested back into the operation of the club and cannot inure to any club or board member.
The advantages of nonprofit tax-exempt status are:
- No federal income tax on related business income
- Contributions to your club are tax deductible for the donor — membership dues are not tax deductible.
- Non-reimbursed expenses incurred by your board of trustees are deductible on their personal income tax returns.
- Postage rates may be lower.
- Enhances ability to apply for government and private grants.
- Greater commitments from sponsors and other civic and public groups.
How to Obtain Nonprofit Designation Under 501(c)3 of the Internal Revenue Code
RRCA member clubs and events wishing to become a nonprofit organization can do so one of two ways. A club can either apply for federal tax exemption directly through the IRS, or it can apply to become a subsidiary organization under the RRCA’s group exemption.
Applying for nonprofit status directly through the IRS requires completing a 10 page application, (known as a Form 1023), providing detailed financial information and budgets, paying a fee, and waiting 6 months or more for the IRS to review the application and make a determination about whether or not to grant the club’s tax exemption.
One of the many benefits of RRCA membership is the opportunity to obtain 501(c)3 nonprofit status with the Internal Revenue Service (IRS) under the RRCA’s group exemption. The procedure for RRCA member clubs and events to obtain federal tax-exempt status is much simpler than applying individually for tax exemption, and there is no cost for members.
Procedure to Obtain Nonprofit Status Under the RRCA’s Group Exemption
Only entities organized as legitimate nonprofit running clubs or nonprofit events will be eligible for nonprofit status through the RRCA’s group exemption with the IRS. The RRCA reserves the right to reject any organization in the nonprofit group exemption that is believes does not meet the requirements of being a nonprofit running club or event. We encourage you to contact the RRCA with questions about club bylaws and the letter of intend to join the RRCA’s nonprofit group as an affiliate member.
- Organize a running club or event that has a similar mission and purpose as outlined in the RRCA bylaws.
- Set your fiscal year to match the RRCA’s fiscal year of January 1 to December 31 (required).
- Adopt a set of bylaws to govern your running club or event. Members are encouraged to use the RRCA’s sample running club bylaws or the sample event member bylaws as a template for creating their own bylaws. We outlined required bylaw items for your organization in these samples.
- Obtain a federal employer identification number (EIN) through the IRS. Learn how to apply for an EIN number.
- Elect a board of directors of no less than three unrelated individuals on an annual basis.
- Adopt a Conflict of Interest and Disclosure Statement Policy for the club and/or event.
- Send a letter, signed by an officer of your organization to the RRCA National Office requesting tax-exempt status under the RRCA group exemption. Your letter must include the following information:
- Your club’s federal employer identification number
- Your club’s official name and address
- A statement that your club is not a private foundation
- A statement that your club has not previously applied and been rejected for tax-exempt status.
- A statement that your club agrees to abide by the policies set forth by the RRCA and the IRS for nonprofit organizations
- A statement that “No substantial part of the activities of your club shall be to carry on propaganda, or otherwise attempt to influence legislation. The club or event may not participate in or intervene in any political campaign on behalf of any candidate for public office.”
- A statement of purpose for your organization. Your statement of purpose must be similar to the RRCA’s that states:
The RRCA promotes and encourages distance running as a competitive sport, and it improves fitness and health by supporting running and jogging. Toward those goals, the RRCA promotes and conducts races or other running activities; disseminates information on running via publications, presentations and educational programs; takes part in or conducts research; makes awards; offers management guidance to member organizations; and does related activities.
Send the letter of intent along with the organization’s bylaws to the RRCA National Office. Upon receipt of these documents you will receive a confirmation letter stating that your club is exempt from federal tax under our group exemption. You will also receive a copy of the RRCA’s federal nonprofit determination letter for your records. At times both letters will be needed to prove nonprofit exemption when working with local governmental agencies or corporate entities.
The group exemption does not apply to state or local taxes. Each cub must review the tax requirements of their state and comply with these tax requirements. Make sure to inquire about your states tax exemption filing requirements and sales tax exemption rules.
Maintaining Your Nonprofit Status Through the RRCA
- Renew your RRCA membership by January 1st of each year. Non-renewed clubs will be dropped from the group if they fail to renew during a 12-month period. Lapsed membership may affect your ability to access nonprofit status in the future.
- Ensure you have independent, individual members elected to your board of directors. Contact information for each board member should be updated annually with the RRCA National Office. Review the RRCA bylaws related to nonprofit club governance.
- File all applicable tax reports for your organization in a timely manner.
- Provide an annual report, which includes financial statements to your members on an annual basis.
Explaining Your Nonprofit Status Through the RRCA Group Exemption
If your club or event is receiving nonprofit status, IRS 501(c)3 designation, through the RRCA, the proper way to articulate this relationship or to communicate this to your members or local community is, “Our club is an affiliate member of the RRCA. Through the RRCA, we are a 501(c)3 nonprofit organization.” This statement will help other entities that your organization works with confirm your nonprofit affiliation with the RRCA. It is not enough to simply state that your organization is a 501(c)3 nonprofit organization if you are taking advantage of the RRCA group exemption. You must explain that you are a member of the RRCA group exemption when communicating about your nonprofit status. If your organization simply states that it is a nonprofit organization, but does not identify that it is a nonprofit affiliate of the RRCA, a donor, sponsor, or local government may not readily be able to confirm your organizations nonprofit status through the IRS.
Nonprofit Tax Filing Responsibilities
Tax return preparation should be a high priority for all nonprofit clubs and events. ALL nonprofit organizations are required to file IRS Form 990 or 990-n annually by the fifteenth (15) day of the fifth (5) month after their fiscal year end. Learn more about filing requirements.
Nonprofit organizations who earn $1,000 or more from unrelated business activities (UBIT), must file IRS Form 990-T. Unrelated business income is income earned from activities not substantially related to the exempt purpose of an organization. Advertising income (in your club newsletter), t-shirt sales, etc. may be considered unrelated business income. State tax filing requirements for nonprofit organizations vary from state to state, and a tax advisor should be consulted to determine the filing requirements of each individual club.
The RRCA does not file tax returns on behalf of any member.
Charitable Solicitation Registration and Independent Audit Requirements.
Due to fraud and abuse in the nonprofit industry, states’ attorneys general are cracking down on nonprofit fundraising. Nonprofit organizations that solicit contributions are required by state law to file charitable solicitation registration forms. Information about state charitable registration can be found at multistatefiling.org.
The RRCA will file the charitable solicitation registrations for members taking advantage of the RRCA group tax exemption. Although the RRCA files the master paperwork, some states require affiliate organizations of a parent organization to file an annual financial report as well. Check with your state to understand charitable solicitation registration rules.
Clubs or events that do not take advantage of the RRCA group exemption status should visit the site above to learn more about the topic and ensure compliance for your organization. If your organization receives funds from a government entity you are required to have an annual independent audit. Some states also require larger nonprofit organizations to have an independent financial audit on file with the state agency. Review your State’s Attorney General website to determine if your organization is required to have an independent audit.