A community theater incorporated in 2019 forgot to file Form 990-N for three consecutive years. On the first day of the fourth year, the IRS automatically revoked its §501(c)(3) status. Donations stopped flowing because contributors lost the charitable deduction, and the theater faced a fresh Form 1023 application and user fee to start over.
§501(a) grants exemption to organizations described in 29 paragraphs of §501(c). The most common:
- Organizational test. Articles of incorporation must limit purposes to one or more exempt purposes, expressly forbid non-exempt activities, and require assets on dissolution to be distributed to another §501(c)(3) or...
- Operational test. The organization must operate primarily for exempt purposes. Insubstantial non-exempt activity is allowed.
- Private inurement. No part of net earnings may benefit an insider (director, officer, substantial contributor). Reasonable compensation for services is allowed.
- Private benefit. Activities must not serve private interests more than incidentally, even for non-insiders.
- Political campaign activity. Absolute prohibition on participating in any political campaign for or against a candidate for public office. Violation triggers loss of exemption and excise tax under §4955.
Common mistakes
- Assuming a §501(c)(4) social welfare organization can accept deductible contributions. Only §501(c)(3), §501(c)(19), and a handful of others generate the donor charitable deduction; (c)(4) contributions are not deductible.
- Filing Form 1023-EZ when the org has assets of $300,000. Caps are gross receipts ≤ $50,000 AND assets ≤ $250,000; exceeding either disqualifies the streamlined form.
- Skipping Form 990-N because gross receipts are only $8,000. Even $0-receipt orgs must file the e-Postcard; three years of skipping triggers automatic revocation.
Bottom line
- §501(c)(3) requires an organizational test (purpose and dissolution clauses) and an operational test (activities primarily exempt); no private inurement.
- For (c)(3), political campaign activity is absolutely prohibited; lobbying is limited to "no substantial part" or the §501(h) mechanical election.
- Form 1023 seeks (c)(3) recognition (1023-EZ if gross receipts ≤ $50,000 and assets ≤ $250,000); Form 1024 covers most other categories; file within 27 months for exemption retroactive to formation.
- Form 990 series due 15th day of the 5th month after year-end (May 15 calendar year); six-month extension on Form 8868.
Exam shortcut
990 series picker by size. Normally ≤ $50K = 990-N, < $200K and < $500K assets = 990-EZ, ≥ $200K or ≥ $500K assets = 990, foundation = 990-PF, gross UBI ≥ $1,000 = add 990-T. (c)(3) prohibitions in two words: "campaign, never." Political campaigns are an absolute bar; lobbying is merely limited. If a fact pattern says the org "endorsed a candidate," exempt status is gone. UBTI three-prong test.
The full lesson (about 2,088 words, 14 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- 2
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