EA2 STUDY UNIT 20.1: Exempt Organizations

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Questions and Answers

A charitable, religious, or scientific organization is presumed to be a private foundation if it meets which of the following conditions?

Has gross receipts under $5,000 and notifies the IRS on Form 1023 within 27 months from the end of the month in which it was organized.

Has gross receipts over $5,000 and notifies the IRS on Form 1023 within 27 months from the end of the month in which it was organized. (correct)

Has gross receipts over $5,000 and does not notify the IRS on Form 1023 within 27 months from the end of the month in which it was organized.

Has gross receipts under $5,000 and does not notify the IRS on Form 1023 within 27 months from the end of the month in which it was organized.

Which of the following organizations is NOT eligible for a charitable deduction for a contribution?

A cemetery company that operates exclusively for the benefit of its members. (correct)

A childcare organization.

A cooperative hospital service organization.

A corporation organized under an Act of Congress.

What form must a non-exempt charitable trust file if its gross receipts during the year were less than $200,000 and its total assets at the end of the year were less than $500,000?

Form 990-EZ (correct)

Form 990

Form 1023

Letter with required information

What form is required for a qualified pension trust to apply for exemption?

Letter with required information (B) Signup and view all the answers

Which of the following is NOT a requirement for claiming a charitable deduction for contributions to an organization?

The organization must be a cemetery company operating for the benefit of its members. (C) Signup and view all the answers

What is unrelated business taxable income (UBTI)?

Income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose constituting the basis for an organization’s tax-exempt status. (C) Signup and view all the answers

Which of the following is NOT a characteristic of UBTI?

It can be derived from services performed by unpaid volunteers. (A) Signup and view all the answers

A tax-exempt organization is required to file a UBTI tax return (Form 990-T) if its:

gross income from an unrelated business is $1,000 or more. (A) Signup and view all the answers

Which of the following activities is MOST LIKELY to result in unrelated business taxable income for a tax-exempt organization?

A hospital operating a gift shop. (B) Signup and view all the answers

A tax-exempt organization's gross income from an unrelated business is $900. Which of the following statements is true?

The organization is not required to file a UBTI tax return. (A) Signup and view all the answers

Which of the following activities would NOT generate unrelated business taxable income for a tax-exempt organization?

A trade association selling publications used as course materials for its seminars. (B) Signup and view all the answers

A social club will lose its exempt status if:

more than 35% of its receipts are from sources other than membership fees, dues, and assessments. (D) Signup and view all the answers

An exempt scientific research organization has elected a $20,000 lobbying expenditure limit for the current year. If the organization spends $30,000 on lobbying this year, what is the consequence?

The organization will owe an excise tax of $2,500. (B) Signup and view all the answers

Which of the following statements about the taxability of UBTI is TRUE?

UBTI is subject to tax at the corporate income tax rate, but only if it exceeds $1,000. (A) Signup and view all the answers

An exempt organization's activities include providing rehabilitation services to individuals with disabilities. The organization also operates a store that sells items made by these individuals as part of their rehabilitation program. Would this store operation generate unrelated business taxable income (UBTI)?

No, because the store is directly related to the organization's exempt purpose of providing rehabilitation services. (C) Signup and view all the answers

Study Notes

Pension Trust Application for Exemption

Employee pension trusts file a letter, not a form, listing required information for exemption.
Parent organizations cannot file for private foundation status—they must file independently.

Private Foundation Status

A charitable, religious, or scientific organization is presumed a private foundation if its gross receipts exceed $5,000 and it doesn't notify the IRS of its status via Form 1023 within 27 months of formation.

Non-Exempt Charitable Trust Filings

A non-exempt charitable trust may file Form 990-EZ if gross receipts are under $200,000 and total assets are under $500,000.

Charitable Deductions

Contributions to civic leagues (promoting social welfare), organizations for scientific or educational purposes are deductible.
Donations to cemetery companies are generally deductible; however, those operating exclusively for members aren't tax-exempt.

Tax-Exempt Organization Activities and UBTI

Selling items made by rehabilitation clients is related to the organization's purpose and thus does not create unrelated business taxable income (UBTI).
Operating a grocery store by emotionally handicapped individuals is related to the organization's therapeutic purpose and does not generate UBTI.
UBTI is income from a business not directly related to the organization's exempt purpose, regularly carried on.

Unrelated Business Taxable Income (UBTI)

Income from services by unpaid volunteers isn't UBTI if substantially all the work is done by them.
Income from business activities not substantially related to the exempt purpose is not UBTI if not regularly conducted.
UBTI is taxed at corporate regular income tax rates, excluding income under $1,000.
Benefit to shareholders, trustees, officers, or employees is irrelevant to UBTI.

Form 990-T and UBTI

An organization must file Form 990-T (UBTI tax return) if gross income from an unrelated business is $1,000 or more.
A tax return for UBTI is not required if gross income used in calculating UBTI is under $1,000.

Activities Not Resulting in UBTI

A trade association selling publications for member seminars is likely a related activity and thus not UBTI.
Accounting and tax services by a labor union chapter for its members is likely not related to the union's exempt purpose.

Exempt status of a social club is lost if net earnings benefit private shareholders.
Exempt status is also lost if over 35% of receipts originate from non-member sources.

Lobbying Expenditures and Exemption

A scientific research organization's exceeding its elected lobbying expenditure limit results in a 25% excise tax on the excess amount.

Civic League Application

Civic leagues seeking exempt status use Form 1024, not Form 1023 or a letter.

Tax-Exempt Organization Categories

Tax-exempt organizations include religious, political, labor, civic welfare, child/animal protection, athletic, fraternal beneficiary, social, and schools.

Annual Filing Requirements Exemptions

Certain types of church or church-affiliated groups and organizations with gross receipts of $50,000 or less are exempt from annual filing requirements.

990-EZ Form Usage

Organizations with under $200,000 in gross receipts and $500,000 in assets can use Form 990-EZ instead of Form 990.

Unrelated Business Definition

An unrelated business is one engaged in trades/businesses generating income (or loss) that isn't substantially related to the organization's exempt purpose.

Deductible Donations

Donations to various exempt organizations (e.g., corporations, 501(c)(3) organizations, cemetery companies, cooperative organizations, childcare) are often tax-deductible.

E-Postcards (Form 990-N)

Organizations with under $50,000 in gross receipts and not required to file an annual notice use an e-Postcard (Form 990-N).

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Description

This quiz covers essential aspects of tax-exempt organizations, including pension trust applications, private foundation status, and non-exempt charitable trust filings. Test your understanding of charitable deductions and unrelated business taxable income (UBTI) as they pertain to various charitable organizations.