501(c)(4) to 501(c)(3) Conversation FAQ

Transcription

1 League of Women Voters of Indiana 501(c)(4) to 501(c)(3) Conversation FAQ January 2017 The LWVIN advises against any local League embarking on the conversion or incorporation process without first speaking with an LWVIN board member as well as Tom Carson with the LWVUS. 1

2 Getting Started: Know Your Current Structure What s the difference between a 501(c)(4) & 501(c)(3)? 501(c)(4): 501(c)(4) is a tax status designation. It refers to a tax exempt, nonprofit organization that promotes social welfare and has no limits placed on its advocacy and lobbying activities. Member dues & donations are not tax deductible. 501(c)(3): 501(c)(3) is a tax status designation. It refers to a tax exempt, nonprofit organization devoted to charitable, educational, etc. purposes which has no limits on its advocacy and that can engage in lobbying as long as the lobbying activities do not consist of a substantial part of its overall activities (up to 20% of annual expenditures). These organizations cannot support or oppose political candidates or parties. Member dues and donations are tax deductible. What does this mean in practical terms for Leagues? Indiana s local LWVs are all 501(c)(4) s. Some of Indiana s local LWVs also operate their own separate Ed Funds, which are 501(c)(3) nonprofits. Local League s operating solely as 501(c)(4) s are referred to as single entity Leagues and those also operating an 501(c)(3) Ed Fund are dual entity Leagues. The LWVIN believes it make sense for all LWVs state & local to operate exclusively as 501(c)(3)s. **NOTE: Make sure your board and members know what kind of LWV you currently exists as.** Is my local LWV incorporated, unincorporated, and does it have Articles of Incorporation? While it is important to understand your current tax structure (above) as it relates to the 501(c)3 conversation process, it is also vital that local LWVs understand their incorporation status. To verify your incorporation status, use the Indiana Secretary of State s business search portal. Simply type in League of Women Voters in the Business Name field. Don t see your LWV s name? You re not incorporated. If you see you name, you are incorporated and should have Articles of Incorporation on file somewhere in your records. **NOTE: If you are a dual-entity League and operate both as a 501(c)(4) and 501(c)(3) (i.e., Ed Fund), you should see both entities listed separately if they are both incorporated.** What if my local LWV is unincorporated, should we incorporate if we dissolve our 501(c)(4) and become a 501(c)(3)? It does make good sense to incorporate especially since the incorporation filing fee in Indiana is only $30. (More information is below regarding the incorporation process with the Secretary of State s Office.) Incorporation provides some liability protection as well as protection for the rights to a League s name, which unincorporated Leagues do not otherwise have. The decision on how to proceed with incorporation should be made before filing for 501(c)(3) status. Basically, plan wisely and do not proceed without first contacting the LWVIN. 2

3 Let s put aside the 501(c)(3) conversion process and focus on how the basic incorporation process works for current 501(c)(4) Leagues. If an LWV incorporates, it is, in fact, forming a new corporation. That new corporation has to establish its tax status with the IRS. So, you pay $30 to the Indiana Secretary of State s Office to incorporate and also update the IRS by filling out a form and paying a fee (approx. $275). The LWVIN advises against any local League embarking on the conversion or incorporation process without first speaking with an LWVIN board member as well as Tom Carson with the LWVUS. Tom has helped state and local Leagues across the country through this process and has offered to advice Indiana s Leagues as well. What does the incorporation process involve? To form a Nonprofit Corporation, Articles of Incorporation must be filed. The Articles of Incorporation must include the following: the name of the corporation (which must include "Corporation", "Company," "Incorporated," "Limited," or an abbreviation thereof); a statement as to whether the corporation will be a public benefit, religious or mutual benefit corporation; the name and address of the Registered Agent; the name and address of all the incorporators; a statement as to whether the corporation will have members; a statement regarding the distribution of assets upon dissolution; and a $30.00 filing fee. The filing form to incorporate a nonprofit 501(c)(3) is here. It s important to note that incorporated LWV s must file a yearly Business Entity Report with the Secretary of State s Office. The SOS sends a reminder and it is only $7.14, if paid online. (Excerpted from the Indiana Secretary of State s Office Entrepreneur s Guide to Starting a Business) How might incorporation impact our insurance coverage? LWVIN insurance covers event liability only. D&O coverage has to be purchased separately. Our current event liability policy covers events for unincorporated Leagues only. (Events have to be on premises at a fixed location, if it is held outside on public streets, it is not covered. There are special events policies available for that purpose.) Incorporated Leagues currently pay between $152-$227/yr for their event liability insurance. This reads like a form nightmare! It s actually not that bad. Additionally, we ve been working with Tom Carson and have template Articles of Incorporation language and forms already drafted for your League to use when the time comes. 3

4 Advocacy vs. Lobbying What s the difference between advocacy & lobbying? Advocacy: Pleading for or against causes and making policy recommendations. Advocacy is about speaking out on issues, not bills or ballot measures. (EX: A community forum, letter to the editor, or legislative office visit about the importance of redistricting reform as an idea are all examples of advocacy.) Lobbying: Lobbying can be direct (i.e., to a legislator or government staff) or grassroots (i.e., asking members to take a specific action) and involves action on specific legislation or ballot measures. (EX: Testimony at legislative meetings meant to sway a vote and/or action alerts asking members to contact their legislators in support or opposition of a specific bill or to vote for or against ballot measure is lobbying.) Will operating exclusively as a 501(c)3 limit lobbying efforts? Most of what the League does is advocacy and there is no limitation on pure advocacy (i.e., action not involving a specific bill or ballot measure). As long as the League does not exceed the federal and state thresholds (see below) on lobbying, it will be fine. To put all this in perspective, even the LWVUS which has a lobbying staff has not historically come close to the 20% threshold. Moreover, to cover potential lobbying activities, a 501(c)(3) can make an election under 501(h) which allows it to measure its activities in dollars, rather than time, spent. The 501(h) favors the LWV because most of our lobbying occurs at the local level where members volunteer their time and little money is spent. 501(h) elections only need to be made once but must be made by each local LWV. What are the lobbying limits on 501(c)(3)s? 501(c)3s cannot support or oppose candidates or political parties (not a problem for the LWV), they must abide by the expenditure rules set by the IRS and the state of Indiana, and keep accurate records of lobbying expenditures (money spent). IRS: Expenditures cannot exceed 20% of the League s annual total expenditures. Indiana (legislative): If an organization spends more than $500 in Indiana legislative functions, it must register before the lobbying deadline (Jan. 15) with the Indiana Lobby Commission. Indiana (executive): If an organization spends more than $1,000 in lobbying the Indiana Executive branch, it must register within 15 days after the event with the Executive Branch of the Indiana Department of Administration. How do 501(c)(3) s report lobbying expenses? Tax filings for 501(c)3s are virtually the same as filings for 501(c)4s. Annual filings for Indiana nonprofit organizations (501(c)4s or 3s), must file an annual return Form 990 to the IRS 4 ½ months after the end of each fiscal year. (The form may be a 990, 990-EZ, or 990-N.) If a League files a Form 990 or 990-EZ, it must complete Schedule C, Part II-A regarding lobbying expenditures. Leagues filing e-postcards do not have this reporting obligation. 1 1 Organizations are exempt from filing that normally have annual gross receipts of $50,000 or less and therefore are eligible to file an annual electronic notice Form 990-N instead of an annual information return. For gross receipts under $200,000 or assets under $500,000, organizations can use Form 990-EZ. For higher assets, use Form

5 The Indiana Department of Revenue annual return form is the NP-20 and should be submitted along with the relevant IRS Form 990, if filing a federal return. How to 501(c)3 organizations track lobbying expenses? The LWVUS has a lobbying activity reporting form to use to help keep track of expenses. Think of the lobbying activity reporting form as you would a reimbursement form. When you spend money out-ofpocket, you complete a form and turn it in to your Treasurer. When you engage in lobbying, you ll do the same with this form. ( the LWVIN to see a copy.) It is also strongly recommended to include a discussion of lobbying activities at every board meeting to guarantee expenditures are being properly tracked. The LWV s nonpartisan policy, candidate forum policies, procedures and moderator scripts, along with coalition policies and partner lists should be reviewed every year to ensure the LWV is conducting itself in a proper, nonpartisan fashion. Want to learn more and read through specific examples of permissible activities? Contact Erin Kelley to ask for a copy of EXPLANATION OF ADVOCACY VS LOBBYING FOR PURPOSES OF IRC 501(c)(3) prepared by Tom Carson for the LWVUS board (March 2016) Also check out NonProfit Vote ( to discover the range of permissible advocacy and lobbying activities nonprofit organizations can engage in. 5

6 How Does the 501(c)(3) Conversion Process Work? How does conversion from a 501(c)(4) to a 501(c)(3) work? There are THREE BASIC WAYS for a state or local LWV to convert to a tax exempt status. 1.) If the LWV has a dual-entity structure that is, it has both a 501(c)(4) entity and a 501(c)(3) entity it can transfer its 501(c)(4) assets and operations into its 501(c)(3) Education Fund and never apply to the IRS. There should be no need to file any kind of application with the IRS or Indiana Dept. of Revenue since the LWV s Education Fund should already have a determination letter regarding its 501(c)(3) status. The newly merged LWV will need to change its name (LWV of Town Education Fund) to something like that of the LWV s traditional name (LWV of Town), ensure its articles of incorporation properly conform, and adopt the bylaws, likely with amendments, of its former 501(c)(4) League. Leagues and/or Ed Funds which have to file Form 990-EZ or Form 990 will have to file copies of their newly amended bylaws with their next federal return. This requirement might also be true for state income tax filings. Following consolidation, the LWV must file a Form 5768 with the IRS making its 501(h) election. The 501(c)(4) can file a notice of dissolution with the State of Indiana (Secretary of State Office). If it does not, the 501(c)(4) will be administratively dissolved without action if the League fails to file a business entity report. This is more about having a level of comfort that the 501(c)(4) is dissolved that fulfilling any legal requirement. The filing fee is $30 to voluntarily dissolve. The above is the RECOMMENDED process for the dual-entity local Leagues as well as the LWVIN. 2.) A single-entity 501(c)(4) LWV wishing to convert to a 501(c)(3) can file an application with the IRS using the simplified (four page) Form 102(3)-EZ if its revenues are $50,000 or less in each three preceding years and it does not hold assets greater than $250,000. The filing fee for each Form 102(3)-EZ is $275. The LWV must also amend its articles of incorporation (if incorporated) and its bylaws (regardless of incorporation status). Once qualified, the LWV should file a Form 5768 with the IRS making its 501(h) election. The LWV then requests from the LWVIN a refund of any Ed Fund monies held in the state or national account. The above is the RECOMMENDED process for the single-entity local Leagues. 3.) The LWVIN could either follow option #1 for itself, which would leave it up to each local LWV to decide whether it wanted to convert (by option #1 or #2 depending on its situation). Alternatively, to assist local Leagues the LWVIN could ask the IRS for a group exemption request that is, the LWVIN would apply to the IRS to grant 501(c)(3) status to all existing and future local LWVs. Local LWVs must give written permission to LWVIN to be included in the group exemption, are not required to participate, and have the right to withdraw from the group at any time. The group exemption filing fee is $3,000, so this approach would only make economic sense if more than eleven of our local Leagues would want to participate in this approach to save on costs. Once the exemption is granted, the LWVIN could admit new LWVs under this umbrella without further applications to the IRS. The LWVIN would also have to file an annual report with the IRS detailing all local LWV participation. The above group exemption request is NOT RECOMMENDED. 6

7 Why is the LWVIN Not Recommending a Group Exemption Process? If the LWVIN gets group exemption and my local LWV is covered, won t that mean our local LWV won t have to file with the IRS? Not true. Local Leagues will still have to file. The same rules will continue to apply in determining whether you file a 990, 990-EZ, or 990-N and required state filings. There are no short cuts or time/paperwork savings for local Leagues in this scenario. Won t the group exemption process be the easiest on local Leagues though? No. Since Indiana s local Leagues are a mixture of incorporated and unincorporated, single- and dualentity Leagues, there is no one shoe fits all approach to this process. Additionally, and most importantly, the group exemption request for the LWV of Wisconsin took (4) years ( ; covered 17 Leagues). The LWV of California filed for a group exemption in 2012 and learned in 2014 it had been denied. However, the IRS made it clear to California that local LWVs could file for 501(c)(3) status on their own which they ve been doing successfully. It is important to understand none of this is immediate and the group exemption route will take years to complete and is not guaranteed. If the LWVIN chooses the group exemption request that means board members 2 to 4 years from now would be seeing this process through its final stages and there is not guarantee those board members will have the expertise or passion to guide the process. 7

8 Other Requirements of a 501(c)(3) Conversion What other legal requirements are involved with a conversion? Single-entity 501(c)(4) LWVs converting to a 501(c)(3) must amend their articles of incorporation and bylaws. Dual-entity LWVs must ensure their articles of incorporation include proper information. The LWVUS has already drafted the needed language for new/revised articles of incorporation. The Indiana Secretary of State s Form 4161 (Articles of Amendment to the Articles of Incorporation) is used to register changes in names, distribution of assets, etc. What will yearly reporting to the IRS look like after conversion? You still have to file for your local LWV. The same rules will continue to apply in determining whether you file a 990, 990-EZ, or 990-N and required state filings. If filing e-postcards or Form 990-N, there is no additional reporting needed on lobbying expenditures but lobbying expenses MUST still be tracked. (Internal record maintenance is extremely important!) LWVs filing Form 990 or 990-EZ must Schedule C and complete Parts I-B and II-A. (Guidance exists at the national level on how to complete these forms.) This sounds like a lot of paperwork and forms to see this process through. What resources exist? With the help of Tom Carson at the LWVUS, the following templates and language samples have already been drafted: Projected Timelines & Checklists Articles of Incorporation Form (sample language and template Secretary of State form) Agreement of Merger language (for dual-entity Leagues collapsing into their 501(c)(3) Ed Funds) Articles of Merger Form (template for Secretary of State s Office) Sample Lobbying Activity Reporting Form Guidance and feedback from Tom Carson on how to complete IRS paperwork 8

9 How Long Will This Take & Why Is it Worth the Effort? How long does all this take? Many single-entity local LWV s have received IRS determination letters after submitting their Form 102(3)-EZ within (3) to (4) weeks. However, two California LWVs were recently asked to supply additional information regarding the nature of their lobbying activities. The matter has been successfully resolved. The group exemption request for the LWV of Wisconsin took (4) years ( ; covered 17 Leagues). The LWV of California filed for a group exemption in 2012 and learned in 2014 it had been denied. However, the IRS made it clear to California that local LWVs could file for 501(c)(3) status on their own which they ve been doing, but under some increased scrutiny as noted below. It is important to understand none of this is immediate and the group exemption route will take years to complete and is not guaranteed. This increased IRS scrutiny sounds scary. Why bother to convert? First, some background. The recent experiences faced by California are likely about timing. In 2013, the IRS issued proposed regulations for 501(c)(4) s which characterized voter registration, voter education, and candidate forums as political activity. At the same time, the IRS raised questions about whether these changes should also be applied to 501(c)(3) s. A broad range of groups pushed back on these proposals and in late 2015 Congress passed a law prohibiting the IRS from amending 501(c)(4) s at all. It is not clear whether the internal policies within the IRS that caused California s denial are still in effect. Pros to conversion include: Membership dues and donations are tax deductible. For dual-entity LWVs, there can be a significant reduction in administrative work, including reduced accounting work, fewer tax returns, needing only one board (one treasurer) needs to be elected. No more PMP calculations based on percentages paid out of this account vs. that account. For LWVs with Ed Fund monies held by the LWVIN, no more requesting funds, waiting on disbursements, and supplying year-end reports. Grant opportunities. (In general, agencies and foundations give to 501(c)(3)s.) Are other LWVs doing this? Yes. State Leagues include: Wisconsin, Oregon, Minnesota, and (hopefully) California. Local LWVs include: Dallas, Houston, St. Louis, Kansas City, 17 Wisconsin LWV s, 28 local California LWVs, and 17 local Minnesota LWVs. State and local Leagues in Texas, Oklahoma, Indiana, and Nebraska are seriously considering it at the present time. 9