Is your nonprofit thinking about merging or otherwise restructuring? You’re not alone. Whether to firm up their financial footing, pursue broader goals or change locations, organizations across the country are mulling restructuring. The good news for such nonprofits is that the IRS has made the process easier for some.
Revising old rules
Under previous IRS rules, a tax-exempt organization was required to file a new exemption application when it made certain changes to its structure. Each of these moves was seen as creating a new legal entity that needed to file an exemption application. An unincorporated association that incorporated generally was considered a new legal entity required to file an application, as well.
Originally, a restructuring organization would need to file a final Form 990 under its initial Employer Identification Number (EIN), obtain a new EIN and apply for exemption for the new entity. This required changing the EIN on all bank and investment accounts, which can be numerous.
The IRS had since eased the rules on obtaining new EINs in many circumstances, but still required new applications for exemption. Moreover, the IRS concluded that requiring a new exemption application after a corporate restructuring often creates an excessive burden on taxpayers. Under Revenue Procedure 2018-15, certain nonprofits that are restructuring need only report significant organizational changes on their Forms 990.
The restructuring must satisfy certain conditions, though.
Meeting reorganization requirements
To avoid having to file a new application, the original organization must be 1) a U.S. corporation or unincorporated association, and 2) exempt as a 501(c) organization. It also must be in good standing in the jurisdiction where it was incorporated or, in the case of an unincorporated association, formed.
The reorganization must:
- Change from an unincorporated association to a corporation,
- Reincorporate under the laws of another state after dissolving in the original state,
- File articles of domestication to transfer a corporation to a new state without dissolving in the original state, or
- Merge a corporation with or into another corporation.
The resulting, or “surviving,” organization needs to carry out the same exempt purposes as the original organization. If it’s a 501(c)(3) organization, the new articles of incorporation must continue to satisfy the IRS’s organizational test for such nonprofits. The test requires that the nonprofit’s organizing documents (for example, articles of incorporation) limit its purposes and use of its assets to exempt purposes.
Understanding exceptions and caveats
The new rules don’t apply if the surviving organization is a “disregarded entity” (an entity the IRS doesn’t consider to be separate from its owner for tax purposes), limited liability company (LLC), partnership or foreign business entity. They also don’t cover the incorporation of exempt trusts, or mergers of organizations into LLCs. Nor do the new rules include reorganizations where the surviving organization obtains a new EIN. Surviving organizations that aren’t covered by the new rules must submit a new exemption application to be recognized as exempt.
Covered surviving organizations don’t escape without any reporting obligations, of course. The IRS still requires survivors to report the restructuring on any required Form 990 for the applicable tax year. In the case of a domestication or reincorporation in a different state, the surviving organization also must report its change of address on Forms 8822-B and 990.
Note, too, that the surviving organization will need to reapply for exemption if there’s been a material change to the exempt purpose or type of exemption from the original. An example would be switching from advocacy to providing outreach services.
The new rules will reduce the burden for many nonprofit restructurings. But, remember, they apply only to federal income tax exemptions. And don’t forget to check your state law, which could require additional filings.