If you’ve recently started a nonprofit or have begun researching the process of starting one, you may have come across the option to file for group exemption as a way to reduce your administrative burden. But what exactly is group exemption, and is it right for your nonprofit?
Group exemption is a status granted by the IRS to one or more nonprofits operating under the supervision of a parent organization. The parent applies for tax exemption on behalf of the nonprofit it will supervise. If granted, the subordinate can share the parent’s tax-exempt status without having to spend the time and money directly applying for it.
Is Group Exemption Right for You?
In order to qualify for group exemption, a subordinate organization must be directly affiliated with and subject to a parent organization’s general supervision. In other words, the subordinate organization must serve some role or function associated with the parent organization. The parent organization must be willing to bear responsibility for the subordinate organization’s actions.
Most group exempt nonprofits are local chapters of a larger national organization or local. If you are interested in opening a local chapter of a national organization (or if someone wants to open a local chapter of your larger organization), group exemption may be right for you.
How to Apply
The application process for group exemption is fairly straightforward. Assuming the parent is already tax-exempt, it must submit a letter to the IRS requesting group exemption on behalf of itself and its proposed subordinates. The letter must include the following:
- the parent organization’s Employer Identification Number (EIN);
- the date on the letter that granted tax-exempt status to the parent;
- a copy of any amendments or changes made to the parent’s governing instruments, internal regulations, purposes, or methods of operation;
- verification of the direct affiliation (relationship) between the parent and subordinate organization;
- a copy of the uniform governing instrument the subordinates have adopted;
- a detailed description of the subordinate’s purposes activities;
- a statement that each subordinate has furnished written authorization to the parent;
- a list of subordinates to be included in the group exemption letter to which the IRS has issued an outstanding ruling or determination letter relating to exemption;
- a list of the names, mailing addresses, physical addresses, and EINs of subordinates to be included in the group exemption letter; and
- additional information, including specific instructions for group exemptions involving 501(c)(3)s and schools.
Although group exemption comes with significant liability concerns for parent organizations, it greatly reduces the administrative burden for subordinates. If you are considering group exemption for your nonprofit—whether from the parent or subordinate position—contact Resilia for a free consultation today!