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Reclassification of Exempt Status

Last modified: January 17, 2023
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CONSIDERATION 

A tax exempt organization can be reclassified from the original determination should it qualify under a different section of Code.

PROCESSES     

The process for reclassification is determined based on the present exempt status an organization is under and the exempt status which it seeks to be reclassified to become.

NON 501(c)(3) ENTITY

We will start with non 501(c)(3) organizations which want to become 501(c)(3) organizations. We see this primarily with organizations exempt under IRC Section 501(c)(4), 501(c)(6), and 501(c)(7) where activities have changed over the years and he board determines that a change in classification based on such activities would be advantageous to fulfilling those activities, and potentially reaching a larger portion of the public with those activities.

Several things will need to take place to apply and receive such a reclassification. First, the corporate documents filed with the state, or the organizing document of an unincorporated association, will need to be amended to change the tax exempt provisions from the previous Code to those of 501(c)(3). The governing document will very likely need to be amended as well, to cite the new Code as well as change anything, like voting members, which may no longer be in place. Then the organization will file Form 1023 to show the IRS why it should now be considered a 501(c)(3) organization versus its previous exempt status.

501(c)(3) ORGANIZATIONS

Now, to 501(c)(3) organizations which are seeking to reclassify the sub-classification which it is exempt under. This may be a ministry which has grown to be a church, an educational organization which wants to be a school, or a Private Foundation seeking to be a Public Charity.

Amendments to both the corporate documents and the bylaws may still be necessary if the specific purpose statement in those documents was not broad enough to encompass the new initiative. Then Form  8940 will need to be submitted, along with the appropriate supporting documentation, for the IRS to consider the reclassification.

For both processes above, an appropriate user fee will need to be submitted as well.

 

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