Three Years Ago
“Congratulations! You’ve created your first tax-exempt organization.”
Two Years Later
“Wow buddy, two more organizations to the list. You must be very proud!”
“You… don’t slow down, do you? More additions, how do you find the time?”
So, you have other organizations that operate in conjunction with your main one. A situation such as that is considered a Group in which your central organization is the Parent and your branching organizations are Subordinates. As in any family, it’s the parents’ job to keep their children, or, in this case, subordinates, well and happy. One way to keep your “children” well and happy is by gaining a Group Exemption, which eliminates each of your subordinates applying for a tax exempt status on their own.
What is a Group Exemption
A group exemption allows the central or parent organization to confirm that its subordinates are eligible for exemption and to include each subordinate under its cover for tax-exempt purposes. This exemption comes in the form of a letter from the IRS to the parent organization and grants tax exemption to one or more of the subordinates.
The method is created to decrease the paperwork for the taxpayers and the IRS when affiliated entities are the same in their purpose, structure, and operations.
Obtaining a Group Exemption Letter
To pursue a group exemption letter, you must, of course, first gain recognition of your own tax-exempt status. After that, you can obtain a group exemption letter if you have one or more subordinate organizations included in your general supervision or control.
Keep in mind that your parent and subordinate organizations don’t have to be categorized under the same tax section; however, the IRS has decided that some fundraising techniques and activities aren’t cleared for group exemptions. For more details, visit the IRS webpage.
How to Be Included in a Group Exemption Letter?
To add a subordinate in your group exemption, your parent organization has to certify that the subordinate is organized and operated conforming to sample documents your parent organization submits in order to support its subordinates’ tax exemption.
For a subordinate to be included, you must authenticate that it:
- Affiliates with the parent and is subject to the parent’s general supervision or control
- Exempts under the same IRC 501(c) paragraph as all your other subordinates
- Excludes as a private foundation or a foreign organization
- Operates on the same tax year as the parent
- Information Needed for a Group Extension Letter
As the parent company, you also have to provide certain information on behalf of your subordinates. Along with proving that your subordinate organization meets the requirements, you must submit a letter that states
- A description of your subordinates’ principle purposes and activities, which includes financial information
- A sample copy of your subordinates’ adopted, uniformed governing instrument
- An assertion that your subordinates’ purposes and activities are as set forth in the representations provided in the above description and governing instrument
- A statement that each subordinate has submitted a written request to be included in the group exemption letter
- A list of your previous recognized subordinates that have tax-exempt status
Once the tax-exempt status has been achieved for your subordinate organizations under a group extension letter, you can then file a group return covering all of your subordinates. Keep in mind that you’ll still have to file a separate return for your parent organization; furthermore, your subordinates are still required to file their own Form 990-T if they are subject to tax on unrelated business income.
A group return can only include your subordinates that have, in writing, authorization to be added in the return. Your group return must also be based on the tax period of the parent organization and your subordinates’ information can be provided by:
- Separate schedules for each subordinate attached
- A consolidated basis for each subordinate and the parent on one group return
For more details on group extension requirements or returns, visit the IRS website.
Keep it all in the family by e-filing your group return with Express990. We support each 990 Form for tax-exempt organizations (Form 990, Form 990-EZ, Form 990-N (e-Postcard)) and provide expert help with live professionals so you’ll be covered like family looking out for family.
For assistance with e-filing your tax-exempt return, contact us at our headquarters located in the quaint town of Rock Hill, South Carolina. We’re available by phone Monday through Friday from 9am to 6pm EST at (704) 839-2321, by email at [email protected], and by live chat at www.expresstaxexempt.com.