Nonprofit Restructuring Has Become Easier, but Challenges Remain
December 10, 2021

A few years ago, IRS Revenue Procedure 2018-15 changed the rules regarding nonprofit restructuring. If you’ve participated in a restructuring in the past, you’ll be relieved to know that in many cases it’s now easier. Even so, if recent challenges have led your organization to consider restructuring, it’s important to work with a professional advisor, such as a CPA.

That Was Then

Under previous IRS rules, tax-exempt organizations were required to file a new exemption application when they made certain changes to their structure. Filing this application created a new legal entity.

To apply for new exempt status, nonprofits had to file a final Form 990 under their initial Employer Identification Number (EIN), obtain a new EIN and apply for exemption for the new entity. In addition to being a time-consuming and often expensive process, the new nonprofit risked failing to receive its tax-exempt status. The process also required changing the EIN on all bank and investment accounts.

This Is Now

Now in many situations restructuring nonprofits are required only to report significant organizational changes on their Forms 990. To be eligible, the restructuring must satisfy certain conditions. Your organization must be:

  1. A U.S. corporation or an unincorporated association,
  2. Tax exempt as a 501(c) organization,
  3. In good standing in the jurisdiction where it was incorporated or, in the case of an unincorporated association, formed.

And your reorganization must do one of the following: change from an unincorporated association to a corporation; reincorporate a corporation 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 “surviving” organization must carry out the same exempt purpose that the original organization did. For a 501(c)(3) organization, the new articles of incorporation must continue to satisfy the IRS’s organizational test that requires your nonprofit’s organizing documents to limit its purposes and use of its assets to exempt purposes.

Special Circumstances

Note that there are additional limitations. For example, the new rules don’t apply if your surviving organization is a “disregarded entity,” limited liability company (LLC), partnership or foreign business entity. Also, surviving organizations still have reporting obligations — for instance, to report the restructuring on any required Form 990 for the applicable tax year. And, these rules apply only to federal income tax exemptions. Your state’s laws could require you to file a new exemption application.

For more information and guidance, contact us.

© 2021

You might also like

Help Donors Help Your Nonprofit with a Planned Gift

Help Donors Help Your Nonprofit with a Planned Gift

Most established nonprofits are already equipped to solicit and accept planned gifts. But if your nonprofit is new to planned giving and doesn’t yet understand the long-term advantages of deferred gifts, it’s a good time to get up to speed. You’ll likely need to...

read more
Want to Boost Income? Consider a For-Profit Subsidiary

Want to Boost Income? Consider a For-Profit Subsidiary

Just because you run a nonprofit organization doesn’t mean you can function on low or no income. Although your nonprofit’s tax-exempt status prohibits certain money-making activities, you may be able to create a for-profit subsidiary that isn’t hampered by such...

read more
Don’t Let IRS Compliance Issues Drag Down Your Nonprofit

Don’t Let IRS Compliance Issues Drag Down Your Nonprofit

In recent years, the IRS has increased its scrutiny of tax-exempt organizations. Most nonprofits that fail to file Form 990 for three consecutive years will have their exempt status revoked automatically. The IRS is also cracking down on nonprofits that don’t properly...

read more