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Tax Guidelines For Large Cash Reserves For A Non-profit Organization

Corporate Law Discussions

Tax Guidelines For Large Cash Reserves For A Non-profit Organization

Postby Delainey » Sun Dec 04, 2016 4:27 am

Dear Harvey...

Our non-profit group was organized in Arizona and is currently designated as a 501(c)(3)organization. Over the years we have accumulated funds that are categorized as "cash reserves". Please advise on the maximum allowed for the cash reserve account of a non-profit organization. Are we required to spend this money?

Thank you for your response.
Delainey
 
Posts: 45
Joined: Sun Feb 23, 2014 6:02 pm

Tax Guidelines For Large Cash Reserves For A Non-profit Organization

Postby conyn16 » Sun Dec 04, 2016 8:56 am

 I am assuming from what you wrote to me that the organization

is not a private foundation(you can confirm that on the IRS

determination letter).

There is no restriction for one or two years of accumulation of

funds.  However, if you do it for many years, then the IRS would

want to see a purpose for the accumulation.

A 501(c)(3) organization that is not a private foundation may

accumulate funds for one or two years or so, as long as it

maintains substantial exempt activities, commensurate with its

financial resources. Exempt activities are those that are related

to the organization's purposes, not just activities to gain

funds. In other words they must be either religious, charitable

or educational activities. If it wants to accumulate funds longer

than a year or two, it must have a reason why it needs to save

up, i.e. for the purchase of a building. The test is that

accumulations of earnings and profits are necessary for the

reasonably anticipated needs of the organization.http://goo.gl/Sc1Fl  page  12(that document is a IRS National

Office Technical Advice Memorandum which cites to Presbyterian

and Reformed Publishing Co. v. Commissioner, 743 F.2d 148(3rd

Cir. 1984), a U.S. Court of Appeals decision.

That Court explained accumulated earning tax.  The court quoted

Section 1.537-1(b)(1) of the Regulations, which sets forth the

rules for determining when accumulations of earnings and profits

are necessary for the reasonably anticipated needs of

a taxable business and applied that Regulation also to

nonprofits:

--- Start of Excerpt ---

In order for a corporation to justify an accumulation of earnings

and profits for reasonably anticipated future needs, there must

be an indication that the future needs of the business require

such accumulation, and the corporation must have specific,

definite and feasible plans for the use of such accumulation.

Such an accumulation need not be used immediately, nor must the

plans for its use be consummated with a short period after the

close of the taxable year, provided that such accumulation will

be used within a reasonable time depending upon all the facts and

circumstances relating to the future need of the business.  Where

the future needs of the business are uncertain or vague, where

the plans for the future use of accumulation are not specific,

definite and feasible, or where the execution of such a plan is

postponed indefinitely, an accumulation cannot be justified on

the grounds of reasonably anticipated needs of the business."

---End of Excerpt--- Harvey Mechanic, Attorney at Law - [email protected]

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.  
conyn16
 
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Joined: Fri Feb 15, 2013 4:40 pm


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