Client Alert: Get Ready to Renew Your DC Tax Exemptions
(Also Be Prepared to Address DC and Federal Tax Compliance Questions)
Date: January 15, 2019
Although the application process as described in detail below is relatively straightforward, some of the questions may trigger other DC tax compliance issues that will need to be addressed. For example, are you reporting to DC and paying taxes on your unrelated business income as well as the taxable income of your PAC/political committee (even if only minimum taxes are due)? Are you collecting and remitting sales taxes that are due on your sales of tangible personal property or personal services to persons or organizations located within the District? Are you reporting and paying use taxes for purchases outside DC that are not otherwise taxed?
Other questions, that include requests for your IRS Forms 990-T and 1120-POL (if filed), serve as a reminder that there are federal tax compliance issues that may be important to consider at this time. For example, should you be filing an IRS Form 990-T to report unrelated business income in light of the new 21% tax on employer-provided transportation and parking benefits? Are you aware of IRS guidance documents on the application of this new tax and also how to interpret the new requirement to “silo” your possible different trades or businesses for calculating profits and losses? If you are reporting political activities on IRS Form 990, Schedule C, are you filing IRS Form 1120-POL? This failure to file currently is triggering IRS audits even if no taxes are due.
The new DC application is relatively simple to complete once you get used to the online filing system, but many questions and issues are raised that are worthy of your careful attention.
We are available to help you complete the application and address these and other questions. Alternatively, we can go online and complete the application if you wish to provide your login information and provide us all of the information that will be needed. Whatever you decide, it is time to get ready and be prepared!
Background and Detailed Instructions
Nonprofits that have offices, employees, do business or have a significant physical presence in DC are required to apply for a DC tax exemption in addition to their federal tax exemption. This includes the Corporation Franchise Tax exemption for which all nonprofits can apply as well as the Sales and Use Tax exemption and Personal Property Tax exemption for which only Section 501(c)(3) organizations may qualify.
The renewal process is accomplished by completing an online application and uploading documents at https://mytax.dc.gov/_/ You start by logging in with your current Login information or you may sign up to access the website if you are a new user.
A step-by-step tutorial and User Guide on How to Request an Exemption to File (FR-164) can be found here.
The online renewal form should be populated with your current information in different places as you work through it. Changes may be required, such as a new address, phone number, or email address.
You should obtain in advance and be prepared to upload the following documents:
- A copy of your IRS determination letter. If older than 4 years, you will need to also submit an IRS affirmation letter you should request now at https://www.irs.gov/charities-non-profits/exempt-organizations-affirmation-letters.
- A certificate of incorporation if incorporated in DC or certificate of registration as a foreign corporation if not incorporated in DC.
- For Sales and Use Tax only, a copy of your lease, DC certificate of occupancy permit or other documentation to show proof of a physical location in DC (which is required to qualify for this exemption).
- For Personal Property Tax only, documentation to show proof of physical location and estimated cost of tangible property in DC.
- Other documents such as a deed or proof of monthly rental and/or utility payments may be requested.
- Copies of your most recent IRS Form 990-T and Form 1120-POL filed by the organization or your PAC (if you filed any).
Your next steps will be to select the type of exemption(s) to be renewed and to answer various questions. These include drop-down menu bars for Purpose of Organization (e.g., Charitable, Religious, etc.); Principle Source of Income (e.g., Donations, Dues, Grants); Federal Exemption Status (e.g., 501(c)(3)); and additional questions about your IRS determination and affirmation letter (if required) or date of application for new nonprofits.
Finally, additional information and filings may be required, depending upon your answers to a number of narrative questions as follows:
- Is the organization a religious organization? If “Yes” – additional information may be requested.
- Does the organization control or is it controlled by any other organization? If “Yes” – you will be asked to attach an explanation.
- Is the organization the outgrowth of (or successor to) another organization, or have a special relationship with another organization by reason of interlocking directorates or other factors? If “Yes” – you will be asked to attach an explanation.
- Other than a statutory office, do you maintain regular places of business outside the District? If “Yes” – you will be asked to attach a statement indicating the locations.
- Does the organization report any unrelated business income on Form 990-T to the IRS? If “Yes” – you will be asked to attach an explanation of the nature of your unrelated business activities or provide a copy of your latest filed IRS Form 990-T. Any unrelated business income is reportable and subject to at least a minimum tax in DC.
- Does the organization file a Form 1120-POL U.S. Income Tax Return for Certain Political Organizations with the IRS? If “Yes” – you will be asked to attach an explanation of the nature of your political activities and provide a copy of your latest filed IRS 1120-POL. By reference to the “organization”—this question presumably is directed to the political activities of the organization itself, which must be reported on IRS Form 990, Schedule C, and IRS Form 1120-POL. Since the organization itself will be obtaining a DC exemption, the implications of this question are unclear. [Note: Apart from this DC application, there is currently an IRS audit trigger for organizations that report political activities on IRS Form 990, Schedule C, but do not file IRS Form 1120-POL.]
- Did the organization establish a political action committee described in section 527(f)(3) of the Internal Revenue Code? If “Yes” – you will be asked to attach an explanation of the nature of your political activities and provide a copy of your latest filed IRS 1120-POL. This question appears to be directed to your PAC or other separate political committee, whose income is reportable and subject to at least a minimum tax in DC.
- Does the organization sell any tangible personal property or provide personal services to persons or organizations located within the District? If “Yes” – you will be asked to attach a statement explaining the nature of these activities. Even though your organization may have an exemption from paying sales or use taxes on products and services you purchase—you must still collect and remit taxes on the personal property or personal services you sell in DC.
- Did the organization purchase any tangible personal property outside the District for use in the District on which you did not pay sales tax to another jurisdiction? If “Yes” – you will be asked if you filed an appropriate sales and use tax return with DC and, if not, to attach an explanation why. Although the playing field is shifting after last year’s Wayfair Supreme Court decision, DC nonprofits are still required to pay use taxes to DC on purchases from other jurisdictions that are not otherwise taxed.
We are available to answer questions and help you complete the application. Alternatively, we can go online and complete the application with your assistance if you wish to provide your login information.