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“commensurate in scope with its financial resources.” The IRS has also ruled that
UBI constituting 5% of an organization’s gross income does not jeopardize its tax
exemption.

If an exempt organization’s status is threatened by the extent of its unrelated
business activities, it should consider spinning off the unrelated activity into a for-
profit corporate subsidiary. Assuming that proper corporate formalities are
observed, the corporate subsidiary’s activities should not affect the parent’s exempt
status. The subsidiary will be taxed on net income from its activities. A subsidiary
formed as a single-member limited liability company (“LLC”) is not effective for
these purposes.

CHAPTER 34. Federal Filing Requirements

a. Annual IRS Form 990

(i) Filing Requirement

Most tax-exempt organizations must file an annual information return with
the IRS. For 501(c)(3) organizations that are public charities, and most other types
of tax-exempt organizations, the information return is made on IRS Form 990 or
Form 990-EZ, depending on the type and size of the organization. See the
Instructions to Form 990, available at http://www.irs.gov/formspubs/lists/0,,id
=97817,00.html.

Failure to file the return for three consecutive years will result in
automatic revocation of tax exemption. The organization will have to reapply
for 501(c)(3) tax-exemption to reinstate the organization’s 501(c)(3) tax-
exemption.

(ii) Annual Notice Requirements for Small Organizations

Small organizations (i.e., those that do not normally receive more than
$25,000 in annual gross receipts) may file an annual electronic notice with the IRS
reporting basic organizational information, called the Form 990-N “e-postcard.” The
e-postcard is available at https://www.irs.gov/charities-non-profits/annual-electronic-
filing-requirement-for-small-exempt-organizations-form-990-n-e-postcard. Failure to
file the electronic notice for three consecutive years will result in automatic loss of
tax exemption.

WASHINGTON NONPROFIT HANDBOOK -108- 2018