Improving Nonprofits: Guidelines for Restructuring
Posted by Jill Johnson on March 27, 2024
Numerous factors may prompt a 501(c) tax-exempt organization to contemplate restructuring. For instance, a financially strained nonprofit may choose to merge with another entity to consolidate operations and pool resources.
Previously, tax-exempt organizations making structural changes were required to submit a new exemption application. However, IRS Revenue Procedure 2018-15 brought about significant changes to nonprofit restructuring regulations. In many instances, nonprofits can merely disclose a restructuring event on their Form 990. To qualify for this streamlined process, the restructuring must meet specific criteria.
First, the organization must be a U.S. corporation or an unincorporated association, have tax-exempt status as a 501(c) entity, and being in good standing in its jurisdiction of incorporation or formation.
Next, restructuring must encompass one of the following actions:
- Transition from an unincorporated association to a corporation.
- Reincorporate under the laws of another state following dissolution in the original state.
- Submit articles of incorporation to relocate a corporation to a new state without dissolution in the original state
- Merge a corporation with or into another corporation.
The "surviving" organization is mandated to pursue the same exempt purpose as the original entity, with its new articles of incorporation continuing to fulfill the IRS's organizational test.
There are additional limitations regarding the use of Form 990 to report a restructuring, for example, the streamlined rules do not apply if the surviving organization is a disregarded entity, limited liability company (LLC), partnership, or foreign business entity. Furthermore, surviving organizations remain obligated to fulfill reporting requirements, such as disclosing the restructuring on any requisite Form 990 for the relevant tax year. Additionally, these regulations solely pertain to federal income tax exemptions, while state laws may require filing a new exemption application.
Although nonprofit restructuring may appear straightforward, consulting professional advisors before proceeding is prudent. Plans may not meet the criteria outlined in Rev. Proc. 2018-15, and may require submission of a new exemption application. For expert guidance, feel free to reach out to us.
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Jill is an expert working with health care and human service organizations including hospitals, nursing homes, diagnostic and treatment centers, mental health service providers, and medical practices; nonprofit organizations; and government-funded entities in the areas of auditing, Single Audit, HUD projects, taxation, information returns, and financial reporting. Jill is integral to our Health Care and Nonprofit services groups managing our larger hospital and human service organization clients. She is a past Regional Executive for the Healthcare Financial Management Association (HFMA) Region 2; she also is a past President of the Western New York Chapter.