Restructuring a Nonprofit Organization

By The Ray Group on 06.18.24   /   Tax Tips & Guides  

If you are looking for a way to increase outreach and consolidate resources, restructuring your nonprofit organization may be the key. Doing so can also help reduce costs for your organization.

But there are many other reasons why restructuring a nonprofit organization might be necessary. For example, if your organization decide to change its state of organization. In general, such changes typically qualify for a simplified restructuring process.

Restructuring a Nonprofit Organization

Collaborations between nonprofits have different considerations than those involving a for-profit entity. This article assumes restructuring between nonprofit entities.

Restructuring a nonprofit organization can include:

• Where entities sever their arrangement with another entity.
• Multiple entitles can join together to share a specific resource to operate a specific program, etc.
• Two entities join to form a distinct third entity and the original two entities dissolve. The newly formed organization will need to undergo formalities to create and register as a nonprofit.
• One entity acquires specific assets of another entity. The entity that acquires the assets can choose which assets it wants and does not have to assume the liabilities.
• When one entity takes over another entity. The acquired entity dissolves such that only the entity that took over the acquired entity remains. The remaining entity assumes the acquired entity’s assets and liabilities.

Tax Rules and Implications When Restructuring

If your not-for-profit is considering restructuring, due diligence is required as well as understanding certain tax rules.

IRS Procedure 2018-15

Prior to IRS Procedure 2018-15, tax-exempt organizations making changes to their structure used to be require to file new exempt publication. They also had to create a new legal entity. But the IRS Procedure 2018-15 changed the rules regarding nonprofit restructuring.

Now, in many cases, nonprofits can simply report a restructuring on their Form 990. To be eligible for this simpler process, your restructuring must satisfy certain conditions:

First, your organization must be a U.S. corporation or an unincorporated association. Must be tax exempt as a 501(c) organization. And be in good standing in the jurisdiction where it was incorporated. Or, in the case of an unincorporated association, where it was formed.

Second, your restructuring must involve one of the following:

1. Merging a corporation with or into another corporation.
2. Filing articles of domestication to transfer a corporation to a new state without dissolving in the original state.
3. Reincorporating a corporation under the laws of another state after dissolving in the original state.
4. Changing from an unincorporated association to a corporation

Your “surviving” organization is required to carry out the same exempt purpose that the original did. Plus, its new articles of incorporation must continue to satisfy the IRS’s organizational test.

When the Rules Don’t Apply

There are some additional limitations to using IRS Form 990 to report a restructuring. In some case, the new rules don’t apply. For example, if your surviving organization is a “disregarded entity,” limited liability company, 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.

Will You Qualify?

Restructuring a nonprofit organization can be straightforward. However, you should talk to your tax advisors before making a move. It’s possible your plans won’t qualify under Rev. Proc. 2018-15 and that you’ll need to apply for a new exemption and clear other hurdles. Contact us for guidance.

You may also enjoy reading: Can Seniors Deduct Medicare Premiums?