Navigating New York’s Rules on Tax ExemptionBy Magdalena M. Czerniawski | Robert Lyons | September 12, 2020
New York’s extremely complicated rules involving the exemption of tax-exempt organizations can be overlooked when an organization is formed or begins to do business in New York. Except as noted below, reference to tax-exempt organizations specifically refers to Section 501(a) of the Internal Revenue Code of 1986. For state tax purposes, Article 13 of the New York Statutes, Tax on Unrelated Business Income, provides for the inclusion of income that is shown on IRS Form 990-T, Exempt Organization Business Income Tax Return, with a nexus to New York State. This requires filing Form CT-13, Unrelated Business Taxable Income Tax Return, unless the income falls within an exempt category. The statutes clearly define “doing business in New York” for both New York and foreign corporations.
Most organizations are familiar with that part of the schema. What comes before is compliance with the state requirements for exemption in the first place. According to Article 9-A, Section 209, Franchise Tax on Business Corporations, “For the privilege of exercising its corporate franchise, or of doing business, or of employing capital. . . every domestic or foreign corporation, except corporations specified in subdivision four of this section, shall annually pay a franchise tax upon the basis of its business income…” Subsection (4) states, “Corporations liable to tax under sections one hundred eighty-three to one hundred eighty four, inclusive, . . .shall not be subject to tax under this article.” Under the subheading of Corporations not subject to tax, part (6) exempts “corporations organized other than for profit which do not have stock or shares . . .and which are operated on a nonprofit basis no part of the net earnings of which inures to the benefit of any officer, director, or member including Not-for-profit Corporations and Religious Corporations.”
Section 9-A provides an exception regarding the issuance of shares of stock and relates to title holding companies exempt under Code Sections (501(2) and 501(c)(25).
In order for an organization to avail itself of this exemption, it must first apply for exemption in the State of New York using Form CT-247, Application for Exemption from Corporation Franchise Taxes by a Not-for-Profit Organization. This form is required for all organizations exempt under Code Section 501(a). Based on guidelines provided by the State, all of the following requirements must be met in order for an organization to qualify for exemption under Section 9(A):
- It must be organized and operated as a not-for-profit organization;
- It must not have stock, shares or certificates for stock or for shares [except as noted above.] Generally, not-for-profit corporations that issue stock are taxable under Article 9A;
- No part of its net earnings may benefit any officer, director or member; and
- It must be exempt from federal income taxation under IRC Section 501(a).
Any organization losing its exemption would immediately become taxable under Article 9A. Organizations listed on the IRS’s revocation list for failure to file Form 990 for three consecutive years would automatically fall within this category and would have to reapply for exemption at such time as their federal exemption is reinstated.
While the law surrounding the necessity for the form is quite complex, the form itself is relatively simple. Probably the most critical question is #5, “Did the entity apply for federal exemption (Yes/No). If Yes, indicate the date of exemption. Attach a copy of your federal exemption letter”. If you do not have your exemption letter, please visit www.irs.gov.
As examined above, the New York rules regarding tax exemption for nonprofit organizations are complex. Please consult with your Marks Paneth tax advisor for help in navigating these rules.
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About Magdalena M. Czerniawski
Magdalena M. Czerniawski, CPA, MBA, is a Partner at Marks Paneth LLP and a member of the firm’s Nonprofit, Government & Healthcare Group. With over 15 years of nonprofit industry experience, she provides tax services to a wide array of nonprofits, including charitable organizations, schools, social welfare organizations, professional associations and private foundations. In addition to providing tax planning and advisory services, Ms. Czerniawski specializes in matters related to ASC 740-10 (FIN 48), the reporting... READ MORE +
About Robert Lyons
Robert (Rob) Lyons, CPA, MST, is a Tax Director, Exempt Organizations in the Nonprofit, Government & Healthcare Group at Marks Paneth LLP. Mr. Lyons brings to this role the skills he has developed during more than 30 years of providing tax and consulting services to his clients in the nonprofit, higher education, and public sector industries. His experience includes handling substantial exempt organization tax issues. Mr. Lyons has testified in front of the House and Ways Committee in... READ MORE +