Group Exemptions for Affiliated NPOs

Exemptions

Group Exemptions for Affiliated NPOs

There are two possible routes for a nonprofit organization (NPO) to obtain tax- exempt status so that, among other things, contributions to the entity are deductible by a donor. The usual and preferred path is for the entity to apply for and obtain its own 501(c)(3) exemption. It may be possible under certain circumstances, however, for the NPO corporation to be included under the umbrella of another entity’s group exemption without separating applying for exemption.

The Group Exemption process permits a tax-exempt entity (called the “Central Organization” or CO) to apply for a Group Exemption Letter (GEL) that names its affiliates (each a “Subordinate Organization” or SO) who are then also derivatively tax-exempt. The GEL provides exemption to every named SO, which is also provided with a 4-digit group exemption number (GEN). The SOs have uniform governing documents with similar purposes and activities. Each SO must be an “affiliate” of the CO, which requires all of the following, as of the close of its accounting period:

1. the CO and SO have a direct relationship, based on common goals, and under some level of shared control or supervision;
2. the SO is a “chapter, local post, or unit” of the CO;
3. the SOs all have “uniform governing instruments”, such as their Articles and Bylaws;
4. all of the SOs must be exempt under the same paragraph of Section 501(c) (e.g. (c)(3), (c)(4) etc.) but this may be different than the paragraph under which the CO itself is exempt; and
5. each SO must be a separate and independent legal entity, although not necessarily incorporated, with its own governing document and Board;

The SO provides the CO with a written Authorization requesting inclusion in the exemption and providing a detailed description of the purposes and activities of the SO, including the sources of receipts and the nature of expenditures. The CO uses this information to apply for a GEL to include at least two SOs, using Form 8940, Schedule Q, which now replaces written letter requests. This can be done at the same time, and along with, the CO’s own application for exemption. A new NPO wishing to be included in a Group Exemption must submit its authorization to the CO before the end of the 15th month after formation for the recognition to relate back under section 508(a).

The CO must maintain records concerning its oversight or supervision, and report annually on its SO’s activities, at least 90 days before the close of its annual accounting period. This Supplemental Group Ruling Information (SGRI) submitted electronically adds new SOs as and informs the IRS of changes to existing SOs.

For more information with examples, see IRS Pub 557 (Tax-Exempt Status for Your Organization), Pub 4573 on Group Exemptions specifically, and Rev. Proc. 80-27, 1980-1 C.B. 677 on the application process. Current Revenue Procedure 2026-8 details the CO’s reporting requirements.