Minnesota Reminds Taxpayers of Charitable Organization Exemption Qualifications

Nov 17th, 2021

The Minnesota Department of Revenue ("Department") has recently released guidance clarifying the qualification requirements for exempt status as a charitable organization. The Department released this guidance due to a recent Supreme Court case that discussed two factors of the exemption: (1) whether recipients of the "charity" are required to pay for the assistance received in whole or in part, and (2) whether the charitable organization makes its dividends and assets available to private interests upon dissolution.

The Supreme Court case determined that organizations must do more than serve a benevolent purpose on a nonprofit basis. These organizations must also provide a substantial portion of their goods and services for free or substantially reduced rates. The case also explained that, upon dissolution, the organization cannot make dividends and assets available to private interests. In addition to these two requirements, a charitable organization must also (1) qualify for exemption under section 501(c)(3) of the Internal Revenue Code, (2) meet the definition of "charitable" as provided in the Minnesota rules, (3) satisfy the charitable organization "organizational and operational tests," and (4) satisfy one of four other factors considered to determine eligibility for the exemption. The factors include whether an organization functions to help others without immediate expectation of material reward, receives support by donations and gifts in whole or in part, receives income from gifts and donations that produce a profit, and provides a benefit to all or to restricted classes of persons.