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Nonprofit Law/Cash carryover for 501(c)3...PTA


We have received conflicting advice about how much cash we can carry over from one fiscal year to the next. Is there an IRS limit to how much cash can be carried over? We are an elementary school PTA in California and we are classified as a 501(c)3 organization.

   I am assuming from what you wrote to me that the organization
is not a private foundation (you can confirm that on the IRS
determination letter).

There is no restriction for one or two years of accumulation of
funds.  However, if you do it for many years, then the IRS would
want to see a purpose for the accumulation. On page 126 of the
book "With Charity for All", author Ken Stern, former CEO of
National Public Radio wrote that "the standard benchmark for
charities: having an endowment and operating reserves at least
equal to the annual budget".  Therefore, I could not see any
problem maintaining at least that amount.

A 501(c)(3) organization that is not a private foundation may
accumulate funds for one or two years or so, as long as it
maintains substantial exempt activities, commensurate with its
financial resources. Exempt activities are those that are related
to the organization's purposes, not just activities to gain
funds. In other words they must be either religious, charitable
or educational activities. If it wants to accumulate funds longer
than a year or two, it must have a reason why it needs to save
up, i.e. for the purchase of a building. The test is that
accumulations of earnings and profits are necessary for the
reasonably anticipated needs of the organization.  page  12 (that document is a IRS National
Office Technical Advice Memorandum which cites to Presbyterian
and Reformed Publishing Co. v. Commissioner, 743 F.2d 148 (3rd
Cir. 1984), a U.S. Court of Appeals decision.

That Court explained accumulated earning tax.  The court quoted
Section 1.537-1(b)(1) of the Regulations, which sets forth the
rules for determining when accumulations of earnings and profits
are necessary for the reasonably anticipated needs of
a taxable business and applied that Regulation also to
--- Start of Excerpt ---
In order for a corporation to justify an accumulation of earnings
and profits for reasonably anticipated future needs, there must
be an indication that the future needs of the business require
such accumulation, and the corporation must have specific,
definite and feasible plans for the use of such accumulation.
Such an accumulation need not be used immediately, nor must the
plans for its use be consummated with a short period after the
close of the taxable year, provided that such accumulation will
be used within a reasonable time depending upon all the facts and
circumstances relating to the future need of the business.  Where
the future needs of the business are uncertain or vague, where
the plans for the future use of accumulation are not specific,
definite and feasible, or where the execution of such a plan is
postponed indefinitely, an accumulation cannot be justified on
the grounds of reasonably anticipated needs of the business."
---End of Excerpt---

Harvey Mechanic
Attorney at Law

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship. For me to consider your individual situation and how the law applies, I would need to gather more information.

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Harvey Mechanic


I am an attorney and I volunteer time to answer general questions about U.S. Federal income tax issues of nonprofit 501(c)(3) public charities only. Those questions could be about establishing and maintaining legal requirements for such non-profit organizations in the United States, including Internal Revenue service filings and requirements. I will not be working on this free forum to answer questions about Nonprofit's possible unrelated or for-profit businesses or how to fill out forms. This forum is only for general questions about federal tax law, not as the law applies to your specific situation. If you do not make your question public then I will not be spending much of my donated time on answers that would not benefit the public. If you have other questions, please contact me at I will reply from my email. In any case, do not reveal confidential information to me until after I have contracted with you to provide personal legal services. My responses on this forum are intended to be general statements of law, should not be relied upon as legal advice, and do not create an attorney/client relationship. For me to consider your individual situation and how the law applies, I would need to gather extensive information about the situation. To search my previous answers you can do a Google search by "" without the quotes and then add your search terms before hitting enter.


I have been practicing law and especially the law of nonprofit organizations since 1990 when I was admitted to the New York Bar and I have maintained my status with the Bar since that time.


B.S. Columbia University in New York City, 1970

J.D. (Law Degree) Brooklyn Law School, 1990 -- Cum Laude.

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