Group Exemption Applications Are Back. Are They Useful for Small Organizations?
Readers may be familiar with the ability of wholly owned subsidiaries of charitable organizations to inherit the tax exempt status of their parent. The IRS’s group exemption process provides a means for multiple affiliated organizations to qualify for exemption under a single determination letter issued to a central organization, even outside of the parent-child relationship. In June 2020, the process was suspended while the IRS updated the relevant procedures. The new procedures were released on January 16, 2026 and the group exemption process has resumed as of January 20, 2026. Common uses for group exemptions include national scale fraternities, religious organizations, and health care organizations.
The updated procedures—which grew from 7 pages to 49—significantly increase clarity for the group exemption process, including reporting requirements and eligibility thresholds. As a result, organizations are better positioned to evaluate when and how pursuing group exemption aligns with their goals.
The new group exemption process is primarily targeted at larger conglomerates, and the framework remains a limited fit for most small organizations. However there may be benefits even for groups at the minimum threshold seeking to centralize or pool complex administration.
The New Federal Group Exemption Framework
To be included in a group exemption application, the central organization and its subordinate organizations must satisfy the following requirements:
The central organization must submit a group exemption application and pay the required user fee of $3500, with a minimum of 5 subordinates at the time of application (but only 1 subordinate is required to retain the group exemption letter).
The subordinates must share a uniform purpose statement with the central organization. This purpose statement must be reflected in the governing documents of each subordinate organization, such as its articles of incorporation, articles of association, charter, or similar organizing document.
The subordinates must be explicitly “affiliated” with the central organization, and subject to its “general supervision or control.” (both now more clearly defined).
The subordinates must qualify under the same 501(c) subsection (although notably the subordinates’ exemption category may differ from the exemption category of the parent).
The group exemption application may be submitted contemporaneously with the central organization’s exemption application or anytime thereafter. However, if the group exemption application is submitted more than 27 months after a subordinate’s incorporation, the determination date will be retroactive only to the date of filing.
Certain entities, like foreign organizations, private foundations, Type III supporting organizations, and qualified nonprofit health insurance providers do not qualify to be included as subordinates.
What the Framework Allows
Group tax returns: Organizations under a group exemption letter may - but are not required to - file group tax returns. Under the group return process, the parent is required to file its own return, and may separately file for the subordinates together as a single group using a special EIN obtained solely for that purpose (see Appendix E of the 990 instructions for further details about the group filing requirements). Filing a group tax return for the subordinates clearly adds some complexity for the central organization, but it can also simplify the filing obligations for individual affiliates.
Information filings: Maintenance of a group exemption also requires electronic filing of an annual “supplemental group ruling information” (SGRI) by the central organization, in addition to annual tax filings. The SGRI contains basic administrative and accounting information about each subsidiary and tracks additions and removals of subsidiaries. If the information filing is missed, the group exemption can be lost.
Centralization: The central organization is required to exercise “general supervision or control” over its subordinates. Note that the “or” indicates that either general supReaders may be familiar with the ability of wholly owned subsidiaries of charitable organizations to inherit the tax exempt status of their parent. The IRS’s group exemption process provides a means for multiple affiliated organizations to qualify for exemption under a single determination letter issued to a central organization, even outside of the parent-child relationship. In June 2020, the process was suspended while the IRS updated the relevant procedures. The new procedures were released on January 16, 2026 and the group exemption process has resumed as of January 20, 2026. Common uses for group exemptions include national scale fraternities, religious organizations, and health care organizations.
The updated procedures—which grew from 7 pages to 49—significantly increase clarity for the group exemption process, including reporting requirements and eligibility thresholds. As a result, organizations are better positioned to evaluate when and how pursuing group exemption aligns with their goals.
The new group exemption process is primarily targeted at larger conglomerates, and the framework remains a limited fit for most small organizations. However there may be benefits even for groups at the minimum threshold seeking to centralize or pool complex administration. Supervision or control is sufficient.
‘Affiliation’ is demonstrated by facts and circumstances “showing that [the subordinate] is a chapter, local, post, or unit of the central organization,” such as “the inclusion of [a subordinate’s] information on a group return” or inclusion in a directory of subordinate organizations.
‘General supervision’ requires the central organization to obtain, review, and retain information on each subordinate entity, as well as informing subsidiaries annually of the requirements to maintain tax exempt status.
‘Control’ can be evidenced by the parent organization’s authority to appoint key parties and/or its maintenance of majority voting control over the subordinate. It can also be demonstrated by a written agreement between the central organization and subsidiary that “evidences the central organization's control over the subordinate.”
Not all affiliated entities within a group necessarily operate in parent-child configurations. In particular, it’s notable that “general supervision” does not require common control. For example, affiliates may follow a common charter that commits them to a shared exempt purpose or the central organization may retain the ability to appoint the board, but not directly control its affiliates. Or affiliates may not have common control at all.
Importantly, the central entity also controls whether to maintain or remove the subordinates from the group exemption application, and subordinates can be removed at any time even without their express consent. Violation of exemption requirements by an affiliate can expose the central organization and other affiliates to risk, and so oversight remains paramount.
Limited Structural Flexibility: All participating subordinates must be exempt under the same 501(c) paragraph, even if it differs from the parent. The group exemption will therefore be less useful for a central organization that manages a diverse portfolio of subsidiaries (e.g., a 501(c)(3) parent with subsidiaries that include an advocacy arm (501(c)(4)) and a trade association (501(c)(6))) since they cannot be included under a single group ruling.
Small Organization Considerations
While we expect that group exemption will be the exception rather than the rule, there are some circumstances where it might be useful even for relatively small groups of organizations meeting the minimum 5 entity threshold.
Administration and reporting are often a significant burden for small organizations that may not be in a position to afford professional support. The cost of filing mistakes by well intentioned but inexperienced volunteers can also be high. The group exemption process allows one organization (the “central organization”) to absorb some of the reporting burden associated with tax exemption on behalf of others (the “affiliates”). One can think of it as another model of fiscal sponsorship — in fact the authoritative textbook on the matter refers to this as the little known “Model D”.
For example, a central organization may choose to specialize in reporting relevant to its affiliates, especially where the nature of the programs and financial flows create efficiencies in shared program narratives and tax reporting. Real estate operations are one area where this can be the case, but there may be others. The more that charitable activities involve specialized operating procedures and licenses, the more there may be benefits to centralization that flow from or to a group exemption process. Alternatively, a central organization focused on capacity building in a specific nonprofit sector may be able to leverage the group exemption process to provide oversight, training, and accountability for development.
Any efficiencies gained through centralizing 990 reporting has to be traded off against the increased administrative burden of supervision across multiple organizations. On the affiliate side, participation in a group exemption process introduces an external dependency and coordination requirements. Affiliates and their central organization are “in it together”— for better and, perhaps, worse, if the central organization fails to meet its obligations. If the central organization fails to satisfy its obligations, the consequences can extend throughout the group.
Regarding dependency on the central entity, some conglomerates may address this through creating a chapter- or member-governed structure for the central entity. This offers a way for affiliates to have some control over the entity that controls their exemption, but introduces additional process design and participation overhead that must be accounted for. Affiliates united by a charter (as discussed above) rather than common control also maintain flexibility to ‘spin out’ from the central entity should they so decide. This could further be used as a kind of incubation capacity.
Cost considerations
While the $3500 price tag may seem high, the 5 organization minimum means that the actual cost per entity is $700— just slightly above the $600 for a single exemption application— and less if there are additional subordinate organizations. The initial cost would be further amortized over any future additions to the group of affiliates, for which there are no additional fees.
In California, organizations seeking to leverage disregarded entities for real estate or program operations might find those entities are not eligible for exemption from the annual $800 LLC tax. The group exemption route could be an alternative approach here that offers cost savings over time depending on the specifics.
Practical Takeaways
Rev. Proc. 2026-08 has brought valuable clarity to the group exemption application process. While it may be uncommon, small nonprofits will now be in a better position to understand if and when group exemption may be relevant for their unique use cases— and if our experience has taught us anything, it’s that the nonprofit sector is full of unique use cases. At its core, centralization concentrates certain compliance obligations in one entity while introducing additional coordination steps for others. This tradeoff is neither good or bad per se, but is a deliberate structural choice. The key is understanding the available options, and choosing the structure intentionally.
