Tax Exempt Status
Complete the Following Five Easy Steps With Attorney Ed Tremblay to Apply for Nonprofit Tax Exempt Status for your Nonprofit Organization. Reviewing the Process and Completing the Documentation with an Experienced Business Law Attorney Will Help You Avoid Delays to Becoming Nonprofit Tax Exempt.
Simply Follow these Five Steps to Apply for Nonprofit Tax Exempt Status for your Nonprofit:
First, Incorporate. Nonprofit incorporation creates your nonprofit in your chosen home state. Also, a copy of your Articles of Incorporation will be required when you apply for Nonprofit Tax Exempt status.
Second, apply for an EIN (Employer Identification Number). Every nonprofit seeking Nonprofit Tax Exempt status must have an Employer Identification Number regardless of whether it has employees. Form SS-4 is filed with the IRS to obtain an EIN.
Next, third, provide a detailed business purpose. In your Articles of Incorporation, you need to provide a detailed explanation of what the nonprofit is being created to do/provide. The IRS will consider this information as it reviews your application for your Nonprofit tax exempt status.
Then, fourth, prepare to file Form 1023 or Form 1023-EZ with the IRS. Most nonprofit corporations apply for Nonprofit Tax Exempt status under Section 501(c)(3). To apply for 501(c)(3) Nonprofit Tax Exempt status the Form 1023 or Form 1023-EZ must be filed.
Finally, fifth, file the Form 1023, which is around 30 pages long without the schedules and attachments. Among the required attachments are the corporation’s Articles of Incorporations and bylaws. Be sure to file the most recent version of the form, which was revised last in January of 2020, and is required to be filed electronically. The IRS estimates preparation time of over 100 hours for completion, and IRS approval can take anywhere from a few months to around a year, depending on the number of written follow-up questions the IRS has and how quickly you provide answers. Smaller nonprofits may be eligible to file Form 1023-EZ. This form must be filed electronically. (Nonprofits seeking tax exempt status under a section of the Internal Revenue Code other than 501(c)(3) file different forms.)
“The overwhelming majority of Nonprofit Tax Exempt
applications are approved each year.”
Source: How Many Nonprofits are there? What the IRS’ Nonprofit Automatic Revocation and 1023-EZ Processes Left Behind. By Michael Wyland. Types and Numbers of Tax Exempt organizations, FY 2017. July 17, 2018. Nonprofit Quarterly.
Nonprofit Tax Exempt
Nonprofit Tax Exempt is when Nonprofit Organizations are Exempt from Federal Income taxes under Subsection 501(c) of the Internal Revenue Service (IRS) Tax Code. A Nonprofit Organization is an Organization that Engages in Activities for both Public and Private Interest without Pursuing the Goal of Commercial or Monetary Profit, which Allows it to Pursue Becoming Nonprofit Tax Exempt.
What does creating a nonprofit incorporation mean?
Some people think that just by creating a nonprofit corporation, it becomes nonprofit tax exempt. That is not the case. Incorporation in the state of formation merely establishes it as a legal business entity. To become a nonprofit tax exempt organization, you must apply for tax exempt status with the IRS and be approved.
What does tax-exempt status mean?
Once you receive nonprofit tax exempt status, this means that the net profits of the nonprofit organization are exempt from federal income taxes. Certain states allow state-level tax exempt status, and in such cases, the net profit is also exempt from payment of state income taxes.
Pay the necessary filing fees.
The IRS charges a user fee of $600 for filing Form 1023 and $275 for filing Form 1023-EZ.
When to file.
Most nonprofits file this application before the end of the 27th month after incorporation. By doing so they will be recognized as nonprofit tax exempt from the date of creation. A nonprofit that files after the 27th-month deadline will only be recognized as nonprofit tax exempt from the date of the application.
Complete the state-level application (if applicable).
Many states do not have a separate tax-exempt application. Some states have a one- or two-page form that must be completed while others have a more detailed application process.
Types of tax-exempt status for nonprofits
There are different types of nonprofit tax exempt organizations. As noted earlier, the most well-known and common is 501(c)(3), which are public charities or private foundations established for purposes that are religious, educational, charitable, scientific, literary, testing for public safety, fostering of national or international amateur sports, or prevention of cruelty to animals and children. There are, however, 501(c)(4) through 501(c)(27) organizations, which are nonprofit tax exempt but not charitable. (The numerical identifier of nonprofits, such as 501(c)(3), references the section of the Internal Revenue Code under which they were granted their nonprofit tax exempt status.) View the IRS Organization Reference Chart for a listing of the nonprofit classifications.
Benefits of tax-exempt status
In addition to being exempt from federal and state income taxes, being nonprofit tax exempt offers other benefits:
- Donations to the nonprofit are tax-deductible. With 501(c)(3) nonprofits, donations are tax-deductible to the donor.
- Access to grants earmarked for 501(c)(3)s.
- Certain grants and other public allocations are only available to 501(c)(3) organizations.
- Possible state and local sales and property taxes exemption.
- This benefit varies by state.
- Credibility. There is established credibility for an organization that is recognized by the IRS as nonprofit tax exempt.
- US Postal Service discounts.
- Nonprofit Tax Exempt Organizations can generally receive reduced postal rates.
To be considered Nonprofit Tax Exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purpose set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be anaction organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.
Easy Online Filing using the 1023-EZ Form to Become Nonprofit Tax Exempt
In January of 2020, as part of an ongoing effort to improve service for the nonprofit community desiring to become Nonprofit tax exempt, the Internal Revenue Service revised Form 1023 to require electronic filing for the first time. In addition, to help charities apply for Section 501(c)(3) nonprofit tax exempt status, the IRS has not only revised Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, and its instructions, but continues to encourage qualified nonprofit organizations seeking to become nonprofit tax exempt to use the form 1023-EZ, if qualified to use that form.
“Filing electronically reduces errors, and we believe this will help provide a smoother application process for those seeking tax exemption,” said Tammy Ripperda, Commissioner of the IRS Tax Exempt and Government Entities division.” As we’ve seen with the 1023-EZ, we believe this change will help with application processing time and help with our wider efforts to improve our work with the tax-exempt community.”
To qualify to use the Form 1023-EZ to become nonprofit tax exempt, your nonprofit organization must meet the following requirements: first, your nonprofit organization must anticipate less than $50,000 in annual gross receipts for each of the first 3 years; second, your nonprofit organization must have less than $50,000 in annual gross receipts for 3 years (if any); and third, your nonprofit organization must have total assets valued at under $250,000.
As mentioned, applications for recognition of exemption with Form 1023 and Form 1023-EZ must be submitted electronically online and payment made at Pay.gov. The required user fee for Form 1023 is $600 and $275 for the Form 1023-EZ. Payment can be made directly from a bank account or by credit or debit card.
Contact Attorney Ed Tremblay to provide assistance to file your forms and documentation to become nonprofit tax exempt.
Edmond P. Tremblay & Associates, PC handles a variety of small business, corporate, strategy, technology, bankruptcy, probate, family, litigation, general counsel and other matters.