Tax Services

Tax-Exempt Statuses and Nonprofit Organizations

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Internal Revenue Service, or IRS, has classified and listed many different tax-exempt statuses on the Organization Reference Chart. In addition to being exempt from federal and state income taxes, several other benefits are also available. From incorporation to approval, this article will elaborate the steps that nonprofit organizations are required to take before earning their choice of tax-exempt status. The steps are not so much difficult as they are time-consuming and costly.

As a starting point, information relating to the business must be provided to the state and made public record by filing the Articles of Incorporation. The requested information differs by states, but they all do require a corporate name, business purpose, registered agent, incorporator, number of authorized shares of stock, share par value, preferred shares, directors, officers and legal address of the company.

A business purpose must also be provided within the Articles of Incorporation. This important statement is carefully reviewed by the Internal Revenue Service and intended to strategically explain the overall objective of an organization, any impact on the surrounding community and how the company goals are expected to be achieved. After a nonprofit organization has been incorporated to a selected state and the business is considered legal, it needs a unique Employer Identification Number, or EIN. This number is used for tax filing and reporting purposes even if there are no employees. To obtain an Employer Identification Number, the Internal Revenue Service requires Form SS-4 to be filed. Different statuses require filing separate forms with the Internal Revenue Service. 501(c)(3) is the most common section that nonprofit organizations electronically apply for using Form 1023 and paying a $600.00 user fee.

Smaller businesses may even be eligible to file 1023-EZ at lower cost of $275.00. Any nonprofit that is tax-exempt under 501(c)(3) is considered charitable, meaning none of the earnings may benefit a private shareholder or individual and it cannot be an action organization. 501(c)(4) through 501(c)(27) organizations are tax-exempt but not charitable. Knowing when to file the forms is also very important. Most organizations stay sharp and file their applications by the end of the twenty-seventh month incorporated to be recognized as tax-exempt since the day it was originally created.

Nonprofits that procrastinate by submitting their applications after the twenty-seventh month will have recognition since the date of their application. Depending on the location, separate state-level application forms may need to be completed at this time. Organizations that receive approval are then entitled to several benefits including donations to the nonprofit being tax-deductible to the donor, access to grants and other public allocations that are only available to 501(c)(3) organizations, possible sales and property taxes exemptions that vary among states, Internal Revenue Service recognized credibility as well as United States Postal Service discounts.

Keep in mind that all organizations successfully approved for exemption must agree to and allow publication of their applications, determination letters, annual returns. There is also the possibility of being subjected to additional disclosure requirements such as fundraising solicitations and due payments. the IRS Exempt Organizations also offer specialized education programs to assist exempted organizations with a better understanding their tax responsibilities through webinars, virtual workshops and nationwide tax forums.

“Filing for Tax Exempt Status for Your Nonprofit.” BizFilings, Wolters Kluwer, 2018.
“Articles of Incorporation – Documents & Requirements.” BizFilings, Wolters Kluwer, 2018.
“Exemption Requirements – 501(c)(3) Organizations.” Internal Revenue Service, 28 Nov. 2018.