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Non-Profit Tax Exempt Status: Applying, Approval & Maintaining

May 23, 2016 by Ed Becker

Most non-profit businesses apply for tax-exempt status with the IRS, this allows several benefits under IRC Section 501(c)(3). The reason for establishing 501 statuses are the benefits provided by the Federal exemption. These benefits include exemption from Federal income tax, tax-deductible contributions, possible state tax exemptions, reduced postage rates, exemptions from Federal unemployment tax and tax-exempt financing. These are very favorable benefits for many organizations. The following information will help guide you through the process of obtaining exempt status.

Tax Taxation Refund Return Exemption Income Concept

  • How to Apply

First the business or community entity must be ‘organized,’ according to the IRS this means either a corporation, trust or unincorporated association. Contacting the local secretary of state or an attorney will ensure that the proper business entity and articles are drawn and filed.

Second apply and obtain an Employer Identification Number from the IRS. An EIN is required even if the organization does not have employees. Use form SS-4 or call the IRS for an immediate EIN assignment.

Lastly, file Form 1023, Application for Recognition of Exemption. Once this application is approved the organization is granted tax-exempt status by the IRS.

  • How long to process

There is no set time frame to process an application, applications are processed in the order received, unless there is a ‘compelling reason’ to process an application ahead of others. Some of these exceptions are:

  • New organization that provides disaster relief to victims
  • An organization that will not be able to operate without a pending grant
  • IRS error caused delays in issuing a determination letter

Tips to shorten the process

  • Ensure that you include the correct user fee, check or money order made payable to the United States Treasury for the appropriate user fee.
  • Include a complete copy of the organization document, with amendments.
  • Show how the activities will achieve the exempt purpose.
  • Completely fill out all pages & include required schedules.
  • Include necessary financial information as well as the month the organization’s accounting period ends.
  • Submit of the organization’s by-laws
  • Ensure Form 1023 is signed by the proper authorized individual.
  • Include required information on the principal officers and board of directors; names, mailing addresses, titles and positions and annual compensation.
  • Maintaining status

An exempt organization must ensure that they follow all requirements to maintain their exempt status. Sometimes things can happen that cause an organization to lose status, without even trying.

Tips to ensure your organization maintains exempt status:

  • File your annual returns, if required.
  • Provide written receipts for donations, as required.
  • Create and adhere to a process for approving contracts or agreements with insiders. These must be authorized by independent persons.
  • Research and fully understand the restrictions on lobbying activities.
  • Exempt organizations cannot engage in any political campaign activities.
  • A 501 organization must pay taxes on unrelated business income.
  • Is 501(c)(3) also sales tax exempt?

Incorporation as a nonprofit with 501 statuses does not automatically ensure or entitle sales tax exemption. The IRS grants federal tax-exempt status, non-profit is determined under state laws. Inquire with you state for the process and requirements for sales tax-exemption.

This is obviously not a detailed guide for obtaining exempt status, but it offers simplified steps of the process. There are also disadvantages of exemption status: cost, time, paperwork, shared control and scrutiny by the public. There are many pros and cons to consider before making a final decision to incorporate and apply for non-profit and/or exempt status. It is advisable to speak to your bookkeeper/accountant and an attorney before you make this final decision.





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