Your Tax Status

If you are a nonprofit organization, you can apply for federal tax exemption by filing with the IRS. Churches, synagogues, mosques, schools, hospitals, nonprofit old-age homes, and certain other organizations automatically qualify for nonprofit status because they are considered public charities. However, they must meet certain criteria. For example, a school has to provide ongoing instruction, have a student population, and have faculty members. A hospital must meet health requirements and have a regular medical staff. You cannot simply call yourself a school or hospital and expect to be recognized as such. For information on which tax-exempt status is right for your organization, you can look at IRS Publication 557, which can be obtained from the IRS or found on its website at www.irs.ustreas.gov.

The fee for filing Form 1023 depends on your organization's gross receipts. As of this writing, if your income has exceeded $10,000 annually over a four-year period, the fee is $750. However, these fees are subject to change, so be sure to visit www.irs.gov and search for the term “user fee.”

Operating as a nonprofit organization, company, or association, you can obtain tax-exempt status under section 501(c)(3) of the Internal Revenue Code if your purpose is charitable, educational, cultural, scientific, literary, or religious or if it tests for public safety, fosters amateur athletic competition, or prevents cruelty to children or animals. The benefit of having this status is that contributors can take a tax deduction on their federal income taxes when they give to your organization.

Applying for Nonprofit Status

To apply for 501(c)(3) status, you will need to file IRS Form 1023 and attach Form 8718 (User Fee for Exempt Organization Determination Letter Request). To make filing easy, you can download Form 1023 from the IRS website or call 1-800-Tax-Form and request a copy or order a CD ROM. You will need to fill out several parts of this form, which asks for administrative information, a description of the activities of your organization, financial statements, and so on. A twelve-page document, Form 1023, will take a while to complete, so proceed slowly and carefully. Then attach all requested accompanying documents and remember to attach a check for the fee.

Not all groups need to file Form 1023. If your organization is part of a larger parent organization that already qualifies for 501(c)(3) status, you do not have to apply. For example, if you are a chapter or branch of a national charity or your state PTA has secured from the IRS federal income tax exemption, you would not have to file the 1023 form. It is important to check with your umbrella organization. Public charities that have gross receipts totaling less than $5,000 a year also need not apply.

If your organization is not a corporation, you will need to submit your constitution, articles of association, or other governing documents besides your bylaws. These materials should include at least two signatures by officers or leaders of the organization. You also need to send financial data, including an income statement (if you have already had some income) and a two-year projected budget. If you are incorporated, submit the articles of incorporation, including the secretary of state's stamp.

It is recommended for most independent nonprofits to apply for tax-exempt status. Achieving this status is the only way to be assured that the IRS views the corporation as a 501(c)(3) tax-exempt group and, therefore, you can confidently let contributors know that they can take a deduction on their personal income taxes for any contributions.

If you are a corporation, you will need to have your 1023 application filed and postmarked within fifteen months after the end of the month in which your articles of incorporation were filed. If you file on time, the tax-exemption status is effective retroactively to the date on which your articles were filed.

You will then receive your 501(c)(3) status letter from the IRS determining that you qualify for tax-exempt status. Copies of this letter will come in handy when:

  • Sending grant proposals

  • Purchasing equipment for the organization

  • Dealing with government agencies

  • Applying for a bulk mail permit

  • Placing classified ads (you can get lower rates)

  • Recording public service announcements

  • Keep copies of the letter handy for other situations that may arise.

    Incorporating

    You may wish to become a nonprofit corporation. To do so, you will first have to incorporate in your state. Keep in mind that each state has its own guidelines for incorporating. Depending on state laws, you may need to incorporate in each state separately if you are doing business in multiple places.

    You will need to follow the guidelines of incorporating, which include establishing bylaws and holding annual meetings of members and directors. Incorporating, however, does not automatically qualify you for tax-exempt status. You will still need to file for your 501(c)(3).

    Despite a lot of additional paperwork, incorporating has some important benefits. As a nonprofit 501(c)(3), your corporation will be exempt from federal corporate income taxes. In addition, you will be able to apply for public and federal grants. As a corporation, you get increased protection against liability. This means board members and others involved in the corporation are protected from being held personally responsible should the corporation incur debts or liabilities.

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