Applying for Tax Exempt Status
Although it is commonly thought that the Internal Revenue Service grants exemptions to nonprofit organizations, technically, the IRS merely checks to see whether an organization is exempt. The exemption has already been granted by Congress. The IRS's only role is to recognize it.
The word charitable does not only mean charities that help the poor-it means any organization that qualifies to receive tax-deductible donations. If you plan to conduct activities that aren’t charitable (for example, if you plan to do substantial lobbying or to participate in political campaigns), you need to form a non-charitable organization.
These are the forms and publications you’ll need:
- Form 1023-Application for Recognition of Exemption
- Form 87 18-User Fee for Exempt Organization Determination Letter Request
- Publication 557-Tax Exempt Status for Your Organization
- Publication 4220-Applying for 501(c)(3) Tax-Exempt Status
The Application for Recognition of Exemption (IRS Form 1023) is the form you need to file to be recognized as an exempt organization. Churches do not need to file the form. The benefits of tax-exempt status include:
- assuring donors of deductibility of donations
- allowing exemption from state taxes
- allowing nonprofit postal rates
- ensuring that the information from the form can be used later in other filings, such as state exemption applications or grant applications
If you are preparing your own application, be sure to read the instructions to both Form 1023 and Publication 557 thoroughly before beginning.
This is the form that serves as your application for being granted tax-exempt status. The instructions for the Form 1023 are available from the IRS. You should be sure to read the instructions for each line as you fill it out. Sometimes a word used in the form means something a little different than what you would expect. To help with some of the pitfalls, this section provides some tips for completing the form.
Note: There is also a more simplified version of this form, Form 1023 EZ. To see if you qualify for this simplified version, check out the application process at the IRS website.
Completing the Form
Form 1023 asks a lot of questions, and sometimes it may seem like the form is asking the same question in different ways. The IRS has to do a thorough review of every application, as tax-exempt status isn’t given out easily.
When filling out Form 1023, you need to explain your organization's past, present, and future activities to the IRS. Be honest in your descriptions, because if not, you could face losing your exemption and having penalties imposed following an audit.
When completing the form, keep these points in mind:
- Explain exactly what the nonprofit’s activities are.
- Detail when the activities began or will start
- Describe much time is or will be devoted to them
- Explain who performs the activities
- Detail how they are or will be funded
- Be detailed, the more specifics you can provide the less likely you are to face delays due to clarifications about the application
Matter of Public Record
While filling out the form, keep in mind that under the law, your answers will be public record, and anyone can get a copy of them from the IRS or from you. (There is a penalty if you do not provide copies to those who request them.) Therefore, if there is any information that you need to include on the form but wish to keep private, such as donor lists or trade secrets, you can write "see attachment" in the space for the information on the form. Then write on the attachment "not subject to public inspection" and include the necessary information you wish to be concealed. You should attach a statement of why the information should be withheld from the public.
If your organization cannot qualify as a charitable organization under Section 501(c)(3), you will need to apply under a different section of the code and use different IRS forms.
Following are some of the other types of nonprofit organizations that can apply for tax exemption and the code sections that they must qualify under:
- Business leagues: Section 501(c)(6)
- Chambers of commerce: Section 501(c)(6)
- Civic leagues: Section 501(c)(4)
- Employee associations: Section 501(c)(4), (9), or (17)
- Labor organizations: Section 501(c)(5)
- Lodges: Section 501(c)(10)
- Recreational clubs: Section 501(c)(7)
- Social clubs: Section 501(c)(7)
- Social welfare organizations: Section 501(c)(4)
- Veterans' organizations: Section 501(c)(19)
All of these organizations use Form 1024 (rather than 1023) to apply for recognition of tax exemption. The questions are similar to those discussed for charitable organizations, but the rules are not as strict. The main concern is that none of the directors or members receive any financial benefits from the organization.
Submitting Your Application
The forms should be filed within twenty-seven months after incorporation in order to have the tax exempt status apply from the corporation's beginning. If the forms are late, they only apply from the date of filing. However, you can usually get an extension if you ask.
Along with your application, you will need to include IRS Form 8718, User Fee For Exempt Organization Determination Letter, and copies of the corporation's articles of incorporation and bylaws.
Response to Your Application
The response from the IRS can be either yes, maybe, or no. If you have successfully completed the form to the satisfaction of the IRS, your exemption will be granted. Most often they will ask for clarification or more information. If this happens, and it likely will, you’ll get a notice in the mail that will include a phone number to get you in touch with the IRS agent reviewing your application. You have thirty days to respond, but the IRS will often grant extensions so you can answer their questions correctly.
State Tax Exemptions
Most states also exempt many nonprofit organizations from income, property, sales, and other taxes. In most states, the exemption is automatic, either because the organization is formed as a nonprofit or the organization's exemption is recognized by the IRS.