Applying for Tax-Exempt Status as a Nonprofit
Posted on December 1st, 2020
If you’re thinking of starting a nonprofit organization, there are a few things you should know before you get started. First, is understanding how nonprofits work under state and federal law. For example, two things you should understand is that state law governs nonprofit status. Nonprofit status is determined by an organization’s articles of incorporation or trust documents while federal law governs tax-exempt status (i.e., exemption from federal income tax). Whether you’re starting a charity, a social organization, or an association here are the steps you need to take before you can apply for tax-exempt status.
1. Determine the type of organization.
Before a charitable organization can apply for tax-exempt status, it must determine whether it is a trust, corporation or association. Here is how each one is generally defined:
- A trust is defined as a relationship in which one person holds title to property, subject to an obligation to keep or use the property for the benefit of another. It is formed under state law.
- A corporation is formed under state law by the filing of articles of incorporation with the state. The state must generally date-stamp the articles before they are effective.
- An association is a group of persons banded together for a specific purpose. To qualify under section 501(a) of the Code, the association must have a written document, such as articles of association, showing its creation. At least two persons must sign the document, which must be dated. The definition of an association can vary under state law.
2. Gather organization documents.
Each application for exemption – except Form 1023-EZ – must be accompanied by an exact copy of the organization’s organizing document, which is generally one of the following:
- Articles of incorporation for a corporation
- Articles of organization for a limited liability company
- Articles of association or constitution for an association
- Trust agreement or declaration of trust for a trust
Organizations that do not have an organizing document will not qualify for exempt status. If the organization’s name has been legally changed by an amendment to its organizing documents, they should also attach an exact copy of that amendment to the application. State law generally determines whether an organization is properly created and establishes the requirements for organizing documents.
3. Understand state registration requirements
Next, you will need to take a look at your state’s registration requirements for nonprofits. State government websites have useful information for tax-exempt organizations such as tax information, registration requirements for charities, and information for employers.
4. Obtain Employer ID numbers.
Finally, once your organization is legally formed you will need to obtain employer id numbers (EINs) for your new organization. Organizations can apply for an EIN online, by fax, or by mail using Form SS-4, Application for Employer I.D. Number. International applicants may apply by phone.
Third parties can also receive an EIN on a client’s behalf by completing the Third Party Designee section. Don’t forget to have the client sign the form to avoid having to file a Form 2848, Power of Attorney, or Form 8821, Tax Information Authorization.
One final thing to note, is that nearly all organizations are subject to automatic revocation of their tax-exempt status if they fail to file a required return or notice for three consecutive years. Once an organization applies for an EIN, the IRS presumes the organization is legally formed and the clock starts running on this three-year period.
Questions about starting a nonprofit? Help is just a phone call away.