How Can I Get Tax-Exempt Status?

Nonprofit organizations play an important role in shaping our society. These groups work tirelessly to address societal challenges and drive positive change in the lives of millions of people. 

But running a nonprofit is not as easy as it seems. It involves various hurdles, such as managing donors and obtaining tax-exempt status.

Understanding how to obtain a tax-exempt status is crucial for nonprofit organizations. It helps secure their finances and allows them to obtain more funding for various projects and opportunities. 

In this blog, we’ll discuss how you can get tax-exempt status for your nonprofit and where to check your tax-exempt status.

What Does It Mean to Be A Tax-Exempt Organization?

Being a tax-exempt organization means your nonprofit doesn’t have to pay federal income taxes on its net income. The IRS only grants this tax status to specific types of entities, such as:

• Charitable organizations
• Churches and religious organizations
• Private foundations
• Political organizations
• Other nonprofit organizations include social welfare groups, civic leagues, social clubs, labor organizations, and business leagues. 

Depending on your nonprofit’s category, you can either apply for the 501(c)(3) or 501(c)(4) status. 

The 501(c)(3) status is primarily for organizations that meet the requirements of the Internal Revenue Code section 501(c)(3). It applies to three types of institutions: charitable organizations, churches/religious entities, and private foundations. 

Meanwhile, the 501(c)(4) status applies to organizations that promote social welfare, like civic leagues. 

When to File For Tax-exempt Status

Nonprofits are required to file their Form 1023 within 27 months of their incorporation. If you were able to submit your application within this period, the tax exemption would take effect on the date you file your articles of incorporation. 

Every donation you receive from that date on will be tax-deductible. But what happens if you fail to file your form within the recommended time frame? The IRS will still accept your application, provided you give reasonable cause for the delay. 

Your nonprofit’s tax-exempt status will only be effective on the postmark date indicated on your application. 

How Can I Get Tax-exempt Status?

You can use two forms to get tax-exempt status: Form 1023 and Form 1023-EZ. Form 1023 is the standard application used by most nonprofit organizations. 

Form 1023-EZ, on the other hand, is the shorter counterpart of the standard form. Institutes with less than $50,000 in annual receipts and $250,000 in total assets can only use these applications. 

How to Fill Out Your Form 1023

The Form 1023 consists of the following parts:

Applicant Identification 

This section of the application asks for your nonprofit’s basic information, such as its name, contact information, date of incorporation, and employer identification number (EIN). 

Your nonprofit needs to have its federal EIN before it applies for tax exemption, regardless of whether or not it has employees. 

Organizational Structure

When applying for tax-exempt status, you must attach a copy of your articles of incorporation and bylaws to your Form 1023. 

Most nonprofits applying for the 501(c)(3) status are corporations. You should consult a lawyer to determine eligibility if your organization is an LLC. 

Required Provisions

In this section, you need to indicate whether or not your formation documents include the provisions the IRS requires for tax-exempt organizations, such as: 

• A clause stating that your corporation is formed for a recognized 501(c)(3) purpose. 
• A clause stating that upon dissolution, the nonprofit’s assets will be distributed to another tax-exempt institution or a federal, state, or local government for public use.

If your articles of incorporation do not include the following clauses, we recommend you revise them before proceeding with your application. This will increase your chances of qualifying for the status. 

Detailed Description of Organizational Activities

Aside from the required provisions, your Form 1023 should include detailed descriptions of your nonprofit’s activities. This includes all past, present, and future programs your organization wants to do. 

Your descriptions should include the following information: 

• Nature and purpose of the activity
• When will the activity start
• Who and where will the activity be conducted
• How will the activity be funded

We also suggest arranging your organizational activities in order of importance.

Compensation Agreements

The IRS will also ask you to indicate your nonprofit’s compensation agreements with the following members:

• Initial directors
• Initial officers, including chief executive officer (CEO), president, vice president, etc. 
• Trustees
• Employees who will earn more than $50,000 yearly. 
• Independent contractors who will earn more than $50,000 yearly. 

When calculating compensation, it’s best to include any employer contributions you’ve made to your employees’ benefit plans. It’s also important to answer any questions you find in this section regarding possible conflicts of interest.

Members & Others Who Receive Benefits From the Nonprofit

If one of your nonprofit’s primary activities is providing goods or services to members of the public, you must report it on this segment of the form. 

Nonprofit’s History

You must also indicate your organization’s history if it’s a successor of a pre-existing nonprofit. 

According to the IRS, a nonprofit is likely a successor if:

• The organization has taken over the activities of its predecessor. 
• The organization has taken over 25% or more of the pre-existing nonprofit’s assets. 
• The organization has been legally converted from a previous association to a nonprofit. 

Financial Statement

Applicants who want tax-exempt status must submit their financial statements with Form 1023. 

Classification

Tax-exempt nonprofits are classified into two: public charities and private foundations. Under IRS regulations, all new 501(c)(3) nonprofits will be classified as public charities within their first five years if their Form 1023 indicates that they expect to receive qualifying support from the public. 

If you qualify, your nonprofit will be classified as a public charity. Once the initial period is over, the IRS will start monitoring the public support it receives. 

Checking Your Tax-Exempt Status

Once you get your determination letter confirming your tax-exempt status, it’s highly recommended that you monitor it using the IRS tax-exempt organization search tool. 

According to IRS regulations, nonprofits who fail to file tax returns for three consecutive years can get their status automatically revoked. You must check your tax-exempt status to ensure it hasn’t been revoked. 

Become A Tax-exempt Organization Today

Enjoy the benefits of being a tax-exempt organization, and submit your application today with NCH’s help. 

NCH is one of Nevada’s leading business formation service providers. Our team of business specialists will assist you in filing your Form 1023 and ensure that you meet the IRS requirements for tax-exempt status. 

To learn more about our services, visit our website here or call us at 1-800-508-1729 to schedule a consultation.

Disclaimer: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.