You’ve finally incorporated your nonprofit organization. Great! Obtaining a federal tax-exempt status is a critical and logical next step when forming a nonprofit organization. And obtaining a tax-exempt status comes with significant benefits. Some of those benefits include federal, state and local tax exemption, the ability to receive donations, qualifying for special grants and even government funding. Obtaining a non-profit status is not extremely difficult, but maintaining it is no easy task. There’s a lot of issues and opportunities to consider that you probably aren’t aware of yet. Today, we’re going to explain how to legally obtain and maintain your tax-exempt status with the help of a qualified attorney.
Obtaining Your Tax-Exempt Status
To apply for tax-exempt status, you have to complete the IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Completing this form can be a complicated task due to the legal and tax complexities that must be understood. This is why hiring an attorney is a great idea.
You should file the Application for Recognition of Exemption Under Section 501(c)(3) within 27 months of the date you file your nonprofit Articles of Incorporation. If you file within this time period, all of the donations you received from the date of incorporation on are now tax deductible!!! If you file Form 1023 more than 27 months after incorporating without reasonable cause for the delay, your tax-exempt status will begin as of the postmark date on the IRS Form 1023. Most organizations pay the standard $850 filing fee when sending their application to the IRS, but so that you’re aware, organizations planning for less than $40,000 in gross revenue during their first four years of operations can pay a reduced filing fee of $400.
Maintaining Your Tax-Exempt Status
Once your nonprofit receives its tax-exempt status, there are some important steps that an organization must take to retain that status. Most tax-exempt nonprofits are required to file annual information returns with the IRS. The nonprofit will file either a Form 990, 990-EZ, or 990-N, depending on its gross receipts and total assets. However, there are some organizations that are not required to file. For instance, a church does not have a filing requirement. Also, if your nonprofit is required to file an information return for three consecutive years, and you fail to do so, the IRS will revoke your nonprofit’s tax exempt status.
If you are receiving donations from individuals or businesses, your nonprofit must provide a written receipt, and also register and file annual reports with the state in which it is incorporated. A donor should be given a written acknowledgement of any gift valued more than $250 in order to take a tax deduction on their own taxes. Additionally, your nonprofit must provide documentation that identifies the fair market value of any goods and services that were donated.
Lastly, if you plan on keeping your tax exempt status, your organization’s activities must serve the public and not your private interests. Avoid engaging in lobbying, and refrain from all political campaign activity, or you may face the removal of your tax exempt status.
Overall, just obtaining and maintaining a tax exempt status can be extremely time consuming, but with our help, your nonprofit will be on it’s way to success in no time!