The IRS is very particular when it comes to approving nonprofit organizations with highly coveted tax exempt status.
Once your nonprofit organization gets approved, your job is far from done (we will discuss this at a later time). Right now, your main objective is to gather all the right documents to prove to the IRS that your nonprofit is qualified.
Here are five steps to follow to obtain your nonprofit’s tax exemptions.
1. Decide which legal form is appropriate for your organization
Your nonprofit must fall under one of three categories:
2. Get your paperwork in order
According to IRS.gov, each application for exemption, except Form 1023-EZ, must be submitted with the following documents.
- Articles of incorporation for a corporation
- Articles of organization for a LLC (Limited Liability Corporation)
- Articles of association or constitution for an association
- Trust agreement or declaration of a trust for a trust
If your nonprofit does not have the appropriate documents based on your legal status, you will not be approved for tax exemption. You will save yourself and your colleagues a lot of time and money by gathering the appropriate documents before submitting your application to the IRS.
Also, if you have changed the name of your nonprofit in the past, please provide documentation showing so.
3. Determine your state’s regulations
We are here to help our clients by preventing any hiccups that may occur in the process of gaining tax exempt status. Click here for a list of each state and their specific registration requirements for charities, information for employers, taxation, and more.
Each state operates slightly different from one another, so be sure to check your state for different specifications that are required to obtain tax exemption. Texas may have different requirements they want your corporate formality set up as opposed to Mississippi or Wisconsin. We would hate for you to submit multiple applications due to a lack of state regulation knowledge.
4. Obtain your employer ID number (EIN)
In order to gain tax exempt status, a company has to have an employer identification number (also known as a Federal Employer Identification Number). This is a unique nine-digit identifier issued by the IRS to business entities operating in the United States. In laments terms, an EIN is a Social Security Number for your business. This number is used for the purpose of reporting employment taxes to the IRS. If this number is used for unsolicited purposes, it will be at risk of deactivation.
Do not apply for an EIN until your nonprofit organization is legally formed. This can be obtained by going to your local courthouse and applying for a DBA (Doing Business As).
5. Keep up-to-date books!
Nonprofits with annual gross income receipts of $50,000 or more are required to file annual tax returns. Those with receipts under this threshold are required to file tax exempt form 990N (thank me later). This will obviously be required of you, after obtaining tax exempt status.
This is why it pays to have a quality bookkeeper that keeps your books balanced and up-to-date, even as a nonprofit organization. The IRS provides lofty tax breaks to those who have accurate books, proper legal formations, and appropriate documents.