Understanding Tax Exempt Status

Having a thorough understanding of the implications of tax exempt status is important for any organization considering this status. Tax-exempt organizations are subject to various state and federal regulations and tax laws.

Tax Exempt

Nonprofit and tax-exempt organizations typically seek to be exempt from federal income taxes, state income taxes as well as local taxes.  Obtaining tax-exempt status can have a major impact on the finances of a nonprofit organization.  One of the primary reasons for this is because it makes the organization eligible for tax-deductible charitable gifts under Internal Revenue Service code section 170.  Many organizations including corporations and individuals are more likely to give if their donation is going to be tax deductible.

Qualification

In order to qualify for tax-exempt status under Internal Revenue Service code 501 (c) (3), an organization must be operated exclusively for exempt purposes. These purposes can include such things as scientific and educational as well as charitable endeavors.  In addition the earnings by the organization may not be distributed to its directors, members or any individuals with the exception of the payment of reasonable salaries to employees of the organization.  In addition, there are regulations regarding lobbying and other types of political activities.

How to File

In order to file for tax-exempt status an organization must first be incorporated as a nonprofit corporation.  You must have an employer identification number and there must be bylaws created for your Corporation. There must also be a Board of Directors and officers appointed.  Upon meeting these requirements you must file a 20 page IRS form 1023 and other related forms with the appropriate filing fees.  The completed application should also be accompanied by a copy of the organization’s articles of incorporation as well as a copy of its bylaws.  It is recommended that a professional who is experienced in nonprofit incorporation review all documents and the application before they are submitted to the Internal Revenue Service. Is important to remember that even if you become tax-exempt under section 501(c)(3) of the internal revenue code you may also still have to comply with state laws to be considered tax-exempt in your particular state.


Before filing for tax-exempt status you’ll want to decide whether it makes sense for your organization and whether you will qualify. An accountant, legal counsel and a document filing service can be helpful in guiding you through the process. It is important to make sure you understand the process and the ongoing federal and state requirements before moving forward.