Want your nonprofit to be exempt from paying taxes? This guide will show you how to do that.
Starting a nonprofit involves navigating the legal and financial aspects that can be daunting, especially when it comes to applying for tax-exempt status in the USA.
That’s why at BrightLeaf Consulting, we manage the entire nonprofit startup process for our clients.
Achieving this status is crucial for a nonprofit. It exempts the organization from paying federal income taxes. It also allows donors to claim their contributions as tax-deductible.
This guide will help you through the process of applying for tax-exempt status, breaking down the steps into manageable pieces.
Qualifying as a Nonprofit
The first step is to ensure that your organization qualifies as a nonprofit under the Internal Revenue Service (IRS) guidelines.
Generally, the organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3) of the Internal Revenue Code. These purposes include the following:
- Religious
- Charitable
- Scientific
- Literary
- Educational
Before proceeding, it’s essential to have a clear mission statement and organizational structure that aligns with these exempt purposes.
We offer our nonprofit startup clients creative assistance and guidance in developing their mission statement.
Incorporation in a State for Tax-Exempt Status
Once you’ve established your nonprofit’s eligibility, the next step is to incorporate your organization.
Incorporation is done at the state level. It involves filing articles of incorporation with your state’s Secretary of State office or similar entity.
BrightLeaf Consulting takes care of all state-level filings for our nonprofit startup clients.
Incorporating not only legitimizes your nonprofit but also provides a layer of legal protection for its board members and staff. It’s important to check your state’s specific requirements, as they can vary.
Getting an EIN
After incorporation, obtaining an Employer Identification Number (EIN) from the IRS is essential. This applies regardless of whether you plan to hire employees immediately.
The EIN is effectively your organization’s social security number. It is required for the next steps in the tax-exempt application process.
Applying for an EIN is straightforward and can be done online through the IRS website.
On that note, we apply for an EIN on behalf of our nonprofit startup clients.
Drafting Bylaws
With your EIN in hand, the next significant step is to draft your nonprofit’s bylaws. These are the internal rules that govern your organization.
The bylaws should cover topics such as:
- The organization’s purpose
- Membership rules
- The structure of the board of directors
- Meeting procedures
- Officer duties
These bylaws don’t need to be filed with the IRS. However, they are crucial for internal governance and the tax-exempt application process.
BrightLeaf Consulting provides all our nonprofit startup clients with customized bylaws for their nonprofits.
Filing Form 1023 for Tax-Exempt Status
Now, you’re ready to tackle the heart of the matter: filing Form 1023 with the IRS to apply for tax-exempt status.
Form 1023 is a detailed document that requires comprehensive information about your organization. This includes its history, structure, governance policies, fundraising activities, and financial data.
Smaller organizations expecting to have $50,000 or less in annual gross receipts, with assets not exceeding $250,000 may be eligible to file Form 1023-EZ. This is a streamlined version of the application.
While preparing your Form 1023, it’s crucial to be thorough and precise. The IRS will scrutinize your application to ensure that your organization meets the strict criteria for tax-exempt status.
This includes a clear demonstration of your nonprofit’s exempt purpose. A narrative of your past, present, and planned activities, and financial statements.
It’s often beneficial to seek professional advice or consulting to navigate this complex process successfully.
With BrightLeaf Consulting’s nonprofit startup service, we simplify the process and take care of all IRS form filings for you.
Waiting for IRS Response and Become Tax-Exempt
Upon submitting Form 1023 or 1023-EZ, the waiting game begins.
The review process can take anywhere from a few months to over a year. It depends on the complexity of your application and the IRS’s backlog.
BrightLeaf Consulting has a proven track record of helping nonprofit startup clients receive a response in a matter of weeks, not months.
During this time, it’s essential to operate as if you’re already tax-exempt. Keep meticulous records and adhere to nonprofit best practices.
If the IRS requires additional information or clarification, they will contact you. It’s crucial to respond promptly and thoroughly to any IRS inquiries to keep the application process moving forward.
Once your application is approved, you’ll receive a determination letter from the IRS, officially recognizing your organization as tax-exempt under section 501(c)(3).
Ongoing Compliance
Achieving tax-exempt status is a significant milestone for any nonprofit. It can open the door to tax-deductible donations, grants, and other funding opportunities.
However, maintaining this status requires ongoing compliance with IRS regulations. This includes filing annual returns and operating in accordance with your stated exempt purpose.
It’s a good idea to familiarize yourself with these requirements and consider establishing a relationship with a nonprofit consulting firm. This is to ensure your organization’s long-term success.
Ready to Apply for a Tax-Exempt Status?
Applying for tax-exempt status is a complex but navigable process, essential for the growth and sustainability of your nonprofit.
By following these steps and seeking the right support, nonprofit founders can focus on what matters most: making a positive impact in their communities and the world at large.
Remember, the journey to making a difference begins with a single step, and obtaining tax-exempt status is a critical part of that journey.
Want to learn more about starting a nonprofit organization? Check out this step-by-step guide for a smooth and stress-free process!