Tax Exempt Nonprofit Status: Applying for it

Are you a charitable soul? Always picking up stray critters and the first to volunteer to help raise money for good causes?

If it’s getting to be a regular thing, you might want to look into forming your own nonprofit tax-exempt organization. But before you dive into those deep waters, there are a couple of things you should know.

The very first thing is that you lose complete control over the organization, at least in a legal sense. As a practical matter, the founder of a small close group — I call them microcharities — is almost always the one in charge. But in a legal sense, it is not “your” nonprofit any longer. One it becomes a nonprofit organization, and even more when it is tax-exempt, it belongs to the public. Not to you. So get out of the habit of saying “my” nonprofit. The moment you incorporate as a nonprofit organization, it’s no longer yours.

Nonprofit v. Tax-exempt: two different critters

Nonprofit status is determined by the state. It’s a matter of which box you check when you filed the papers to incorporate.

The 501(c)(3) tax-exempt status only applies to federal taxes. You apply for tax-exempt status using IRS Form 1023. If it’s granted, the organization does not have to pay federal income tax on money it brings in.

Now, many states recognize federal 501(c)(3)tax-exempt status in terms of state income tax, but not all of them. Some require your group to file for state tax-exempt status as well and require a 501(c)(3) determination. The procedures vary so widely from state to state it can be difficult to know exactly what you’re supposed to do. That’s why it’s often a costly mistake to rely on what some other group did to get their federal and status tax-exempt statuses.

Also, federal 501(c)(3) status doesn’t  necessarily apply to any other type of state tax. Generally speaking, you’ll have to fill out some state forms and then you won’t have to pay state sales tax on stuff you buy for the organization. However, in MANY states, your organization WILL HAVE TO PAY SALES TAX on things that it sells. This varies widely from state to state. Make SURE you know what your state rule is. It is very easy to hose this up and it takes a lot of work to fix it if you get it wrong — and you may end up owing income taxes!

How to get your tax-exempt status

Clever you, you immediately saw that that was trick heading! 🙂 Remember what I said in the third paragraph? Once tax-exempt status is granted, “your” group belongs to the public.

While it may initially seem straightforward, IRS Form 1023 was not created by human beings. The best way to do-it-yourself is with an expert standing right behind you to coach you through filling it out.

So — how does the organization get its nonprofit tax-exempt status? Well, it’s complicated if you do it right.  You have to get everything in exactly the right order and make sure you comply with the state requirements (each state is different!) and still meet all the federal rules.

That’s why so many people pay lawyers or accountants to do it. But you can do it yourself with the right advice from someone who’s done literally thousands of them.

How long does it take?  Well, the instructions say to allow 180 days for an answer!  Now, we’re not seeing it take that long usually, but it can, especially if everything is not crystal clear to the IRS. You’ve got to say exactly what they’re expecting to see in every slot or the entire application will take a lot longer than it should.  And it’s not like they tell you exactly what to say — you have to figure it out and read between the lines.

As long as you don’t make any mistakes, the IRS will usually let you know in 2-10 weeks (short form or long form).  If they’ve got questions, they’ll bounce your application back to you and ask. That can take forever, trying to figure out exactly what boxes they want checked where and how to answer all the questions.

Note: if you application is rejected, you do NOT get your filing fee back!