Establishing a nonprofit corporation is only the first of many steps required to create and operate a legal nonprofit organization. The next step is filing for federal tax-exempt status.
Tax-exempt status is the most important step in the formation of a nonprofit. The IRS alone determines a nonprofit organization’s exempt status. Once recognized as tax-exempt by the IRS, the organization is not required to pay federal and (in many cases) state corporate income taxes. Without obtaining tax-exempt status, an organization is responsible for corporate taxes at both the federal and state level, even if incorporated as a nonprofit corporation.
Depending on the type of tax-exempt status issued by the IRS, donors may also claim donations to the organization as tax-deductible gifts on their taxes. Tax-deductible contributions are a big part of fundraising, which we’ll discuss later in the guide.
There are many types of tax-exempt status. The most common form is a 501(c)(3) organization. The vast majority of nonprofits fall into this classification, though other tax-exempt types exist depending on the organization’s purpose. Different types include 501(c)(4) for politically-focused organizations, 501(c)(6) for business leagues, and 501(c)(10) for fraternal orders. These are just a small selection of the 14 types of tax-exempt organizations. Understanding what type of tax-exempt status to file for is a crucial step in forming your nonprofit.
Once identifying the correct tax-exempt type, applying for IRS tax-exempt status is a time-consuming and detail-oriented process. There are multiple applications, known as Form 1023 EZ, Form 1023, or From 1024. These applications are upwards of 40 pages in length and often require many attachments and other IRS forms providing additional explanations and information.
The average person will spend between eight and ten hours filing out the IRS tax-exempt application. BryteBridge specialists are well versed in every question asked on IRS applications. They take your vision and correctly fill out the application on your behalf.
After an organization applies, it typically takes the IRS between three and six months to issue a determination. While the organization is waiting for status, it is free to operate as a nonprofit. However, there may be restrictions on soliciting donations, which we’ll cover in Step 3.
When the IRS issues tax-exempt status, it sends a Letter of Determination through the USPS to the organization’s address. This simple letter is a nonprofit organization’s most important document. It contains all information necessary to prove and maintain tax-exempt status. Organizations should keep this letter safe, though copies are often available on the IRS website a few months after the physical letter arrives.