How to Gain Tax-Exempt Status for Your Nonprofit
Obtaining federal tax-exempt status is somewhat of a mystery for many incorporated business owners. Gaining tax-exempt status for your nonprofit 501(c)(3) organization is necessary to reap the majority of the real benefits, such as access to grant money, income exemptions, property exemption, and tax-deductions for donations received. Therefore, it’s important to understand the steps to successfully apply for tax-exempt status.
Planning and Forming a Nonprofit
When forming a nonprofit business, you must plan the organizational structure to ensure that no individual incurs profit from the business and that it also provides a public benefit. These types of 501(c)(3) organizations fall into the categories of religious, charitable, scientific, testing for public safety, prevention of animal cruelty, amateur sports, literary, or educational.
Establish a Corporation
Once you have a business plan for your nonprofit and have discovered that it meets the IRS requirements for a 501(c)(3), the next step is to form a corporation in your state. Because the process can differ from state to state, it is highly advisable to seek the assistance of a professional in your area that is well versed in forming corporations. Essentially, you’ll need to create a unique name, prepare and file articles of incorporation, appoint at least one director, create the organization’s bylaws, and obtain a tax identification number.
Filing IRS Form 1023
Incorporated businesses seeking tax-exempt status need to file an IRS Form 1023, otherwise called the Application of Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, within 27 months of filing your nonprofit articles of incorporation. File within this 27-month time frame and your nonprofit tax exemption is created when you filed your articles of incorporation. However, if you filed later the tax-exempt status will begin on the postmark date of the Form 1023. For smaller organizations, ask your CPA if you qualify to file a streamlined version of the Form 1023, known as a Form 1023-EZ.
Maintaining Your Nonprofit
Creating a Nonprofit can be a great deal of work, however, keeping a nonprofit running involves a great deal of effort as well. In addition to ensuring compliance with state and federal regulations, you’ll need to file annual forms with the Internal Revenue Service outlining your revenue, expenses, and assets, keep financial records, and manage funding sources. Although you’re operating a nonprofit, it’s nearly identical to the demands posed by running a for-profit business.
Even when running a tight ship, federal or state level, government agencies may request independently audited financial statements to prove your nonprofit is staying within the legal guidelines. Additionally, if your nonprofit spends more than $750,000 in federal funds an annual audit will be required. At The Baird Audit Group, we focus solely on audit services for businesses, governments, and nonprofits. We offer comprehensive audit services as well as limited services, such as reviews and compilations.
If your organization requires an audit from an experienced and professional team, contact us today. Give us a call at 706-855-9500 or fill out our online form HERE.