If your business exists to serve a charitable goal, then it would likely be in your best interest to become a tax-exempt organization. Numerous tax exemptions are offered by state governments and the Internal Revenue Service, and people may be more likely to donate to your organization if they know their donation would be tax-deductible. Once you qualify for this status, your business would not have to pay income taxes on anything it gains through fundraisers or private donations. In order to get this status for your business, you will need to follow several steps.
Determining If Your Business Qualifies
Before you even begin filling out paperwork, your business needs to be involved in a certain activity in order to qualify for tax-exempt status. Religious organizations generally qualify in addition to scientific or charitable organizations that work for the public’s interest. You can also get this status if your business is involved with education, literacy or public safety. Organizations that work to prevent cruelty to animals and children should also look into filing. Ultimately, your business should strive to help the public as opposed to a single individual. There are of course exceptions to anything mentioned above. For example, if you operate an educational organization, it could not teach a single political viewpoint.
Creating Your Corporation
Once you have figured out that your organization falls into any of the categories mentioned above, you will actually need to create your corporation. Many people seek legal assistance, but plenty of individuals are able to get by on their own. Creating your own corporation entails coming up with a permissible and unique name, preparing your articles of incorporation, appointing directors to oversee the activities of your organization, starting a record book and getting your state identification number. It is wise to start a business plan so that it is on record what profits will go toward. While private corporations seek to earn profits to better the lives of shareholders and employees, nonprofits worked to further their intended goal within the community.
Filing Documents With the IRS
Once you have qualified as a corporation within your state, you will need to file with the IRS in order to get your tax-exempt status. This requires you to get an employer identification number. Once you have done that, you will need to fill out and turn in Form 1023. The information you provide with this form will determine whether you are able to get your tax-exempt status. There may be other forms you need to complete. Once you have submitted everything, the IRS will review the paperwork and get back to you on whether you were accepted or denied this status.
Turning in Paperwork at the State and Local Levels
Getting approved by the IRS means the federal government has approved you for tax-exempt status. However, you still need to get approved by your state and local governments. Every state is different, so you will need to do research in your own area to determine what you need to do. There are many cases where all you need to do is show you have been approved by the IRS to get state protections.
Maintaining Your Status
Once you have gotten your nonprofit status, it can be easy to assume that you are done. However, remaining free of taxes is an ongoing endeavor you need to maintain throughout the life of your organization. You need to follow the rules to ensure your organization keeps its tax-exempt status and that includes continuing to provide the public service you said you would and keeping highly detailed financial records. There is a lot more that needs to be done, so make sure you always remain within the boundaries. It can be a daunting process to file for tax-exempt status, but it is well worth it in the long run if you qualify. Read up on the law so that you do not overlook a single thing.
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