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.
Does Your Existing Business Fit The Mold?
It is important to understand that there are several types of organizations that may apply and be granted exemption status. These generally include foundations, trusts, community chests, associations and corporations. Most organizations fall under the definition of a nonprofit. People often associate a nonprofit with a charity like the Salvation Army or the Bill & Melissa Gates Foundation. However, your company does not have to give free money or goods to others in order to qualify as a tax-exempt business. For example, a private school offers education to people at a price. However, if it declares in its governing documents that it does not discriminate against any students or applicants because of their race, then it may qualify for tax exemption status, even though students must pay a tuition to attend the school. If your business is rescuing animals, working with abused children, conducting scientific research or educating the public in safety awareness, you have a good chance of obtaining tax exempt status. Churches also receive this protection. Ultimately, your business should strive to help the public as opposed to a single individual.
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, if you havent already. 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.
Filing Documents With the IRS
Once you have qualified as a corporation or business within your state, you will need to file with the IRS in order to receive a tax-exempt status. This requires you to get an employer identification number and to submit a copy of your operation documents. The next step is to fill out the correct form, which depends on the type of organization that you have. Educational and religious organizations will need to fill out either the 1023 or the 1023-EZ while other organizations will need to fill out Form 1024 or Form 8976. Once you have submitted your paperwork, the IRS will review your application and notify you as to 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 received your tax exemption 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.