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You may be eligible for tax exemption if you’re a non-profit or charitable organization. This implies that the federal government will not tax your revenue, resulting in substantial savings for you and your donors. However, how do you apply? And what do you need to know about tax exemption applications?
The IRS recognizes that certain institutions, including churches, schools, and charities, are tax-exempt. However, it can be challenging to apply for tax-exempt status at times. If your organization serves non-profits, you can prepare 501(c)(3) application or follow similar procedures.
Regardless of how you go about it, this guide will walk you through the steps to obtain tax-exempt status for your organization.
What Is Tax-Exempt Status?
The Internal Revenue Service (IRS) grants tax-exempt status to some organizations whose income is shielded from taxation. In other words, your business can generate income without incurring tax liability. Due to its status, the organization is exempt from paying taxes on donations, grants, and other types of support it receives. As a result, your company is free from paying taxes on its earnings and assets.
Who Qualifies For Tax-Exempt Status?
To be tax-exempt, your organization must be structured in such a way that it meets the requirements of the Internal Revenue Code.
To begin, your organization must be incorporated as a non-profit corporation under state law to qualify for tax-exempt status. A non-profit corporation is formed for charity or educational purposes. The IRS also recognizes other types of organizations that are tax-exempt. Institutions that qualify for tax-exempt status include churches, state or municipal schools, hospitals, medical research organizations, libraries, and museums.
Furthermore, your organization cannot spend a significant portion of its time seeking to influence legislation and cannot engage in any campaign activity for or against political candidates. Although your organization may campaign for concerns such as women’s rights or environmental conservation, you must ensure that your cause is nonpartisan. This means that you cannot advocate for a topic that benefits one party over another.
Finally, your organization can educate the public via publications or conferences about essential issues to your cause. But again, only if these efforts don’t favor one party over another.
Benefits of Tax-exempt Status
Tax-exempt status is an incredibly powerful tool for your non-profit organization and can help you do much more for your mission. Some benefits of tax-exempt status include increased donations, fundraising efforts, and increased public awareness about your cause.
Furthermore, tax-exempt status can help your organization issue tax-deductible charitable donations as a non-profit organization. It also provides opportunities for receiving government and private grants.
When your non-profit organization is qualified for tax-exempt status, it gives your organization lower insurance premiums. Additionally, it gives your business an improved credit rating when applying for loans and lines of credit.
Ways To Apply For Tax-Exempt Status
If you go through the proper channels, obtaining tax-exempt status is relatively straightforward. In addition, to get tax-exempt status, several options are available to you. However, the IRS can reject your company if you make mistakes in the application process.
The last thing your company wants to do is go through the application procedure just to get rejected. Tax-exempt status can be obtained in one of five ways:
1. Find Out Your Qualifications
The first step in applying for tax-exempt status is ensuring that your organization qualifies as a non-profit. According to the IRS, this designation has been given to organizations that are considered public charities or private foundations.
Some organizations are automatically exempt from taxation, but others may need to apply for an exemption. You can find out if your organization qualifies by consulting with a tax professional or visiting the IRS website.
2. File Your Application
File an application with the IRS. If your organization qualifies for exemption, you’ll need to fill out Form 1023 and submit it with applicable supporting documentation by the filing date, which is most often on the 15th of March.
The form is available on the IRS’s website and will take you through all the steps required to become an official non-profit organization. To apply online, you must have a user ID and password or use a current e-file PIN. If you don’t have an existing user ID or PIN, you will be required to create one by following the prompts on the IRS website. The application process takes about 15 minutes to complete.
Make sure you complete the form, which includes information about your organization’s mission and activities and basic contact information about your organization. This form will be submitted to the IRS along with Form 1023-EZ, another simple form that asks for basic financial information about your organization.
3. Receive Approval Of Your Application
You can receive approval of your application from the IRS by submitting a letter of determination. This letter establishes that your organization meets the requirements for tax exemption under a specific section of the IRC. Therefore, it’s a crucial part of your application process.
4. Wait For 60 Days
Once you’ve submitted your Form 1023, the IRS has 60 days to respond with a determination letter. This letter states whether or not they think you qualify as a tax-exempt entity under section 501(c)(3) of the IRC. If you qualify, you’re good to go. If not, you should get back to them for reasons and recommendations.
5. Appeal Rejection
You may appeal the decision if you are rejected for illegitimate reasons or if the recommendations are inadequate. You can do so by submitting Form 8736 within 30 days of receiving their letter of denial.
If you want your organization to be eligible for tax-exempt status, you have to be sure that the goals and actions it pursues do not go against fundamental principles of public policy. It is important to note that if you want your approval, your organization must not be organized or operated for the benefit of private interests, such as the founder or the founder’s family, stockholders of the organization, or other assigned individuals controlled explicitly or implicitly by such private entities.
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