Non-profit status and tax-exempt status: what exactly do those terms mean from a tax perspective? Is my non-profit automatically tax-exempt? How do I become tax-exempt? These are just some of the questions I have received over the years. Before we discuss how to earn and maintain the tax-exempt status, you need to understand how the two statuses relate!
First, a non-profit is not automatically considered tax-exempt. A majority of non-profit organizations would like to have tax-exempt status. But, a big difference between the two statuses exist, no matter how small your non-profit is.
Non-profit status is granted at the individual state level. The coveted tax-exempt status is granted by the federal government. Your non-profit must meet requirements set forth by both the IRS and the state to get tax-exempt status. These requirements include drafting bylaws and incorporating at the state level before you apply.
Earning Tax-Exempt Status
Forms 1023 or 1024 are used to apply for tax-exempt status with the IRS. However, a limited number of organizations are not required to file Form 1023 to obtain 501(c)(3) status but may still operate as if they are tax-exempt. Examples of these entities are listed below:
- Synagogues or temples
- Any organization with less than $5,000 of gross receipts each taxable year (except Private Foundations)
Maintaining Tax-Exempt Status
Once your non-profit earns tax-exempt status from the IRS and your respective state, the work doesn’t stop. You will need to follow the annual federal and state reporting requirements to maintain tax-exempt status. Tax rules for these types of organizations are vastly different from for-profit entities. While holding a tax-exempt status might sound like there would be zero interaction with the IRS, it would be a mistake to believe so.
No entity, for-profit or not, can fly under the IRS’s radar. Non-profits are expected to file some kind of annual report, especially after receiving an Employer Identification Number and state-level identifier. Failing to file annual reports to the IRS will mean suspension and possible revocation of the tax-exempt status. Here is an overview of the different filing forms required by the federal government for tax-exempt entities:
- Form 990-N – File if gross receipts ≤ $50,000
- Form 990-EZ – File if gross receipts < $200,000, and total assets < $50,000
- Form 990 – File if gross receipts ≥ $200,000, or total assets ≥ $500,000
- Form 990-PF – Private Foundations must file on this form regardless of financial status
The 990-N is the most basic form but so many organizations fail to submit it! The IRS literally calls it an e-Postcard which is submitted online through the IRS website. The other forms are more typical tax filing forms which can be prepared and submitted electronically by myself or a local CPA firm.
From a professional standpoint, I often see organizations such as high school booster clubs or other social clubs misunderstand the rules for obtaining an IRS letter of exemption approval and completing their annual filing. They mistakenly believe that because their transactions are so few and far between, the rules don’t apply to them. I tell my client prospects that the IRS will not hesitate to enforce the business entity filing regulations if their non-profit ignores the straight-forward path for tax exemption.
Benefits of Tax-Exempt Status
Understanding the annual reporting requirements and state-specific filings for your organization are crucial to earning the tax-exempt status. Without tax-exempt status, the organization will be subject to for-profit entity filings, such as Form 1120 for Corporations. And let’s not forget that the current tax bracket for Corporations is 21%. So if the entity winds up having taxable income for the year, they could pay 21% in tax to the IRS. Ouch!
Non-profits make a huge impact on local communities. Are you inspired and motivated by lending a helping hand but aren’t sure how to make it happen? Don’t let the tax code overwhelm you! We are here to help.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.