How to Apply for Tax-Exempt Status as a Nonprofit Organization

Tax exemption means that the net profits of an organization are exempt from federal income taxes. Certain states allow the state-level exemption, but primarily, this status is granted by the IRS. If your organization is new, you may not have obtained tax-exempt status yet. You will have to apply for this status with the IRS. Here’s a quick guide to tax-exempt status for nonprofit organizations.

What are the Benefits of Tax Exemption?

There are a number of reasons your organization could benefit from tax-exempt status, beyond the obvious exemption from federal income tax. Some of the additional reasons to apply are:

• Access grants intended for tax-exempt organizations.
• Possibly avoid state and local sales and property taxes.
• USPS discounts
• Tax-deductible classification for your donations.
• Increased credibility in the eyes of donors and the community.

First Things First

Before applying for tax-exempt status, you’ll need to determine if your organization is a(n):

Do You Have an EIN?

To file these forms, you’ll need an EIN number–something you can obtain, if you haven’t already, by filing Form SS-4 (also available online). You’ll need to include your organization’s organizing documents in your application for tax-exempt status, as well.

Keep in mind:

• If your organization has not existed for at least 3 years, you’ll also need to include financial statements for the current year and proposed budgets for the next two years.
• You must also attach Form 8718 (User Fee for Exempt Organization Determination Letter Request), along with the appropriate user fee. User fees for form 1023 and 1023-EZ must be paid online.

Applying for Tax-Exempt Status

In order for your organization to be recognized as exempt, you must submit an application to the IRS.

• If your organization falls under IRC section 501(c)(3), you must file a Form 1023-series application (this includes charitable, religious, and educational organizations).
• If your organization falls under IRC section 501(c)(4), you must file Form 1024-A. Other organizations will need to file Form 1024.

After You Apply

After you’ve double-checked and made sure to include all the necessary materials and information, you’re ready to submit your application to the IRS. Per the IRS website, applications are processed as quickly as possible–and you can check the status of your application here.

Once you’ve been granted tax-exempt status, there are a couple of things to keep in mind to make sure that you maintain it:

• While tax-exempt status means that your organization is not required to pay federal income tax, you still must report your financial details, activities, and certain other information to the IRS.
• This is done by filing a Form 990 Series annually. Which Form 990 Series you file will depend on your organization’s gross receipts and assets.