Organizational leaders can gain valuable insights into tax-exempt organizations by attending the Small to Mid-Size Tax Exempt Organization Workshop. This online program consists of 10 courses designed to help leaders understand the benefits, limitations, and expectations of a tax-exempt status.
Nonprofit vs. tax-exempt status: Understanding the key differences
One of the most common misconceptions about tax-exempt organizations is the distinction between nonprofit and tax-exempt status. Nonprofit status is a designation at the state level, meaning the organization operates without the intention of distributing profits to shareholders or individuals. This designation may allow an organization to qualify for certain benefits, such as exemptions from state sales, property, and income taxes. However, being a nonprofit does not automatically grant an organization exemption from federal income tax.
To receive federal tax-exempt status, an organization must meet specific criteria outlined in the Internal Revenue Code. The IRS recognizes various types of tax-exempt organizations under different sections of the code. For instance, charitable organizations generally fall under Section 501(c)(3). To learn more about the types of tax-exempt organizations, refer to IRS Publication 557.
Applying for tax-exempt status: The step-by-step process
Organizations seeking tax-exempt status must apply for recognition of exemption from the IRS. While some small organizations qualify for an automatic exemption, most must complete a formal application. The IRS provides specific forms depending on the organization’s purpose and structure:
- Form 1023-EZ – Streamlined application for smaller charitable organizations under Section 501(c)(3).
- Form 1023 – Standard application for charitable organizations seeking recognition under Section 501(c)(3).
- Form 1024-A – Application for social welfare organizations under Section 501(c)(4).
- Form 1024 – General application for organizations seeking exemption under Section 501(a) or Section 521.
Each of these applications has a corresponding set of instructions and eligibility requirements. The application process requires a fee, and organizations must submit their completed forms electronically via Pay.gov. The processing time varies, and delays can occur due to errors or additional IRS review.
To ensure a smooth application process, organizations should:
- Answer all questions thoroughly.
- Submit all required documents.
- Review common reasons for processing delays.
Additional considerations and compliance requirements
Once an organization receives tax-exempt status, it must comply with ongoing reporting requirements to maintain its status. If the organization undergoes significant changes in its purpose, structure, or activities, it must notify the IRS in writing. Failure to comply with annual filing requirements can result in automatic revocation of tax-exempt status. If revoked, the organization must reapply for exemption, even if the state reinstates its corporate charter.
Expedited processing of tax-exempt applications is available in certain cases. The IRS may prioritize applications if an organization is at risk of losing a substantial grant or if it provides emergency disaster relief. However, expedited processing is granted at the IRS’s discretion and requires a written request explaining the urgency.
Government entities typically do not need to apply for tax-exempt status, as most state and local government organizations are already exempt from federal income tax. However, in some cases, a government entity may need a determination letter from the IRS to prove its exempt status.
Organizations should be aware that exemption applications become public records once approved or denied. Unlike some states that issue tax-exempt numbers, the IRS does not provide a separate tax-exempt identification number. Instead, organizations receive an Employer Identification Number (EIN), which serves as their unique identifier.
By understanding these key aspects of tax-exempt organizations, leaders can navigate the complexities of nonprofit compliance and maintain their organization’s good standing with the IRS.
