Nonprofit Accounting Basics
Tax Exemption
Probably the main reason for you to form a nonprofit organization rather than a for-profit entity is the exemption benefits that come with the tax-exempt status. As a tax-exempt nonprofit, your organization is exempted from federal income taxes and, at the state and local level, besides state income taxes, you may receive an exemption from property and sales taxes and other special fees.
After successfully filing for the recognition of your organization's tax-exempt status, the IRS will send you your determination letter. This is probably the most valuable document your organization has and should be handled with due care. This letter indicates under which section of the IRS code your organization qualifies.
The Internal Revenue Code 501(c) lists 29 different tax-exempt categories. Depending on your organization's purpose, activities, and structure, you need to choose one option for your organization. The most common one is the category 501(c)(3) that defines a public charity. Please see the list of the categories https://en.wikipedia.org/wiki/501(c)_organization#Types
Forms to file for exemption:
- If you want to be recognized as a public charity you will file Form 1023 https://www.irs.gov/forms-pubs/about-form-1023 or Form 1023EZ https://www.irs.gov/forms-pubs/about-form-1023-ez.
- 501(c)(4) organizations will file Form 1024-A https://www.irs.gov/forms-pubs/about-form-1024-a.
- For any other organization, you need Form 1024 https://www.irs.gov/forms-pubs/about-form-1024.
Read the instructions carefully (Publication 557) https://www.irs.gov/publications/p557. You may want to have a nonprofit lawyer review your application before sending it to the IRS to ensure that you have distinctly explained the nature and structure of your organization. Any omissions or vague explanations simply lengthen the waiting period.
In addition to filing the forms noted above, you need to get an employer identification number (EIN) for the organization. This is the ‘social security number' for the nonprofit. You file Form SS-4. See more details https://www.irs.gov/forms-pubs/about-form-ss-4.
The IRS has ample information on its site to help you walk through tax exemption and to understand the various steps involved in the application process. Please see Frequently Asked Questions https://www.irs.gov/forms-pubs/about-form-1024.
- Exemption requirements for public charities https://www.irs.gov/charities-non-profits/other-non-profits/requirements-for-exemption
- Where is my application? https://www.irs.gov/charities-non-profits/charitable-organizations/wheres-my-application-for-tax-exempt-status
Additional resources