In my last column, I discussed how to incorporate a nonprofit in Washington state. This month, I will discuss what steps to take if you would like your nonprofit to also be tax-exempt under federal law.
Forming a nonprofit in any state does not mean that your entity is also tax-exempt; nonprofit and tax-exempt are two different concepts. In Washington, it is possible to have a nonprofit that is taxable.
Another important concept is that once you apply for and obtain your tax-exempt status with the IRS (federal taxes), you will still be subject to state and local taxes, unless an exemption exists. Some states track the federal tax-exempt status (mostly income-tax states); Washington state does not.
To become tax-exempt under the Internal Revenue Code Section 501(c)(3), you must file an application with the IRS. There are other tax-exempt organizations as well, ranging from 501(c)(2) through 501(c)25; they also require an application (Form 1024), but it is not addressed in this column.
To become a 501(c)(3) organization, the organization must file Form 1023 (Application for Recognition of Exemption Under Section 501(c)(3)). There are three versions of the form: interactive, standard and EZ. The first two must be printed and filed by sending it to the IRS, with a check for either $400 or $850, depending what your estimated average, annual, gross receipts. If they exceed or will exceed $10,000 over a four-year period, payment is $850; if it is under then the required fee is $400.
Form 1023 looks and feels like a tax return and should be dealt with in a similar matter.
At first, the application seems rather lengthy, but without the schedules, it is only 12 pages. Most applicants do not need to complete any of the schedules.
Also keep in mind, that the IRS requires all organizations to file the same application, with the exception of organizations that qualify for Form 1023-EZ, which is filed online. To check whether your organization qualifies, you must complete the worksheet found in the instructions to Form 1023-EZ (www.irs.gov/pub/irs-pdf/i1023ez.pdf).
The first stumbling block is usually the narrative. The IRS asks you to describe the organization’s past, present and future operation. New organizations will have none, while others may have operated without an entity for some time so that answer will vary.
If you are a new organization, stating none under past is acceptable. When it comes to present and future, it is important to describe in detail what the organization’s charitable purpose is and how you plan to achieve it. You must provide a detailed plan of what the organization’s activities are.
If you are up and running, include a screenshot from your website (if one exists), or if you have articles, reports or photos from events, include them. The IRS wants to make sure that the organization is real.
Read the questions carefully, and answer truthfully. Some of the questions do not have room to answer on the form, so you will need to provide additional sheets of paper with the answers. Make sure you list which questions you are providing answers to.
If you submit an incomplete application, the IRS will keep the application fee and return the application to you, asking for more or corrected information. This will delay the approval process, which already can be very long.
The next hurdle is the budget. The form asks for several years of budget information, depending on how long you have been operating; it will ask for either prior years or future years. You MUST complete the budget information. If you are a new organization, that means you must estimate your budget.
Make sure the budget is sustainable and that it corresponds with what you provided in the narrative. If you are planning to provide services, make sure you allow for enough money in the budget to provide them.
Finally, before submitting the application, have someone with fresh eyes review the application. Questions can be missed because the application (and form) can be very tedious, and after you have looked at it 10 times, you’ll think you have answered everything.
As always, there are great sources out there; many of them can be found on the IRS’ website (www.irs.gov).
MONICA LANGFELDT is founding partner at Queen Anne-based Langfeldt Law PLLC (www.langfeldtlaw.com). To comment on this column, write to QAMagNews@nwlink.com.