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Starting a Tax-Exempt Organization

Have you always wanted to do something for the public and not just for yourself by creating a company just like the other tax-exempt organizations? Well, the process is very simple and all you need to do is to follow the IRS laws carefully and timely.

People usually start a business in order to earn money or achieve something for themselves, and mostly it is for both the reasons. But if you are a person who wants to do something for others by starting a charitable enterprise, you need to know that it is not just a simple organization and requires a lot more than just making the choice of owning a company like this.

Building a Tax-Exempt Organization

Forming a tax-exempt organization is not an entity selection, it is basically a declaration of how you are going to conduct the business with this organization. The tax-exempt organizations are the same as the non-profit organizations, and the term “tax-exempt” refers to the total profits of the organization being exempt from the federal or state taxes.

And even though a non-profit organization is built by just incorporating, it does not automatically become tax-exempt after filing the articles of incorporation with the state in which the organization is being established. The status of the tax-exemption can be obtained by first submitting the application, and then getting the approval from the IRS (Internal Revenue Service.

The most common of all the tax-exempt organizations is the Section 501(c)(3), which is a private foundation or a public charity foundation. These types of tax-exempt organizations are formed for the purposes that are amateur sports, safety-oriented, literary, scientific, charitable, educational, or religious related. But these are not the only organization types that are considered tax-exempt.

There are many others that are designated by the IRS as tax-exempt organizations but are not charitable. Some of these types are the certain advocacy organizations that are involved in political lobbying, social clubs, and association. If you want to know more about these tax-exempt organizations, check out the IRS website for the classification chart.

Application Process for Tax-Exempt Organizations

The overall application process for obtaining the tax-exempt status is not easy, and it is highly recommended to take some professional help. IN the application process, you would need to file the form 1023 and submit it to the IRS within the first 27 months of the formation of the organization. Moreover, the form is lengthy where a standard application can have about 25 to even 75 pages.

To complete the overall process, it takes about 100 hours or even more. Furthermore, the organization that has a two-tiered filing fee structure which is ($300 and $750) permits the tiny organizations to also apply at costs that are much reduced as compared to the larger organizations.

And even though the IRS rejects typically about one-tenth of the all the applications that reach them, one-third of those filing frequently abandon the application due to the inability to answer the IRS follow-up questions or due to frustration. This is the reason why it is advised to have a professional help to build the tax-exempt organizations. And Inc Paradise can assist you with the details and the filing.

The overall procedure takes the time of about 2 hours to 12 months for being completed, which depends entirely on the need for any of the follow-up details. The organization can appeal for a negative determination by the IRS, or it can also decide to apply again. But in both the cases, the chances of becoming one of the tax-exempt organizations are slim.

Other than the IRS, you might also need to file about the tax-exempt status with the state. But not all the states have the same process for the tax-exempt organizations, where a handful just have a simple one-page or two-page form that has to be completed.

California is the only one where you would need to apply separately from what you have filed with the IRS. Other than this, the federal tax-exemption in California doesn’t eliminate the liability for the state income tax until the approval comes from the California Franchise Tax Board.

As soon as a company has obtained the tax-exempt status, it would have to continue operating for the reason why it received the tax-exempt status. Additionally, there might be some state and federal compliance filings every year which have to be complied with. To have a better idea, ask a professional or ensure that you find all the details from your local state government office.

Advantages of Tax-Exempt Organizations

There are a lot of benefits to becoming a tax-exempt organization, and one of its main advantages is that you would be able to accept donations and contributions that would be tax-deductible to the person donating it. The added advantages are, which are not limited to:

  • Discounts on the United States Postal bulk-mail rates and many other services.
  • The public legitimacy of IRS recognition.
  • Potentially higher thresholds that are before acquiring the tax liabilities of the state and/or federal unemployment.
  • Capability to give applications for grants and other private or public allocations that are available only to any IRS-recognized 501(c)(3) organizations.
  • Potential immunity from state property and sales taxes, which does vary from state to state.
  • Exemption from state and/or federal income taxes.

Obligations of the Tax-Exempt Organizations

As soon as an organization gets the tax-exempt status and joins the group of tax-exempt organizations as per the IRS, it does not have the rights to violate or ignore the tax obligations. Some specific liabilities and laws would still have to be paid for and followed strictly by the tax-exempt organizations as well.

The private foundations might still be subjected to the taxes on the undistributed minimum grant allocations and the investment earnings. Moreover, all the tax-exempt organizations would also have to pay the taxes on the “unrelated business income.” But that is not all; if there are paid employees in the organization, the state and federal employment taxes have to be paid.

For details on this, it is advised to consult a lawyer.