By Dawn Mikkelson
So you’re a nonprofit corporation in the eyes of your state. You’ve filed the Articles of Incorporation, paid the fee and received a Certificate of Incorporation from the Secretary of State. But did you know that this does not make you a tax exempt organization in the eyes of the IRS? People often use the words “nonprofit”, “tax exempt” and “501c3” interchangeably. This is not accurate. Your state recognizes you as a nonprofit corporation, the IRS grants you tax exempt status for federal income tax purposes, and this status is granted under Section 501(c)(3).
To become exempt from federal income taxes, you must apply for exemption using Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. This is an extensive form that proves to the IRS why your reason for forming is for charitable purposes. The timing for filing your application for exemption is important. If you are requesting exemption within the first 27 months of formation, you will need to report past years’ actual activity and project your next couple of years’ estimated financial operations. Yes, it can be difficult to project donations you hope to receive in the future. But, don’t worry, the IRS won’t hold you to it. It is merely used as a gauge by the IRS for potential filings of the Form 990 in the future and a basis for the fee they charge for filing Form 1023.
It is a different story if you’re requesting exemption after 27 months of operations. You risk not being granted exemption from the point of origination. The worst case scenario means that you may owe taxes for the time between your formation and the exemption date. And even if you didn’t have a profit (yes, nonprofits can make a profit), you could be assessed penalties for failure to file tax returns.
But don’t fret, you can still file and be granted exemption back to your date of formation. You just have to give them an acceptable reason for missing the filing date. And an acceptable reason can be that you were not aware of the filing requirements. However, it is important that the application for exemption is filed prior to the IRS discovering your failure to file.
This area of the tax code can be very complex. If you need advice in preparing your Form 1023, or even determining if you have ever received tax-exemption, please contact us.
We’re here to help.
