Once your organization is incorporated, you’ll need to apply for tax-exemption at 2 levels – with the IRS and with your state. With that under your belt, you’ll also need to register with your state to solicit contributions, and you’ll have ongoing compliance to stay on top of with annual filings to the IRS and your state.
The IRS application for tax exemption is called the Form 1023. You can find a fillable PDF here, as well as instructions here. In order to fill out the Form 1023, you’ll need an employer ID number, or EIN, which is the corporate equivalent of a Social Security Number, and which you can apply for online. If you expect to have gross receipts of less than $50,000 per year, and assets less than $250,000, you may be able to fill out the Form 1023-EZ, a much shorter version of the form. To determine if you’re eligible, use the worksheet on pages 13 and following of the instructions.
The Form 1023 will ask about the nature of your organization’s activities to ensure it falls under a qualifying category for being tax-exempt, as well as proposed budgets for the current and following 2 years and anticipated financial support. You’ll also provide administrative information about your organization, such as names and address of directors and officers, and your articles of incorporation and bylaws. You may wait several months for the IRS to approve your exemption, at which point they’ll send you a determination letter, which you should keep in your files permanently. If you apply for tax exemption within 27 months of forming your organization, your exemption will typically be retroactive to the formation date, and contributions you’ve received up to that point will be tax-deductible.
In addition to federal tax exemption, you’ll also need to apply for exemption with your state. This will likely be through the office of the Attorney General, Comptroller, or Secretary of State. Most, but not all, states will recognize the federal exemption from income taxes and honor that at the state level. You may need to apply specially to be exempt from state income tax, and will also need to apply for exemption from paying sales tax. Sales tax exemptions are state-by-state, so if you shop in another state regularly, you’ll need to get a separate exemption from them. If you sell anything that would require you to collect and submit sales tax, it’s unlikely you’ll be exempt from that, only from paying sales tax on items you purchase. Any state where you actively solicit contributions or hire someone to solicit on your behalf, you’ll need to register with, and typically renew that registration annually. If you own real estate, that’s normally exempt from local property taxes; check in with your town or city for the steps to get that exemption.
Every year you’re in operation, you’ll need to file reports with the IRS and your state. These take the place of tax returns that for-profit organizations file. You won’t have taxes to pay, unless you have unrelated business income, but these filings are to show that you’re operating in compliance with regulations overseeing tax-exempt organizations. You’ll report information about your finances, governance, and operations, and for the federal filing, certain accompanying schedules are required if you have particular financial or operational activities. The state filing will typically be submitted to the Secretary of State or Attorney General’s office. Many of them have sites dedicated to corporate- or nonprofit-specific filings that will tell you what’s required and provide instructions for filling out and submitting your paperwork. In most states, if you solicit contributions, you’ll need to renew your solicitation registration annually.
What you file with the IRS will depend partly on the size of your organization. The default filing is called the Form 990 (2017 form and instructions). If you have gross receipts less than $200,000, and assets under $500,000 at the end of the year, you can file the abbreviated version, Form 990-EZ (2017 form and instructions). If you normally have gross receipts under $50,000, you can file the Form 990-N, also known as the e-postcard, which only asks for basic information about your organization. If you fail to file your Form 990 for 3 years in a row, your tax exemption will automatically be revoked by the IRS.