Getting Tax Exemption Status is Easy – Don’t Be Fooled!

Tax Exemption Status

There are several reasons you may want to start a nonprofit organization or foundation. A legacy, tax purposes, community give back, and even publicity. No matter the reason the requirements to apply are all the same.

Consider the elements to apply for tax exemption: state and federal government regulations, mission and vision statements, Board of Directors, strategic plans, budget development, and fundraising or funds distribution. Put all these ingredients together and it feels like a bowl of perplexing alphabet soup.

Although it is recommended, having a vision statement is not required, but a mission statement is. The mission state provides the reason for creating the organization and lets the public know why the organization exists. For example, Goodwill’s mission is to provide training, employment, and supportive services for people with disabilities or disadvantages who seek greater independence.

Step one may seem easy when reading a finished statement, but often this can be the toughest. Knowing how to formulate the right words into a concise proclamation can be daunting and is only the tip of the mountain in steps needed to get an organization or foundation setup and filed for tax exemption.

Moving forward, a person or family may have set up their for-profit without a professional consultant, lawyer, or accountant. It may have been easy to file articles of incorporation with the state government, get tax identification numbers from the internal revenue service to open a bank account, buy some business cards, and bam be in business. But, starting a private or family foundation or nonprofit organization is a lot more detailed process which should be expected since you are asking the government to waive tax fees forever.

Consider the fact that trusted board members will need to be selected with decision-making abilities regarding money fundraised or injected from personal funds. In addition, board members provide input into the full strategic plan of action for the growth of the organization. This includes all the high-level goals and objectives and oversight of the Executive Director.

This is because the number one goal of the board is to maintain fiscal responsibility of the funds. Meaning this could be providing funds from their personal accounts or company, or donations from their network of contacts, or time and effort, and the list goes on as to what the board members can bring to the table. Multiple board members are allowed, at a minimum consider having a secretary, treasurer, and executive officer.

One thing is for sure, nothing officially nonprofit moves until the tax exemption is complete. Most people have heard of 501(c)3 however there are multiple categories to choose from. This means determining which type of entity the organization is filing for. According to the Internal Revenue Service, there are two requirements for an organization to be exempt from federal income tax. An organization must be organized and operated exclusively for one or more exempt purposes. This means the organization can be a corporation, trust, or unincorporated association but it must limit its purposes and permanently dedicate its assets to exempt purposes.

The main way to distinguish it from a public charity or a private foundation is the source of its funding. Public charities have a broad base of support and private foundations have a limited number of donors. The primary reason for this matter is because private foundations’ donations are more limited in the ability to deduct contributions than public charities. In addition, private foundations are charged excise taxes while public charities are not.

If the organization decides to provide programs, then the details will need to be designated. From the number of programs to the amount of budget for each program to the application criteria to program evaluations to recordkeeping. Deciding on the program activities may be the next hardest step to complete. Why? Because often clients have a general idea of the services, they want to provide but do not understand program development. When explaining the services, the client may think they are offering three or four programs but by the time they finish talking, I may have determined there were many more.

For example, if a client wants to help feed and shelter homeless people that are two different programs that require two different budgets, not one. The items and cost and labor to feed the homeless are not the same as what is needed for helping find shelter. Even more, programs if the discussion moved into getting them a job or training.

The number one question when contacting Leverette Consulting Group is, do we write grants? Although we provide this service, most cannot afford it. Grant proposal writing is not a free service. There is a fee for writers’ time and there is no guarantee of approval. Researching, writing, and grant management are all time-intensive.

Therefore, we recommend those starting a nonprofit with small to no funds contemplate fundraising as part of their funding strategy. Paying the fees to apply for tax exemption is more costly and detailed than a for-profit setup. There are not many grants that pay to become tax-exempt. However, there is almost an unlimited amount of grant support after-tax exemption has been approved.

Finally, starting a nonprofit does not excuse it from laws and regulations. Whoever runs operations still must follow employment and labor laws, maintain records, be aware raffles are considered gambling and other soliciting donation guidelines, conflicts of interest, additional political and church rules, and scenarios where the organization can still be taxed.

Inconslusion

In summary, nonprofit tax exemption is a lot more detailed upfront to set up than for-profit companies. However, if the goal is to give back to the community and leave a legacy then the steps will be well worth it. Yes, anyone can apply by themselves, but they may miss some details in the steps. It’s best to use a professional in the beginning so nothing is missed and further down the line impacts activities and operations.

Have a question about how to start a nonprofit? Have you started your own nonprofit, and have some tips to offer? Let us know at the Leverette Consulting Group. Do you need web design help check out our partners for assistance.

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