How do you obtain your Federal and State tax exemption?

Applying for Federal Tax exemption is the most challenging part of creating a non-profit and also the most essential and costly step. Obtaining the Federal tax exemption will not only save you money but will also build your credibility as a non-profit. In order to obtain it you will have to file a 1023 Form (Application for recognition of exemption under section 501 (c) (3) of the Internal Revenue Code).

The form is complex and requires really detailed information about your organization. It is advised to read the requirement of the form before filing the articles of incorporation. Contrary to what it seems it is the most difficult step and the assistance of a lawyer is highly recommended.

Smaller non-profits may be eligible to file the Form 1023 EZ. It is a much simpler, shorter form that can also be filed online. Only non-profits with a projected annual gross receipts under $50 000 can qualify for this form.

It is recommended to file within 27 months of the date you file for your articles of incorporation. Indeed, this way the donations you received since filing will be tax deductible.

You will also need to attach a copy of your articles of incorporation as well as your bylaws. You will have to have your EIN ready too, even if you don’t have any employees.
You must incorporate a clause stating that your corporation was formed for a recognized 501 (c) (3) tax-exempt purpose. You must also have a clause stating that if any assets of the non-profit remain after the entity is dissolved, you will distribute them to another 501 (c) (3) tax exempt non-profit.
You also have to specify that you won’t use forbidden fundraising techniques such as Bingo or gaming activities and that you won’t be involved in political campaigns.

After filing the IRS will either grant the Federal tax exemption, request further information or deny it. If you wish to appeal you should contact a lawyer.
For more information about filing for the tax exemption status, please visit: https://origin-www.ftb.ca.gov/businesses/exempt_organizations/.

Once you’ve applied for the Federal tax exemption you can also apply for a California State exemption. In some states, filing for the Federal exemption automatically grants you the State tax exemption. In California you must file separately.

In order to file Form 3500A you must attach a copy of the IRS letter granting you the Federal tax exemption.

You will also have to register for Charitable Solicitation/Fundraising. If you are planning on raising funds in several states, you must file in all of them. All non-profits must register except for schools, hospitals and government entities.

Depending on the size of your organization and the nature of your activities you might have to obtain additional business licenses and permits.