NonProfit Organizations: Applying for Tax Exempt Status

Diana Basel

Urban Food, Farm & Agriculture Law Practicum

Urban Food, Farm & Agriculture Law Practicum

Are Nonprofit And Tax-exempt Statuses The Same?

- No. However, nearly all organizations that are nonprofit also wish to have tax-exempt status

- Becoming nonprofit and becoming tax-exempt are different processes, and are done by different government agencies- Granting nonprofit status is done by the state- Applying for tax-exempt designation (such as 501(c)(3), the

charitable tax-exemption) is granted by the federal government, by the IRS.

- To apply for federal tax-exemption, you need to have been granted nonprofit status first. Further, not all nonprofits are eligible to be tax-exempt.

Urban Food, Farm & Agriculture Law Practicum

Forming a Nonprofit Organization

Forming a charitable nonprofit organization: 1) File for an Employee ID number AND

Apply for 501(c)(3) status with the Internal Revenue Service (IRS).

2) File Articles of Incorporation (or other required organizing document) with the appropriate agency in their state (usually the Secretary of State)

Urban Food, Farm & Agriculture Law Practicum

Requirements for Nonprofit Articles of Incorporation

1) Limit the organization’s purpose to one or more of the exempt purposes set forth in Section 501(c)(3): religious, charitable, educational, literary or scientific.

2) Must not expressly empower the organization to engage in activities that undermine or distract from the purpose, and none of its earnings can advantage/benefit any private shareholder or individual

3) Must permanently dedicate assets of the organization to an exempt purpose described under Section 501(c)(3)- If an organization dissolves, its assets must be distributed for an

exempt purpose described in section 501(c)(3), or to the government (local, state or federal) for a public purpose.

Urban Food, Farm & Agriculture Law Practicum

What are bylaws?

- Bylaws are an organization’s internal operating rules- Federal tax law does not require specific language in

the bylaws of most organizations. - State law may require an organization to adopt bylaws- The Internal Revenue Service requires the submission

of bylaws, if adopted, with an application for exemption under section 501(c)(3), and will review these documents to ensure that the applicant is organized exclusively for exempt purposes and that the applicant’s proposed or actual activities are consistent with those documents.

Urban Food, Farm & Agriculture Law Practicum

Advantages of Having Tax-Exempt Status

- Exemption from federal corporate and income taxes for most types of revenue.

- Organizations designated as 501(c)(3) are able to solicit tax deductible contributions.

- You can apply for grant funds directly. Almost all grants require evidence of federal tax-exempt (501(c)(3)) status.

Urban Food, Farm & Agriculture Law Practicum

Things to Keep in Mind

- Tax-exempt organizations are taxable, to the extent that they participate in activities unrelated to the performance of tax-exempt functions.

- Incorporation creates another level of complexity and responsibility - e.g. Reporting and Renewal Requirements

- Hire legal counsel to help you make decisions and guide you through the process