501c3 filing is a powerful designation for American corporations looking to avoid paying federal taxes. With some restrictions, many types of non-profit corporations that are exempt from state taxes can also apply for federal tax exemptions. Official registration for the organization also opens many opportunities to receive federal charity grants. Of course, this company registration process protects business from tax losses. New business owners looking to take advantage of these opportunities should know what they need to successfully file for 501c3 status. The following are five requirements for obtaining federal 501c3 tax exempt status.
Establish A Non-Profit Corporation
In order to successfully apply for federal 501c3 designations, a corporation must first be approved as a non-profit by their home state. While the regulations regarding what type of corporation can vary, there are a few common rules. For example, many states allow corporations to be designated as non-profits during the incorporation process. Approval of this status during that process typically requires a concrete statement of purpose. This purpose should specifically enumerate how the business plans to serve a public good. Business owners should make sure their company complies with state level non-profit regulations before proceeding with 501c3 applications.
Comply With Charitable Organization Rules
The federal government will only designate organizations as tax exempt if they follow a certain set of rules. Part of this rule set overlaps with the state level non-profit regulations, such as needing to service a specific public good. You must also follow several non-profit fundraising rules. However, 501c3 filing is not applicable to all types of state level tax exempt businesses. For example, religious institutions and government organs are exempt from taxation at a federal level, but not considered 501c3 organizations. Additionally, stock profit-sharing trusts are also ineligible to file for 501c3 status. Business owners should make sure their organization is eligible to become tax exempt under existing 501c3 rules.
Prepare To File Annual Returns
Businesses that file with the federal government under 501c3 regulations must submit to yearly returns in order to maintain their status. Therefore, it is important for businesses claiming this status to create a bureaucratic infrastructure to service these returns. As federal return requirements are thorough, business owners may wish to retain specialized services. These annual returns are required to contain information explaining almost every step of the business’ financial process. For example, a business must report their total gross receipts and also how these receipts can be considered tax exempt work. Creating or hiring an organization to file annual returns is an important requirement for business owners to obtaining and maintaining 501c3 status.
Fill Out Form 990
Establishing a 501c3 non-profit requires business owners to fill out and submit form 990. This form is effectively a reporting of the company’s gross receipts over a fiscal year. Companies with gross receipts below $50,000 per year should fill out a form 990-N as regulations differ for companies under a certain size. Companies above this size must also report their asset totals. Privately owned non-profits have to fill out form 990-PF regardless of gross receipt or asset size. Business owners looking to file as a 501c3 should understand what type of form 990 they need to fill out.
Submit To An IRS Audit
The last requirement to begin filing as a federal nonprofit is to fill out form 1023, which effectively invites an IRS audit of the company. To prepare for this, you can look at IRS tax filing statistics fiscal year end.The form itself is extensive at 28 pages, but the reporting requirements often grow this form to over 100 pages. The form gathers information about the structure of the company, including the details of the administration. The IRS typically uses this information to investigate key company members before granting tax-exempt status. Rather than a simple form, business owners should think of form 1023 as submitting to an IRS investigation. Business owners should prepare their company and major shareholders before proceeding with their 501c3 status.
New business owners need to understand the multiple requirements the federal government has of tax exempt corporations. First, found your corporation as a non-profit on the state level. This requires the corporation to be compliant with both federal and state regulations for charitable businesses. They must develop an organization within the company to maintain their new tax exempt status. Then business owners must formally submit for tax exempt status by filling out the right form 990. Finally, business owners must submit to a rigorous examination by the IRS. Abiding by these requirements will allow new business owners to successfully obtain 501c3 status.