Q: What is the procedure for applying for tax-exempt status?

A: Consider starting at MCN's Start a Nonprofit section for this information. This section will provide you information on how to apply for tax exemption, among other helpful tips on how to start a nonprofit organization.

Once the organization's articles of incorporation have been filed and the bylaws have been approved by the initial board of directors, the next step for a new nonprofit is applying for federal tax exemption from the Internal Revenue Service. A common myth is that all nonprofits are automatically tax- exempt.

There are several steps and filing requirements an organization needs to complete before receiving exemption. And even then, not all organizations qualify for the same exemptions. The following applies for 501(c)(3) status from the IRS, the most common type of tax-exempt organization.

First, obtain IRS Publication 557— Tax-Exempt Status for Your Organization. This 55-page document includes no forms to file, but lays out the federal laws regulating tax-exempt organizations. It is available free and serves as a useful reference guide for filing requirements, employment issues, lobbying expenditures, and many other complex nonprofit issues regulated by IRS codes.

Second, get copies of IRS Form 1023 — Application for Recognition of Exemption under 501(c)(3) of the Internal Revenue Code. Form 1023 applies for for a ruling or determination letter on an organization’s exempt status under Section 501(c)(3). Organizations applying for exemption under another 501(c) section may need to file IRS Form 1024. Find the forms and instructions you need from the IRS.

The filing fee is $750 for organizations anticipating gross receipts averaging more than $10,000 during its first four years and $300 for organizations anticipating gross receipts averaging less than $10,000 during its first four years.

Processing time varies, so be prepared for an approximate wait time of six months. 

Q: Where can I receive specialized assistance about applying for tax-exemption and annual filing requirements for a nonprofit corporation?

A:

IRS Exempt Organizations (EO) Division

TE/GE Customer Account Services

PO Box 2508

Cincinnati OH 45201

EO Customer Service: (877) 829-5500

EO Website: www.irs.gov/eo

Q: How do I locate grantwriters and professional fundraisers?

A: One of the free services MCN provides is an Online Nonprofit Yellow Pages of consultants available and with expertise in working with nonprofit organizations.

Q: Are nonprofits allowed to generate a “profit”?

A: A common misperception is that nonprofits must survive on grants alone, or that nonprofits cannot generate a “profit.” Nonprofits can and should budget for an operating reserve. Funders like to see evidence of organizational sustainability and may ask the question, “If the organization’s funding is dependent on a source that dries up, can the organization survive?”

Q: What is the recommended percentage of revenue raised vs. amount spent for development and administration for a nonprofit organization?

A: The Charities Review Council of Minnesota recommends that a charitable organization spend no more than 30 percent of its budget on administration and fundraising, leaving at least 70 percent of its funds devoted to programs (though there is no law requiring this and small and start-up organizations may have difficulty maintaining this standard). However, organizational growth requires investment in administrative functions that are unique to the nonprofit sector, such as development and fundraising, volunteer management, and public policy and advocacy.

Q: How can I tell if donations to a nonprofit organization are tax-deductible? 

A: You can check to see if a nonprofit organization has been granted tax-exempt status at the Internal Revenue Service's website.

Q: How do I find out more about donor confidentiality?

A: Principles and Practices for Nonprofit Excellence
http://www.mncn.org/info_principles.htm#CHARITABLE%20FUNDRAISING
<http://www.mncn.org/info_principles.htm#CHARITABLE%20FUNDRAISING>

MN Attorney General's Guide to Minnesota's Charities Laws
http://www.ag.state.mn.us/pdf/charities/GuidetoCharLaws_01.pdf
<http://www.ag.state.mn.us/pdf/charities/GuidetoCharLaws_01.pdf>

GuideStar Donor's Bill of Rights
http://www.guidestar.org/learn/rights.jsp
<http://www.guidestar.org/learn/rights.jsp>