One of the most common misconceptions is that your nonprofit is automatically tax-exempt. Another is that all nonprofits are, too. Unfortunately, it’s not quite that simple, but there are advantages to getting a tax-exempt number for your organization.
Why Seek Out Tax Exemption?
Having a tax-exempt nonprofit comes with a few benefits for the designated 501(c)(3) organization.
An IRS tax exemption means that contributions made to your nonprofit are tax-deductible by both individuals and organizations under IRS Code section 170. It also means that the nonprofit is exempt from federal income taxes.
State and local tax exemptions also mean that the nonprofit can purchase goods and services without paying taxes, saving money that can be used for the organization’s mission.
The personal assets of the directors, officers, and members are protected.
The organization is also eligible to receive both public and private grants for funding.
However, Unrelated Business Income is treated differently and taxed accordingly.
What’s Required?
To become a tax-exempt 501(c)(3) nonprofit, an organization must first fulfill one of these purposes:
- Charitable
- Educational
- Literary
- Religious
- Scientific
- Public safety testing
- Promoting competition in amateur sports
- Preventing cruelty to children or animals
The organization must also show that it works for the good of the public interest, providing services such as:
- Help for the underprivileged
- Advancement of education, science and/or religion
- Defense of human and civil rights
- Elimination of discrimination and prejudice
The organization must clearly state in its organizing papers that it will not participate in any kind of political campaign for a candidate, nor make any expenditures for political purposes.
Many organizations that qualify as a tax-exempt nonprofit include:
- Charitable hospitals
- Schools and alumni associations
- Churches and other religious groups
- Parent-teacher associations
- Chapters of the Salvation Army and the American Red Cross
- Chapters of Boys Clubs and Girls Clubs
These are just a few of the many different nonprofits that have a tax-exempt status.
Why You May Need Help
Because tax-exemptions can be complicated, getting help from a nonprofit attorney who understands nonprofit formations and tax exemptions allows you to hand off this complex task to someone with specific expertise. Rather than spend time on something that will take time away from your core mission, outsourcing it to an Illinois nonprofit attorney and expert ensures that it will be done correctly. You can spend more time doing the work and less time worrying if you’ve done the exemption forms right.
Additionally, having outside help can also make sure your nonprofit is operating as the bylaws intended, and that everything is in compliance.
Illinois state tax exemption rules are also require an “E” number to operate a nonprofit in the state. Completion of the Form STAX-1, Application for Sales Tax Exemption, is required, along with a number of the nonprofit’s documents. Although applying for the number is free, there may be other expenses involved with assembling and completing the application letter. Your number renews every five years.
Get Help With Your Nonprofit’s Tax-Exemption Application
We have over 20 years of experience helping major nonprofits in and around the Chicago area with their legal matters, including tax exemptions. Along with comprehensive knowledge of Illinois nonprofit law as well as best practices for growing nonprofits, Attorney James C. Provenza can ensure that your tax exemptions are properly prepared and submitted. Contact our office at (847) 729-3939 today, or use our online contact form. We look forward to helping ensure that your organization is successful.
