You have an idea, and you’re ready to start your new nonprofit organization in Chicago. You need more than an idea, of course, and there are a lot of plans to make. What will you call it? Who will you be working with, and who will be working for you? What will be in your articles of incorporation and mission statement? Where will your funding come from?
One thing you can do to make your nonprofit’s money go farther is to apply for a tax exemption certificate. Saving on sales taxes can be the difference between operating at a profit or a loss, especially for new startups.
What Tax Exemption Covers
Starting a nonprofit involves purchasing—office furniture and equipment, supplies, and even printing for program materials. Tax exemption means that your organization doesn’t pay state and local taxes on these tangible goods unless you plan to sell them (see below for sales.)
An Illinois tax exemption only covers goods and services purchased within the state of Illinois. If your nonprofit is near the border or does business out of state, you will have to apply for and obtain tax exemption for that state as well, using your IRS nonprofit registration.
Becoming Tax Exempt
A nonprofit that is properly registered as a 501(c)(3) is also eligible to make purchases tax-free under Section 115 of the Internal Revenue Code. But just being a nonprofit doesn’t mean you’re tax exempt. You’ll have to apply to and be qualified for a tax-exempt (“charitable”) organization first through the IRS.
To qualify in Illinois, the nonprofit must be structured and functioning as a religious, educational and/or charitable organization exclusively. Organizations that are typically granted this status are:
- Other religious organizations
- Traditional social service organizations
- Other charitable organizations
Illinois’ criteria for exemption is more stringent than the IRS is. A nonprofit must prove its qualification for tax exemption by “clear and convincing evidence” and having “all debatable facts resolved against exemption.”
To apply, submit your nonprofits’ documentation to the Illinois Department of Revenue (DOR). You’ll need:
- Your nonprofit’s organizing documents
- The IRS tax-exempt determination letter (or information on why it’s not needed, such as a church’s automatic tax-exempt status)
- A brief explanation of the organization’s functions, activities, and purposes
- A recent revenue and expense statement (some religious organizations may be exempt from this one)
You’ll receive the tax exemption in about four to six weeks. You can read more about the process and fill out the forms online at MyTax Illinois.
Note that the sales tax exemption is state-specific. While you may have state tax exemption when buying in Illinois, as well as states like Texas, Indiana, and Louisiana, South Carolina has no such sales tax exemption available.
Once assigned, you’ll renew your nonprofit’s tax exemption every five years. You’ll also receive an expiration date with your letter of exemption, and you’ll need to resubmit much of the same information as you did to get the exemption. Begin your renewal process at least four months ahead of the expiration date to give the DOR time to review your documentation for re-approval.
Charging Sales Tax
If you are selling items, you will still have to collect sales tax in Chicago. A nonprofit that regularly sells goods is required to collect and remit sales tax on these goods.
Keeping Your Nonprofit Legal
If you’re in the beginning stages of starting your nonprofit, getting legal help at the outset can prevent small problems from becoming bigger ones later.
James C. Provenza is a leading Illinois non-profit attorney with years of experience navigating the complex legal landscape surrounding nonprofit organizations and the issues they face. Call our firm today at (847) 729-3939, or use our online contact form. We can help you start your nonprofit and run it well for many years to come.