For many nonprofits, tax-exempt status is everything. Not only does this exemption allow nonprofits to avoid federal corporate taxes, but allows donors to write off their contributions at the end of the year. In many states, IRS-granted, tax-exempt status can also open doors to other exemptions on property taxes and sales tax. But when filing the application for exemption, the process is daunting, if not utterly overwhelming.
The 501c3 application will always be difficult; and likely it should be (the IRS recently streamlined the application process for small nonprofits with Form 1023EZ). But like anything else, if you break something down into smaller steps, even large tasks become doable.
The first step in obtaining tax exemption should be defining your nonprofit’s purpose.
Crafting Your Purpose
The IRS has identified 33 different types of nonprofits eligible for tax exemption. The vast majority of nonprofits formed will seek 501c3 status—tax exemption for charitable organizations. But how do you convince the IRS that your nonprofit is actually a charitable organization? It all starts with the language in your nonprofit’s purpose.
Articles of incorporation (aka: certificate of incorporation) are a nonprofit’s formation documents that you file with the state to create the entity. In the articles, you’ll find a section known as the purpose clause. The purpose clause is the section of your articles the IRS will look at the closest during your application period. Whether your nonprofit is actively preventing animal cruelty or donating yoga mats to needy Canadians, the purpose clause must be crafted with special language in mind. Fortunately, the IRS has provided nonprofits with the exact language it likes to see.
What You Need to Write
The IRS will be concerned with three aspects of your nonprofit’s purpose: that it’s exclusively charitable; that no part of the earnings will benefit an individual; and that upon dissolution the nonprofit’s assets will not benefit an individual. In total, the IRS wants to see that the nonprofit has been created for public good, not yours or someone else’s. The exact language provided by the IRS follows below:
“Said corporation is organized exclusively for charitable, religious, educational, and scientific purposes, including, for such purposes, the making of distributions to organizations that qualify as exempt organizations under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code.”
“No part of the net earnings of the corporation shall inure to the benefit of, or be distributable to its members, trustees, officers, or other private persons, except that the corporation shall be authorized and empowered to pay reasonable compensation for services rendered and to make payments and distributions in furtherance of the purposes set forth in Article Third hereof. No substantial part of the activities of the corporation shall be the carrying on of propaganda, or otherwise attempting to influence legislation, and the corporation shall not participate in, or intervene in (including the publishing or distribution of statements) any political campaign on behalf of or in opposition to any candidate for public office. Notwithstanding any other provision of these articles, the corporation shall not carry on any other activities not permitted to be carried on (a) by a corporation exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or (b) by a corporation, contributions to which are deductible under section 170(c)(2) of the Internal Revenue Code, or the corresponding section of any future federal tax code.”
“Upon the dissolution of the corporation, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government, for a public purpose. Any such assets not so disposed of shall be disposed of by a Court of Competent Jurisdiction of the county in which the principal office of the corporation is then located, exclusively for such purposes or to such organization or organizations, as said Court shall determine, which are organized and operated exclusively for such purposes.”
Submitting Your Articles of Incorporation
Most secretary of state websites offer templates for articles of incorporation. However, most leave very little room to include the specific language you need. You should type the purpose on a separate page and attach it to the filing. Feel free to include a few sentences on the specialized purpose of the nonprofit (i.e. stating that the nonprofit seeks to end animal cruelty). Some nonprofit purposes take up several pages; others are only a few sentences.
Once your articles of incorporation are complete, you will also want to adopt the language used in the purpose in your organization’s bylaws.
To learn more about bylaws, articles of incorporation, and tax exemption, check out the following links: