How to Become Tax Exempt in Indiana for Your Organization

Tax exemption allows qualifying organizations to operate without paying certain federal and state taxes. This status permits organizations to dedicate more resources directly towards their charitable, educational, religious, or scientific activities. Obtaining and maintaining tax-exempt recognition involves meeting specific requirements set forth by both federal and state authorities. The process generally begins at the federal level before state-specific exemptions can be secured.

Federal Tax-Exempt Status

Organizations typically seek federal tax-exempt status under Internal Revenue Code (IRC) Section 501(c)(3). This section is reserved for entities organized and operated exclusively for charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to children or animals. To qualify, an organization must pass both an organizational test, ensuring its founding documents limit its purposes to those specified in Section 501(c)(3), and an operational test, demonstrating that its activities primarily further its exempt purposes. These organizations must serve a public rather than a private interest, and no part of their net earnings can benefit any private shareholder or individual.

Before applying, an organization needs to gather several pieces of information and documentation. This includes obtaining an Employer Identification Number (EIN) from the IRS. The organization’s organizing documents, such as Articles of Incorporation or a Trust Agreement, are required, along with its bylaws. Detailed statements describing the organization’s purpose, a comprehensive list of its past, present, and planned activities, and financial information covering revenues, expenses, and asset details are also necessary. Information about compensation for officers, directors, trustees, and highly compensated employees, alongside details about board members, completes the preparatory phase.

The primary application form for 501(c)(3) status is IRS Form 1023, “Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.” This form is available for download directly from the IRS website. Completing Form 1023 involves accurately transferring all the preparatory information into its specific fields. The form requires a detailed description of the organization’s purpose and activities, financial data including revenues and expenses, compensation information for key individuals, and details about the organization’s assets, liabilities, and operational activities. All responses must be consistent with the organization’s articles of incorporation and bylaws, which are submitted as attachments.

Once Form 1023 is fully prepared and all required attachments are compiled, it must be submitted to the IRS. The preferred method of submission is electronically through Pay.gov. Organizations can also mail the completed Form 1023 package to the IRS address specified in the form’s instructions. A user fee, which can range from $275 to $600, must accompany the submission.

After submission, the IRS begins its review process, which can take anywhere from three to six months. The IRS may issue requests for additional information (RAI) if clarification or further documentation is needed. Responding promptly to these requests is important. Upon successful review, the IRS issues a “determination letter” formally recognizing the organization’s 501(c)(3) tax-exempt status.

Indiana State Tax Exemptions

Organizations recognized as federally tax-exempt under IRC Section 501(c)(3) are generally eligible to apply for specific tax exemptions at the state level in Indiana. These state exemptions typically cover sales tax on purchases and property tax on owned real and personal property. Obtaining these state-specific exemptions usually follows the federal determination.

Indiana Sales Tax Exemption

Indiana’s sales tax exemption applies to purchases of tangible personal property and certain services made by qualified organizations for their exempt purposes. This exemption means the organization does not pay sales tax on items it buys. Federal 501(c)(3) status is a requirement for this exemption.

To apply for the Indiana sales tax exemption, organizations must complete Indiana Department of Revenue Form NP-20A, “Application for Sales Tax Exemption for Qualified Organizations.” This form requires specific organizational details, including the organization’s name, address, EIN, and the date of its federal determination letter. The applicant must also provide proof of its federal 501(c)(3) status, typically by attaching a copy of the IRS determination letter. The form also asks for a description of the organization’s primary purpose and activities. Once completed, Form NP-20A, along with a copy of the IRS determination letter, must be mailed to the Indiana Department of Revenue. Upon approval, the Department issues an exemption certificate, which the organization then presents to vendors when making qualifying purchases.

Indiana Property Tax Exemption

Indiana property tax exemption applies to real property and personal property owned and used by a qualified organization for its exempt purposes. This exemption applies to facilities used directly in charitable, educational, or religious operations. Federal 501(c)(3) status is a prerequisite, and the property’s use must align with the organization’s exempt activities.

To apply for the Indiana property tax exemption, organizations use Indiana Department of Local Government Finance Form 136, “Application for Property Tax Exemption.” This form requires detailed information about the property for which the exemption is sought, including its parcel number, address, and a description of improvements. The application also asks for an explanation of how the property is used exclusively for the organization’s exempt purposes. Proof of the organization’s federal 501(c)(3) status, such as a copy of the IRS determination letter, must also be submitted.

The form must be filed with the local county assessor’s office in the county where the property is located. The filing deadline is typically April 1st of the assessment year for which the exemption is sought. Property tax exemptions often require annual renewal, meaning a new application or affirmation of continued exempt use must be submitted each year by April 1st.

Maintaining Tax-Exempt Status

Maintaining tax-exempt status requires ongoing compliance with both federal and state regulations after initial approval. Organizations must adhere to specific reporting requirements and operational guidelines to ensure their continued eligibility. Failure to meet these obligations can result in the revocation of tax-exempt status.

Federal Compliance

Federally tax-exempt organizations are generally required to file an annual information return with the IRS, known as the Form 990 series. The specific form depends on the organization’s gross receipts and total assets. These forms are due by the 15th day of the 5th month after the organization’s tax year ends.

Organizations must also be aware of potential federal requirements such as Unrelated Business Income Tax (UBIT). If an exempt organization regularly conducts a trade or business not substantially related to its exempt purpose, the income may be subject to federal income tax. Limitations also exist on lobbying and political campaign activities.

Indiana Compliance

Organizations with Indiana sales tax exemption certificates generally do not have an annual filing requirement with the Indiana Department of Revenue to maintain this specific exemption. However, they must ensure that their federal 501(c)(3) status remains active. If the federal status is revoked or changed, the organization must notify the Indiana Department of Revenue.

Indiana property tax exemptions require annual renewal. Organizations must file a new Form 136 or a simplified renewal form with their local county assessor’s office by April 1st each year to confirm that the property continues to be used for exempt purposes.

General Compliance

Maintaining tax-exempt status involves adhering to general compliance best practices. Organizations must continuously operate in a manner consistent with their stated exempt purpose and avoid actions that could constitute private inurement or benefit to individuals. Maintaining accurate and complete financial records, including documentation of all revenues and expenses, is also fundamental.