How to Get a Tax Exempt Number for an Organization
Navigate the formal requirements for your organization's tax-exempt status, from preparing foundational documents to fulfilling federal and state obligations.
An organization’s “tax-exempt number” refers to a status granted by government bodies that frees it from paying certain taxes. The Internal Revenue Service (IRS) grants federal income tax exemption, which is confirmed by an official determination letter. This federal status does not automatically extend to state taxes.
Organizations must also apply to a state agency to become exempt from state-level taxes, such as sales tax on purchases. If approved, the state issues a certificate or number to use as proof of exemption. This means an organization navigates two distinct processes: one with the IRS for federal income tax and another with a state agency.
Qualifying for Federal Tax-Exempt Status
To qualify for federal tax-exempt status, an organization must be organized and operated exclusively for purposes the IRS considers exempt. The most common category is defined under Internal Revenue Code Section 501(c)(3), for entities with charitable, religious, educational, or scientific missions. This category also includes organizations dedicated to public safety testing, certain amateur sports, or preventing cruelty to children or animals.
A requirement for 501(c)(3) status is that none of the organization’s net earnings can benefit any private shareholder or individual, and it must not be operated for private interests. Its activities are also restricted, as it cannot engage in substantial lobbying or participate in political campaigns. While other tax-exempt classifications exist, the 501(c)(3) status is the primary designation that allows donors to receive a tax deduction for their contributions.
Required Information for Federal Application
Before applying for federal tax exemption, an organization must obtain an Employer Identification Number (EIN) from the IRS. An EIN is a nine-digit number that identifies the business entity for tax purposes and is required even if the organization has no employees. The application for an EIN is completed online using Form SS-4.
The organization must also have organizing documents, including Articles of Incorporation and Bylaws. The Articles of Incorporation create the entity under state law and must contain specific language, including a statement of the organization’s exempt purpose and a dissolution clause. Bylaws are the internal operating rules and are often mandated by state law.
The application for tax-exempt status is made using either Form 1023 or Form 1023-EZ. To complete these forms, an organization must provide:
- A narrative of its past, present, and planned activities
- Financial data, including past statements and future projections
- A list of its officers, directors, and trustees
The standard Form 1023 requires extensive detail, while the Form 1023-EZ is a shorter, online option for smaller organizations with projected gross receipts under $50,000 and assets under $250,000.
Submitting the Federal Application
Applications for tax-exempt status must be filed electronically through the federal government’s online portal, Pay.gov. A user fee is required at the time of submission. The fee for the standard Form 1023 is $600, and the fee for the streamlined Form 1023-EZ is $275.
After submitting the application and fee, the organization will receive an electronic acknowledgment of receipt. The processing timeline varies depending on the form filed and the application’s complexity. Form 1023-EZ applications may be processed in a few months, while the more detailed Form 1023 can take six months or longer.
During the review, an IRS agent may contact the organization for additional information. The process concludes when the IRS issues an official determination letter granting or denying tax-exempt status.
Securing State Sales Tax Exemption
After receiving a federal determination letter, an organization can pursue a state sales tax exemption. This process is managed by a state agency, like a Department of Revenue, and allows an organization to purchase goods and services for its mission without paying sales tax.
Most states require a copy of the IRS determination letter as proof of 501(c)(3) status. States may also require the organization’s Articles of Incorporation, bylaws, and recent financial statements. To begin, an organization can search online for its state’s requirements using terms like “[State Name] sales tax exemption for nonprofits.”
This search should lead to the appropriate state government website with the necessary application forms and instructions. After a successful review, the state will issue a sales tax exemption certificate or number. The organization must present this to vendors at the time of purchase to claim its exemption.