Tax Exempt Status

Securing Organizational Benefits

Environmental nonprofits perform a wide range of valuable services to the community. They promote the protection of local waterways and forests, restore polluted or eroded sites and habitats, combat suburban sprawl, offer environmental education programs, and/or develop eco-tourism.

Despite this inspiring potential, most nonprofits have small budgets to carry out their work. Therefore, many organizations would like to solicit donations so they can participate in watershed management activities, address environmental concerns, and engage in education initiatives. One of the best ways for a group to attract donations and accomplish these goals is to obtain tax-exempt status from the Internal Revenue Service (IRS). Filing for tax-exempt status offers several benefits to an organization, including:

  • Public and Private Contributions
  • Exemption from Income Taxes
  • Discounted Rates (postal rates, advertising and registration fees)
Getting Started

Before a group can file for tax-exempt status and take advantage of the associated benefits, there are certain steps it must take. For example, the IRS requires a conformed copy of a group’s Certificate of Incorporation as part of the application process. Therefore, a group must incorporate with their state before it can begin preparing its tax-exempt application. Other requirements include a conformed copy of your Bylaws and a request for an Employer Identification Number (EIN).
There are various tax-exempt status options; the most common is the 501(c)(3) determination. The main advantage to filing as a 501(c)(3) involves tax deductible contributions. A disadvantage involves your group’s political involvement. The IRS limits a 501(c)(3)’s lobbying abilities and other political activities.

Other common alternatives are briefly outlined below. For more information on these options, contact your attorney or tax advisor, or visit the IRS website at www.irs.gov.

  • File as a 501(c)(4). A 501(c)(4) is a type of nonprofit association that is also not required to pay federal income taxes. A 501(c)(4) group must be organized to promote social welfare. Donations to this kind of group are not tax-deductible, however, these groups may engage in lobbying as a primary activity without threatening their tax-exempt status.
  • Form a Sister Organization. If your group is already recognized by the IRS as a 501(c)(3), form a sister group that is a 501(c)(4) organization.
  • Work Under an Umbrella Organization. You can also choose to work under a local umbrella organization that has already filed as tax-exempt.
  • Elect 501(h) status. If you file as a 501(c)(3), your group can elect to follow a different standard called the 501(h) standard, also known as the lobbying expenditures test. The test allows a group to spend a certain amount of its budget on lobbying.

It is important to note that not all activities are appropriate for tax-exempt organizations. To be eligible for federal 501(c)(3) tax-exemption, your group must be organized for charitable, educational, religious, literary, or scientific purposes; or participate in fostering national or international sports competition, preventing cruelty to animals, or testing for public safety. Therefore, when determining which option is best for your group, consider your group’s mission, the types of activities in which your group will participate, and whether or not these activities will be limited by a certain tax-exempt status.

IRS Tax Exempt Government Entity Helpline: (877) 829-5500

Once an organization incorporates, it is important to begin preparing its tax-exempt application. According to the IRS, an application is filed in a timely manner within 27 months of incorporation. This includes a deadline of 15 months after incorporation with a 12-month extension. If your application is filed within this time period, your tax-exempt status is considered retroactive to the date of incorporation. Otherwise, it is effective from the postmark date.

Consult an attorney versed in tax-exemption or the IRS for assistance in determining if your group’s purposes comply with those allowed for tax-exempt organizations.

As of 2006, organizations must file their annual report online. Each year your organization needs to renew your incorporation status. To file electronically, a nonprofit will need to go to the State’s website, http://www.state.nj.us/njbgs/. Failure to file forms and pay the annual fee for two consecutive years results in dissolution of the corporation. 

Further Resources

  • Center for Non-Profits  Provides guidance to charitable organizations on a wide range of issues such as incorporating, obtaining 501(c)resources(3) tax-exempt status, insurance, and board development.
  • USA.gov for Nonprofits Highlights resources in numerous areas of running a nonprofit including tax-exempt status, incorporating, and more.
  • Internal Revenue Service Offers a hotline for questions on nonprofit, tax-exempt matters and allows a group to check the status of its application. Phone: (877) 829-5500
  • IRS Stay Exempt Tax Basics for 501(c)(3)s This website provides online training to help you keep your organization’s exempt status intact. It consists of five interactive courses, which you can take individually and in any order.
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