1. What Is Washington, D.C. Nonprofit Tax Exemption?
2. What Is Unrelated Business Income?
3. How to Obtain Tax Exemption in D.C.
4. Tax Exemption Reapplication
5. D.C. Tax Reform

D.C. franchise tax exemption occurs when a company is not required to pay franchise tax. This is a status given to certain businesses registered in Washington, D.C. Tax-exempt status is given to different types of businesses depending on what kinds of work or services they provide.

What Is Washington, D.C. Nonprofit Tax Exemption?

Many states require nonprofit organizations to apply for tax exemption through the state tax authority. Tax exemption takes away a business's requirement to pay income and franchise taxes. Even if a nonprofit receives a determination letter from the Internal Revenue Service (IRS), it still might need to file for tax exemption with the state. An organization will need to file a 501(c) tax form with the IRS to be awarded tax-exempt status.

What Is Unrelated Business Income?

When a nonprofit raises money to be used for charitable causes, it can file for tax exemption. This status is offered because the organization isn't trying to profit from its income, but is using it solely to help others. Plans for the income must be outlined in the organization's purpose or mission statement.

Sometimes nonprofits will receive what is called unrelated business income, or UBI, throughout their regular operations. Income that isn't used for the charitable mission of the organization may be subject to taxation. To ensure that your nonprofit only pays taxes on the income it should, you'll want to hire an experienced business lawyer who will help you sort out your tax-exempt status.

How to Obtain Tax Exemption in D.C.

If you want to obtain tax-exempt status for a nonprofit organization in D.C., you'll need to follow these steps:

  1. Visit the IRS website for information on tax-exempt status.
  2. File form 1023, also called an Application for Recognition of Exemption.
  3. Await your approval or denial.

When your organization is approved for tax-exempt status, the IRS will send you a Letter of Determination. Then you'll need to file for tax-exempt status with the state. Washington, D.C. requires nonprofit organizations to file Form FR-500 when you register your new business. You'll be able to request exemption from the following taxes when you fill out form FR-164:

  • Income tax
  • Franchise tax
  • Sales tax
  • Use tax
  • Personal property tax

This can be completed online or via mail.

Tax Exemption Reapplication

Every five years, the District of Columbia requires tax-exempt and nonprofit organizations to re-file for their status if they want to continue to be exempt from franchise taxes, personal property tax, and sales and use tax. This is done online through D.C.'s office of tax and revenue website. Once your reapplication is processed and approved, you'll receive a certificate that will be valid for another five years.

Make sure you reapply for your nonprofit's tax-exempt status before the expiration date on your current certificate. You'll want to give yourself plenty of time to avoid any complications. Give three months or more for the process to be completed. Also, be sure that your information is correct and everything is included that is required. Failure to properly and thoroughly fill out the form will result in rejection or a longer processing time.

D.C. Tax Reform

Thanks to D.C.'s strong economy and business growth, the state has been able to make some recent tax changes and approve a very healthy budget. These changes will benefit all taxpaying individuals and even some businesses. They also should help encourage more healthy competition between local businesses. Tax burdens were reduced for many individuals as were business and estate taxes.

A new tax reform package was passed in 2014 for Washington, D.C. All of the changes covered in the package went into effect at the beginning of 2018 on January 1. This has had some effects on the tax-exempt status of D.C. nonprofits and business taxes in general. For instance, the business tax was reduced to 8.25 percent from the previous 9.975 percent.

Income taxes were lowered for those in the middle-income tax bracket and for those who earn as much as $1 million in a year. Exemption allowances for individuals and businesses are now closer to those allowed by the federal government. Low-income workers who are without children are receiving a great earned income tax credit.

If you need help with a D.C. franchise tax exemption, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.