How to Get a Tax Exempt Certificate
How to get a tax exempt certificate will vary by state and will depend on the type of certificate you want to obtain.3 min read
2. Acquiring Tax-Exempt Status for a Nonprofit
3. Benefits of Tax-Exempt Status
How to get a tax exempt certificate will vary by state and will depend on the type of certificate you want to obtain. Tax-exempt certificates act as proof that a business or organization is not required to pay sales tax or is purchasing items that will be used in a way that makes them tax-exempt.
The two main exemption certificate types are:
- Resale certificates for items purchased at retail that will be resold.
- Offshore certificates for items that will be used on oil rigs or similar.
While resale certificates are used most often, there are other tax-exempt certificate types used for specific purposes.
- Entity exemption certificates allow the entity to purchase items tax-free that will then be used by the same entity. This type of certificate can be used by federal, state, and local governments or tax-exempt and nonprofit organizations. State laws for who can use an entity exemption certificate vary from state to state and should be reviewed if unclear.
- A direct pay certificate allows a company that makes a high-volume purchase of items with the intent to resell to also use those items within the company. A direct pay certificate isn't actually an exemption certificate but a way for the company to file and pay sales tax rather than pay the tax directly to the vendor.
Acquiring Tax-Exempt Status for a Nonprofit
When a nonprofit is formed, it does not automatically have tax-exempt status. Formation only gives the business entity legal status in that state. To gain tax-exempt status, you must apply with the Internal Revenue Service (IRS) and receive approval. When approved, the nonprofit will not be required to pay federal income taxes. At the state level, some states offer tax-exempt status as well, meaning the net profit will be exempt from state income tax payments.
To apply for tax-exempt status the following must happen:
- A copy of the articles of incorporation must be submitted.
- An EIN, or Employee Identification Number, must be obtained. This is a mandatory step regardless of whether the entity has employees or not.
- The purpose of the business must be expressed in full detail. This is needed to explain why tax-exempt status is being requested.
While there are many types of tax-exempt nonprofits, 501(c)(3) is the most common. This type can apply to both public and private foundations and charities that fall under these categories:
- Public safety testing
- Prevention of cruelty to children and animals
For a nonprofit to gain tax-exempt status under Internal Revenue Code Sec. 501(c)(3), form 1023 must be filed. This form usually requires the articles of incorporation and the bylaws. The time is estimated to be at least 100 hours to complete, with approval time ranging from several months up to a year. In some cases, the approval is delayed when additional information is required, so it is beneficial to supply any needed answers as soon as possible. If the nonprofit is small, Form 1023-EZ is an alternate option that can be filed online.
The current filing fees are $600 for Form 1023 and $275 for Form 1023-EZ. If the nonprofit files the application prior to the twenty-seventh month from when they incorporated, tax-exempt status can be backdated to the date of their formation. If it is after this time period, the tax-exempt status will start from the day the application was filed. Check with your state to find out if an application must be filed with the state as well. Not all states require this extra step.
The Internal Revenue Code also has the option to give tax-exempt status to organizations that are not charitable. These organizations fall under 501(c)(4) to 501(c)(27) of the IRS code.
Benefits of Tax-Exempt Status
The acquisition of tax-exempt status offers several benefits, including:
- Donations made to a 501(c)(3) organizations are tax deductible and the donor can claim them as deductions.
- The organization can qualifying for grants that are for 501(c)(3) organizations only.
- In some states, property, state, and local taxes may be exempt.
- Organizations with IRS tax-exempt status often have increased credibility.
- Organizations receive a reduction in postal rates through the U.S. Postal Service.
If you need help with how to get a tax exempt certificate, 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.