From the desk of David B. McRee, Certified Public Accountant:
Congratulations on successfully forming a new Florida nonprofit corporation!
But you aren’t finished yet. Below I go over the basics and provide links to help you figure out what to do next on your way to tax-exempt status.
Applying for Federal Tax-Exemption & Getting a Determination Letter
A nonprofit corporation is a creation of the state. The next step for most new nonprofits after incorporation is to become exempt from federal income taxes under Internal Revenue Code section 501(c)(3) or some other paragraph of section 501(c), as appropriate. When the IRS reviews your application, it makes a determination as to whether the organization does in fact qualify as tax-exempt. If it does, the IRS issues a “determination letter.” This is your proof to the public that the organization is in fact tax-exempt and under which paragraph of section 501(c) it qualifies.
A 501(c)(3) organization can be either a public charity (like Hospice or Goodwill), or it could be a private foundation (like the Bill and Melinda Gates Foundation). The important thing about a 501(c)(3) organization is that donations it receives are tax deductible as charitable contributions on the donor’s tax return. It is strictly limited in its ability to engage in lobbying and is absolutely prohibited from political speech or activities. Examples include: amateur sports organizations, school booster organizations, neighborhood associations, religious organizations and ministries, animal rescue, humanitarian aid and disaster relief organizations, food distribution, homeless assistance, elderly assistance, educational organizations, private foundations that make grants to public charities or needy individuals, private foundations that carry on charitable programs, and many more.
It’s important that you understand the difference between a public charity and a private foundation. A private foundation normally receives all of its support (income) from a few donors, or sometimes from only one donor. A public charity receives its support (income) from a broad section of the general public. There are some exceptions, so it’s important to consult with a professional if you have any doubts about whether your organization is eligible for public charity status.
Other common types of organizations might apply for tax-exemption under the following paragraphs:
- 501(c)(4) – This is a social welfare organization. It’s purposes may be beneficial to the community, but do not quite rise to the definition of “charitable.” Examples might include a homeowner’s association, a volunteer fire company, or an organization that wishes to engage in lobbying activities to advance its purpose (see other examples). It can engage in lobbying as its primary purpose without endangering its tax-exemption. Apply on the new IRS Form 1024-A . A new 501(c)(4) organization also has a 60 day notification requirement.
- 501(c)(6) – This is a business league, association, or chamber of commerce (see other examples). Apply using IRS Form 1024
- 501(c)(7) – This is a social club, like a yacht club, a garden club, etc. It exists primarily to provide enjoyment and fellowship for its members. Apply using IRS Form 1024
Only the 501(c)(3) organization has a requirement to file an application for recognition of tax-exempt status within 27 months of formation. For the other types, formal application is optional, but is highly desirable in most cases. And don’t forget the 60 day notice requirement for 501(c)(4) organizations.
Since you’ve already incorporated, how do you know what to do next?
What To Do After Incorporating a New Florida Nonprofit. Becoming Federally Tax-Exempt.
First, determine if you plan to seek tax-exempt status as a 501(c)(3) organization, or whether you’ll seek it under a different paragraph.
Let’s start by assuming 501(c)(3) is what you want. Great. You’ve got 27 months from the date the organization was first incorporated to submit your IRS Form 1023 or 1023-EZ to the IRS.
Form 1023 is the official application to have the IRS recognize the organization as exempt from federal income taxes.
Some really small public charities that expect to have income of less than $5,000 may not have to file a Form 1023. However, they are still subject to the Form 990-N filing requirement (discussed below). Organizations expecting $50,000 or less in annual gross receipts may be eligible to use the simpler Form 1023-EZ to apply. Larger organizations will have to use the long form Form 1023. A professional tax advisor can help you determine which form is right for your organization. A private foundation has to file Form 1023 or possibly Form 1023-EZ no matter how low its gross receipts are. But be careful, especially if you are applying with Form 1023-EZ. The last thing you want to do is to end up classified as a private foundation when you actually intend to operate as a public charity.
Annual Federal Filing Requirements
All tax-exempt organizations are required to file either an annual return or electronic notice with the IRS. Even if the organization has not yet applied for tax-exempt status, it still has to file an annual Form 990 return or notice “as-if” it is tax-exempt. This annual filing is done on one of the Form 990 series returns, as follows:
Form 990-N – this is known as the “annual notice” or “electronic postcard.” There is no paper form. It must be filed online at the IRS web site. It is for organizations whose annual gross receipts are normally $50,000 or less. There is no penalty for late submission, but filing to submit for three consecutive years results in a revocation of tax-exempt status.
Form 990-EZ – this return is for organizations with annual gross receipts of less than $200,000. It can be filed on paper or electronically. Late filing penalties are $20 per day for each day the return is filed after the due date. Failure to file for three consecutive years results in automatic revocation of tax-exempt status.
Form 990 – This long form return is for organization with annual gross receipts of $200,000 or more. The $20 late-filing penalty and automatic revocation also applies to this return, except that for organizations with one million dollars or more of annual gross receipts the late filing penalty is $100 per day.
Form 990-PF – This is the tax return filed by private foundations. Late filing penalties and automatic revocation rules apply. By the way, the 990-PF is not a do-it-yourself project. Get professional help on this one.
When is Your First Tax Return Due?
Your first Form 990 series return is due four and one-half months (the 15th day of the 5th month) after the end of your first tax year. Even if there was no income, a public charity must at least submit Form 990-N. A private foundation must file a Form 990-PF even if it had little or no income.
Example #1: You incorporated on October 15, 2017 and you keep your books on the calendar year basis. Your first return is due May 15, 2018. The return will be filed on the 2017 Form 990 and will cover the short period beginning October 15, 2017 through December 31, 2017.
Example #2: You incorporated February 2, 2018 and you keep your books on the calendar year basis. Your first return is due May 15, 2019. The return will be filed on the 2018 Form 990 and will cover the short period beginning February 2, 2018 through December 31, 2018.
Example #3: You incorporated February 2, 2018 and you keep your books based on a June 30 fiscal year end. Your first return is due November 15, 2018 and will be filed on the 2018 Form 990 and will cover the period beginning February 2, 2018 through June 30, 2018.
What Else Do We Need to Do?
Do you have an employer ID# ? That’s something you’ll need to get (by filing IRS Form SS-4) before you can open a corporate bank account and before you can apply to the IRS for tax-exempt status. If you used an incorporation service like Legal Zoom, for instance, they may have already gotten an employer ID# for you. It’s also referred to as a “TIN,” or “Taxpayer ID.” It has nothing to do with your tax-exempt status and you still need an employer ID# even if you will never have employees.
Have you had your first board meeting to elect directors and authorize the opening of a bank account?
Keep records (please) – The law requires that all business entities (yes a charity is a business entity) keep sufficiently detailed records to account for all items of income and expense. For a tiny organization, an Excel worksheet or Google Sheets will probably work fine. For slightly larger charities that don’t have assets other than cash, Quicken is a fantastic program to use to keep your books. It’s a simple but powerful check register. For organizations that have other assets like equipment and buildings and that conduct multiple fundraising events or receive significant grants, you’ll want to step up to Quickbooks Online. I recommend Quickbooks Online (QBO) over the desktop software because its easier to transition between treasurers and easier to have an accountant or bookkeeper access your books remotely. When you get a new treasurer, all you have to do is add them as a new user and remove the old treasurer’s access. With QBO you don’t have to worry about installing updates or surviving computer crashes or theft.
Reconcile your check register to your bank account monthly. You don’t want to get behind on this or you may end up with a very expensive mess. You must do this reconciliation whether your check register is on Excel, Quicken, or Quickbooks. Failing to do this monthly is the most common way businesses end up having to spend a small fortune for an accountant to “fix” their books before being able to prepare a tax return.
Apply for a Florida Sales Tax Exemption by filing Form DR-5 so you can purchase items and supplies to use in your organization without paying sales tax. You must have 501(c)(3) status to qualify for a sales tax exemption. This exemption certificate does not mean you can avoid collecting sales tax on taxable items you sell. More details…
Register to Solicit Contributions – Florida requires most nonprofit organizations to register with the Department of Agriculture and Consumer Services in order to lawfully solicit contributions in Florida. There are some exemptions to the registration requirement. Determine if your organization is subject to this registration requirement. This is an annual registration.
Register to Collect Sales Tax – With a few exceptions, when a nonprofit organization sells taxable items or services, or leases or rents commercial real property or transient rental property to others in Florida, the organization must register with the Department to collect, report, and remit sales tax. Most small nonprofit organizations do not engage in activities that require the collection of sales tax, but it is always a good idea to be sure your organization does not sell any taxable items or services.
File Your Corporate Annual Report – Now that you have formed a nonprofit corporation, to remain in good standing as a Florida corporation, you’ll have to file an annual report each year along with your renewal fee. You should receive a notice from the state reminding you of the report due date. Normally it is sent to the registered agent of the corporation.
Make sure your entire board of directors understands all the filing requirements. Don’t pile all the responsibility on your treasurer. The IRS expects board participation in allocating resources to monitor and meet filing deadlines.
Finally, nonprofit organizations may be eligible for reduce postal rates on mailings. If you have a lot of mailings to members, donors, or customers, it may be worth looking into.
For Organizations Other Than 501(c)(3)
Organizations that are not claiming exemption under section 501(c)(3) do not apply for recognition of tax-exempt status using Form 1023. They must use Form 1024 or Form 1024-A if applicable. (Certain types of nonprofits, like credit unions, don’t use any form, but that’s beyond the scope of this article).
The Form 1024 and Form 1024-A is not required to be filed within the 27 month period after incorporation, however, to comply with the Form 990 filing requirement, the organization may have to call the IRS to be set up as a filing entity. Otherwise the filing may be rejected since the IRS may not know you exist. Also, organizations claiming tax-exemption under section 501(c)(4) have a new and more urgent filing requirement of filing Form 8976 with the IRS within 60 days of incorporation or be subject to penalties of $20 per day.
When filing Form 1023-EZ, it usually only takes a couple of weeks to get a determination letter from the IRS. When filing the full Form 1023, Form 1024-A, or Form 1024, it could take between two months and a year (or more) depending on the complexity of the organization and the stated purpose and activities.
Applying for tax-exempt status can be a confusing and time-consuming process, but you don’t have to go it alone.
If I can be of any service to you, please contact me by email or give me a call at 727-345-4288. I’m in St. Petersburg, Florida and I’ll be glad to help.
But whoever you get to help you move forward, please hire someone with specific experience with nonprofits. All professionals are not qualified to help, even if they have “CPA” following their name.
David McRee, Certified Public Accountant
Licensed (#AC0031324) by the Florida Department of Business and Professional Regulation
That’s license number AC zero zero 31324