Companies want to apply for tax exempt status because, as the phrase implies, they will not have to pay income taxes to the IRS. However, unless you are one of the company types listed by the IRS you will not succeed in getting that tax exempt statues. The restaurants down the street or the retailers next door are not the types of businesses that will get that coveted tax exempt status. Churches, schools, and hospitals are among the types that are commonly given that status. For a complete list of what types of organizations are eligible, see IRS Publication 557.
Just because your organization is eligible does not mean you should stop paying taxes. The IRS will not take that very well. You need to apply for that tax exempt status - AND continue paying taxes until the IRS officially grants your tax exemption. The IRS can take well over six months, and in some cases a year, to decide so it will take patience on your part. So what do you need to do?
- Get an Employer Identification Number - EIN
Even if you don't have any employees, you will need this number. You can find the form here
There is more than one type of application. You will need to determine which application is appropriate for your business. Check out this IRS website for more help on choosing an application. Before you turn it in, it may be a good idea to have a lawyer look it over.
- Gather the documentation you will need to provide. Information like your articles of incorporation, your balance sheet and up to four years worth of other financials is usually required. You will need to submit this data with your application. Make sure you send copies only and not the original documents.
As mentioned, it can take well over 6 months to get your approval back from the IRS. There isn't much you can do to speed up the process. However, there are a lot of things you can do to slow it down. The IRS even provides you with a checklist of 10 things that can hang up your application. These range from simply forgetting to sign the form to failing to provide all the requested documentation. It's a good idea to double check your application against this list prior to sending it in.
The number one reason for delayed approval is a missing or incorrect user fee. Your application should state right on it what the user fee will be for your specific organization. You should also check carefully to make sure that you are filling out the correct form. Again, it is probably wise to have a professional review your application before you send it in.
One thing to remember is that even though you succeed in getting that tax exempt status doesn't mean all of your activities are tax exempt. Many tax exempt businesses have some of their activities still subject to taxes. Check with a professional to make sure you are following the law.