Non-profit organizations are organizations that operate not for the purpose of gaining income but rather for the pursuance of its goals, survival and expansion. In this type of organization, any surplus that is gained out of operations is not distributed to owners/shareholders. Any amount considered to be surplus is used to pursue its goals. The difference therein is that for-profit organizations are "owned" by shareholders. While that of non-profit organizations are referred to as controlling members/boards. They are not allowed to sell their shares for profit. Because they do not function for profit, they are deemed exempt from paying income and property tax. To be tax-exempt, one must still apply for a tax ID number or specifically a non-profit tax ID number.
To apply for a non-profit tax ID number, simply follow these steps.
- Find out if you are qualified. Determine if your company qualifies under the bracket of companies with tax-exempt status (or non-profit). Examples of these are charitable organizations, scientific or educational organization, hospitals, schools and homeless shelters.
- You must have 501(c) (3) status. 501(c) (3) status is an Internal Revenue Code that states the 28 types of nonprofit organizations that are exempt from some federal income taxes. It states that the following are exempted from taxes: Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations. In general, the two exempt classifications of 501(c) (3) organizations are Public Charity and Private Foundation. Where the former receives funds from the general public or the government and the latter being funded by investments and endowments. You will be able to get this status by applying through Internal Revenue Service (IRS) using IRS form 1023.
- Get the required forms. Fill up IRS form SS_4, “Application for Employer Identification Number” to get a federal employer identification number (EIN). This is used by IRS for identification processes. The form can be obtained by logging in to IRS website: irs.gov. When applying online, you need to check the box describing best your legal structure. Under the 7th option which is View Additional Types (Including Tax Exempt and Governmental Agencies), you will find the legal structures for all Tax Exempt organizations. For manual application, you can get a copy of the form through your US local Post Office. No registration fee is required. It would take approximately 10 weeks for your application to be processed. Your EIN or Employer Identification number is your permanent number that you will use to transact all businesses in behalf of your organization. Such as applying for business licenses, opening bank accounts and filing tax returns.
- File your tax report. You can do this using your employer identification number (EIN) and your 501 (c) (3) status to qualify for tax exemption.
Note that applying for non-profit tax ID number must entail that you
meet all requirements needed by IRS. Such requirements are the articles
of incorporation that state a required purposed clause and dissolution
of assets provision. You can check this website for samples of articles
of incorporation: irs.gov. Click the “Charities and Nonprofits” link
and then the Life Cycle of a Public Charity link.