Non-Profit Series: 9. Additional Applications and Accounts for Non-Profits

Written by Sagan L. Carman-Downer

Once you have made the decision to start a non-profit organization and completed the steps to officially form an entity (filing Articles of Incorporation, for example), there are additional steps that may be necessary. This article will explain some of those additional steps.

Apply for Federal Employer Identification Number

One of the next steps will be applying for an Employer Identification Number (EIN or federal tax id). This is a unique number assigned to the organization by the IRS. An EIN will be used for things like opening bank accounts and identifying the organization for tax purposes. The organization will complete a form called an SS-4, which can now be completed online through the IRS website. If completed online, the organization can receive the EIN immediately after the application is submitted.

Set Up EFTPS Account

Your organization may also need to set up an account with the Electronic Federal Tax Payment System. This is a system for the organization to deposit tax money withheld from any employees the organization may have. This will include money withheld from employees’ paychecks for FICA taxes and income taxes. The organization should automatically receive instructions in the mail for setting up this account after they have received their EIN.

Apply for State Identification Number

Even if you have received an EIN through the IRS, you may still be required to obtain an additional tax identification number through the state where your organization is located. Many states require the organization to apply for this additional identification number for state tax purposes. This is likely necessary if you will have employees that the organization will be required to withhold state income tax for, or if you will be required to collect a sales tax or other state tax. This can typically be done by submitting an application for an identification number through the state’s department of revenue.

Additional State Requirements

There may be additional requirements that vary by state. For example, in Nebraska, the organization may have to purchase a workers’ compensation insurance policy. This is an insurance policy that provides benefits to employees who are injured during their employment. Unless the organization meets certain exceptions, they may have to provide this type of insurance for its employees or officers. Another example in Nebraska, is the requirement that the organization complete an application through the Department of Labor for unemployment insurance. If the organization will have employees, they may be required to complete this to provide unemployment benefits to employees.

This list provides information on some of the next steps that the non-profit organization will need to take once they have officially formed an entity. There may be additional requirements depending on the state in which the organization is located, and the type and size of the organization. To ensure that you have completed the necessary steps, submitted the necessary applications, and created the necessary accounts, it is best to speak with an attorney in your state.

Non-Profit Series: 7. Benefits of 501(c)(3) Status

Written by Sagan L. Carman-Downer

The previous article in this series explained what the term 501(c)(3) means, and briefly which organizations can qualify for tax-exempt status under 501(c)(3). As explained in that article, many non-profit entities seek tax-exempt status under this provision as charitable organizations.

In order to qualify under the charitable portion of 501(c)(3), your organization must be operated for a purpose that is recognized by the federal government as “charitable.” Purposes that are recognized include:

• Relief of the poor, the distressed, or the underprivileged;
• Advancement of religion;
• Advancement of education or science;
• Erecting or maintaining public buildings, monuments, or works;
• Lessening the burdens of government;
• Lessening neighborhood tensions;
• Eliminated prejudice and discrimination;
• Defending human and civil rights secured by law; and
• Combating community deterioration and juvenile delinquency.

When seeking tax-exempt status, the non-profit organization must go through an application process to be recognized as having 501(c)(3) status. During this process, the organization must ensure that they operate for one or more of the purposes listed above to qualify as a charitable organization.

If the organization’s application is approved, it will be considered tax-exempt for purposes of federal law. There are two major tax benefits to obtaining 501(c)(3) status. First, the organization is exempt from paying federal income tax. Second, the organization can receive tax deductible contributions. This allows people who donate to the organization to deduct their contribution from their income, which may lower the income tax they would otherwise owe. This provides a direct benefit to the donors, and an indirect benefit to the organization. Because the donors’ contributions may help lower their tax burden, it can encourage donors to contribute to an organization that has 501(c)(3) status over one that doesn’t.

If you believe your organization could benefit from having status as 501(c)(3), it is best to speak with an attorney in your state to discuss the requirements further. This article provides general guidelines, but you should seek advice specific to your situation to determine whether this is the best option for your organization.

Non-Profit Series: 6. What is a 501(c)(3)?

Written by Sagan L. Carman-Downer

The term 501(c)(3) is commonly used to refer to a non-profit organization. But what, exactly, is a 501(c)(3)? This goal of this post is to explain what this term means, and what types of organizations have 501(c)(3) status.

501(c)(3) is not actually a term that describes an entity itself, but instead describes its status (a non-profit corporation can’t technically BE a 501(c)(3), but it can have 501(c)(3) status). The term 501(c)(3) refers to the provision in the United States Code (federal law) that grants certain entities an exemption from paying federal income tax. Section 501(c)(3) is a specific part of Section 501. Section 501, appropriately captioned “Exemption from tax on corporations, certain trusts, etc.,” provides, with detail, what entities are exempt from paying federal income tax. Here is a link to a website that displays the actual language of Section 501 if you are interested in reading it https://www.law.cornell.edu/uscode/text/26/501.

Section 501, as a whole, includes the provisions allowing the exemption. The wording of the section is broken down into subsections, paragraphs, subparagraphs, etc. In the term 501(c)(3), 501 is the section, (c) is the subsection, and (3) is the paragraph. Subsection (c) provides a specific list of what entities are allowed the exemption, each one explained in a separate paragraph. There are 29 categories of entities (and thus 29 paragraphs) listed under Subsection (c) that are allowed the exemption; Paragraph (3) is just one of those 29.

Although there are 29 categories, many non-profit organizations fall under the category in Paragraph 501(c)(3), which provides that the following entities are exempt, “Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes…” The explanation of entities included in this paragraph continues, but many non-profit corporations fall under the “charitable” portion of this paragraph. Thus, if you are a charitable non-profit corporation, you are exempt from having to pay federal income tax pursuant to paragraph 501(c)(3).

Simply stating that a non-profit corporation’s activities are charitable, though, isn’t enough to qualify for this tax exemption. To be exempt under this provision, your activities must meet the federal government’s definition of “charitable.” To learn about what activities are considered “charitable” check back for the next article in this series.

Non-Profit Series: 1. What is a Non-Profit Organization?

Written by Sagan L. Carman-Downer

Have you and a group of your peers started or considered starting a non-profit organization? It can be difficult when starting out to decide whether creating a formal non-profit entity is necessary in your situation. And if it is necessary, figuring out the next steps you need to take can be overwhelming. This article will start a mini-series discussing non-profit organizations and answering some common questions.

First, it is important to understand what a non-profit organization is and what differentiates it from a traditional business entity. The main distinction is that a non-profit’s goal or purpose is not to generate a profit for its shareholders. That is not to say, though, that a non-profit will not generate money. The difference lies in how that money is distributed. Non-profit organizations utilize that money to further one or more charitable purposes recognized by their state, while traditional business entities typically distribute their profit among the business’s owners.

Next, it is worth noting that the requirements for recognizing a non-profit for purposes of state law are not identical to those for federal law. Non-profit entities are creatures of state law. Thus, the requirements you must meet to establish a formal non-profit will depend on the state in which you are located. The main question the state will examine is the purpose for which the organization is formed. There are numerous purposes that state law typically recognizes as charitable. These purposes will be addressed in a later article. For now, it is enough to understand that what is charitable will depend on your state’s laws.

While this may come as a surprise to some, an organization that is considered a non-profit for purposes of state law, is not necessarily a non-profit for purposes of federal law. In fact, federal law does not expressly recognize “non-profit organizations.” Instead, federal law provides that certain organizations, meeting specific requirements, are exempt from paying federal income tax. Thus, you may sometimes hear non-profits referred to as “tax-exempt organizations” in reference to federal law.

In sum, a non-profit is an organization formed and operated for some charitable purpose that is recognized by state law. If that non-profit meets certain federal requirements, it may be a tax-exempt organization, meaning it does not have to pay federal income tax. While many of the state and federal requirements are the same or similar, they are not always identical, so it is possible that a non-profit organization recognized by a state would still be required to pay federal income tax.

First Amendment, Pastors, and the IRS

I thought that this story (here and here) was fascinating.  Currently churches can lose their 501(c)(3) status if the pastor endorses candidates, as the church is no longer purely a religious organization.  These pastors believe that such a rule violates their First Amendment right to free speech.  I guess we'll have to wait and see what happens.  Any pastors in Nebraska participating?