Forming a nonprofit will not automatically exempt you from federal or state taxes. You must meet specific guidelines and requirements, then apply to receive federal and state tax exemptions. This article reviews the advantages of obtaining a state tax exemption and how your nonprofit can get it.
We've already covered the federal level steps in our article "How to Apply for Nonprofit Federal Tax Exemption: Form 1023 vs 1023-EZ." We suggest reading that first because qualifying for federal tax-exempt status is required before obtaining state exemption.
What Does It Mean to Be Tax-Exempt at the State Level?
There are many types of tax exemptions, but religious, charitable, and nonprofit organizations may qualify and apply for tax exemption in the state where they are incorporated. While specifics vary by state, a state tax exemption generally allows an organization to receive income, donations, and gifts without paying any state-level taxes.
State tax exemptions may also grant qualifying organizations the ability to purchase goods and services without paying sales tax. However, these goods must typically be used for the organization's exempt purpose to qualify. For example, you can't buy a 4K HD TV for your own home, but you could maybe buy a 4K HD TV to install in your local youth center or as part of a giveaway for a fundraising raffle.
Difference Between Federal & State Tax Exemption
For nonprofits, there are some significant differences between federal and state-level tax exemptions. A federal tax exemption means an organization is exempt from paying federal corporate income tax. A state tax exemption usually means not paying any state taxes, including:
- Sales taxes
- Use taxes
- Property taxes
- State income taxes
- Franchise taxes
Why State Tax Exemptions Matter for Nonprofits
For nonprofits, seeking a state tax exemption is critical. After receiving your federal tax exemption, filing for your state-level exemption should be your next step. This exemption can help save your organization significant money. Other benefits of receiving your state's tax exemption include:
- Allows donors to make tax-deductible donations
- Gives access to grant money
- Increases credibility to potential donors
- Provides U.S. Postal Service discounts
Obtaining Your State Level Tax Exemption
If you've received your IRS-issued federal tax exemption and resultant determination letter, you should already have almost everything you need to apply for your state tax exemption. Every state has slightly different requirements. However, most list online the information you will need to submit, including any necessary forms, paperwork, and submission deadlines.
Common forms required to receive your state-level tax exemption include:
- IRS-issued federal exemption
- Certificate of Incorporation
- Articles of Incorporation
- Annual financial filings
- State-specific submission forms
As each state has different requirements, you can get details about specific paperwork and submission deadlines through your State Attorney General's Office or by visiting the State Links for Exempt Organizations on the IRS's website.
Ongoing State Requirements to Consider
After receiving your state's tax exemption, there may be some ongoing requirements to remain in good standing. Below are a few your nonprofit should take into consideration.
If your nonprofit plans on soliciting donations, you will probably need to register with your state and submit details regarding the type of fundraising activities you plan to engage in. Most states also require annual renewal. Any professional fundraisers working on behalf of your nonprofit might also be required to register. This typically applies to the state you're incorporated in and any other state in which you plan to solicit donations.
Annual Corporate Filings
Most states require nonprofit corporations to file an annual or bi-annual corporate report. Names and details vary by state, but these reports typically must include your address or the address of your registered agent.
Annual Financial Returns
To keep your state's tax exemption, you may need to file annual financial disclosures. Some states will accept IRS Form 990, which the federal government requires tax-exempt nonprofits to file every year. However, each state has its own requirements for financial disclosures, so be sure to familiarize yourself with your state's requirements to keep your tax-exempt status.
Don't Overlook State Tax Exemptions
Far too many nonprofits put all their attention on obtaining their federal tax exemption and never take the steps required to take advantage of their state's tax-exempt status. When a nonprofit fails to follow through on obtaining and maintaining their state's tax exemption, they miss out on tremendous savings opportunities, including sales tax, income tax, franchise tax, and property tax.
After you receive your Determination Letter from the IRS granting tax exemption on the federal level, your nonprofit should already be entitled to receive the state exemption. Be sure to follow through with your state's requirements to receive the additional savings you may already be entitled to.
Need Help With Your 501(c)(3) Application?
While submitting your 501(c)(3) application is a crucial step in receiving your state and federal tax exemptions, the process can be daunting. Swyft Filings can help you prepare your application, so you can focus on bringing your mission to life. Check out our 501(c)(3) Application page today to learn more.