Helping Tax-Exempt Organizations In Bowling Green
Certain organizations, usually nonprofit organizations, are exempt from paying state and federal income taxes. There are very specific requirements to meet to fall into this category and to stay in compliance with the law after your organization is granted tax-exempt status, also known as 501(c)(3) status. The team of lawyers at Mockensturm Ltd can advise and represent tax-exempt organizations to ensure they are meeting the legal criteria required of a tax-exempt organization. Our team handles legal issues so you can focus on running your organization.
Qualifying As A Tax-Exempt Organization
Just because you fall into one of the categories above doesn’t automatically make your organization tax-exempt. Being a nonprofit organization also doesn’t automatically qualify you, either. Although most tax-exempt organizations are also nonprofits, nonprofit status is recognized under state law, and tax-exempt status is under federal law. Organizations seeking tax-exemption status are required to complete the formation process to qualify for tax exemption at the federal level.
During formation, an organization must develop its articles of incorporation following the Internal Revenue Service’s (IRS) requirements. Specific language must be used, and the articles must note that monetary distributions to shareholders or members are prohibited. The exact requirements are dependent on the type of nonprofit organization you are establishing.
Organizations seeking tax-exempt status apply with the IRS by providing a copy of its articles and other required application documents. An attorney can guide you through the application process by assisting with drafting your articles of incorporation and ensuring necessary documents and forms are completed accurately. Applications are submitted electronically and processed by the IRS in the order they are received.
Types Of Nonprofit Organizations
We serve as legal counsel to a wide variety of nonprofit organizations. Many of the following are types of tax-exempt organizations:
- Public and private elementary and secondary schools
- Public and private state universities and state colleges
- Nonprofit hospitals and other health organizations such as nursing homes or home health agencies
- Private foundations and public charities
- Religious organizations
- Professional and employment associations
- Social clubs, hunting clubs, golf clubs, etc.
Benefits Of Becoming A 501(C)(3) Tax-Exempt Organization
Aside from being exempt from federal income tax, there are other possible benefits of becoming a tax-exempt organization, including:
- Increased grant eligibility. Some grants from foundations and government agencies limit grant applications to charities and nonprofit organizations with a tax-exemption status.
- Tax-deductible contributions. Tax-exempt organizations can use their status to encourage donations from individuals and corporations since those donors can itemize the donation on their own income tax filings.
- Lower postage rates. Bulk mailings through USPS are available at a reduced rate for many tax-exempt organizations.
- Possible exemption from state and local taxes. Obtaining 501(c)(3) tax-exempt status only exempts you from federal income tax, but some nonprofits are also exempt from similar state and local taxes. Check with your state and local laws and get the advice of an attorney to learn about other tax advantages you might benefit from.
If your organization has employees, being tax-exempt does not mean you are exempt from withholding payroll taxes for those employees. Tax-exempt status means you are not subject to paying federal income tax on the money your organization brings in — not that you are free from worrying about all tax laws. There are some exceptions to the rule that a tax law attorney can explain to you.
Tips For Shortening The Application Process
The IRS typically processes applications in the order they are received unless there is a compelling reason to expedite the process. This often leaves organizations asking, “How can I get tax-exemption status granted as quickly as possible?” Hiring a tax law attorney will be a good first step, as submitting all materials and documentation accurately and completely is the best way to ensure faster approval. The IRS provides some tips for saving time and effort during the application process:
- List the names, mailing addresses, titles, and positions of all principal officers and the board of directors of the organization.
- Ensure the correct people with the authority to sign the forms do so.
- Submit a copy of the organization’s adopted by-laws and rules of operation.
- Include the necessary financial data outlined in the form instructions, based on how long your organization has been in operation.
- Indicate the month your organization’s annual accounting period ends, and make sure this matches the information provided elsewhere in the application materials.
- Attach all required schedules and complete all the required pages without leaving anything blank
- Provide information about your organization that demonstrates how it will achieve tax exemption. List specific activities and consider a “who, what, when, where, why, how” format when it comes to providing these details so the IRS has a clear understanding of your organization’s operation.
- Pay the correct fee based on your organization’s form. Fees are paid online upon submission of your application.
Maintaining Your Organization’s Tax-Exempt Status
Once you’ve obtained 501(c)(3) tax-exempt status, it needs to be maintained by following the rules in six different areas. An experienced asset attorney can provide counsel on your organization’s operation to ensure you are not out of compliance in any of these required areas:
- Private benefit and inurement. A tax-exempt organization shall not serve the private interests or benefit of individuals or organizations. Insiders, such as board members or directors, shall not receive income from the organization.
- Lobbying. Tax-exempt organizations can participate in some lobbying activities, but influencing legislation cannot be a substantial part of their focus or activities.
- Political activity. Tax-exempt organizations cannot participate in political campaigns for or against public office candidates. This applies to all levels of government, including local, state, and federal campaigns. The ability to participate in some lobbying while also navigating a ban on political activity can be a difficult line for organizations to tow. For example, tax-exempt churches may be allowed to provide their members with information regarding a political issue but should not directly participate in campaigns for candidates who support their views on certain issues. The IRS provides specific guidance for organizations compelled to participate in political activities.
- Unrelated business income. Tax-exemption status can be threatened if an organization earns too much income from activities that are unrelated to its purpose. Additional reporting requirements and payment of income taxes could be necessary for organizations that have more than $1000 in unrelated business income annually. Some exclusions and exceptions can be made, which an asset lawyer can help you navigate if necessary.
- Annual reporting. Despite being exempt from taxes, tax-exempt organizations do still need to report certain information each year. This is commonly overlooked and resulted in 275,000 organizations losing their tax exemption status in 2011, according to the IRS.
- Operating under stated exempt purposes. In the initial application, an organization’s reason for exemption is stated. The organization must pursue the activities outlined in its application to maintain compliance or inform the IRS of any changes to avoid losing that status.
Appealing IRS Determinations On Tax-Exempt Status
Unfortunately, things don’t always go as planned when applying for tax-exemption status, especially when you do so without the help of an experienced asset or tax law attorney. The IRS can make a determination about your organization’s tax-exempt status upon your initial application or at any time as the result of an audit. You do have the option to appeal the decision in either case.
In the event you are denied upon the initial application, you’ll be issued a determination letter from the IRS that will explain why they believe your organization doesn’t meet the requirements for 501 (c)(3) tax-exempt status. If you disagree with the reason(s) in the letter, you may appeal the determination by submitting a protest that demonstrates you do, in fact, meet the qualifications. You will then receive either a favorable letter or a revised denial letter. If you receive an adverse letter and still believe you qualify, you can continue fighting your case with the Appeals Office, which could eventually lead to litigation if the dispute cannot be resolved.
The process is similar for those who find out their organization’s status is jeopardized following an audit. You can file a protest or request a conference with an IRS manager. If, after the meeting, you still do not agree that you were out of compliance, you can file a protest to be reviewed by the Appeals Office. Again, if the dispute is not resolved at that level, you may be entitled to enter litigation to settle the issue.
Filing a protest must be done within 30 days of receiving the adverse determination letter from the IRS. It must contain specific information, including your organization’s identifiers, a statement that you want to protest the determination, and a copy of the determination letter that shows the findings you disagree with and your explanation for disagreeing. Including supporting documentation will help your case, as well as citing the law or authority, you are relying on in your reasoning. A specific protest statement is also required that states you are telling the truth when it comes to the information in your protest.
At any level of appeal, your organization can authorize an attorney or CPA to represent you. At Mockensturm, Ltd., we have a team of tax law attorneys who are also registered CPAs, so we have a detailed understanding of tax law as it relates to 501(c)(3) tax-exempt organizations.
How Do I Apply At The State Level?
Federal law designates which organizations are 501(c)(3) tax-exempt, but there are still requirements at the state level for nonprofit organizations in Ohio. Similar to the tax-exempt application process, starting a nonprofit organization in Ohio requires you to apply, following state codes. Your nonprofit must also be continually verified every five years.
To register as a nonprofit in Ohio, you must file your Initial Articles of Incorporation, which contain specific information, including your corporation’s name, location, purpose, and names of those in charge. A local tax law attorney can be helpful in this process, as much of the information required for the federal tax-exemption application also applies to the state-level nonprofit application.
What Services Can An Asset Lawyer Provide To Tax-Exempt Organizations?
Having a lawyer on your side is essential when creating and managing a tax-exempt organization. Our team is experienced and able to assist in a variety of situations impacting tax-exempt organizations, including:
- Obtaining tax-exempt status. The formation process requires organizations to apply for tax-exempt status with the IRS. A tax law attorney can assist with drafting articles of incorporation, ensuring forms are filled out accurately and obtaining the correct supporting documentation for your application.
- Tax planning, compliance, and filing. Tax-exempt organizations are often held to a higher standard when it comes to compliance and governance. A tax law attorney will stay up to date on laws to ensure compliance and can also assist your organization with budget creation and fund allocation planning. When it comes time to report to the IRS annually, lawyers can assist with that also, as well as any auditing the IRS may complete.
- Policy drafting. Organizations run more smoothly when policies are established and clearly documented. Some policies are required to follow certain laws to be valid, which an attorney can assist with, especially when these policies are related to how finances are handled within your tax-exempt organization.
- Mergers and acquisitions. While mergers and acquisitions can be an exciting time for an organization, it is important to consider the tax implications of such ventures. Having a tax law attorney on your team is crucial to ensuring these transitions go smoothly and legally and do not impact your tax-exempt status.
- Creation and management of trusts. Some tax-exempt nonprofit organizations can also organize themselves as a trust, which would be considered a private foundation. The layering of these components and designations is legally complex, so the support of a tax law attorney is crucial in these situations.
- Dispute resolution. Our team can assist with the resolution of a variety of disputes you may experience during the creation or maintenance of your 501(c)(3) tax-exempt organization. This includes navigating the appeals process with the IRS in the event your initial qualification status is denied or a determination is made that indicates you no longer qualify. Disputes can often be resolved outside of litigation, but an experienced tax law attorney can assist with such disputes inside or outside of court as necessary.
How Do I Choose The Right Tax Attorney?
If you are involved in the establishment or operation of a 501(c)(3) tax-exempt organization, you will want to consider hiring an attorney to help with all of the processes involved. A skilled tax law attorney can also monitor your organization’s operation and anticipate any possible tax implications and help you avoid those.
When researching which attorney to choose, there are many factors to consider. Try to find lawyers with the following qualities and experiences in your search:
- Experience with representing organizations like yours. You want an attorney who has experience with 501(c)(3) tax-exempt organizations. There are several different types of organizations that fall into this category, however, so finding a lawyer to join your team that has successfully worked with organizations as similar to yours as possible is advantageous.
- Experience dealing with the IRS, specifically as it relates to tax-exempt laws. Tax law is very broad, so it is wise to find out if your attorney has dealt with the IRS before, as well as how much experience they have with the formation and maintenance of 501(c)(3) tax-exempt organizations.
- Efficient communication style. As you contact lawyers, consider the communication style of each, and determine whether it fits well with how you prefer to communicate. Are they able to explain the laws to you in a way you can understand? Consider the timeliness of their communication, as well, as this could be an indicator of their overall efficiency and time management skills.
- Membership in the American Bar Association’s Tax Section. This designation demonstrates that the lawyer keeps up to date on changes in tax law, which will help to eliminate interference with the IRS.
- Positive reputation. You want to feel confident in the attorney you choose to support you in the creation and maintenance of your 501(c)(3) tax-exempt organization. Check online reviews and speak with others in the nonprofit sector about legal help to get a sense of the lawyer’s reputation before committing to them.
Contact Mockensturm, Ltd. In Bowling Green For Your Tax-Exempt Legal Needs
Our team of tax law attorneys at Mockensturm, Ltd. is available to provide legal counsel and representation for organizations seeking to obtain or retain federal tax-exempt status and state-level nonprofit status. In addition to being lawyers, many of our team members are also Certified Public Accountants, further increasing our understanding of tax law, tax planning, and the maintenance of 501(c)(3) tax-exempt organizations.
Mockensturm, Ltd. has years of experience representing a variety of nonprofit and tax-exempt organizations in Bowling Green and the surrounding areas. One of our primary tax services is helping organizations navigate the processes required to achieve and maintain 501(c)(3) tax-exempt status. Let our team handle the legal work of obtaining and maintaining your tax-exempt status so you can fulfill your passion for operating your organization. Contact us today.