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A to Z of Becoming Tax-Exempt

You’ve formed a non-profit group and now you want to become tax-exempt in the eyes of the IRS.  Lucky for you, there’s an easy and free way to do this, in spite of what you may hear from third-party companies offering to “help” you become tax exempt.  They charge a “small fee” of course, and that’s absolutely not necessary.  IRS form 1023 is all you need, plus a little bit o’ internet guidance from me!

IRS Form 1023 Looks Intimidating But Don’t Let That Stop You!

But before we get Form 1023, which is the application for tax-exempt status, let’s start at the very beginning…

Step One: Get an EIN

Obtain an EIN (Employer Identification Number) for your organization.  That can be done in minutes over the phone, on the IRS website here, or by mail if you insist on being old-fashioned.

Step Two:  Make Sure Your Organization is Structured Properly

Your organization must be a corporation or a trust.  It can also be something called an unincorporated association, which means a group of people who volunteer to come together for the same purpose…like a trade union or an environmental group.
Partnerships are NOT eligible to become tax-exempt under Section 501(3)(c).

Your organization must also have a mission statement or other such organizing document that limits its activities to furthering only its stated exempt purpose.

Step Three:  Fill Our IRS Form 1023

Yes it’s a long form so just take your time and step by step you’ll make it through.  Here are the things you’ll be asked about on the form:

  • who are the members
  • what is the history of your group?
  • do the officers/directors/key players get compensated?  if so, how and how much?
  • does anyone get benefits?  who and what are the benefits?
  • what are the activities of your group?
  • supply detailed financial records of your group
  • is your group a public charity?
Step Four:  Use the IRS Website as a Resource

Go here for an online tutorial on becoming tax-exempt under Section 501(3)(c).  There are also FAQs and publications you can read here.  And just remember: you don’t have to pay somebody to help you apply to become tax-exempt.  You can do it!

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IRS Form 8283: When You Donate Property

The IRS likes it when you give things away.  They will give you a tax deduction for donating things that are worth money, and IRS Form 8283 is how you claim this deduction.  It’s called Noncash Charitable Contribution.  It’s for property you donate to charity and believe me you can’t ignore the rules on donations because the IRS has a tight system for checking up on charitable donations.

What are the Rules for Charitable Contributions?

“Noncash charitable donations” means anything  but cash money.  The word “property” means something different to the IRS than what it means to you and me in everyday life.  To the IRS, and when we’re talking taxes, “property” means anything but cash.  It can mean a painting, a piece of land, some stocks you own, or a copyright in your name. When you give any of this kind of thing away and it’s worth more than $500, it’s called a Noncash Charitable Contribution.

Now, it matters to whom you give the contribution.  Donating a used sofa worth $600 to your niece does not count.  That’s because your niece is not an official charity, recognized by the IRS.  If you want your charitable contribution to be tax-deductible, you must donate to a tax-exempt organization that’s officially recognized by the IRS.  They must apply for the status and once they’re accepted they must make public their business records so the public can check them out and make sure that’s where they really want their contributions to go.

You can look up the charitable organizations that have properly applied for tax-exempt status and can therefore accept your deductible donations…go to the GuideStar website at http://www.guidestar.org/rxg/give-to-charity/index.aspx. You can also review their IRS Form 990 submissions, which are informational tax returns if you want to check out their financial and business proceedings.

How Do I Fill out IRS Form 8283?

You’ll need to know a lot about the value and history of the item(s) you are donating, as well as information about the actual charity.

As for the donated property, you must fill in the following information:

  • when you acquired it
  • when you donated it
  • how you acquired it
  • what it cost you
  • the current value (Fair Market Value- FMV)
  • how you determined the FMV

The charitable organization must sign Form 8283 also, acknowledging that they are a recognized tax-exempt organization under section 170(c).  Then you sign, and you’re ready to claim that tax deduction!