The onus is on charities to operate within the law. They must supply the right information to both federal and state authorities on their status. Even if they are tax exempt under federal and state legislation, they must still provide accurate communications about their financial state. From their initial formation, charitable organizations must clearly indicate to the right officials and/or agents in Minnesota whether, under 501c3, they are exempt from federal and state sales tax on their donations and gifts.
What Is 501c3?
The number and letter refers to the chapter of the Internal Revenue Code responsible for regulating non-profit organizations including both foundations and charities. In Minnesota, only by obtaining a tax exemption status from the federal government can you obtain the same from the state government.
How to Apply for 501c3
To apply for tax exemption, it is essential to fill in and file the right forms with the Internal Revenue Service (IRS). The specific form nonprofits will use may vary. In general, the most common one in use is Form 1023. The streamlined version is Form 1023-EZ. Whatever form is required, it is a daunting process. The IRS demands a somewhat overwhelming amount of information. Online the instructions cover 37 pages including the appendix and index.
Yet, it is among the most important steps if an organization wishes to enjoy several benefits including raising a certain percentage of funding, accepting grants and gifts without paying sales tax. As noted above, it is essential to first receive exemption federally before an organization can apply successfully in Minnesota. Although, the two are linked together, each must be applied for separately. Successfully obtaining a tax exemption at the federal level does not automatically grant you the same privilege at the state level. Furthermore, if the state establishes at any time the charitable organization is not operating in accordance with the laws governing charities, it can immediately revoke tax exemption. These are all reasons why it is considered an excellent idea to contact a lawyer for help in maneuvering through this tricky mine field.
Should your Organization Apply for 501c3 Status?
If your charitable organization is quite small, it may not be essential to apply for tax exemption. In fact, the costs involved in hiring a lawyer and submitting the forms may make it inefficient and not cost-effective. If, however, the organization is of such a size and the overall cost will indeed be beneficial, then it is recommended to apply for 501c3 status with the help of a lawyer conversant in Minnesota charity law.
