What Does Tax-Exempt Really Mean for Nonprofits?
In the course of doing business, organizations pay taxes in many forms and at different levels of government. When a nonprofit public charity is created, there is not one central place or form to fill out to receive exemptions from all types of tax. Instead, there are different forms and requirements to obtain tax exemptions at different levels of government.
Nonprofits may need to file paperwork for tax exemptions at three different levels: federal, state, and county. It is important for nonprofits to work with legal counsel and tax professionals to ensure they meet the requirements and file correctly at each level.
The information below includes links to various forms at both the federal and state level. Before filing, check with the federal or state entity, your tax professional, or your legal counsel to ensure you have the most current version of the form, as updated forms are released periodically.
Income tax exemption
The starting point for filing taxes is the Internal Revenue Service (IRS). A federal tax exemption grants you exemption from income tax. In Oklahoma, Title OS68 Section 2359 says that the state of Oklahoma will honor the income tax exemption at the state level. In order to receive federal tax exemption, nonprofits must file Form 1023 or Form 1024, depending on the type of organization.
After receiving tax exempt status from the IRS, nonprofits must file tax forms annually using Form 990 at the federal level and Form 512-E at the state level. Failing to file these forms annually will result in penalties and interest on any monies owed to the IRS at the federal level and the Oklahoma Tax Commission at the state level.
Sales tax exemption
In some states, receiving income tax exemption automatically qualifies organizations for sales tax exemptions. Oklahoma is not one of those states. Instead, it limits sales tax exemptions to narrowly defined categories. The Oklahoma Application for Sales Tax Exemption requires declaring what category applies to the organization and references the code defining each category. Organizations must understand and properly declare what category they fall under to qualify for a sales tax exemption in Oklahoma.
Ad valorum (property) tax exemption
In Oklahoma, organizations who are recognized as 501(c)3 public charities by the IRS are not required to pay property tax on property they own that is used for their tax-exempt purpose.
This exemption applies to the property or part of the property that is used for charitable purposes. If there is a portion of the property that is used for unrelated business income, that portion is not tax exempt. Likewise, a for-profit entity that rents a portion of their property to a nonprofit may receive an exemption for that portion. Questions on what qualifies should be discussed with your legal counsel.
“Questions on what qualifies should be discussed with your legal counsel.”
In the state of Oklahoma, the exemption is the same statewide. However, the forms are processed by the county, and each county does things a little differently. Check with your county for information on how to file for Ad Valorem Tax Exemption for Nonprofit Schools and Colleges, called OTC 988.
Additional Filings
In addition to the required forms for tax exemptions and annual tax filings, there are other forms all nonprofits need to file.
● Articles of incorporation – These set up the LLC or other corporation needed to operate. It is a one-time filing; however, it can be amended over time as needed if the organization changes its name, address, or other key details.
● Charitable registration – This is an annual filing that charities must submit to the Secretary of State in order to raise funds. Fundraising without filing a charitable registration with the state of Oklahoma is a crime enforced by the attorney general. There are several exemptions that could apply here, and it is always best to consult with an attorney if you have any questions about this process.
Tax exemptions can greatly benefit nonprofit organizations as they serve the community, but it’s critical that every nonprofit organization fully understands what their tax-exempt status really means and takes the necessary action each year to maintain their status.
