If you visit the IRS website, you’ll find a tax-exempt number lookup. These organizations, often charities and nonprofits, don’t have to pay federal taxes. So, how do you get that coveted tax-exempt status? It all depends on the structure and mission of your organization. You can apply for a tax-exempt number through the IRS, but only certain types of businesses qualify.
State vs. Federal
All businesses pay state and federal taxes as long as they’re based in a state that has state income tax. If you happen to be operating a pass-through business (sole proprietorship or LLC), you won’t have to pay taxes in Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
Regardless, most tax-exempt businesses are nonprofit organizations, but becoming a nonprofit organization doesn’t necessarily mean you’re exempt from paying federal income tax. The idea is something that exists at a state level. The federal government has different requirements for anyone receiving a tax-exempt number.
Do You Qualify for Federal Exemption?
Most businesses that can become federally tax exempt are charities and nonprofits, but not always. Some of the other organizations that qualify include:
- Agricultural or horticultural organizations
- Labor organizations
- Social welfare organizations
- Social clubs
- Fraternal societies
- Employee benefit associations or funds
- Veterans’ organizations
- Political organizations
- Religious organizations
The IRS also lists an “other” category for a separate subset of businesses that may qualify for tax-exempt status but aren’t necessarily traditional charities. This includes nonprofit cemetery companies, credit unions, teachers' retirement fund associations, employee-funded pension trusts, black lung benefit trusts, mutual insurance companies, nonprofit health insurance issuers and child care organizations.
Form a Nonprofit
To get a tax-exempt number for your organization, you’ll probably want to form a nonprofit. Instead of structuring your company like an LLC or S corporation, you’ll want to become a 501(c) corporation and comply with local requirements to maintain your status. This includes having a set of written bylaws and the number of directors you must have on the board.
To maintain your status, your organization cannot be designed to profit an individual person and must provide public benefits. It also must fall into one of the following categories:
- Public safety
- Preventing child or animal cruelty
- National or international amateur sports competitions
Once you apply and elect your officials, you can get a state tax ID number, but you have to also apply for a federal employer identification number (EIN). This is required to obtain a tax-exempt number regardless of whether or not you plan to hire employees. You can apply for an EIN through the IRS website or mail in Form SS-4.
Fill Out the Proper Recognition of Exemption Form
If you think your business might qualify for tax-exempt status, you need to apply for recognition of exemption through the IRS to get a number and be added to their tax-exempt number lookup bank. Most organizations and nonprofits use IRS Form 1023. This is the application for all charitable organizations that fall under Section 501(c)(3) of the internal revenue code (the typical nonprofit that lets you donate for a tax write-off).
Some organizations fall under different sections and require different forms, so you’ll have to consult the IRS page on types of tax-exempt organizations. For example, organizations like employee benefit associations that fall under Section 501(c)(4) use Form 1024-A. Organizations like fraternal societies and veterans’ organizations that fall under other 501(c) subsections will generally use Form 1024. You can mail your form to:
Internal Revenue Service
P.O. Box 12192
Covington, KY 41012-0192
The IRS also sometimes sees a group of organizations as tax exempt if the parent organization is also tax exempt. In other words, if you’re petitioning for exempt status for a number of related organizations, you may only need to file once. When your application is approved, you’ll get a tax-exempt number and be added to the IRS tax-exempt number lookup library.
What About Sales Tax Exempt Status?
Unlike federal exemption, sales tax exempt status runs on the state level, and plenty of businesses that aren’t nonprofits qualify. For example, if your business purchases wholesale products for individual sale, you should not have to pay sales tax on those products because your customers are paying the sales tax. To utilize your built-in sales-tax-exempt status, you’ll need to give the seller an exemption certificate, which you can print out from your local government’s website.
If you’re not a reseller and rather a 501(c)(3) organization or nonprofit, you may still be exempt from sales tax. In this case, you’ll typically have to apply at the state level via your state’s website.
- The IRS does not provide tax-exempt numbers for federal tax-exemption status, but instead provides the Employer Identification Number (EIN), which is essentially a Social Security number for an organization. It does not indicate tax-exempt status, but your state might require the federal EIN before you can apply for the tax-exempt number. For tax-exempt status at the federal level, the IRS only provides a letter stating official tax exemption.
Mariel Loveland is a small business owner, content strategist and writer from New Jersey. Throughout her career, she's worked with numerous startups creating content to help small business owners bridge the gap between technology and sales. Her work has been featured in publications like Business Insider and Vice.