Basic Steps in Forming a Tax-Exempt Organization
- Determine which type of tax-exempt organization is best for your proposed activities. For example, should this be a 501(c)(3) public charity, a private foundation, or a supporting organization?
- Determine if you are going to apply for an advance ruling or a definitive ruling.
- Form a Maryland corporation, with appropriate 501(c)(3) provisions. (This requires filing fees to the State of Maryland of approximately $220.00, if using expedited service.) You should incorporate the appropriate language or the entity will have to pay annual personal property taxes of $300 per year.
- Draft and execute by-laws and necessary consents (e.g., conflict of interest policy, elections of initial board, etc.)
- Obtain employer identification number (EIN).
- Line up your board of directors, officers, etc.
- Complete Form 1023, including financial data and detailed description of proposed activities, including fundraising activities.
- Publish statement of racial nondiscrimination policy in local papers, and show that such is included in all catalogs, brochures, advertisements, etc. (if required).
- File completed Form 1023, along with check in the amount of $400.00 (assuming expected revenues are no more than $40,000) or $850.00 (for expected revenues in excess of $40,000) with IRS.
- File for certification letter from the State of Maryland (registration statement on Form COR-92 and Form COF-85 (Financial Form)).
It can be confusing and time consuming to apply for recognition of tax-exempt status for your organization. Just determining which type of tax-exempt organization is best for your proposed activities can require the uninitiated to spend hours trying to decipher and understand complex provisions of the Internal Revenue Code and regulations. Then there is the Application itself: more than twenty-five pages of questions, requests for information and descriptions that can sometimes seem to be written in another language. (The IRS estimates that completing and filing the Form 1023 (including gathering data) should take approximately 26 hours—plus up to 150 hours of record keeping—but many people find that estimate to be woefully inadequate, and will spend double or even triple that time on the task.) When you finally complete it the best you can, and file it with the IRS, you have to wait months for an answer, only to often be told that your application was insufficient and further information and action is needed.
Hire the Right Attorney
Using an attorney familiar with the process will save hours of time, make your application better and improve your chances of getting tax-exempt status. I have formed and obtained tax exempt status for many organizations. My services include:
- Forming the Maryland corporation using the appropriate IRS approved language for tax-exempt organizations (and the proper language that will save the organization $300 per year in Maryland personal property taxes)
- Drafting the bylaws
- Providing advice on corporate procedures and governance, operation of the board of directors and appropriate board resolutions and minutes
- Obtaining the federal tax identification number
- Drafting and filing the correct IRS exemption application and the related IRS documents and forms
- Drafting the additional documentation including detailed statements of purpose and proposed activities, the conflict of interest policy, notice of non-discrimination (when necessary), financial projections, and other required attachments
- Filing the necessary Certification Letters with the State of Maryland
- Ongoing compliance for organizations to ensure that they do not run afoul of the rules regarding lobbying, unrelated business taxable income, discrimination, self-dealing or other prescribed activities.
- Continuing assistance with general business matters such as employment issues, leases, and contracts.
Dealing with the IRS
In addition, the IRS commonly will ask a series of additional questions when reviewing an exemption application. My services include being the contact person to answer any questions or requests for additional documentation forthcoming from the IRS, until the initial determination regarding exempt status is made.
How long does it usually take to get recognition of tax-exemption?
The entire process generally takes about 8-10 months from start to finish, usually depending on how fast the client gets information to me. The IRS is currently taking 6-8 months to review applications. (However, the tax-exemption from the IRS will date back to the original date of incorporation if the tax-exemption application is filed within 27 months from the incorporation.)
How much does the process cost?
Costs will vary depending on the complexity of the application, but in general the costs are $220 payable to the State Department of Assessments and Taxation to form the Maryland Non-Profit Corporation, an IRS filing fee of either $400 or $850 (depending on your organization’s expected annual gross income), and the costs of legal services. The IRS estimates that completing and filing the Form 1023 (including gathering data) should take approximately 26 hours depending on the complexity of the organizational structure. For a novice to attempt the accounting and legal work involved could double or even triple that number. My fees are $150 per hour for services performed for charitable organizations; the average bill for my services ranges between $3,000–$5,000, although large or complex matters may require more time. In addition, some organizations may wish to hire an accountant to prepare financial reports.
How often does the IRS deny tax-exemption?
The IRS has never denied an application that I prepared. I don’t take on cases that I don’t think will qualify for tax-exempt status.
How do I get started?
Call me for an appointment to discuss your proposed organization. My initial consultation is free and I will give you an honest appraisal of your chances to obtain tax exempt status.
If you have questions about properly forming a tax-exempt organization, contact D. Kathleen Rus at 410-591-6992.
Click to View Our Service Area
Baltimore County Legal Service: All of Baltimore County, including Freeland (21053), Glen Arm (21057), Hampstead (21074), Hunt Valley- Cockeysville (21030), Hydes (21082), Kingsville (21087), Middle River (21220), Monkton (21111), Owings Mills (21117), Parkton (21120), Perry Hall (21128), Pikesville (21208), Reisterstown (21136), Sparks (21152), Timonium-Lutherville (21093), Towson (21204, 21286), Upperco (21155), White Hall (21161), Windsor Mill (21244), and more.
Carroll County Legal Service: Eldersburg (21784), Finksburg (21048), Hampstead (21074), Manchester (21102), Marriottsville (21104), Taneytown (21787), Union Bridge (21791), Westminster (21157, 21158), Mount Airy (21771), New Windsor (21776), Sykesville (21784), Woodbine (21797), Taneytown (21787), and more.