Steps to Verify Your Tax Exempt Certificate
In general, a tax-exempt certificate is a document that allows a buyer to conduct tax-free transactions of goods and services that qualify for such a tax break. In most cases, it is the responsibility of a buyer to fill out the tax-exempt certificate at the point of purchase. In turn, the tax-exempt certificate is kept by the seller, which gives them the go-ahead to transact with the buyer without fear of breaking the law. On the other hand, a tax-exempt certificate for a non-profit organization is a document or status that allows such an institution to operate without paying taxes for generated revenue. However, before a non-profit organization becomes eligible for tax exemption, such an institution must first apply to the IRS (Internal Revenue Service) and get approval. After an organization has obtained approval, they can then begin to enjoy the benefits of tax-exempt.
How a Non-profit can Obtain Tax-Exempt Status
Here, a brief description of how a non-profit organization can obtain tax-exempt status is going to be discussed. The steps are highlighted below.
- First of all, such an organization needs to be incorporated, to begin with. Therefore, an organization must be registered as a non-profit organization following the rule and regulations of the resident jurisdiction.
- Secondly, an organization must obtain an EIN (Employer Identification Number) or Federal Tax Identification Number. This identification number is used to identify and differentiate between organizations. A perspective non-profit organization can easily obtain an IRS number by following the guidelines stated on the IRS website.
- Next, a detailed description of the purpose of the creation of the non-profit organization must be provided. Therefore, the applicant must describe the type of work they are going to carry out in detail.
- Fourthly, the applicant proceeds to fill the tax-exempt form.
- Fifthly, the applicants pay the standard IRS charges, which amount to about $775.
- Finally, once payment is made, the process is completed. However, the applicant may want to complete the incorporation application on the 27th of any month of the year. Doing this allows the organization to be recognized as a tax-exempt non-profit from that very day.
How to Verify Tax Exempt Certificates for Non-profit Organizations
If for any reason a person or a business entity wants to verify the tax-exempt status of a non-profit organization, this process can be easily completed by accessing the database that is available on the IRS website. Once an individual lands on the front page of the IRS website, they can click on the Charities & Nonprofits menu which is located at the top right-hand corner as seen below. Proceeding to the next page, an individual can then select the “Search or Charities” option, which is amongst the options on the left-hand side of the page as shown below. Next, the individual proceeds to select the “Tax Exempt Organization Search Tool”, which is shown below. The “online search tool” is then selected, which finally reveals the search form as shown below. The snapshot of the Tax-Exempt Organization Search form is shown below. The tax-exempt organization search form can directly be accessed by clicking here. Looking at the form, a user is required to provides the required information, which is discussed below.
The Select Database field gives a user the option to either search all the databases, or narrow down the search to a single database. There are five databases to choose from, which are Publication 78 Data, Auto-Revocation List, Determination Letters, Copies of Returns, and Form 990-N (e-Postcard). The type of database a person uses to search may depend on the kind of non-profit information they are looking for.
The Search By allows for search by Employer Identification Number or Organization Name. The information that is at the searcher’s disposal determines the option to select.
Underneath the Search Term search field, an individual can provide the Employer Identification Number if available.
Location Search Fields
The location search fields are City, State, and Country. Filling out these fields with the correct information makes the entire search process a little less difficult.
Any non-profit organization that can get tax-exempt status would have access to several opportunities and advantages. These advantages are highlighted below.
- Non-profit organizations with tax-exempt status can access public funds and grants that are available under the law.
- A non-profit organization can enjoy both local and state property and sales tax exemptions. However, the rates and degree of exemption defer by jurisdiction.
- Non-profit organizations that have tax-exempt status can enjoy discounted postal service rates from the U.S. Postal Service.
- All the donations that are made to a non-profit organization that has a tax-exempt status are automatically tax-deductible, which is a form of a tax incentive.
- Donors and other affiliates are more comfortable working with a non-profit organization that is tax-exempt certified.
Any organization whose activities are tax exempted can obtain a tax-exempt certificate.
The Federal Government
The federal government is also tax-exempt under the U.S. Constitution. The constitution prohibits states from taxing goods and services sold directly to the federal government. Most states simply exempt any sales that the U.S. Constitution has exempted from sales tax.
State and Local Governments
Most states and local governments are exempted from paying taxes. Under the constitution, states are free to exempt themselves and local governments from taxes. However, not all states exempt themselves from taxes.
Other entities serving the state and local governments, such as contractors, can also get tax exemptions. The goal of these exemptions is to lower the amount of taxes spent to acquire services and goods for the government.
Charity organizations are exempt from paying taxes because they do not profit from their activities. That makes it easy for them to spend the donations they receive entirely on charitable organizations. Usually, the main expense in such organizations is the salaries they pay their employees.
There are cases where employees of nonprofits pay themselves excessively high salaries. In such cases, the IRS can penalize that nonprofit and the employee for receiving an excessive salary.
Overall, the guiding clause of the law that governs nonprofits states that the resources of a nonprofit should be used to benefit or enrich a private party. Excessive pay often violates this mandate.
To avoid being penalized by the IRS even though they are tax-exempt, nonprofits tend to pay salaries that are equivalent to salaries paid in for-profit organizations of the same size.
Religious organizations are exempt from paying taxes. However, if the organization’s income comes from an unrelated business, then it has to pay tax on that income. Such income includes the proceeds the religious organization gets from investing its income from members’ contributions.
Moreover, churches that meet the requirements of IRC Section 501(c)(3) don’t need to apply for a tax exemption certificate. Instead, they automatically get a tax exemption.
Educational institutions are not taxed because the government considers their services to increase the productivity and capacity of the citizens. In return, the government benefits from the growing productive population.
However, educational institutions need to get a tax exemption certificate from state and local governments. They do not automatically qualify for a tax exemption. Educational institutions that have a discriminatory policy are not tax-exempt.
Resellers are also tax-exempt but for sales taxes only, and they need to apply for a tax exemption certificate. They are exempt from sales taxes because they aren’t the end-users of the products they buy. In that regard, a sales tax targets the end-user and not entities in the supply chain.
Resellers still have to pay income taxes if they make a profit. They are also required to pay other taxes such as corporate or LLC taxes.
Manufacturers can also apply for a tax exemption certificate. They are exempted from paying sales tax on the raw materials they buy. Moreover, they don’t need to collect sales taxes when selling their goods to resellers.
Other useful articles:
- Sales Tax by State in the United States
- How to Verify Tax Exempt Certificate
- Verify Tax Exempt Resale Certificate by State
- What is a Tax Exempt Status
- VAT Taxes in Europe
- Sales Tax Thresholds by State