US Nonprofit Tax Exemption and Annual Filings

When It Matters

Federal tax exemption for charities means the organization is organized and operated exclusively for exempt purposes, and none of its earnings benefit any private shareholder or individual. You need this page if you are forming a US nonprofit, joining its board, or taking over its finance and operations.

The first thing to get straight is that "nonprofit" and "tax-exempt" are different statuses. Nonprofit status comes from state law, through the articles of incorporation or the trust documents. Tax-exempt status comes from federal law. Incorporating as a nonprofit does not make you exempt, because you still have to apply to the national tax agency.

Three layers of obligation follow from that: the federal exemption itself, the annual federal return, and the state filings. State filings split again into registration with a charity regulator and annual reports to the business registry. This page sets them side by side, so you can see what an organization owes and to whom.

How It Works

Settle the entity and gather documents. Decide whether the organization is a trust, a corporation or an association. Collect its organizing documents, such as articles of incorporation, and obtain an employer ID number.
Check your state's registration rules. Do this before you apply for federal status, not after.
Choose the application form and pay online. Form 1023 applications go in online through a government payment portal, and the fee is paid there when you file. Check the instructions for your form. Charitable, religious and educational organizations use Form 1023-EZ or Form 1023. Social welfare organizations file a notice of intent on Form 8976 and then apply on Form 1024-A. Other nonprofit types use Form 1024. Have your financial information ready, showing receipts and expenditures for the current year and the preceding or future years, as the instructions for your form describe.
File the right annual return every year. Most tax-exempt organizations must file. The form depends on size: Form 990-N, Form 990-EZ or Form 990, or Form 990-PF for a private foundation. The thresholds are in the next section. Churches and certain church-related organizations are outside this requirement.
Meet the due date. Form 990, 990-EZ and 990-PF are due by the 15th day of the 5th month after the accounting period ends. For a calendar-year organization that is May 15.
Handle state registration. Many states require charities to register with a state agency before soliciting residents. Some also want periodic financial reports.
File state annual reports. Many states expect an annual report to the state's business registry. The example below uses Illinois.

Key Components

What exemption requires. Exclusively exempt purposes and no private benefit. A charity may not make influencing legislation a substantial part of its activities and may not take part in any campaign for or against political candidates. Most recognized exempt charities can receive tax-deductible contributions.
Application forms and fees. Form 1023 costs $600 and Form 1023-EZ costs $275, and these amounts can change. Among other conditions, Form 1023-EZ requires an attestation of gross receipts of no more than $50,000 in each of the past 3 years and/or none projected above $50,000 in the next 3, plus total assets with a fair market value of no more than $250,000. See the Form 1023-EZ instructions for the full eligibility test.
Which annual return. Gross receipts normally $50,000 or less: Form 990-N, or a full return if you prefer. Gross receipts under $200,000 and total assets under $500,000: Form 990-EZ or Form 990. Gross receipts of $200,000 or more, or total assets of $500,000 or more: Form 990. Private foundations file Form 990-PF regardless.
Automatic revocation. Miss the annual return or notice for three consecutive years and exemption ends automatically, effective on the original due date of the third missed filing. The organization may owe ordinary corporate or trust income tax, cannot receive tax-deductible contributions, and comes off the national list of exempt organizations. The law provides no appeal. A revoked organization must apply to be reinstated.
State charitable registration. Some states also require registration and filings from organizations holding assets subject to a charitable trust, even without fundraising.

Best Practices

Register before you solicit. Many states generally require charities to register with a state agency before asking residents for gifts, with exemptions for certain categories. Some states add rules for paid solicitors and fundraising counsel, and in some places local governments want registration too. Contact the relevant state agency before you start asking.

File on time and use the extension. If the May 15 date (or your equivalent) is out of reach, Form 8868 gives an automatic 6-month extension for Form 990, 990-EZ and 990-PF. The Form 990-N date cannot be extended. There is no penalty for a late Form 990-N unless it is the third year missed, which brings automatic revocation.

Keep your contact details current everywhere. In the example state, communications from the business registry go to the registered agent, so keep your address and contact details current with each government office.

Check the revocation list. The national tax agency updates its list of automatically revoked organizations monthly. Look for your name. Donors can still deduct gifts made before an organization's name appears on it. Check the list for current details.

Use the charity officials' website for state rules. An association of state charity officials publishes which states require registration. It is the place to check which states require registration.

Common Mistakes

Treating nonprofit status as tax exemption. An organization that has only incorporated is not exempt. Apply for exemption on the right form and pay the fee.

Skipping the annual return for three years. Even a small organization files at least the Form 990-N notice. Three missed years means automatic revocation, effective on the original due date of the third one. A revoked organization is not eligible to receive tax-deductible contributions, though donors can still deduct gifts made before its name appears on the revocation list. Revocation cannot be appealed.

Assuming federal exemption covers the states. It does not. State registration and state financial reports are their own obligations, and state and local laws may also affect an organization that loses exemption. Check each state before you solicit there.

Confusing the state annual report with the federal return. They are separate obligations. In the example state, failure to file the annual report may lead to involuntary dissolution, and a missed federal return can end tax exemption.

Ignoring excess benefit rules. If a charity enters an excess benefit transaction with someone who has substantial influence over it, an excise tax may fall on that person and on the managers who agreed to it.

Example

This is an illustration, not a real case. A small health organization in a US city is starting up. It incorporates as a nonprofit under Illinois law and gets an employer ID number. It has not yet applied for exemption, so it is a nonprofit but not yet tax-exempt.

To pick a form, it checks its numbers. Its gross receipts are not projected to exceed $50,000 in the next 3 years, and its assets are worth well under $250,000. It can attest to both, so it files Form 1023-EZ online and pays the $275 fee.

Once recognized, it files annually. With gross receipts of $50,000 or less it files Form 990-N. If receipts climb but stay under $200,000 and assets under $500,000, it can use Form 990-EZ or Form 990. At $200,000 or more in receipts, or $500,000 or more in assets, it files the full Form 990.

The state work comes next, and here the details are one state's example, not a national rule. In Illinois the business registry expects an annual report listing current officers and directors, due before the first day of the incorporation anniversary month. Because it asks for donations, it also registers as a charity with a state office and completes an annual report form there with financial details. If it later asks donors in other states for gifts, it checks the charity officials' website, because registering elsewhere may bring additional filings.

US Nonprofit Tax Exemption and Registration