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Invoice for construction work for non-profit organizations

- My name's Toby Mathis. I am one of the partners at Anderson Business Advisors and Law Group, and what we're gonna be doing today is a four-part series on nonprofits. This is part number one, and I'm gonna go over each one of these. There's a bunch of questions that I have written down to answer for you guys. It's on establishing a nonprofit organization, that's gonna be part one. First question that's on top of everybody's mind whenever they get started with a nonprofit is, how much does it actually cost to form one? And I'm just gonna give you the kind of the general answer that most lawyers and accountants give, it's gonna depend on the complexity. I can say this, that you could get done with the filing with the state, the federal application for exemption, and all the way through completion, along with all the binder documents, everything else that gives it a body, for somewhere in the $3,000 on up range, with the on up meaning that if you're doing something very complicated, for example, a housing entity working with someone who's low to moderate income housing that's gonna be HUD qualified, you might be looking as high as $7,500 to $8,000. And a typical startup on a 501(c)(3), you're probably looking at starting around the $3,000 range. Now this is why it's different than a typical organization. With the typical for-profit, you're setting up with the state, and then you're letting the Feds know this is how I'm being taxed. So you could have a LLC, for example, taxed as a corporation. You could just have a corporation taxed as a corporation, but the Fed and the state match. You don't have to go through any applications for exemptions because you are a for-profit entity. You also have your bylaws, you have your paperwork giving it a body. In a nonprofit, it's not just enough to go through the state and then get an EIN. You actually have to do a full on exemption letter in an application called a 1023 or a 1024, and that can take quite literally over a year to get that process done. Now before you freak out and say, shoot, I wanted to get this thing started. It takes generally speaking between right around nine months is probably about the average to get your exemption letter, but it relates back to the date that your business started. So you could literally set up a nonprofit in about a week and get it operational, and then the exemption letter relates back when you're filing for an exemption letter. And we'll get into this. Next question. How do you make money in a nonprofit? Well, it could depend on what that nonprofit is doing. So for example, if I was underneath the business association, I'm not looking to get charitable donations, I'm actually charging a membership fee and I don't pay tax on that. So as an organization, how do I make money? I could be saying, hey it's a rotary club. You guys pay in every month $20 to come to a meeting. And you know, maybe we're covering a lunch with that or something, but the money's going to the organization for its operational budget. On the flip side, the typical 501 company that we hear about is a 501(c)(3). And that's set up typically for religious, charitable, or education purposes. You have preventing cruelty to animals, you have amateur sports, and a few others, but the typical one is for charitable, education, or scientific purposes. And that one, I can actually solicit donations. And those are the entities where when somebody gives it money, not only does the organization not pay tax, but the individual who gave the money gets to write it off on their taxes. That's the one that's how do they make money? They go out and raise money. And when you raise that money you're not paying tax on that money. It's fantastic, as long as it's used for your purpose. And so you kind of set up, what's my purpose? And then you kind of go from there. Now can the nonprofit also be engaged in activities where it's making money? I use the example of a housing entity that's providing housing for lower-income or moderate-income taxpayers or veterans or single moms or incarcerated individuals who are transitioning back into the population. All those things qualify as a nonprofit activity. It can make its money charging rents. It can make its money charging fees. It can actually make money, the only difference is it's tax exempt. It doesn't pay tax on that money, which is why they're so powerful. Somebody asked, how long does it take to get nonprofit status? So, kind of touched on this. It's generally speaking, it's between nine months, probably nine to 15 months. We have obtained them in as little as three months, and you know, I don't wanna set your expectation too high, just 'cause right now the government had gone through a shutdown and IRS was slow, it always varies depending on the time of year. All those things adjust how long these things take. Your complexity of your application will determine how long it takes. My firm, we've done over 3,000 with our partners, well over 3,000 organizations. We've never had one where we weren't able to get the exemption letter, but we're typically in the six to nine month range. We've had 'em super quick where it's just a few months, and then we've had them where you're coming back and answering lots and lots of questions because of the nature of the activity that the nonprofit's doing. So sometimes it's difficult depending on what it is you're trying to seek the exemption for. So I'm just trying to give you guys an idea. You have up to 29 months to get your exemption letter and it relates back to the date that you file, so it's not like you're under the gun. Some people feel really, a little bit nervous if they go through a tax season where they're accepting charitable donations and somebody wants to see their exemption letter and they don't have it yet. All you can show 'em is that you applied for it. And then typically speaking, the IRS will let you know about 90 days out that they're reviewing your application, and then they either come back with questions, or they give you your exemption. Most the time you see if it's something we've done before, you're getting the exemption, because we already know what they're gonna be asking so we answer it in the application. Do you have to have a business license for a nonprofit organization? The answer's actually yes. There are exclusions and exemptions that you have to apply for. So for example, I'm standing in Nevada right now, and here a nonprofit can be exempt from the business license which is about $200 a year, but you have to file the exemption when you file your entity. So you're actually saying, hey I'm a nonprofit, and I don't wanna pay for the business license. It's different everywhere. More importantly, if you're gonna solicit for donations, you may need to register and be licensed in an organization. And then this is all different than things like sales tax exemptions, et cetera. So you wanna be very cognizant of the fact that you get benefit when you're running a nonprofit. It doesn't mean that you don't have to assert that right somehow with the state and say, hey I'm a nonprofit, you need to prove to them that you've either applied for the exemption or that you've already received it, and then you're saying, hey either I shouldn't have to pay sales tax, real estate tax, I shouldn't have to file a business license, et cetera. Otherwise, the presumption is that yes, you would have to. So it's quite literally jurisdiction by jurisdiction, but it's something that if you're working with a confident professional, they're gonna be able to tell you. Next question is, do I need a tax identification number for a nonprofit organization? The answer is yes. If you look at the IRS, they're gonna say, hey, all entities need to have a tax identification number. Or it's called an EIN. If you're gonna do banking, if you're going to accept donations, or if you're running a business association, or one of the other 29 categories of a nonprofit. It goes everything from Black Lung Associations on down to your typical 501(c)(3), but there's 29 different places that these things could fall into. You're gonna need to give them a tax number when they're reporting their taxes. They're gonna need to know what your tax ID is, and if you're gonna do banking, obviously you're gonna need to have some sort of number. And then when you file taxes, which you do have to file taxes on a nonprofit, with the exclusion of churches don't have to file taxes, but everybody else still does. You're gonna need that tax identification number. Last question for this section is, how do I get an EIN for a nonprofit? Very simple, the same way you do for a for-profit. You apply via Form SS-4 and you're going to check nonprofit. So it's not rocket science to get the EIN. The hardest part is once you get that EIN, now I have to file for the exemption. And again, the exemption will relate back but I need to do something. I'm gonna give the IRS projected financials. I'm gonna tell it what I'm doing. I'm probably showing it my bylaws, or my organizational documents, everything. And there's special language that has to be in your articles, by the way, when you file with the state. All of that, you're gonna have to provide to the IRS to show them what you are doing and why you deserve to be exempt as an organization. It's not hard to get the EIN. The hardest part, and the most time consuming, is that exemption letter, and that's the part that some folks miss. They just set up a nonprofit with the state, they get their bylaws and they use the bylaws that actually have shareholders and things like that, which you do not use because a nonprofit does not have shareholders. But they go in and they go to some online course and they do it and they forget completely that the exemption isn't automatic. You actually have to go through and apply for it, provide documentation and prove to the IRS that you're gonna operate in an activity that is qualified as an exempt activity. So if you're running an amateur sports league, if you're doing a scientific organization that's for research, if you're just doing the plain old hey, I'm gonna help feed the poor, all of that, you still have to go through the exemption. Even though it's clearly a nonprofit activity, you still have to file, in the case of the 501(c)(3), a 1023 app, and then all the others, a 1024 app, go through all that paperwork. There is a fee, it's usually around 800 bucks to file with the IRS and to go through and get that exemption. But it is all doable. If you work with professionals that know what they're doing, it'll be painless. Try to do it yourself, then you're gonna have a little bit of a learning curve. Doesn't mean you can't do it. It just means you're probably gonna be spending a few more hours on this thing than necessary and answering questions and probably going through a bit of a learning curve when things get rejected. Since we've done so many, we already know how they're done. But that's the first six questions. This is section one of four on nonprofits. (upbeat music)