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Tax invoice format for non-profit organizations

hey everybody so today we're going to talk about how to apply for tax-exempt status for your nonprofit let's get into it [Music] [Music] budget to help smaller new nonprofits get up and running so today I wanted to talk to you about how to become a tax-exempt organization so if you want more videos like this please remember to subscribe to my channel I drop a video every week and I talk about tips and strategies to become a stronger nonprofit so if you subscribe to my channel already you would have seen a video that I created called what is a 501 C 3 organization so in that I broke down what it means to be tax-exempt but I didn't necessarily go through the how-to of how to do it so I wanted to do that and break it down in this video now if you saw that video and if you didn't I'm not mad it's okay you still have time to go see it but if you did see that video you would have heard me talk about the differences between being a non-profit and being tax-exempt so just because you're a nonprofit organization does not mean you're automatically tax-exempt that only really applies to churches but you are trying to be a nonprofit organization so if you want to have federal tax-exempt status you have to do a separate process of going to the IRS so the first thing you do is incorporate as a business in the state that you're operating in once you take that care of that then you go to the IRS and you become tax-exempt so you see how its levels to this it's two different processes so that's one thing to keep in mind the other thing I want to talk about is what you need to do to prepare to apply for your tax-exempt status there are some things you need to understand and there are some things you just need to have handy before you start going through that process now if you wait to the end of this video I'm going to break down the two different forms you can use to apply for tax-exempt status those are the only two forms you will use I'm gonna break down the differences between the two to kind of help guide you through that but before we do that let's talk about what you need to know to understand the Apple patient process so first things first you're going to have to have certain documents on hand the number one document you need to have is what we call an organizing document or an Articles of Incorporation or maybe it's called a certificate of incorporation it's whatever document that the state gave to you to confirm that you are officially a business operating in their state so in some states they have a form you just fill out you put in the name of your organization you put in the name of maybe the resident agent and then your mission or your purpose and then they send something back to you and say congrats your business in other one in other states they may ask you to submit something in writing and they just give you a certificate so just know that it depends and so you really need to check with your Secretary of State to figure out what the process is in your state and it is going to be different wherever you go the other thing that's important to know is that in your articles of incorporation you're gonna have to make sure you put in there your exempt purpose the IRS needs to have confirmation that when you created your business or your nonprofit that you were made for exempt purposes the other piece of that is if you dissolve as a non-profit the IRS wants to know that your assets and whatever you own is gonna go to another nonprofit so they'd like to see a dissolution statement and I'm also gonna link that below just keep in mind that every state is not gonna automatically have that on their forms so if they supply a form to you and they say well you can just fill this form out and this can qualify as your articles or your organising document they may not have those statements in that document so you need to do your due diligence and make sure that's written clearly in your Articles of Incorporation so if you ever have to submit to the IRS that's clearly stated on your articles of incorporation if you need help figuring out what your state does or what the processes are in your state a really good resource is your nonprofit Association so more than likely they're going to have a guide on their website or some kind of documentation help guide you through the incorporation process there just a good resource generally so I just encourage you to find out where the nonprofit association is in your area and a lot of times this stuff is free you don't have to be a member to get these guides and get these instructions and it's important to do that in your state because every state is different and there are different laws that govern how nonprofits operate so you need to really check the laws in your particular state the other important document you need to have on hand is your bylaws so they are the operating rules of your organization so it's going to dictate how many board members you you have board limits the officers the committees all of that so your bylaws are important to have as a reference and you may have to submit that as well with your application it depends on which application that you're using but it's important to have your bylaws bylaws in place because your state's gonna require that more than likely anyway and I always tell people when you're creating your bylaws yeah it's easy to google and figure out oh this is a sample bylaw from such-and-such organization but make sure you're googling from the organization that's in the state you're operating in state law governs how boards should operate state laws dictate what should be in your bylaws so what California requires it's going to be different from what Missouri requires so pay a lot of attention to that and make sure that you're looking at bylaws for an organization from the state that you're operating in the third thing you're going to have to understand is are you a public charity or are you operating as a private foundation now if you don't tell the IRS that you're operating like a public charity then they're gonna automatically designate you as a private foundation which if you're going to be a traditional nonprofit providing services in the community and you're gonna do traditional fundraising and getting grants you're not typically going to be a private foundation so what is the difference so most of our profits are designated as public charities that means that they get their support from a variety of places that means you get a broad range of support it could be government it could be other types of grants contracts it could be money you earn from services you provide that align with your mission it could be individual donations that means not one person can dictate how the funding is dispersed because funding is coming from everywhere so you're designated as a public charity and you're doing activities in the community private foundations are different in that they usually have one source or a limited amount of sources of where they're getting their money so that means that those sources can really dictate and control the purse strings of how money is used so public charities and private foundations have different requirements for how they submit their tax forms at the end of the year and they're just different rules and expectations for them so you need to make sure that when you set up and you apply you know you want to be a public a public charity and you fill out the documentation the right way so there are two things or two places on the application and that are going to ask or test whether or not your public charity one is going to ask whether or not you get your support from a government agency so or you get a lot of government support so if that's the plan then you would pick that another one's going to say well maybe you're not getting it from a government agency or a public agency maybe you're getting it from earned income or contributions that are related to your mission okay so that's another place where you can designate that your public charity if not if those don't apply to you or if you don't select those you're going to be designated as a private foundation so make sure you pay attention to that and you may be saying to yourself well Tiffany I don't necessarily know where my money's going to come from I have a business on the side that I am planning to use that to fund my organization so does that really mean I'm a private foundation well no what I will say is if you say that you're a public charity for the first five years of your operation the IRS is not necessarily going to check that they're not going to require or see if you actually are operating like a public charity after five years you're gonna have to start proving where you're getting your money from so the the plan is within five years you would have built up a donor base you would have gotten comfortable with writing grants you would have kind of expanded the scope of where you're getting money from so the idea is that eventually you're going to have a broad range of public support just not right now so if that's the plan then it's okay for you to designate right now your public charity and then not worry about being a private foundation hey y'all just wanted to stop here for a second to explain a little bit more about what I mean by the five years so in the sixth year of your tax-exempt status the IRS is going to begin applying the public support test so what that means is they're gonna look at your 990 form that you submit and they're gonna see where your revenue sources are right so they're gonna want to see that there's a diverse pool of sources that are providing you funding for your organization the public support test which is basically at least a third of your revenue so 33% has to come from either a public source or money you earn from your exempt purposes so examples of that could be a government grant it could be money you earn from membership fees or product sales or service income or individual donors but if individual donors give more than 2% of your overall budget they will not count as public support so you can only include individual donors who give a small amount which is 2% of your overall budget so again why is this important it's important because the IRS wants to make sure that you are actually a public charity that not one or two donors have a lot of sway on how money is spent in your organization so they want to make sure that there's a diverse pool and they use this public support test when looking at your tax forms to check that if you actually go under that percentage so if you have less than 33% from public sources or your program then they're gonna convert you to a product foundation so it's really important that you pay attention to that so you don't kind of go into a status that you're not prepared for okay let's go back to the video okay so now that you know what you need to do and how to prepare to apply for tax exempt status let's talk about the different ways you can apply there are only two ways you can get your tax exempt status and that's through two forms either the 10:23 easy or the regular 10:23 which sometimes I call the long form the 10:23 easy is relatively new within the last word like six seven years and it's an application process that the IRS created to help smaller nonprofits get up and running because the regular 10:23 is just a bear it's just a lot of work and you have to supply a lot of information and some of the information on there is confusing so they created a streamlined application to make it easier for smaller organizations to kind of be able to compete and not be kind of shafted or ignored so they have the opportunity in the access to become tax exempt as well so the 10:23 easy is really really easy you just have to supply the name you organization your purpose and your mission your board members and then you have to answer some questions about how you plan to operate just like I talked about with are you a public charity or a private foundation those are the things now not everyone is one to apply or be eligible to fill out the 10:23 easy so if you are a non-profit and you've been in existence for a while and you've made more than fifty thousand dollars each year of the past three years you're not eligible if you're a non-profit and within the next three years you plan to make more than fifty thousand each year you can't apply for the easy form if you have assets more than two hundred fifty thousand you can't apply or easy so do you see the theme it's if you're a smaller organization you're just getting up and running the easy form is for you but if you're more established and you have a larger budget your larger organization then it's not really gonna apply to you and you're gonna have to fill out the 10:23 the long form the easy form is 275 dollars as of this recording it may change and you just use the form online go through peg of fill out the form and generally you get an answer within a month or two but that may shift based on what's happening out there in society so there's a pandemic or there's something going on like a strike or furloughs that may be different but generally within one or two months you get a response with the easy form now with the long form that thing is a bear so you're gonna have to have all of you organizing documents your bylaws a list of your board members you're gonna have to have your budget for the next three years you're gonna have to report money from the previous three years you're gonna have to report things in the way you would fill out your regular tax form so what's your programming dollars versus your admin dollars versus your fundraising dollars so what the long form does is prepare you as an organization for what's coming down the pike so the IRS is interested in learning and knowing how you operate and again checking to make sure that you're still operating as an exempt organization so they're they're gonna want to see where your money is going they're going to want to see where your money is coming from so it's a very detailed form that you're gonna have to fill out to prove to the IRS that you're an exempt organization now that form just recently as of this recording is now available online you can also apply at PEG of its $600 as of this recording to apply and as I said there are a bunch of different things and documentation and possibly Board minutes your bylaws your Articles of Incorporation your budget a bunch of different schedules that you're going to have to fill out detailed activities or descriptions of your programming and what you do all of that's going to be required is going to take a long time so just take your time and make sure you fill out everything completely now what I will say is that nonprofit law and requirements can be very complicated so I would suggest that if you're trying to do this yourself you at least get the advice of an attorney or an accountant to help you figure out how to answer the questions the right way so you're not kind of all out there by yourself because if you answer one question the wrong way it can completely derail your application so just take your time and submit it and go through the process and if you do the long form it will prepare you for what's expected coming down the road all right Sean thank you for hanging in there with me so now you know how to apply for tax-exempt status if you're interested in creating your own nonprofit I have a checklist that kind of guides you through the steps from A to Z about how to become a non-profit even more than just tax-exempt status I also have a workbook where if you're the kind of person where it's like I just need you to tell me what to doing what to write I have a workbook also that you can purchase that will help guide you through that checklist and as always if you have questions for me visit me at .uvu.edu/library you