Estate Planning & Elderlaw | Dallas, TX

Forming a Nonprofit: The Texas Three-Step

Individuals and families may establish a tax-exempt charitable organization to accomplish substantive philanthropy while affording favorable tax treatment.  The degree of maintenance of such an organization requires depends whether the organization can be classified as a public 501(c)(3) charity or is instead a private foundation.

Either way, forming a charitable organization is a three-step process in Texas.

Step One: Form the Organization

A charitable organization must be formed as a corporation in the state in which it is to be located. Many states, including Texas, have a special corporate form called a “nonprofit corporation,” which is required to be able to qualify for tax-exempt status.  Special provisions must be included in the Articles of Formation. Formation of a nonprofit corporation in Texas is substantially less expensive than formation of a business corporation.

Step Two: Obtain Federal Tax-Exempt Status from the IRS

Formation as a nonprofit organization does not automatically make the organization tax-exempt.  For the organization’s income to be tax-free, and for donations to be tax-deductible to the donor, another step must occur.  The organization must file for tax-exempt status with the IRS.  The application for tax-exempt status (Form 1023) is a comprehensive application for which legal assistance is usually desired.  Small organizations may qualify for the new, simpler application (Form 2012-EZ) that was introduced in 2014. Most organizations with anticipated annual gross receipts of $50,000 or less and assets of $250,000 or less are eligible for the shorter application.

Step Three: Obtain State Tax-Exempt Status from the State of Formation

After an organization receives its tax-exemption letter from the IRS, a final step remains. The state in which the organization was incorporated must be notified of the IRS tax-exempt status.  Most states, including Texas, have a streamlined process for obtaining state tax-exempt status once the IRS has approved federal tax-exempt status.

For a consultation on forming or administering a nonprofit organization or charitable foundation, contact Liza Farrow-Gillespie.

Charitable Organizations | FGH Law | Dallas, TX

New Simpler 501(c)(3) Tax-Exempt Application

In July 2014, the Internal Revenue Service introduced a new, shorter application form to help small charities apply for 501(c)(3) tax-exempt status more easily.

The new Form 1023-EZ is three pages long, compared with the standard 26-page Form 1023. Most small organizations, including as many as 70 percent of all applicants, qualify to use the new streamlined form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.

Previously, all groups — regardless of size — went through the same lengthy application process regardless of size. This process created long delays for all organizations seeking to receive tax-exempt status.

According to the IRs: “The change will allow the IRS to speed the approval process for smaller groups and free up resources to review applications from larger, more complex organizations while reducing the application backlog. Currently, the IRS has more than 60,000 501(c)(3) applications in its backlog, with many of them pending for nine months. . . . We believe that many small organizations will be able to complete this form without creating major compliance risks.”

A reduced fee accompanies the streamlined application.  Whereas larger groups required to use the standard Form 1023 must pay a filing fee of $850, smaller groups entitled to use Form 1023-EZ must pay only $400.  For either application, the fee is due at the time application is made.

For more information on charitable organizations, call Liza Farrow-Gillespie at 214-361-5600.

Farrow-Gillespie Heath Witter LLP | Dallas, TX