Business & Work
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In this article, we will focus on applying for tax-exempt status for 501(c)(3) organizations in Illinois. This includes income, sales, and real estate taxes.
A "nonprofit" corporation is a state-level designation, while 501(c)(3) status is a federal subset of organizations that are exempt from federal income tax. The Internal Revenue Service (IRS) recognizes more than 30 types of nonprofit organizations. Only organizations that qualify under Section 501(c)(3) of the US Internal Revenue Code can say that their donations are tax-deductible.
This article does not address the ongoing reporting requirements for tax-exempt organizations or registering your entity with the Illinois Attorney General's office.
Nonprofits and taxes
501(c)(3)s do not have to pay federal and state income tax.
But they do have to pay:
- Employment taxes on wages paid to employees, and
- Taxes on money received from an unrelated business activity.
A 501(c)(3) operating in Illinois may not have to pay Illinois sales tax, and it may be exempt from real estate taxes on property it owns.
Both the Illinois sales tax and property tax exemptions are not automatic based on the 501(c)(3)'s income tax-exempt status. You must apply for both additional exemptions separately. A letter to the Illinois Department of Revenue may also be required.
Donations to certain nonprofit organizations may also be tax deductible for the person making the donation.
Note: Net earnings of a 501(c)(3) cannot go to a person. This could lead to losing your status and paying fines to the IRS.
Applying for 501(c)(3) status for your nonprofit
After you have created your nonprofit, the steps below will help you apply for tax-exempt status.
Learn more about getting an EIN.
Form 1023 is the IRS form used for your organization to apply for income tax-exempt status. The Form 1023 is complex, and you should seek the assistance of an attorney, accountant, or tax professional to complete it. You can find more information on Form 1023 from the IRS website.
After the IRS successfully reviews the Form 1023, the organization will receive a determination letter. This letter notifies the organization that its application for a federal tax exemption under Section 501(c)(3) has been approved.
Certain organizations may use Form 1023-EZ instead of Form 1023. Form 1023-EZ is a streamlined version of Form 1023.
To determine whether your organization is eligible to file Form 1023-EZ, check the Instructions for Form 1023-EZ. Generally, an organization must meet all of the following requirements:
- Anticipates no more than $50,000 in annual gross receipts over the next three years,
- Has no more than $250,000 in assets based on fair market value,
- Is organized as a corporation, unincorporated association, or trust, and
- Is not a church, temple, mosque, synagogue, or similar institution that meets certain specifications under the IRS’s terminology.
You also need to pay user fees when you file the forms. The user fee for Form 1023 is $600. The user fee for Form 1023-EZ is $275.
Visit the IRS website for an online training on how to apply for tax-exempt status.
A nonprofit is not automatically exempt from Illinois sales tax. You must apply for a sales tax exemption (E) number by sending in:
- Form STAX-1, Application for Sales Tax Exemption,
- The articles of incorporation,
- The bylaws,
- The IRS letter, reflecting federal tax-exempt status,
- The most recent full-year audited financial statement showing income and expenses (religious organizations do not need to submit a financial statement with the initial request),
- A brief narrative that explains the purposes, functions, and activities of your organization,
- Brochures or other printed material explaining the purposes, functions, and activities of your organization, and
- Any other information that describes the purposes, functions, and activities of your organization.
There is no fee to apply. The information outlined above should be sent to the following address:
Exemption Section MC3-520
Illinois Department Of Revenue
101 West Jefferson Street
Springfield, IL 62702
Or you can apply online using MyTax Illinois.
The most common exemption from real estate taxes for nonprofits is the ownership and use exemption. The real estate at issue must both be owned and used by the nonprofit. The primary use of the property must be for your organization’s charitable purposes.
Applications by nonprofit entities, like 501(c)(3) organizations, are first reviewed by the local county. The application is then sent to the Illinois Department of Revenue for final review and approval. Each county has its own filing deadlines and forms, so please reach out to your local county board of review for more information.
A consultation with an attorney who specializes in real estate tax appeals is highly recommended.
Worried about doing this on your own? You may be able to get free legal help.
