Is Your Business Tax-Exempt? How To Become One

July 18, 2022
Is Your Business Tax-Exempt? How To Become One

It’s possible to make your business tax-exempt, but you must follow the proper steps. It’s not as easy as simply stating that you want your business to be tax-exempt. There are numerous IRS regulations and requirements that must be followed for your business to qualify for tax-exempt status.

If you’re running a business that’s not tax-exempt and wants it to be tax-exempt, there are ways to go about it. Outsourcing 501(c)(3) application for your business is one, and providing required information is another. Now that you want your business to become tax-exempt, this article provides a guide to becoming one.

What Is Tax-Exempt Status For Business?

Tax-exempt status for business is when a business doesn’t have to pay taxes on its income. This can be because the business owner is a non-profit organization. After all, they’re an educational institution or because a state owns them.

The reason why tax-exempt status for business is important is that it makes it easier for the company to continue operating. Without this exemption, they would have to pay taxes on their income yearly, making it more difficult for them to operate as profitably as possible.

There are several ways to achieve tax-exempt status for a business. One way is through incorporation as a non-profit organization. Another way involves obtaining 501(c)(3) status by applying to the Internal Revenue Service (IRS), while another option is to register as a charitable organization with the state.

With the following steps, you can turn your business into a tax-exempt:

1. Learn The Basics Of 501(c)(3)

There are many reasons to want your business to be tax-exempt. Perhaps you’re a nonprofit organization, or you’d like your for-profit company to have the same tax advantages as a nonprofit. You might need this to apply for grants or other funding sources that require 501(c)(3) status. Whatever your reason, it’s essential to understand what tax-exempt means and how it works to get the most out of this designation.

A 501(c)(3) is an IRS designation given by the Internal Revenue Service (IRS). It stands for “Exempt Organization,” which means that the organization can operate free of federal income taxes on its profits (or losses). If you file for tax exemption and are approved by the IRS, then all donations made directly through your company will also be exempt from federal income taxes, which could mean more profits.

2. Choose An Available Name And File Articles Of Incorporation

Choose a name that isn’t already taken. This will be the name of your business as well as its official title on documents and filings. If you want to use a fictitious name for marketing or other purposes, you can file an assumed name certificate with your county clerk to reserve it for business purposes only.

However, you don’t have to do this if the fictitious name has been registered with your state’s Secretary of State or equivalent office.

If you’re starting up a nonprofit organization, you’ll need to file incorporation articles with the state and federal governments (separate entities). The same goes if someone else wants to establish an LLC within their existing corporation; they’ll need both sets of documents filed separately at each level.

3. Obtain An Employer Identification Number

If your business is a corporation, partnership, or limited liability company, you must apply for an employer identification number (EIN) before applying for tax-exempt status.

The EIN is a nine-digit number that the IRS assigns to businesses. You’ll need this number to report business income and other tax-related information to the IRS. If your business already has an EIN but hasn’t applied for tax-exempt status, you should apply now rather than wait.

4. Apply For Tax-Exempt Status With The IRS

Another step in becoming a tax-exempt organization is to apply to the Internal Revenue Service (IRS). To do so, you must fill out Form 1024 and pay a processing fee. You’ll also need to provide information about your business, including its purpose, how it’s organized, and how it operates.

Additionally, you need to give details about your employees and financials, as well as any relevant documents like articles of incorporation or bylaws.

Once you submit this application, the IRS will review it before deciding whether your organization qualifies for tax-exempt status. In some cases where there are questions about an organization’s eligibility for exemption status, they may request additional documentation such as a copy of the group’s articles of incorporation or other legal filings related to its operation.

5. Comply With Federal, State, And Local Laws

First, you need to know what the federal, state, and local laws are. To find out what these laws are, you’ll have to do your research. You can start by going to the Internal Revenue Service website and reading through all the information on tax exemptions for small businesses.

The IRS website has a lot of helpful information that’ll help you learn more about how to comply with federal, state, and local laws when making your business tax exempt.

Once you’ve done some research on the IRS website, it’s time for another step: finding out if your business is complying with federal, state, and local laws about tax exemptions for small businesses or not complying with them at all.

If it isn’t complying with these laws, it means that there could be penalties imposed by both federal agencies as well as state agencies (which often work together). Then this is something worth looking into further before making any decisions about whether or not getting certified would benefit anyone involved in this type of operation venture, including yourself.

6. Maintain Proper Records Of Your Business

Making sure to document your business finances properly is one of the most important things you can do if you want to apply for an exemption successfully. This means keeping track of what income comes in, what expenses go out, and how much money you have left over at the end of each month.

Keeping good records will help keep your tax burden low because it’ll make it easy for you to prove that you were operating as a nonprofit organization during those years when the IRS didn’t yet grant you 501(c)(3) status.

If a discrepancy arises between what’s been reported on paper versus what has been recorded in digital databases, an auditor may see fit to ask questions about how much money was earned over time, even though there might be nothing suspicious about these numbers other than it’s different from what was initially declared publicly or privately submitted as part of an application process seeking exemption under Section 501(c)(3).


Becoming tax-exempt is a step-by-step process. This article has given you a better understanding of becoming tax-exempt. As you’ve seen here, it’s not as simple as just filling out a form; you need to have a solid operational plan and be prepared for some paperwork. But if you follow these steps diligently, you can rest assured that your business is on the right track towards becoming tax-exempt.

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