Nonprofit & Tax-Exempt Status
Although the University of Minnesota requires all Registered Student Organizations to operate as nonprofit entities, these groups do not have nonprofit status with the state of Minnesota, unless applied for independently. Nonprofit status refers to the form of an entity under state law and the limitations on its ability to make distributions of income to shareholders. Nonprofit status may make a group eligible for certain benefits such as sales tax, property, and income tax exemptions.
“Nonprofit” status is not the same as “tax-exempt” status. Nonprofit corporations may be taxable or tax-exempt. A nonprofit entity wishing to be recognized as Tax-Exempt must go through a federal application and approval process. See the section below titled "Federal Tax Exempt Status" for more information.
The Minnesota Attorney General provides good resources to nonprofits. One resource is the Information for Non-Profits section. A step-by-step guide to forming a tax-exempt non-profit can also be found on the website for the MN Council of Non-Profits.
Information for Local Chapters of National Organizations
Some student groups may have Tax-Exempt status through a group exemption from their national organization. You should contact your national chapter to see if you have federal Tax-Exempt status (from the IRS) as well as state sales tax exemption for any items purchased.
Should your organization become a MN nonprofit corporation?
Most nonprofits begin as an unincorporated association. This means that they have not registered with the State of Minnesota. This is the case for most student groups. Organizations with less than $5,000 in annual revenue can continue with programs and activities informally, and can consider remaining an unincorporated association.
PLEASE NOTE: Unincorporated organization are not separate legal entities, meaning that individual officers can be held liable in the event of a serious incident. Organizations that want to limit the liability for their members, or that operate on a larger scale (generally, when revenue exceeds $5,000), may consider incorporating.
To incorporate under the Minnesota Nonprofit Statutes, RSOs need to send the organization’s Articles of Incorporation that comply with the nonprofit corporation statues to the Minnesota Secretary of State either online or by mail. To file online, go to www.sos.state.mn.us. There is a $90 filing fee for online filings. To file in person or by mail, send your articles to the Minnesota Secretary of State - Business Services, Retirement Systems of Minnesota Building, 60 Empire Drive, Suite 100, St. Paul, MN 55103. The filing fee is $70 payable to the MN Secretary of State. Once the articles are filed, the organization will receive a Certificate of Incorporation from the Minnesota Secretary of State’s Office. This certificate includes a charter number unique to that organization. The charter number is used only internally by the Secretary of State.
Additional information regarding starting a nonprofit entity in Minnesota, as well as filing and renew forms, is available on the Minnesota Secretary of State website.
Benefits to nonprofits and tax-exempt organizations
There are different types of tax exemption, based primarily upon the purposes of the groups, and not all are treated alike. Some of the following benefits are offered to some of these groups:
- Exemption from federal and state income taxes.
- A significantly reduced cost for mailing 200 or more identical pieces of mail at one time.
- Possible exemption from paying federal unemployment tax on payroll, stipends, wages, etc. All groups are required to withhold Social Security (FICA), Federal and State income taxes, and pay Minnesota unemployment tax on wages paid.
- Donors’ gifts to student groups are tax-deductible under certain conditions. If you solicit large donations this is important. Generally, your group must be registered as a 501(c)(3) group to benefit. This is an IRS designation for charitable, religious, educational, and scientific organizations.
- Exemption from Minnesota sales tax can be obtained by charitable, religious or educational organizations on purchases for your group’s own use (tables, chairs, office supplies, etc.), but not from sales of tangible personal property, nor admission events.
Federal Tax-Exempt Status
If your organization is planning on seeking federal tax-exempt status, you should begin the process of developing a mission statement by analyzing what you want to do, who you want to reach, and how you want to impact society. A mission statement should be brief and descriptive of what you are trying to accomplish. This statement will guide the organization through not only its initial formation, but also future program development, growth and change. It will also help you decide what tax-exempt organization for which you may want to apply. There are many different types of tax-exempt organizations. See Publication 557 Organization Reference Chart for more information.
To qualify as Tax-Exempt from federal taxes, a group must meet requirements set forth in the Internal Revenue Code. For more information see Types of Tax-Exempt Organizations or Publication 557 on the IRS Website at www.irs.gov. The IRS also has excellent resource material on the life cycle of a tax-exempt entity on its website that explains the appropriate procedures that a group must take to be tax-exempt and to maintain its exemption.
If your organization receives federal tax-exempt status, it means that your organization would be exempt from both federal and state income taxes on all your related business income. That can be a huge savings to your organization. If your organization does not get tax-exempt status, its net income could be subject to the corporate income tax rates for both federal and state income tax purposes.
Minnesota nonprofits are not automatically tax-exempt from income tax. Therefore, if your organization is incorporated as a Minnesota nonprofit, tax-exempt status must still be applied with the Internal Revenue Service.
Federal tax-exempt status also can mean that any donations to your organization are tax deductible to the donor. This is only true if your organization is a 501(c)(3) tax-exempt organization. Stated differently, donations are not deductible as charitable contributions if your organization is organized under section 501(c)(4), (c)(5), (c)(6), etc. Not all student groups are eligible to b.. classified as a section 501(c)(3) organization, depending upon the nature of the mission (purpose) developed by the organizers of the group.
There are several steps and filing requirements an organization needs to complete before receiving tax-exempt status.
Read IRS Publication 557, Tax-Exempt Status for Your Organization.
This IRS publication lays out the federal laws regulating tax-exempt organizations. It is free and serves as a useful reference guide.
Fill out IRS Form 1023, Form 1023-EZ, or Form 1024, Application for Recognition of Exemption.
Form 1023 applies for a ruling or determination letter on an organization’s exempt status under Section 501(c)(3). Form 1023-EZ is a streamlined version of Form 1023. To qualify to file Form 1023-EZ, your organization must have not exceeded annual revenue of $50,000 in the past 3 yeasr. Form 1024 applies for exemption under another 501(c) section.
Fill out IRS Form 8718, User Fee for Exempt Organization’s Determination Letter Request.
Form 8718 is used to process the fee for applying for tax-exempt status and must be included when filing Form 1023 or Form 1024.
- The filing fee is:
- $400 for organizations anticipating gross receipts averaging not more than $10,000 during its first 4 years.
- $850 for organization anticipating gross receipts averaging more than $10,000 during its first 4 years.
An organization is not required to file Form 1023 or Form 1024 unless its annual gross receipts are normally more than $5,000. These applications are very detailed and time consuming, so plan accordingly to make sure your organization files within the allotted timeframe.
After receiving your IRS Determination Letter, keep the original copy along with a copy of your complete application, in your organization’s permanent files.
Minnesota Sales Tax Exemption
Some nonprofits may qualify for exemption from sales tax on purchases through the Minnesota Department of Revenue. (This is a separate exemption from the federal tax exemption which is for income taxes.) The sales tax exemption allows purchases of office supplies, furniture, computer equipment, and other taxed items to be purchased without the sales tax. Prepared food, candy, soft drinks and lodging are excluded from the exemption. Most exemptions are given to purely educational charitable or religious organizations.
To apply for sales tax exemption, organizations must complete and submit Form ST16, Application for Nonprofit Exempt Status – Sales Tax. There is no fee to filing the form and it should be mailed to Minnesota Revenue, Mail Station 6330, St. Paul, MN 55146-6330. Effective December 2008, if approved, the RSO will receive an authorization letter from the department rather than an exempt status number.
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