Many nonprofits qualify for exemption from at least some taxes (sales tax, income tax, real property tax).  If your organization qualifies, it is generally best to start taking advantage of the exemption(s) for which it qualifies right from day one.  You will need to know how to obtain these exemptions.  You will also need to make sure you know how to maintain tax exemption – a step far too many nonprofit leaders neglect.  

Sometimes an organization will operate for many years (sometimes decades) before seeking tax exemption.  Occasionally an organization’s leaders will mistakenly think that the organization is tax-exempt when it is not.

Attorney Cevin Taylor recently assisted an Ann Arbor, Michigan nonprofit that was formed more than two decades earlier as a Michigan nonprofit corporation with the purpose of supporting a public school in Ann Arbor.  It had taken in hundreds of thousands of dollars in donations and grants over the years.  Its leaders believed that it was a tax-exempt 501(c)(3) organization.  Consequently, they had never paid taxes on any of its income.  However, upon looking into the matter, Taylor Legal discovered that the organization’s founders had never applied for tax-exempt status, and it did not fit under any of the narrow exceptions to the requirement to apply for and be recognized as exempt by the Internal Revenue Service.  Attorney Cevin Taylor helped the organization’s board address this situation, apply for and obtain tax-exempt status.  In addition, the organization was able to avoid paying taxes, penalties, and interest on for the many years it spent as a nonexempt entity.

Attorney Cevin Taylor recently assisted an Ann Arbor nonprofit organization that was incorrectly classified as a private foundation by the IRS at the time it was recognized as tax-exempt.  This was likely due to the person that prepared the application making an incorrect choice when filling out the application.  Generally speaking, being classified as a private foundation is much less favorable than being a public charity.  A public charity will not be subject to many of the complicated restrictions that bind private foundations.  A public charity can also file a much simpler annual return than a private foundation.  Attorney Taylor was successful in petitioning the IRS to reclassify the organization as a public charity.  This mistake is just one example of the many traps for the unwary that you will run across when setting up a nonprofit.  (Incidentally, the client in question who made this mistake was a lawyer himself, but he was practicing outside of his area of expertise.)  

Exemption from income tax as a recognized 501(c)(3) organization is not the only type of tax exemption for which your nonprofit might be eligible.  There are also exemptions from Michigan sales tax that an organization should be aware of.  Organizations that own real property might also be entitled to an exemption from real property taxes, which can be thousands of dollars per year.  Michigan nonprofits need an attorney that can advise them on obtaining all of the exemptions for which they might be eligible.