Determine Your Exempt Purpose

North Carolina Tax-Exempt Organizations

The overall purpose of most corporations is to earn a profit for its owners. Tax exempt organizations (nonprofits) can and should also earn profit. However, any profit earned must be used in support of the nonprofit’s tax exempt purpose.

If you have already started your research, you will have realized that the IRS has created a significant mountain for us to climb. You may have seen IRS Form 1023; it's massive. The IRS asks for a broad range of information, both descriptive and financial. But don’t let the paperwork affect your resolve. Becoming tax exempt is not difficult, it’s just time-consuming.

Creating a 501(c) organization is primarily an administrative exercise. You will need to: (1) create your North Carolina Nonprofit Corporation; (2) draft your corporate Bylaws; (3) draft your Conflict of Interest Policy; (4) obtain your federal Tax Identification Number; and (5) get your North Carolina Tax Number. However, before you do any of these things, we suggest you draft a mission statement, create a descriptive narrative of all of your nonprofit activities, and then organize your financial data.

Developing a Tax-Exempt Purpose

To qualify as a tax exempt organization, a nonprofit must exist and operate for at least one of the following purposes: (1) charitable, (2) religious, (3) educational, (4) scientific, (5) literary, (6) testing for public safety, (7) fostering national or international amateur sports competition, and (8) preventing cruelty to children or animals.  

For a moment, however, try not to focus on the above categories and think about what inspires or motivates you? For me, I always wanted to be a lawyer. I liked rules and fair play. Justice, as a form of fairness, just made sense to me.

Now, ignoring any IRS and State requirements, and in a few sentences, answer the following questions: (1) What is our organizational purpose and (2) how will we achieve it? When you are done, at the top of your summary, write Mission Statement.

Mission Statement

With your mission statement in hand, make a list of your nonprofit's programs and initiatives. Make sure you use clear concepts and concrete terms. For example, if your motivation for creating a nonprofit was an experience domestic violence in your past, improving the quality of life of women who are victims of domestic violence could form the basis of your exempt purpose.

Remember, you are creating a blue print for your organization to follow. Your goal is to develop an exempt purpose and integrate your nonprofit‘s programmatic elements with the appropriate IRS category or categories.

If your organizational aim is to improve the quality of life of domestically abused women, the opening of a women’s shelter could satisfy the IRS’ Charitable category. If a further aim is to conduct educational seminars to raise public awareness of the dangers of domestic violence, such a program could satisfy the IRS’ Educational category.

Nonprofit Activities

The IRS asks for a narrative description of all past, present, and future nonprofit activities. Your narrative description will need to include answers the following questions for each activity:

  • What is the activity?
  • Who conducts the activity?
  • When is the activity conducted?
  • How does the activity further your exempt purposes?
  • What percentage of your total time is allocated to the activity?
  • How is the activity funded?

Do not repeat of your exempt purpose. Instead, write, in detail, about each of your programs as they relate to your exempt purpose. Assume your reader knows nothing of your nonprofit activities and your narrative is their sole source of information.

IRS Form 1023 may seem like a big scary monster, but it's just twenty-six pieces of paper. With the proper research and planning, it will seem less intimidating. Keep in mind; a tax exempt organization should only focus on one or two core programs. My dad used to tell me, do what you do best and let other people do what they do best.

Nonprofit Income and Expenses

The IRS asks for financial reporting based on your organization‘s years of existence. If your organization has completed less than one tax year, you will need to provide estimates of your income and expenses for the current tax year and good faith projections for the next two years.

Nonprofits who have existed for more than one year, but less than four years will need to provide financial information for each completed tax year and good faith estimates for the current year and each year you have not existed for a total of three years of financial data.

If your organization has been in existence for four or more years, you will need to provide financial information for your most recent completed tax year and each of the three years before it for a total of four years of financial data.

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