Q&A #129 – Are 501(c)(3) organizations automatically exempt from state corporate income tax?
Question: My nonprofit organization recently received approval of 501(c)(3) status from the IRS. Does this mean that we are also automatically exempt from corporate income tax in our state?
Answer: Organizations that receive IRS approval of 501(c)(3) status are almost always eligible for exemption from state corporate income tax, subject to exceptions for certain types of revenue. However, the process varies widely depending on the state and you should not assume that the exemption from state corporate income tax is automatic. In some states, this exemption automatically applies upon IRS approval of 501(c)(3) status and no additional steps are required. Other states require a separate application to be filed.
The exemption from state corporate income tax is usually easier for a 501(c)(3) organization to obtain than other types of state tax exemptions such as the real property tax, personal property tax, and sales and use tax.
For example, unlike sales and use tax exemptions (discussed in Q&A #126), which typically require a detailed application and often have more rigid qualification criteria, some states treat 501(c)(3) organizations as automatically exempt from state corporate income tax. Other states require a short application form to be submitted with the 501(c)(3) approval letter attached, and a few states have more complex application requirements similar to the process for obtaining sales and use tax exemption.
Planning Tip – Do not assume that compliance with state law means your organization has complied with applicable laws and rules of the city, county, or other local governmental body. For example, many cities and municipalities have their own tax exemption processes and requirements separate and apart from the state. Make sure to include a review of local law as well as state law in your planning process.
However, as with the federal tax exemption, the exemption from state corporate income tax is not absolute. For example, most states require a tax-exempt organization to file a corporate income tax return, and potentially pay corporate income tax, if the organization has unrelated business taxable revenue under federal law. Note that some states impose a minimum tax that must be paid with these filings, so there may be some cost even if the tax burden is otherwise offset by deductions. And of course, there may also be other types of state taxes besides the corporate income that your organization is required to pay.
Therefore, it is essential to closely review the laws and processes of any state in which your organization operates.
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