How to Claim and Protect Your Tax Exempt Status


Employees in nonprofit organizations wear many hats. Directors end up managing budgets and program managers end up managing marketing campaigns. There are limited available resources, and everyone has to be ready to step up to the plate. With help, most employees can piece together a marketing campaign or a new budget without significant negative consequences.

That said, a nonprofit organization’s most valuable asset is its nonprofit status. If you happen to work in a nonprofit organization, and you’re wearing an accounting hat today, feel free to use this quick guide to help you claim and protect your nonprofit status.

Are You Exempt?

The first step is to determine whether or not you’ve already claimed your tax exempt status. If your organization has already claimed its status, feel free to skip ahead. If not, keep reading to learn how to claim tax exemption for your nonprofit organization.

  1. First determine if your organization is a trust, corporation, or association
  2. Second, gather your organization’s documents, including: articles of incorporation for a corporation; articles of organization for a limited liability company; articles of association or constitution for an association, or trust agreement; and declaration of trust for a trust.
  3. Determine your state’s exempt registration requirements. Here are New Mexico’s.
  4. Obtain an employer ID number (EIN) for your new organization. Not sure how? Click here.

Can You Lose Your Tax Exempt Status?

Once you have achieved exempt status, it’s important to comply with federal regulations to make sure you don’t lose your tax exempt status.

According to a recent NOLO article, “Noncompliance with tax laws and IRS regulations can result in termination of your nonprofit’s tax exemption.” The article continues, “Fortunately, a look at history shows that a nonprofit must engage in some truly egregious conduct to lose its 501(c)3 tax exemption.”

While NOLO’s assertion may be true, the easiest way to lose a tax exempt status is failing to report annual earnings. While nonprofits are exempt from taxation, they also are required to report earnings annually. Failure to do so can results in revocation of the organization’s tax exempt status.

Best Practices for Nonprofit Bookkeeping

Let’s assume your organization is operating in compliance with laws and regulations – you still need to be mindful of protecting your status. Below a few best practices that will help prepare you for challenges or audits.

Keep Good Corporate Records

Corporate records include notes of decisions made that affect the organization. Good practice is to keep detailed minutes from every meeting.

Keep Information In a Corporate Record Book

Keep records in a Corporate Records Book. “The book should also contain a copy of your articles of incorporation, bylaws, and tax exemption determination letters from the IRS and your state tax agency if applicable.”

Keep Record of All Financial Transactions

Employ a double-entry bookkeeping system so nothing is accidentally omitted. There’s a lot to take into account, but hopefully this quick guide will help you claim and protect your tax-exempt status. If you still feel lost, schedule a consultation with us so we can help your nonprofit stay exempt