05 May 2020

Approved by IRS, Revoked by State

Allyssa Klingberg

The world of compliance for nonprofit organizations can feel daunting at times, especially since there are often both IRS and state-level filing requirements to manage. As we’ve recently discussed in our article about updated tax deadlines, non-church nonprofits need to file the annual Form 990 with the IRS to maintain their federal tax-exempt status, but what about state-level filings? State requirements are just as important and can be even more confusing, especially since each state has it’s own unique requirements that differ from the IRS and from other states.

Oftentimes, state filing requirements can vary depending on if the organization is a church, non-church nonprofit, or for-profit. 

So how do you know what is required in your state?

That’s what we are here for! 

Since working in our KeepRIGHT Department the past year and a half, helping our clients with state-level filings, I understand how important it is to have someone there to help you navigate the world of state compliance.

Your heart and dream is to minister to your community, not to be bogged down by deadlines and paperwork.

We understand that every great calling is not only full of responsibility but also fruitful partnerships. Christ never did his work alone, and neither should you. That is why we are here to walk alongside you in whatever capacity you need. From incorporation to bookkeeping to continued state-level compliance, we are here to help!

So today, let’s look at an all too familiar example of how important it is to maintain state-level compliance and what can happen if you don’t.

California: losing state exemption

Over the past 20 years that StartCHURCH has been partnering with churches and nonprofits, we have heard this story numerous times. 

A church incorporated with the state of California and received its 501(c)(3) approval from the IRS. Then, they applied for and received franchise tax exemption with California’s Franchise Tax Board. 

However, amidst the everyday responsibilities of running a ministry, the filing of the state’s biennial report was overlooked. 

Most states require a similar report to be filed annually, but California requires this report to be filed every two years rather than every year.

Resource: https://www.sos.ca.gov/business-programs/business-entities/statements/help/

As a result of not filing this report with the state of California, the church was placed into bad standing, and its franchise tax exemption was immediately revoked.

I share this all too familiar story not to make any of you feel overwhelmed or discouraged, but rather empowered with this knowledge. The option to exempt out of franchise taxes in California as a nonprofit is a wonderful thing! 

California requires a few filings to stay in touch with over time. Ensuring you are in compliance is their due diligence, just as you may keep your internal documents for the same purpose.

State filing requirements that your church or ministry cannot forget

We work with both churches and ministries in all 50 states. If there is one thing that can easily trip up churches and ministries in their quest to maintain compliance, it is the filing requirements at the state level. 

This is because the filing requirements of all 50 states differ to some degree, as I mentioned before. Additionally, in some states, the filing requirements vary between churches and ministries.

From our experience in working with churches and ministries all across the country, there are two state filing requirements that tend to cause the most issues:

  •  a state’s annual report and
  •  a state’s franchise tax

Applying for a franchise tax exemption

As previously stated, most states automatically exempt charitable organizations from having to pay the franchise tax; however, there are four states in which charitable organizations must apply for an exemption: California, Texas, New York, and Utah.

Here is a brief look at the requirements from those states.

1. California Requirements


California requires that all corporations pay an annual franchise tax. Currently, the annual rate for California’s franchise tax is at $800 for corporations.

Resource on tax rate: https://www.ftb.ca.gov/file/business/tax-rates.html

California does, however, allow nonprofit corporations to apply for an exemption.

If your church or ministry does not apply for an exemption and fails to pay the franchise tax within two years of being incorporated, your organization will be administratively suspended by the state.

In California, whether or not you have received your 501(c)(3) status from the IRS, you can apply for a franchise tax exemption.

2. Texas Requirements


For franchise tax purposes, all Texas nonprofit corporations are considered taxable entities.

In other words, Texas nonprofit corporations must apply for a franchise tax exemption or pay the annual franchise tax.

Currently, the franchise tax fee in Texas is estimated at $1,400.00 per year.

Tax rates, thresholds & more: https://comptroller.texas.gov/taxes/franchise/

Applying for a franchise tax exemption in Texas includes exemption from the sales and use tax for all nonprofit organizations. Churches may also receive an exemption from the hotel occupancy tax in Texas when applying for a franchise tax exemption. 

In order to apply for this exemption in Texas, all nonprofits, except for churches, must have 501(c)(3) approval from the IRS. The key factor for churches is that they must be actively holding worship services to apply.

3. New York Requirements


The State of New York grants franchise tax exemption to 501(c)(3) approved nonprofit organizations that apply for it. Churches are automatically considered exempt from franchise tax in New York and do not need to apply for the exemption.

Resource: https://nystax.custhelp.com/app/answers/detail/a_id/1015/~/what-are-the-corporation-franchise-tax-filing-requirements-for-a-not-for-profit

Another plus for 501(c)(3) churches and nonprofits in New York is that they can also apply for exemption of sales and use taxes

These applications, once approved, need only be submitted once in order to not have to pay estimated franchise taxes or any sales and use taxes.

FT Resource: https://www.tax.ny.gov/bus/ct/article9a.htm

4.Utah Requirements


The State of Utah also requires all corporations to pay an annual franchise tax. Currently, the franchise tax amount in Utah equates to either 5% of your church’s income or $100.00, whichever is greater. Similar to Texas, Utah requires organizations applying for the franchise tax exemption to first have 501(c)(3) approval.

Tax rate resource: https://tax.utah.gov/forms/current/tc-20inst.pdf

Unlike California and Texas, the State of Utah has only one form for the franchise tax exemption. In the state of Utah, your church or ministry must complete and file Form TC-161. Also, a copy of your organization’s 501(c)(3) approval letter will need to be included when applying for the franchise tax exemption.

Failure to apply for the franchise tax exemption, or to pay the tax within two years, will result in a suspension of your organization’s corporate status in Utah.

   

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So, what now?

As apparent as the saying goes, it is true that being forewarned is being forearmed. And it is also doubly so that with new information comes new questions. And that is where StartCHURCH can help!

Our hearts are to not only assist you with a service but to equip you with knowledge for your church or ministry.

If you have questions about or need assistance with the state filing requirements for your church or ministry, we can help!

Give us a call at 877-494-4655 and speak to a specialist today. 

   

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Please feel free to comment. We always appreciate good dialogue. However, we do moderate each comment to ensure that it is on topic and not derogatory to other participants. We ask that you keep your comments brief and pertinent to the topic so that others may benefit.

Blessings,
Raul Rivera


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