Tax-Exempt Status in Massachusetts

by Wayne Thomas
Your nonprofit must be granted a federal exemption before pursuing state tax relief.

Your nonprofit must be granted a federal exemption before pursuing state tax relief.

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Massachusetts exempts certain nonprofits from having to pay corporate income, property and sales taxes. In order to qualify, your nonprofit must be formed under the state incorporation statute and must obtain federal tax-exempt status from the IRS. After the nonprofit is designated as exempt by the IRS, Massachusetts requires additional filings for each type of tax in which you seek a state exemption.

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Charitable Purpose

Nonprofit corporations are businesses organized with a goal other than making a profit. This does not mean that these organizations cannot generate revenue, but no director or member may profit from those gains other than being paid reasonable compensation. An added benefit available to some Massachusetts nonprofits is relief from state income, property and sales taxes. However, this benefit is only available to those organizations that qualify for exempt status under section 501(c)(3) of the federal Internal Revenue Code. This designation is limited to nonprofits created for the purposes of promoting a specific charitable, scientific, educational or religious purpose.

Articles of Incorporation

In Massachusetts, nonprofits interested in pursuing tax exempt status must provide certain information in their Articles of Incorporation. This may be done at the formation stage or by amendment at a later date. The articles are essentially the constitution for the nonprofit and are filed with the Secretary of the Commonwealth. You must specify in the articles that the purpose of your organization is to promote a charitable mission or one of the other IRS recognized reasons. The articles must also state that upon the dissolution of the nonprofit, all remaining assets will be used for a charitable purpose. Once the articles have been filed, you must draft bylaws and hold an organizational meeting. The bylaws set forth the internal rules and procedures of the nonprofit.

Form 1023

Once your nonprofit organization has been formed in accordance with Massachusetts law, you must apply for the IRS exemption. This is accomplished by completing and filing Form 1023, along with a filing fee. You must attach certified copies of the articles and bylaws to the form to verify that your organization meets IRS guidelines. You can obtain these copies from the Secretary. You will also need to describe, in narrative form, the past, present and proposed activities your organization will perform. You will need to provide information about compensation for your officers, and include financial data about your nonprofit. The information you provide in this form will be reviewed for completeness and then made available for public inspection.

State Exemptions

If the IRS approves your application, you will receive a confirmation letter. You may request tax-exempt status from the state at that time. To be exempted from income tax, you are required to mail a photocopy of the confirmation letter to the Corporate Exemptions Division of the Massachusetts Department of Revenue. Once you have received this, you do not need to file a corporate income tax return. To be exempted from state sales tax, complete and file form TA1 and send it with a copy of the confirmation letter to the Bureau of Sales Excise of the Department of Revenue. To be exempt from property taxes, you must fill out form 3ABC and send it to your local assessor along with the confirmation letter.