United States
Environmental Protection
Agency
Office of Emergency and
Remedial Response
(5204G)
EPA540-F-98-034
October 1998
www.epa.gov/superfund
v>EPA Technical Assistance Grants
(TAG):
Incorporation and Tax-Exempt
Status
Community Involvement and Outreach Center
Quick Reference Fact Sheet
The Superfund Technical Assistance Grant (TAG) Program was created to provide grants to groups of
citizens living near Superfund sites for the purpose of hiring independent technical advisors. TAG
recipients help communities become more active in the Superfund process. To be eligible to receive a
TAG, citizens' groups must be incorporated to address the Superfund site. This fact sheet answers
questions that frequently arise regarding incorporation and tax-exempt status for citizens' groups. This
information will help you get started, but it does not substitute for advice from legal and financial
specialists.
What Is Incorporation?
Incorporation is a process through which an
organization is granted legal status and is
recognized as an entity under state law. An
incorporated organization has the legal right and
power to enter into contracts, own property,
borrow money, and mortgage its property. It
continues to exist legally, even if the founders,
officers, or directors change.
By incorporating, your group adopts a widely
recognized structure and operating procedures
required by state law. The process for
incorporating varies from state to state. Consult
the corporate law of your state government for
the specific requirements and steps you must
follow. In most states, the corporate division of
the Secretary of State is responsible for
incorporation of organizations.
What are the Advantages of Incorporating?
In addition to making the group eligible for a
Technical Assistance Grant (TAG),
incorporating can help your group qualify for
financial assistance from other federal, state,
public, or private sources. Incorporation also
shields officers, board members, and the
employees of a corporation from liability and
debts incurred by the corporation. Incorporation
costs are reimbursable with TAG funds if your
group receives a TAG.
When you incorporate, it is important to identify
your group as a nonprofit organization. Banks
and other financial institutions often favor
nonprofit corporations. Consult an attorney for
more information on the legal and financial
benefits of incorporating your group as a
nonprofit organization.
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What are the Responsibilities of Officers and
Directors?
Directors and officers of a corporation have a
legal duty to the corporation. Generally, they
may not mix their personal affairs with those of
the corporation or act in a way that is harmful to
it. The corporate laws in each state include
provisions defining the responsibilities and
obligations of the corporation's officers and
directors. Under the corporate bylaws, an
officer or employee must be designated for
financial reporting and tax payment. That
individual can
be held personally responsible if he or she fails
to file or pay taxes.
What are the Tax Responsibilities of a Non-
Profit Organization?
Incorporating your citizens' group as a
nonprofit organization does not automatically
exempt the group from taxation. Nonprofit
organizations are required to file a corporate tax
return (U.S. Internal Revenue Service Form
1120} with the federal government, even if they
take in no revenue. The only nonprofit
Procedures for Setting Up a Nonprofit Corporation
1. Contact the state agency responsible for incorporation of nonprofit organizations. In most states, the
corporate division of the Secretary of State incorporates nonprofit organizations. Other states have
corporate commissions or maintain corporate divisions in departments regulating commerce and
business affairs. Telephone numbers for these offices often are listed in the blue pages under "State
Government."
The state agency will provide information on state incorporation laws, tell you how to obtain legal forms,
and specify requirements for filing them.
2. Define the purpose of the corporation. Writing a mission statement provides the basis of the
organization's charter as a nonprofit corporation. This statement is essential for establishing the
organization's identity as a nonprofit corporation. To be eligible for a TAG, the group must state that
they are incorporating in order to address the Superfund site in their community.
3. Complete forms and draft other required documents. This generally includes:
Arrange for incorporators
Select a board of directors
Draft a constitution or set of bylaws
Draft Articles of Incorporation
Draft other required documents
It is a good idea to get the help of an attorney to assist you in preparing and filing your corporate charter
or to review your application package before you submit it to the state. You may be able to find a local
attorney to review it pro bono. Reasonable fees in most areas of the country range from $250 to $550.
4. Submit paperwork and required fees to the state's incorporating agency. Required fees vary from state
to state, but generally they are less than $100. In some states, fees are considerably lower. Check with
the state's incorporating agency, a local certified public accountant, or your attorney to find out
applicable fees in your state.
By planning the incorporation process to coincide with the TAG application process, your group will
avoid incurring incorporation costs until after you find out if your application is approved. Costs of
incorporation can then be reimbursed by the grant. Be sure to state in your application that this is what
your group plans to do.
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corporations that do not have to file a corporate
tax return are those that are recognized by the
U.S. Internal Revenue Service (IRS) as
"tax-exempt" and that have gross receipts in each
tax year that normally are not more than
$25,000. Filing for tax-exempt status is a
separate process from incorporation, and it is
described below.
Most states also require nonprofit corporations to
file corporate income tax returns, even if the
nonprofit corporation has no revenue. Some
states impose a minimum tax on any corporation,
even a nonprofit one, that is not recognized as
tax-exempt by the IRS. The legal and financial
implications vary widely among the states, so it
is important to find out what your state requires.
What is a 501(c)(3) Organization?
A 501(c)(3) organization is a nonprofit
corporation organized and operated exclusively
for a special and useful purpose that is
recognized by the IRS as exempt from federal
income tax. Section 501(c) of the Internal
Revenue Code includes more than 20
classifications of organizations eligible for tax-
exempt status. The most appropriate
classification for citizens' groups is designation
as a charitable organization under Section
501(c)(3). This classification allows the
organization to solicit financial support from the
public and to receive government grants and
support from public and private foundations.
Procedure for Securing Tax-Exempt Status for a Citizens' Group
1. Obtain the required forms from the IRS. You will need IRS Form 1023, Application for Recognition of
Exemption Under Section 501(c)(3) of the Internal Revenue Code.
Your corporation also must have an Employer Identification Number (BIN) whether or not it has employees or
plans to hire any. IRS Form SS-4, Application for Employer Identification Number, can be filed at the same time
you file an application for tax-exempt status. In most cases, you can submit applications by mail and by
facsimile (FAX). The IRS Office in your area can provide the local FAX number. It also is possible to obtain an
EIN within 24 hours by calling your local IRS Office.
2. Define the purpose of the organization. A written mission statement is essential for establishing the
organization's identity as a nonprofit corporation and obtaining tax-exempt status. The statement should include:
Information on how the organization will meet the eligibility criteria under Section 501(c)(3), that is, how it
will organize and operate exclusively for one or more of the special purposes specified under Section 501(c).
A statement that no part of the net earnings of revenues of the organization will be distributed for the private
benefit of individuals or shareholders.
Certification that the organization will not engage in lobbying as a substantial part of its activities, and will
not participate in any way in political campaign activities. IRS Publication 557, Tax-Exempt Status for Your
Organization provides useful information for drafting this statement.
3. Submit necessary forms and supporting documents to the IRS. Submit IRS Form 1023, Application for
Recognition of Exemption Under Section 501 (c) (3) of the Internal Revenue Code, and IRS Form SS-4,
Application for Employer Identification Number to the appropriate IRS Regional office. Be sure to include all
necessary supporting documents.
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It also may be necessary to file applications with
state and local authorities to obtain exemption
from state and local taxes; however, this
designation usually is automatic based on the IRS
ruling.
Is Tax-Exempt Status Required to Receive a
TAG?
No. However, there are several advantages to
securing tax-exempt status from the IRS:
• Once tax-exempt status is formally recognized
by the IRS, the income and assets of the
nonprofit corporation are free from federal
taxation and, usually, from state and local
taxation, too.
• Some classifications of tax-exempt status
offer the nonprofit corporation legal authority
to accept contributions, and permit
contributors to deduct their donations from
income tax.
• A tax-exempt, nonprofit corporation also may
apply to the U.S. Postal Service for a special
permit for lower-rate postal privileges.
Nonprofit corporations must meet several
standards to qualify for tax-exempt status under
Section 501(c)(3):
• The organization must organize and operate
exclusively for one or more of the special
purposes specified under Section 501(c).
These include religious, educational,
charitable, scientific, or literary purposes;
testing for public safety; or other specific
purposes outlined in the law.
• None of the net earnings or revenues of the
organization can be distributed for the
private benefit of individuals or
shareholders.
• The organization cannot engage in lobbying
(defined as attempting to influence
legislation) as a substantial part of its
activities.
• Participation in political campaigns or on
behalf of any candidate is strictly prohibited.
A nonprofit corporation must provide evidence
that it meets these criteria in its bylaws and
Articles of Incorporation. It also must
demonstrate that the eligibility criteria are met
by documenting its actual operations and
activities in annual filings with the IRS (usually
by filing IRS Form 990 or 900EZ).
Additional Resources:
Ted Nicholas, The Complete Guide to Nonprofit
Corporations: Step-by-Step Guidelines,
Procedures and Forms To Maintain a Nonprofit
Corporation (Chicago: Enterprise-Dearborn,
1993). Cost: $19.95.
U.S. Internal Revenue Service Publication 557,
Tax-Exempt Status for Your Organization.
FREE. Find the address of the nearest Internal
Revenue Service Office in the "United States
Government" section of your local telephone
directory. Many IRS publications and forms
also are on the Internet at www.irs.ustreas.gov.
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