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Nonprofit Organizations and State Tax-Exempt Applications

“My 501(c)(3) nonprofit organization recently received its federal tax exemption. Is the organization also exempt from California state income tax?” 

First of all, congratulations on obtaining your tax-exempt status as a 501(c)(3) nonprofit organization! As you’re well aware by now, the Form 1023 (or Form 1023-EZ, if you were so lucky) can be tedious, hyper-technical, and downright confusing, so I’m sure that you’re glad to have that off your plate. Unfortunately, the nonprofit organization must take a few additional steps to obtain tax-exempt status in California.

As the Franchise Tax Board notes, “[a]ll corporations and unincorporated organizations, even if organized on a nonprofit basis, are subject to California corporation franchise or income tax until the Franchise Tax Board (FTB) gives exempt status to the organization.” Since the nonprofit already has an IRS determination letter in-hand, the process will be simpler for your organization (as opposed to a nonprofit organization with a pending IRS application).

In your case, the FTB will acknowledge federally tax-exempt 501(c)(3) “organizations as tax-exempt from state income tax if the organization submits form FTB 3500A, Submission of Exemption Request, and a copy of its federal determination letter to the FTB.” Therefore, you need to complete the Form 3500A, append a copy of the determination letter to the application prior to submittal, and pay any applicable fees.

Ben Schwefel is an Associate Attorney at The Loftin Firm. For questions relating to a corporate governance, nonprofit, estate planning, or real estate matter, contact Ben at 760-814-9649.