One of the many advantages of running a nonprofit thrift store is tax exemption.
Thrift stores serve their communities by offering a place for people to purchase clothes and other items at low prices — as well as a place for people to donate unwanted items, rather than sending them to a landfill. In return for the public service nonprofit thrift stores offer, the government allows them to be exempt from paying taxes, given they meet certain criteria.
Being exempt from taxes means more revenue that can be put towards overhead costs and reinvested in the organization to help keep it running. But to receive tax exemption, you first have to make sure your organization meets all of the criteria and apply for tax exemption with the government.
In this blog, we offer seven tips for qualifying for, applying for, and maintaining federal and state tax exemption for nonprofit thrift stores, so you can save money and help more customers.
Tip #1: Educate Yourself on Tax Exemption Basics
Nonprofit thrift stores qualify for tax exemptions on the basis of being "charitable" organizations that help people. To receive the tax exemption, thrift store owners must apply for and receive 501(c)(3) status. This status grants you exemption from federal income tax, sales tax, and property tax.
The application to receive 501(c)(3) status requires you to explain why your organization fits the criteria. To persuade the IRS to grant the exemption, you must include data to support your claim and clearly explain what your organization does.
Related Read: 501(c)(3) vs. 501(c)(4): Thrift Business Types Defined
Tip #2: Secure Federal Tax Exemption With 501(c)(3) Status
You can find the IRS’ full criteria for granting 501(c)(3) status on its official site.
Some key requirements for an organization include:
- Must be operated for exempt purposes (charitable, religious, educational, etc.)
- Must not be operated for the benefit of private interests
- Is limited in the government lobbying it may conduct
- Must not participate in political campaign activity or campaign against a political candidate
To apply for the exemption, you need to film out Form 1023, or Form 1023-EZ. 1023-EZ is a simplified form for nonprofits that expect to bring in less than $50,000 per year. If your organization expects to bring in more than that, you need to fill out the standard form.
As you fill out the form, communicate to the IRS why your organization meets the criteria by offering a low-cost option to customers, avoiding private interests, and avoiding participating in political campaigns.
Once you attain 501(c)(3) status, you need to maintain the required standards and protocols so it isn’t revoked. This requires filing an annual tax return, including a Form 990, which the IRS requires all 501(c)(3) organizations to submit annually.
Make sure to continue following the government standards for 501(c)(3) organizations, and periodically check the standards to see if they’ve changed.
Related Read: How To Get 501(c)(3) Status for Your Nonprofit: 7 Steps
Tip #3: Attain State Tax Exemptions
Each state has its own process and requirements for granting nonprofits exemption from state taxes. So, do research to understand the requirements for your state. You can find a list of state requirements here.
Most states require you to fill out and submit a form, but in most states, the application is free. Remember that state tax exemptions for nonprofit thrift stores need to be renewed every few years, depending on your state.
Tip #4: Overcome Common Challenges in the Application Process
If your thrift store is truly a nonprofit and doesn’t operate in benefit of a private individual, it should be approved for both federal and state tax-exemptions. But, it may be denied if you fail to fill out the application thoroughly and include everything you need to. To ensure you’re granted tax-exempt status, make sure to avoid a few common errors.
When filling out the application, make sure to include governing documents, or documents that describe how the organization functions — this may include information about the chain of command, articles of incorporation, bylaws, and other information that makes it clear how your organization is set up.
As you fill out the application, remember to explain things clearly, without using too much thrift-related jargon. If you use too much language specific to your industry, someone outside your industry may not have enough information to confirm you meet the criteria.
Finally, don’t forget to pay the user fee. The government charges $600 to submit a standard Form 1023 and $275 for a Form 1023-EZ. As you complete the 501(c)(3), pay close attention to what’s required and fill the application out as completely and accurately as possible.
Related Read: Overcoming Inventory Obstacles: Dealing With Donor Fatigue and Declining Quality
Tip #5: Leverage Technology for Efficient Tax Management
To accurately report information about your organization, you need to be able to accurately track these metrics. Digital systems have tools that make this task easier. Point of sale (POS) systems offer a variety of features that can help you run your thrift store, including sophisticated sales tracking that keeps a record of your inventory levels, revenue, and profits.
As you prepare information to apply for tax exemption for a nonprofit thrift store or maintain your tax-exempt status, rely on digital systems to prepare your information for you. These systems often have tools for presenting this data, so you can clearly demonstrate your organization’s most important metrics.
Related Read: 3 Top Thrift Store Software Providers [Features & Reviews]
Tip #6: Know When To Enlist Professional Help
If you’re confused about whether or not your nonprofit thrift store meets the criteria for 501(c)(3), it may be helpful to reach out to a professional for advice. You may have questions about whether your organization operates for exempt purposes, or benefits a private individual. In these matters, consulting an expert can light your way.
Reach out to the right professional based on what you need. A tax accountant is familiar with the tax code and can answer questions about tax requirements. A lawyer is more helpful in helping you determine how your organization must be set up and how you must comply to avoid legal issues. Determine what your issue is, and reach out to a professional accordingly.
By consulting with a qualified professional, you can avoid errors and make the changes necessary to ensure your organization can qualify for tax exemptions.
Tip #7: Stay Informed on Future Trends in Nonprofit Taxation
Once you’ve attained tax exemption for your nonprofit thrift store, you’ll keep more of your organization’s revenue, allowing you to better compensate your employees, do more to help the community, and see more success. At this point, it’s easy to take your tax-exempt status for granted, but it’s important to periodically check up on the requirements to see if anything changes.
The IRS periodically adjusts standards for 501(c)(3) organizations, and failing to stay up to date with new standards could mean losing your status. Every once in a while, check in on the standards to make sure your organization is in compliance. Each year when you file your taxes is a good time to do a check-in.
Keep Your Nonprofit Tax-Exempt With ThriftCart
Your nonprofit thrift store is more than just a business — it’s an organization with a mission to help people. You offer an affordable option for families to buy clothing and other items; you stand for sustainability and reuse as an alternative to waste.
The government wants to help your store fulfill its mission by reducing the taxes it owes — but it’s up to you to meet the criteria, apply for the exemption, and abide by the standards given so you can keep it.
By following these tips, you’ll be granted tax exemption and can keep it for years to come. Remember to do your research, fill out the application thoroughly, leverage technology, reach out to professionals when needed, and periodically check for updates in the requirements for tax exemption. As you take these steps, you’ll ensure your thrift store’s future success.
To maintain accurate records, and manage the rest of your business, you need a solid point of sale system. ThriftCart is an all-in-one POS solution designed specifically for thrift stores. In addition to tracking your sales and revenue so you can report accurately, ThriftCart helps you manage your inventory, set up your website, communicate with customers, and much more.
To see what ThriftCart can do for your nonprofit, schedule a free demo today!
